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UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549

FORM 10-QSB

[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934

For the quarterly period ended July 31, 2003

OR

[   ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

For the transition period from ____________ to ____________

Commission file number: 1-31642

INTERNATIONAL ABSORBENTS INC.(Exact name of registrant as specified in its charter)

|                                                                                                    |  |                                          
|--------------------------------------------------------------------------------------------------- |  | -----------------------------------------
|Province of British Columbia, Canada
(State or other jurisdiction of incorporation or organization) |  | None
(IRS Employer Identification Number)

1569 Dempsey Road
North Vancouver, British Columbia
Canada V7K 1S8
(Address of principal executive offices)

(604) 681-6181
(Issuers telephone number, including area code)

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 the past 90 days. Yes [X] No [ ]

State the number of shares outstanding of each of the issuers classes of
common stock, as of September 10, 2003.

|                            |  |               |           | 
|--------------------------- |  | ------------- | --------- | 
|Title of Class              |  | No. of Shares
|                            |  |              
|Common Shares, no par value |  |               | 5,699,545 | 





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|                                                                                              |  |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 
|CONDENSED CONSOLIDATED BALANCE SHEETS                                                        
|CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS                                              
|CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                                              
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                         
|ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|RISK FACTORS                                                                                 
|ITEM 3. CONTROLS AND PROCEDURES                                                              
|PART II  OTHER INFORMATION                                                                  
|ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                                                                                   
|Cert. of Gordon Ellis pursuent to Rule 13A-14(A)                                             
|Cert.of David Thompson pursuent to Rule 13A-14(A)                                            
|Cert.of Gordon Ellis pursuent to 18 U.S.C.-1350                                              
|Cert.of D. Thompson pursuent to 18 U.S.C.-1350                                               



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INTERNATIONAL ABSORBENTS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(US dollars, in thousands)

|                                                                                                                                                             |                                          |                            |        |               |       |                  |        |       |       | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------------- | -------------------------- | ------ | ------------- | ----- | ---------------- | ------ | ----- | ----- | 
|                                                                                                                                                             |                                          |                            |        | As at         |       | As at           
|                                                                                                                                                             |                                          |                            |        | July 31, 2003 |       | January 31, 2003
|                                                                                                                                                             |                                          |                            |        | (unaudited)   |       | (audited)       
|                                                                                                                                                             |                                          |                            |        |               |       |                 
|ASSETS                                                                                                                                                       |                                          |                            |        |               |       |                  |        |      
|Current assets:                                                                                                                                              |                                          |                            |        |               |       |                  |        |      
|                                                                                                                                                             | Cash and cash equivalents                |                            | $      | 2,060         |       |                  | $      | 3,051 |      
|                                                                                                                                                             | Restricted Cash                          |                            |        | 1,357         |       |                  |        |      |      
|                                                                                                                                                             | Short term investments                   |                            |        | 211           |       |                  |        | 207   |      
|                                                                                                                                                             | Accounts receivable, net                 |                            |        | 1,361         |       |                  |        | 1,489 |      
|                                                                                                                                                             | Inventories                              |                            |        | 1,514         |       |                  |        | 1,042 |      
|                                                                                                                                                             | Prepaid expenses                         |                            |        | 169           |       |                  |        | 151   |      
|                                                                                                                                                             | Receivable from related party            |                            |        |              |       |                  |        | 26    |      
|                                                                                                                                                             | Deferred income tax asset                |                            |        | 134           |       |                  |        | 273   |      
|                                                                                                                                                             |                                          |                            |        |               |       |                  |        |       |      
|                                                                                                                                                             |                                          |                            | 6,806  |               |       |                  | 6,239  |      
|                                                                                                                                                             | Property, plant and equipment            |                            |        | 7,363         |       |                  |        | 3,971 |      
|                                                                                                                                                             | Intangible assets                        |                            |        | 190           |       |                  |        | 99    |      
|                                                                                                                                                             |                                          |                            |        |               |       |                  |        |       |      
|                                                                                                                                                             |                                          | $                          | 14,359 |               |       | $                | 10,309 |      
|                                                                                                                                                             |                                          |                            |        |               |       |                  |        |       |      
|LIABILITIES                                                                                                                                                  |                                          |                            |        |               |       |                  |        |      
|Current liabilities:                                                                                                                                         |                                          |                            |        |               |       |                  |        |      
|                                                                                                                                                             | Accounts payable and accrued liabilities |                            |        | 1,669         |       |                  |        | 1,295 |      
|                                                                                                                                                             | Related party payable                    |                            |        |              |       |                  |        | 5     |      
|                                                                                                                                                             | Current portion of long-term debt        |                            |        | 119           |       |                  |        |      |      
|                                                                                                                                                             | Income taxes payable                     |                            |        | 19            |       |                  |        | 28    |      
|                                                                                                                                                             |                                          |                            |        |               |       |                  |        |       |      
|                                                                                                                                                             |                                          |                            | 1,807  |               |       |                  | 1,328  |      
|Long term liabilities:                                                                                                                                       |                                          |                            |        |               |       |                  |        |      
|                                                                                                                                                             | Deferred income tax liability            |                            |        | 262           |       |                  |        | 162   |      
|                                                                                                                                                             | Long-term debt                           |                            |        | 2,764         |       |                  |        |      |      
|                                                                                                                                                             |                                          |                            |        |               |       |                  |        |       |      
|                                                                                                                                                             |                                          |                            | 4,833  |               |       |                  | 1,490  |      
|SHAREHOLDERS EQUITY                                                                                                                                         |                                          |                            |        |               |       |                  |        |      
|Common
stock, no par value,
100,000,000 shares authorized
5,697,045 and 5,667,345 issued and outstanding at
July 31, 2003 and January 31, 2003, respectively |                                          |                            | 7,099  |               |       |                  | 7,052  |      
|Additional paid in capital                                                                                                                                   |                                          |                            | 448    |               |       |                  | 444    |      
|Retained earnings                                                                                                                                            |                                          |                            | 1,979  |               |       |                  | 1,323  |      
|                                                                                                                                                             |                                          |                            |        |               |       |                  |        |       |      
|                                                                                                                                                             |                                          | Total shareholders equity |        |               | 9,526 |                  |        |       | 8,819 | 
|                                                                                                                                                             |                                          |                            |        |               |       |                  |        |       |      
|                                                                                                                                                             |                                          | $                          | 14,359 |               |       | $                | 10,309 |      
|                                                                                                                                                             |                                          |                            |        |               |       |                  |        |       |      

Unaudited (all amounts in U.S. dollars except where otherwise noted). The
accompanying notes are an integral part of these consolidated financial
statements.

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INTERNATIONAL ABSORBENTS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(US dollars, in thousands, except for per share amounts)

|                                                             |                            |   |                  |       |                    |   |               |       |               |   |       |       |  |   |       |       | 
|------------------------------------------------------------ | -------------------------- | - | ---------------- | ----- | ------------------ | - | ------------- | ----- | ------------- | - | ----- | ----- |  | - | ----- | ----- | 
|                                                             |                            |   | Six Months Ended |       | Three Months Ended
|                                                             |                            |   |                  |       |                   
|                                                             |                            |   | July 31, 2003    |       | July 31, 2002      |   | July 31, 2003 |       | July 31, 2002
|                                                             |                            |   |                  |       |                    |   |               |       |              
|Sales                                                        |                            | $ | 9,349            |       |                    | $ | 7,258         |       |               | $ | 4,831 |       |  | $ | 3,570 |      
|Cost of goods sold                                           |                            |   | 5,813            |       |                    |   | 4,136         |       |               |   | 2,884 |       |  |   | 2,147 |      
|                                                             |                            |   |                  |       |                    |   |               |       |               |   |       |       |  |   |       |      
|                                                             |                            |   | 3,536            |       |                    |   | 3,122         |       |               |   | 1,947 |       |  |   | 1,423 |      
|Corporate and administrative expenses:                       |                            |   |                  |       |                    |   |               |       |               |   |       |       |  |   |       |      
|                                                             | Marketing and sales        |   |                  | 1,382 |                    |   |               | 1,090 |               |   |       | 773   |  |   |       | 536   | 
|                                                             | General and administrative |   |                  | 1,136 |                    |   |               | 1,091 |               |   |       | 656   |  |   |       | 599   | 
|                                                             |                            |   |                  |       |                    |   |               |       |               |   |       |       |  |   |       |      
|                                                             |                            |   | 2,518            |       |                    |   | 2,181         |       |               |   | 1,429 |       |  |   | 1,135 |      
|Net income from operations                                   |                            |   | 1,018            |       |                    |   | 941           |       |               |   | 518   |       |  |   | 288   |      
|Interest income                                              |                            |   | 18               |       |                    |   | 30            |       |               |   | 10    |       |  |   | 4     |      
|                                                             |                            |   |                  |       |                    |   |               |       |               |   |       |       |  |   |       |      
|Net income before income taxes                               |                            |   | 1,036            |       |                    |   | 971           |       |               |   | 528   |       |  |   | 292   |      
|                                                             |                            |   |                  |       |                    |   |               |       |               |   |       |       |  |   |       |      
|Income tax provision                                         |                            |   | (140             | )     |                    |   |              |       |               |   | (140  | )     |  |   |      |      
|Deferred income tax provision                                |                            |   | (240             | )     |                    |   | (321          | )     |               |   | (50   | )     |  |   | (33   | )    
|                                                             |                            |   |                  |       |                    |   |               |       |               |   |       |       |  |   |       |      
|Net income for the period                                    |                            | $ | 656              |       |                    | $ | 650           |       |               | $ | 338   |       |  | $ | 259   |      
|                                                             |                            |   |                  |       |                    |   |               |       |               |   |       |       |  |   |       |      
|Basic earnings per share                                     |                            | $ | 0.12             |       |                    | $ | 0.11          |       |               | $ | 0.06  |       |  | $ | 0.05  |      
|Fully diluted                                                |                            | $ | 0.11             |       |                    | $ | 0.11          |       |               | $ | 0.06  |       |  | $ | 0.04  |      
|Weighted average number of shares
outstanding (in thousands) |                            |   |                  |       |                    |   |               |       |               |   |       |       |  |   |       |      
|                                                             | Basic                      |   |                  | 5,679 |                    |   |               | 5,662 |               |   |       | 5,689 |  |   |       | 5,662 | 
|                                                             | Diluted                    |   |                  | 5,943 |                    |   |               | 5,796 |               |   |       | 6,005 |  |   |       | 5,801 | 




INTERNATIONAL ABSORBENTS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(US dollars, in thousands)

|                                               |  |                  |        |               |  |   |       |  
|---------------------------------------------- |  | ---------------- | ------ | ------------- |  | - | ----- | -
|                                               |  | Six Months Ended
|                                               |  |                 
|                                               |  | July 31, 2003    |        | July 31, 2002
|                                               |  |                  |        |              
|Cash flows from operating activities           |  | $                | 527    |               |  | $ | 992   |  
|Cash
flows from (used) in investing activities |  |                  | (4,449 | )             |  |   | (878  | )
|Cash flows from financing activities           |  |                  | 2,931  |               |  |   |      |  
|                                               |  |                  |        |               |  |   |       |  
|Net change in cash                             |  | $                | (991   | )             |  | $ | 114   |  
|Cash and cash equivalents, beginning of period |  | $                | 3,051  |               |  | $ | 3,806 |  
|                                               |  |                  |        |               |  |   |       |  
|Cash and cash equivalents, end of period       |  | $                | 2,060  |               |  | $ | 3,920 |  
|Cash paid for interest                         |  |                  | 26     |               |  |   |      |  
|Cash paid for income taxes                     |  | $                | 167    |               |  | $ | 10    |  

Unaudited (all amounts in U.S. dollars except where otherwise noted). The
accompanying notes are an integral part of these consolidated financial
statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(US dollars, in thousands, except where otherwise noted)

1. Significant Accounting Policies

Basis of consolidation and presentation

The consolidated financial statements include the accounts of International
Absorbents Inc. (the Company) and its wholly owned subsidiary Absorption Corp
(Absorption), a Nevada corporation doing business in Washington State.

These unaudited interim condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in the
United States and include the accounts of the Company and its wholly owned
subsidiary. All significant inter-company transactions and balances have been
eliminated upon consolidation. Our accompanying interim condensed consolidated
financial statements do not include all notes normally included in our audited
annual financial statements and 10-KSB, and therefore should be read in
conjunction with our annual financial statements. The accompanying financial
statements include all normal recurring adjustments, which, in the opinion of
management, are necessary to present fairly the Companys financial position at
July 31, 2003, its results of operations and statement of cash flows for the
six months ended July 31, 2003 and 2002.

Stock-based employee compensation

The Company accounts for stock-based employee and non-employee directors
compensation arrangements in accordance with the provisions of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees
(APB No. 25) and complies with the disclosure provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123). Under APB No. 25, compensation expense is
recognized based on the difference, if any, on the date of grant between the
fair value of the Companys common stock and the amount the employees and
non-employee directors must pay to acquire the common stock. Compensation
expense is recognized rateably over the option-vesting period.

Compensation expense recognized under APB No. 25 for the grant of options to
employees and non-employee directors was $0 and $82,000 during the six months
ended July 31, 2003 and 2002, respectively. Had the Company determined
compensation costs based on fair value at the date of grant for its awards
under the method prescribed by SFAS No. 123, the Companys net earnings and net
earnings per share would be as follows:

|                                    |             |                  |      |                  |  |                    |      |                    |  |   |     |      |  |   |      |      | 
|----------------------------------- | ----------- | ---------------- | ---- | ---------------- |  | ------------------ | ---- | ------------------ |  | - | --- | ---- |  | - | ---- | ---- | 
|(in thousands, except per           |             | Six months ended |      | Six months ended |  | Three months ended |      | Three months ended
|share amounts)                      |             | July 31, 2003    |      | July 31, 2002    |  | July 31, 2003      |      | July 31, 2002     
|                                    |             |                  |      |                  |  |                    |      |                   
|Net earnings                        |             | $                | 656  |                  |  | $                  | 650  |                    |  | $ | 338 |      |  | $ | 259  |     
|Stock based compensation
recognized |             |                  |     |                  |  |                    | 82   |                    |  |   |    |      |  |   | 41   |     
|Additional compensation
expense     |             |                  | (150 | )                |  |                    | (351 | )                  |  |   | (87 | )    |  |   | (176 | )   
|                                    |             |                  |      |                  |  |                    |      |                    |  |   |     |      |  |   |      |     
|Pro forma net earnings              |             |                  | 506  |                  |  |                    | 381  |                    |  |   | 251 |      |  |   | 124  |     
|                                    |             |                  |      |                  |  |                    |      |                    |  |   |     |      |  |   |      |     
|Basic earnings per share            |             |                  |      |                  |  |                    |      |                    |  |   |     |      |  |   |      |     
|                                    | As reported |                  |      | 0.12             |  |                    |      | 0.11               |  |   |     | 0.06 |  |   |      | 0.05 | 
|                                    | Pro forma   |                  |      | 0.09             |  |                    |      | 0.07               |  |   |     | 0.04 |  |   |      | 0.02 | 
|Diluted earnings per share          |             |                  |      |                  |  |                    |      |                    |  |   |     |      |  |   |      |     
|                                    | As reported |                  |      | 0.11             |  |                    |      | 0.11               |  |   |     | 0.06 |  |   |      | 0.04 | 
|                                    | Pro forma   |                  |      | 0.09             |  |                    |      | 0.07               |  |   |     | 0.04 |  |   |      | 0.02 | 

Unaudited (all amounts in U.S. dollars except where otherwise noted). The
accompanying notes are an integral part of these consolidated financial
statements.

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The pro forma compensation expense reflected above has been estimated using the
Black-Scholes option-pricing model. Assumptions used in the pricing model
included:

|                                     |  |      |        |      |  |  |       |  
|------------------------------------ |  | ---- | ------ | ---- |  |  | ----- | -
|                                     |  | 2003 |        | 2002
|                                     |  |      |        |     
|a) risk free interest rate           |  |      | 2.04   | %    |  |  | 3.80  | %
|b) expected volatility               |  |      | 103.00 | %    |  |  | 84.00 | %
|c) expected dividend yield           |  |      | 0.00   | %    |  |  | 0.00  | %
|d) estimated average life (in
years) |  |      | 3.00   |      |  |  | 3.00  |  

2. Share Capital

Common Shares

|                                            |  |        |           |         |  |   |       | 
|------------------------------------------- |  | ------ | --------- | ------- |  | - | ----- | 
|                                            |  | Shares |           | Capital
|                                            |  |        |           |        
|Common shares outstanding, January 31, 2003 |  |        | 5,667,345 |         |  | $ | 7,052 | 
|Common shares outstanding, July 31, 2003    |  |        | 5,697,045 |         |  | $ | 7,099 | 

Options

Stock options at July 31, 2003 and January 31, 2003 were 579,030 and 417,400,
respectively. Stock based compensation expense for options granted to
consultants was $0 during the quarter that ended July 31, 2003, and $4,000 for
the six months ended July 31, 2003.

Warrants

|                                       |        |  |        |   |  |                |  |   | 
|-------------------------------------- | ------ |  | ------ | - |  | -------------- |  | - | 
|Warrants outstanding, January 31, 2003 |        |  | 44,120 |   |  | $2.25 to $2.29
|                                       | Issued |  |        |  |  |                |  |  | 
|                                       |        |  |        |   |  |               
|Warrants outstanding, July 31, 2003    |        |  | 44,120 |   |  | $2.25 to $2.29
|                                       |        |  |        |   |  |               

Stock based compensation expense for the warrants issued was $0 during the
first quarter ending and for the six months ending July 31, 2003.

3.     Segmented Information

The Company is involved primarily in the development, manufacture, distribution
and sale of absorbent products. Its assets are located and its operations are
primarily conducted in the United States.

The Company defines its business segments based upon the market in which its
customers sell products. The Company operates principally in three business
segments: the animal care industry, the industrial cleanup industry and the
hydro-mulch industry.

Management of the Company evaluates these segments based upon the operating
income before depreciation and amortization generated by each segment.
Depreciation and amortization are managed on a consolidated basis and as such
are not allocated to individual segments. There are no inter-segment
transactions or significant differences between segment accounting and
corporate accounting basis.

Unaudited (all amounts in U.S. dollars except where otherwise noted). The
accompanying notes are an integral part of these consolidated financial
statements.

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Business Segment Data  Six Months Ended July 31, 2003

|                                                             |  |             |       |            |  |             |     |              |  |   |     |   |  |   |       |  
|------------------------------------------------------------ |  | ----------- | ----- | ---------- |  | ----------- | --- | ------------ |  | - | --- | - |  | - | ----- | -
|                                                             |  | Animal Care |       | Industrial |  | Hydro-Mulch |     | Consolidated
|                                                             |  |             |       |            |  |             |     |             
|Revenues                                                     |  | $           | 8,627 |            |  | $           | 497 |              |  | $ | 225 |   |  | $ | 9,349 |  
|Operating costs and expenses                                 |  |             | 7,440 |            |  |             | 439 |              |  |   | 274 |   |  |   | 8,153 |  
|                                                             |  |             |       |            |  |             |     |              |  |   |     |   |  |   |       |  
|Operating income (loss)
before depreciation and
amortization |  |             | 1,187 |            |  |             | 58  |              |  |   | (49 | ) |  |   | 1,196 |  
|Depreciation & amortization                                  |  |             |       |            |  |             |     |              |  |   |     |   |  |   | (178  | )
|Interest income                                              |  |             |       |            |  |             |     |              |  |   |     |   |  |   | 18    |  
|                                                             |  |             |       |            |  |             |     |              |  |   |     |   |  |   |       |  
|Net income before taxes                                      |  |             |       |            |  |             |     |              |  |   |     |   |  | $ | 1,036 |  
|                                                             |  |             |       |            |  |             |     |              |  |   |     |   |  |   |       |  
|Capital expenditures                                         |  | $           | 3,129 |            |  | $           | 165 |              |  | $ | 367 |   |  | $ | 3,661 |  

Business Segment Data  Six Months Ended July 31, 2002

|                                                             |  |             |       |            |  |             |     |              |  |   |   |  |  |   |       |  
|------------------------------------------------------------ |  | ----------- | ----- | ---------- |  | ----------- | --- | ------------ |  | - | - |  |  | - | ----- | -
|                                                             |  | Animal Care |       | Industrial |  | Hydro-Mulch |     | Consolidated
|                                                             |  |             |       |            |  |             |     |             
|Revenues                                                     |  | $           | 6,705 |            |  | $           | 553 |              |  | $ |  |  |  | $ | 7,258 |  
|Operating costs and expenses                                 |  |             | 5,628 |            |  |             | 518 |              |  |   |  |  |  |   | 6,146 |  
|                                                             |  |             |       |            |  |             |     |              |  |   |   |  |  |   |       |  
|Operating income (loss)
before depreciation and
amortization |  |             | 1,077 |            |  |             | 35  |              |  |   |  |  |  |   | 1,112 |  
|Depreciation & amortization                                  |  |             |       |            |  |             |     |              |  |   |   |  |  |   | (171  | )
|Interest income                                              |  |             |       |            |  |             |     |              |  |   |   |  |  |   | 30    |  
|                                                             |  |             |       |            |  |             |     |              |  |   |   |  |  |   |       |  
|Net income before taxes                                      |  |             |       |            |  |             |     |              |  |   |   |  |  | $ | 971   |  
|                                                             |  |             |       |            |  |             |     |              |  |   |   |  |  |   |       |  
|Capital expenditures                                         |  | $           | 423   |            |  | $           | 430 |              |  | $ |  |  |  | $ | 853   |  

Business Segment Data  Three Months Ended July 31, 2003

|                                                             |  |             |       |            |  |             |     |              |  |   |     |   |  |   |       |  
|------------------------------------------------------------ |  | ----------- | ----- | ---------- |  | ----------- | --- | ------------ |  | - | --- | - |  | - | ----- | -
|                                                             |  | Animal Care |       | Industrial |  | Hydro-Mulch |     | Consolidated
|                                                             |  |             |       |            |  |             |     |             
|Revenues                                                     |  | $           | 4,478 |            |  | $           | 232 |              |  | $ | 121 |   |  | $ | 4,831 |  
|Operating costs and expenses                                 |  |             | 3,884 |            |  |             | 194 |              |  |   | 144 |   |  |   | 4,222 |  
|                                                             |  |             |       |            |  |             |     |              |  |   |     |   |  |   |       |  
|Operating income (loss)
before depreciation and
amortization |  |             | 594   |            |  |             | 38  |              |  |   | (23 | ) |  |   | 609   |  
|Depreciation & amortization                                  |  |             |       |            |  |             |     |              |  |   |     |   |  |   | (91   | )
|Interest income                                              |  |             |       |            |  |             |     |              |  |   |     |   |  |   | 10    |  
|                                                             |  |             |       |            |  |             |     |              |  |   |     |   |  |   |       |  
|Net income before taxes                                      |  |             |       |            |  |             |     |              |  |   |     |   |  | $ | 528   |  
|                                                             |  |             |       |            |  |             |     |              |  |   |     |   |  |   |       |  
|Capital expenditures                                         |  | $           | 1,657 |            |  | $           | 74  |              |  | $ | 346 |   |  | $ | 2,077 |  

Unaudited (all amounts in U.S. dollars except where otherwise noted). The
accompanying notes are an integral part of these consolidated financial
statements.

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Business Segment Data  Three Months Ended July 31, 2002

|                                                             |  |             |       |            |  |             |     |              |  |   |   |  |  |   |       |  
|------------------------------------------------------------ |  | ----------- | ----- | ---------- |  | ----------- | --- | ------------ |  | - | - |  |  | - | ----- | -
|                                                             |  | Animal Care |       | Industrial |  | Hydro-Mulch |     | Consolidated
|                                                             |  |             |       |            |  |             |     |             
|Revenues                                                     |  | $           | 3,261 |            |  | $           | 309 |              |  | $ |  |  |  | $ | 3,570 |  
|Operating costs and expenses                                 |  |             | 2,896 |            |  |             | 289 |              |  |   |  |  |  |   | 3,185 |  
|                                                             |  |             |       |            |  |             |     |              |  |   |   |  |  |   |       |  
|Operating income (loss)
before depreciation and
amortization |  |             | 365   |            |  |             | 20  |              |  |   |  |  |  |   | 385   |  
|Depreciation & amortization                                  |  |             |       |            |  |             |     |              |  |   |   |  |  |   | (97   | )
|Interest income                                              |  |             |       |            |  |             |     |              |  |   |   |  |  |   | 4     |  
|                                                             |  |             |       |            |  |             |     |              |  |   |   |  |  |   |       |  
|Net income before taxes                                      |  |             |       |            |  |             |     |              |  |   |   |  |  | $ | 292   |  
|                                                             |  |             |       |            |  |             |     |              |  |   |   |  |  |   |       |  
|Capital expenditures                                         |  | $           | 29    |            |  | $           | 405 |              |  | $ |  |  |  | $ | 434   |  

Assets

|                    |  |             |        |            |  |             |     |              |  |   |     |  |  |   |        | 
|------------------- |  | ----------- | ------ | ---------- |  | ----------- | --- | ------------ |  | - | --- |  |  | - | ------ | 
|                    |  | Animal Care |        | Industrial |  | Hydro-Mulch |     | Consolidated
|                    |  |             |        |            |  |             |     |             
|At July 31, 2003    |  | $           | 12,796 |            |  | $           | 721 |              |  | $ | 842 |  |  | $ | 14,359 | 
|At January 31, 2003 |  | $           | 8,965  |            |  | $           | 702 |              |  | $ | 642 |  |  | $ | 10,309 | 

Approximately 2.3% and 6% of our sales during the six months ended July 31,
2003 and 2002, respectively, were to foreign customers. Approximately 4.6% and
7% of our sales during the three months ended July 31, 2003 and 2002,
respectively, were to foreign customers.

4. Inventories components

|            |                |  |          |     |             |  |       |     | 
|----------- | -------------- |  | -------- | --- | ----------- |  | ----- | --- | 
|            |                |  | July 31, |     | January 31,
|            |                |  | 2003     |     | 2003       
|            |                |  | $        |     | $          
|            |                |  |          |     |            
|Inventories |                |  |          |     |             |  |       |    
|            | Raw materials  |  |          | 732 |             |  |       | 541 | 
|            | Finished goods |  |          | 782 |             |  |       | 501 | 
|            |                |  |          |     |             |  |       |    
|            |                |  | 1,514    |     |             |  | 1,042 |    
|            |                |  |          |     |             |  |       |    

Unaudited (all amounts in U.S. dollars except where otherwise noted). The
accompanying notes are an integral part of these consolidated financial
statements.

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5. Property, Plant and Equipment

|                               |                                    |  |          |       |             |  |        |       | 
|------------------------------ | ---------------------------------- |  | -------- | ----- | ----------- |  | ------ | ----- | 
|                               |                                    |  | July 31, |       | January 31,
|                               |                                    |  | 2003     |       | 2003       
|                               |                                    |  | $        |       | $          
|                               |                                    |  |          |       |            
|Property, plant and equipment  |                                    |  |          |       |             |  |        |      
|                               | Land                               |  |          | 1,503 |             |  |        | 1,503 | 
|                               | Buildings (leasehold improvements) |  |          | 627   |             |  |        | 603   | 
|                               | Equipment                          |  |          | 4,204 |             |  |        | 3,841 | 
|                               | Construction in progress           |  |          | 3,284 |             |  |        | 117   | 
|                               |                                    |  |          |       |             |  |        |       | 
|                               |                                    |  | 9,618    |       |             |  | 6,064  |      
|Less: Accumulated depreciation |                                    |  | (2,255   | )     |             |  | (2,093 | )    
|                               |                                    |  |          |       |             |  |        |       | 
|                               |                                    |  | 7,363    |       |             |  | 3,971  |      
|                               |                                    |  |          |       |             |  |        |       | 

6. Subsequent Events

During the first quarter, the Company completed a $2,910,000 Industrial Revenue
Bond financing. The proceeds of the financing are being used for the
construction of a new facility to house production lines and corporate offices
located in Whatcom County, Washington. The Company received the funds on April
11, 2003, from GE Capital. These funds have been placed in an escrow account
for Absorption Corp for construction of facilities in Ferndale, WA. Funds are
drawn on the account as construction takes place. The escrow account balance
(restricted cash) at July 31, 2003 of $1,357,000 is for further construction
and equipment purchases.

On August 20, 2003, Absorption purchased approximately fifteen acres of real
property, with an existing 41,000 square foot facility, in Jesup, Georgia,
located 75 miles southwest of Savannah for $140,000. During August 2003,
Absorption entered into a loan agreement with Branch, Banking and Trust Company
(BB&T) to borrow $4,691,000. Absorption intends to use $1,827,000 of the
total proceeds for the purchase of real property and the construction of a
manufacturing and warehouse facility, and $2,864,000 will be used for the
purchase and installation of manufacturing equipment in the new facility.
Total project costs are currently forecasted at $6,155,000, and the Company
anticipates that the necessary funds in excess of $4,691,000 will be financed
through Absorptions cash flow.

The loan interest rate is the 30-day LIBOR (1.11% on August 27, 2003) rate plus
2.25%. The loan is amortized over 180 months on real estate and 84 months on
equipment, with a balloon due in five years on both.

Unaudited (all amounts in U.S. dollars except where otherwise noted). The
accompanying notes are an integral part of these consolidated financial
statements.

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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We manufacture and distribute both animal care and industrial products. Our
wholly owned subsidiary and operating company is Absorption Corp. Absorptions
primary product line is CareFRESH, which is an animal bedding product.
CareFRESHprovides us with a substantial source of revenues and, as a result,
contributes significantly to our profits. Sources of revenues and contribution
to profits are the primary factors that we take into account when evaluating
what is our core business and how that affects our goals and objectives. We
consider our core business to be the activities that surround producing
CareFRESHand selling it to our pet specialty customers. Our business strategy
is to promote and grow our core business, while at the same time creating
diversification in our market channels, our production methods, and our product
lines in an effort to add strength to our business structure. As a result, we
are currently in the middle of a three-year period where we are dedicating
significant resources to both building infrastructure for the support of our
core business and to developing more product and customer diversification. We
believe that this strategy has started to provide results. Specifically, we
continue to grow sales in our core business and improve the production process
of our core CareFRESHproduct, while expanding sales of new products and
distributing existing products through new market channels. We believe these
steps have strengthened the market position of our products. Even though we
are currently experiencing significant initial costs, we believe our progress
with the sales of new product lines will continue to move us toward developing
multiple sources of income, which we anticipate will help reduce our risk of
significant economic hardship that could result from reliance on sales from
only one significant product.

RESULTS OF OPERATIONS

The following table illustrates our financial results for the first six months
of fiscal year 2004 as compared to the first six months of fiscal year 2003.

First Six Months of Fiscal Year
2004 and 2003

|                                    |                          |               |       |                  |   |               |     |                  |    |                   |       |       |   |  |     |    |    |  |    |     |   
|----------------------------------- | ------------------------ | ------------- | ----- | ---------------- | - | ------------- | --- | ---------------- | -- | ----------------- | ----- | ----- | - |  | --- | -- | -- |  | -- | --- | --
|(in thousands of U.S. dollars)      |                          | July 31, 2003 |       | Percent of Sales |   | July 31, 2002 |     | Percent of Sales |    | Percentage Change
|                                    |                          |               |       |                  |   |               |     |                  |    |                  
|Sales                               |                          | $             | 9,349 |                  |   |               | 100 | %                |    | $                 | 7,258 |       |   |  | 100 | %  |    |  | 29 | %  
|Cost of Goods Sold                  |                          |               | 5,813 |                  |   |               | 62  | %                |    |                   | 4,136 |       |   |  | 57  | %  |    |  | 41 | %  
|                                    |                          |               |       |                  |   |               |     |                  |    |                   |       |       |   |  |     |    |    |  |    |    
|Gross Profit                        |                          |               | 3,536 |                  |   |               | 38  | %                |    |                   | 3,122 |       |   |  | 43  | %  |    |  | 13 | %  
|Corporate & Administrative expenses |                          |               |       |                  |   |               |     |                  |    |                   |       |       |   |  |     |    |    |  |    |    
|                                    | Marketing & Sales        |               |       | 1,382            |   |               |     | 15               | %  |                   |       | 1,090 |   |  |     | 15 | %  |  |    | 27  | % 
|                                    | General & Administrative |               |       | 1,136            |   |               |     | 12               | %  |                   |       | 1,091 |   |  |     | 15 | %  |  |    | 4   | % 
|                                    |                          |               |       |                  |   |               |     |                  |    |                   |       |       |   |  |     |    |    |  |    |    
|                                    |                          |               | 2,518 |                  |   |               | 27  | %                |    |                   | 2,181 |       |   |  | 30  | %  |    |  | 15 | %  
|Net income from operations          |                          |               | 1,018 |                  |   |               | 11  | %                |    |                   | 941   |       |   |  | 13  | %  |    |  | 8  | %  
|                                    | Interest Income          |               |       | 18               |   |               |     | 0                | %  |                   |       | 30    |   |  |     | 0  | %  |  |    | (40 | )%
|                                    |                          |               |       |                  |   |               |     |                  |    |                   |       |       |   |  |     |    |    |  |    |    
|Net income before taxes             |                          |               | 1,036 |                  |   |               | 11  | %                |    |                   | 971   |       |   |  | 13  | %  |    |  | 7  | %  
|Provision for income taxes          |                          |               |       |                  |   |               |     |                  |    |                   |       |       |   |  |     |    |    |  |    |    
|                                    | Current                  |               |       | (140             | ) |               |     | (1               | %) |                   |       |      |   |  |     |    |    |  |    |     |   
|                                    | Deferred                 |               |       | (240             | ) |               |     | (3               | %) |                   |       | (321  | ) |  |     | (4 | %) |  |    |     |   
|                                    |                          |               |       |                  |   |               |     |                  |    |                   |       |       |   |  |     |    |    |  |    |    
|Net Income                          |                          | $             | 656   |                  |   |               | 7   | %                |    | $                 | 650   |       |   |  | 9   | %  |    |  | 1  | %  
|                                    |                          |               |       |                  |   |               |     |                  |    |                   |       |       |   |  |     |    |    |  |    |    

Unaudited (all amounts in U.S. dollars except where otherwise noted). The
accompanying notes are an integral part of these consolidated financial
statements.

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This table illustrates our results for the second quarter of fiscal year 2004
as compared to the second quarter of fiscal year 2003.

Second Quarter of Fiscal Years
2004 and 2003

|                                    |                          |               |       |                  |   |               |     |                  |    |                   |       |     |   |  |     |    |    |  |    |     |  
|----------------------------------- | ------------------------ | ------------- | ----- | ---------------- | - | ------------- | --- | ---------------- | -- | ----------------- | ----- | --- | - |  | --- | -- | -- |  | -- | --- | -
|(in thousands of U.S. dollars)      |                          | July 31, 2003 |       | Percent of Sales |   | July 31, 2002 |     | Percent of Sales |    | Percentage Change
|                                    |                          |               |       |                  |   |               |     |                  |    |                  
|Sales                               |                          | $             | 4,831 |                  |   |               | 100 | %                |    | $                 | 3,570 |     |   |  | 100 | %  |    |  | 35 | %  
|Cost of Goods Sold                  |                          |               | 2,884 |                  |   |               | 60  | %                |    |                   | 2,147 |     |   |  | 60  | %  |    |  | 34 | %  
|                                    |                          |               |       |                  |   |               |     |                  |    |                   |       |     |   |  |     |    |    |  |    |    
|Gross Profit                        |                          |               | 1,947 |                  |   |               | 40  | %                |    |                   | 1,423 |     |   |  | 40  | %  |    |  | 37 | %  
|Corporate & Administrative expenses |                          |               |       |                  |   |               |     |                  |    |                   |       |     |   |  |     |    |    |  |    |    
|                                    | Marketing & Sales        |               |       | 773              |   |               |     | 16               | %  |                   |       | 536 |   |  |     | 15 | %  |  |    | 44  | %
|                                    | General & Administrative |               |       | 656              |   |               |     | 14               | %  |                   |       | 599 |   |  |     | 17 | %  |  |    | 10  | %
|                                    |                          |               |       |                  |   |               |     |                  |    |                   |       |     |   |  |     |    |    |  |    |    
|                                    |                          |               | 1,429 |                  |   |               | 30  | %                |    |                   | 1,135 |     |   |  | 32  | %  |    |  | 26 | %  
|Net income from operations          |                          |               | 518   |                  |   |               | 11  | %                |    |                   | 288   |     |   |  | 8   | %  |    |  | 80 | %  
|                                    | Interest Income          |               |       | 10               |   |               |     | 0                | %  |                   |       | 4   |   |  |     | 0  | %  |  |    | 150 | %
|                                    |                          |               |       |                  |   |               |     |                  |    |                   |       |     |   |  |     |    |    |  |    |    
|Net income before taxes             |                          |               | 528   |                  |   |               | 11  | %                |    |                   | 292   |     |   |  | 8   | %  |    |  | 81 | %  
|Provision for income taxes          |                          |               |       |                  |   |               |     |                  |    |                   |       |     |   |  |     |    |    |  |    |    
|                                    | Current                  |               |       | (140             | ) |               |     | (3               | %) |                   |       |    |   |  |     |    |    |  |    |     |  
|                                    | Deferred                 |               |       | (50              | ) |               |     | (1               | %) |                   |       | (33 | ) |  |     | (1 | %) |  |    |     |  
|                                    |                          |               |       |                  |   |               |     |                  |    |                   |       |     |   |  |     |    |    |  |    |    
|Net Income                          |                          | $             | 338   |                  |   |               | 7   | %                |    | $                 | 259   |     |   |  | 7   | %  |    |  | 31 | %  
|                                    |                          |               |       |                  |   |               |     |                  |    |                   |       |     |   |  |     |    |    |  |    |    

Revenues

The majority of our revenues during the second quarter of fiscal year 2004 were
the result of sales of our animal care products. Over the past few years, our
goal has been to diversify our product lines and customer base by selling both
new products and entering into additional product channels. Sales of both
existing product lines and new product lines contributed to the increase in
revenues for the six months and quarter ended July 31, 2003, as compared to the
same periods in 2002. The increased sales of new product lines included our
small animal food, called Supreme Pet Foods, and we experienced increased sales
of our bedding products from further penetration in the mass merchandise market
channel. We also saw increased sales of certain lines of our litter products
and a new line of small animal bedding, CareFRESH Ultra, which was introduced
during the fourth quarter of fiscal 2003. As in prior periods, our flagship
product, CareFRESH, also contributed significantly to the increased sales of
existing products. Over the next quarter we expect CareFRESHsales to continue
to grow, though not at the rates which have been achieved over the past three
years. During the current fiscal year, we also anticipate that Supreme Pet
Foodsand CareFresh Ultraand other new product lines will be larger
contributors to our revenues. Moreover, we will continue to investigate and
develop opportunities in other product lines and market channels.

Even though we significantly reduced our investment in the marketing of our
industrial line of sorbent products several years ago, sales have been
maintained at a steady rate. Customers who have been supporters of this line
of products for many years continue to purchase these products. Unfortunately,
issues surrounding our price point continue to outweigh performance in this
market. We plan to continue to look for other avenues through which to market
these products, but will make no significant marketing investments until a
promising path is found. There is no assurance that such distribution channels
will be available in the near term, or at all.

During fiscal year 2003, we purchased the assets of a hydro-mulch manufacturing
company and signed a three-year manufacturing contract with a marketer of
hydro-mulch. The purchase and sales contracts were not consummated until June
2002. The remainder of the summer of fiscal 2003 was used in setting up the

Unaudited (all amounts in U.S. dollars except where otherwise noted). The
accompanying notes are an integral part of these consolidated financial
statements.

10



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manufacturing plant. By the time the plant was running effectively the main
hydro-mulch season had passed.
We spent the slow winter months refining our manufacturing process so that we
were capable of meeting the demands of our marketing partner during the current
year. During the first half of fiscal year 2004, our production was able to
meet and exceed market demand for the product. We were able to build
hydromulch inventory
for the two months that production was shut down due to the move to our new
facility in Whatcom County, Washington during the second quarter of 2004.

Gross Profits

For the past year we projected a decrease in our gross margin percentage (which
is defined as gross profit divided by net sales) for this fiscal year as
compared to the previous fiscal year. A change in product mix is the primary
reason for this decrease in gross margin. As we gain momentum in the sales of
new product lines that have margins lower than our primary product base, our
overall gross margin percentage will decrease. However, even with these lower
margins, we expect the increased sales of these products to have a positive
effect on our financial results through an increase in total revenues and gross
profits. As already stated, we have adopted this business plan of diversifying
our product lines and customer base to help strengthen the company for the long
term. Even though we continue to be affected by factors beyond our control,
such as energy prices, we were able to improve our gross margin during the
quarter ended July 31, 2003, to 40% (as compared to the quarter ended April 31,
2003 when our gross margin was 35%) and bring it back to the same level as the
previous year. As such, the year-to-date reduction in our gross margin was
partially offset.

Maintenance costs related to the age of our Bellingham production facility
continue to be at higher levels than in previous periods, though not as high as
during the first quarter due to improved infrastructure management. These
maintenance costs have increased over the same period in the prior year due to
the fact that we are now running a twenty-year-old plant twenty-four hours a
day at rates which are above the original design parameters. We are
maintaining it at a high level to prevent shortages, which could disrupt the
flow of product to our customers. Over the next eighteen months, while the new
east coast and west coast production facilities are brought on line, these
maintenance costs will remain high. Once the old facility has been replaced,
we expect that the maintenance costs of running the new facility will be lower.

During the balance of fiscal year 2004, we expect that gross profits will once
again grow along with an expected increase in sales, but that gross profits
will grow on an annual basis at a lower rate than sales. We believe that this
will be the result of the increase in sales of new lower margin products, as a
percentage of total sales, rather than any decrease in sales of our core
products, along with continued elevated energy costs and maintenance costs.

We have now acquired a site in Jesup, Georgia where we will construct our new
east coast production facility. We will finance the purchase price for this
real property and the related construction costs through current cash reserves,
cash flow from operations and long-term debt. Once construction is completed,
which we anticipate may occur in the first quarter of fiscal year 2005, we
believe there will be a period lasting at least two quarters during which plant
commissioning costs will reduce our gross profit. After the completion of the
initial commissioning phase, we expect gross profits to improve due to lower
production and freight costs.

Sales and Marketing

Sales and marketing expenses, measured as a percentage of sales, remained the
same for the first six months of fiscal year 2004 at 15% as compared to the
same period of the previous fiscal year and increased slightly to 16% for the
second quarter of the fiscal year as compared to 15% during the same quarter in
the previous year. Sales and marketing expenses increased by 27% for the first
six months of the current fiscal year to $1,382,000, and 44% for the second
quarter of the current fiscal year to $773,000, as compared to the same periods
of the previous year. These increases were a result of our aggressive plan to
continue to support our core product, CareFRESH, to promote the sales of new
product lines, and to introduce our existing animal bedding products into new
market channels. During the remainder of fiscal year 2004, we expect to
continue to invest marketing dollars at similar or higher rate as in the two
periods of fiscal year 2004, which we just completed, while maintaining the
same strategic goals.

Unaudited (all amounts in U.S. dollars except where otherwise noted). The
accompanying notes are an integral part of these consolidated financial
statements.

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We plan to continue to limit our investment in marketing our industrial line of
products. This policy is not expected to change during the next fiscal year,
but we will make a larger investment if an opportunity is found that has a high
probability of significant return.

Due to our marketing agreement with Mat, Inc. relating to the marketing of our
hydro-mulch product, we dont expect a need for any significant material
expenditure to market our hydro-mulch product until at least the first quarter
of fiscal year 2005.

General and Administrative

For the first six months of fiscal years 2004 and 2003, general and
administrative expenses measured as a percentage of sales were 12% and 15%,
respectively. For the second quarter of fiscal years 2004 and 2003, general
and administrative expenses first measured as a percentage of sales were 14%
and 17%, respectively. Overall, the actual expenses increased by 4% for the
six months of fiscal year 2004 to $1,136.000 and by 10%for the second quarter
of fiscal year 2004 to $656,000 in each case as compared to the same period
during the previous fiscal year. In the past several years we had focused on
reducing our overhead costs. This was a strategy that we believe had helped us
become profitable and remain profitable. As our sales have increased for the
past several years, our general and administrative resources became stretched.
We determined that for us to grow at our targeted rates, we would need to
upgrade our infrastructure in terms of personnel, information systems, and
general resources. Certain of these investments have been incremental changes
that have now been implemented and which we expect will become more financially
efficient as our sales grow, although we cannot assure that they will achieve
the planned efficiencies. The majority of the implementation of this
infrastructure upgrade has now been completed, but there may continue to be
some further costs during the balance of the current fiscal year. Beginning
with the third quarter of fiscal year 2004, we will incur expenses related to
moving into our new Whatcom County facility.

Interest Income

Interest income decreased during the six months ended July 31, 2003 as compared
to the six months ended July 31, 2002 primarily because interest rates in
general were at extremely low levels in comparison to the previous year.
Interest income for the second quarter of fiscal year 2004 increased as
compared to the same quarter in fiscal year 2003, due to the additional cash
(restricted) which was a result of our industrial revenue bond proceeds. This
income item is expected to remain low during the balance of fiscal year 2004
because of continued predicted low interest rates and on-going cash investments
in property, plant and equipment.

Income Taxes

Since fiscal year 1999, Absorption has been profitable for income tax purposes,
but has been able to offset the payment of income taxes in the United States
with the accumulated losses from previous years. Because Absorption has
demonstrated consistent and continuing profitability for income tax purposes,
the tax benefits of unused net operating losses for U.S. operations have been
fully utilized as of the second quarter of fiscal 2004. During the first six
months of fiscal year 2003 and 2004, $321,000 and $240,000, respectively, of
the deferred tax benefit was recognized in the income tax provision,
representing the utilization of the net operating loss benefit, and accelerated
tax deductions from capital investments. Over the next year, this provision is
expected to continue to be partially funded from accelerated tax deductions
related to our investment in new production facilities.

Net Income

There was a slight increase in our net income in the first six months of fiscal
year 2004 as compared to the first six months of fiscal year 2003. Our net
income increased in the second quarter of fiscal year 2004 by 27% over the same
quarter of the previous year. During the first quarter of fiscal year 2004 our
net income decreased, as compared to the same quarter the previous year, mostly
due to a reduction in our gross profit. we believe that the factors that
caused this reduction during the first quarter were proactively addressed
during the second quarter. The result was improved gross profits in the second
quarter, which resulted in increased net income for that quarter and also
increased net income for the first six months of fiscal year 2004

Unaudited (all amounts in U.S. dollars except where otherwise noted). The
accompanying notes are an integral part of these consolidated financial
statements.

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to the point
where it was the same as net income for the same period in fiscal year 2003.
The overall reduction in gross profit margins and the increase in marketing
expenses were expected as they were part of our plan to strengthen our core product and diversify our business activities.
The investments we made in achieving these goals and building infrastructure to
strengthen our future are most clearly illustrated by our net
income from operations as reported on our consolidated statements of operations.
During the first six months of fiscal year 2003 this amount represented 13% of
our sales as reported on our consolidated statements of operations. In the
first quarter of fiscal year 2004 this measure represented 11% of our sales.
This decrease is within the range we predicted during this period of
significant capital expansion and increasing sales. It is our goal to grow
this percentage back up to higher levels, but we do not expect to do so for at
least two more years. We believe that we have now put in place the majority of
the infrastructure needed to support our growth goals and therefore do not
anticipate incurring additional expenditures, other than sales and marketing
expenses, that would significantly reduce this gross profit percentage.

LIQUIDITY AND CAPITAL RESOURCES

|                               |  |                     |        |                        |  |   |        | 
|------------------------------ |  | ------------------- | ------ | ---------------------- |  | - | ------ | 
|                               |  | As of July 31, 2003 |        | As of January 31, 2003
|                               |  |                     |        |                       
|Financial Condition            |  |                     |        |                        |  |   |        | 
|Total Assets                   |  | $                   | 14,359 |                        |  | $ | 10,309 | 
|Total Liabilities              |  |                     | 4,833  |                        |  |   | 1,490  | 
|Total Equity                   |  |                     | 9,526  |                        |  |   | 8,819  | 
|Debt/Equity Ratio              |  |                     | 0.51   |                        |  |   | 0.17   | 
|Assets/Debt Ratio              |  |                     | 2.97   |                        |  |   | 6.92   | 
|Working Capital                |  |                     |        |                        |  |   |        | 
|Current Assets                 |  |                     | 6,806  |                        |  |   | 6,239  | 
|Current Liabilities            |  |                     | 1,807  |                        |  |   | 1,328  | 
|Current Ratio                  |  |                     | 3.77   |                        |  |   | 4.70   | 
|Cash Position                  |  |                     |        |                        |  |   |        | 
|Cash & Short Term Investments  |  |                     | 3,628  |                        |  |   | 3,258  | 
|Cash Generated from Operations |  |                     | 527    |                        |  |   | *2,343 | 



---

|* |  | for the year ended January 31, 2003
|- |  | -----------------------------------

As used above the current ratio is defined as current assets divided by
current liabilities.

Financial Condition

During the first six months of fiscal year 2004, we had a significant increase
in assets. The majority of this increase came from an increase in our
property, plant and equipment resulting from the construction of our new
production facility located in Whatcom County, Washington. We also entered
into our first long-term debt instruments to finance a portion of this new
facility. In March 2003, we completed a $2,910,000 bond financing. The
proceeds of the financing are to be used for the construction of the facility,
which will house production lines, warehouse space and corporate offices
located in Whatcom County, Washington. The bonds are comprised of $2,355,000
as tax exempt and $555,000 as taxable. The bonds were issued through the
Washington Economic Development Finance Authority in Washington State. The
purchaser and holder of the bonds is GE Capital Public Finance. The tax exempt
bonds have an initial rate of 5.63%, which lowers to 5.38% on October 1, 2003.
The term of these bonds is 190 months, with interest-only payments for the
first 52 months. The taxable bonds have an initial rate of 5.78%, which lowers
to 5.53% on October 1, 2003. The term of these bonds is 52 months. The
indebtedness underlying our bonds is secured by a mortgage on our real property
and a security interest in our equipment assets, located in Whatcom County,
Washington. If we are in default under the agreements governing our
indebtedness, the creditors may be able to foreclose on our property and
assets, which would substantially harm our business and financial condition.
The funds from the sale of the bonds are held in escrow and released at a 85%
rate as a percent of total building costs. Ten percent of the bond proceeds
will be held back until an occupancy permit is issued by Whatcom County
authorities. In connection with the tax exempt bonds, we have warranted that
we will follow tax exempt bond rules as dictated by the Internal Revenue
Service, the most significant of which is a maximum allowable

Unaudited (all amounts in U.S. dollars except where otherwise noted). The
accompanying notes are an integral part of these consolidated financial
statements.

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expenditure of
$10,000,000 on capital assets in Whatcom County for three years proceeding the
issuance date and three years following the issuance date. In the event that
we intend to exceed the $10,000,000 limit, we will have to pay off the tax
exempt bonds before doing so.

Short-term liabilities increased due to acquisitions related to the
construction of the new facility, which resulted in a decrease in our current
ratio. Our debt to equity ratio has remained low even though we are undergoing
considerable capital expansion. During fiscal year 2004, we expect that our
long-term debt will increase by approximately $4,700,000, as additional debt
will be needed to finance our facility expansion located in Jesup, Georgia. We
anticipate that a corresponding change will occur in our debt to equity ratio
in fiscal year 2004 and we expect this ratio to be approximately 1.00.

Working Capital

We believe that our existing cash on hand, long-term debt, and available line
of credit currently provides us with enough cash to meet our existing needs.
Our balance of current assets increased during the first six months of fiscal
year 2004 due to cash generated from operations and cash received as a result
of long-term debt incurred. Current liabilities, mostly in the area of
accounts payable, increased as a result of short-term payables related to the
construction of our new West Coast production facility. This resulted in a
decrease in our current ratio for fiscal year 2003, although the ratio remained
at a relatively high level. Our current ratio is expected to decrease during
fiscal year 2004 as additional investments are made in a new production
facility in Whatcom County and in a second facility in Jesup, Georgia.

Cash Position

Unrestricted cash decreased during the first six months of fiscal year 2004 as
a result of cash invested in capital assets. We expect to continue to use cash
in expanding our production infrastructure during the balance of the current
fiscal year. The year-end cash balance will be determined by our use of cash
for capital expansion and the amount of cash we generate from operations. We
expect to have lower cash balances by the end of the current fiscal year. We
will continue to closely monitor both current liabilities and current assets as
they relate to the generation of cash with an emphasis on maximizing potential
sources of cash. As of July 31, 2003, $1,357,000 of our cash was restricted as
the result of an escrow agreement attached to our industrial revenue bond
financing. The agreement requires the cash to be released from escrow as
portions of the new Whatcom County production facility are completed.

Cash Generated from Operations

We continued to generate cash from operations during the first six months of
fiscal year 2004, although at a lower level than generated during the same
period for the previous year. During the first six months of fiscal year 2003
we generated $992,000 as compared to $527,000 generated during the first six
months of fiscal year 2004. This reduction in cash generated from operations
is primarily the result of an increase in inventory levels which occurred
during the first half of the current fiscal year. These inventory levels were
increased to provide better customer service during the current economic slow
down and to fulfill our customers requirements resulting from successful sales
of new product lines. During the first six months of fiscal year 2004 our
accounts payable increased mostly as a result of construction-related items and
our accounts receivable decreased, even though there was a sales increase,
which resulted in a use of cash. If our sales continue to increase and we are
able to continue to profitably produce our product, we should be able to
continue to generate cash from operating activities, although we cannot assure
you that this will be the case.

Financing and Investing Activities

Cash from financing activities during the quarter ended July 31, 2003 provided
$2,931,000. The majority of the cash received was the result of the issuance
of industrial revenue bonds of $2,910,000, for the construction of our Whatcom
County, Washington production facility. In addition $48,000 was received from
the exercise of stock options and $27,000 was used to pay principle on
industrial revenue bond debt. A significant amount of cash was used in the
same quarter of fiscal year 2004 in investing activities. Cash used in
investing activities during the six months ended July 31, 2003, totaled
$4,449,000. The majority of the cash, $3,011,000, was used for the purchase of
plant and equipment located in Whatcom County

Unaudited (all amounts in U.S. dollars except where otherwise noted). The
accompanying notes are an integral part of these consolidated financial
statements.

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Washington and the balance, $1,357,000
remaining in an escrow account which is being released during the
construction of our new West Coast facility. Also, during the six months ended
July 31, 2003, loans to related parties were re-paid in the amount of $26,000.

During the remainder of fiscal year 2004, we plan to continue the
implementation of our three-phase production expansion plan.

The first phase is already in motion. This is the construction of our new
facility in Whatcom County, Washington. We are currently operating in five
separate leased facilities in Whatcom County. This new facility, which is
being financed approximately half through debt and half through cash, will
consolidate four of these leased facilities, resulting in what we anticipate to
be a saving in cost of goods sold and general and administrative
expenses of approximately $500,000 a year in lease payments. The
consolidation of these facilities should also provide us with savings in other
expenses caused by poor logistics. The construction phase of this facility is
now 75% complete and we currently project the final completed cost to be within
5% of budget. At July 31, we anticipate incurring $2,700,000 of construction
and equipment cost to complete phase one of the Whatcom County facility, of
which $1,357,000 will be funded. From the escrow account (restricted cash),
and the remaining will be from cash on hand and cash flow from operations. We
expect that interest on the debt will be approximately $160,000 a year.

Phase two is planned to be a second production facility in Southeastern
Georgia. Approximately fifteen acres of real property, with an existing 41,000
square foot facility was purchased during August for $140,000 in southeastern
Georgia. We intend to begin construction during the second half of fiscal year
2004 on this property. The total project cost is estimated at $6,155,000. Of
the total cost approximately $4,700,000 will be financed through a long-term
bank debt instrument and we anticipate that the balance will be financed with
cash on hand. The annual interest expense of the debt used to finance this
facility is estimated to be approximately $160,000 a year. By having
production on the east coast, we will be much closer to a majority of our
customers, which we believe will not only allow us to serve them better, but we
anticipate we will also save approximately a $1,000,000 in freight annually.

The third phase will occur in approximately two years when we will move the
Bellingham production facility to the new Whatcom County plant.

We believe that this three phase plan will give us the ability to achieve
significant cost savings, better serve our customers, expand our production
lines, diversify our production capacity, and physically move manufacturing in
a manner which is transparent to the users of our products.

Environmental Matters

We are committed to being an environmentally friendly company and to producing
products which benefit the quality of the environment. Hazardous wastes are
not produced, treated, or stored at any company owned or operated facilities.
State, federal, and local laws all have jurisdiction over production
activities. We are currently in full compliance with these laws and expect to
remain so for the foreseeable future.

CRITICAL ACCOUNTING POLICIES

Our significant accounting policies are described in Note 1 to the financial
statements included in Item 1 of this Quarterly Report. We believe our most
critical accounting policies are as follows:

Inventory

Finished goods inventory are valued at the lower of cost (determined on the
first-in, first-out basis) or net realizable value. Cost includes direct
materials, labor and overhead allocation. Raw materials and supplies are valued
at the lower of cost (determined on the first-in, first-out basis) or
replacement cost.

Unaudited (all amounts in U.S. dollars except where otherwise noted). The
accompanying notes are an integral part of these consolidated financial
statements.

15



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##### Table of Contents



Accounts Receivable and Allowance for Doubtful Accounts

We typically offer credit terms to our customers without collateral. Finance
charges of 1.5% are assessed when a customer receivable balance becomes 30 days
past due. We record accounts receivable at the face amount less an allowance
for doubtful accounts and an allowance for finance charges. On a regular
basis,
we evaluate our accounts receivable and establish these allowances based on a
combination of specific customer circumstances, as well as credit conditions
and the history of write-offs and collections. Where appropriate, we obtain
credit rating reports and financial statements of the customer to initiate and
modify their credit limits. We obtain credit insurance for certain accounts
that qualify for coverage in order to minimize credit risk exposure. If
circumstances related to specific customers change, our estimates of the
recoverability of receivables could materially change. At July 31, 2003 and
2002, management considered all accounts receivable in excess of the allowances
for doubtful accounts and finance charges to be fully collectible.

Property, plant and equipment

Property, plant and equipment assets are recorded at cost. Our buildings and
equipment are located on owned and leased land. Buildings and Improvements are
depreciated on a straight line basis over 40 years, leasehold improvements are
depreciated on a straight line basis over the life of the lease agreement.
Equipment is depreciated over the estimated useful life using an accelerated
declining-balance method.

Revenue recognition

Revenue from the sale of products is recognized at the time title passes to the
purchaser, which is when the goods are conveyed to a carrier.

Income taxes

We account for income taxes under Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes. Income taxes and liabilities are
recognized for the expected future tax consequences of events that have been
included in the financial statements or income tax returns. Deferred tax
assets and liabilities are determined based on the difference between the book
and tax basis of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse. Allowances are
provided for certain deferred tax assets that are not expected to be realized.

Impairment of long lived assets

We review the carrying amount of long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable. The determination of any impairment would include a comparison of
estimated future operating cash flows anticipated to be generated during the
remaining life with the net carrying value of the asset.

Use of estimates

The preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
We believe that the material estimates that are particularly susceptible to
significant change relate to the determination of the allowance for doubtful
accounts and finance charges, deferred income taxes valuation allowance, and
allowances for sales incentives.

Unaudited (all amounts in U.S. dollars except where otherwise noted). The
accompanying notes are an integral part of these consolidated financial
statements.

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RISK FACTORS

The following risk factors and other information included in this Quarterly
Report should be carefully considered. The risks and uncertainties described
below are not the only ones we face. Additional risks and uncertainties not
presently known to us or that we currently deem immaterial also may impair our
business operations. If any of the following risks occur, our business,
financial condition, operating results and cash flows could be materially
adversely affected.

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 that compete in the animal care market. We
are still attempting to build our market presence as we compete with both
domestic and foreign companies. 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.

We may be adversely affected by trends in the retail industry.

With the growing trend towards retail trade consolidation, we are increasingly
dependent upon key retailers whose bargaining strength is growing. Our
business may be negatively affected by changes in the policies of our retailer
customers, such as inventory destocking, limitations on access to shelf space,
price demands and other conditions. In addition, as a result of the desire of
retailers to more closely manage inventory levels, there is a growing trend
among retailers to make purchases on a just-in-time basis. This requires us
to shorten our lead time for production in certain cases and more closely
anticipate demand, which could in the future require the carrying of additional
inventories and increase our working capital and related financing requirement.

A significant deterioration in the financial condition of one of our major
customers could have a material adverse effect on our sales, profitability and
cash flow. We continually monitor and evaluate the credit status of our
customers and attempt to adjust sales terms as appropriate. Despite these
efforts, a bankruptcy filing by a key customer could have a material adverse
effect on our business, results of operations and financial condition.

We depend on a few customers for a significant portion of our business.

Our largest customer accounted for approximately 9% and 24% of our net sales in
the first six months of fiscal year 2004 and 2003, respectively, while our
second largest customer accounted for approximately 8% and 18% of our net sales
in the first six months of fiscal year 2004 and 2003, respectively.

The loss of, or significant adverse change in, our relationship with any of
these key retailers could cause our net sales, income from operations and cash
flow to decline. The loss of, or reduction in, orders from any significant
customer, losses arising from customer disputes regarding shipments, fees,
merchandise condition or related matters, or our inability to collect accounts
receivable from any major customer could reduce our income from operations and
cash flow.

Any increase in the costs, or decreases in the supply, of the raw materials
necessary for our business could have an adverse effect on our financial
condition.

Our business places heavy reliance on raw materials being readily available.
Although we believe that there are a number of pulp and paper mills in British
Columbia, Canada and in the State of Washington that can provide us with the
raw materials necessary to conduct our business, any significant decreases in
supplies, or any increase in costs or a greater increase in delivery costs for
these materials, could result in a further decrease in our margins, which would
harm our financial condition.

Unaudited (all amounts in U.S. dollars except where otherwise noted). The
accompanying notes are an integral part of these consolidated financial
statements.

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We have significant indebtedness.

As of July 31, 2003, we had total indebtedness under our bonds,
capitalized-lease obligations and other asset financings of $2,883,000. We
make interest payments (and principal payments on the taxable bond) on the
indebtedness under our bonds, which are due in 2007 and 2019. In addition, in
August 2003, we entered into a loan agreement to borrow up to $4,691,000. We
may incur substantial additional debt in the future. Our indebtedness could
limit our ability to obtain necessary additional financing for working capital,
capital expenditures, debt service requirements or other purposes in the
future; plan for, or react to, changes in technology and in our business and
competition; and react in the event of an economic downturn. There is no
guarantee that we will be able to meet our debt service obligations. If we are
unable to generate sufficient cash flow or obtain funds for required payments,
or if we fail to comply with covenants in our indebtedness,
we will be in default. The indebtedness underlying our bonds is secured by a
mortgage on our real property and a security interest in our assets. If we are
in default under the agreements governing our indebtedness, the creditors may
be able to foreclose on our property and assets, which would substantially harm
our business and financial condition.

The ownership of real property and the building of our own manufacturing
facilities expose us to certain risks that could harm our business.

We are currently in the process of building a manufacturing facility on real
property in Whatcom County, Washington that we purchased in fiscal year 2003,
and we have purchased additional real property in Georgia to build another
manufacturing plant in fiscal year 2004. Although we believe that we have
sufficient funds to finance this build-out, we may exceed our capital
expenditure budget substantially as a result of project delays, construction
cost overruns and other factors, and we may be required to seek additional
sources of funds for our planned expansion. We cannot assure you that such
funds will be available on satisfactory terms. Failure to obtain such
financing could delay or prevent our planned expansion, which could harm our
operating results. In addition, we cannot assure you that there will not be a
decline in the market value of our properties, which could also have an adverse
effect on our financial condition. Moreover, ownership of real property could
expose us to additional environmental regulations, the noncompliance with which
could substantially harm our business.

Our business is subject to many regulations and noncompliance is costly.

The manufacture, marketing and sale of our products are subject to the rules
and regulations of various federal, provincial, state and local health
agencies, including, without limitation, the air emission standards enforced by
the Northwest Air Pollution Authority and regulations promulgated by the U.S.
Food and Drug Administration. If a regulatory authority finds that a current
or future product or production run is not in compliance with any of these
regulations, we may be fined, production may be stopped or our product may be
pulled from the shelves, any of which could adversely affect our financial
conditions and operations. Similarly, any adverse publicity associated with
any noncompliance may damage our reputation and our ability to successfully
market our products. Furthermore, the rules and regulations are subject to
change from time to time and while we closely monitor developments in this
area, we have no way of anticipating whether changes in these rules and
regulations will impact our business adversely. Additional or revised
regulatory requirements, whether labeling, environmental, tax or otherwise,
could have a material adverse effect on our financial condition and results of
operations.

If we need to raise additional capital for our operating plan, our business
would be harmed if we were unable to do so on acceptable terms.

We currently anticipate that our existing capital resources and cash flows from
operations will enable us to maintain our currently planned operations for the
foreseeable future. However, our current operating plan may change as a result
of many factors, including general economic conditions affecting the U.S.
economy which are beyond our control. If we are unable to generate and
maintain positive operating cash flows and operating income in the future, we
may need additional funding. We may also choose to raise additional capital
due to market conditions or strategic considerations even if we believe that we
have sufficient funds for our current or future operating plans. If additional
capital were needed, our inability to raise capital on favorable terms would
harm our business and financial condition. To the extent that we raise
additional

Unaudited (all amounts in U.S. dollars except where otherwise noted). The
accompanying notes are an integral part of these consolidated financial
statements.

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capital through the sale of equity or debt securities convertible
into equity, the issuance of these securities could result in dilution to our
stockholders.

Competition in our industries may hinder our ability to execute our business
strategy, achieve profitability, or maintain relationships with existing
customers.

We operate in highly competitive industries. We compete against numerous other
companies, some of which are more established in their industries and have
substantially greater revenue or resources than we do. Our products compete
against national and regional products and private label products produced by
various suppliers. To compete effectively, among other things, we must:



| |  |  | maintain our relationships with key retailers;                       
| | - |  | ---------------------------------------------------------------------
|
| |  |  | continually develop innovative new products that appeal to consumers;
|
| |  |  | maintain strict quality standards; and                               
|
| |  |  | deliver products on a reliable basis at competitive prices.          

Competition could cause lower sales volumes, price reductions, reduced profits
or losses, or loss of market share. Our inability to compete effectively could
have a material adverse effect on our business, results of operations and
financial condition.

The indentures governing our bonds and bank debt financing includes financial
covenants that restrict certain of our activities and impose certain financial
tests that we must meet in order to be in compliance with their terms.

The terms of the indentures governing our bonds and bank debt financing
restrict our ability to, among other things, incur additional indebtedness, pay
dividends or make other restricted payments on investments, consummate asset
sales or similar transactions, create liens, or merge or consolidate with any
other person or sell, assign, transfer, lease, convey or otherwise dispose of
all or substantially all of our assets. The terms also contain covenants that
require us to meet financial tests. We currently are in compliance with these
restrictions and covenants and expect that we will continue to comply. If we
were not able to do so, we could be materially and adversely affected.

The loss of key senior management personnel could negatively affect our
business.

We depend on the continued services and performance of our senior management
and other key personnel. We do not have key person life insurance policies.
The loss of any of our executive officers or other key employees could harm our
business.

We cannot be certain that our product innovations and marketing successes will
continue.

We believe that, to an extent, our past performance has been based upon, and
our future success will partially depend upon, in part, our ability to continue
to improve our existing products through product innovation and to develop,
market and produce new products. We cannot assure you that we will be
successful in the introduction, marketing and production of any new products or
product innovations, or develop and introduce in a timely manner innovations to
our existing products which satisfy customer needs or achieve market
acceptance. Our failure to develop new products and introduce them
successfully and in a timely manner could harm our ability to grow our business
and could have a material adverse effect on our business, results of operations
and financial condition.

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 U.S. patent laws, to preserve our trade secrets and to operate
without infringing the proprietary rights of third parties. We have three U.S.
patents issued (and corresponding Canadian patents and patent applications) and
one U.S. patent application 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

Unaudited (all amounts in U.S. dollars except where otherwise noted). The
accompanying notes are an integral part of these consolidated financial
statements.

19



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products
or otherwise circumvent our patent protection. Should we fail to obtain and
protect our patents, our competitive advantage will be harmed.

The products that we manufacture could expose us to product liability claims.

Our business exposes us to potential product liability risks, which are
inherent in the manufacture and distribution of certain of our products.
Although we generally seek to insure against such risks, there can be no
assurance that such coverage is adequate or that we will be able to maintain
such insurance on acceptable terms. A successful product liability claim in
excess of our insurance coverage could have a material adverse effect on us and
could prevent us from obtaining adequate product liability insurance in the
future on commercially reasonable terms.

The price for our common shares may continue to be volatile.

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 limited
trading volume in our common shares.

The liquidity of our stock depends in part on our continued listing with the
American Stock Exchange.

In March 2003, we received official notice from the American Stock Exchange
(AMEX) that our securities had been approved for listing. In order to
continue to have our common shares listed, we must remain in compliance with
the AMEX listing standards, including standards related to stock price, market
capitalization and corporate governance. If we are unable to do so, AMEX could
delist our stock, in which event the liquidity and the value of our shares
could be adversely impacted.




ITEM 3. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, we performed an
evaluation under the supervision and with the participation of our management,
including the Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures. Based upon that
evaluation, our management, including the Chief Executive Officer and Chief
Financial Officer, concluded that our disclosure controls and procedures were
effective as of the end of the period covered by this report.

No change in our internal control over financial reporting occurred during
our last fiscal quarter that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.

Unaudited (all amounts in U.S. dollars except where otherwise noted). The
accompanying notes are an integral part of these consolidated financial
statements.

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PART II  OTHER INFORMATION




ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At the annual general meeting of shareholders held on June 25, 2003, the
following proposals were adopted by the margins indicated.



|1. |  | The election of the following directors who will serve until
their successors are elected and qualified, or their earlier death or
resignation:
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------

|                    |  |                  |           |          |  |  |         | 
|------------------- |  | ---------------- | --------- | -------- |  |  | ------- | 
|                    |  | Number of Shares
|                    |  |                 
|                    |  | For              |           | Withheld
|                    |  |                  |           |         
|Stephen Silbernagel |  |                  | 4,923,731 |          |  |  | 99,620  | 
|John Sutherland     |  |                  | 4,922,172 |          |  |  | 101,179 | 
|Lionel G. Dodd      |  |                  | 4,924,231 |          |  |  | 99,120  | 
|Daniel J. Whittle   |  |                  | 4,924,231 |          |  |  | 99,120  | 



|   |  | The Companys other directors include Gordon Ellis, Douglas Ellis and
Michael Bentley, each of whose terms will expire in 2004 unless
re-elected.                                                                
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | The selection of Moss Adams, LLP to continue as the auditors for
International Absorbents, Inc., was approved by the following vote:
For  4,997,047; Against  21,479; Withheld  4,825.                        
|  
|3. |  | A grant of options to directors and executive officers of the
Company to purchase Common Shares was approved by the following vote:
For  1,019,644; Against  375,853; Withheld  52,130; Not Voted 
3,575,724.
|  
|4. |  | An amendment to the 1993 Stock Option Plan for U.S. Participants
was approved by the following vote: For  1,033,174; Against 
364,340; Withheld  50,133; Not Voted  3,575,724.                               
|  
|5. |  | An amendment to the 1993 Equity Stock Option Plan was approved by
the following vote: For  1,046,987; Against  349,147; Withheld 
51,493; Not Voted  3,575,724.                                              




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



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

|        |  |                                                                                                                                                                             
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                             
|Number  |  | Exhibit Description                                                                                                                                                         
|        |  |                                                                                                                                                                             
|3.1     |  | Altered Memorandum of Company (Amended) (incorporated by reference to
Exhibit 3.1 to the Companys Form 10-KSB filed on April 3, 2003).                                     
|        |  |                                                                                                                                                                             
|3.2     |  | Articles of the Company (incorporated by reference to the exhibits to the
Companys registration statement filed on February 24, 1992, as amended
(No. 33-45020)).          
|        |  |                                                                                                                                                                             
|31.1    |  | Certification of Gordon Ellis, President and Chief Executive Officer of
International Absorbents Inc., pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934.
|        |  |                                                                                                                                                                             
|31.2    |  | Certification of David Thompson, Chief Financial Officer of International
Absorbents Inc., pursuant to Rule 13a-14(a) under the Securities Exchange
Act of 1934.            
|        |  |                                                                                                                                                                             
|32.1    |  | Certification of Gordon Ellis, President and Chief Executive Officer of
International Absorbents Inc., pursuant to 18 U.S.C. Section 1350.                                  
|        |  |                                                                                                                                                                             
|32.2    |  | Certification of David Thompson, Chief Financial Officer of International
Absorbents Inc., pursuant to 18 U.S.C. Section 1350.                                              

Unaudited (all amounts in U.S. dollars except where otherwise noted). The
accompanying notes are an integral part of these consolidated financial
statements.

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##### Table of Contents





|b) |  | Reports on Form 8-K
|-- |  | -------------------



| | 1) |  | On July 14, 2003 a report on Form 8-K was filed with the
Securities and Exchange Commission announcing the election of
Daniel J. Whittle to the Board of Directors for a term of two years
and the appointment of Michael Bentley to the Board of Directors to
replace the resigning Shawn Dooley.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2) |  | On June 13, 2003, a report on Form 8-K was filed with the
Securities and Exchange Commission announcing the Companys earning
for the first fiscal quarter ending April 30, 2003.                                                                                                                 
|
| | 3) |  | On August 29, 2003 a report on Form 8-K was filed with the
Securities and Exchange Commission announcing the Company entering
into a loan agreement with Branch, Banking and Trust Company
(BB&T) whereby BB&T has agreed to loan to Absorption the amount
of $4,691,000.                       

Unaudited (all amounts in U.S. dollars except where otherwise noted). The
accompanying notes are an integral part of these consolidated financial
statements.

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##### Table of Contents






SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

|                         |  |                                           
|------------------------ |  | ------------------------------------------
|                         |  | INTERNATIONAL ABSORBENTS INC.
(Registrant)
|                         |  |                                           
|Date: September 10, 2003 |  | /s/ GORDON L. ELLIS                       
|                         |  | Gordon L. Ellis                           
|                         |  | President & CEO                           

Unaudited (all amounts in U.S. dollars except where otherwise noted). The
accompanying notes are an integral part of these consolidated financial
statements.

23