UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-QSB

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

For the quarterly period ended July 31, 2001

OR

[  ] Transition Report Pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _____________ to _______________

Commission file Number 0-15673

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

|                                                                                                    |  |                                          
|--------------------------------------------------------------------------------------------------- |  | -----------------------------------------
|Province of British Columbia, Canada
(State of 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)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes [x]      No [  ]

Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of September 6, 2001.

|                            |  |              
|--------------------------- |  | -------------
|Title of Class              |  | No. of Shares
|                           
|                           
|                           
|                           
|Common Shares, no par value |  | 5,624,497    



---



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

|                     |                                                                                                                                                    |                                          |                            |       |               |       |                  |        |       |       | 
|-------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------- | -------------------------- | ----- | ------------- | ----- | ---------------- | ------ | ----- | ----- | 
|                     |                                                                                                                                                    |                                          |                            |       | As at         |       | As at           
|                     |                                                                                                                                                    |                                          |                            |       | July 31, 2001 |       | January 31, 2001
|                     |                                                                                                                                                    |                                          |                            |       |               |       |                 
|                     |                                                                                                                                                    |                                          |                            |       |               |       | (audited)       
|ASSETS              
|                    
|                    
|                    
|                    
|Current assets:     
|                    
|                    
|                    
|                    
|                     |                                                                                                                                                    | Cash                                     |                            | $     | 3,125         |       |                  | $      | 2,071 |      
|                    
|                    
|                    
|                    
|                     |                                                                                                                                                    | Short term investments                   |                            |       | 100           |       |                  |        | 400   |      
|                    
|                    
|                    
|                    
|                     |                                                                                                                                                    | Accounts receivable, net                 |                            |       | 1,014         |       |                  |        | 976   |      
|                    
|                    
|                    
|                    
|                     |                                                                                                                                                    | Inventories                              |                            |       | 490           |       |                  |        | 389   |      
|                    
|                    
|                    
|                    
|                     |                                                                                                                                                    | Prepaid expenses                         |                            |       | 122           |       |                  |        | 57    |      
|                    
|                    
|                    
|                    
|                     |                                                                                                                                                    | Deferred income tax asset                |                            |       | 757           |       |                  |        | 661   |      
|                     |                                                                                                                                                    |                                          |                            |       |               |       |                  |       
|                     |                                                                                                                                                    |                                          | 5,608                      |       |               |       | 4,554            |       
|                    
|                    
|                    
|                    
|                     |                                                                                                                                                    | Property, plant, and equipment           |                            |       | 1,324         |       |                  |        | 1,393 |      
|                    
|                    
|                    
|                    
|                     |                                                                                                                                                    | Intangible assets                        |                            |       | 131           |       |                  |        | 149   |      
|                    
|                    
|                    
|                    
|                     |                                                                                                                                                    | Note receivable from affiliate (note 5)  |                            |       | 223           |       |                  |        |      |      
|                    
|                    
|                    
|                    
|                     |                                                                                                                                                    | Deferred income tax asset                |                            |       | 336           |       |                  |        | 791   |      
|                     |                                                                                                                                                    |                                          |                            |       |               |       |                  |       
|                     |                                                                                                                                                    | $                                        | 7,622                      |       |               | $     | 6,887            |       
|                     |                                                                                                                                                    |                                          |                            |       |               |       |                  |       
|LIABILITIES         
|                    
|                    
|                    
|                    
|Current liabilities:
|                    
|                    
|                    
|                    
|                     |                                                                                                                                                    | Accounts payable and accrued liabilities |                            |       | 807           |       |                  |        | 810   |      
|                    
|                    
|                    
|                    
|                     |                                                                                                                                                    | Income taxes payable                     |                            |       | 23            |       |                  |        | 13    |      
|                    
|                    
|                    
|                    
|                     |                                                                                                                                                    | Due to related parties                   |                            |       |              |       |                  |        | 4     |      
|                     |                                                                                                                                                    |                                          |                            |       |               |       |                  |       
|                     |                                                                                                                                                    |                                          | 830                        |       |               |       | 827              |       
|                    
|                    
|                    
|                    
|Long term liability:
|                    
|                    
|                    
|                    
|                     |                                                                                                                                                    | Deferred income tax liability            |                            |       | 137           |       |                  |        | 137   |      
|                     |                                                                                                                                                    |                                          |                            |       |               |       |                  |       
|                     |                                                                                                                                                    |                                          | 967                        |       |               |       | 964              |       
|                    
|                    
|                    
|                    
|SHAREHOLDERS EQUITY
|                    
|                    
|                    
|                    
|Common stock:       
|                    
|                    
|                    
|                    
|                     | 100,000,000 common shares authorized, no par value
5,624,497 & 5,618,372 issued and outstanding at
July 31, 2001 and January 31, 2001 respectively |                                          |                            | 7,072 |               |       |                  | 7,077  |      
|                    
|                    
|                    
|                    
|                     | Capital surplus                                                                                                                                    |                                          |                            | 276   |               |       |                  | 264    |      
|                    
|                    
|                    
|                    
|                     | Shareholder loans to acquire stock (note 4)                                                                                                        |                                          |                            | (104  | )             |       |                  | (190   | )    
|                    
|                    
|                    
|                    
|                     | Deficit                                                                                                                                            |                                          |                            | (589  | )             |       |                  | (1,228 | )    
|                     |                                                                                                                                                    |                                          |                            |       |               |       |                  |       
|                     |                                                                                                                                                    |                                          | Total shareholders equity |       |               | 6,655 |                  |        |       | 5,923 | 
|                     |                                                                                                                                                    |                                          |                            |       |               |       |                  |       
|                     |                                                                                                                                                    | $                                        | 7,622                      |       |               | $     | 6,887            |       
|                     |                                                                                                                                                    |                                          |                            |       |               |       |                  |       

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

2



---



INTERNATIONAL ABSORBENTS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(US dollars, in thousands)

|                                                             |                            |   |               |       |               |   |               |       |               |   |       |       |  |   |       |       | 
|------------------------------------------------------------ | -------------------------- | - | ------------- | ----- | ------------- | - | ------------- | ----- | ------------- | - | ----- | ----- |  | - | ----- | ----- | 
|                                                             |                            |   | 6 Months      |       | 3 Months     
|                                                             |                            |   |               |       |              
|                                                             |                            |   | July 31, 2001 |       | July
31, 2000 |   | July 31, 2001 |       | July 31, 2000
|                                                             |                            |   |               |       |               |   |               |       |              
|Sales revenues                                               |                            | $ | 5,737         |       |               | $ | 4,237         |       |               | $ | 3,196 |       |  | $ | 2,058 |      
|                                                            
|                                                            
|                                                            
|                                                            
|Cost of goods sold                                           |                            |   | 3,239         |       |               |   | 2,359         |       |               |   | 1,710 |       |  |   | 1,162 |      
|                                                             |                            |   |               |       |               |   |               |       |               |   |       |       |  |   |       |      
|                                                             |                            |   | 2,498         |       |               |   | 1,878         |       |               |   | 1,486 |       |  |   | 896   |      
|                                                            
|                                                            
|                                                            
|                                                            
|Corporate and administrative expenses:                      
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Marketing and sales        |   |               | 736   |               |   |               | 650   |               |   |       | 427   |  |   |       | 324   | 
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | General and administrative |   |               | 831   |               |   |               | 578   |               |   |       | 497   |  |   |       | 295   | 
|                                                             |                            |   |               |       |               |   |               |       |               |   |       |       |  |   |       |      
|                                                             |                            |   | 1,567         |       |               |   | 1,228         |       |               |   | 924   |       |  |   | 619   |      
|                                                            
|                                                            
|                                                            
|                                                            
|Net income from operations                                   |                            |   | 931           |       |               |   | 650           |       |               |   | 562   |       |  |   | 277   |      
|                                                            
|                                                            
|                                                            
|                                                            
|Interest income                                              |                            |   | 78            |       |               |   | 43            |       |               |   | 36    |       |  |   | 24    |      
|                                                             |                            |   |               |       |               |   |               |       |               |   |       |       |  |   |       |      
|Net income before income taxes                               |                            |   | 1,009         |       |               |   | 693           |       |               |   | 598   |       |  |   | 301   |      
|                                                             |                            |   |               |       |               |   |               |       |               |   |       |       |  |   |       |      
|Income tax provision                                         |                            |   | (10           | )     |               |   | (10           | )     |               |   | (5    | )     |  |   |      |      
|                                                            
|                                                            
|                                                            
|                                                            
|Deferred income tax recovery (provision)                     |                            |   | (360          | )     |               |   | (227          | )     |               |   | (222  | )     |  |   | (120  | )    
|                                                             |                            |   |               |       |               |   |               |       |               |   |       |       |  |   |       |      
|Net income for the period                                    |                            | $ | 639           |       |               | $ | 456           |       |               | $ | 371   |       |  | $ | 181   |      
|                                                             |                            |   |               |       |               |   |               |       |               |   |       |       |  |   |       |      
|Basic earnings per share                                     |                            | $ | .11           |       |               | $ | .08           |       |               | $ | .07   |       |  | $ | .04   |      
|                                                            
|                                                            
|                                                            
|                                                            
|Fully diluted                                                |                            | $ | .11           |       |               | $ | .08           |       |               | $ | .06   |       |  | $ | .04   |      
|                                                            
|                                                            
|                                                            
|                                                            
|Weighted average number of shares
outstanding (in thousands)
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Basic                      |   |               | 5,620 |               |   |               | 5,515 |               |   |       | 5,620 |  |   |       | 5,580 | 
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Diluted                    |   |               | 5,707 |               |   |               | 5,515 |               |   |       | 5,710 |  |   |       | 5,580 | 

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

3



---



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

|                                               |  |                |       |               |  |   |       |  
|---------------------------------------------- |  | -------------- | ----- | ------------- |  | - | ----- | -
|                                               |  | 6 Months Ended
|                                               |  |               
|                                               |  | July 31, 2001  |       | July 31, 2000
|                                               |  |                |       |              
|Cash flows from operating activities           |  | $              | 1,184 |               |  | $ | 458   |  
|                                              
|                                              
|                                              
|                                              
|Cash flows used in investing activities        |  |                | (125  | )             |  |   | (429  | )
|                                              
|                                              
|                                              
|                                              
|Cash flows from (used in) financing activities |  |                | (5    | )             |  |   | 392   |  
|                                               |  |                |       |               |  |   |       |  
|Net change in cash                             |  | $              | 1,054 |               |  | $ | 421   |  
|                                              
|                                              
|                                              
|                                              
|Cash and cash equivalents, beginning of period |  | $              | 2,071 |               |  | $ | 1,324 |  
|                                               |  |                |       |               |  |   |       |  
|Cash and cash equivalents, end of period       |  | $              | 3,125 |               |  | $ | 1,745 |  
|                                               |  |                |       |               |  |   |       |  

NOTES TO 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. (IABI) and its wholly-owned subsidiaries Absorption Corp
(Absorption), a Nevada company doing business in Washington State, and Total
Absorb Inc. (TAI), a British Columbia company.

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
subsidiaries. All significant intercompany transactions and balances have been
eliminated on consolidation. Our accompanying interim condensed consolidated
financial statements do not include all notes normally included in 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 International Absorbents financial position at
July 31, 2001, its results of operations for the three and six months ended
July 31, 2001 and 2000 and statement of changes in cash flows for the six
months ended July 31, 2001 and 2000.

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

4



---



2.   Share Capital

|                                            |                              |  |           |        |   |   |               |      |  
|------------------------------------------- | ---------------------------- |  | --------- | ------ | - | - | ------------- | ---- | -
|Common Shares                              
|                                           
|                                           
|                                           
|                                           
|Common shares outstanding, January 31, 2001 |                              |  | 5,618,372 |        |   | $ | 7,077         |     
|                                           
|                                           
|                                           
|                                           
|                                            | Exercise of options          |  |           | 6,125  |   |   |               | 5    |  
|                                           
|                                           
|                                           
|                                           
|                                            | Retirement of treasury stock |  |           |        |   |   |               | (10  | )
|                                            |                              |  |           |        |   |   |               |     
|Common shares outstanding, July 31, 2001    |                              |  | 5,624,497 |        |   | $ | 7,072         |     
|                                            |                              |  |           |        |   |   |               |     
|Stock Options                              
|                                           
|                                           
|                                           
|                                           
|Stock options outstanding, January 31, 2001 |                              |  | 445,011   |        |   | $ | 0.80 to $4.00 |     
|                                           
|                                           
|                                           
|                                           
|                                            | Exercised                    |  |           | (6,125 | ) |   | $             | 0.80 |  
|                                            |                              |  |           |        |   |   |               |     
|                                           
|                                           
|                                           
|                                           
|Stock options outstanding, July 31, 2001    |                              |  | 438,886   |        |   | $ | 0.80 to $4.00 |     
|                                            |                              |  |           |        |   |   |               |     

Stock options outstanding at July 31, 2001 are due to expire from October 1,
2001 to September 30, 2005. Pursuant to the vesting terms of the option
agreements, all outstanding stock options were eligible for exercise at July
31, 2001.

Warrants

Warrants outstanding at July 31, 2001 and January 31, 2001 are 12,500 at an
exercise price of $.80 and expire December 7, 2001.

3.   Segmented Information

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

The Company defines its business segments based upon the market in which its
customers sell products. The Company operates principally in two business
segments, the animal care industry and the industrial cleanup 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  Six Months Ended July 31, 2001

|                                                      |  |             |       |            |  |              |     |  |  |   |       |  
|----------------------------------------------------- |  | ----------- | ----- | ---------- |  | ------------ | --- |  |  | - | ----- | -
|                                                      |  | Animal Care |       | Industrial |  | Consolidated
|                                                      |  |             |       |            |  |             
|Revenues                                              |  | $           | 5,063 |            |  | $            | 674 |  |  | $ | 5,737 |  
|                                                     
|                                                     
|                                                     
|                                                     
|Operating costs and expenses                          |  |             | 4,045 |            |  |              | 645 |  |  |   | 4,690 |  
|                                                      |  |             |       |            |  |              |     |  |  |   |       |  
|Operating income before depreciation and
amortization |  |             | 1,018 |            |  |              | 29  |  |  |   | 1,047 |  
|                                                     
|                                                     
|                                                     
|                                                     
|Depreciation and amortization  corporate             |  |             |       |            |  |              |     |  |  |   | (116  | )
|                                                     
|                                                     
|                                                     
|                                                     
|Interest income                                       |  |             |       |            |  |              |     |  |  |   | 78    |  
|                                                      |  |             |       |            |  |              |     |  |  |   |       |  
|Net income before taxes                               |  |             |       |            |  |              |     |  |  | $ | 1,009 |  
|                                                      |  |             |       |            |  |              |     |  |  |   |       |  
|Capital Expenditures                                  |  | $           | 26    |            |  | $            | 3   |  |  | $ | 29    |  

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

5



---



Business Segment Data  Six Months Ended July 31, 2000

|                                                      |  |             |       |            |  |              |     |  |  |   |       |  
|----------------------------------------------------- |  | ----------- | ----- | ---------- |  | ------------ | --- |  |  | - | ----- | -
|                                                      |  | Animal Care |       | Industrial |  | Consolidated
|                                                      |  |             |       |            |  |             
|Revenues                                              |  | $           | 3,558 |            |  | $            | 679 |  |  | $ | 4,237 |  
|                                                     
|                                                     
|                                                     
|                                                     
|Operating costs and expenses                          |  |             | 2,869 |            |  |              | 640 |  |  |   | 3,509 |  
|                                                      |  |             |       |            |  |              |     |  |  |   |       |  
|Operating income before depreciation and
amortization |  |             | 689   |            |  |              | 39  |  |  |   | 728   |  
|                                                     
|                                                     
|                                                     
|                                                     
|Depreciation and amortization  corporate             |  |             |       |            |  |              |     |  |  |   | (78   | )
|                                                     
|                                                     
|                                                     
|                                                     
|Interest income                                       |  |             |       |            |  |              |     |  |  |   | 43    |  
|                                                      |  |             |       |            |  |              |     |  |  |   |       |  
|Net income before taxes                               |  |             |       |            |  |              |     |  |  | $ | 693   |  
|                                                      |  |             |       |            |  |              |     |  |  |   |       |  
|Capital expenditures                                  |  | $           | 166   |            |  | $            | 42  |  |  | $ | 208   |  

Business Segment Data  Three Months Ended July 31, 2001

|                                                      |  |             |       |            |  |              |     |  |  |  |   |       |   |  |  | 
|----------------------------------------------------- |  | ----------- | ----- | ---------- |  | ------------ | --- |  |  |  | - | ----- | - |  |  | 
|                                                      |  | Animal Care |       | Industrial |  | Consolidated
|                                                      |  |             |       |            |  |             
|Revenues                                              |  | $           | 2,820 |            |  | $            | 376 |  |  |  | $ | 3,196 |  
|                                                     
|                                                     
|                                                     
|                                                     
|Operating costs and expenses                          |  |             | 2,199 |            |  |              | 369 |  |  |  |   | 2,568 |  
|                                                      |  |             |       |            |  |              |     |  |  |  |   |       |  
|Operating income before depreciation
and amortization |  |             | 621   |            |  |              | 7   |  |  |  |   | 628   |  
|                                                     
|                                                     
|                                                     
|                                                     
|Depreciation & amortization  corporate               |  |             |       |            |  |              |     |  |  |  |   | (66   | )
|                                                     
|                                                     
|                                                     
|                                                     
|Interest income                                       |  |             |       |            |  |              |     |  |  |  |   | 36    |  
|                                                      |  |             |       |            |  |              |     |  |  |  |   |       |  
|Net income before taxes                               |  |             |       |            |  |              |     |  |  |  | $ | 598   |  
|                                                      |  |             |       |            |  |              |     |  |  |  |   |       |  
|Capital expenditures                                  |  | $           | 23    |            |  | $            | 3   |  |  |  | $ | 26    |  

Business Segment Data  Three Months Ended July 31, 2000

|                                                      |  |             |       |            |  |              |     |   |  |  |   |       |   |  |  | 
|----------------------------------------------------- |  | ----------- | ----- | ---------- |  | ------------ | --- | - |  |  | - | ----- | - |  |  | 
|                                                      |  | Animal Care |       | Industrial |  | Consolidated
|                                                      |  |             |       |            |  |             
|Revenues                                              |  | $           | 1,721 |            |  | $            | 337 |   |  |  | $ | 2,058 |  
|                                                     
|                                                     
|                                                     
|                                                     
|Operating costs and expenses                          |  |             | 1,395 |            |  |              | 346 |   |  |  |   | 1,741 |  
|                                                      |  |             |       |            |  |              |     |   |  |  |   |       |  
|Operating income before depreciation
and amortization |  |             | 326   |            |  |              | (9  | ) |  |  |   | 317   |  
|                                                     
|                                                     
|                                                     
|                                                     
|Depreciation & amortization  corporate               |  |             |       |            |  |              |     |   |  |  |   | (40   | )
|                                                     
|                                                     
|                                                     
|                                                     
|Interest income                                       |  |             |       |            |  |              |     |   |  |  |   | 24    |  
|                                                      |  |             |       |            |  |              |     |   |  |  |   |       |  
|Net income before taxes                               |  |             |       |            |  |              |     |   |  |  | $ | 301   |  
|                                                      |  |             |       |            |  |              |     |   |  |  |   |       |  
|Capital expenditures                                  |  | $           | 87    |            |  | $            | 22  |   |  |  | $ | 109   |  

Assets

|                    |  |             |       |            |  |              |       |  |  |   |       | 
|------------------- |  | ----------- | ----- | ---------- |  | ------------ | ----- |  |  | - | ----- | 
|                    |  | Animal Care |       | Industrial |  | Consolidated
|                    |  |             |       |            |  |             
|At July 31, 2001    |  | $           | 6,236 |            |  | $            | 1,386 |  |  | $ | 7,622 | 
|                   
|                   
|                   
|                   
|At January 31, 2001 |  | $           | 5,510 |            |  | $            | 1,377 |  |  | $ | 6,887 | 

4.   Related Party Transactions

During fiscal year 2001, we loaned a total of $215,000 to officers and
directors of IABI for the purpose of exercising warrants. These notes accumulated
interest at 12% annually, non-compounding and are due on demand. The
principal
balance and accrued interest outstanding at July 31, 2001 is $104,000 and is
included in shareholders equity.

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

6



---



5.   Receivable From Affiliate

On May 31, 2001, International Absorbents Inc. entered into an agreement with
an affiliated corporation whose main purpose is to provide Internet
connectivity to primary markets throughout Central and South America. IABIs
chairman is a director of the affiliated corporation.

Initially, under the agreement, IABI will provide secured funds designated for
certain expenditures. As of this filing date, IABI has provided up to $270,000
in loans to satisfy these certain obligations. At July 31, 2001, outstanding
advances are $205,000 and accrued interest of $18,000. Until November 15, 2001
and subject to approval of the Board of Directors, IABI has the option to
provide further material advances upon demonstrable growth of the company in
exchange for a majority of the affiliated corporations equity.

6.   Deferred Taxes

Deferred tax amounts relate to non-capital tax loss carry forwards, $757,000 of
which is expected to be used currently. Deferred tax liabilities relate
primarily to temporary property and equipment depreciation differences.

MANAGEMENTS DISCUSSION & ANALYSIS

RESULTS OF OPERATIONS

Sales

Our net sales for the six month period ending July 31, 2001 were
$5,737,000, which was a 35% increase over the $4,237,000 total for the previous
year. Net sales for the quarter ended July 31, 2001 were $3,196,000 compared
to the quarter ended July 31, 2000 total of $2,058,000. This was an increase
of 55%. These increases were achieved primarily through an increase in sales
of the Animal Care divisions flagship product, CareFRESH®small
animal bedding. Also, there were additional increases among the other Animal
Care product lines. Sales to both regional distributors and direct buying
accounts increased due to customer recognition of the products superior
performance, Company sponsored promotional activity, and increased customer
support. The rate at which future sales grow will be determined by the
markets acceptance of a price increase that was put into effect over the first
three months of the year, continued growth of the Companys
CareFRESH®small animal bedding, increased distribution of
products that were introduced by the Company over the past two years, and the
introduction of several new ancillary small animal products.

Gross Profits

Gross profits on net sales for the first six months of fiscal year 2002
were $2,498,000, a gross margin of 44%. In the first six months of fiscal
year 2001 they were $1,878,000, or 44%. During the second quarter of the
current fiscal year our gross profits were $1,486,000 (46%), versus $896,000
(44%) for the second quarter of the previous year. During the second quarter
of the year there was continued abatement of the West Coast energy crisis.
This resulted in natural gas prices which were substantially lower than those
rates paid at the height of the crisis during the fourth quarter of the
previous fiscal year, yet still somewhat higher than prices in the second
quarter of fiscal year 2001. In addition to energy price increases, we had an
increase in the delivered cost of our short fiber raw material, due to the
closing of the Georgia Pacific West pulp plant in Bellingham, Washington. Even
though some basic production costs increased, gross margins (gross profit
divided by net sales) improved, because of new production efficiencies that
resulted from new equipment, which was installed in the previous fiscal year.
Due to energy prices having recently increased to levels which energy pricing
experts had predicted would not be reached for another five to ten years, it is
unknown how this factor will affect gross profit. Over the next year, annual
energy contract rates are predicted to return to affordable levels. That, in
combination with new production efficiencies, will allow gross margins to
remain at current levels. There will continue to be downward pressure on gross
margins as a result of the closing of the Georgia Pacific pulp plant in
Bellingham. After the resulting reduction in

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

7



---



gross margin, the Bellingham
production facility will remain profitable. New products will be introduced
during fiscal 2002, which will have lower gross margins than existing products.

Other Expenses and Income

In the first six months of fiscal year 2002, we spent $736,000 on
marketing and sales expenses compared to $650,000 in the same period last
year, resulting in a 13% increase. During the second quarter ended July 31,
2001, our marketing and sales expenses increased 31% to $427,000, as compared
to $324,000 in the same quarter ending July 31, 2000. In fiscal 2002, there
continues to be a significant investment in launching new products. There is
also an on-going investment in marketing programs for existing products. Over
the remainder of the year, significant investments will continue to be made in
marketing, advertising, and promoting recently launched products. At the same
time, product promotion and marketing programs for new products will continue.

General and administrative expenses were $831,000 for the first six months
of fiscal year 2002. In the first six months of 2001 expenses were $578,000, a
44% increase. Comparing the second quarter of fiscal 2002 to 2001, expenses
increased by 68% from $295,000 to $497,000. As sales increase, basic operating
and administrative functions have been expanded to support the growth, which
will continue with increasing sales. The rate of increase is expected to
return to a level below the sales growth rate, now that new infrastructure is
in place to handle our growth.

As cash is accumulated and invested in short term cash equivalents,
International Absorbents interest income has increased. In the first six
months of fiscal 2002, $78,000 in interest income was accumulated as compared
to $43,000 in the same period the previous year. Comparing second quarter 2000
to second quarter 2001, interest income grew from $24,000 to $36,000. Until a
significant capital investment is made, this income will continue to grow with
the rate of growth dependent on short term interest rates.

Net Income

Our net income before taxes increased by 46% to $1,009,000 for the six
months ended July 31, 2001 over $693,000 in the same period last year. During
the second quarter of fiscal year 2002 we had a net income before taxes of
$598,000, versus $301,000 for the second quarter of fiscal 2001, resulting in a
99% increase. In the first six months of 2002, the company recognized income
tax provisions of $370,000 compared with income tax provisions of $237,000 in
the first six months of 2001 representing a 56% increase. Profits after taxes
increased by 40% from $456,000 after the first six months of fiscal 2001 to
$639,000 after the first six months of fiscal 2002. During the second quarter,
profits after taxes increased to $371,000 as compared to $181,000 for the same
quarter in the previous year. The increase for the quarter was 105%. The
amount of the deferred income tax provision is determined by generally accepted
accounting principles, not management. Net income before taxes increased as a
result of increased higher sales revenues and continued controls on general and
administrative expenses, as steps have been taken to maintain expenses at a
level which will allow improved profits. These cost controls will remain in
place for the remainder of the year. Marketing and sales will see the largest
non-capital investment during 2002. While there will be an increase in net
income before taxes and tax related items, it will not be significant due to
investments that will be made to introduce new products.

Currency

Approximately 6% of International Absorbents sales were to foreign
customers. Of the foreign sales, 42% were to Canadian customers. Over the
past three years, the value of the Canadian dollar compared to other global
currencies, has been stable in relation to the value of the U.S. dollar. Sales
in the first half of fiscal year 2002 were not significant enough to be
adversely affected by changes in the value of the U.S. dollar. This trend is
expected to continue through fiscal year 2002.

Inflation

Inflationary pressures on costs, especially energy costs, are greater than
they were during the same quarter of the previous fiscal year. These pressures
appear to be moderating; but because the price increases in the energy sector
were so far beyond historical measures, there is no way to accurately predict
what they will be in the future.

Environmental Matters

International Absorbents and its wholly owned subsidiary Absorption Corp,
are committed to being an environmentally friendly company and to producing
products which benefit the quality of the environment.

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

8



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Hazardous wastes are
not produced, treated, or stored at any company owned or operated facilities.
State federal and local laws all have jurisdiction over production activities.
International Absorbents and its wholly owned subsidiary Absorption Corp
believe they are currently in compliance with these laws and expect to remain
so through fiscal 2002.

Risk Factors

Except for the historical information contained herein, certain matters
discussed in this report are forward-looking statements as defined in the
Private Securities Litigation Reform Act of 1995, which involve risks and
uncertainties, including but not limited to, changing economic conditions,
governmental policies affecting operations and costs, market competitive
challenges, product acceptance and performance, customer service requirements,
raw material, labor and utility costs, and inflationary pressures.

Economic downturns or recessionary conditions in markets served by
International Absorbents can adversely affect the demand for International
Absorbents products.

LIQUIDITY AND CAPITAL RESOURCES

Financial Condition

At the end of the first six months of fiscal year 2002, International
Absorbents capital structure comprised $830,000 of short-term liabilities,
$137,000 of deferred tax liability, and $6,655,000 of stockholders equity.
The ratio of total assets to total liabilities was 7.88:1 compared to 7.14:1 at
January 1, 2001. Total debt increased by $3,000. Total stockholders equity
increased by $732,000 to $6,655,000 in the first six months of 2002. The
increase was primarily due to net income for the period and from an increase in
other capital accounts. The change in other capital relates to the repayment
of loans made to related parties for purchase of shares.

As fiscal year 2002 continues, International Absorbents capital structure
is expected to continue to improve. As growth opportunities are sought,
working capital may be reduced or debt may be incurred to fund the growth.

Cash Generated from Operations

The cash flow generated from operations of International Absorbents
increased to $1,184,000 during the first six months of fiscal year 2002 from
$458,000 at the end of the same period in 2001. This was substantially due to
our increase in sales and profits. During the balance of fiscal 2002, cash
being generated from operations will be invested in short term instruments.

Working Capital

Our working capital position, net of current deferred tax assets at July
31, 2001, was $4,021,000, as compared to $3,066,000 at the end of fiscal 2001.
The current ratio (current assets to current liabilities) improved to 5.84:1 in
comparison to 4.71:1 at the end of fiscal 2001. Cash generated from operations
resulted in an increase in working capital.

As 2002 continues, we project
working capital will grow, but it is not
expected to grow as fast as in recent history. There is expected to be enough
cash and equivalents throughout 2002 to meet all short-term working capital
needs.

Financing and Investing Activities

During the first six months of fiscal year 2002, we used $125,000 in cash
for investing activities and used $5,000 for financing activities. This is
compared to $429,000 being used for investing and $392,000 received from
financing in the first six months of 2001. New manufacturing and production
opportunities are continuously being sought. During the remainder of the
current fiscal year we will be using cash for investing activities. Some cash
is expected to be received from financing activities in the third quarter of
the current fiscal year from the exercise of common stock options that will be
expiring.

Share Repurchase Plans

On October 24, 2000, the Board of Directors authorized a program to
purchase up to 1 million shares of International Absorbents common stock from
the open market. During the fourth quarter of fiscal 2001, 6,000 common shares
were purchased at a total cost of $10,000. In December of 2000, the program
was

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

9



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suspended until the extent of the effect on the company of the West Coast
energy price increases could be fully evaluated. It was determined to be
prudent that cash reserves be held until the higher energy costs stabilize.
Management has not yet determined when the program will be resumed.

Stock Performance

The market price of International Absorbents common stock ranged from
$2.15 to $1.66 in the second quarter of fiscal year 2002. Market
capitalization (calculated as period end share price multiplied by ending
issued and outstanding common shares) at quarter end, July 31, 2001, was
$9,449,155 in comparison to $11,625,893 at quarter end July 31, 2000.

Forward-looking Statements

Statements made in the preceding Managements Discussion and Analysis referring
to the Companys outlook, future sales revenue, gross profits, general and
administrative expenses, marketing expenses, liquidity and capital resources,
and cash flow, that state the Company managements intentions, hopes, beliefs,
expectations, or predictions of the future, are forward-looking statements. It
is important to note that the Companys actual results could differ materially
from those projected in such forward-looking statements. Additional
information concerning factors that could cause actual results to differ
materially from those in the forward-looking statements is contained from time
to time in the Companys SEC filings, including but not limited to the Companys
report on forms
10-KSB, 10-QSB, and the Companys proxy statement to
shareholders. Copies of these filings may be obtained by contacting the
Company or the SEC.

PART II  OTHER INFORMATION

4.   Submission of Matters to a
Vote of Security Holders

At the annual general meeting of shareholders held on June 5, 2001, the
following proposals were adopted by the margins indicated.



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

|                    |  |                  |           |          |  |  |        | 
|------------------- |  | ---------------- | --------- | -------- |  |  | ------ | 
|                    |  | Number of Shares
|                    |  |                 
|                    |  | For              |           | Withheld
|                    |  |                  |           |         
|Stephen Silbernagel |  |                  | 4,623,491 |          |  |  | 86,466 | 
|                   
|                   
|                   
|                   
|John Sutherland     |  |                  | 4,630,612 |          |  |  | 79,345 | 



|   |                                                                                                                                                                                                  
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2. | The selection of PricewaterhouseCoopers to continue as the
auditors for International Absorbents, Inc., was approved by the
following vote: For  4,537,662; Against  33,640; Withheld
 15,958.

5.   Other information

On May 31, 2001, International Absorbents Inc. entered into an agreement
with a corporation whose main purpose is to provide Internet connection to
primary markets throughout Central and South America. IABIs chairman is
a director of the corporation.

Initially, under the agreement, IABI will provide secured funds designated
for certain expenditures. As of the filing date, IABI has provided up to
$270,000 in loans to satisfy these certain obligations. Until November
15, 2001 and subject to approval of the Board of Directors, IABI has the
option to provide further material advances upon demonstrable growth of
the company in exchange for a majority of the companys equity.

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

10



---



Directors as at July 31, 2001:



| | Gordon L. Ellis
| | ---------------



| | Stephen H. Silbernagel
| | ----------------------



| | John J. Sutherland, Jr.
| | -----------------------



| | Douglas E. Ellis
| | ----------------



| | Shawn M. Dooley
| | ---------------

6.   Exhibits and Reports on Form 8-K

No exhibits

On April 9, 2001 a report on Form 8-K was filed with the Securities and
Exchange Commission announcing the 1 for 4 reverse split of International
Absorbents, Inc.s common shares.

On July 3, 2001, a report on Form 8-K was filed naming Moss-Adams, LLP as
International Absorbents, Inc.s (IABI) auditors to replace
PricewaterhouseCoopers, LLP (PWC). An amended report on Form 8-K was
filed on July 12 with PWCs response to IABIs filing on the change of
auditors. PWCs response agreed with IABIs announcement that the change
was a result of moving accounting functions to the United States and not a
result of adverse opinions or disagreements between the registrant and
PWC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

|               |  |                                           
|-------------- |  | ------------------------------------------
|               |  | INTERNATIONAL ABSORBENTS INC.
(Registrant)
|              
|               |  |                                           
|              
|Date: 9/5/2001 |  | /s/ Gordon L. Ellis                       
|              
|               |  |                                           
|              
|               |  | Gordon L. Ellis
President & CEO           

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

11