INVENTORIES

Inventories are carried at the lower of cost, first-in, first-out method or market. All inventories are pledged as collateral for bank loans. Inventories at September 30, 2011 and December 31, 2010 consist of:

	2011			2010
Finished goods	$	3,698,121		$	3,949,340
Components, packaging and work in process		2,493,599			1,626,789
Inventory reserve		( 450,000	)		-0-

Total	$	5,741,720		$	5,576,129

The Company recorded a inventory reserve adjustment of $450,000 as of September 30, 2011. During September and October 2011, management reviewed its business model and decided to refocus sales and marketing resources to most marketable and profitable products.

Three major categories of obsolete inventory were identified:

1.	$122,000, or 27%, relates to the overhaul of the Cosmic Pet product line which was implemented at the end of July 2011;

2.	$97,000, or 22%, relates to a prior generation of SmartScoop® product management determined during its review to no longer market due to technical obsolescence; and

3.	$231,000, or 51%, relates to decisions made by the sales/marketing department in the third quarter 2011 to cease marketing the products related to this inventory.

The company will continue its policy of regularly reviewing inventory quantities on hand based on related service levels and functionality, and carrying cost is reduced to net realizable value for inventories in which their cost exceeds their utility due to changes in marketing and sales strategies, obsolescence, changes in price levels or other causes. Until the Company completes its physical inventory count (as of December 31, 2011) and its valuation, it cannot guarantee there will be no further inventory adjustments to reserves for the year end December 31, 2011. Furthermore, if future demand or market conditions for the Company’s products are less favorable than forecasted or if unforeseen technological changes negatively impact the utility of certain products or component inventory the Company may be required to record additional inventory reserves, which would negatively affect its results of operations in the period when the inventory reserve adjustments are recorded.