U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549





FORM 10-QSB

(Mark One)



[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934 for the period ended September 30, 2004



[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE Act of 1934 for the transition period from ___ to ___.



Commission file number: 000-23319



AVANI INTERNATIONAL GROUP INC.

(Name of Small Business Issuer in its charter)



Nevada                                         88-0367866

(State of                                      (I.R.S. Employer

Incorporation)                                 I.D. Number)



#328-17 Fawcett Road, Coquitlam, B.C. (Canada)           V3K 6V2

(Address of principal executive offices)              (Zip Code)



Issuer's telephone number 604-525-2386.



Securities registered under Section 12 (b) of the Act:



Title of each class         Name of exchange on which

to be registered            each class is to be registered



None                              None



Securities registered under Section 12(g) of the Act:



Common Stock

(Title of Class)



Check whether issuer (1) filed all reports to be filed by Section 13 or

15(d) of the Exchange Act during the past 12 months (or 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.

(1). Yes: X  No:

(2). Yes: X  No:



The number of shares issued and outstanding of issuer's common stock,

$.001 par value, as of November 1, 2004 was 14,582,571.



Transitional Small Business Issuer Format (Check One):

Yes:      No:  X







1





PART I - FINANCIAL INFORMATION

INDEX



Item 1. Financial Statements.                                     Page No.

-Consolidated Interim Balance Sheets as of September 30, 2004

(unaudited) and December 31, 2003 (audited).                  3

-Consolidated Interim Statements of Operations and

Comprehensive Income (Loss) for the  Three-Month and

Nine-Month Periods Ended September 30, 2004 and

2003 (unaudited).                                             4

-Consolidated Interim Statements of Changes in Stockholders'

Equity for the Nine-Month Periods Ended

September 30, 2004 (unaudited).                               5

-Consolidated Interim Statements of Cash Flows

for the Nine-Month Period Ended September 30, 2004

and 2003 (unaudited).                                         6

-Notes to Consolidated Interim Financial Statements.           7

Item 2. Management's Discussion and Analysis.                        14

Item 3. Effectiveness of the Registrants Disclosure Controls and

Procedures                                                   19

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.                                           20

Item 2. Changes in Securities.                                       20

Item 3. Defaults upon Senior Securities.                             20

Item 4. Submission of Matters to Vote of Securityholders.            20

Item 5. Other Information.                                           20

Item 6. Exhibits and Reports on Form 8-K.                            20

Signatures                                                           21























































2













Item 1. Financial Statements.



|Avani International Group Inc.                                                                                                                
|----------------------------------------------------------------------------------------------------------------------------------------------
|Consolidated Interim Balance Sheets                                                                                                           
|(Expressed in US dollars)                                                                                                                     
|(Unaudited)                                                                                                                                   
|                                                                                                                                              
|                                                                                                                                              
|Assets                                                                                                                                        
|Current                                                                                                                                       
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|Property, plant and equipment (Note 3)                                                                                                        
|Other assets                                                                                                                                  
|                                                                                                                                              
|Liabilities and Stockholders Equity                                                                                                          
|Liabilities                                                                                                                                   
|Current                                                                                                                                       
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|Obligations payable (Note 3)                                                                                                                  
|                                                                                                                                              
|Non-controlling interest (Note 2)                                                                                                             
|                                                                                                                                              
|Stockholders Equity                                                                                                                          
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|(*)  Represents the financial position of Avani International Group Inc. and its wholly-owned subsidiaries and Avani O2 Water Sdn Bhd (Note 2)
|The accompanying notes are an integral part of these consolidated interim financial statements.
3                                             

|Avani International Group Inc.                                                                                                                                                                                                                                    
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Consolidated Interim Statements of Operations and Comprehensive Loss                                                                                                                                                                                              
|(Expressed in US Dollars)                                                                                                                                                                                                                                         
|(Unaudited)                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|Revenue                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|Cost of revenue                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|Gross profit                                                                                                                                                                                                                                                      
|Operating expenses                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|Income (loss) from operations                                                                                                                                                                                                                                     
|Other income (expenses)                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|Non-controlling Interest                                                                                                                                                                                                                                          
|Net income (loss) before cumulative effect of change in accounting policy                                                                                                                                                                                         
|Cumulative effect of change in accounting
policy (Note 2)                                                                                                                                                                                                         
|Net income (loss) for the period                                                                                                                                                                                                                                  
|Foreign currency translation adjustment                                                                                                                                                                                                                           
|Comprehensive income (loss) for the period                                                                                                                                                                                                                        
|Income (Loss) per share - basic and diluted                                                                                                                                                                                                                       
|Weighted average shares outstanding                                                                                                                                                                                                                               
|(*) Represents the operations and comprehensive loss of Avani International Group Inc. and its wholly-owned subsidiaries
and Avani O2 Water Sdn Bhd (Note 2)




The accompanying notes are an integral part of these consolidated interim financial statements.
4

|Avani International Group Inc.                                                                   
|-------------------------------------------------------------------------------------------------
|Consolidated Interim Statements of Changes in Stockholders Equity                               
|(Expressed in US Dollars)                                                                        
|(Unaudited)                                                                                      
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Balance, January 1, 2003                                                                         
|Issuance of common stock on exercise of options                                                  
|Stock option compensation                                                                        
|Net loss for the year                                                                            
|Foreign exchange translation adjustment                                                          
|Balance, December 31, 2003                                                                       
|Issuance of common stock on exercise of options                                                  
|Stock option compensation (Note 4)                                                               
|Net loss for the period                                                                          
|Foreign exchange translation adjustment                                                          
|Balance, September 30, 2004                                                                      
|The accompanying notes are an integral part of these consolidated interim financial statements

5

|Avani International Group Inc.                                                                                                        
|--------------------------------------------------------------------------------------------------------------------------------------
|Consolidated Statements of Cash Flows                                                                                                 
|(Expressed in US Dollars)                                                                                                             
|(Unaudited)                                                                                                                           
|                                                                                                                                      
|For the nine-month periods ended September 30                                                                                         
|Cash provided by (used in)                                                                                                            
|Operating activities                                                                                                                  
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|Investing activities                                                                                                                  
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|Financing activities                                                                                                                  
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|Increase (decrease) in cash during the period                                                                                         
|Effect of foreign exchange on cash                                                                                                    
|Cash and cash equivalents, beginning of period                                                                                        
|Cash and cash equivalents, end of period                                                                                              
|Supplemental Information:                                                                                                             
|                                                                                                                                      
|The following transactions which did not result in cash                                                                               
|flows have been excluded from financing activities:                                                                                   
|                                                                                                                                      
|(*)  Represents the cash flows of Avani International Group Inc. and its wholly-owned subsidiaries and Avani O2 Water Sdn Bhd (Note 2)
|The accompanying notes are an integral part of these consolidated interim financial statements.
6                                     





|Avani International Group Inc.                       
|-----------------------------------------------------
|Notes to the Consolidated Interim FinancialStatements
|(Expressed in US Dollars)                            
|(Unaudited)                                          
|                                                     
|September 30, 2004 and 2003                          

1.

Basis of Presentation and Ability to Continue as a Going Concern

The consolidated interim financial statements included herein, presented in accordance with United States generally accepted accounting principles and stated in US dollars, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.

The consolidated interim financial statements for the nine-month period ended September 30, 2004 include the accounts of the Company, its subsidiaries and its related party Avani O2 Water Sdn. Bhd. ("Avani O2"), whose director is also a significant shareholder of the Company. As described in Note 2, the Company is the primary beneficiary of Avani O2, a variable interest entity (VIE) as defined by Financial Accounting Standards Board (FASB) Interpretation No. 46R. Accordingly, Avani O2 was consolidated in the three-month and nine-month periods ended September 30, 2004.  All material inter-company balances and inter-company transactions have been eliminated. The financial statements as of December 31, 2003 and for the three-month and nine-month periods ended September 30, 2003 include the accounts of the Company and its subsidiaries only.

These statements reflect all adjustments, consisting of normal recurring adjustments which, in the opinion of management, are necessary for fair presentation of the information contained therein.  It is suggested that these consolidated interim financial statements be read in conjunction with the financial statements of the Company for the year ended December 31, 2003 and notes thereto included in the Company's 10-KSB annual report.  The Company follows the same accounting policies in the preparation of interim reports.

Results of operations for the interim periods are not indicative of annual results.

These accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company has incurred accumulated losses to September 30, 2004 of $7,382,192 which includes a loss of $573,597 for the nine-month period ended September   30, 2004.  The continuation of the Company is dependent upon the continuing financial support of creditors and stockholders, obtaining additional long-term financing, as well as achieving and maintaining a profitable level of operations.  The Company plans to raise additional equity and debt capital as necessary to finance the operating and capital requirements of the Company.  Amounts raised will be used to provide financing for the marketing and promotion of the Company's business, capital expansion and for other working capital purposes.  While the Company is expending its best efforts to achieve the above plans, there is no assurance that any such activity will generate sufficient funds for operations.

These conditions raise substantial doubt about the Company's ability to continue as a going concern.  These financial statements do not include any adjustments that might arise from this uncertainty.



7



|Avani International Group Inc.                       
|-----------------------------------------------------
|Notes to the Consolidated Interim FinancialStatements
|(Expressed in US Dollars)                            
|(Unaudited)                                          
|                                                     
|September 30, 2004 and 2003                          

2.

Change in Accounting Policy

In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB 51 (which was amended in December 2003, FIN No. 46R).  The primary objectives of FIN No. 46R are to provide guidance on the identification of entities for which control is achieved through means other than voting rights (variable interest entities or VIEs) and how to determine when and which business enterprise should consolidate the VIE.  This new model for consolidation applies to an entity for which either: (1) the equity investors do not have a controlling financial interest; or (2) the equity investment at risk is insufficient to finance that entitys activities without receiving additional subordinated financial support from other parties.  In addition, FIN No. 46R requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures.  As amended in December 2003, the effective dates of FIN No. 46R for public entities that are small business issuers, as defined (SBIs), are as follows:  (a) for interests in special-purpose entities: periods ended after December 15, 2003; (b) for all VIEs created before January 31, 2003: periods ending after December 15, 2004; and (c) for all VIEs created after January 31, 2003, FIN 46R is applicable immediately.  The December 2003 amendment of FIN No. 46R also includes transition provisions that govern how an SBI which previously adopted the pronouncement (as it was originally issued) must account for consolidated VIEs.

Avani O2 was incorporated in July 1999 in Malaysia mainly to explore the opportunities of developing and marketing bottled water in South East Asia.  In 2000, Avani O2 entered into a joint-venture agreement with the Company for the world-wide rights and licenses, except in Canada, to access and use, for all purposes, the Companys technology of producing oxygen enriched bottled water.  Avani O2 is considered a VIE of the Company because, pursuant to the joint-venture agreement, the Company is entitled to, among other things, a rental fee payable by Avani O2 equal to 20,000 Malaysian Ringitt (RM) per each bottling line per month plus 0.19RM per 355ml or 0.00054RM per ml per bottle commencing January 1, 2002, and appoint two of the three directors on the Board of Directors of Avani O2. As a result, the equity investors of Avani O2 do not have a controlling financial interest in Avani O2 and the Company is the primary beneficiary of Avani O2, the VIE.  According to the above-noted requirements, the Company commenced consolidating Avani O2 in 2004.  The prior year comparative information has not been restated to reflect a consolidation of Avani O2.  The cumulative effect of the change in accounting policy of $91,664 was recorded in the Statement of Operations and Comprehensive Loss at January 1, 2004 and included in accumulated deficit.  Subsequent to the elimination of intercompany balances and transactions, Avani O2 had net assets of $1,175,159 as at September 30, 2004 and net income of $472,045 for the nine-month period then ended. These amounts were recorded as non-controlling interests in these consolidated interim financial statements.



1.

Obligations Payable



| |                                        |   | September 30, |   | December 31,
| | -------------------------------------- | - | ------------- | - | ------------
| |                                        |   | 2004          |   | 2003        
| | Assignment of net profits interest     | $ | 285,745       | $ | 285,745     
| | Instalments received on sale of assets |   | -             |   | 724,396     
| |                                        | $ | 285,745       | $ | 1,010,141   

8



|Avani International Group Inc.                       
|-----------------------------------------------------
|Notes to the Consolidated Interim FinancialStatements
|(Expressed in US Dollars)                            
|(Unaudited)                                          
|                                                     
|September 30, 2004 and 2003                          

3.

Obligations Payable - Continued



During 2002, the Company assigned a fully reserved account receivable in the amount of $200,944 to certain lenders in full settlement of a $475,771 loan payable.  In addition to the assignment of the account receivable, the Company also assigned its net profits interest in production equipment located in Malaysia (the "Net Profits Interest) to two of the lenders.  The assignment of Net Profits Interest to these lenders will revert back to the Company when the lenders have received from such interest, an amount equal to $285,745, the principal amount of the cancelled loans.  The Company will record reductions in this account as Net Profits Interests are received by the lenders.  All Net Profits Interest balance and transactions between the Company and Avani O2 were eliminated in the consolidated interim financial statements for the nine months ended September 30, 2004.



In October 2002, the Company entered into an agreement with Avani O2 whereby the Company agreed to sell its Canadian building, related land and production equipment to Avani O2 with a carrying amount of approximately $1,065,000 for proceeds of CDN$1,650,000 (US$1,272,645 at year end exchange rates) plus interest charges at 8% per annum and applicable taxes.  The proceeds were to be received over two years in twenty-four monthly installments of CDN$70,620 (US$54,469) and a final payment of CDN$220,686 (US$170,215).  The gain on disposal of the properties was estimated to be $320,000 which was being deferred until the completion of the sale and then eliminated on consolidation. At December 31, 2003, prior to the consolidation of Avani O2, the installments received by the Company were recorded as obligations payable on the consolidated balance sheet.  As at December 31, 2003, installments of $724,396 had been received from Avani O2.  These assets were not classified as held for sale at December 31, 2003 as management anticipated that significant changes to the transaction would be made in 2004.  The advances and balance as at September 30, 2004 between the Company and Avani O2 were eliminated in the consolidated interim financial statements.  Title to the property and production equipment will be transferred to Avani O2 when all of the installments and payments have been received by the Company.





4.

Capital Stock

Transactions not disclosed elsewhere in these consolidated interim financial statements are as follows:

a)

As at September 30, 2004 and December 31, 2003, the Company had 22,862,557 fully exercisable share purchase warrants outstanding.  Of this amount, 1,500,000 warrants that were granted August 2003 are exercisable at any time within 5 years at an exercise price of $0.06 per share on or before September 2, 2008, and 550,000 warrants that were granted September 26, 2001 are exercisable at any time within 5 years at an exercise price of $0.06 on or before September 26, 2005, and $0.07 on or before September 26, 2006. The remaining 20,812,557 warrants were granted on May 13, 2002 and July 15, 2002 and were exercisable at any time within 5 years at a price of $0.03 in the first two years, $0.05 in the third and fourth year and $0.07 in the last year.







9

|Avani International Group Inc.                       
|-----------------------------------------------------
|Notes to the Consolidated Interim FinancialStatements
|(Expressed in US Dollars)                            
|(Unaudited)                                          
|                                                     
|September 30, 2004 and 2003                          

4.

Capital Stock - Continued



b)

A summary of share purchase warrant transactions for the periods presented is as follows:



| |  |                                                         |             |            |           |        | Weighted | 
| |  | ------------------------------------------------------- | ----------- | ---------- | --------- | ------ | -------- | 
| |  |                                                         |             |            |           |        | Average  | 
| |  |                                                         |             |            |           |        | Exercise | 
| |  |                                                         |             |            |           | Number | Price    | 
| |  | Outstanding at January 1, 2003                          |             | 21,362,557 | $0.03     |       
| |  |                                                         | Granted (a) |            | 1,500,000 | $0.06  |         
| |  | Outstanding at December 31, 2003 and September 30, 2004 |             | 22,862,557 | $0.06     |       

All of the share purchase warrants are exercisable on the grant date and remain outstanding at September 30, 2004 and December 31, 2003.

c)

On June 10, 2003, the Company granted 1,950,000 stock options to Companys employees and directors.  Of this amount 1,150,000 stock options have an exercise period of two years.  Each option entitles the holder to purchase one share of the Companys common stock at $0.05 per share during the first year and $0.30 per share in the second year.  Only 30% of the options granted during the period are exercisable immediately with the remaining 70% to be vested on the one year anniversary of the date of grant.  Another 800,000 fully vested stock options have an exercisable period of 3 years and an exercise price of $0.05 per share.

The Company follows Statement of Financial Accounting Standard (SFAS) No.123, "Accounting for Stock-Based Compensation," which requires compensation cost associated with stock options granted to other than employees to be valued based on the fair value of the stock options, where such fair value was estimated using the Black-Scholes option pricing model.  Unvested stock options are remeasured quarterly for the purpose of determining stock option compensation. As at June 30, 2004, tThe fair value of these options was estimated using the following assumptions: a risk free interest rate of 1.92%, expected volatility of 200%, no dividend yield and an expected life of the options of two years.  Compensation expense is amortized over the vesting period and compensation expense of $83,363 was recognized for the nine-month period ended September 30, 2004 (2003  Nil).

The Company applies Accounting Principles Board (APB) Opinion 25 and related interpretations in accounting for stock options granted to employees.  Generally, under APB No. 25 compensation expense is recognized for the difference between the market price of the underlying stock and the exercise price of the stock options.  Accordingly, no compensation has been recognized in connection with options granted to employees. Had compensation cost been determined based upon the fair value of the stock options at the grant date consistent with the fair value method prescribed in SFAS No. 123, the Company's net loss and loss per share would have been increased to the pro forma amounts as indicated below.





10



|Avani International Group Inc.                       
|-----------------------------------------------------
|Notes to the Consolidated Interim FinancialStatements
|(Expressed in US Dollars)                            
|(Unaudited)                                          
|                                                     
|September 30, 2004 and 2003                          

4.

Capital Stock - Continued

As there was no stock-based compensation awarded to employees during the period ended September 30, 2003, the pro-forma information for the periods ended September 30, 2003 equals the information as reported on the Statement of Operations and Comprehensive Income (Loss).

| |  |                                                   |                                                         | Three-month period ended Sept. 30, 2004 |        | Nine-month period ended Sept.  30, 2004
| |  | ------------------------------------------------- | ------------------------------------------------------- | --------------------------------------- | ------ | ---------------------------------------
| |  | Net loss, as reported                             | $                                                       | (277,387)                               | $      | (573,597)                              
| |  | Deduct: stock-based employee compensation expense |                                                         |                                         |        |                                        
| |  |                                                   | determined under fair-value based method for all awards |                                         |        |                                        
| |  |                                                   | not included in net loss                                |                                         | -      |                                        
| |  | Pro-forma net loss                                | $                                                       | (277,387)                               | $      | (584,524)                              
| |  | Loss per share:                                   |                                                         |                                         |        |                                        
| |  |                                                   | Basic and diluted  as reported                         | $                                       | (0.02) | $                                      
| |  |                                                   | Basic and diluted  pro-forma                           | $                                       | (0.02) | $                                      

A summary of stock option transactions for the period presented is as follows:

| |  |                                   |  |           |        |        | Weighted | 
| |  | --------------------------------- |  | --------- | ------ | ------ | -------- | 
| |  |                                   |  |           |        |        | Average  | 
| |  |                                   |  |           |        |        | Exercise | 
| |  |                                   |  |           |        | Number | Price    | 
| |  | Outstanding at December 31, 2003  |  | 3,850,000 | $ 0.21 |       
| |  | Exercised                         |  | (60,000)  | 0.05   |       
| |  | Outstanding at September 30, 2004 |  | 3,790,000 | 0.21   |       
| |  | Exercisable at September 30, 2004 |  | 3,790,000 | 0.21   |       
| |  | Exercisable at December 31, 2003  |  | 2,275,000 | $ 0.10 |       













11

|Avani International Group Inc.                       
|-----------------------------------------------------
|Notes to the Consolidated Interim FinancialStatements
|(Expressed in US Dollars)                            
|(Unaudited)                                          
|                                                     
|September 30, 2004 and 2003                          

4.

Capital Stock - Continued

Stock options outstanding at September 30, 2004 are summarized as follows:

| |  | Number    | Year 1 | Year 2 | Expiry Date       | 
| |  | --------- | ------ | ------ | ----------------- | 
| |  |           |        |        |                   | 
| |  | 300,000   | $0.05  | $0.30  | November 18, 2004 | 
| |  | 2,190,000 | $0.05  | $0.30  | June 9, 2005      | 
| |  | 1,300,000 | $0.05  | $0.05  | June 9, 2006      | 
| |  |           |        |        |                   | 
| |  | 3,790,000 |        |        |                   | 









5.

Major Customer and Supplier

During the nine-month period ended September 30, 2004, sales to one Malaysian customer totaled $389,830. At September 30, 2004, there were $1,171,380755,196 amounts due from this customer in receivables.  There were no sales to this customer in the prior year comparison as Avani O2 was not consolidated.  For the nine-month period ended September 30, 2003, sales to the largest customer, Avani O2, were $1,000,512 and there were $208,416 amounts due from Avani O2 at September 30, 2003.  As at December 31, 2003, prior to consolidation of Avani O2, accounts receivable due from Avani O2 was $442,392.

During the nine-month periods ended September 30, 2004 and 2003, the Company purchased approximately 59% and 64% of its materials from one supplier.  At September 30, 2004 and December 31, 2003, there were $Nil amounts due to that supplier in accounts payable.









6.

Related Party Transactions



During the nine-month period ended September 30, 2004, the Company accrued $54,000 as salary (2003 - $54,000) payable to the President of the Company.  In addition, the Company accrued $9,000 (2003 - $Nil) of marketing expenses payable to the President of the Company.  The Company also accrued consulting fees of approximately $71,000 (2003 - $71,000) payable to a significant stockholder of the Company who is also a director of Avani O2.

















12



|Avani International Group Inc.                       
|-----------------------------------------------------
|Notes to the Consolidated Interim FinancialStatements
|(Expressed in US Dollars)                            
|(Unaudited)                                          
|                                                     
|September 30, 2004 and 2003                          

7.

Segmented Information



The Company sells oxygen-enriched, purified bottled water to customers in Canada and other countries and to a customer in Malaysia through Avani O2 (Note 5).  The Company has determined that it operates in one reporting segment. All activities in 2003 were related to the one reporting segment based in Canada. In 2004, geographic reporting information is as follows:



|                                               | Three-month periods ended
September 30 | Nine-month periods ended
September 30
|---------------------------------------------- | -------------------------------------- | -------------------------------------
|                                               |                                        | 2004                                 
|Revenue                                        |                                        |                                      
|Bottled water and supply sales                 |                                        |                                      
|Canada and other countries                     | $                                      | 11,632                               
|Malaysia (via Avani O2)                        |                                        | 349,951                              
|                                               |                                        | 361,583                              
|Cooler rentals and equipment sales in          |                                        |                                      
|Canada                                         |                                        | 3,685                                
|                                               | $                                      | 365,268                              
|                                               |                                        |                                      
|Cost of revenue                                |                                        |                                      
|Cost of goods sold (excluding depreciation)    |                                        |                                      
|Canada                                         | $                                      | 6,027                                
|Malaysia (via Avani O2)                        |                                        | 229,047                              
|                                               |                                        | 235,074                              
|Depreciation                                   |                                        | 46,449                               
|                                               | $                                      | 281,523                              
|                                               |                                        |                                      
|Income (loss) from operations                  |                                        |                                      
|Canada                                         | $                                      | (288,107)                            
|Malaysia (via Avani O2)                        |                                        | 74,149                               
|                                               |                                        | (213,958)                            
|Interest on debt payable in Canada             |                                        | (1,530)                              
|Miscellaneous income in Canada                 |                                        | 12,938                               
|                                               |                                        | (202,549)                            
|Non-controlling interest                       |                                        | (74,838)                             
|Net loss before cumulative effect of change in |                                        |                                      
|accounting policy                              |                                        | (277,387)                            
|Cumulative effect of change in accounting      |                                        |                                      
|policy                                         |                                        | -                                    
|                                               | $                                      | (277,387)                            
|                                               |                                        |                                      
|                                               |                                        |                                      
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|Property, plant and equipment                  |                                        |                                      
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Item 2. Management's Discussion and Analysis.



The Company has significant business relationships with Avani O2 Water Sdn. Bhd. (Avani O2), a Malaysian company and its affiliate. The Companys prior periodic, quarterly and annual filings, including the Companys Form 10-KSB for the period ended December 31, 2003 discusses in greater detail the following;



•

Avani O2 was incorporated in July 1999 in Malaysia mainly to explore the opportunities of developing and marketing bottled water in South East Asia.  On February 18, 2000, the Company entered into an agreement with Avani O2 pursuant to which Avani O2 received, among other rights, the right and license to construct manufacturing facilities, and to produce and sell the Companys proprietary water product worldwide, subject to certain conditions and exclusions, including a 30% pre-tax net profits interest and 2% gross royalty interest payable to the Company. On April 19, 2004, the agreement was amended by replacing the  30% pre tax net profits interest with a rental fee payable by Avani O2 to the Company equal to 20,000 Malaysian Ringitt (RM) per each bottling line per month plus 0.19RM per 355ml or 0.00054RM per ml per bottle commencing January 1, 200 2
.. [3.8 RM equals $1.00 USD]
 As of September 30, 2004, Avani O2 owes $389,768 to the Company in respect of the payments due the Company under the stated agreement.



•

On October 25, 2002, the Company, together with its wholly owned subsidiary, Avani Oxygen Water Corp. entered into a Sale and Purchase Agreement with Avani O2 (Asset Sale Agreement), pursuant to which the Company agreed to sell all of the assets of its subsidiary consisting of its plant, production equipment, and real estate to Avani O2. The Asset Sale Agreement provides for 24 monthly instalments of $70,620 CDN (or $54,469 USD at year end exchange rates) commencing October 1, 2002 to and continuing to September 1, 2004, with a final payment of $220,686 CDN (or $170,217 USD at year end exchange rates) on October 1, 2004.Avani O2 did not make its final payment under the Asset Sale Agreement, and the payment date has been extended to November 25, 2004.



•

Avani O2 is controlled by a significant shareholder of the Company.





Please refer to these filings for a broader description of the transactions and relationships with Avani O2 and its affiliate.

As described in Note 2 of the consolidated interim financial statements, the Company is the primary beneficiary of Avani O2, a variable interest entity (VIE) as defined by Financial Accounting Standards Board (FASB) Interpretation No. 46R. Accordingly, the Company consolidated Avani O2 in the results for the 2004 periods.  All material inter-company balances and inter-company transactions have been eliminated. The financial statements as of December 31, 2003 and for the nine-month period ended September 30, 2003 include the accounts of the Company and its subsidiaries only.



The following discusses the results of operations and the financial position of the consolidated accounts of the Company, its two wholly owned subsidiaries; Avani Oxygen Water Corporation, and Avani International Marketing Corporation and Avani O2 for the period ended September 30, 2004. As discussed above, Avani O2 is considered to be a VIE and its operations have been consolidated into the operations of the Company commencing in the first quarter of 2004 in accordance with US GAAP. The cumulative effect of the accounting change has been recorded in

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the Statement of Operations and Comprehensive Loss for the period ended September

30, 2004 and the prior years financial results and positions have not been restated to reflect the consolidation of Avani O2. Accordingly, increase in expenses between the three and nine month periods ended September 30, 2004 and 2003 are principally due to the consolidation of Avani O2.Also, the consolidated balance sheet may not be indicative of the resources available to the Company to settle liabilities and commitments since the net assets of Avani O2 may not be readily available to the Company or are completely within the control of the Companys management.  Segmented information by geographic area is included in Note 8 of the consolidated interim financial statements.  Readers should consider the effect of such change in accounting policy and the limitations on balance sheet resources when reviewing the discussion below.



Results of Operations.



Nine Months Ended September 30, 2004 compared with Nine Months Ended September 30, 2003.



Revenues for the nine months ended September 30, 2004 were $1,792,060 representing an increase of $423,880 or 13.1% from revenues of $1,368,180 for the same period in 2003. The increase is based principally on higher water sales in Malaysia which occurred during the 2004 period attributable to product sales by Avani O2. During 2002, Avani O2 commenced its own manufacture and sale of a water product from its Malaysian plant under an agreement with the Company. The amounts for the 2003 period represent private label sales to support Avani O2's product demand in the Far East. The amounts for the 2004 represent the consolidated sales of both the Company and Avani O2. Revenues for the nine-month period in 2004 consisted of $1,763,954 in water and supply sales (an increase of 30.4% from $1,353,082 for the prior period), $28,106 in cooler rentals and equipment sales (an increase of 86.1% from $15,099 for the same period in prior year).



Cost of revenue which includes depreciation for the nine-month period in 2004 totaled $1,092,052, an increase of $230,162 or 26.7% from $861,890 for the same period in 2003. Cost of revenue as a percentage of sales was 60.9% for the 2004 period representing a slight decrease of 2.1% from 63% for the prior period. The decrease in cost of revenue as a percentage of sales for the 2004 period reflects the effect of the increased revenues on fixed costs and depreciation. Cost of revenue for the nine-month period ended September 30, 2004 consisted of $951,138 in bottled water, supplies, coolers, and related equipment, and delivery costs (an increase of $180,594 or 265% from $770,544 for the prior period) and $140,914 in depreciation (an increase of $49,568 or 54.3% from $91,346 for the same period in prior year). The increase in costs of revenue is due mainly to higher material and labor costs associated with the increased production levels. Gross profit for the nine-month period ended September 30, 2004 was $700,008, an increase of $193,718 or 38.3% from gross profit of $506,290 for the same period in 2003. The increase is due to the consolidation of Avani O2 in the Companys operations, and for the reasons discussed above.



Operating expenses which includes marketing expenses, and general and administrative expenses for the nine-month period ended September 30, 2004 totaled $737,307, an increase of $99,630 or 15.6% from $637,677 for the same period in 2003. General and administrative costs were $681,606 in 2004, an increase of 11.6% from $610,871 in the prior period. The increase is due mainly the inclusion of Avani O2s general and administrative expenses of $125,854 in the consolidated statements of the Company. Marketing expenses totaled $55,701 for the nine-month period in 2004 representing an increase of 108% from $26,806 for the prior period. The increase is due to a promotion program in Canada which includes advertising and salesperson hiring.  Loss from operations for the 2004 period is $37,299 compared to a loss of $131,387 for the comparable period 2003 due to the reasons discussed above.

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During the 2004 period, the Company recorded interest on debts payable of $4,518 compared with $23,961 for the 2003 period. The amount in 2003 included mortgage interest of $20,473, which mortgages were paid off by the Company in the third quarter of 2003. Miscellaneous income for 2004 was $31,928 (which consisted of foreign exchange gains of $23,285 and vehicle leasing income of $2,033 from the Company and $5,486 from Avani O2), compared with $27,772 in 2003.



During 2004, as a result of the consolidation of Avani 02, the Company recorded a non-controlling interest adjustment of $(472,045) and recorded a change of accounting policy adjustment of $(91,664). No such accounts were recorded for the 2003 period.



Net loss for the nine-month period ended September 30, 2004 was $573,597 compared with a net loss of $127,576 for the prior period. The Company had a foreign currency transaction adjustment of $22,436 in 2004 compared with $23,343 for the 2003 period. Comprehensive loss for the 2004 period was $551,161 compared with a loss of $104,233. Loss per share was $0.04 in 2004 and $0.01 in 2003.



Liquidity and Capital Resources



Since its inception, the Company has financed its operations principally through the private placement of its common stock. In June 2001, the Company received $500,771 in loan proceeds from five private lenders. The loans are unsecured and were due and payable on December 31, 2001. During the 2001 period, $25,000 of a loan payable in favor of one lender was converted to 500,000 shares of common stock and 500,000 common stock purchase warrants. During 2002, the Company entered into agreements with each of the lenders pursuant to which each lender cancelled the full amount of their respective loan outstanding. In exchange, the Company assigned accounts receivable in the amount of $200,944 to four of the lenders which represented a full satisfaction of amounts owed to three of the four lenders, and a partial satisfaction of amounts owed to the fourth lender. The Company also assigned $285,745 in net profits interest to two lenders including the partially satisfied lender. The account receivable relates to water product sold to Avani O2. The net profits interest results from the Companys agreement with Avani O2 under which Avani O2 received certain licensing rights from the Company. The assignment of net profits interest (which was amended to become monthly rental charges as discussed above) to these lenders will revert back to the Company when the lenders have received from such interest, an amount equal to the principal amount of the cancelled loans.



In 2002, the Company raised a total of $75,750 from the private placement of its common stock and warrants. As discussed above, the Company also satisfied an outstanding payable in the amount of $124,800 in exchange for the issuance of its common stock and warrants which resulted in a controlling interest in the Company. In August 2003, the Company completed two separate transactions pursuant to which the Company sold 2,500,000 (a total of 5,000,000) shares of common stock of the Company at a price per share equal to $0.06 and received a consideration of $150,000 (a total of $300,000). In connection with the share issuance, the Company agreed to pay a finder's fee to a third party equal to 10% of the gross proceeds, totaling $30,000 in cash and 1,500,000 share purchase warrants.



The Company expects that all available cash, including cash received from Avani O2 from the Asset Sale Agreement, will be used by the Company to fund its ongoing operations. As of September 30, 2004, the Company has sufficient cash to fund its operations for the next four months.



As of September 30, 2004, the Company had working capital of $727,941. Working capital as of December 31, 2003 was $235,530. The increase in working capital is principally a result of consolidation of Avani O2.



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Property, plant and equipment, net of accumulated depreciation, totaled $1,489,397, which consists of $1,280,687 in Company  assets located in Canada and $208,710 in Avani O2 assets located in Malaysia as at September 30, 2004. Property, plant and equipment of the Company, net of accumulated depreciation, totaled $1,430,329 on December 31, 2003. The reduction is due to amortization that occurred during the period.



Historically, the Company has experienced significant losses from operations. However, during the first quarter of 2004, the Companys operations improved due to the product sales through Avani O2 as discussed above. The Company expects to continue to sell products to Avani O2 through the completion of the Asset Sale Agreement (which has been extended to November 25, 2004) when it transfers its property and production equipment to Avani O2. Following the transfer of assets, the Company intends to negotiate a co-packing arrangement with Avani O2 under which the Company would sell its bottled water products in certain
 markets worldwide
.. Initially, t
he Company expects to continue selling its five gallon containers in the local Vancouver market, and
pursue markets
international ly
, provided a mutually acceptable arrangement with Avani O2 can be reached. Despite its intentions of continuing the marketing and sale of its water products, the Company recognizes that it may be required to seek other business opportunities in the near future. The Company also may seek to establish other arrangements with Avani O2, including providing managerial services for Avani O2s Canadian operation following the completion of the Asset Sale Agreement. Both parties have not agreed on any plan, proposal, letter of understanding, agreement or arrangement yet. There is no guarantee that Company will reach any agreement with Avani O2. In addition, since the second quarter of 2002, the Company began searching for business opportunities to acquire through a merger or share exchange. Management of the Company has conducted discussions and engaged in meetings with principals of a number of private companies, however, the Company has been unable to reach a formal agreement with such parties. The Company continues to search for other business opportunities to acquire, however, it cannot predict whether it will be successful in its efforts. In the event that additional funding is required, the Company plans to raise additional capital through a combination of equity and debt financing.



In their auditors report on the consolidated financial statements for the year ended December 31, 2003, the Companys independent auditors included an explanatory paragraph regarding the Companys ability to continue as going concern. In addition, any future financings will result in significant dilution to existing shareholders (see disclosure relating to cautionary statements in the  Company's  Annual  Report on Form 10-KSB for the year ending December 31, 2003).



Cautionary Statements.  Readers  are urged to refer to the section entitled "Cautionary Statements  in the  Company's  Form 10-KSB  for  the year ended December 31, 2003  and elsewhere therein for  a broader  discussion of such risks and uncertainties. These risks include the lack of profitable operations, limited distribution channels, the need for additional capital to sustain operations, and significant dilution to existing shareholders.

Critical Accounting Policies

Change in Accounting Policy.  In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB 51 (which was amended in December 2003, FIN No. 46R).  The primary objectives of FIN No. 46R are to provide guidance on the identification of entities for which control is achieved through means other than voting rights (variable interest entities or VIEs) and how to determine when and which business enterprise should consolidate the VIE.  This new model for consolidation applies to an entity for which either:

17

(1) the equity investors do not have a controlling financial interest; or (2) the equity investment at risk is insufficient to finance that entitys activities without receiving additional subordinated financial support from other parties.  In addition, FIN No. 46R requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures.  As amended in December 2003, the effective dates of FIN No. 46R for public entities that are small business issuers, as defined (SBIs), are as follows:  (a) for interests in special-purpose entities: periods ended after December 15, 2003; (b) for all VIEs created before January 31, 2003: periods ending after December 15, 2004; and (c) for all VIEs created after January 31, 2003, FIN 46R is applicable immediately.  The December 2003 amendment of FIN No. 46R also includes transition provisions that govern how an SBI which previously adopted the pronouncement (as it was originally issued) must account for consolidated VIEs.

Pursuant to a joint-venture agreement dated February 18, 2000 (as amended in January 2002 and April 2004), the Company is entitled to, among other things, rental fee payable by Avani O2 to the Company equal to 20,000 Malaysian Ringitt (RM) per each bottling line per month plus 0.19RM per 355ml or 0.00054RM per ml per bottle commencing January 1, 2003, and appoint two of the three directors on the Board of Directors of Avani O2.  .As a result, the equity investors of Avani O2 do not have a controlling financial interest in Avani O2 and the Company is the primary beneficiary of Avani O2, the VIE.  According to the above-noted requirements, the Company commenced consolidating Avani O2 in the first quarter of 2004.  The prior year comparative information has not been restated to reflect a consolidation of Avani O2.  The cumulative effect of the change in accounting policy of $91,664 was recorded in the Statements of Operations and Comprehensive Loss at January 1, 2004 and included in accumulated deficit.  Subsequent to the elimination of intercompany balances and transactions, Avani O2 has net assets of $1,601,412 as at June 30, 2004 and net income of $392,410 for the six-month period then ended. These amounts were recorded as non-controlling interests in these consolidated interim financial statements.



Revenue Recognition. Revenue on sales of bottled water and sales of cooler and equipment is recognized when the products are delivered and title transfers to customers. Sales terms generally do not permit a right of return.  Revenue from leasing of water coolers and filters are accounted for as operating leases and, accordingly, rental income is reported over the terms of the leases. Deposits received for bottles and coolers are accrued as liabilities until refunded upon return of bottles and coolers. Freight charges billed to customers are included in Revenue while associated freight costs are included in Cost of Revenue.



As part of the settlement of the loan payables from two lenders, the Company assigned its Net Profits Interest referred to above to these lenders.  The Company will recognize the revenue from the Net Profits Interest (subsequently amended to become a monthly rental fee) and reduce the amount of obligation payable related to the assignment of such interest when the lenders receive their assigned Net Profits Interest payments.  For the nine-month period ended September 30, 2004, all intercompany balances and transactions have been eliminated upon consolidation.



Stock Based Compensation. Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation", requires the Company to provide pro-forma information regarding net income as if compensation cost for the Company's stock option plan had been determined in accordance with the fair value based method prescribed in SFAS No. 123.  The value of stock options granted to consultants is recognized in these consolidated financial statements as compensation expense using the Black-Scholes option pricing model.  Such compensation is amortized over the contract services period or, if none exists, from the date of grant until the options vest.  Compensation associated with unvested options is remeasured on each balance sheet date using the Black Scholes

18

option pricing model. The Company has not adopted the fair value method of accounting for stock-based compensation awarded to employees.  For the three months ended March 31, 2003, compensation expenses of $83,363 was recognized for unvested options granted to non-employees in 2003. As there were no stock-based compensation awarded to employees during the nine months ended September 30, 2004, the pro-forma information equals the information as reported on the Statement of Operations and Comprehensive Loss.





Off Balance Sheet Arrangements.

------------------------------

As described elsewhere herein, prior to consolidation, Avani O2 is the largest customer of the Company and has agreed to purchase all the production asset of the Company on October 1, 2004. As such, the Companys continued operation is highly dependent on the collection of trade receivables and asset sale installment from Avani O2. Should Avani O2 default on any of these payments, it will have a severely adverse effect on the Company.

New Accounting Pronouncement

There were no new accounting pronouncement that impacted the Company since the issuance of the audited consolidated financial statements.



Item 3. Effectiveness of the registrants disclosure controls and procedures



At September 30, 2004, the Company carried out an evaluation of the effectiveness of the Companys disclosure controls and procedures (as defined by Rule 13a-14(c) under the Securities Exchange Act of 1934) under the supervision and with the participation of the Companys chief executive officer and chief financial

19

officer. Based on and as of the date of such evaluation, the aforementioned officers have concluded that the Companys disclosure controls and procedures have functioned effectively so as to provide those officers the information necessary whether:

(i) this quarterly report on Form 10 QSB contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report on Form 10 QSB, and(ii) the financial statements, and other financial information included in this quarterly report on Form 10 QSB, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report on Form 10 QSB.

There have been no significant changes in the Company's internal controls or in other factors since the date of the Chief Executive Officer's and Principal Financial Officer's evaluation that could significantly affect these internal controls, including any corrective actions with regards to significant deficiencies and material weaknesses.























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Part II OTHER INFORMATION

Item 1. Legal Proceedings.

None



Item 2. Changes in Securities.

None



Item 3. Defaults upon Senior Securities.

None



Item 4. Submission of Matters to a Vote of Securityholders.

None



Item 5. Other Information.

None



Item 6. Exhibits.

Exhibit 31  Certification Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002.

Exhibit 32  Certification Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002.



(b) Reports on Form 8-K.

None







































































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SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the

registrant has duly caused this report to be signed on its behalf by the

undersigned thereunto duly authorized.



AVANI INTERNATIONAL GROUP, INC.



Date: November 22, 2004          /s/Dennis Robinson

Dennis Robinson

Vice President and

Principal Financial Officer



























































































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