##### 



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UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549

Form 10-QSB

|  |  |                                                                                        
|- |  | ---------------------------------------------------------------------------------------
|þ |  | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934

For the quarterly period ended April 30, 2003

OR

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|o |  | 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
(Registrants telephone number, including area code)

State the number of shares outstanding of each of the issuers classes of
common stock, as of June 3, 2003.

|                            |  |              
|--------------------------- |  | -------------
|Title of Class              |  | No. of Shares
|                            |  |              
|Common Shares, no par value |  | 5,683,645    



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TABLE OF CONTENTS



|                                                                                             |  |  |  |  |  |  |  | 
|-------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 
|CONDENSED CONSOLIDATED BALANCE SHEETS                                                       
|CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS                                             
|CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CASH FLOWS                                  
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                        
|ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|RISK FACTORS                                                                                
|ITEM 3. CONTROLS AND PROCEDURES                                                             
|PART II -- OTHER INFORMATION                                                                
|Item 6. Exhibits and Reports on Form 8-K                                                    
|SIGNATURES                                                                                  
|CERTIFICATION PURSUANT TO EXCHANGE ACT RULE 13a-14                                          
|CERTIFICATION PURSUANT TO  EXCHANGE ACT RULE 13a-14                                         




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

|                                                                                                                                                             |                                          |                            |        |                |       |                  |        |       |       | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------------- | -------------------------- | ------ | -------------- | ----- | ---------------- | ------ | ----- | ----- | 
|                                                                                                                                                             |                                          |                            |        | At             |       | At              
|                                                                                                                                                             |                                          |                            |        | April 30, 2003 |       | January 31, 2003
|                                                                                                                                                             |                                          |                            |        |                |       |                 
|                                                                                                                                                             |                                          |                            |        | (unaudited)    |       | (audited)       
|ASSETS                                                                                                                                                       |                                          |                            |        |                |       |                  |        |      
|Current assets:                                                                                                                                              |                                          |                            |        |                |       |                  |        |      
|                                                                                                                                                             | Cash and cash equivalents                |                            | $      | 4,047          |       |                  | $      | 3,051 |      
|                                                                                                                                                             | Restricted cash                          |                            |        | 1,785          |       |                  |        |       |      
|                                                                                                                                                             | Short term investments                   |                            |        | 211            |       |                  |        | 207   |      
|                                                                                                                                                             | Accounts receivable, net                 |                            |        | 1,550          |       |                  |        | 1,489 |      
|                                                                                                                                                             | Inventories                              |                            |        | 1,474          |       |                  |        | 1,042 |      
|                                                                                                                                                             | Prepaid expenses                         |                            |        | 182            |       |                  |        | 151   |      
|                                                                                                                                                             | Loan to related party                    |                            |        | 26             |       |                  |        | 26    |      
|                                                                                                                                                             | Deferred income tax asset                |                            |        | 91             |       |                  |        | 273   |      
|                                                                                                                                                             |                                          |                            |        |                |       |                  |        |      
|                                                                                                                                                             |                                          |                            | 9,366  |                |       |                  | 6,239  |      
|                                                                                                                                                             | Property, plant and equipment            |                            |        | 5,432          |       |                  |        | 3,971 |      
|                                                                                                                                                             | Intangible assets                        |                            |        | 136            |       |                  |        | 99    |      
|                                                                                                                                                             |                                          |                            |        |                |       |                  |        |      
|                                                                                                                                                             |                                          | $                          | 14,934 |                |       | $                | 10,309 |      
|                                                                                                                                                             |                                          |                            |        |                |       |                  |        |      
|LIABILITIES                                                                                                                                                  |                                          |                            |        |                |       |                  |        |      
|Current liabilities:                                                                                                                                         |                                          |                            |        |                |       |                  |        |      
|                                                                                                                                                             | Accounts payable and accrued liabilities |                            |        | 2,668          |       |                  |        | 1,295 |      
|                                                                                                                                                             | Income taxes payable                     |                            |        | 28             |       |                  |        | 28    |      
|                                                                                                                                                             | Due to related parties                   |                            |        |                |       |                  |        | 5     |      
|                                                                                                                                                             |                                          |                            |        |                |       |                  |        |      
|                                                                                                                                                             |                                          |                            | 2,696  |                |       |                  | 1,328  |      
|Long term liabilities:                                                                                                                                       |                                          |                            |        |                |       |                  |        |      
|                                                                                                                                                             | Deferred income tax liabilities          |                            |        | 170            |       |                  |        | 162   |      
|                                                                                                                                                             | Long term Debt                           |                            |        | 2,910          |       |                  |        |       |      
|                                                                                                                                                             |                                          |                            |        |                |       |                  |        |      
|                                                                                                                                                             |                                          |                            | 5,776  |                |       |                  | 1,490  |      
|SHAREHOLDERS EQUITY                                                                                                                                         |                                          |                            |        |                |       |                  |        |      
|Common stock, no par value,
100,000,000 shares authorized
5,676,045 and 5,667,345 issued andoutstanding at
April 30, 2003 and January 31, 2003, respectively |                                          |                            | 7,068  |                |       |                  | 7,052  |      
|Additional Paid in Capital                                                                                                                                   |                                          |                            | 449    |                |       |                  | 444    |      
|Retained earnings                                                                                                                                            |                                          |                            | 1,641  |                |       |                  | 1,323  |      
|                                                                                                                                                             |                                          |                            |        |                |       |                  |        |      
|                                                                                                                                                             |                                          | Total shareholders equity |        |                | 9,158 |                  |        |       | 8,819 | 
|                                                                                                                                                             |                                          |                            |        |                |       |                  |        |      
|                                                                                                                                                             |                                          | $                          | 14,934 |                |       | $                | 10,309 |      
|                                                                                                                                                             |                                          |                            |        |                |       |                  |        |      

2

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)

|                                                             |                            |   |                    |       |                |   |       |       | 
|------------------------------------------------------------ | -------------------------- | - | ------------------ | ----- | -------------- | - | ----- | ----- | 
|                                                             |                            |   | Three Months Ended
|                                                             |                            |   |                   
|                                                             |                            |   | April 30, 2003     |       | April 30, 2002
|                                                             |                            |   |                    |       |               
|                                                             |                            |   | (unaudited)        |       | (unaudited)   
|Sales                                                        |                            | $ | 4,518              |       |                | $ | 3,688 |      
|Cost of goods sold                                           |                            |   | 2,929              |       |                |   | 1,989 |      
|                                                             |                            |   |                    |       |                |   |       |      
|                                                             |                            |   | 1,589              |       |                |   | 1,699 |      
|Corporate and administrative expenses:                       |                            |   |                    |       |                |   |       |      
|                                                             | Marketing and sales        |   |                    | 609   |                |   |       | 554   | 
|                                                             | General and administrative |   |                    | 480   |                |   |       | 492   | 
|                                                             |                            |   |                    |       |                |   |       |      
|                                                             |                            |   | 1,089              |       |                |   | 1,046 |      
|Net income from operations                                   |                            |   | 500                |       |                |   | 653   |      
|Interest income                                              |                            |   | 8                  |       |                |   | 26    |      
|                                                             |                            |   |                    |       |                |   |       |      
|Net income before income taxes                               |                            |   | 508                |       |                |   | 679   |      
|                                                             |                            |   |                    |       |                |   |       |      
|Income tax provision                                         |                            |   |                   |       |                |   |      |      
|Deferred income tax provision                                |                            |   | (190               | )     |                |   | (288  | )    
|                                                             |                            |   |                    |       |                |   |       |      
|Net income for the period                                    |                            | $ | 318                |       |                | $ | 391   |      
|                                                             |                            |   |                    |       |                |   |       |      
|Basic earnings per share                                     |                            | $ | 0.06               |       |                | $ | 0.07  |      
|Fully diluted                                                |                            | $ | 0.05               |       |                | $ | 0.07  |      
|Weighted average number of shares
outstanding (in thousands) |                            |   |                    |       |                |   |       |      
|                                                             | Basic                      |   |                    | 5,668 |                |   |       | 5,662 | 
|                                                             | Diluted                    |   |                    | 5,840 |                |   |       | 5,793 | 




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

|                                               |  |                    |        |                |  |   |       |  
|---------------------------------------------- |  | ------------------ | ------ | -------------- |  | - | ----- | -
|                                               |  | Three Months Ended
|                                               |  |                   
|                                               |  | April 30, 2003     |        | April 30, 2002
|                                               |  |                    |        |               
|                                               |  | (unaudited)        |        | (unaudited)   
|Cash flows from operating activities           |  | $                  | 451    |                |  | $ | 906   |  
|Cash flows from investing activities           |  |                    | (2,381 | )              |  |   | (319  | )
|Cash flows from financing activities           |  |                    | 2,926  |                |  |   |      |  
|                                               |  |                    |        |                |  |   |       |  
|Net change in cash                             |  | $                  | 996    |                |  | $ | 587   |  
|Cash and cash equivalents, beginning of period |  | $                  | 3,051  |                |  | $ | 3,806 |  
|                                               |  |                    |        |                |  |   |       |  
|Cash and cash equivalents, end of period       |  | $                  | 4,047  |                |  | $ | 4,393 |  
|                                               |  |                    |        |                |  |   |       |  

3

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 company 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 audited
annual financial statements 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 April 30, 2003,
its results of operations and statement of changes in cash flows for the three
months ended April 30, 2003 and 2002.

New accounting pronouncements

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. The Company adopted the
provisions of SFAS No. 149 and it had no material effect on its results of
operations or financial position.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. The Company
is currently assessing the impact of the provisions of SFAS No. 150, and
believes the adoption will not have a material effect on its results of
operations or financial position.

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 $42,000 during the three months
ended April 30, 2003 and 2002, respectively. Had the Company determined
compensation costs based on fair value at the date of grant for its awards
under a method prescribed by SFAS No. 123, the Companys net earnings and net
earnings per share would be as follows:

4

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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|                                         |             |                |                    |                |                    |   |      |      | 
|---------------------------------------- | ----------- | -------------- | ------------------ | -------------- | ------------------ | - | ---- | ---- | 
|                                         |             |                | Three months ended |                | Three months ended
|(in thousands, except per share amounts) |             | April 30, 2003 |                    | April 30, 2002
|                                         |             |                |                    |               
|Net earnings                             |             | $              | 318                |                |                    | $ | 391  |     
|Stock based compensation recognized      |             |                |                   |                |                    |   | 42   |     
|Additional compensation expense          |             |                | (60                | )              |                    |   | (176 | )   
|                                         |             |                |                    |                |                    |   |      |     
|Pro forma net earnings                   |             |                | 258                |                |                    |   | 257  |     
|                                         |             |                |                    |                |                    |   |      |     
|Basic earnings per share                 |             |                |                    |                |                    |   |      |     
|                                         | As reported |                |                    | 0.06           |                    |   |      | 0.07 | 
|                                         | Pro forma   |                |                    | 0.05           |                    |   |      | 0.05 | 
|Diluted earnings per share               |             |                |                    |                |                    |   |      |     
|                                         | As reported |                |                    | 0.05           |                    |   |      | 0.07 | 
|                                         | Pro forma   |                |                    | 0.04           |                    |   |      | 0.04 | 

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, April 30, 2003   |  |        | 5,676,045 |         |  | $ | 7,068 | 

The Companys share capital grew from $7,052,000 at January 31, 2003 to
$7,068,000 at April 30, 2003, due to the exercise of options to
purchase common stock.

Options

Stock options outstanding at April 30, 2003 and January 31, 2003 were 614,300
and 417,400, respectively. During the first quarter of fiscal year 2004, the
Company granted 189,420 stock options to employees and non-employee directors
and 16,180 stock options to consultants, with the exercise price of $2.10,
which was equal to the fair market value on the date of grant. Stock based
compensation expense for options granted to consultants was $5,000 during the
quarter ending April 30, 2003.

Warrants

|                                       |        |  |        |   |  |                |  |   | 
|-------------------------------------- | ------ |  | ------ | - |  | -------------- |  | - | 
|Warrants outstanding, January 31, 2003 |        |  | 44,120 |   |  | $2.25 to $2.29
|                                       | Issued |  |        |  |  |                |  |  | 
|                                       |        |  |        |   |  |                |  |  
|Warrants outstanding, April 30, 2003   |        |  | 44,120 |   |  | $2.25 to $2.29
|                                       |        |  |        |   |  |                |  |  



|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.

5

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 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 intersegment
transactions or significant differences between segment accounting and
corporate accounting basis.

Business Segment Data  Three Months Ended April 30, 2003

|                                                             |  |             |       |            |  |             |     |              |  |   |     |   |  |   |       |  
|------------------------------------------------------------ |  | ----------- | ----- | ---------- |  | ----------- | --- | ------------ |  | - | --- | - |  | - | ----- | -
|                                                             |  | Animal Care |       | Industrial |  | Hydro-Mulch |     | Consolidated
|                                                             |  |             |       |            |  |             |     |             
|Revenues                                                     |  | $           | 4,149 |            |  | $           | 265 |              |  |   | 104 |   |  | $ | 4,518 |  
|Operating costs and expenses                                 |  |             | 3,556 |            |  |             | 245 |              |  |   | 130 |   |  |   | 3,931 |  
|                                                             |  |             |       |            |  |             |     |              |  |   |     |   |  |   |       |  
|Operating income (loss)
before depreciation and
amortization |  |             | 593   |            |  |             | 20  |              |  |   | (26 | ) |  |   | 587   |  
|Depreciation & amortization                                  |  |             |       |            |  |             |     |              |  |   |     |   |  |   | (87   | )
|Interest income                                              |  |             |       |            |  |             |     |              |  |   |     |   |  |   | 8     |  
|                                                             |  |             |       |            |  |             |     |              |  |   |     |   |  |   |       |  
|Net income before taxes                                      |  |             |       |            |  |             |     |              |  |   |     |   |  | $ | 508   |  
|                                                             |  |             |       |            |  |             |     |              |  |   |     |   |  |   |       |  
|Capital expenditures                                         |  | $           | 1,472 |            |  | $           | 91  |              |  | $ | 21  |   |  | $ | 1,584 |  

Business Segment Data  Three Months Ended April 30, 2002

|                                                      |  |             |       |            |  |             |     |              |  |  |  |  |  |   |       |  
|----------------------------------------------------- |  | ----------- | ----- | ---------- |  | ----------- | --- | ------------ |  |  |  |  |  | - | ----- | -
|                                                      |  | Animal Care |       | Industrial |  | Hydro-Mulch |     | Consolidated
|                                                      |  |             |       |            |  |             |     |             
|Revenues                                              |  | $           | 3,444 |            |  | $           | 244 |              |  |  |  |  |  | $ | 3,688 |  
|Operating costs and expenses                          |  |             | 2,732 |            |  |             | 229 |              |  |  |  |  |  |   | 2,961 |  
|                                                      |  |             |       |            |  |             |     |              |  |  |  |  |  |   |       |  
|Operating income before
depreciation and
amortization |  |             | 712   |            |  |             | 15  |              |  |  |  |  |  |   | 727   |  
|Depreciation & amortization                           |  |             |       |            |  |             |     |              |  |  |  |  |  |   | (74   | )
|Interest income                                       |  |             |       |            |  |             |     |              |  |  |  |  |  |   | 26    |  
|                                                      |  |             |       |            |  |             |     |              |  |  |  |  |  |   |       |  
|Net income before taxes                               |  |             |       |            |  |             |     |              |  |  |  |  |  | $ | 679   |  
|                                                      |  |             |       |            |  |             |     |              |  |  |  |  |  |   |       |  
|Capital expenditures                                  |  | $           | 394   |            |  | $           | 25  |              |  |  |  |  |  | $ | 419   |  

Assets

|                    |  |             |        |            |  |             |     |              |  |   |     |  |  |   |        | 
|------------------- |  | ----------- | ------ | ---------- |  | ----------- | --- | ------------ |  | - | --- |  |  | - | ------ | 
|                    |  | Animal Care |        | Industrial |  | Hydro-Mulch |     | Consolidated
|                    |  |             |        |            |  |             |     |             
|At April 30, 2003   |  | $           | 13,423 |            |  | $           | 796 |              |  | $ | 715 |  |  | $ | 14,934 | 
|At January 31, 2003 |  | $           | 8,965  |            |  | $           | 702 |              |  | $ | 642 |  |  | $ | 10,309 | 

6

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



---



##### 





|4. |  | Balance sheet components
|-- |  | ------------------------

|                               |                                    |  |           |       |             |  |        |       | 
|------------------------------ | ---------------------------------- |  | --------- | ----- | ----------- |  | ------ | ----- | 
|                               |                                    |  | April 31, |       | January 31,
|                               |                                    |  | 2003      |       | 2003       
|                               |                                    |  | $         |       | $          
|                               |                                    |  |           |       |            
|Inventories                    |                                    |  |           |       |             |  |        |      
|                               | Raw materials                      |  |           | 582   |             |  |        | 541   | 
|                               | Finished goods                     |  |           | 892   |             |  |        | 501   | 
|                               |                                    |  |           |       |             |  |        |      
|                               |                                    |  | 1,474     |       |             |  | 1,042  |      
|                               |                                    |  |           |       |             |  |        |      
|Property, plant and equipment  |                                    |  |           |       |             |  |        |      
|                               | Land                               |  |           | 1,503 |             |  |        | 1,503 | 
|                               | Buildings (leasehold improvements) |  |           | 631   |             |  |        | 603   | 
|                               | Equipment                          |  |           | 3,921 |             |  |        | 3,841 | 
|                               | Construction in progress           |  |           | 1,549 |             |  |        | 117   | 
|                               |                                    |  |           |       |             |  |        |      
|                               |                                    |  | 7,604     |       |             |  | 6,064  |      
|Less: Accumulated depreciation |                                    |  | (2,172    | )     |             |  | (2,093 | )    
|                               |                                    |  |           |       |             |  |        |      
|                               |                                    |  | 5,432     |       |             |  | 3,971  |      
|                               |                                    |  |           |       |             |  |        |      



|5. |  | Other Items
|-- |  | -----------

During the first quarter, the Company completed a $2,910,000 bond financing.
The proceeds of the financing are to be 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
April 30, 2003 of $1,785,000 is for further construction and equipment
purchases.

7

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



---



##### 






|        |  |                                                                                      
|------- |  | -------------------------------------------------------------------------------------
|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 our animal bedding product.
CareFRESHis our main source of revenues and, as a result, contributes the
majority of our profits. Source 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 CareFRESH, and selling it
to our pet specialty customers. Our business strategy is to promote and grow
our core business, and to create diversification in both our production methods
and our product lines in an effort to add strength to our business structure.
As a result of this business strategy we have dedicated significant resources
over the past year to building infrastructure to support our core business and
to create 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. Both of these steps have strengthened the market position
of this product. We have also achieved initial success in introducing new
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 due to reduced reliance
on sales from only one product.

RESULTS OF OPERATIONS

The following table illustrates our results for the first quarter of fiscal
year 2004 as compared to the first quarter of fiscal year 2003. These
financial results are discussed below.

|                                    |                          |                |       |                  |   |                |     |                  |    |                   |       |      |   |  |     |    |    |  |     |     |   
|----------------------------------- | ------------------------ | -------------- | ----- | ---------------- | - | -------------- | --- | ---------------- | -- | ----------------- | ----- | ---- | - |  | --- | -- | -- |  | --- | --- | --
|(in thousands of U.S. dollars)      |                          | April 30, 2003 |       | Percent of Sales |   | April 30, 2002 |     | Percent of Sales |    | Percentage Change
|                                    |                          |                |       |                  |   |                |     |                  |    |                  
|Sales                               |                          | $              | 4,518 |                  |   |                | 100 | %                |    | $                 | 3,688 |      |   |  | 100 | %  |    |  | 23  | %  
|Cost of Goods Sold                  |                          |                | 2,929 |                  |   |                | 65  | %                |    |                   | 1,989 |      |   |  | 54  | %  |    |  | 47  | %  
|                                    |                          |                |       |                  |   |                |     |                  |    |                   |       |      |   |  |     |    |    |  |     |    
|Gross Profit                        |                          |                | 1,589 |                  |   |                | 35  | %                |    |                   | 1,699 |      |   |  | 46  | %  |    |  | (6  | )% 
|Corporate & Administrative expenses |                          |                |       |                  |   |                |     |                  |    |                   |       |      |   |  |     |    |    |  |     |    
|                                    | Marketing & Sales        |                |       | 609              |   |                |     | 13               | %  |                   |       | 554  |   |  |     | 15 | %  |  |     | 10  | % 
|                                    | General & Administrative |                |       | 480              |   |                |     | 11               | %  |                   |       | 492  |   |  |     | 13 | %  |  |     | (2  | )%
|                                    |                          |                |       |                  |   |                |     |                  |    |                   |       |      |   |  |     |    |    |  |     |    
|                                    |                          |                | 1,089 |                  |   |                | 24  | %                |    |                   | 1,046 |      |   |  | 28  | %  |    |  | 4   | %  
|Profit before under noted items     |                          |                | 500   |                  |   |                | 11  | %                |    |                   | 653   |      |   |  | 18  | %  |    |  | (23 | )% 
|                                    | Interest Income          |                |       | 8                |   |                |     | 1                | %  |                   |       | 26   |   |  |     | 1  | %  |  |     | (69 | )%
|                                    |                          |                |       |                  |   |                |     |                  |    |                   |       |      |   |  |     |    |    |  |     |    
|Profit before taxes                 |                          |                | 508   |                  |   |                | 11  | %                |    |                   | 679   |      |   |  | 18  | %  |    |  | (25 | )% 
|Provision for income taxes          |                          |                |       |                  |   |                |     |                  |    |                   |       |      |   |  |     |    |    |  |     |    
|                                    | Current                  |                |       |                 |   |                |     |                  |    |                   |       |     |   |  |     |    |    |  |     |     |   
|                                    | Deferred                 |                |       | (190             | ) |                |     | (4               | %) |                   |       | (288 | ) |  |     | (8 | %) |  |     | (34 | %)
|                                    |                          |                |       |                  |   |                |     |                  |    |                   |       |      |   |  |     |    |    |  |     |    
|Net Income                          |                          | $              | 318   |                  |   |                | 7   | %                |    | $                 | 391   |      |   |  | 11  | %  |    |  | (19 | )% 
|                                    |                          |                |       |                  |   |                |     |                  |    |                   |       |      |   |  |     |    |    |  |     |    

Revenues

The majority of our revenues during the first quarter of fiscal year 2004
resulted from the sales of animal care products. Over the past few years, our
goal has been to diversify our product lines and customer base by

8

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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##### 



selling both new products and entering into related product channels. The
increase in revenues for the period ended April 30, 2003 as compared to the
same period in 2002 was primarily the result of increased sales of our new line
of small animal foods, called Supreme Pet Foods, and from placement of our
bedding products in the mass merchandise market channel. In addition, we
experienced a slight increase in sales of certain lines of our cat litter and a
new line of white small animal bedding, CareFRESH Ultra, which was introduced
during the fourth quarter of fiscal 2003. Once again, CareFRESHsales were a
significant factor in our sales growth. 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 Foods will be a larger contributor to our revenues,
and that we will have increased sales of small animal bedding into the mass
merchandise market as well as increased sales of CareFRESH Ultra. 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 them. 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 channel 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
manufacturing plant. By the time the plant was running effectively the main
hydro-mulch season had passed. We have spent the slow winter months refining
our manufacturing process so that we will be capable of meeting the demands of
our marketing partner during the coming year. During the first quarter of
fiscal year 2004 our production was able to meet market demand for the product
and build inventory for the busy summer months.

Gross Profits

For the past year we have been projecting a steady decrease in our gross margin
percentage (which is defined as gross profit divided by net sales). 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 eventually 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 a portion of
this decrease was expected based on our business plan, the trend was
accentuated during the quarter ended April 30, 2003 as a result of several
factors. The first of these factors was the occurrence of higher than
predicted winter energy rates. Current predictions are that energy rates are
not going to return to normal levels in the summer. As such, we do not expect
short term relief from energy rates. To address this issue we are designing
both of our new plants to not only use more economical energy sources, but to
also be more energy efficient.

The second factor contributing to our lower gross margin percentage in the
first quarter of fiscal 2004 was a small animal bedding promotional program
which significantly reduced net sales (net sales are gross sales less direct
promotional costs), but was necessary to help off-set lower-than-expected
retail store traffic due to the general economy. This program, although costly
on a short-term basis, is anticipated to maintain our sales volume and market
share and is expected to improve sales over time.

The third factor was costs associated with new product lines. As we strive for
more product diversification, we will periodically incur similar costs. We
plan to minimize these costs by keeping tight controls on the commissioning of
new product lines.

The fourth factor was an increase in the maintenance costs at our Bellingham
production facility. These maintenance costs have increased over the same
period a year ago due to the fact that we are now running a

9

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



---



##### 



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
failures 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 selected 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 capital debt. Once construction is completed,
which we anticipate may occur in the fourth quarter of fiscal year 2004 or
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 for the first quarter of fiscal year 2004
decreased as a percentage of sales as compared to the same quarter of the
previous fiscal year. The 10% increase in actual costs that we did experience
was a result of our 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 at least the same
rate as in the first quarter of fiscal year 2004, with the same strategic goals
in mind.

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 larger investments 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 there to be a need for any material
expenditures on marketing our hydro-mulch product until at least the middle of
fiscal year 2004.

General and Administrative

Between the first quarters of fiscal years 2004 and 2003, general and
administrative expenses as a percentage of sales decreased from 13% to 11%,
respectively. Overall, these expenses decreased by 2% for the quarter 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, 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. Since
general and administrative costs includes depreciation and amortization, we
expect significant increases in these categories during the final quarters of
the current fiscal year and the first two quarters of fiscal 2005 as our new
production facilities are brought on line. Also beginning with the second
quarter of fiscal year 2004 we will incur expenses related to moving into our
new Whatcom County facility.

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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##### 



Interest Income

Interest income decreased during the quarter ended April 30, 2003 as compared
to the quarter ended April 30, 2002 because interest rates in general were at
extremely low levels in comparison to the previous year. This income item is
expected to remain low during the balance of fiscal year 2004 as a result 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 and has been able to
offset the payment of income taxes with the accumulated losses from previous
years. Because Absorption has demonstrated consistent and continuing
profitability, the tax benefits of unused net operating losses for U.S.
operations have been and are currently shown as an asset on our consolidated
balance sheet. During the first quarters of fiscal year 2003 and 2004,
$288,000 and $190,000, respectively, of the deferred tax benefit was recognized
in the income tax provision, representing the utilization of the net operating
loss benefit. The 2004 amount also includes accelerated tax deductions from
capital investments. Over the next year, this provision is expected to
continue to be at least partially funded from accelerated tax deductions
related to our investment in new production facilities.

Net Income

Our net income decreased by 19% in the first quarter of fiscal year 2004 as
compared to the first quarter of fiscal year 2003. The decrease in net income
was primarily due to the reduction of gross profits. The reduction in gross
profit 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
profit before under noted items. In the first quarter of fiscal year 2003
this amount was 18% of sales. In the first quarter of fiscal year 2004 it was
11% of sales. This decrease is within the range we predicted to have while
going through this period of significant capital expansion, while continuing to
increase sales. Even though gross profit margins were lower than expected, we
were able to off-set that decrease by continuing to control both sales and
marketing and general and administration expenses. 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 that would significantly reduce
this gross profit percentage.

LIQUIDITY AND CAPITAL RESOURCES

|                               |  |                    |        |                      |  |   |        | 
|------------------------------ |  | ------------------ | ------ | -------------------- |  | - | ------ | 
|                               |  | As
ofApril 30,2003 |        | As
ofJanuary 31,2003
|                               |  |                    |        |                     
|Financial Condition            |  |                    |        |                      |  |   |        | 
|Total Assets                   |  | $                  | 14,934 |                      |  | $ | 10,309 | 
|Total Debt                     |  |                    | 5,776  |                      |  |   | 1,490  | 
|Total Equity                   |  |                    | 9,158  |                      |  |   | 8,819  | 
|Debt/Equity Ratio              |  |                    | 0.63   |                      |  |   | 0.17   | 
|Assets/Debt ratio              |  |                    | 2.59   |                      |  |   | 8.11   | 
|Working Capital                |  |                    |        |                      |  |   |        | 
|Current Assets                 |  |                    | 9,366  |                      |  |   | 6,239  | 
|Current Liabilities            |  |                    | 2,696  |                      |  |   | 1,328  | 
|Current Ratio                  |  |                    | 3.47   |                      |  |   | 4.69   | 
|Cash Position                  |  |                    |        |                      |  |   |        | 
|Cash & Short Term Investments  |  |                    | 4,258  |                      |  |   | 3,258  | 
|Cash Generated from Operations |  |                    | 451    |                      |  |   | *2,343 | 



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

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

11

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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##### 



Financial Condition

During the first quarter 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 early phases of 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 a new facility
to 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 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 funds from the sale of the bonds will be held in escrow and
released at a 85% rate as the building is completed. Ten percent of the bond
proceeds will be held back until an occupancy permit is issued by Whatcom
County authorities. In relation to 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 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 debt increased with additional operating activity and expenses
related to the construction of the new production 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 significantly because we
will use debt as a significant source of funds to finance our facility
expansion. We anticipate that a corresponding change will occur in our debt to
equity ratio in fiscal year 2004, although we expect this ratio to remain below
1.00.

Working Capital

Our balance of current assets increased during the first quarter 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 increased operating activities and 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 increased during the first quarter of fiscal year 2003. Even
though we invested significantly in capital infrastructure, enough cash was
generated from operations to improve our cash position. We expect to continue
to generate cash from operations at increasing rates. The amount of increase
will be directly proportional to the increase in sales we are able to achieve,
and we will continue to closely monitor both current liabilities and current
assets. As of April 30, 2003 $1,785,000 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 quarter of
fiscal year 2004, although at a lower level than generated during the same
period for the previous year. During the first quarter of fiscal year 2003 we
generated $906,000 as compared to $451,000 generated during the first quarter
of fiscal year 2004. Since

12

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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##### 



$2,343,000 of cash was generated from operations during the entire 2003 fiscal
year, the average for the second, third, and fourth quarters of fiscal year
2003 was $479,000 per quarter. As a result, the amount of cash generated from
operations during the current first quarter was consistent with recent trends.
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.

Financing and Investing Activities

Cash from financing activities during the quarter ended April 30, 2003 resulted
in $2,926,000 in cash being provided. The majority of the cash received was
the result of cash being received from the issuance of industrial revenue
bonds, with $16,000 being received from the exercise of stock options. A
significant amount of cash was used in the same quarter of fiscal year 2003 in
investing activities. The vast majority of the cash that was used during the
first quarter of fiscal year 2003 was for the purchase of property, plant and
equipment and cash from the industrial revenue bonds which was placed in escrow
to be released during the construction of our new west coast facility. During
the remainder of fiscal year 2004, we plan to implement a three-phase
production expansion plan.

The first phase is already in motion. This is the construction of our new
facility in Whatcom County. We are currently operating in five separate leased
facilities in Whatcom County, Washington. 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 of approximately $500,000 a year in lease payments. The
consolidation of these facilities should also provide us with savings in other
expenses related to having facilities spread out in the area. 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, which we intend to construct during the second half of fiscal year
2004. The annual interest expense of the debt used to finance this facility is
estimated to be approximately $270,000 a year. By having production on the
east coast, we will be much closer to a majority of our customers, which means
we will not only be able 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 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.

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.

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

13

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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##### 



minimize credit risk exposure. If circumstances related to specific customers
change, our estimates of the recoverability of receivables could materially
change. At April 30, 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 leasehold
improvements are depreciated on a straight line basis over the life of the
lease agreement. Equipment is depreciated over the estimated useful life as
follows:

|          |  |                             |  | 
|--------- |  | --------------------------- |  | 
|Equipment |  | 15% declining-balance basis

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
financial statement 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

In addition, 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 sales incentives.

14

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 24% of our net sales in
fiscal year 2003 and 24% in fiscal year 2002, while our second largest customer
accounted for approximately 18% of our net sales in fiscal year 2003 and 12% in
fiscal year 2002.

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.

We have significant indebtedness.

As of April 30, 2003, we had total indebtedness under our bonds,
capitalized-lease obligations and other asset financings of $2,910,000. We
make interest payments on the indebtedness under our bonds, which are due in
2007 and 2019. 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.

15

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



---



##### 



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 also intend to purchase 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 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:

16

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



---



##### 





| |  |  | 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 indenture governing our bonds 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 the terms of the bonds.

The terms of the indenture governing our bonds 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 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.

17

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



---



##### 



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

Within the 90 days prior to the date of filing this Quarterly Report on Form
10-QSB, we carried out an evaluation, under the supervision and with the
participation of our management, including our chief executive officer and the
chief financial officer, of the effectiveness of the design and operation of
our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14.
Based upon that evaluation, our chief executive officer and chief financial
officer concluded that our disclosure controls and procedures are effective in
timely alerting them to material information relating to us (including our
consolidated subsidiaries) required to be included in the our periodic SEC
filings. Subsequent to the date of that evaluation, there have been no
significant changes in our internal controls or in other factors that could
significantly affect internal controls, nor were any corrective actions
required with regard to significant deficiencies and material weaknesses.

18

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



---



##### 






PART II  OTHER INFORMATION




|        |  |                                 
|------- |  | --------------------------------
|Item 6. |  | Exhibits and Reports on Form 8-K



|a) |  | List of Exhibits
|-- |  | ----------------

|              |  |                    
|------------- |  | -------------------
|ExhibitNumber |  | 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. 33-45929)).
|
| | 99.1 |  | Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section § 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.           
|
| | 99.2 |  | Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section § 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.           



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



| | 1) |  | On March 24, 2003 a report on Form 8-K was filed with the
Securities and Exchange Commission announcing the Company had entered
an agreement with GE Capital Public Finance Inc. and Washington
Economic Development Finance Authority for the purpose of financing the
construction of the new manufacturing facility in Bellingham,
Washington.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2) |  | On March 13, 2003 a report on Form 8K was filed with the Securities
and Exchange Commission announcing the initial application to list its
shares of common stock on The American Stock Exchange had been
approved.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

19



---



##### 






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: June 10, 2003 |  | /s/ Gordon L. EllisGordon L. Ellis
      President & Chief Executive Officer

20



---



##### 






CERTIFICATION PURSUANT TO
EXCHANGE ACT RULE 13a-14

I, Gordon Ellis, President and Chief Executive Officer, certify that:

1.     I have reviewed this quarterly report on Form 10-QSB of International
Absorbents Inc.;

2.     Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
|
| | b) Evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):



| |                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants ability
to record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in
internal controls; and
|
| | b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants internal
controls; and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|      |  |                                      
|----- |  | -------------------------------------
|Date: |  | June 10, 2003                        
|     
|     
|      |  | /s/ Gordon L. Ellis                  
|      |  |                                      
|      |  | Gordon L. Ellis                      
|      |  | President and Chief Executive Officer

21



---



##### 






CERTIFICATION PURSUANT TO
EXCHANGE ACT RULE 13a-14

I, David H. Thompson, Chief Financial Officer, certify that:

1.     I have reviewed this quarterly report on Form 10-QSB of International
Absorbents Inc.;

2.     Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
|
| | b) Evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):



| |                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants ability
to record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in
internal controls; and



| |                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| | b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants internal
controls; and

6.     The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|      |  |                        
|----- |  | -----------------------
|Date: |  | June 10, 2003          
|     
|     
|      |  | /s/ David H. Thompson  
|      |  |                        
|      |  | David H. Thompson      
|      |  | Chief Financial Officer

22