##### Table of Contents

As filed with the Securities and Exchange Commission on March 30, 2005

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United States

Securities and Exchange Commission

Washington, DC 20549



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Form 10-KSB



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

Of the Securities Exchange Act of 1934



For
the fiscal year ended December 31, 2004



OR



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

of the Securities Exchange Act of 1934



Commission file number: 000-31279



OurPets Company

(Exact name of Small Business Issuer as specified in its charter)



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



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



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



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



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





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



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



Issuers revenues for the fiscal year ended December 31, 2004 were $5,445,049. 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 $1,178,202 as of March 8, 2005. As of March 8, 2005, the issuer had outstanding 11,771,473 shares of Common Stock.



Documents Incorporated by Reference



Part III  Portions of the registrants definitive proxy statement
to be issued in conjunction with registrants annual meeting to be held on May 18, 2005.



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



www.ourpets.com



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##### Table of Contents

OURPETS COMPANY



FORM 10-KSB



For The Fiscal Year Ended December 31, 2004



INDEX



|         |  |                                                                                                                |  |     
|-------- |  | -------------------------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                                |  | Page
|PART I   |  |                                                                                                                |  |     
|         |  |                                                                                                               
|Item 1.  |  | Description of Business                                                                                        |  | 3   
|Item 2.  |  | Description of Property                                                                                        |  | 9   
|Item 3.  |  | Legal Proceedings                                                                                              |  | 9   
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                            |  | 10  
|         |  |                                                                                                               
|PART II  |  |                                                                                                                |  |     
|         |  |                                                                                                               
|Item 5.  |  | Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities |  | 11  
|Item 6.  |  | Managements Discussion and Analysis or Plan of Operations                                                     |  | 12  
|Item 7.  |  | Financial Statements                                                                                           |  | 17  
|Item 8.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                           |  | 17  
|Item 8A. |  | Controls and Procedures                                                                                        |  | 17  
|Item 8B. |  | Other Information                                                                                              |  | 17  
|         |  |                                                                                                               
|PART III |  |                                                                                                                |  |     
|         |  |                                                                                                               
|Item 9.  |  | Directors and Executive Officers of the Registrant                                                             |  | 18  
|Item 10. |  | Executive Compensation                                                                                         |  | 18  
|Item 11. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                 |  | 18  
|Item 12. |  | Certain Relationships and Related Transactions                                                                 |  | 18  
|Item 13. |  | Exhibits, Lists and Reports on Form 8-K                                                                        |  | 19  
|Item 14. |  | Principal Accountant Fees and Services                                                                         |  | 20  
|         |  | Signatures                                                                                                     |  | 20  
|         |  | Certifications                                                                                                 |  | 40  



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##### Table of Contents

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



Introductory Note



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



PART I



|Item 1. | Description of Business.
|------- | ------------------------



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



Virtu develops and markets products for
improving the health, safety, comfort and enjoyment of pets. The products sold have increased from the initial Big Dog Feeder to approximately 125 products for dogs, cats, birds and other small animals. All are marketed under the
OurPets label to customers, both domestic and foreign. The manufacturing of these products is subcontracted to other entities, both domestic and foreign, based upon price and quality.



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



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##### Table of Contents

We sell our products in the following market segments:



|                                                                                                                                                                                                                                                                                                                                                
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|mass retailerseg. Wal-Mart, Kmart pet store chains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
150 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 150 customers for the year ended December 31, 2004, 45.7% of our revenue was derived from two major customers. Revenue generated from each of these customers amounted to $1,656,928 and $830,915, respectively, which represents 30.4% and
15.3% of total revenue.



We currently market products such as
dog and cat feeders, dog and cat toys, cat litter, and natural and nutritional pet supplements and treats. We conduct our marketing and sales activities through 6 in-house officers and/or employees, 46 general merchandise independent sales agents,
12 specialty market independent sales agents and 2 catalog market independent sales agents. Domestic independent sales agents are paid commissions, which range from 3% to 15% of net sales to customers.



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



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



We have been granted or assigned twenty-two United States patents for dog and cat feeders and have thirty-eight 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 sixteen additional trademark registrations and applied for seven trademark registrations, which are still
pending.



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##### Table of Contents

The patents issued and granted or assigned to us are:



|           |  |                   |  |                                                               
|---------- |  | ----------------- |  | --------------------------------------------------------------
|Patent No. |  | Issue Date        |  | Title                                                         
|5,509,376  |  | April 23, 1996    |  | Animal Feeder Assembly                                        
|5,730,081  |  | March 24, 1998    |  | Animal Feeder Assembly                                        
|D393,107   |  | March 31, 1998    |  | Small Animal Feeder                                           
|6,032,615  |  | March 7, 2000     |  | Amusement Device for                                          
|6,145,474  |  | November 14, 2000 |  | Household Pets, such as Cats Adjustable Animal Feeder
Assembly
|6,158,390  |  | December 12, 2000 |  | Pet Ball                                                      
|6,237,538  |  | May 29,2001       |  | Pet Toy Ball Feeder                                           
|6,371,053  |  | April 16, 2002    |  | Simulated Mouse Toy with                                      
|           |  |                   |  | Pre-Recorded Sound Chip                                       
|D456,570   |  | April 30, 2002    |  | Pet Toy and Exerciser                                         
|6,467,428  |  | October 22, 2002  |  | Filtered Water and Feeding System                             
|D467,045   |  | December 10, 2002 |  | Stackable Pet Feeder                                          
|6,550,426  |  | April 22, 2003    |  | Pet Toy                                                       
|6,568,433  |  | May 27, 2003      |  | Portable Fluid Delivery Device                                
|6,571,742  |  | June 3, 2003      |  | Interactive Pet Toy                                           
|D486,274   |  | February 3, 2004  |  | Adjustable Height Pet Feeder                                  
|D486,273   |  | February 3, 2004  |  | Adjustable Height Pet Feeder                                  
|D489,847   |  | May 11, 2004      |  | Adjustable Height Pet Feeder                                  
|D491,697   |  | June 15, 2004     |  | Pet Feeder Top                                                
|6,786,177  |  | September 7, 2004 |  | Animal Feeder with Storage Wells                              
|6,817,315  |  | November 16, 2004 |  | Improved Cat Litter                                           
|6,838,097  |  | January 1, 2005   |  | Pet Food Product                                              
|6,854,419  |  | February 2, 2005  |  | Adjustable Height Pet Feeder                                  



Patent applications that are pending
are:



|           |  |                    |  |                                               
|---------- |  | ------------------ |  | ----------------------------------------------
|Serial No. |  | File Date          |  | Title                                         
|09/813746  |  | March 21, 2001     |  | Cover for Pet Food and Water Bowls            
|09/590815  |  | June 9, 2000       |  | Food and Treat Dispenser                      
|09/778543  |  | February 7, 2001   |  | Vocal Training and Companionship              
|10/325019  |  | December 20, 2002  |  | Toxic Material Exposure Indicator             
|10/423,706 |  | April 28, 2003     |  | Gourmet Spray                                 
|10/444,163 |  | May 23, 2003       |  | Portable Fluid Delivery Device                
|10/456,919 |  | June 9, 2003       |  | Vocal Training and Companionship Apparatus    
|10/611,821 |  | July 1, 2003       |  | Nutrient and Anti-Microbial Pet Bone          
|10/616,282 |  | July 10, 2003      |  | Cover for Pet Bowls                           
|10/679,029 |  | October 3, 2003    |  | Pet Food and Water Bowl                       
|10/688,672 |  | October 20, 2003   |  | Food and Treat Dispenser                      
|60/528,968 |  | December 12, 2003  |  | Meaty Bone                                    
|60/528,963 |  | December 12, 2003  |  | Chew-N-Squeak                                 
|60/528,819 |  | December 12, 2003  |  | Bouncy Bone                                   
|60/528,820 |  | December 12, 2003  |  | Doggie Pop                                    
|10/755,160 |  | January 12, 2004   |  | Pet Chew Toy For Holding Consumable Treats    
|10/885,741 |  | July 8, 2004       |  | Rolling Pet Toy                               
|10/886,544 |  | July 9, 2004       |  | Improved Cat Litter                           
|60/608,459 |  | September 10, 2004 |  | Annular Pet Toy for Holding Consumable Treats 
|60/608,460 |  | September 10, 2004 |  | Boomerang Shaped Pet Toy for Consumable Treats



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|           |  |                    |  |                                                               
|---------- |  | ------------------ |  | --------------------------------------------------------------
|Serial No. |  | File Date          |  | Title                                                         
|60/608,462 |  | September 10, 2004 |  | Discus Shaped Pet Toy for Holding Consumable Treats           
|60/611,420 |  | September 20, 2004 |  | Activated Charcoal Cloth and Pet Litter Box                   
|10/957,050 |  | October 1, 2004    |  | Pet Food and Water Bowl                                       
|10/960,252 |  | October 7, 2004    |  | Rawhide Biscuit and Method                                    
|60/608,458 |  | October 11, 2004   |  | Sphere-Shaped Pet Toy                                         
|10/963,953 |  | October 12, 2004   |  | Apparatus for Scooping Cat Litter                             
|29/215,733 |  | October 25, 2004   |  | Apparatus for Scooping Cat Litter                             
|60/626,850 |  | November 12, 2004  |  | Hanging Pet Toy                                               
|60/626,853 |  | November 12, 2004  |  | Pet Toy with Sound Module                                     
|60/626,852 |  | November 12, 2004  |  | Toy Fishing Wand                                              
|60/626,851 |  | November 12, 2004  |  | Floor Support Pet Toy                                         
|11/009,165 |  | December 10, 2004  |  | Drumcicle                                                     
|11/009,164 |  | December 10, 2004  |  | Savor-Sphere                                                  
|60/638,211 |  | December 23, 2004  |  | Compression Molded Rawhide Article                            
|11/067,046 |  | February 28, 2005  |  | Cover for Pet Bowls and Water Bowls                           
|11/072,755 |  | March 4, 2005      |  | Pet Chew Toy for Holding Consumable Treats Having Sound Module
|11/072,750 |  | March 4, 2005      |  | Method and System for Application of Aromatherapy for Cats    
|Pending    |  | March 17, 2005     |  | A Pet Toy                                                     



Our trademark registrations obtained
are:



|                 |  |                   |  |               
|---------------- |  | ----------------- |  | --------------
|Registration No. |  | Date Registered   |  | Name          
|2,048,003        |  | March 25, 1997    |  | OurPets      
|2,016,545        |  | November 21, 1996 |  | Flexo-Feeder  
|2,219,049        |  | January 19, 1999  |  | Push-N-Roll   
|2,220,580        |  | January 26, 1999  |  | Triple Track  
|2,221,776        |  | February 2, 1999  |  | Zig-N-Zag     
|2,226,341        |  | February 23, 1999 |  | Play-N-Treat  
|2,498,759        |  | October 16, 2001  |  | Play-N-Squeak 
|2,447,094        |  | April 24, 2001    |  | Molecuball    
|2,563,464        |  | April 23, 2002    |  | Delidome      
|2,577,849        |  | June 11, 2002     |  | OurPets      
|2,574,795        |  | June 4, 2002      |  | Wufer Ball    
|2,664,532        |  | December 17, 2002 |  | Speed-E-Drink 
|2,688,515        |  | February 18, 2003 |  | Mouse-N-Cheese
|2,749,682        |  | August 12, 2003   |  | IcePudding    
|2,792,219        |  | December 9, 2003  |  | Speed-E-Treat 
|2,820,846        |  | March 9, 2004     |  | Butterfly Ball
|2,896,244        |  | October 19, 2004  |  | Bubble Mouse  



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The following trademark registration applications are pending:



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



As of March 8, 2005,
we had 13 full-time employees consisting of 3 officers, 5 other employees in sales and marketing, 2 employees in finance and administration and 3 employees in warehousing and shipping. We do not have any employees in manufacturing since that
operation is subcontracted to outside vendors. None of our employees are subject to a collective bargaining agreement and we have not experienced any work stoppages, nor to our knowledge, are any threatened.



We conduct our own research and development activities and also use outside
sources to perform specific projects such as engineering drawings and prototype models. Research and development costs are charged to expenses as incurred, and totaled $51,661 for the year ended December 31, 2004 and $44,196 for the year ended
December 31, 2003.



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Risk Factors



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



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



Additional financing may not be available when required by us.



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



The loss of key personnel could adversely affect our operations.



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



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



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



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



We currently have 11,771,473 shares of Common Stock outstanding which could
be diluted by the following potential issuances of Common Stock. As of March 8, 2005, we had outstanding 71,000 shares of Convertible Preferred Stock (Preferred Stock) convertible into 710,000 shares of Common Stock at a conversion rate
of $1.00 per share. Also as of March 8, 2005, we had outstanding 778,426 warrants to purchase an aggregate of 778,426 shares of Common Stock at exercise prices ranging from $0.288 to $1.227 per share and options to purchase an aggregate of 824,750
shares of Common Stock at exercise prices ranging from $0.10 to $0.625 per share. We have reserved an aggregate of 1,350,000 shares of Common Stock for issuance under the 1999 Stock Option Plan as of the date of this Report. In addition, the
exercise of such warrants and options could have a material adverse effect on the future market price of, and liquidity in the market for, shares of Common Stock trading in the over-the-counter market. Further, while these warrants and options are
outstanding, our ability to obtain additional financing on favorable terms may be adversely affected.



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



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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. | Description of Property.
|------- | ------------------------



We lease a 28,000 square foot production, warehouse and office facility in Fairport Harbor, Ohio from a related entity, Senk Properties. Senk Properties
is a general partnership comprised of Dr. Steven Tsengas, Konstantine S. Tsengas, Nicholas S. Tsengas and Evangelia S. Tsengas. Dr. Tsengas is our Chairman, President, Chief Executive Officer, a director and a major stockholder of the Company.
Konstantine Tsengas is our Vice President and Secretary, as well as being a stockholder. Nicholas Tsengas and Evangelia Tsengas are both stockholders of OurPets. The current monthly rental is $12,113 plus real estate taxes with annual
increases based upon the change in the indicated consumer price index in the preceding year. The initial lease term was five years ending on May 31, 1998. The lease was extended for two additional five year terms ending on May 31,2008, with the
possibility of three additional term extensions of five years each. We believe that this facility will provide adequate warehouse and office space to meet our needs for the immediate future. Any longer-range future growth can be accommodated by
expanding that facility or leasing nearby space.



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



|Item 3. | Legal Proceedings.
|------- | ------------------



In December 2000, our former intellectual property counsel informed us that one of its associates had missed a number of deadlines for filings with the
Patent and Trademark Office, resulting in the loss of patent and trademark rights for several products. As a result of this negligence, which was addressed in a lawsuit that was settled in December 2003, Jack Lemkin, owner and operator of Sinitron
Corp., was able to file for and obtain a patent on various aspects of one of our products. We commenced suit against Lemkin personally on June 6, 2002 in the United States District Court, Northern District of Ohio and against Sinitron Corp. on
December 26, 2002 under the caption OurPets Company and Virtu Company vs Sinitron Corp., in the Common Pleas Court located in Summit County, Ohio. We subsequently transferred the case to the Common Pleas Court located in Franklin
County, Ohio being the county where Sinitron is located. Sinitron subsequently filed a counterclaims against OurPets alleging tortious interference with contract and damage to business reputation and damages for unpaid invoices. The Federal
Court in our action against Lemkin personally issued a temporary restraining order against Lemkin in November 2003. Subsequent to the issuance of the restraining order, Mr. Lemkin filed suit against us



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##### Table of Contents

on December 4, 2003 in the United States District Court, Southern District of Ohio alleging violations of the United States Patent Act and breach of good
faith and fair dealings pertaining to one of our patents. Lemkin also joined with another individual, Gloria Teschke, to file an action against OurPets in the United States District Court, Southern District of Ohio, alleging claims related to
the subject matter of the first three lawsuits. In October 2004, the parties agreed to settle and dismiss all four pending actions and the settlement agreement and mutual release were executed as of October 29, 2004. Under the agreement Mr. Lemkin
assigned the two patents in litigation to OurPets in exchange for $50,000 payable in three equal annual installments beginning January 1, 2005 which has been included in the balance sheet under the caption of patents and will be amortized over
the remaining life of the two patents.



On March 31, 2000, SMP
Company, Incorporated (formerly known as Sanar Manufacturing, Inc.) (SMP), a wholly-owned subsidiary of the Company, entered into an asset purchase agreement with Akon Plastic Enterprises, Inc. (Akon) whereby Akon agreed to
purchase substantially all of the assets used by SMP in molding plastics. Further, as part of the sale, Akon and its President, David F. Harman (Harman), entered into an Indemnity Agreement whereby Akon and Harman, jointly and severally,
agreed to indemnify us and the individual guarantors of the Small Business Administration loans to SMP against any liability for such loans, which were assumed as a part of the asset purchase by Akon. In September 2000, Akon breached the asset
purchase agreement and in October 2000, we filed suit in the Court of Common Pleas, Summit County, Ohio for damages, including non-payment of loans, resulting from Akons breach of the asset purchase agreement. In December 2001, Harman filed a
Third-Party Complaint against us alleging intentional infliction of emotional distress seeking compensatory and punitive damages against us and the individual guarantors. Both actions were dismissed without prejudice in March 2003. On June 5, 2003,
we re-filed the action against Akon, the directors of Akon, and Harman in the Court of Common Pleas of Lake County, Ohio where it is currently pending. Discovery has been completed and the parties to the litigation are awaiting rulings by the court
on their respective motions for summary judgment. While we believe that our case against Akon, its directors, and Harman is strong, we cannot predict the likely outcome of this action.



On April 16, 2004 a patent infringement action was filed against the Company under the caption TFH Publications, Inc. vs
OurPets Company and Bonybone, S.A. de C.V.in the United States District Court for the District of New Jersey. The plaintiff, TFH Publications, Inc, a Delaware corporation located in New Jersey, alleges that a product distributed
exclusively by us in the United States infringes upon a competing product for which TFH Publications holds the patent. Our supplier and co-defendant in the action, Bonybone, is a Mexican company that developed the product at issue and also
manufactures it for distribution in the United States by us. While we believe that the complaint is without merit, we are currently evaluating our options with respect to settling the action or defending it vigorously to determine the best
alternative for the Company to pursue. While it is too early to predict the outcome, we believe that the Companys likely risk of facing any significant damages is minimal.



On January 19, 2005 a trademark infringement action was filed against the Company under the caption Barbaras Canine
Catering, Inc. vs OurPets Company in the United States District Court for the Western District of North Carolina. The plaintiff, Barbaras Canine Catering, Inc. alleges that one of our products infringes upon a trademark which the
plaintiff owns. While there are differences in products, packaging and name, there has been negotiations directed toward eliminating any confusion over the packaging and trademark. While it is too early to predict the outcome, we believe that the
Companys likely risk of facing any significant damages is minimal.



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 2004.



10



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##### Table of Contents

PART II



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



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



|                   |  |      |  |     
|------------------ |  | ---- |  | ----
|Quarter Ended      |  | High |  | Low 
|March 31, 2003     |  | 0.21 |  | 0.09
|June 30, 2003      |  | 0.21 |  | 0.16
|September 30, 2003 |  | 0.41 |  | 0.19
|December 31, 2003  |  | 0.38 |  | 0.23
|March 31, 2004     |  | 0.52 |  | 0.26
|June 30, 2004      |  | 0.45 |  | 0.23
|September 30, 2004 |  | 0.30 |  | 0.23
|December 31, 2004  |  | 0.31 |  | 0.24



As of March 8, 2005,
we had approximately 184 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.



11



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##### Table of Contents

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



Overview



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



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



These products are
manufactured by domestic and foreign subcontractors and then sold by us to retailers and distributors who then sell the products to the end consumer. According to the 2003/2004 APPMA National Pet Owners Survey approximately 64.2 million U.S.
households currently own a pet with an estimated pet population of 65.0 million dogs, 77.7 million cats and 17.3 million birds.



As discussed below and in Liquidity and Capital Resources on Pages 11, 12 and 13, we have funded our operations principally from net cash provided by
operating activities during 2004 and 2003.



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



During 2003 we had a net repayment of $200,000 under our line of credit facility with our bank under which we can borrow up to $1,500,000 based on the
level of qualifying accounts receivable and inventories. At December 31, 2003 and December 31, 2004 we had a balance of $650,000 under the line of credit with the bank at an interest rate of prime plus 1%.



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



12



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##### Table of Contents

Results of Operations



Year Ended December 31, 2004 Compared to Year Ended December 31, 2003



In the following discussion all references to 2004 are for the year ended December 31, 2004 and all references to 2003 are
for the year ended December 31, 2003.



Net revenue for 2004 was
$5,445,049, an increase of 5.1 percent in revenue from $5,180,779 in 2003, consisting of sales of proprietary products for the retail pet business. This increase of $264,270 was primarily the result of an increase in sales of approximately $128,000
to our two major customers due to promotions of existing products and sales of new products. The balance of the increase was from sales to other customers which increased by approximately $136,000 including both sales of new products and sales to
new customers. Total sales to all customers of new products in 2004 was approximately $381,000. Our sales to foreign customers decreased by approximately $98,000, or 32.0 percent, from 2003 mainly due to decreased sales to customers in England and
South Korea.



While net revenue increased by 5.1 percent in
2004, cost of goods sold also increased by 1.4 percent, from $3,932,208 in 2003 to $3,987,013 in 2004. This increase of $54,805 was as a result of the cost of purchased products sold and freight increasing by 2.0 percent due mainly to higher freight
costs as a result of fuel surcharges by our freight carriers. Our variable and fixed warehouse and overhead costs decreased by 1.1 percent from 2003 due to reduced depreciation on tooling and foreign warehouse expenses.



As a result of the net revenue increasing by more than the cost of goods sold
, our gross profit on sales increased by 16.8 percent, or $209,465, from $1,248,571 in 2003 to $1,458,036 in 2004.



Selling, general and administrative expenses in 2004 were $1,388,861, an increase of $18,127, or 1.3 percent, from $1,370,734 in 2003. The significant
increases were in (i) accruals for professional services of approximately $52,000 due to increased accounting and auditing fees resulting from the Sarbanes-Oxley Act of 2002 and increased legal fees and expenses in 2004 that were included in the
extraordinary item in 2003, (ii) increased commissions for our sales representatives of approximately $10,000 due to higher domestic sales in 2004 on which commissions are paid and lower foreign sales on which commissions are not paid, and (iii)
increased costs of recruiting employees of approximately $7,000 due to finding new employees. These increases were partially offset by decreases in (i) advertising and marketing expenses of approximately $26,000 due to a decrease in advertising in
trade magazines and the number of trade shows attended, (ii) travel expenses of approximately $15,000 due to one less employee in sales in 2004, and (iii) salaries and wages of approximately $14,000 due to having one less administrative employee for
part of the year.



The income (loss) from operations improved
by $191,338, from a $(122,163) loss in 2003 to a $69,175 profit in 2004 as a result of our gross profit on sales increasing by $209,465, or 16.8 percent, which was more than the increase in selling, general and administrative expenses of $18,127, or
1.3 percent.



The loss from other income and expense decreased
by $176,212 as a result of a loss of $(2,294) in 2004 from the disposal of excess inventory compared to a loss of $(176,212) in 2003. The loss in 2003 includes (i) the loss on disposal of excess inventory of one of our products of approximately
$40,000, (ii) the write-off of undepreciated tooling costs for discontinued products of approximately $71,000, and (iii) the write-off of the inventory of components for discontinued products of approximately $55,000.



Interest expense for 2004 was $53,941, a decrease of 50.8 percent, or
$55,664, from $109,605 in 2003. This decrease was primarily due to the interest expense for the subordinated debt decreasing by approximately $39,000 due to the reduction in principal balance from $450,000 in 2003 to $100,000 in 2004 and for the
bank line of credit decreasing by approximately $13,000 due to the reduction in average principal balance outstanding from $891,000 in 2003 to $644,000 in 2004.



13



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##### Table of Contents

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



The net income for 2004 was $12,940 as compared to net income in 2003 of
$440,186 or a decrease of $427,246. This was the result of the following changes from 2003 to 2004:



|                                                              |  |   |          |  
|------------------------------------------------------------- |  | - | -------- | -
|Net revenue increase of 5.1%                                  |  | $ | 264,270  |  
|Cost of goods sold increase of 1.4%                           |  |   | (54,805  | )
|                                                              |  |   |          |  
|Gross profit on sales increase of 16.8%                       |  |   | 209,465  |  
|Selling, general and administrative expenses increase of 1.3% |  |   | (18,127  | )
|Other income and expense decrease of 98.7%                    |  |   | 173,918  |  
|Interest expense decrease of 50.8%                            |  |   | 55,664   |  
|                                                              |  |   |          |  
|Income (loss) before extraordinary item increase of 103.2%    |  |   | 420,920  |  
|Extraordinary item decrease of 100.0%                         |  |   | (848,166 | )
|                                                              |  |   |          |  
|Decrease in Net Income                                        |  | $ | (427,246 | )
|                                                              |  |   |          |  



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 $213,000 in available funds at December 31, 2004 based upon the balance
of accounts receivable and inventories at that date.



As of
December 31, 2004, we had $846,544 in principal amount of indebtedness consisting of:



|                                                |  |                 |         |  |   |        
|----------------------------------------------- |  | --------------- | ------- |  | - | -------
|Bank line of credit                             |  | Prime plus 1%   |         |  | $ | 650,000
|Small Business Administration (SBA) term loan |  | 6.999%          |         |  |   | 46,209 
|Installment notes payable                       |  | 7.022% & 7.517% |         |  |   | 50,335 
|Other notes payable                             |  | Prime plus 3    | % & 10% |  |   | 100,000



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



The term loan with the SBA is payable in monthly installments of $2,180 including interest through October 2006. The installment notes payable for the
purchase of warehouse equipment are due in monthly payments of $1,374 including interest through June 2008. The other notes payable are due in the amount of $75,000 on February 1, 2006, to Beachcraft L.P. and $25,000 to Over the Hill Ltd., plus
accrued interest. Our indebtedness, which is secured by liens on our assets, was used to finance our equipment and working capital requirements. The agreements related to such indebtedness contain the customary covenants and default provisions.



14



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##### Table of Contents

The note payable to Beachcraft L.P. was originally for $150,000 and $75,000 was repaid in 2003. This
note, which was originally due February 1, 2001, was extended six times for six months each and the remaining balance was due with accrued interest on February 1, 2004. As of February 1, 2004, a new note payable to Beachcraft L.P. was issued to
replace the $75,000 remaining balance. The replacement note is due on February 1, 2006 with interest payable quarterly at prime plus 3%. In consideration for this refinancing we issued warrants for the purchase of 56,250 shares of Common Stock to
Beachcraft L.P. at an exercise price of $0.30 per share with an expiration date of February 1, 2007. Subsequent to their issuance the warrants were adjusted to 56,628 warrants exercisable at $0.298 per share in accordance with the warrant
anti-dilution provisions.



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 $13,000 for the year ended 2004 and $440,000 for the year ended 2003. At year end
2001 we closed on a new bank line of credit facility for an increased line of credit. As a result, absent a failure to maintain the required debt service coverage ratio and the tangible net worth, we should be able to fund our operating cash
requirements for 2005. We have no material commitments for capital expenditures.



A schedule of our contractual obligations as of December 31, 2004 is as follows:



|                                   |  |                        |           |                 |   |           |  |           |         |              |   |        |  |   |    
|---------------------------------- |  | ---------------------- | --------- | --------------- | - | --------- |  | --------- | ------- | ------------ | - | ------ |  | - | ---
|                                   |  | Payments Due By Period
|Contractual Obligation             |  | Total                  |           | Less than1 year |   | 1-3 years |  | 4-5 years |         | After5 years
|Long-Term Debt                     |  | $                      | 846,544   |                 | $ | 711,920   |  | $         | 127,104 |              | $ | 7,520  |  | $ | -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                   |  |                        | 609,949   |                 |   | 172,238   |  |           | 360,319 |              |   | 77,392 |  |   | -0-
|                                   |  |                        |           |                 |   |           |  |           |         |              |   |        |  |   |    
|Total Contractual Cash Obligations |  | $                      | 1,456,493 |                 | $ | 884,158   |  | $         | 487,423 |              | $ | 84,912 |  | $ | -0-
|                                   |  |                        |           |                 |   |           |  |           |         |              |   |        |  |   |    



Net cash provided by
operating activities for the year ended December 31, 2004 was $370,186. Cash was provided by the net income for the year of $237,852, which is net of the non-cash charges for depreciation of $214,525 and amortization of $10,387. Cash was provided by
the net change of $132,334 in our operating assets and liabilities. These changes consisted of decreases in inventories of $201,348 and prepaid expenses of $34,492 and increases in accounts payable of $85,798 and in accrued expenses of $1,208, which
were partially offset by increases in accounts receivable of $71,734, patent costs of $117,639 and domain name and other assets of $1,139.



Net cash used in investing activities for the year ended December 31, 2004 was $297,010, which was used for the acquisition of property and equipment. Net
cash used in financing activities for the year was $80,779. Cash was used for $76,889 for the principal payments on long-term debt and $3,890 was used for the principal payments on capital lease obligations.



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



Net cash used in investing activities for the year ended December 31, 2003 was $162,222, which was used for the acquisition of property and equipment. Net
cash used in financing activities for the year was $487,070.



15



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##### Table of Contents

Cash was provided by the $100,000 borrowed under the note payable to a shareholder, the $60,000 borrowed under the bank term loan agreement and the $68,882
borrowed under the equipment purchase notes. Cash was used for $200,000 net repayment under the line of credit agreement with the bank, $204,471 was used for the principal payments on long-term debt, $11,481 was used for the principal payments on
capital lease obligations and $300,000 was used for the payments of notes payable to shareholders.



Critical Accounting Policies/Estimates



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



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



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.



16



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##### Table of Contents

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



The financial statements of OurPets Company as of December 31, 2004 and 2003, and for the years then ended together with the Report of Independent
Registered Public Accounting Firm are included in this Form 10-KSB on the pages indicated below.



|                                                        |  |         
|------------------------------------------------------- |  | --------
|                                                        |  | Page No.
|Report of Independent Registered Public Accounting Firm |  | 21      
|Consolidated Balance Sheets                             |  | 22      
|Consolidated Statements of Operations                   |  | 23      
|Consolidated Statements of Stockholders Equity         |  | 24      
|Consolidated Statements of Cash Flows                   |  | 25      
|Notes to Consolidated Financial Statements              |  | 26      



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



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



|Item 8A. | Controls and Procedures.
|-------- | ------------------------



As of December 31, 2004, we carried out an evaluation, under the supervision and with the participation of our management, including our President and
Chief Executive Officer along with our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Rule 13a-14. Based upon that evaluation, our President and Chief
Executive Officer along with our Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including our consolidated subsidiaries) required
to be included in our periodic SEC filings. There have been no significant changes in our internal controls over financial reporting or in other factors which could significantly affect internal controls over financial reporting that occurred during
our most recent fiscal quarter.



|Item 8B. | Other Information.
|-------- | ------------------



None.



17



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##### Table of Contents

PART III



|Item 9. | Directors and Executive Officers of the Registrant.
|------- | ---------------------------------------------------



The information required by this Item with respect to the directors, executive officers, promoters, control persons and
compliance with Section 16(a) of the Securities and Exchange Act and our Code of Ethics is incorporated by reference from the information provided under the headings Election of Directors, Executive Compensation and
Other Matters, respectively, contained in our Proxy Statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for our Annual Meeting of Shareholders to be held on May 18, 2005.



|Item 10. | Executive Compensation.
|-------- | -----------------------



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



|Item 11. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
|-------- | -----------------------------------------------------------------------------------------------



Equity Compensation Plan Information



|                                                           |  |                                                                                            |  |                                                                            |  |                                                                                                                                         
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------ |  | -------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------
|Plan Category                                              |  | Number of Securities to be Issued Upon Exercise of Outstanding Options,Warrants and Rights |  | Weighted Average Exercise Price of Outstanding Options,Warrants and Rights |  | Number of SecuritiesRemaining Available for Future Issuance Under Equity Compensation Plans(Excluding SecuritiesReflected in Column (a))
|                                                           |  | (a)                                                                                        |  | (b)                                                                        |  | (c)                                                                                                                                     
|Equity compensation plans approved by security holders     |  | 824,750                                                                                    |  | $0.330                                                                     |  | 525,250                                                                                                                                 
|Equity compensation plans not approved by security holders |  | 38,922                                                                                     |  | $0.957                                                                     |  | -0-                                                                                                                                     
|                                                           |  |                                                                                            |  |                                                                            |  |                                                                                                                                         
|Total                                                      |  | 863,672                                                                                    |  | $0.358                                                                     |  | 525,250                                                                                                                                 
|                                                           |  |                                                                                            |  |                                                                            |  |                                                                                                                                         



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



Public relations in 2002 for 13,454 warrants
at $0.446 per share which expire on March 1, 2005.



Investor
relations in 2002 for 25,468 warrants at $1.227 per share which expire on August 3, 2006.



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



|Item 12. | Certain Relationships and Related Transactions.
|-------- | -----------------------------------------------



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



18



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##### Table of Contents

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



(a) Exhibits



|      |  |                                                                                                                                                                                                                                             
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1   |  | Articles of Incorporation of Manticus, Inc., dated May 23, 1996.*                                                                                                                                                                           
|      | 
|3.1.1 |  | Articles of Amendment to the Articles of Incorporation of Manticus, Inc., changing the name of
the corporation to OurPets Company, effective September 1, 1998.*                                                                         
|      | 
|3.1.2 |  | Articles of Amendment to the Articles of Incorporation of Manticus, Inc., nka OurPets
Company, reflecting changes to the corporations capital structure, adopted July 20,
1999.*                                                          
|      | 
|3.2   |  | Bylaws of Manticus, Inc.*                                                                                                                                                                                                                   
|      | 
|4.1   |  | Common Stock Certificate.*                                                                                                                                                                                                                  
|      | 
|4.2   |  | Preferred Stock Certificate.*                                                                                                                                                                                                               
|      | 
|4.3   |  | Promissory Note dated September 1, 1999 for $200,000, made by the Company to Joseph T. Aveni.*                                                                                                                                              
|      | 
|10.1  |  | Asset Purchase Agreement, dated March 31, 2000, between Akon Plastic Enterprises, Inc. and
Sanar Manufacturing Company, a wholly-owned subsidiary of OurPets Company.*                                                                     
|      | 
|10.2  |  | Lease Agreement dated March 17, 1993, with Addendums, between Senk Properties and GPI
Division, NAPRO, Inc.*                                                                                                                                
|      | 
|10.5  |  | 1999 Stock Option Plan.*                                                                                                                                                                                                                    
|      | 
|10.6  |  | Standard Option Agreement.*                                                                                                                                                                                                                 
|      | 
|10.7  |  | Standard Common Stock Purchase Warrant.*                                                                                                                                                                                                    
|      | 
|10.8  |  | Indemnity Agreement, dated March 31, 2000, between Akron Plastic Enterprises, Inc. and its President, David Herman, individually, and OurPets Company and Dr. Steven Tsengas, Evangelia Tsengas, Nicholas Tsengas and Konstantine Tsengas.*
|      | 
|10.10 |  | Small Business Administration loan agreement dated March 10, 1995 with Napro, Inc.*                                                                                                                                                         
|      | 
|10.12 |  | Vendor Agreement between the Company and Wal-Mart Stores, Inc.*                                                                                                                                                                             
|      | 
|10.17 |  | PetsMart 2001 Vendor Purchasing Terms*                                                                                                                                                                                                      
|      | 
|10.18 |  | Credit Agreement, Revolving Note and Security Agreements, dated December 31, 2001, between FirstMerit Bank, N.A., the Company, Virtu Company, Dr. Steven Tsengas and Evangelia S. Tsengas. **                                               
|      | 
|10.19 |  | Promissory Note dated February 1, 2004 for $75,000, made by the Company to Beachcraft Limited
Partnership.                                                                                                                                  
|      | 
|11    |  | Statement of Computation of Net Income (Loss) Per Share.                                                                                                                                                                                    
|      | 
|14    |  | OurPets Code of Ethics***                                                                                                                                                                                                                  
|      | 
|21    |  | Subsidiaries of the Registrant.*                                                                                                                                                                                                            
|      | 
|31.1  |  | Certificate of the President and Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.                                                                                                                         
|      | 
|31.2  |  | Certificate of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                       
|      | 
|32.1  |  | Certification of the President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                         
|      | 
|32.2  |  | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                      

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

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

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



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##### Table of Contents

All other Exhibits filed herewith.



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



Form 8-K filed October 28, 2004 reporting that OurPets issued a press release and other financial information regarding our third quarter results on October 28, 2004.



|Item 14. | Principal Accountant Fees and Services.
|-------- | ---------------------------------------



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



SIGNATURES



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



Dated: March 30, 2005



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 TSENGASSteven Tsengas         |  | Chairman, President, Chief Executive Officer and Director (principal executive officer) |  | March 30, 2005
|                                            |  |                                                                                        
|/s/    JOHN G. MURCHIEJohn G. Murchie       |  | Vice President, Treasurer and Controller (principal accounting officer)                 |  | March 30, 2005
|                                            |  |                                                                                        
|/s/    JOSEPH T. AVENIJoseph T. Aveni       |  | Director                                                                                |  | March 30, 2005
|                                            |  |                                                                                        
|/s/    CARL FAZIO,
JR.Carl Fazio, Jr        |  | Director                                                                                |  | March 30, 2005
|                                            |  |                                                                                        
|/s/    BENJAMIN D.
SUAREZBenjamin D.
Suarez |  | Director                                                                                |  | March 30, 2005



20



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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, 2004 and December 31, 2003, 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, 2004 and December 31, 2003, and the consolidated results of
their operations and cash flows for the years ended December 31, 2004 and December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.



S. R. SNODGRASS, A. C.

Certified Public Accountants



Mentor, Ohio

February 25, 2005



21



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OURPETS COMPANY AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                                     |  |              |            |   |      |   |            |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ---------- | - | ---- | - | ---------- | -
|                                                                                                                                                                                                     |  | December 31, |           
|                                                                                                                                                                                                     |  | 2004         |            |   | 2003 |  
|ASSETS                                                                                                                                                                                               |  |              |            |   |      |   |            |  
|CURRENT ASSETS                                                                                                                                                                                       |  |              |            |   |      |   |            |  
|Cash and cash equivalents                                                                                                                                                                            |  | $            | 28,989     |   |      | $ | 36,592     |  
|Accounts receivabletrade, less allowance for doubtful accounts of $ 15,466 and $ 12,460                                                                                                             |  |              | 701,033    |   |      |   | 629,299    |  
|Inventories                                                                                                                                                                                          |  |              | 1,425,652  |   |      |   | 1,627,000  |  
|Prepaid expenses                                                                                                                                                                                     |  |              | 112,752    |   |      |   | 147,244    |  
|                                                                                                                                                                                                     |  |              |            |   |      |   |            |  
|Total current assets                                                                                                                                                                                 |  |              | 2,268,426  |   |      |   | 2,440,135  |  
|                                                                                                                                                                                                     |  |              |            |   |      |   |            |  
|PROPERTY AND EQUIPMENT                                                                                                                                                                               |  |              |            |   |      |   |            |  
|Computers and office equipment                                                                                                                                                                       |  |              | 155,263    |   |      |   | 116,557    |  
|Warehouse equipment                                                                                                                                                                                  |  |              | 106,389    |   |      |   | 106,389    |  
|Leasehold improvements                                                                                                                                                                               |  |              | 25,393     |   |      |   | 25,393     |  
|Tooling                                                                                                                                                                                              |  |              | 1,283,930  |   |      |   | 1,112,603  |  
|Construction in progress                                                                                                                                                                             |  |              | 109,284    |   |      |   | 39,384     |  
|                                                                                                                                                                                                     |  |              |            |   |      |   |            |  
|Total                                                                                                                                                                                                |  |              | 1,680,259  |   |      |   | 1,400,326  |  
|Less accumulated depreciation                                                                                                                                                                        |  |              | 935,911    |   |      |   | 738,463    |  
|                                                                                                                                                                                                     |  |              |            |   |      |   |            |  
|Net property and equipment                                                                                                                                                                           |  |              | 744,348    |   |      |   | 661,863    |  
|                                                                                                                                                                                                     |  |              |            |   |      |   |            |  
|OTHER ASSETS                                                                                                                                                                                         |  |              |            |   |      |   |            |  
|Patents, less amortization of $46,118 and $35,731                                                                                                                                                    |  |              | 211,488    |   |      |   | 104,236    |  
|Domain name and other assets                                                                                                                                                                         |  |              | 11,234     |   |      |   | 10,095     |  
|                                                                                                                                                                                                     |  |              |            |   |      |   |            |  
|Total other assets                                                                                                                                                                                   |  |              | 222,722    |   |      |   | 114,331    |  
|                                                                                                                                                                                                     |  |              |            |   |      |   |            |  
|Total assets                                                                                                                                                                                         |  | $            | 3,235,496  |   |      | $ | 3,216,329  |  
|                                                                                                                                                                                                     |  |              |            |   |      |   |            |  
|LIABILITIES                                                                                                                                                                                          |  |              |            |   |      |   |            |  
|CURRENT LIABILITIES                                                                                                                                                                                  |  |              |            |   |      |   |            |  
|Notes payable                                                                                                                                                                                        |  | $            | 675,000    |   |      | $ | 750,000    |  
|Current maturities of long-term debt                                                                                                                                                                 |  |              | 36,920     |   |      |   | 70,480     |  
|Current portion of capital lease obligations                                                                                                                                                         |  |              |           |   |      |   | 3,890      |  
|Accounts payabletrade                                                                                                                                                                               |  |              | 631,534    |   |      |   | 545,736    |  
|Accrued expenses                                                                                                                                                                                     |  |              | 93,903     |   |      |   | 92,695     |  
|                                                                                                                                                                                                     |  |              |            |   |      |   |            |  
|Total current liabilities                                                                                                                                                                            |  |              | 1,437,357  |   |      |   | 1,462,801  |  
|                                                                                                                                                                                                     |  |              |            |   |      |   |            |  
|LONG-TERM DEBT                                                                                                                                                                                       |  |              |            |   |      |   |            |  
|Long-term debtless current portion above                                                                                                                                                            |  |              | 134,624    |   |      |   | 102,953    |  
|                                                                                                                                                                                                     |  |              |            |   |      |   |            |  
|Total long-term debt                                                                                                                                                                                 |  |              | 134,624    |   |      |   | 102,953    |  
|                                                                                                                                                                                                     |  |              |            |   |      |   |            |  
|Total liabilities                                                                                                                                                                                    |  |              | 1,571,981  |   |      |   | 1,565,754  |  
|                                                                                                                                                                                                     |  |              |            |   |      |   |            |  
|STOCKHOLDERS EQUITY                                                                                                                                                                                 |  |              |            |   |      |   |            |  
|COMMON STOCK, no par value; authorized 50,000,000 shares, issued and outstanding 11,771,473 and 11,700,473 shares                                                                                    |  |              | 2,853,693  |   |      |   | 2,832,393  |  
|CONVERTIBLE PREFERRED STOCK, no par value; convertible into Common Stock at the rate of 10 common shares for each preferred share; authorized
5,000,000 shares, issued and outstanding 71,000 shares |  |              | 648,337    |   |      |   | 648,337    |  
|PAID-IN CAPITAL                                                                                                                                                                                      |  |              | 149,046    |   |      |   | 170,346    |  
|ACCUMULATED DEFICIT                                                                                                                                                                                  |  |              | (1,987,561 | ) |      |   | (2,000,501 | )
|                                                                                                                                                                                                     |  |              |            |   |      |   |            |  
|Total stockholders equity                                                                                                                                                                           |  |              | 1,663,515  |   |      |   | 1,650,575  |  
|                                                                                                                                                                                                     |  |              |            |   |      |   |            |  
|Total liabilities and stockholders equity                                                                                                                                                           |  | $            | 3,235,496  |   |      | $ | 3,216,329  |  
|                                                                                                                                                                                                     |  |              |            |   |      |   |            |  



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



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OURPETS COMPANY AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                                                                            |  |                                  |            |   |      |   |            |  
|----------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                                            |  | For the Years Ended December 31, |           
|                                                                                                            |  | 2004                             |            |   | 2003 |  
|Net revenue                                                                                                 |  | $                                | 5,445,049  |   |      | $ | 5,180,779  |  
|Cost of goods sold                                                                                          |  |                                  | 3,987,013  |   |      |   | 3,932,208  |  
|                                                                                                            |  |                                  |            |   |      |   |            |  
|Gross profit on sales                                                                                       |  |                                  | 1,458,036  |   |      |   | 1,248,571  |  
|Selling, general and administrative expenses                                                                |  |                                  | 1,388,861  |   |      |   | 1,370,734  |  
|                                                                                                            |  |                                  |            |   |      |   |            |  
|Income (loss) from operations                                                                               |  |                                  | 69,175     |   |      |   | (122,163   | )
|Other income and expense                                                                                    |  |                                  | (2,294     | ) |      |   | (176,212   | )
|Interest expense                                                                                            |  |                                  | (53,941    | ) |      |   | (109,605   | )
|                                                                                                            |  |                                  |            |   |      |   |            |  
|Income (loss) before extraordinary item                                                                     |  |                                  | 12,940     |   |      |   | (407,980   | )
|Extraordinary itemgain on litigation settlement                                                            |  |                                  |           |   |      |   | 848,166    |  
|                                                                                                            |  |                                  |            |   |      |   |            |  
|Net income                                                                                                  |  | $                                | 12,940     |   |      | $ | 440,186    |  
|                                                                                                            |  |                                  |            |   |      |   |            |  
|Basic and Diluted Earnings Per Common Share After Dividend Requirements For Preferred Stock:                |  |                                  |            |   |      |   |            |  
|Loss before extraordinary item                                                                              |  | $                                |           |   |      | $ | (0.04      | )
|Extraordinary item                                                                                          |  |                                  |           |   |      |   | 0.08       |  
|                                                                                                            |  |                                  |            |   |      |   |            |  
|Net income (loss)                                                                                           |  | $                                |           |   |      | $ | 0.04       |  
|                                                                                                            |  |                                  |            |   |      |   |            |  
|Weighted average number of common shares outstanding used to calculate basic and diluted earnings per share |  |                                  | 11,712,306 |   |      |   | 11,202,580 |  
|                                                                                                            |  |                                  |            |   |      |   |            |  







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



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OURPETS COMPANY AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

For the Years Ended December 31, 2004 and December 31, 2003



|                                                           |  |                 |  |              |         |                 |            |        |   |                |  |       |                    |   |  |                     |            |   |  |   |          
|---------------------------------------------------------- |  | --------------- |  | ------------ | ------- | --------------- | ---------- | ------ | - | -------------- |  | ----- | ------------------ | - |  | ------------------- | ---------- | - |  | - | ---------
|                                                           |  | Preferred Stock |  | Common Stock |         |                 |            |        |   |                |  | Total
|                                                           |  | Number ofShares |  | Amount       |         | Number ofShares |            | Amount |   | Paid-InCapital |  |       | AccumulatedDeficit |   |  | StockholdersEquity
|Balance at January 1, 2003                                 |  | 71,000          |  | $            | 648,337 |                 | 11,188,297 |        | $ | 2,661,093      |  | $     | 191,646            |   |  | $                   | (2,440,687 | ) |  | $ | 1,060,389
|Common Stock issued in payment of Preferred Stock dividend |  |                |  |              |        |                 | 71,000     |        |   | 21,300         |  |       | (21,300            | ) |  |                     |           |   |  |   |         
|Common Stock issued in exchange for cancellation of debt   |  |                |  |              |        |                 | 441,176    |        |   | 150,000        |  |       |                   |   |  |                     |           |   |  |   | 150,000  
|Net income for the year                                    |  |                |  |              |        |                 |           |        |   |               |  |       |                   |   |  |                     | 440,186    |   |  |   | 440,186  
|                                                           |  |                 |  |              |         |                 |            |        |   |                |  |       |                    |   |  |                     |            |   |  |   |          
|Balance at December 31, 2003                               |  | 71,000          |  |              | 648,337 |                 | 11,700,473 |        |   | 2,832,393      |  |       | 170,346            |   |  |                     | (2,000,501 | ) |  |   | 1,650,575
|Common Stock issued in payment of Preferred Stock dividend |  |                |  |              |        |                 | 71,000     |        |   | 21,300         |  |       | (21,300            | ) |  |                     |           |   |  |   |         
|Net income for the year                                    |  |                |  |              |        |                 |           |        |   |               |  |       |                   |   |  |                     | 12,940     |   |  |   | 12,940   
|                                                           |  |                 |  |              |         |                 |            |        |   |                |  |       |                    |   |  |                     |            |   |  |   |          
|Balance at December 31, 2004                               |  | 71,000          |  | $            | 648,337 |                 | 11,771,473 |        | $ | 2,853,693      |  | $     | 149,046            |   |  | $                   | (1,987,561 | ) |  | $ | 1,663,515
|                                                           |  |                 |  |              |         |                 |            |        |   |                |  |       |                    |   |  |                     |            |   |  |   |          





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



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OURPETS COMPANY AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                  |  |                                  |          |   |      |   |          |  
|--------------------------------------------------------------------------------- |  | -------------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                  |  | For the Years Ended December 31, |         
|                                                                                  |  | 2004                             |          |   | 2003 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                              |  |                                  |          |   |      |   |          |  
|Net income                                                                        |  | $                                | 12,940   |   |      | $ | 440,186  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                  |          |   |      |   |          |  
|Depreciation expense                                                              |  |                                  | 214,525  |   |      |   | 235,387  |  
|Amortization expense                                                              |  |                                  | 10,387   |   |      |   | 6,562    |  
|Loss on disposal of property and equipment                                        |  |                                  |         |   |      |   | 71,026   |  
|(Increase) decrease in assets:                                                    |  |                                  |          |   |      |   |          |  
|Accounts receivabletrade                                                         |  |                                  | (71,734  | ) |      |   | 30,915   |  
|Inventories                                                                       |  |                                  | 201,348  |   |      |   | 75,847   |  
|Prepaid expenses                                                                  |  |                                  | 34,492   |   |      |   | (117,238 | )
|Patent costs                                                                      |  |                                  | (117,639 | ) |      |   | 13,230   |  
|Domain name and other assets                                                      |  |                                  | (1,139   | ) |      |   | 2,001    |  
|Increase (decrease) in liabilities:                                               |  |                                  |          |   |      |   |          |  
|Accounts payabletrade                                                            |  |                                  | 85,798   |   |      |   | (61,723  | )
|Accrued expenses                                                                  |  |                                  | 1,208    |   |      |   | (46,743  | )
|                                                                                  |  |                                  |          |   |      |   |          |  
|Net cash provided by operating activities                                         |  |                                  | 370,186  |   |      |   | 649,450  |  
|                                                                                  |  |                                  |          |   |      |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                              |  |                                  |          |   |      |   |          |  
|Acquisition of property and equipment                                             |  |                                  | (297,010 | ) |      |   | (162,222 | )
|                                                                                  |  |                                  |          |   |      |   |          |  
|Net cash used in investing activities                                             |  |                                  | (297,010 | ) |      |   | (162,222 | )
|                                                                                  |  |                                  |          |   |      |   |          |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                              |  |                                  |          |   |      |   |          |  
|Principal payments on long-term debt                                              |  |                                  | (76,889  | ) |      |   | (204,471 | )
|Issuance of note payable to shareholder                                           |  |                                  |         |   |      |   | 100,000  |  
|Net repayment on bank line of credit                                              |  |                                  |         |   |      |   | (200,000 | )
|Issuance of long-term debt                                                        |  |                                  |         |   |      |   | 128,882  |  
|Principal payments under capital lease obligations                                |  |                                  | (3,890   | ) |      |   | (11,481  | )
|Payment of notes payable to shareholders                                          |  |                                  |         |   |      |   | (300,000 | )
|                                                                                  |  |                                  |          |   |      |   |          |  
|Net cash used in financing activities                                             |  |                                  | (80,779  | ) |      |   | (487,070 | )
|                                                                                  |  |                                  |          |   |      |   |          |  
|Net increase (decrease) in cash                                                   |  |                                  | (7,603   | ) |      |   | 158      |  
|CASH AT BEGINNING OF YEAR                                                         |  |                                  | 36,592   |   |      |   | 36,434   |  
|                                                                                  |  |                                  |          |   |      |   |          |  
|CASH AT END OF YEAR                                                               |  | $                                | 28,989   |   |      | $ | 36,592   |  
|                                                                                  |  |                                  |          |   |      |   |          |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                                  |  |                                  |          |   |      |   |          |  
|Interest paid                                                                     |  | $                                | 55,948   |   |      | $ | 142,846  |  
|                                                                                  |  |                                  |          |   |      |   |          |  
|SUPPLEMENTAL DISCLOSURE OF NON CASH TRANSACTIONS                                  |  |                                  |          |   |      |   |          |  
|Common Stock issued in payment of Preferred Stock dividend                        |  | $                                | 21,300   |   |      | $ | 21,300   |  
|                                                                                  |  |                                  |          |   |      |   |          |  
|Notes payable converted into Common Stock                                         |  | $                                |         |   |      | $ | 150,000  |  
|                                                                                  |  |                                  |          |   |      |   |          |  



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



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##### Table of Contents

OURPETS COMPANY AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Summary of
Significant Accounting Policies



Organization and
Nature of OperationsOurPets Company (the Company) management originally founded Napro, Inc. (Napro), an Ohio corporation, in 1985 as an enterprise for launching new ventures and acquiring companies in various
lines of business. In February 1996 Napro formed a wholly-owned Ohio subsidiary, Virtu Company (Virtu), to market proprietary products to the retail pet business under the OurPets label. Napro then changed its name to OurPets
Company effective March 19, 1998. On July 16, 1998, Manticus, Inc. (Manticus) obtained all of the outstanding shares of OurPets Company in exchange for 8,000,000 shares of common stock of Manticus in a transaction accounted for as
a pooling of interests. After the transaction, the holders of the former OurPets shares owned approximately 89% of the shares of Manticus, resulting in a reverse takeover. On October 12, 1998, Manticus changed its name to OurPets
Company.



The accompanying consolidated financial statements
have been prepared in accordance with 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.



InventoryInventories are carried at the lower of cost, first-in, first-out method or market. Inventories at December 31, 2004 and December 31, 2003 consist of:



|                         |  |      |           |      |   |          
|------------------------ |  | ---- | --------- | ---- | - | ---------
|                         |  | 2004 |           | 2003
|Finished goods           |  | $    | 1,057,054 |      | $ | 1,327,944
|Components and packaging |  |      | 368,598   |      |   | 299,056  
|                         |  |      |           |      |   |          
|Total                    |  | $    | 1,425,652 |      | $ | 1,627,000
|                         |  |      |           |      |   |          



All inventories are
pledged as collateral for bank and small business administration loans.



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



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



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



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OURPETS COMPANY AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Summary of Significant Accounting Policies (Continued)



All property and equipment is pledged as collateral for bank and small business administration loans.
Total depreciation for the years ended December 31, 2004 and December 31, 2003 was $ 214,525 and $ 235,387, respectively.



Intangible AssetsThe Company has filed for patents and trademarks for its proprietary products. The costs incurred of $117,639 in the year
ended December 31, 2004 and $16,279 in the year ended December 31, 2003 have been capitalized and are being amortized over 15 years on a straight-line basis. In 2002 the Company purchased a domain name for its website for $10,000 which is not
subject to amortization. The recoverability of the carrying value of intangible assets is evaluated on an ongoing basis, and permanent declines in value, if any, are charged to expense. All intangible assets are pledged as collateral for the bank
loan.



Revenue Recognition and Major CustomersWith
respect to revenue from product sales, revenue is recognized only upon shipment of products to customers. The Company derives its revenues from the sale of proprietary pet products under the OurPets brand name. Net revenue is comprised of
gross sales less discounts given to distributors and returns and allowances.



For the year ended December 31, 2004, 45.7% of the Companys revenue was derived from two major customers. Revenue generated from each of these customers amounted to $ 1,656,928 and $ 830,915, which represents
30.4% and 15.3% of total revenue, respectively.



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



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, 2004 and December 31, 2003 was $ 51,661 and $ 44,196, respectively.



Advertising CostsAdvertising costs are charged to operations
when the advertising first takes place. Advertising expense for the years ended December 31, 2004 and December 31, 2003 was $ 41,040 and $ 114,709, respectively.



Stock OptionsThe Company adopted Financial Accounting Standards Statement No. 123, Accounting for
Stock-Based Compensation. This statement encourages, but does not require, the Company to recognize compensation expense for all awards of equity instruments issued. The statement established a fair value based method of accounting for
stock-based compensation plans. The standard applies to all transactions in which an entity acquires goods or services by issuing equity instruments or by incurring liabilities in amounts based on the price of the entitys common stock or other
equity instruments. Statement No. 123 permits companies to continue to account for such transactions under Accounting Principles Board Opinion No. 25 (APB No. 25), Accounting for Stock Issued to Employees, but requires disclosure of pro
forma net income and earnings per share as if the Company had applied the new method.



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



27



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##### Table of Contents

OURPETS COMPANY AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Summary of Significant Accounting Policies (Continued)



For purposes of pro forma disclosures, the estimated fair value of the options granted in 2004, 2003,
2002, 2001 and 2000 is amortized to expense from the date of grant to the date of expiration. The weighted-average fair value of options granted during 2004, 2003, 2002, 2001 and 2000 were $0.09, $0.10, $0.30, $0.16 and $0.28, respectively. The
Companys pro forma information follows:



|                                              |  |                         |         |   |      |   |        
|--------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | -------
|                                              |  | Year Ended December 31,
|                                              |  | 2004                    |         |   | 2003
|Net income (loss) applicable to Common Stock: |  |                         |         |   |      |   |        
|As reported                                   |  | $                       | (8,360  | ) |      | $ | 418,886
|Less pro forma expense related to options     |  |                         | 10,768  |   |      |   | 18,300 
|                                              |  |                         |         |   |      |   |        
|Pro forma                                     |  | $                       | (19,128 | ) |      | $ | 400,586
|                                              |  |                         |         |   |      |   |        
|Basic Net Income (Loss) per Common Share:     |  |                         |         |   |      |   |        
|As reported                                   |  |                         | (0.00   | ) |      |   | 0.04   
|Pro forma                                     |  |                         | (0.00   | ) |      |   | 0.04   
|Diluted Net Income (Loss) per Common Share:   |  |                         |         |   |      |   |        
|As reported                                   |  |                         | (0.00   | ) |      |   | 0.04   
|Pro forma                                     |  |                         | (0.00   | ) |      |   | 0.04   



Net Income (Loss)
Per Common ShareBasic net loss per Common Share is based on the net loss attributable to common stockholders after preferred stock dividend requirements for the year, divided by the weighted average number of common shares outstanding
during the year. Potential common shares have not been included since their effect would be antidilutive. As of December 31, 2004, common shares that could be potentially dilutive include 874,750 stock options at exercise prices from $0.100 to
$0.625 a share, 791,880 warrants to purchase Common Stock at exercise prices from $0.288 to $1.227 a share and 710,000 shares underlying the Preferred Stock at a conversion rate of $1.000 per share. As of December 31, 2003, common shares that could
be potentially dilutive include 741,249 stock options at exercise prices from $0.100 to $0.625 a share, 2,473,291 warrants to purchase Common Stock at exercise prices from $0.407 to $1.454 a share and 710,000 shares underlying the Preferred Stock at
a conversion rate of $1.000 per share.



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, 2004. 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 December 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (FAS) No. 123 (Revised 2004), Share-Based Payment. The Statement requires that compensation cost relating to share-based payment transactions be



28



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##### Table of Contents

OURPETS COMPANY AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Summary of Significant Accounting Policies (Continued)



recognized in financial statements and that this cost be measured based on the fair value of the equity or liability instruments issued. FAS No. 123 (Revised
2004) covers a wide range of share-based compensation arrangements including stock options, restricted stock plans, performance-based awards, stock appreciation rights, and employee stock purchase plans. The Company will adopt FAS No. 123 (Revised
2004) on January 1, 2006 and is currently evaluating the impact the adoption of the standard will have on the Companys results of operations.



Notes Payable and Long-term Debt



|                                                                                                                                                                                                                                                                                                                      |  |              |         |      |   |        
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | ---- | - | -------
|                                                                                                                                                                                                                                                                                                                      |  | December 31,
|                                                                                                                                                                                                                                                                                                                      |  | 2004         |         | 2003
|Revolving note payableBank, under line of credit facility of up to $ 1,500,000 with interest at prime plus 1% (6.25% at December 31,
2004 and 5.00% at December 31, 2003). The note is secured by accounts receivable, equipment, inventory, trademarks, patents and the personal guarantee of certain stockholders. |  | $            | 650,000 |      | $ | 650,000
|Note payableSmall Business Administration $ 270,000 in 1993, due in monthly installments of $ 3,121 including interest at 5.244%. This
note was secured by accounts receivable, inventory, property and equipment, and the personal guarantee of certain stockholders.                                               |  |              |        |      |   | 42,497 
|Note payableSmall Business Administration, bridge note increased to $ 175,000 in 1995, due in monthly installments of $ 2,180 through
October 1, 2006 including interest at 6.999%. This note is secured by various equipment purchases, and the personal guarantee of certain stockholders.                         |  |              | 46,209  |      |   | 68,287 
|Note payableformer director and shareholder, due on February 1, 2006. Interest at prime plus 3% (8.25% at December 31, 2004) payable
quarterly. This note is subordinated to the bank loans.                                                                                                                         |  |              | 75,000  |      |   | 75,000 
|Note payableshareholder and investor, due on July 31, 2005. Interest is payable quarterly at 10%. This note is subordinated to the bank
loan.                                                                                                                                                                        |  |              | 25,000  |      |   | 25,000 
|Installment notes payabledue in 60 monthly payments of $1,374 including interest through June 1, 2008.                                                                                                                                                                                                               |  |              | 50,335  |      |   | 62,649 
|                                                                                                                                                                                                                                                                                                                      |  |              |         |      |   |        
|                                                                                                                                                                                                                                                                                                                      |  |              | 846,544 |      |   | 923,433
|Less current portion of long-term debt                                                                                                                                                                                                                                                                                |  |              | 711,920 |      |   | 820,480
|                                                                                                                                                                                                                                                                                                                      |  |              |         |      |   |        
|                                                                                                                                                                                                                                                                                                                      |  | $            | 134,624 |      | $ | 102,953
|                                                                                                                                                                                                                                                                                                                      |  |              |         |      |   |        



Future maturities of
long-term debt are as follows:



|                         |  |        |        
|------------------------ |  | ------ | -------
|Year Ending December 31, |  | Amount
|2005                     |  | $      | 711,920
|2006                     |  |        | 111,781
|2007                     |  |        | 15,323 
|2008                     |  |        | 7,520  
|                         |  |        |        
|                         |  | $      | 846,544
|                         |  |        |        



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



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##### Table of Contents

OURPETS COMPANY AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Notes Payable and Long-term Debt (Continued)



$ 300,000 annually for capital expenditures; and (iv) pay principal on subordinated notes due to officers and directors. In addition, the Company must
follow certain other requirements as to maintaining a minimum debt service coverage ratio of at least 1.15 to 1.00 and an adjusted tangible net worth of at least $ 1,500,000.



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



In July and August of 2000, the Company borrowed a total of $ 275,000 from an officer, directors, stockholders and investor
for working capital purposes at an annual interest rate of 10%. A note for $ 75,000 is due on February 1, 2006 with interest payable quarterly and the other note for $ 25,000 is due on July 31, 2005 with interest payable quarterly. One of the notes
for $ 25,000 and accrued interest and a cash payment totaling $ 6,250 was paid on November 15, 2001 by conversion into 25,468 shares of Common Stock upon the exercise of warrants. Two of the notes for $75,000 were repaid on December 30, 2003 by
$25,000 in cash and $50,000 by conversion into 147,058 shares of Common Stock. Another of the notes for $150,000 was reduced to $75,000 by a $75,000 cash payment on December 30, 2003. On February 1, 2004 the reduced note of $75,000 was extended to
become due on February 1, 2006 at an interest rate of prime plus 3% payable quarterly. In addition the lender received 56,628 warrants for the purchase of Common Stock at $ 0.298 per share.



Intangible Assets



|                                          |  |                         |         |                         |   |        |  |              |         |  |   |       
|----------------------------------------- |  | ----------------------- | ------- | ----------------------- | - | ------ |  | ------------ | ------- |  | - | ------
|                                          |  | As of December 31, 2004 |         | As of December 31, 2003
|                                          |  | Cost                    |         | Amortization            |   | Cost   |  | Amortization
|Amortized intangible assets:              |  |                         |         |                         |   |        |  |              |         |  |   |       
|Patents and trademarks                    |  | $                       | 257,606 |                         | $ | 46,118 |  | $            | 139,967 |  | $ | 35,731
|                                          |  |                         |         |                        
|Unamortized intangible assets:            |  |                         |         |                         |   |        |  |              |         |  |   |       
|Domain name                               |  | $                       | 10,000  |                         | $ |       |  | $            | 10,000  |  | $ |      
|                                          |  |                         |         |                        
|Amortization expense for year ended 12/31 |  | $                       | 10,387  |                         |   |        |  | $            | 6,562   |  |   |       
|                                          |  |                         |         |                        
|Estimated amortization expense:           |  |                         |         |                         |   |        |  |              |         |  |   |       
|For year ending 12/31/05                  |  | $                       | 19,215  |                         |   |        |  |              |         |  |   |       
|For year ending 12/31/06                  |  | $                       | 19,215  |                         |   |        |  |              |         |  |   |       
|For year ending 12/31/07                  |  | $                       | 19.215  |                         |   |        |  |              |         |  |   |       
|For year ending 12/31/08                  |  | $                       | 19,215  |                         |   |        |  |              |         |  |   |       
|For year ending 12/31/09                  |  | $                       | 19,215  |                         |   |        |  |              |         |  |   |       



Related Party Transactions



The Company leases warehouse and office facilities from a
related entity, Senk Properties. Current monthly rentals are $ 12,113 with annual increases each June in the monthly rental based upon the change in the indicated consumer price index in the preceding year plus real estate taxes. The initial term of
the lease was for five years ending on May 31, 1998 and it has been extended for two additional five year terms, with the possibility of three additional extensions of five years each. Lease expense for the year ended December 31, 2004 and the year
ended December 31, 2003 was $ 163,834 and $ 147,560, respectively.



30



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##### Table of Contents

OURPETS COMPANY AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Concentration of Credit Risk



The Company maintains cash balances at a bank. Accounts at the institution are insured by the Federal Deposit Insurance
Corporation up to $100,000. Bank balances, including outstanding checks, at December 31, 2004 and December 31, 2003 were $92,566 and $466,397, respectively, which results in an uninsured balance of $366,397 at December 31, 2003.



At December 31, 2004, 43.1% of the Companys accounts receivable was due
from three major customers. Amounts due from each of these customers were $108,989, $99,954, and $99,686, which represents 15.2%, 14.0%, and 13.9% of total accounts receivable, respectively.



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



Capital Stock



From July through November 1999, the Company sold in a Private Placement 100,000 shares of no par value non-voting
Convertible Preferred Stock. Each share of the Preferred Stock is convertible into ten shares of Common Stock at a conversion rate of $ 1.00 per share. The Company may redeem the preferred shares at $ 10 per share or convert each preferred share
into ten common shares, at the option of the shareholder, at such time as the common shares are trading on a public exchange at a closing price of $ 4.00 or above for a period of ten consecutive business days. The holders of the Preferred are
entitled to a 10% stock dividend paid annually in common shares beginning twelve months from the final close of the Private Placement. Under certain conditions, each Preferred shareholder may elect to receive a cash dividend in lieu of the Common
Stock dividend. The Company paid brokers or dealers a cash sales commission of 8% and issued them warrants, which expire on October 31, 2005, to purchase 80,113 shares of Common Stock at an exercise price of $ 1.060 per share.



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



Warrants



At December 31, 2004, the Company had the following Common Stock purchase warrants outstanding, all of which were exercisable:



|                                             |  |                  |  |               |  |                  
|-------------------------------------------- |  | ---------------- |  | ------------- |  | -----------------
|                                             |  | Number of Shares |  | ExercisePrice |  | Expiration Date  
|1999 Private Placement to brokers or dealers |  | 80,113           |  | 1.060         |  | October 31, 2005 
|1999 Issuance to related parties             |  | 518,672          |  | 0.964         |  | December 14, 2005
|2001 Directors for fees                      |  | 14,405           |  | 1.215         |  | October 1, 2006  
|2002 Payment for services                    |  | 13,454           |  | 0.446         |  | March 1, 2005    
|2002 Payment for services                    |  | 25,468           |  | 1.227         |  | August 3, 2006   
|2003 Note payable to director                |  | 12,654           |  | 0.405         |  | September 4, 2006
|2004 Note payable to stockholder             |  | 56,628           |  | 0.298         |  | February 1, 2007 
|2004 Directors for fees                      |  | 70,486           |  | 0.288         |  | October 1, 2009  
|                                             |  |                  |  |               |  |                  
|Total                                        |  | 791,880          |  |               |  |                  
|                                             |  |                  |  |               |  |                  



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##### Table of Contents

OURPETS COMPANY AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Warrants (Continued)



The exercise price and number of warrant shares are subject to adjustment in the event of a Common
Stock dividend or distribution, a stock split or reverse stock split, or reorganization of the Company. The financial statements reflect the adjustments for the Common Stock issued in payment of the Preferred Stock dividends in 2004, 2003, 2002,
2001 and 2000.



Stock Option Plan



On December 4, 1999, the Board of Directors approved the 1999 Stock Option
Plan, which was approved by the shareholders on August 5, 2000. Stock options may be granted at the discretion of the Board of Directors for which the Company has reserved 1,350,000 shares of its Common Stock for issuance upon the exercise of
options granted under the Plan. The options vest one-third on each of the second, third and fourth anniversaries of the date of grant and expire on the fifth anniversary of the date of grant. The Company grants stock options at exercise prices equal
to or greater than the fair market value of the Companys Common Stock on the date of grant. On May 8, 2003, the Board of Directors approved the adjustment of the exercise price of unexercised stock options to the higher of 50% of the existing
exercise price or the current market price on May 8, 2003. The following table summarizes the activity in options under the Plan:



|                                 |  |                 |  |                                |    
|-------------------------------- |  | --------------- |  | ------------------------------ | ---
|                                 |  | Number ofShares |  | Weighted AverageExercise Price
|Outstanding at January 1, 2003   |  | 669,250         |  | $                              | .90
|Granted                          |  | 122,750         |  |                                | .21
|Exercised                        |  |                |  |                                |   
|Forfeited                        |  | 50,751          |  |                                | .63
|                                 |  |                 |  |                                |    
|Outstanding at December 31, 2003 |  | 741,249         |  |                                | .40
|Granted                          |  | 738,500         |  |                                | .31
|Exercised                        |  |                |  |                                |   
|Forfeited                        |  | 604,999         |  |                                | .38
|                                 |  |                 |  |                                |    
|Outstanding at December 31, 2004 |  | 874,750         |  |                                | .34
|                                 |  |                 |  |                                |    



The following table
summarizes options outstanding at December 31, 2004:



|            |  |                   |  |                              |      |                                          |           |                   |        |                              |   |     
|----------- |  | ----------------- |  | ---------------------------- | ---- | ---------------------------------------- | --------- | ----------------- | ------ | ---------------------------- | - | ----
|            |  |                   |  | Options Outstanding          |      | Options Exercisable                     
|Range       |  | NumberOutstanding |  | WeightedAverageExercisePrice |      | WeightedAverageRemainingContractual Life |           | NumberExercisable |        | WeightedAverageExercisePrice
|$0.45-$0.63 |  | 107,000           |  | $                            | 0.56 |                                          | 1.0 Years |                   | 86,333 |                              | $ | 0.55
|$0.27-$0.35 |  | 734,500           |  | $                            | 0.31 |                                          | 4.6 Years |                   |       |                              |   |    
|$0.10-$0.21 |  | 33,250            |  | $                            | 0.21 |                                          | 3.1 Years |                   | 3,499  |                              | $ | 0.20



There were 89,832 and
556,997 options exercisable at December 31, 2004 and December 31, 2003, respectively. The weighted average fair value of options granted in 2004 and 2003 was $0.31 and $0.21, respectively.



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##### Table of Contents

OURPETS COMPANY AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Capital Leases



The Company was the lessee of equipment under a capital lease expiring in 2004. The assets and liabilities under capital leases are recorded at the lower
of the present value of the minimum lease payments or the fair value of the asset. The assets are amortized on a straight-line basis over the lesser of their related lease terms or their estimated productive lives. Amortization of assets under
capital leases is included in depreciation expense for the years ended December 31, 2004 and December 31, 2003 was $ 3,131 and $ 4,074, respectively.



A summary of property held under capital leases, included in property, plant and equipment, is as follows as of December 31, 2004 and December 31, 2003:



|                               |  |      |   |      |   |         |  
|------------------------------ |  | ---- | - | ---- | - | ------- | -
|                               |  | 2004 |   | 2003 |  
|Office equipment               |  | $    |  |      | $ | 17,077  |  
|Less: accumulated amortization |  |      |  |      |   | (13,946 | )
|                               |  |      |   |      |   |         |  
|Total                          |  | $    |  |      | $ | 3,131   |  
|                               |  |      |   |      |   |         |  



Minimum future lease
payments under operating leases as of December 31, 2004 are as follows:



|                             |  |                 |        
|---------------------------- |  | --------------- | -------
|                             |  | OperatingLeases
|2005                         |  | $               | 172,238
|2006                         |  |                 | 177,480
|2007                         |  |                 | 182,839
|2008                         |  |                 | 77,392 
|2009                         |  |                 |       
|Thereafter                   |  |                 |       
|                             |  |                 |        
|Total minimum lease payments |  | $               | 609,949
|                             |  |                 |        



Total rent expense of
the Company for the years ended December 31, 2004 and December 31, 2003 was $ 166,491 and $ 155,558, respectively.



Other Income and Expense



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



Extraordinary Item



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



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##### Table of Contents

OURPETS COMPANY AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Income Taxes



There were income tax benefits of $5,152 and $150,885 from use of operating loss carryforwards by the Company for the years ended December 31, 2004 and
December 31, 2003, respectively.



Following is a reconciliation
of the expected income tax expense/benefit to the amount based on the U.S. statutory rate of 34% for the years ended December 31, 2004 and December 31, 2003:



|                                                      |  |      |        |   |      |   |          |  
|----------------------------------------------------- |  | ---- | ------ | - | ---- | - | -------- | -
|                                                      |  | 2004 |        |   | 2003 |  
|Income tax expense/benefit based on US statutory rate |  | $    | 5,152  |   |      | $ | 150,885  |  
|Current period change in the valuation allowance      |  |      | (5,152 | ) |      |   | (150,885 | )
|                                                      |  |      |        |   |      |   |          |  
|Provision for income taxes                            |  | $    |       |   |      | $ |         |  
|                                                      |  |      |        |   |      |   |          |  



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



|                                |  |              |          |   |      |   |          |  
|------------------------------- |  | ------------ | -------- | - | ---- | - | -------- | -
|                                |  | December 31, |         
|                                |  | 2004         |          |   | 2003 |  
|Deferred tax assets:            |  |              |          |   |      |   |          |  
|Net operating loss carryforward |  | $            | 523,248  |   |      | $ | 528,400  |  
|Valuation allowances            |  |              | (523,248 | ) |      |   | (528,400 | )
|                                |  |              |          |   |      |   |          |  
|Net deferred tax assets         |  | $            |         |   |      | $ |         |  
|                                |  |              |          |   |      |   |          |  



The Companys
valuation allowance decreased by approximately $5,200 and $150,900 for the years ended December 31, 2004 and December 31, 2003, respectively, which represents the effect of net income. The Company has recorded a valuation allowance to record its
deferred tax assets at estimated net realizable value due to the uncertainty of realization of these assets through future taxable income.



The Company has available at December 31, 2004, unused operating loss carryforwards that may be applied against future taxable income and that expire as
follows:



|             |  |                                             |           |                             |     
|------------ |  | ------------------------------------------- | --------- | --------------------------- | ----
|Year Of Loss |  | Amount of UnusedOperating LossCarryforwards |           | ExpirationDuring YearEnding
|1996         |  | $                                           | 77,405    |                             | 2011
|1997         |  |                                             | 464,680   |                             | 2012
|1998         |  |                                             | 150,362   |                             | 2018
|1999         |  |                                             | 438,086   |                             | 2019
|2000         |  |                                             | 141,177   |                             | 2020
|2002         |  |                                             | 267,255   |                             | 2022
|             |  |                                             |           |                             |     
|             |  | $                                           | 1,538,965 |                             |     
|             |  |                                             |           |                             |     



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##### Table of Contents

OURPETS COMPANY AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Litigation



In December 2000, our former intellectual property counsel informed us that one of its associates had missed a number of deadlines for filings with the
Patent and Trademark Office, resulting in the loss of patent and trademark rights for several products. As a result of this negligence, which was addressed in a lawsuit that was settled in December 2003, Jack Lemkin, owner and operator of Sinitron
Corp., was able to file for and obtain a patent on various aspects of one of our products. We commenced suit against Lemkin personally on June 6, 2002 in the United States District Court, Northern District of Ohio and against Sinitron Corp. on
December 26, 2002 under the caption OurPets Company and Virtu Company vs Sinitron Corp., in the Common Pleas Court located in Summit County, Ohio. We subsequently transferred the case to the Common Pleas Court located in Franklin
County, Ohio being the county where Sinitron is located. Sinitron subsequently filed a counterclaims against OurPets alleging tortious interference with contract and damage to business reputation and damages for unpaid invoices. The Federal
Court in our action against Lemkin personally issued a temporary restraining order against Lemkin in November 2003. Subsequent to the issuance of the restraining order, Mr. Lemkin filed suit against us on December 4, 2003 in the United States
District Court, Southern District of Ohio alleging violations of the United States Patent Act and breach of good faith and fair dealings pertaining to one of our patents. Lemkin also joined with another individual, Gloria Teschke, to file an action
against OurPets in the United States District Court, Southern District of Ohio, alleging claims related to the subject matter of the first three lawsuits. In October 2004, the parties agreed to settle and dismiss all four pending actions and
the settlement agreement and mutual release were executed as of October 29, 2004. Under the agreement Mr. Lemkin assigned the two patents in litigation to OurPets in exchange for $50,000 payable in three equal annual installments beginning
January 1, 2005 which have been capitalized to patents and will be amortized over the remaining life of the two patents.



On March 31, 2000, SMP Company, Incorporated (formerly known as Sanar Manufacturing, Inc.) (SMP), a wholly-owned subsidiary of the Company,
entered into an asset purchase agreement with Akon Plastic Enterprises, Inc. (Akon) whereby Akon agreed to purchase substantially all of the assets used by SMP in molding plastics. Further, as part of the sale, Akon and its President,
David F. Harman (Harman), entered into an Indemnity Agreement whereby Akon and Harman, jointly and severally, agreed to indemnify us and the individual guarantors of the Small Business Administration loans to SMP against any liability
for such loans, which were assumed as a part of the asset purchase by Akon. In September 2000, Akon breached the asset purchase agreement and in October 2000, we filed suit in the Court of Common Pleas, Summit County, Ohio for damages, including
non-payment of loans, resulting from Akons breach of the asset purchase agreement. In December 2001, Harman filed a Third-Party Complaint against us alleging intentional infliction of emotional distress seeking compensatory and punitive
damages against us and the individual guarantors. Both actions were dismissed without prejudice in March 2003. On June 5, 2003, we re-filed the action against Akon, the directors of Akon, and Harman in the Court of Common Pleas of Lake County, Ohio
where it is currently pending. While we believe that our case against Akon, its directors, and Harman is strong, we cannot predict the likely outcome of this action.



On April 16, 2004 a patent infringement action was filed against the Company under the caption TFH Publications, Inc. vs
OurPets Company and Bonybone, S.A. de C.V.in the United States District Court for the District of New Jersey. The plaintiff, TFH Publications, Inc, a Delaware corporation located in New Jersey, alleges that a product distributed
exclusively by us in the United States infringes upon a competing product for which TFH Publications holds the patent. Our supplier and co-defendant in the action, Bonybone, is a Mexican company that developed the product at issue and also
manufactures it for distribution in the United States by us. While we believe that the complaint is without merit, we are currently evaluating our options with respect to settling the action or defending it vigorously to determine the best
alternative for the Company to pursue. While it is too early to predict the outcome, we believe that the Companys likely risk of facing any significant damages is minimal.



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##### Table of Contents

OURPETS COMPANY AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Litigation (Continued)



On January 19, 2005 a trademark infringement action was filed against the Company under the caption
Barbaras Canine Catering, Inc. vs OurPets Company in the United States District Court for the Western District of North Carolina. The plaintiff, Barbaras Canine Catering, Inc. alleges that one of our products infringes upon
a trademark which the plaintiff owns. While there are differences in products, packaging and name, there has been negotiations directed toward eliminating any confusion over the packaging and trademark. While it is too early to predict the outcome,
we believe that the Companys likely risk of facing any significant damages is minimal.



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



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