##### 



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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-QSB

þ     Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934

For the quarterly period ended October 31, 2003

OR

o     Transition Report Under 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 small business issuer as specified in its charter)


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



1569 Dempsey Road
North Vancouver, British Columbia
Canada V7K 1S8(Address of principal executive offices) (604) 681-6181(Issuers telephone number, including area code)


Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yesþ
Noo

State the number of shares outstanding of each of the issuers classes of
common stock, as of December 2, 2003.

|                                           |  |                        
|------------------------------------------ |  | -----------------------
|Title of Class
Common Shares, no par value |  | No. of Shares
5,761,370



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TABLE OF CONTENTS



|                                                                                             |                                          |  |  |  |  |  |  | 
|-------------------------------------------------------------------------------------------- | ---------------------------------------- |  |  |  |  |  |  | 
|CONDENSED CONSOLIDATED BALANCE SHEETS                                                       
|CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS                                             
|CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                                             
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                        
|ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                                                                             | RESULTS OF OPERATIONS                   
|                                                                                             | LIQUIDITY AND CAPITAL RESOURCES         
|                                                                                             | CRITICAL ACCOUNTING POLICIES            
|RISK FACTORS                                                                                
|ITEM 3. CONTROLS AND PROCEDURES                                                             
|                                                                                             | PART II -- OTHER INFORMATION            
|                                                                                             | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
|SIGNATURES                                                                                  




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

|                                     |                                                                                                                                      |                                            |       |             |        |             |       |       |        | 
|------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ----- | ----------- | ------ | ----------- | ----- | ----- | ------ | 
|                                     |                                                                                                                                      |                                            |       | As at       |        | As at      
|                                     |                                                                                                                                      |                                            |       | October 31, |        | January 31,
|                                     |                                                                                                                                      |                                            |       | 2003        |        | 2003       
|                                     |                                                                                                                                      |                                            |       |             |        |            
|                                     |                                                                                                                                      |                                            |       | (unaudited) |        | (audited)  
|Assets                               |                                                                                                                                      |                                            |       |             |        |             |       |      
|Current
assets:                      |                                                                                                                                      |                                            |       |             |        |             |       |      
|                                     | Cash and cash equivalents                                                                                                            |                                            | $     | 1,924       |        |             | $     | 3,051 |       
|                                     | Restricted cash                                                                                                                      |                                            |       | 431         |        |             |       |      |       
|                                     | Short term investments                                                                                                               |                                            |       | 211         |        |             |       | 207   |       
|                                     | Accounts receivable, net                                                                                                             |                                            |       | 2,060       |        |             |       | 1,489 |       
|                                     | Inventories, net                                                                                                                     |                                            |       | 1,179       |        |             |       | 1,042 |       
|                                     | Prepaid expenses                                                                                                                     |                                            |       | 164         |        |             |       | 151   |       
|                                     | Receivable from related party                                                                                                        |                                            |       |            |        |             |       | 26    |       
|                                     | Deferred income tax asset                                                                                                            |                                            |       | 134         |        |             |       | 273   |       
|                                     |                                                                                                                                      |                                            |       |             |        |             |       |      
|                                     |                                                                                                                                      | Total current assets                       |       |             | 6,103  |             |       |       | 6,239  | 
|Property, plant and equipment        |                                                                                                                                      |                                            | 9,285 |             |        |             | 3,971 |      
|Intangible assets                    |                                                                                                                                      |                                            | 193   |             |        |             | 99    |      
|                                     |                                                                                                                                      |                                            |       |             |        |             |       |      
|                                     |                                                                                                                                      | Total assets                               |       | $           | 15,581 |             |       | $     | 10,309 | 
|                                     |                                                                                                                                      |                                            |       |             |        |             |       |      
|Liabilities and Shareholders Equity |                                                                                                                                      |                                            |       |             |        |             |       |      
|Current liabilities:                 |                                                                                                                                      |                                            |       |             |        |             |       |      
|                                     | Accounts payable and accrued liabilities                                                                                             |                                            | $     | 2,046       |        |             | $     | 1,295 |       
|                                     | Related party payable                                                                                                                |                                            |       |            |        |             |       | 5     |       
|                                     | Current portion of long-term debt                                                                                                    |                                            |       | 121         |        |             |       |      |       
|                                     | Income taxes payable                                                                                                                 |                                            |       | 179         |        |             |       | 28    |       
|                                     |                                                                                                                                      |                                            |       |             |        |             |       |      
|                                     |                                                                                                                                      | Total current liabilities                  |       |             | 2,346  |             |       |       | 1,328  | 
|Deferred income tax liability        |                                                                                                                                      |                                            | 312   |             |        |             | 162   |      
|Long-term debt                       |                                                                                                                                      |                                            | 2,745 |             |        |             |      |      
|                                     |                                                                                                                                      |                                            |       |             |        |             |       |      
|                                     |                                                                                                                                      | Total liabilities                          |       |             | 5,403  |             |       |       | 1,490  | 
|                                     |                                                                                                                                      |                                            |       |             |        |             |       |      
|Shareholders equity:                |                                                                                                                                      |                                            |       |             |        |             |       |      
|Common
stock, no par value          |                                                                                                                                      |                                            |       |             |        |             |       |      
|                                     | 100,000,000
shares authorized, 5,746,570 and 5,667,345 issued and outstanding
at
October 31, 2003 and January 31, 2003, respectively |                                            |       | 7,200       |        |             |       | 7,052 |       
|Additional paid in capital           |                                                                                                                                      |                                            | 452   |             |        |             | 444   |      
|Retained earnings                    |                                                                                                                                      |                                            | 2,526 |             |        |             | 1,323 |      
|                                     |                                                                                                                                      |                                            |       |             |        |             |       |      
|                                     |                                                                                                                                      | Total shareholders equity                 |       |             | 10,178 |             |       |       | 8,819  | 
|                                     |                                                                                                                                      |                                            |       |             |        |             |       |      
|                                     |                                                                                                                                      | Total liabilities and shareholders equity |       | $           | 15,581 |             |       | $     | 10,309 | 
|                                     |                                                                                                                                      |                                            |       |             |        |             |       |      

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

2



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

|                                                             |                            |   |                   |       |                    |   |             |       |             |   |       |       |  |   |       |       | 
|------------------------------------------------------------ | -------------------------- | - | ----------------- | ----- | ------------------ | - | ----------- | ----- | ----------- | - | ----- | ----- |  | - | ----- | ----- | 
|                                                             |                            |   | Nine Months Ended |       | Three Months Ended
|                                                             |                            |   |                   |       |                   
|                                                             |                            |   | October 31,       |       | October 31,        |   | October 31, |       | October 31,
|                                                             |                            |   | 2003              |       | 2002               |   | 2003        |       | 2002       
|                                                             |                            |   |                   |       |                    |   |             |       |            
|Sales                                                        |                            | $ | 15,012            |       |                    | $ | 11,557      |       |             | $ | 5,663 |       |  | $ | 4,299 |      
|Cost of goods sold                                           |                            |   | 9,229             |       |                    |   | 6,598       |       |             |   | 3,416 |       |  |   | 2,462 |      
|                                                             |                            |   |                   |       |                    |   |             |       |             |   |       |       |  |   |       |      
|                                                             |                            |   | 5,783             |       |                    |   | 4,959       |       |             |   | 2,247 |       |  |   | 1,837 |      
|Corporate and administrative expenses:                       |                            |   |                   |       |                    |   |             |       |             |   |       |       |  |   |       |      
|                                                             | Marketing and sales        |   |                   | 2,192 |                    |   |             | 1,639 |             |   |       | 810   |  |   |       | 549   | 
|                                                             | General and administrative |   |                   | 1,688 |                    |   |             | 1,712 |             |   |       | 552   |  |   |       | 621   | 
|                                                             |                            |   |                   |       |                    |   |             |       |             |   |       |       |  |   |       |      
|                                                             |                            |   | 3,880             |       |                    |   | 3,351       |       |             |   | 1,362 |       |  |   | 1,170 |      
|Income from operations                                       |                            |   | 1,903             |       |                    |   | 1,608       |       |             |   | 885   |       |  |   | 667   |      
|Interest expense                                             |                            |   | (51               | )     |                    |   |            |       |             |   | (51   | )     |  |   |      |      
|Interest income                                              |                            |   | 26                |       |                    |   | 43          |       |             |   | 8     |       |  |   | 13    |      
|                                                             |                            |   |                   |       |                    |   |             |       |             |   |       |       |  |   |       |      
|Income before provision for income taxes                     |                            |   | 1,878             |       |                    |   | 1,651       |       |             |   | 842   |       |  |   | 680   |      
|Current income tax provision                                 |                            |   | (385              | )     |                    |   |            |       |             |   | (245  | )     |  |   |      |      
|Deferred income tax provision                                |                            |   | (290              | )     |                    |   | (596        | )     |             |   | (50   | )     |  |   | (275  | )    
|                                                             |                            |   |                   |       |                    |   |             |       |             |   |       |       |  |   |       |      
|Net income                                                   |                            | $ | 1,203             |       |                    | $ | 1,055       |       |             | $ | 547   |       |  | $ | 405   |      
|                                                             |                            |   |                   |       |                    |   |             |       |             |   |       |       |  |   |       |      
|Basic earnings per share                                     |                            | $ | .21               |       |                    | $ | .19         |       |             | $ | .10   |       |  | $ | .07   |      
|Fully diluted earnings per share                             |                            | $ | .20               |       |                    | $ | .18         |       |             | $ | .09   |       |  | $ | .07   |      
|Weighted average number of shares outstanding
(in thousands) |                            |   |                   |       |                    |   |             |       |             |   |       |       |  |   |       |      
|                                                             | Basic                      |   |                   | 5,691 |                    |   |             | 5,662 |             |   |       | 5,715 |  |   |       | 5,663 | 
|                                                             | Diluted                    |   |                   | 5,967 |                    |   |             | 5,763 |             |   |       | 6,008 |  |   |       | 5,706 | 




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

|                                               |                    |   |                   |        |             |   |        |        |  
|---------------------------------------------- | ------------------ | - | ----------------- | ------ | ----------- | - | ------ | ------ | -
|                                               |                    |   | Nine Months Ended
|                                               |                    |   |                  
|                                               |                    |   | October 31,       |        | October 31,
|                                               |                    |   | 2003              |        | 2002       
|                                               |                    |   |                   |        |            
|Cash flows from operating activities           |                    |   | 1,313             |        |             |   | 1,723  |       
|Cash flows from investing activities           |                    |   | (5,454            | )      |             |   | (2,730 | )     
|Cash flows from financing activities           |                    |   | 3,014             |        |             |   | (1     | )     
|                                               |                    |   |                   |        |             |   |        |       
|                                               | Net change in cash |   | $                 | (1,127 | )           |   | $      | (1,008 | )
|Cash and cash equivalents, beginning of period |                    | $ | 3,051             |        |             | $ | 3,806  |       
|                                               |                    |   |                   |        |             |   |        |       
|Cash and cash equivalents, end of period       |                    | $ | 1,924             |        |             | $ | 2,798  |       
|                                               |                    |   |                   |        |             |   |        |       
|Cash paid for interest                         |                    | $ | 97                |        |             | $ |       |       
|Cash paid for income taxes                     |                    | $ | 247               |        |             | $ | 10     |       

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

3



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(US dollars, in thousands, except where otherwise noted)



|1. |  | Significant Accounting Policies
|-- |  | -------------------------------

Basis of consolidation and presentation

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

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

Stock-based employee compensation

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

Compensation expense recognized under APB No. 25 for the grant of options to
employees and non-employee directors was $0 and $98,000 during the nine months
ended October 31, 2003 and 2002, respectively. Had the Company determined
compensation costs based on fair value at the date of grant for its awards
under the method prescribed by SFAS No. 123, the Companys net earnings and net
earnings per share would be as follows:

|                                                                                        |             |   |                   |      |                    |   |             |      |             |   |     |      |  |   |     |      | 
|--------------------------------------------------------------------------------------- | ----------- | - | ----------------- | ---- | ------------------ | - | ----------- | ---- | ----------- | - | --- | ---- |  | - | --- | ---- | 
|                                                                                        |             |   | Nine months ended |      | Three months ended
|                                                                                        |             |   |                   |      |                   
|                                                                                        |             |   | October 31,       |      | October 31,        |   | October 31, |      | October 31,
|                                                                                        |             |   | 2003              |      | 2002               |   | 2003        |      | 2002       
|                                                                                        |             |   |                   |      |                    |   |             |      |            
|Net earnings                                                                            |             | $ | 1,203             |      |                    | $ | 1,055       |      |             | $ | 547 |      |  | $ | 405 |     
|Stock based compensation recognized
under APB No. 25, net of related tax effects        |             |   |                  |      |                    |   | 73          |      |             |   |    |      |  |   | 10  |     
|Compensation expense calculated in accordance
with SFAS 123, net of related tax effects |             |   | (220              | )    |                    |   | (311        | )    |             |   | (70 | )    |  |   | (49 | )   
|                                                                                        |             |   |                   |      |                    |   |             |      |             |   |     |      |  |   |     |     
|Pro forma net earnings                                                                  |             | $ | 983               |      |                    | $ | 817         |      |             | $ | 477 |      |  | $ | 366 |     
|                                                                                        |             |   |                   |      |                    |   |             |      |             |   |     |      |  |   |     |     
|Basic earnings per share                                                                |             |   |                   |      |                    |   |             |      |             |   |     |      |  |   |     |     
|                                                                                        | As reported |   | $                 | 0.21 |                    |   | $           | 0.19 |             |   | $   | 0.10 |  |   | $   | 0.07 | 
|                                                                                        | Pro forma   |   | $                 | 0.17 |                    |   | $           | 0.15 |             |   | $   | 0.09 |  |   | $   | 0.06 | 
|Diluted earnings per share                                                              |             |   |                   |      |                    |   |             |      |             |   |     |      |  |   |     |     
|                                                                                        | As reported |   | $                 | 0.20 |                    |   | $           | 0.18 |             |   | $   | 0.09 |  |   | $   | 0.07 | 
|                                                                                        | Pro forma   |   | $                 | 0.16 |                    |   | $           | 0.14 |             |   | $   | 0.08 |  |   | $   | 0.06 | 

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

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

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



|2. |  | Share Capital
|-- |  | -------------

Common Shares

|                                            |  |        |           |         |  |   |       | 
|------------------------------------------- |  | ------ | --------- | ------- |  | - | ----- | 
|                                            |  | Shares |           | Capital
|                                            |  |        |           |        
|Common shares outstanding, January 31, 2003 |  |        | 5,667,345 |         |  | $ | 7,052 | 
|Common shares outstanding, October 31, 2003 |  |        | 5,746,570 |         |  | $ | 7,200 | 

Options

Stock options outstanding at October 31, 2003 and January 31, 2003 were 534,905
and 417,400, respectively. Stock based compensation expense for options
granted was $4,000 and $14,000 during the quarter ended October 31, 2003 and
2002, respectively, and $8,000 and $98,000 for the nine months ended October
31, 2003 and 2002, respectively.

Warrants

|                                       |                                                     |  |        |        |                |  |                |       | 
|-------------------------------------- | --------------------------------------------------- |  | ------ | ------ | -------------- |  | -------------- | ----- | 
|                                       |                                                     |  | Shares |        | Exercise Price
|                                       |                                                     |  |        |        |               
|Warrants outstanding, January 31, 2003 |                                                     |  | 44,120 |        |                |  | $2.25 to $2.29 |      
|                                       | Exercised during nine months ended October 31, 2003 |  |        | 10,900 |                |  |                | $2.29 | 
|                                       |                                                     |  |        |        |                |  |                |      
|Warrants outstanding, October 31, 2003 |                                                     |  | 33,220 |        |                |  | $2.25 to $2.27 |      
|                                       |                                                     |  |        |        |                |  |                |      

Stock-based compensation expense for the warrants issued was $0 and $0 during
the quarter ended and for the nine months ended October 31, 2003, respectively.



|3. |  | Segmented Information
|-- |  | ---------------------

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

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

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

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

5



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##### 



Business Segment Data  Nine Months Ended October 31, 2003

|                                                             |  |        |        |            |  |             |     |              |  |   |      |   |  |   |        |  
|------------------------------------------------------------ |  | ------ | ------ | ---------- |  | ----------- | --- | ------------ |  | - | ---- | - |  | - | ------ | -
|                                                             |  | Animal |        |            |  |             |     |              |  |   |      |   |  |  
|                                                             |  | Care   |        | Industrial |  | Hydro-Mulch |     | Consolidated
|                                                             |  |        |        |            |  |             |     |             
|Revenues                                                     |  | $      | 13,837 |            |  | $           | 823 |              |  | $ | 352  |   |  | $ | 15,012 |  
|Operating cost and expenses                                  |  |        | 11,598 |            |  |             | 746 |              |  |   | 482  |   |  |   | 12,826 |  
|                                                             |  |        |        |            |  |             |     |              |  |   |      |   |  |   |        |  
|Operating income (loss) before depreciation
and amortization |  |        | 2,239  |            |  |             | 77  |              |  |   | (130 | ) |  |   | 2,186  |  
|Depreciation and amortization                                |  |        |        |            |  |             |     |              |  |   |      |   |  |   | (283   | )
|Interest expense                                             |  |        |        |            |  |             |     |              |  |   |      |   |  |   | (51    | )
|Interest Income                                              |  |        |        |            |  |             |     |              |  |   |      |   |  |   | 26     |  
|                                                             |  |        |        |            |  |             |     |              |  |   |      |   |  |   |        |  
|Net income before taxes                                      |  |        |        |            |  |             |     |              |  |   |      |   |  | $ | 1,878  |  
|                                                             |  |        |        |            |  |             |     |              |  |   |      |   |  |   |        |  
|Capital expenditures                                         |  | $      | 4,515  |            |  | $           | 475 |              |  | $ | 703  |   |  | $ | 5,693  |  

Business Segment Data  Nine Months Ended October 31, 2002

|                                                             |  |        |        |            |  |             |     |              |  |   |     |   |  |   |        |  
|------------------------------------------------------------ |  | ------ | ------ | ---------- |  | ----------- | --- | ------------ |  | - | --- | - |  | - | ------ | -
|                                                             |  | Animal |        |            |  |             |     |              |  |   |     |   |  |  
|                                                             |  | Care   |        | Industrial |  | Hydro-Mulch |     | Consolidated
|                                                             |  |        |        |            |  |             |     |             
|Revenues                                                     |  | $      | 10,710 |            |  | $           | 804 |              |  | $ | 43  |   |  | $ | 11,557 |  
|Operating cost and expenses                                  |  |        | 8,853  |            |  |             | 755 |              |  |   | 77  |   |  |   | 9,685  |  
|                                                             |  |        |        |            |  |             |     |              |  |   |     |   |  |   |        |  
|Operating income (loss) before depreciation
and amortization |  |        | 1,857  |            |  |             | 49  |              |  |   | (34 | ) |  |   | 1,872  |  
|Depreciation and amortization                                |  |        |        |            |  |             |     |              |  |   |     |   |  |   | (264   | )
|Interest Income                                              |  |        |        |            |  |             |     |              |  |   |     |   |  |   | 43     |  
|                                                             |  |        |        |            |  |             |     |              |  |   |     |   |  |   |        |  
|Net income before taxes                                      |  |        |        |            |  |             |     |              |  |   |     |   |  | $ | 1,651  |  
|                                                             |  |        |        |            |  |             |     |              |  |   |     |   |  |   |        |  
|Capital expenditures                                         |  | $      | 1,987  |            |  | $           | 147 |              |  | $ | 571 |   |  | $ | 2,705  |  

Business Segment Data  Three Months Ended October 31, 2003

|                                                             |  |        |       |            |  |             |     |              |  |   |     |   |  |   |       |  
|------------------------------------------------------------ |  | ------ | ----- | ---------- |  | ----------- | --- | ------------ |  | - | --- | - |  | - | ----- | -
|                                                             |  | Animal |       |            |  |             |     |              |  |   |     |   |  |  
|                                                             |  | Care   |       | Industrial |  | Hydro-Mulch |     | Consolidated
|                                                             |  |        |       |            |  |             |     |             
|Revenues                                                     |  | $      | 5,210 |            |  | $           | 326 |              |  | $ | 127 |   |  | $ | 5,663 |  
|Operating cost and expenses                                  |  |        | 4,158 |            |  |             | 307 |              |  |   | 208 |   |  |   | 4,673 |  
|                                                             |  |        |       |            |  |             |     |              |  |   |     |   |  |   |       |  
|Operating income (loss) before depreciation
and amortization |  |        | 1,052 |            |  |             | 19  |              |  |   | (81 | ) |  |   | 990   |  
|Depreciation and amortization                                |  |        |       |            |  |             |     |              |  |   |     |   |  |   | (105  | )
|Interest expense                                             |  |        |       |            |  |             |     |              |  |   |     |   |  |   | (51   | )
|Interest income                                              |  |        |       |            |  |             |     |              |  |   |     |   |  |   | 8     |  
|                                                             |  |        |       |            |  |             |     |              |  |   |     |   |  |   |       |  
|Net income before taxes                                      |  |        |       |            |  |             |     |              |  |   |     |   |  | $ | 842   |  
|                                                             |  |        |       |            |  |             |     |              |  |   |     |   |  |   |       |  
|Capital expenditures                                         |  | $      | 1,386 |            |  | $           | 108 |              |  | $ | 538 |   |  | $ | 2,032 |  

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

6



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##### 



Business Segment Data  Three Months Ended October 31, 2002

|                                                             |  |        |       |            |  |             |     |              |  |   |     |   |  |   |       |  
|------------------------------------------------------------ |  | ------ | ----- | ---------- |  | ----------- | --- | ------------ |  | - | --- | - |  | - | ----- | -
|                                                             |  | Animal |       |            |  |             |     |              |  |   |     |   |  |  
|                                                             |  | Care   |       | Industrial |  | Hydro-Mulch |     | Consolidated
|                                                             |  |        |       |            |  |             |     |             
|Revenues                                                     |  | $      | 4,005 |            |  | $           | 251 |              |  | $ | 43  |   |  | $ | 4,299 |  
|Operating cost and expenses                                  |  |        | 3,225 |            |  |             | 237 |              |  |   | 77  |   |  |   | 3,539 |  
|                                                             |  |        |       |            |  |             |     |              |  |   |     |   |  |   |       |  
|Operating income (loss) before depreciation
and amortization |  |        | 780   |            |  |             | 14  |              |  |   | (34 | ) |  |   | 760   |  
|Depreciation and amortization                                |  |        |       |            |  |             |     |              |  |   |     |   |  |   | (93   | )
|Interest Income                                              |  |        |       |            |  |             |     |              |  |   |     |   |  |   | 13    |  
|                                                             |  |        |       |            |  |             |     |              |  |   |     |   |  |   |       |  
|Net income before taxes                                      |  |        |       |            |  |             |     |              |  |   |     |   |  | $ | 680   |  
|                                                             |  |        |       |            |  |             |     |              |  |   |     |   |  |   |       |  
|Capital expenditures                                         |  | $      | 1,564 |            |  | $           | 122 |              |  | $ | 166 |   |  | $ | 1,852 |  

Assets

|                    |  |        |        |            |  |             |     |              |  |   |       |  |  |   |        | 
|------------------- |  | ------ | ------ | ---------- |  | ----------- | --- | ------------ |  | - | ----- |  |  | - | ------ | 
|                    |  | Animal |        |            |  |             |     |              |  |   |       |  |  |  
|                    |  | Care   |        | Industrial |  | Hydro-Mulch |     | Consolidated
|                    |  |        |        |            |  |             |     |             
|At October 31, 2003 |  | $      | 13,427 |            |  | $           | 755 |              |  | $ | 1,399 |  |  | $ | 15,581 | 
|At January 31, 2003 |  | $      | 8,965  |            |  | $           | 702 |              |  | $ | 642   |  |  | $ | 10,309 | 

Approximately 5.1% and 5% of our sales during the nine months ended October 31,
2003 and 2002, respectively, were to foreign customers. Approximately 5.1% and
3% of our sales during the three months ended October 31, 2003 and 2002,
respectively, were to foreign customers.



|4. |  | Inventories components
|-- |  | ----------------------

|                           |  |             |       |             |  |   |       | 
|-------------------------- |  | ----------- | ----- | ----------- |  | - | ----- | 
|                           |  | October 31, |       | January 31,
|                           |  | 2003        |       | 2003       
|                           |  |             |       |            
|Raw materials and supplies |  | $           | 544   |             |  | $ | 541   | 
|Finished goods             |  |             | 635   |             |  |   | 501   | 
|                           |  |             |       |             |  |   |       | 
|                           |  | $           | 1,179 |             |  | $ | 1,042 | 
|                           |  |             |       |             |  |   |       | 

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

7



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##### 





|5. |  | Property, Plant and Equipment
|-- |  | -----------------------------

|                               |                                    |   |             |       |             |   |        |       | 
|------------------------------ | ---------------------------------- | - | ----------- | ----- | ----------- | - | ------ | ----- | 
|                               |                                    |   | October 31, |       | January 31,
|                               |                                    |   | 2003        |       | 2003       
|                               |                                    |   |             |       |            
|Property, plant and equipment  |                                    |   |             |       |             |   |        |      
|                               | Land                               |   | $           | 1,547 |             |   | $      | 1,503 | 
|                               | Buildings (leasehold improvements) |   |             | 5,032 |             |   |        | 603   | 
|                               | Equipment                          |   |             | 4,777 |             |   |        | 3,841 | 
|                               | Construction in progress           |   |             | 277   |             |   |        | 117   | 
|                               |                                    |   |             |       |             |   |        |      
|                               |                                    | $ | 11,633      |       |             | $ | 6,064  |      
|Less: Accumulated depreciation |                                    |   | (2,348      | )     |             |   | (2,093 | )    
|                               |                                    |   |             |       |             |   |        |      
|                               |                                    | $ | 9,285       |       |             | $ | 3,971  |      
|                               |                                    |   |             |       |             |   |        |      

During the nine months ended October 31, 2003 we have incurred interest expense
of $97,000 of which $46,000 has been capitalized as part of the new facility
located in Whatcom County, Washington.

During the fiscal year 2004, the Company has substantially completed the
construction of a new facility to house production lines and corporate offices
located in Whatcom County, Washington. The Company received $2,910,000 bond
financing, from GE Capital. These funds were placed in an escrow account for
Absorption during construction of facilities in Ferndale, WA. Funds were drawn
on the account as construction took place. The escrow account balance
(restricted cash) at October 31, 2003 of $431,000 will be released when a
final occupancy permit is issued.

On August 20, 2003, Absorption purchased approximately fifteen acres of real
property, with an existing 41,000 square foot facility, in Jesup, Georgia,
located 75 miles southwest of Savannah for $140,000. This property will be
used for a new production facility. Total project costs are currently
forecasted at $6,155,000, and the Company anticipates that the necessary funds
in excess of $4,691,000 will be financed through Absorptions cash flow.



|6. |  | Long-term debt
|-- |  | --------------

In March 2003, we completed a $2,910,000 bond financing. 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 lowered 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 lowered to 5.53% on October 1, 2003. The term of
these bonds is 52 months. The indebtedness underlying our bonds is secured by
a mortgage on our real property and a security interest in our equipment
assets, located in Whatcom County, Washington. At October 31, 2003 the balance
outstanding was $2,355,000 on the tax exempt and $499,000 on the taxable bonds.

On August 20, 2003 we signed a loan agreement with Branch Banking & Trust Co.
to borrow up to $4,691,500 to be used for the construction and equipping of our
new facility in Jesup, Georgia. The loan agreement allows for up to 85% of the
appraised value of property and plant to be borrowed and up to 80% of the value
of equipment to be borrowed. The interest rate for the credit facility is the
one-month LIBOR rate (1.12% on November 3, 2003) plus 2.25%. The property and
plant portion is amortized over 15 years with a five-year balloon payment on
the outstanding due August 20, 2009. The equipment portion is amortized over
seven years with a five-year balloon payment on the outstanding balance due on
August 20, 2009. Funds are drawn on the account as construction takes place.
At October 31, 2003, $12,000 had been drawn on this loan.

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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##### 








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

Overview

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




RESULTS OF OPERATIONS

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

First Nine Months of Fiscal Year 2004 and 2003(in thousands of U.S. dollars)

|                                    |                          |   |             |       |          |  |             |    |          |   |            |       |   |  |     |    |    |  |    |     |   
|----------------------------------- | ------------------------ | - | ----------- | ----- | -------- |  | ----------- | -- | -------- | - | ---------- | ----- | - |  | --- | -- | -- |  | -- | --- | --
|                                    |                          |   | October 31, |       | Percent  |  | October 31, |    | Percent  |   | Percentage
|                                    |                          |   | 2003        |       | of Sales |  | 2002        |    | of Sales |   | Change    
|                                    |                          |   |             |       |          |  |             |    |          |   |           
|Sales                               |                          | $ | 15,012      |       |          |  | 100         | %  |          | $ | 11,557     |       |   |  | 100 | %  |    |  | 30 | %  
|Cost of goods sold                  |                          |   | 9,229       |       |          |  | 61          | %  |          |   | 6,598      |       |   |  | 57  | %  |    |  | 40 | %  
|                                    |                          |   |             |       |          |  |             |    |          |   |            |       |   |  |     |    |    |  |    |    
|Gross profit                        |                          |   | 5,783       |       |          |  | 39          | %  |          |   | 4,959      |       |   |  | 43  | %  |    |  | 17 | %  
|Corporate & Administrative expenses |                          |   |             |       |          |  |             |    |          |   |            |       |   |  |     |    |    |  |    |    
|                                    | Marketing & Sales        |   |             | 2,192 |          |  |             | 15 | %        |   |            | 1,639 |   |  |     | 14 | %  |  |    | 34  | % 
|                                    | General & Administrative |   |             | 1,688 |          |  |             | 11 | %        |   |            | 1,712 |   |  |     | 15 | %  |  |    | (1  | %)
|                                    |                          |   |             |       |          |  |             |    |          |   |            |       |   |  |     |    |    |  |    |    
|                                    |                          |   | 3,880       |       |          |  | 26          | %  |          |   | 3,351      |       |   |  | 29  | %  |    |  | 16 | %  
|Net income from operations          |                          |   | 1,903       |       |          |  | 13          | %  |          |   | 1,608      |       |   |  | 14  | %  |    |  | 18 | %  
|                                    | Interest expense         |   |             | (51   | )        |  |             | (0 | %)       |   |            |      |   |  |     | 0  | %  |  |    |     |   
|                                    | Interest income          |   |             | 26    |          |  |             | 0  | %        |   |            | 43    |   |  |     | 0  | %  |  |    | (40 | %)
|                                    |                          |   |             |       |          |  |             |    |          |   |            |       |   |  |     |    |    |  |    |    
|Net income before taxes             |                          |   | 1,878       |       |          |  | 13          | %  |          |   | 1,651      |       |   |  | 14  | %  |    |  | 14 | %  
|Provision for income taxes          |                          |   |             |       |          |  |             |    |          |   |            |       |   |  |     |    |    |  |    |    
|                                    | Current                  |   |             | (385  | )        |  |             | (3 | %)       |   |            |      |   |  |     | 0  | %  |  |    |     |   
|                                    | Deferred                 |   |             | (290  | )        |  |             | (2 | %)       |   |            | (596  | ) |  |     | (5 | %) |  |    |     |   
|                                    |                          |   |             |       |          |  |             |    |          |   |            |       |   |  |     |    |    |  |    |    
|Net Income                          |                          | $ | 1,203       |       |          |  | 8           | %  |          | $ | 1,055      |       |   |  | 9   | %  |    |  | 14 | %  
|                                    |                          |   |             |       |          |  |             |    |          |   |            |       |   |  |     |    |    |  |    |    

9



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##### 



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

Third Quarter of Fiscal Years 2004 and 2003(in thousands of U.S. dollars)

|                                    |                          |   |             |      |          |  |             |    |          |   |            |      |   |  |     |    |    |  |    |     |   
|----------------------------------- | ------------------------ | - | ----------- | ---- | -------- |  | ----------- | -- | -------- | - | ---------- | ---- | - |  | --- | -- | -- |  | -- | --- | --
|                                    |                          |   | October 31, |      | Percent  |  | October 31, |    | Percent  |   | Percentage
|                                    |                          |   | 2003        |      | of Sales |  | 2002        |    | of Sales |   | Change    
|                                    |                          |   |             |      |          |  |             |    |          |   |           
|Sales                               |                          | $ | 5,663       |      |          |  | 100         | %  |          | $ | 4,299      |      |   |  | 100 | %  |    |  | 32 | %  
|Cost of goods sold                  |                          |   | 3,416       |      |          |  | 60          | %  |          |   | 2,462      |      |   |  | 57  | %  |    |  | 39 | %  
|                                    |                          |   |             |      |          |  |             |    |          |   |            |      |   |  |     |    |    |  |    |    
|Gross profit                        |                          |   | 2,247       |      |          |  | 40          | %  |          |   | 1,837      |      |   |  | 43  | %  |    |  | 22 | %  
|Corporate & Administrative expenses |                          |   |             |      |          |  |             |    |          |   |            |      |   |  |     |    |    |  |    |    
|                                    | Marketing & Sales        |   |             | 810  |          |  |             | 14 | %        |   |            | 549  |   |  |     | 13 | %  |  |    | 48  | % 
|                                    | General & Administrative |   |             | 552  |          |  |             | 10 | %        |   |            | 621  |   |  |     | 14 | %  |  |    | (11 | %)
|                                    |                          |   |             |      |          |  |             |    |          |   |            |      |   |  |     |    |    |  |    |    
|                                    |                          |   | 1,362       |      |          |  | 24          | %  |          |   | 1,170      |      |   |  | 27  | %  |    |  | 16 | %  
|Net income from operations          |                          |   | 885         |      |          |  | 16          | %  |          |   | 667        |      |   |  | 16  | %  |    |  | 33 | %  
|                                    | Interest expense         |   |             | (51  | )        |  |             | (1 | %)       |   |            |     |   |  |     | 0  | %  |  |    |     |   
|                                    | Interest income          |   |             | 8    |          |  |             | 0  | %        |   |            | 13   |   |  |     | 0  | %  |  |    | (38 | %)
|                                    |                          |   |             |      |          |  |             |    |          |   |            |      |   |  |     |    |    |  |    |    
|Net income before taxes             |                          |   | 842         |      |          |  | 15          | %  |          |   | 680        |      |   |  | 16  | %  |    |  | 24 | %  
|Provision for income taxes          |                          |   |             |      |          |  |             |    |          |   |            |      |   |  |     |    |    |  |    |    
|                                    | Current                  |   |             | (245 | )        |  |             | (4 | %)       |   |            |     |   |  |     | 0  | %  |  |    |     |   
|                                    | Deferred                 |   |             | (50  | )        |  |             | (1 | %)       |   |            | (275 | ) |  |     | (6 | %) |  |    |     |   
|                                    |                          |   |             |      |          |  |             |    |          |   |            |      |   |  |     |    |    |  |    |    
|Net Income                          |                          | $ | 547         |      |          |  | 10          | %  |          | $ | 405        |      |   |  | 9   | %  |    |  | 35 | %  
|                                    |                          |   |             |      |          |  |             |    |          |   |            |      |   |  |     |    |    |  |    |    

Revenues

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

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

During fiscal year 2003, we purchased the assets of a hydro-mulch manufacturing
company and signed a three-year manufacturing contract with a marketer of
hydro-mulch. The purchase and sales contracts were

10



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##### 



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 were capable of meeting the demands of our
marketing partner during the current year. During the first half of fiscal
year
2004 our production was able to meet and exceed market demand for the product.
Demand for this product continued as expected during the third quarter of
fiscal year 2004 and the annual seasonal drop-off in demand is expected for the
fourth quarter.

Gross Profits

For the past year we projected a decrease in our gross margin percentage (which
is defined as gross profit divided by net sales) for this fiscal year as
compared to the previous fiscal year. A change in product mix is the primary
reason for this decrease in gross margin. As we gain momentum in the sales of
new product lines that have margins lower than our primary product base, our
overall gross margin percentage will decrease. However, even with these lower
margins, we expect the increased sales of these products to have a positive
effect on our financial results through an increase in total revenues and gross
profits. As already stated, we have adopted this business plan of diversifying
our product lines and customer base to help strengthen the company for the long
term.

During the quarter ended October 31, 2003, we had to pay higher-than-usual
prices for fiber, which we use as feedstock, because our normal sources were
not able to supply us at our high production rates. This was a factor in
limiting our gross margin to prior levels. We anticipate that this will be a
recurring issue for us through the fourth quarter of fiscal year 2004 and the
first two quarters of fiscal year 2005. We expect that our new east coast
production facility will help eliminate this issue as a problem, because it
provides us with additional sources of raw materials. Natural gas prices have
also remained high resulting in higher production costs. Also, maintenance
costs related to the age of our Bellingham production facility continue to be
at higher levels than in previous periods, though not as high as during the
first quarter due to improved infrastructure management. These maintenance
costs increased in the third quarter of fiscal year 2004 as compared to the
same period in the prior year due to the fact that we are now running a
twenty-year-old plant twenty-four hours a day at rates which are above the
original design parameters. We are maintaining it at a high level to prevent
shortages that could disrupt the flow of product to our customers. Over the
next year, while the new east coast production facility is brought on line,
these maintenance costs will remain high. When our new facilities are in
operation, we expect that the maintenance costs of running the new facility
will be lower.

Due to unexpected challenges with our hydro-mulch production, which we faced in
moving and upgrading our production facility during the third quarter of fiscal
year 2004, we were not able to achieve efficient levels of production until the
final week of the quarter. As a result, we incurred higher costs than
anticipated, which significantly reduced the margin on this product line. We
will use the seasonal slow time to correct these problems and expect to be able
to achieve efficient production levels in the spring busy season.

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 percentage 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 costs as described above.

We have now started construction of our new east coast facility in Jesup,
Georgia. We will finance the purchase price for this real property and the
related construction costs through current cash reserves, cash flow from
operations and long-term debt. Once construction is completed, which we
anticipate may occur in the second 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.

11



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##### 



Sales and Marketing

Sales and marketing expenses, measured as a percentage of sales, increased
slightly during the first nine months of fiscal year 2004 as compared to the
same period of the previous fiscal year and increased slightly for the third
quarter of the fiscal year as compared to the same quarter in the previous
year. Actual sales and marketing expenses increased by 34% for the first nine
months of the current fiscal year, and 48% for the third quarter of the current
fiscal year, as compared to the same periods of the previous year. These
increases were a result of our aggressive plan to continue to support our core
product, CareFRESH, to promote the sales of new product lines, and to introduce
our existing animal bedding products into new market channels. During the
remainder of fiscal year 2004, we expect to continue to invest marketing
dollars at a rate that is at least the same as in the three quarters of fiscal
year 2004 which we just completed, while maintaining the same strategic goals.

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

Due to our marketing agreement with Mat, Inc. relating to the marketing of our
hydro-mulch product, we dont expect a need for any significant material
expenditure to market our hydro-mulch product until at least the first quarter
of fiscal year 2006.

General and Administrative

For the first nine months of fiscal years 2004 and 2003, general and
administrative expenses measured as a percentage of sales were 11% and 15%,
respectively. For the third quarter of fiscal years 2004 and 2003, general and
administrative expenses measured as a percentage of sales were 10% and 14%,
respectively. Overall, the actual expenses decreased by 1% for the first nine
months of fiscal year 2004 and 11% for the third quarter of fiscal year 2004 in
each case as compared to the same period during the previous fiscal year. In
previous years we had focused on reducing our overhead costs. This was a
strategy that we believe had helped us become profitable and remain profitable.
As our sales have increased for the past several years, our general and
administrative resources became stretched. We determined that for us to grow
at our targeted rates, we would need to upgrade our infrastructure in terms of
personnel, information systems, and general resources. Certain of these
investments have been incremental changes that have now been implemented and
which we expect will become more financially efficient as our sales grow,
although we cannot assure that they will achieve the planned efficiencies. The
majority of the implementation of this administrative infrastructure upgrade
has now been completed, but there may continue to be some further costs during
the balance of the current fiscal year.

Interest Income

Interest income decreased during the first nine months ended October 31, 2003
as compared to the first nine months ended October 31, 2002 primarily because
interest rates in general were at extremely low levels in comparison to the
previous year and we have used cash for the construction of our new west coast
facility. Interest income for the third quarter of fiscal year 2004 decreased
as compared to the same quarter in fiscal year 2003 for the same reasons as the
nine-month decrease. This income item is expected to remain low during the
balance of fiscal year 2004 because of continued predicted low interest rates
and on-going cash investments in property, plant and equipment.

Interest expense

For the first time since fiscal year 1999 we have outstanding debt. We
obtained debt financing during the current fiscal year to pay for portions of
our new manufacturing facilities. As a result we make interest payments on the
debt facilities. We are now paying interest on the full amount of both bond
series used to finance our Whatcom County manufacturing facility. Interest on
this debt facility for the fourth quarter of 2004 is expected to be $39,000.
The amount of interest resulting from the Jesup, GA loan facility will depend
on the amount of production equipment that is purchased for that plant. We
currently estimate it to be about $30,000 per quarter. This second loan
facility is a variable rate loan, so our estimates could vary accordingly.

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Income Taxes

Since fiscal year 1999, Absorption has been profitable for income tax purposes,
but has been able to offset the payment of income taxes in the United States
with the accumulated losses from previous years. Because Absorption has
demonstrated consistent and continuing profitability for income tax purposes,
the tax benefits of unused net operating losses for U.S. operations have been
fully utilized as of the second quarter of fiscal 2004. During the first nine
months of fiscal year 2004 and 2003, $290,000 and $596,000, respectively, of
the deferred tax benefit was recognized in the income tax provision,
representing the utilization of the net operating loss benefit, and accelerated
tax deductions from capital investments. Over the next year, this provision is
expected to continue to be partially funded from accelerated tax deductions
related to our investment in new production facilities.

Net Income

There was an increase of 14% in our net income in the first nine months of
fiscal year 2004 as compared to the first nine months of fiscal year 2003. Our
net income increased in the third quarter of fiscal year 2004 by 35% over the
same quarter of the previous year. The overall reduction in gross profit
margins and the increase in marketing expenses were expected, as they were part
of our plan to strengthen our core product and diversify our business
activities. The investments we made in achieving these goals and building
infrastructure to strengthen our future are most clearly illustrated by our
net income from operations, as reported on our consolidated statements of
operations. During the first nine months of fiscal year 2003 this amount
represented 14% of our sales as reported on our consolidated statements of
operations. In the first nine months of fiscal year 2004 this measure
represented 13% of our sales. This decrease is within the range we predicted
during this period of significant capital expansion and increasing sales. It
is our goal to grow this percentage back up to higher levels, but we do not
expect to do so for at least two more years. We believe that we have now put
in place the majority of the administrative infrastructure needed to support
our growth goals and therefore do not anticipate incurring additional
expenditures, other than sales, marketing and depreciation expenses, that would
significantly reduce this gross profit percentage.




LIQUIDITY AND CAPITAL RESOURCES

|                    |                                |  |             |        |             |  |   |        | 
|------------------- | ------------------------------ |  | ----------- | ------ | ----------- |  | - | ------ | 
|                    |                                |  | As of       |        | As of      
|                    |                                |  | October 31, |        | January 31,
|                    |                                |  | 2003        |        | 2003       
|                    |                                |  |             |        |            
|Financial Condition |                                |  |             |        |             |  |   |       
|                    | Total assets                   |  | $           | 15,581 |             |  | $ | 10,309 | 
|                    | Total liabilities              |  |             | 5,403  |             |  |   | 1,490  | 
|                    | Total equity                   |  |             | 10,178 |             |  |   | 8,819  | 
|                    | Debt/equity ratio              |  |             | .53    |             |  |   | 0.17   | 
|                    | Assets/debt ratio              |  |             | 2.88   |             |  |   | 6.92   | 
|Working Capital     |                                |  |             |        |             |  |   |       
|                    | Current assets                 |  |             | 6,103  |             |  |   | 6,239  | 
|                    | Current liabilities            |  |             | 2,346  |             |  |   | 1,328  | 
|                    | Current ratio                  |  |             | 2.63   |             |  |   | 4.70   | 
|Cash Position       |                                |  |             |        |             |  |   |       
|                    | Cash & short term investments  |  |             | 2,566  |             |  |   | 3,258  | 
|                    | Cash generated from operations |  |             | 1,313  |             |  |   | 2,343* | 



---

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

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

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Financial Condition

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

On August 20, 2003 we signed a loan agreement with Branch Banking & Trust Co.
to borrow up to $4,691,500 to be used for the construction and equipping of our
new facility in Jesup, Georgia. $1,827,500 is to be used for property and
plant. The balance of $2,864,000 is for production equipment in the facility.
The loan agreement allows for up to 85% of the appraised value of property and
plant to be borrowed and up to 80% of the value of equipment to be borrowed.
The interest rate is the one month LIBOR rate (1.12% on November 3, 2003) plus
2.25%. The property and plant portion is amortized over 15 years with a
five-year balloon payment on the outstanding balance due August 20, 2009. The
equipment portion is amortized over seven years with a five-year balloon
payment on the outstanding balance due on August 20, 2009. 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.

Short-term liabilities increased in the third quarter of fiscal year 2004 due
to acquisitions related to the construction of the new facility, which resulted
in a decrease in our current ratio. Our debt to equity ratio has remained low
even though we are undergoing considerable capital expansion. We anticipate
that an increase will occur in our debt to equity ratio during the balance of
fiscal year 2004 and early 2005 as we continue construction in Georgia.

The following chart indicates our contractual obligations from long-term Debt
and from purchases obligations. The purchase obligations relate to remaining
contracts for building the new facility in Whatcom County, Washington and new
contracts for building the new facility in Jesup, Georgia.

Contractual Obligations

|                              |  |                        |       |        |  |           |       |       |  |         |     |           |  |   |     |  |  |   |       | 
|----------------------------- |  | ---------------------- | ----- | ------ |  | --------- | ----- | ----- |  | ------- | --- | --------- |  | - | --- |  |  | - | ----- | 
|                              |  | Payments due by period
|                              |  |                       
|                              |  |                        |       |        |  | Less than |       | 1-3   |  | 3-5     |     | More than
|                              |  | Total                  |       | 1 year |  | years     |       | years |  | 5 years
|                              |  |                        |       |        |  |           |       |       |  |        
|Long-term Debt Obligations    |  | $                      | 2,866 |        |  | $         | 121   |       |  | $       | 272 |           |  | $ | 296 |  |  | $ | 2,177 | 
|Purchase Obligations          |  |                        | 1,137 |        |  |           | 1,137 |       |  |         |     |           |  |   |     |  |  |   |       | 
|                              |  |                        |       |        |  |           |       |       |  |         |     |           |  |   |     |  |  |   |       | 
|Total Contractual Obligations |  | $                      | 4,003 |        |  | $         | 1,258 |       |  | $       | 272 |           |  | $ | 296 |  |  | $ | 2,177 | 
|                              |  |                        |       |        |  |           |       |       |  |         |     |           |  |   |     |  |  |   |       | 

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Working Capital

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

Cash Position

Unrestricted cash decreased during the first nine months of fiscal year 2004 as
a result of cash invested in capital assets. We expect to continue to use cash
in expanding our production infrastructure during the balance of the current
fiscal year. The year-end cash balance will be determined by our use of cash
for capital expansion and the amount of cash we generate from operations.
Because cash generated from operations will be less than the amount of cash we
will need to complete our capital expansion, we expect to have lower cash
balances by the end of the current fiscal year. We will continue to closely
monitor both current liabilities and current assets as they relate to the
generation of cash with an emphasis on maximizing potential sources of cash.
As of October 31, 2003, $431,000 of our cash was restricted as the result of an
escrow agreement attached to our industrial revenue bond financing. This final
balance will be released when Whatcom County Building & Planning converts our
conditional occupancy permit to a final occupancy permit.

Cash Generated from Operations

We continued to generate cash from operations during the first nine months of
fiscal year 2004, although at a lower level than generated during the same
period for the previous year. During the first nine months of fiscal year 2003
we generated $1,723,000 as compared to $1,313,000 generated during the first
nine months of fiscal year 2004. This reduction in cash generated from
operations is primarily the result of an increase in accounts receivable and
cash income taxes paid during the first three quarters of fiscal year 2004.
The significant increase in accounts receivable was the result of the increase
in sales which occurred during the most recently completed quarter. During the
first nine months of fiscal year 2004 our accounts payable increased primarily
as a result of construction-related items. If our sales continue to increase
and we are able to continue to profitably produce our product, we should be
able to continue to generate cash from operating activities, although it cannot
assure that this will be the case.

Financing and Investing Activities

Cash from financing activities during the nine months ended October 31, 2003
provided $3,014,000. The majority of the cash received was the result of the
issuance of industrial revenue bonds of $2,910,000, for the construction of our
Whatcom County, Washington production facility. In addition $148,000 was
received from the exercise of stock options and warrants. A significant amount
of cash was used in the same quarter of fiscal year 2004 in investing
activities. Cash used in investing activities during the nine months ended
October 31, 2003, totaled $5,454,000. The majority of the cash, $4,924,000,
was used for the purchase of plant and equipment located in Whatcom County,
Washington, while $431,000 remained in an escrow account, which will be
released upon receipt of the final occupancy permit. Also, during the nine
months ended October 31, 2003, loans to related parties were re-paid in the
amount of $26,000.

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

The first phase of our production expansion plan was substantially completed
during the third quarter of fiscal year 2004. This is the construction of our
new west coast facility in Whatcom County, Washington. We had been operating
in five separate leased facilities in Whatcom County. This new facility, which
is being financed approximately half through debt and half through cash, will
consolidate four of these leased facilities, resulting in what we anticipate to
be a saving in cost of goods sold and general and administrative
expenses of approximately $500,000 a year in lease payments. The consolidation
of these facilities should also provide us with savings in other expenses
caused by inefficient logistics. We currently have a

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conditional occupancy
permit for the new facility and anticipate receiving our final permit during
the fourth quarter of fiscal 2004. Upon receipt of that permit, the balance of
the escrow account will be released to us. We expect that interest on the
debt will be approximately $160,000 a year.

Phase two of our production expansion plan is planned to be a second production
facility in Jesup, Georgia. We purchased approximately fifteen acres of real
property in Jesup, Georgia, with an existing 41,000 square foot facility,
during August, 2003 for $140,000. We have begun construction during the fourth
quarter of fiscal year 2004 on this property. The total project cost is
estimated at $6,155,000. Of the total cost, approximately $4,700,000 will be
financed through a long-term bank debt instrument and we anticipate that the
balance will be financed with cash on hand. The annual interest expense of the
debt used to finance this facility is estimated to be approximately $160,000 a
year. By having production on the east coast, we will have cost savings well
in excess of additional overhead expenses and interest on the debt facilities.
In addition, we will better be able to service our east coast customers and we
will have added long-term production security as a result of this
diversification of manufacturing plants.

The third phase of our production expansion plan will occur in approximately
eighteen months when we will move the Bellingham production facility to the new
Whatcom County plant.

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

Environmental Matters

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




CRITICAL ACCOUNTING POLICIES

Some of our significant accounting policies are described in Note 2 to the
financial statements included in our 10-KSB as filed on April          , 2003. 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. We record
accounts receivable at the face amount less an allowance for doubtful accounts
and an allowance for finance charges. On a regular basis, we evaluate our
accounts receivable and establish these allowances based on a combination of
specific customer circumstances, as well as credit conditions and the history
of write-offs and collections. Where appropriate, we obtain credit rating
reports and financial statements of the customer to initiate and modify their
credit limits. We obtain credit insurance for certain accounts that qualify
for coverage in order to minimize credit risk exposure. If circumstances
related to specific customers change, our estimates of the recoverability of
receivables could materially change. At October 31, 2003 and 2002, management
considered all accounts receivable in excess of the allowances for doubtful
accounts and finance charges to be fully collectible.

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Property, plant and equipment

Property, plant and equipment assets are recorded at cost. Our buildings and
equipment are located on owned and leased land. Buildings and improvements are
depreciated on a straight line basis over 40 years 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 using an accelerated
declining-balance method.

Revenue recognition

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

Income taxes

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

Impairment of long lived assets

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

Use of estimates

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




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

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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 21% and 23% of our net sales
in the first nine months of fiscal year 2004 and 2003, respectively, while our
second largest customer accounted for approximately 20% and 18% of our net
sales in the first nine months of fiscal year 2004 and 2003, respectively.

The loss of, or significant adverse change in, our relationship with any of
these key retailers could cause our net sales, income from operations and cash
flow to decrease substantially. 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.

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. If any of these
competitors elect to dedicate significant resources to continued development
and marketing of products that are competitive to our products, our business
would be harmed. Our products compete against national and regional products
and private label products produced by various suppliers. To compete
effectively, among other things, we must:



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

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

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. For example, in the third quarter of fiscal year
2004, we experienced an increase in the cost of fiber which we use as
feedstock, which resulted in a decline in our gross profits for the period.

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We have significant indebtedness.

As of October 31, 2003, we had total long-term indebtedness under our bonds,
capitalized-lease obligations and other asset financings of $2,747,000. We
make interest payments (and principal payments on the taxable bond) on the
indebtedness under our bonds, which are due in 2007 and 2019. In addition, in
August 2003, we entered into a loan agreement to borrow up to $4,691,000 which
has a balloon payment of the principle balance due in August of 2009. We may
incur substantial additional debt in the future. Our indebtedness could limit
our ability to obtain necessary additional financing for working capital,
capital expenditures, debt service requirements or other purposes in the
future; plan for, or react to, changes in technology and in our business and
competition; and react in the event of an economic downturn. There is no
guarantee that we will be able to meet our debt service obligations. If we are
unable to generate sufficient cash flow or obtain funds for required payments,
or if we fail to comply with covenants in our indebtedness, we will be in
default. The indebtedness underlying our bonds is secured by a mortgage on our
real property and a security interest in our assets. If we are in default
under the agreements governing our indebtedness, the creditors may be able to
foreclose on our property and assets, which would substantially harm our
business and financial condition.

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

We have substantially completed building a manufacturing facility on real
property in Whatcom County, Washington that we purchased in fiscal year 2003,
and we have purchased additional real property in Georgia where we have begun
to build another manufacturing plant. 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 and the U.S. Department of Agriculture. 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

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

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

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

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

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

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

We believe that, to an extent, our past performance has been based upon, and
our future success will partially depend upon 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 and may not provide sufficiently broad protection. 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. Litigation may be necessary in the future
to enforce our intellectual property or to defend against a claim of
infringement or invalidity. Litigation could result in substantial costs and
the diversion of resources and could harm our business and operating results.

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

Our business exposes us to potential product liability risks that 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.

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

The market price of our securities, like that of many other emerging companies,
has been highly volatile, experiencing wide fluctuations not necessarily
related to the operating performance of such companies. Factors such as our
operating results, announcements by us or our competitors concerning
innovations and new products or systems may have a significant impact on the
market price of our securities. In addition, we have experienced limited
trading volume in our common shares.

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

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






|ITEM 3. |  | CONTROLS AND PROCEDURES
|------- |  | -----------------------

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

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

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PART II  OTHER INFORMATION




ITEM 6. EXHIBITS AND REPORTS ON
FORM 8-K



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

|        |  |                                                                                                                                                                             
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
|Number  |  | Exhibit Description                                                                                                                                                         
|        |  |                                                                                                                                                                             
|3.1     |  | Altered Memorandum of Company (Amended) (incorporated by reference to
Exhibit 3.1 to the Companys Form 10-KSB filed on
April 3, 2003).                                     
|        |  |                                                                                                                                                                             
|3.2     |  | Articles of the Company (incorporated by reference to the exhibits to the
Companys registration statement filed on February 24, 1992, as amended
(No. 33-45020)).          
|        |  |                                                                                                                                                                             
|10.1    |  | Loan Agreement Among BB&T, Inc., as Lender, and Absorption Corp., as
Borrower, dated as of August 20, 2003.                                                                 
|        |  |                                                                                                                                                                             
|31.1    |  | Certification of Gordon Ellis, President and Chief Executive Officer of
International Absorbents Inc., pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934.
|        |  |                                                                                                                                                                             
|31.2    |  | Certification of David Thompson, Chief Financial Officer of International
Absorbents Inc., pursuant to Rule 13a-14(a) under the Securities Exchange
Act of 1934.            
|        |  |                                                                                                                                                                             
|32.1    |  | Certification of Gordon Ellis, President and Chief Executive Officer of
International Absorbents Inc., pursuant to 18 U.S.C. Section 1350.                                  
|        |  |                                                                                                                                                                             
|32.2    |  | Certification of David Thompson, Chief Financial Officer of International
Absorbents Inc., pursuant to 18 U.S.C. Section 1350.                                              



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



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

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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: |  | December 10, 2003 |  | /s/ GORDON L. ELLIS          
|      |  |                   |  |                              
|      |  |                   |  | Gordon L. Ellis              
|      |  |                   |  | President & CEO              

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