UNITED STATES ~~SECURITIES AND EXCHANGE COMMISSION~~

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

——————

FORM 10-K

——————

(Mark One)

ü	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	ACT OF 1934
For the fiscal year ended January 31, 2010
For the fiscal year ended: January 31, 2009
OR
	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	ACT OF 1934
For the transition period from: _____________ to _____________

For the transition period from ____________ to ____________

Commission file number: 1-31642

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

(Exact name of registrant as specified in its charter)

British Columbia, Canada		98-0487410
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

British Columbia, Canada		98-0487410
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
1569 Dempsey Road North Vancouver, British Columbia Canada		V7K 1S8
(Address of principal executive offices)		(Zip Code)

(604) 681-6181

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Name of each exchange on which registered
Common Shares, no par value per share		NYSE Amex LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No þ

Indicate by check mark ifwhether the registrant is(1) ~~not~~has ~~required~~filed toall ~~file~~ reports ~~pursuant~~required to be filed by Section 13 or ~~Section~~ 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

~~Yes~~Indicate ~~o No~~by þcheck mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark ~~whether~~if ~~the~~disclosure ~~registrant~~of ~~(1)~~delinquent ~~has~~filers ~~filed~~pursuant ~~all reports required~~ to beItem ~~filed~~405 ~~by Section 13 or 15(d)~~ of ~~the~~Regulation ~~Securities~~S-K ~~Exchange~~is ~~Act~~not ofcontained ~~1934~~herein, ~~during~~and ~~the~~will ~~preceding~~not 12be ~~months~~contained, ~~(or~~to ~~for~~the ~~such~~best ~~shorter~~of ~~period~~registrant's ~~that~~knowledge, ~~the~~in ~~registrant~~definitive ~~was~~proxy ~~required~~or toinformation ~~file~~statements ~~such~~incorporated ~~reports),~~by ~~and~~reference ~~(2)~~in ~~has~~Part ~~been~~III ~~subject~~of tothis ~~such~~Form ~~filing~~10-K ~~requirements~~or ~~for~~any ~~the~~amendment ~~past~~to 90this ~~days.~~Form 10-K. þ

Yesþ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer £o Accelerated filer £o Non-accelerated filer ~~£ Smaller reporting company þ~~ (Do not check if a smaller reporting company) o Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

~~Yes~~Aggregate ~~o No~~market ývalue of the voting and non-voting common equity held by non-affiliates of the registrant as of July 31, 2009, based upon the closing price of the common stock as reported by NYSE Amex on such date, was approximately $17,579,037.

Aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of July 31, 2008, based upon the closing price of the common stock as reported by the American Stock Exchange on such date, was approximately $13,991,708.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Class		Outstanding at April 18, ~~2009~~2010
Common Shares, no par value per share		6,410,282 shares

DOCUMENTS INCORPORATED BY REFERENCE

Document		Parts Into Which Incorporated
Portions of the Proxy Statement for the Annual General Meeting of Shareholders to be held on June 10, 2009		Part III

None

INTERNATIONAL ABSORBENTS INC.

Annual Report on Form 10-K

For the Fiscal Year Ended January 31, ~~2009~~2010

TABLE OF CONTENTS

Item			Page
Item Number				Page Number
Number			Number
		PART I
	PART I
1.		Business			1
1.		Business	4
1A.		Risk Factors			8
1A.		Risk Factors	10
1B.		Unresolved Staff Comments			15
2.		Properties	16		15
3.		Legal Proceedings	16		15
4.		~~Submission~~(Removed ofand ~~Matters to a Vote of Security Holders~~Reserved)	16		15
	~~PART II~~	PART II
5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	17		16
7.		Management's Discussion and Analysis of Financial Condition and Results of Operations	18
6.		Selected Financial Data			17
8.		Financial Statements and Supplementary Data	26
7.		Management's Discussion and Analysis of Financial Condition and Results of Operations			18
9A(T).		Controls and Procedures	46
7A.		Quantitative and Qualitative Disclosures About Market Risk			26
	PART III
8.		Financial Statements and Supplementary Data			27
10.		Directors, Executive Officers and Corporate Governance	47
9.		Changes in and Disagreements With Accountants on Accounting and Financial Disclosure			49
11.		Executive Compensation	47
9A(T).		Controls and Procedures			49
12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	47
9B		Other Information			49
13.		Certain Relationships and Related Transactions, and Director Independence	47
		PART III
14.		Principal Accountant Fees and Services	47
10.		Directors, Executive Officers and Corporate Governance			50
	PART IV
11.		Executive Compensation			55
15.		Exhibits and Financial Statement Schedules	48
12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			67
SIGNATURES			49
13.		Certain Relationships and Related Transactions, and Director Independence			69
EXHIBIT INDEX			50
14.		Principal Accounting Fees and Services			71
		Unless otherwise indicated, all dollar amounts in this report are U.S. dollars.
		PART IV
15.		Exhibits, Financial Statement Schedules			75
SIGNATURES					74
EXHIBIT INDEX					76

3 Unless otherwise indicated, all dollar amounts in this report are U.S. dollars.

PART I

ITEM 1. BUSINESS

~~BUSINESS~~Unless otherwise indicated by the context, as used in this Annual Report on Form 10-K, “we,” “us” and “our” refer to International Absorbents Inc. (“International Absorbents”) and our wholly-owned U.S. subsidiary, Absorption Corp. (“Absorption”).

~~Unless~~As ~~otherwise~~more ~~indicated~~fully bydescribed ~~the~~in ~~context,~~our asdefinitive ~~used~~proxy instatement ~~this~~filed ~~Annual~~with ~~Report~~the Securities and Exchange Commission (the “SEC”) on ~~Form 10-K~~April 16, 2010 (the “~~we,~~Proxy Statement”), on December 14, 2009, International Absorbents entered into an Arrangement Agreement (the “usArrangement Agreement”) ~~and~~with IAX Acquisition Corporation, a Delaware corporation (“~~our~~Parent”), ~~refer~~and toIAX ~~International~~Canada ~~Absorbents~~Acquisition Company Inc., a corporation incorporated under the laws of the Province of British Columbia (“~~International~~Canada ~~Absorbents~~Sub”) and ~~our~~a wholly-owned Usubsidiary of Parent.S. The Arrangement Agreement provides that, upon the terms and subject to the conditions set forth in the Arrangement Agreement, Parent, through its wholly-owned subsidiary, ~~Absorption~~will ~~Corp~~acquire all of the outstanding common shares of International Absorbents for $4.75 per common share in cash, with International Absorbents continuing as the surviving corporation (the “~~Absorption~~Arrangement”). As a result of the Arrangement, International Absorbents will become a wholly-owned subsidiary of Parent. The consummation of the Arrangement is subject to various closing conditions, including obtaining the approval of the Arrangement by our shareholders and the Supreme Court of British Columbia. The Arrangement Agreement contains certain termination rights for International Absorbents, Parent and Canada Sub and further provides that, upon termination of the Arrangement Agreement under specified circumstances, International Absorbents may be required to pay Parent a termination fee of 4% of the aggregate purchase price. Our board of directors and the board of directors of Parent have approved the Arrangement Agreement. In addition, concurrently with the execution of the Arrangement Agreement, certain of our executive officers, who together hold approximately 11.2% of our issued and outstanding common shares, have entered into a support agreement whereby they agreed, among other things, to vote all common shares held by them in favor of the approval of the Arrangement.

~~FORWARD~~This Annual Report on Form 10-~~LOOKING~~K ~~STATEMENTS~~may be deemed to be solicitation material in respect of the proposed Arrangement. The Proxy Statement contains important information about the Arrangement and related matters. INVESTORS AND SHAREHOLDERS ARE URGED TO READ THE PROXY STATEMENT CAREFULLY. Investors and shareholders are able to obtain free copies of the Proxy Statement and other documents filed with the SEC by us through the web site maintained by the SEC at www.sec.gov. In addition, investors and shareholders may obtain free copies of the Proxy Statement and other documents filed with the SEC from us by contacting David Thompson, Corporate Secretary, by telephone at (604)681-6181, or by mail at International Absorbents Inc., Investor Relations, 1569 Dempsey Road, North Vancouver, British Columbia V7K 1S8 Canada.

~~This~~We ~~Annual~~and ~~Report~~our ondirectors ~~Form 10-K~~ and ~~the~~executive ~~documents~~officers ~~incorporated~~may ~~herein~~be bydeemed ~~reference~~to ~~contain~~be ~~forward-looking~~participants ~~statements~~in ~~within~~ the ~~meaning~~solicitation of ~~Section 27A~~proxies offrom ~~the~~our ~~Securities~~shareholders ~~Act~~in ofconnection ~~1933~~with ~~and Section 21E of~~ the ~~Securities Exchange Act of 1934, as amended (the “Exchange Act”) based on current expectations, estimates and projections about our industry and our management’s beliefs and assumptions~~Arrangement. Information ~~They~~regarding ~~can be identified by~~ the ~~use~~interests of ~~forward-looking~~these ~~words~~directors such as “believes,” “expects,” “plans,” “may,” “will,” “would,” “could,” “should” or “anticipates” or other comparable words, or by discussions of strategy, plans or goals that involve risks and ~~uncertainties~~executive ~~that~~officers ~~could~~in ~~cause~~the ~~actual~~Arrangement ~~results~~is toincluded ~~differ~~in ~~materially~~the ~~from~~Proxy ~~those currently anticipated~~Statement. Additional ~~You~~information ~~are~~regarding ~~cautioned~~these ~~that~~directors ~~any forward-looking statements are not guarantees of future performance~~ and ~~involve~~executive ~~risks~~officers ~~and~~is ~~uncertainties,~~also ~~including~~included ~~those set forth below under “Item 1A-Risk Factors” and as described from time to time~~ in ~~our reports filed with the Securities and Exchange Commission (“SEC”), including~~ this Annual Report onin ~~Form 10-K~~Part ~~and our Quarterly Reports on Form 10-Q~~III. ~~Such forward-looking statements include, but are not limited to, statements with respect to the following:~~

·FORWARD-LOOKING STATEMENTS

This Annual Report and the documents incorporated herein by reference contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) based on current expectations, estimates and projections about our ~~future~~industry ~~growth~~and ~~strategies~~our management’s beliefs and ~~prospects~~assumptions. They ~~for~~can be identified by the use of forward-looking words such as “believes,” “expects,” “plans,” “may,” “will,” “would,” “could,” “should” or “anticipates” or other comparable words, or by discussions of strategy, plans or goals that involve risks and uncertainties that could cause actual results to differ materially from those currently anticipated. You are cautioned that any forward-looking statements are not guarantees of future; performance and involve risks and uncertainties, including those set forth below under “Item 1A-Risk Factors” and as described from time to time in our reports filed with the SEC, including this Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q. Such forward-looking statements include, but are not limited to, statements with respect to the following:

·1

~~potential~~· ~~financial~~our ~~results,~~future ~~including~~growth ~~anticipated~~strategies ~~revenue~~ and ~~gross~~prospects ~~profits~~for the future;

· the proposed Arrangement between International Absorbents, Parent and Canada Sub;

~~projected~~· ~~benefits~~potential ~~from~~financial ~~our~~results, ~~ongoing~~including ~~efforts~~anticipated torevenue ~~improve our infrastructure~~ and ~~production~~gross ~~facilities~~profits;

· projected benefits from our ongoing efforts to improve our infrastructure and production facilities;

· the impact of ~~the ongoing global~~ economic ~~downturn~~conditions on our financial condition, consumer preferences and ability to remain competitive;

· our ability to control expenses and improve operating efficiencies;

· our ~~ability~~market toand ~~control~~product ~~expenses~~line growth and ~~improve~~ability ~~operating~~to ~~efficiencies~~enter new markets;

· our ability to introduce new products and remain competitive; and

· our ~~market~~competitiveness and ~~product~~profitability ~~line~~as ~~growth~~a ~~and~~result ~~ability~~of toconsumer ~~enter~~preferences ~~new~~and ~~markets;~~sales and marketing programs.

·Readers are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date made. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.

~~our ability to introduce new products and remain competitive; and~~ General

·International Absorbents is the parent company of its wholly owned U.S. subsidiary, Absorption. Absorption accounts for almost all of the consolidated entity’s assets and annual sales revenue. As such, International Absorbents is the holding company and Absorption is its operating entity. There are no other subsidiaries of International Absorbents.

~~our~~Absorption ~~competitiveness~~is ~~and~~engaged ~~profitability~~in asdeveloping, manufacturing and marketing a ~~result~~wide range of ~~sales~~animal care and ~~marketing~~industrial ~~programs~~cleanup absorbent products made from off-specification and reclaimed cellulose fibers. International Absorbents was incorporated on May 13, 1983 under the laws of British Columbia, Canada under the name West-Norse Resources Ltd, and changed its name to Absorptive Technologies Inc. in 1986 and to International Absorbents Inc. in 1999. Absorption was incorporated on July 25, 1985 in the State of Nevada.

~~Readers~~Absorption ~~are~~is ~~cautioned~~a ~~not~~leading tomanufacturer ~~place~~and ~~undue~~seller ~~reliance~~of onpremium ~~the~~small ~~forward-looking~~animal ~~statements,~~bedding ~~which~~in ~~speak~~North ~~only~~America. asThe ofprimary product that we sell in this market is small animal bedding sold under the ~~date~~brand ~~made~~name CareFRESH®. We ~~Except~~consider asthe ~~required~~activities bythat ~~law,~~surround wethe ~~undertake~~manufacture noand ~~obligation~~distribution of CareFRESH® to ~~update~~be ~~any~~our ~~forward-looking~~core ~~statement,~~business. We ~~whether~~have asalso aexpanded ~~result~~the animal care segment of our business by the addition of new ~~information,~~sales ~~future~~channels ~~events~~and orthe ~~otherwise.~~introduction of animal food.

~~General~~The majority of our products, in both the animal care and industrial cleanup segments, are sold in the United States, though we do sell products internationally.

~~International~~Business Absorbents is the parent company of its wholly owned U.S. subsidiary, Absorption. Absorption accounts for almost all of the consolidated entity’s assets and annual sales revenue. As such, International Absorbents is the holding company and Absorption is its operating entity. There are no other subsidiaries of International Absorbents.Strategy

~~Absorption~~We isdesign, ~~engaged in developing~~manufacture, ~~manufacturing~~ and ~~marketing~~sell aproducts ~~wide~~that ~~range~~are of ~~animal~~high ~~care~~quality and ~~industrial~~performance, ~~cleanup~~easy ~~absorbent~~to use and cost effective for consumers. We also focus on producing products ~~made~~that ~~from~~are ~~off-specification~~known ~~and~~for ~~reclaimed~~their ~~cellulose~~environmentally ~~fibers~~friendly characteristics. We ~~International~~provide ~~Absorbents~~rapid ~~was~~delivery ~~incorporated~~of our products and prompt service and sales support. Based on ~~May 13~~communication with our customers and other industry participants, ~~1983~~we ~~under~~believe that our products have strong brand name recognition and we seek to continue to develop the ~~laws~~value of ~~British~~our ~~Columbia,~~brands ~~Canada.~~through ~~Absorption~~a ~~was~~variety ~~incorporated~~of oncustomer-driven ~~July 25,~~strategies. Information ~~1985~~provided inby customers has led to the ~~State~~development of ~~Nevada~~many of our products and we expect that customer needs will continue to shape our product development, marketing, and services. In the pet industry, our products are designed to make owning a small animal a safe, healthy and enjoyable experience.

~~Absorption~~Our isbusiness astrategy ~~leading~~is ~~manufacturer~~to promote and ~~seller~~grow ofour ~~premium~~core ~~small~~business ~~animal~~and ~~bedding~~to create diversification in ~~North~~our ~~America.~~market ~~The~~channels, ~~primary~~our ~~product~~production ~~that~~methods, weand ~~sell~~our inproduct ~~this~~lines ~~market~~in isan ~~small~~effort ~~animal~~to ~~bedding~~add ~~sold~~strength ~~under~~and ~~the~~breadth ~~brand~~to ~~name~~our ~~CareFRESH®~~business structure. As Wea ~~consider~~result, ~~the~~we ~~activities~~continue ~~that~~to ~~surround~~dedicate ~~the~~resources ~~manufacture~~to ~~and~~improving ~~distribution~~our ofinfrastructure ~~CareFRESH®~~for tothe besupport of our core business. and creating more product and customer diversification. We ~~have~~believe ~~also~~that ~~expanded~~this ~~the~~strategy ~~animal~~continues ~~care~~to ~~segment~~provide ofresults. Specifically, we continue to grow sales in our core business byand improve the ~~addition~~production process of ~~new~~our ~~sales~~core ~~channels~~CareFRESH® ~~and~~product ~~the~~while ~~introduction~~expanding sales of ~~animal~~new ~~food~~products and ~~cat~~existing ~~litter~~products ~~into~~in ~~our~~new ~~product~~market ~~line~~channels.

~~The~~In ~~majority~~recent years we have added significantly to our capital infrastructure to diversify our production facilities and accommodate sales growth. This process has reduced the risk of not being able to deliver product to our ~~products,~~customers on a timely basis due to major break-downs; has resulted in ~~both~~the location of production facilities closer to the ~~animal~~consumer, ~~care~~thereby reducing the cost of transportation and ~~industrial~~increasing ~~cleanup~~our ~~segments,~~service ~~are~~levels; ~~sold~~and inhas ~~the~~increased ~~United~~our ~~States~~production capacity, ~~though~~which wegives dous ~~sell~~the ~~products~~ability ~~internationally~~to grow into the future.

4Our long-term strategy includes developing, acquiring, and/or investing in product lines or businesses that (a) complement our existing product lines, (b) can be marketed through existing distribution channels, (c) might benefit from the use of our existing brand names, and (d) are responsive to the needs of our customers. In addition, we will continue to explore strategic opportunities in an effort to maximize shareholder value.

~~Business Strategy~~2

We design, manufacture, and sell products that are of high quality and performance, easy to use and cost effective for consumers. We also focus on producing products that are known for their environmentally friendly characteristics. We provide rapid delivery of our products and prompt service and sales support. Based on communication with our customers and other industry participants, we believe that our products have strong brand name recognition and we seek to continue to develop the value of our brands through a variety of customer-driven strategies. Information provided by customers has led to the development of many of our products and we expect that customer needs will continue to shape our product development, marketing, and services. In the pet industry, our products are designed to make owning a small animal a safe, healthy and enjoyable experience.Products

Our ~~business~~leading ~~strategy~~product is tosmall ~~promote~~animal ~~and~~bedding ~~grow~~made ~~our~~from ~~core~~cellulose ~~business~~fiber. ~~and~~It tois ~~create~~used ~~diversification~~as ina ~~our~~substrate ~~market~~for ~~channels~~rodents, ~~our~~rabbits, ~~production~~reptiles ~~methods~~and hand-fed exotic birds instead of wood shavings, ~~and~~hardwood chips or corn cobs. We believe that our product ~~lines~~is insuperior anto ~~effort~~traditional tobedding ~~add~~materials ~~strength~~because ~~and~~it ~~breadth~~is better able to ~~our~~control ~~business~~and ~~structure~~contain animal waste odors. We Asare a ~~result,~~significant webedding ~~continue~~supplier to ~~dedicate~~major ~~resources~~pet store chains and to ~~improving~~independent ~~our~~pet ~~infrastructure~~stores ~~for~~through the ~~support~~use of ~~our~~a ~~core~~wide ~~business~~North ~~and~~American ~~creating~~network ~~more~~of ~~product~~wholesale ~~and customer diversification~~distributors. The Webedding ~~believe~~is ~~that~~also ~~this~~widely ~~strategy~~used ~~has~~by ~~started~~universities toand ~~provide~~research ~~results~~facilities. We ~~Specifically~~market our animal bedding under the CareFRESH®, CareFRESH® Colors™ weand CareFRESH® ~~continue~~Ultra™ tobrands ~~grow~~of ~~sales~~small animal bedding in the pet specialty channel. CareFRESH® Colors is our ~~core~~colored ~~business~~bedding offering and ~~improve~~CareFRESH® ~~the~~Ultra ~~production~~is ~~process~~our ofwhite small animal bedding. Both are premium line extensions to our core product, CareFRESH®. We ~~product~~also ~~while~~distribute ~~expanding~~our ~~sales~~small ofanimal ~~new~~pet ~~products~~bedding under the brands Healthy Pet™ and ~~existing~~Critter ~~products~~Care™ in ~~new~~the ~~market~~grocery and/or mass merchandiser distribution channels.

InOur ~~recent~~Healthy ~~years~~Pet™ webrand ~~have~~of ~~added~~cat ~~significantly~~litters toconsists ~~our~~of ~~capital~~a ~~infrastructure~~range toof ~~diversify~~natural ~~our~~products ~~production~~made ~~facilities~~from ~~and~~cellulose ~~accommodate~~fiber, ~~sales~~wood, ~~growth~~grain and plant-based materials. These ~~This~~products ~~process~~are ~~has~~aimed ~~reduced~~at the ~~risk~~“holistic” ofmarket ~~not~~and ~~being~~are ~~able~~designed to ~~deliver~~be ~~product~~healthier tofor ~~our~~pets ~~customers~~and onpeople athan ~~timely~~traditional ~~basis~~clay ~~due~~litter tobecause ~~major~~of ~~break-downs;~~potential ~~has~~health ~~resulted~~problems inassociated ~~the~~with ~~location~~crystalline ofsilica ~~production~~in ~~facilities~~clay ~~closer~~products. toOur ~~the~~products ~~consumer,~~also ~~thereby~~generally ~~reducing~~prove ~~the~~to ~~cost~~be ofless ~~transportation~~dusty and ~~increasing~~to ~~our~~weigh ~~service~~less ~~levels;~~than ~~and~~other ~~has~~mineral-based ~~increased~~litter ~~our production capacity~~products, ~~which~~making ~~gives~~their ushandling ~~the~~and ~~ability~~disposal ~~to grow into the future~~easier.

~~Our~~We ~~long-term~~were ~~strategy~~among ~~includes~~the ~~developing,~~first ~~acquiring,~~to ~~and/or~~offer ~~investing in product lines or businesses that (~~a) ~~complement~~dog ~~our~~litter ~~existing~~ product ~~lines~~, ~~(b)~~which ~~can~~we bebelieve ~~marketed~~created ~~through~~an ~~existing~~entirely ~~distribution~~new ~~channels~~retail category, ~~(c)~~and ~~might~~which ~~benefit~~helps ~~from~~provide ~~the~~a ~~use~~lifetime ofcomfort ~~our~~solution ~~existing~~for ~~brand~~small ~~names,~~house-bound ~~and~~dogs. We ~~(d)~~sell ~~are responsive to the needs of~~ our ~~customers.~~dog Inlitter ~~addition,~~products wethrough ~~will~~pet ~~continue~~specialty toretailers ~~explore~~and ~~strategic~~via ~~opportunities~~mail inorder anunder ~~effort~~the tobrand ~~maximize~~name ~~shareholder~~Puppy ~~value.~~Go Potty™.

~~Products~~Through our joint marketing alliance with Supreme Petfoods Ltd, a privately held British firm, we distribute a premium line of small animal food products to pet stores across North America under such brand names as Russel Rabbit™, Gerty Guinea Pig™ and Reggie Rat™ brand premium diets. In addition, during fiscal year 2010, we introduced a proprietary line of small animal foods branded CareFRESH® Complete™.

~~Our~~We ~~leading~~also ~~product~~manufacture isloose ~~small~~particulate, ~~animal bedding made from cellulose fiber. It is used as a substrate for rodents~~pillows, ~~rabbits~~socks, ~~reptiles and hand-fed exotic birds instead of wood shavings~~booms, ~~hardwood~~pads ~~chips or corn cobs. We believe that our product is superior to traditional bedding materials because it is better able to control~~ and ~~contain~~spill ~~animal~~kits ~~waste~~for ~~odors. We are a significant bedding supplier to major pet store chains and to independent pet stores through the~~ use ofin aspill ~~wide~~clean ~~North~~up ~~American network of wholesale distributors. The bedding is also widely used by universities~~ and ~~research~~plant ~~facilities.~~maintenance Wein ~~market our animal bedding under~~ the ~~CareFRESH®~~manufacturing, ~~CareFRESH®~~repair ~~Colors™~~ and ~~CareFRESH®~~operations ~~Ultra™~~(MRO) ~~brands of small animal bedding in the pet specialty channel~~marketplace. These ~~CareFRESH®~~products ~~Colors is our colored bedding offering and CareFRESH® Ultra is our white small animal bedding. Both~~ are ~~premium~~either ~~line~~general ~~extensions~~purpose ~~to our core product, CareFRESH®. We also distribute our small animal pet bedding under the brands Healthy Pet™ and Critter Care™~~ in ~~the~~nature ~~grocery and/~~or ~~mass~~specifically ~~merchandiser~~designed ~~distribution~~for ~~channels.~~oil-based liquids.

~~Our~~Absorbent ~~Healthy Pet~~W™ ~~brand~~is ofa ~~cat~~cellulose ~~litters~~absorbent ~~consists~~specially ofprocessed ato ~~range~~absorb ofand ~~natural~~retain ~~products~~hydrocarbons ~~made~~like ~~from~~diesel ~~cellulose fiber~~fuel, ~~wood,~~hydraulic ~~grain~~fluid ~~and~~or ~~plant-based~~lubricating ~~materials.~~oil, ~~These~~while ~~products are aimed~~ at the ~~“holistic”~~same ~~market~~time ~~and~~repelling ~~are~~water. We ~~designed~~believe tothat beAbsorbent ~~healthier~~W ~~for~~absorbs ~~pets~~more, ~~and~~is ~~people~~better ~~than~~able ~~traditional~~to ~~clay~~retain ~~litter~~what ~~because~~it ofabsorbs ~~potential~~and ~~health~~is ~~problems~~less ~~associated~~costly ~~with~~from ~~crystalline~~production ~~silica in clay products. Our products also generally prove~~ to bedisposal ~~less dusty and to weigh less~~ than ~~other~~the ~~mineral-based~~polypropylene ~~litter~~ products, ~~making~~with ~~their~~which ~~handling~~it ~~and~~primarily ~~disposal easier~~competes.

WeAbsorbent ~~were~~GP™ ~~among~~is ~~the first to offer~~ a ~~dog~~cellulose ~~litter~~universal ~~product,~~absorbent ~~which~~used weto ~~believe~~absorb ~~created~~all antypes ~~entirely~~of ~~new~~liquids ~~retail~~including ~~category~~oil, water and ~~which helps provide a lifetime comfort solution for small house-bound dogs~~chemicals. It Weis ~~sell~~not ~~our~~compatible ~~dog~~with ~~litter~~aggressive ~~products~~caustics ~~through pet specialty retailers~~ and ~~via~~acids ~~mail~~but ~~order~~has ~~under~~a ~~the~~wide ~~brand~~range ~~name~~of ~~Puppy~~general Gopurpose ~~Potty™~~uses.

~~Through~~Spill-Sorb™ ~~our~~and ~~joint~~Spill-Dri™ ~~marketing~~are ~~alliance~~two ~~with~~different ~~Supreme~~types ~~Petfoods~~of ~~Ltd,~~floor asweep ~~privately~~made ~~held~~from ~~British~~waste ~~firm,~~paper wefiber. They ~~distribute~~are adesigned ~~premium~~for ~~line~~a variety of ~~small~~floor ~~animal~~surfaces ~~food~~and ~~products~~applications, toand ~~pet~~we ~~stores~~believe ~~across~~that ~~North~~both ~~America~~products ~~under~~are ~~such~~more ~~brand~~absorbent ~~names~~and aslighter ~~Russel~~in ~~Rabbit™,~~weight ~~Gerty~~than ~~Guinea~~traditional ~~Pig™~~clay floor sweeps, and ~~Reggie~~do ~~Rat™~~not ~~brand~~pose ~~premium~~the ~~diets.~~potential health problems associated with clay products.

5Markets

WeA ~~also~~majority ~~manufacture~~of ~~loose~~our ~~particulate,~~animal ~~pillows,~~care ~~socks~~products are sold in the pet specialty channel, ~~booms~~through wholesale distributors throughout North America, ~~pads~~and to two major pet supply retailers and ~~spill~~one ~~kits~~major general merchandise retailer, which are our three largest customers as described below under “Risk Factors.” Competition for ~~use~~the insmall ~~spill~~animal ~~clean~~bedding upbusiness comes primarily from regional suppliers of wood shavings and ~~plant~~major ~~maintenance~~small inanimal food/bird seed manufacturers who sell wood shavings and corncob bedding as product line extensions. These food manufacturers offer distributors and retailers the ~~manufacturing~~advantage of a single source supply, ~~repair~~cross marketing opportunities between food and ~~operations~~bedding ~~(MRO)~~and, ~~marketplace~~in some cases, strong brand recognition within the pet specialty channel. While ~~These~~we ~~products~~believe ~~are~~no ~~either~~other ~~general~~company ~~purpose~~currently inhas ~~nature~~a orproduct ~~specifically~~that ~~designed~~performs ~~for~~as ~~oil-based~~well ~~liquids~~as our proprietary flagship product, the success of our product has led to the entry of additional competitors in the cellulose bedding category.

Absorbent W™ is a cellulose absorbent specially processed to absorb and retain hydrocarbons like diesel fuel, hydraulic fluid or lubricating oil, while at the same time repelling water. We believe that Absorbent W absorbs more, is better able to retain what it absorbs and is less costly from production to disposal than the polypropylene products with which it primarily competes.3

~~Absorbent~~The ~~GP™~~consolidation isof athe ~~cellulose~~pet ~~universal~~retail ~~absorbent~~business ~~used~~that began over 10 years ago has expanded in recent years to ~~absorb~~the ~~all~~distributor ~~types~~level. This means that there are fewer, but larger, customers for our products. We believe that the logistical requirements of ~~liquids~~serving ~~including~~these ~~oil~~larger customers are a barrier to entry into the market for many smaller companies. However, ~~water~~the larger customers frequently seek supply partners with more than one product line in order to reduce supply chain costs and ~~chemicals~~to be able to deal with fewer suppliers. ItManufacturers isare ~~not~~being ~~compatible~~consolidated as well, primarily by private equity firms and two public companies. We will continue to expand our product offerings in order to take advantage of our existing relationships with ~~aggressive~~major ~~caustics~~customers and ~~acids~~the ~~but~~wholesale ~~has~~distributor network we have established. We estimate that we have product in 80% of the pet specialty stores in North America and enjoy a ~~wide~~market ~~range~~share of ~~general~~approximately ~~purpose~~30% ~~uses~~in the pet specialty channel for our flagship CareFRESH® brand.

~~Spill~~The general merchandise channel, most notably Wal-~~Sorb™~~Mart, Kmart and ~~Spill-Dri™~~Target, ~~are~~accounted ~~two~~for ~~different~~a ~~types~~significant portion of ~~floor~~the ~~sweep~~wood ~~made~~shavings ~~from~~sold ~~waste~~for ~~paper~~pet ~~fiber~~bedding in the United States. Since ~~They~~general ~~are~~merchandise ~~designed~~retailers ~~for~~typically offer most pet products as a ~~variety~~convenience ofitem, ~~floor~~their ~~surfaces~~product ~~and~~offering ~~applications~~is generally not as broad as in the pet specialty channel, and wethe ~~believe~~product ~~that~~duplication ~~both~~found in the pet specialty channel is generally lacking. As a result, niche products such as our pet bedding are ~~more~~generally ~~absorbent~~only ~~and~~found ~~lighter~~at instores ~~weight~~with ~~than~~larger ~~traditional~~pet ~~clay~~departments. Additionally, ~~floor~~since ~~sweeps~~the three largest general merchandise retailers, namely Wal-Mart, Kmart and doTarget, ~~not~~account ~~pose~~for ~~the~~approximately ~~potential~~70% ~~health~~of ~~problems~~the ~~associated~~dollar ~~with~~volume ~~clay~~in this channel, products must be successful in one or more of these three major retailers in order to achieve significant market share.

~~Markets~~Our industrial cleanup sorbent products are currently marketed under the Absorbent GP™, Absorbent W™, SpillSorb™, and Spill-Dri™ trade names in North America, Europe and Pacific Rim countries. A significant portion of these industrial cleanup products is sold overseas through our international distributor channel. Our absorbents are sold in Canada through a master distributor agreement with ITW Devcon Plexus.

AOur ~~majority~~industrial ofcleanup ~~our~~sorbent ~~animal care~~ products ~~are~~compete ~~sold~~against inclay-based ~~the~~floor ~~pet~~sweep ~~specialty~~materials ~~channel, through wholesale distributors throughout North America,~~ and topolypropylene ~~two~~materials ~~major~~in ~~pet supply retailers and one major general merchandise retailer, which are our three largest customers as described below under~~ “~~Risk Factors.~~oil-only” ~~Competition for the small animal bedding business comes primarily from regional suppliers of wood shavings~~ and ~~major~~marine-based ~~small animal food/bird seed manufacturers who sell wood shavings and corncob bedding as product line extensions~~applications. The ~~These~~primary ~~food~~market ~~manufacturers~~for ~~offer~~our ~~distributors~~products ~~and~~is ~~retailers~~in ~~the advantage of a single source supply~~factories, ~~cross~~warehouses ~~marketing opportunities between food~~ and ~~bedding~~maintenance ~~and, in some cases, strong brand recognition within the pet specialty channel~~facilities. Additional ~~While~~markets weinclude ~~believe~~marine nooil ~~other~~spill ~~company~~response ~~currently~~and ~~has~~oil/water afiltration ~~product that performs as well as our proprietary flagship product~~applications, ~~the~~ranging ~~success~~from ofstorm ~~our~~drain ~~product~~inserts ~~has led~~ to ~~the~~marine ~~entry~~bilge ~~of additional competitors in the cellulose bedding category~~cleanout.

~~The~~Clay ~~consolidation~~absorbents ofare ~~the~~sold ~~pet~~as ~~retail~~commodities ~~business~~on ~~that~~a ~~began~~price ~~over~~basis. Competitors 10who ~~years~~offer ~~ago~~clay-based ~~has~~floor ~~expanded~~sweep inmaterials ~~recent~~are ~~years~~generally toregional ~~the~~mines ~~distributor~~and ~~level~~re-packagers. Other ~~This~~organic ~~means~~products ~~that~~such ~~there~~as ~~are~~corncobs ~~fewer,~~also ~~but~~compete ~~larger,~~in ~~customers~~this ~~for our products~~category. We believe that ~~the~~our ~~logistical~~products ~~requirements of serving these larger customers~~ are asuperior ~~barrier~~in toabsorption ~~entry~~rate ~~into~~and ~~the market for many smaller companies. However~~capacity, ~~the~~are ~~larger~~lighter ~~customers frequently seek supply partners with more than one product line~~ in ~~order~~weight, toand ~~reduce~~have ~~supply~~a ~~chain~~lower ~~costs~~environmental and tofinancial becost ~~able~~from production to ~~deal~~disposal ~~with~~than ~~fewer~~mineral-based ~~suppliers~~absorbents. ~~Manufacturers are being consolidated as well~~ However, ~~primarily~~due ~~by private equity firms and two public companies. We will continue~~ to ~~expand~~the ~~our~~price ~~product~~sensitivity ~~offerings~~ in ~~order~~the toMRO ~~take~~marketplace ~~advantage~~and ofless ~~our~~stringent ~~existing~~regulations ~~relationships with major customers~~ and ~~the~~enforcement ~~wholesale~~on ~~distributor~~“low ~~network~~level wewaste ~~have~~generators,” ~~established.~~our Weindustrial ~~estimate~~cleanup ~~that~~sorbent weproducts have ~~product~~limited insales, ~~80%~~brand ofrecognition ~~the pet specialty stores in North America~~ and ~~enjoy a~~ market share ~~of approximately 30% in the pet specialty channel for our flagship CareFRESH® brand~~.

~~The~~Polypropylene ~~general~~is ~~merchandise~~used ~~channel,~~in ~~most~~a ~~notably~~variety ~~Wal~~of marine spill and MRO-~~Mart~~based applications. After years of strong downward price pressure, ~~Kmart~~the ~~and~~polypropylene ~~Target~~industry has consolidated, ~~accounted~~resulting ~~for~~in ~~approximately~~fewer ~~one-half~~manufacturers ofand ~~the~~converters. Polypropylene ~~wood~~has ~~shavings~~also ~~sold~~experienced ~~for~~strong ~~pet~~upward ~~bedding~~price inpressure over the ~~United~~past ~~States~~several ~~during~~years ~~2006,~~due to the ~~most~~price ~~recent~~of ~~date~~crude ~~for~~oil. Together, ~~which~~ this ~~information~~has isresulted ~~available.~~in ~~Since~~a general ~~merchandise~~increase ~~retailers~~in ~~typically~~the ~~offer~~price ~~most~~of ~~pet~~polypropylene products, aswhich ais ~~convenience~~favorable ~~item~~to our higher priced, ~~their~~cellulose ~~product~~pads. However, ~~offering~~we isbelieve ~~generally~~that ~~not~~established asdistribution ~~broad~~networks, asa reduction in the ~~pet~~volume ~~specialty~~of ~~channel,~~sorbents used and the ~~product~~significant ~~duplication~~price ~~found~~differential that still exists in ~~the~~this ~~pet~~market ~~specialty~~all ~~channel~~limit isour ~~generally~~sales ~~lacking~~results at present. We Ashave aexperienced ~~result,~~the ~~niche~~most ~~products~~success ~~such~~in asselling ~~our~~Absorbent ~~pet~~W™ ~~bedding~~for ~~are~~cleaning ~~generally~~up ~~only~~hydrocarbons ~~found~~in atthe ~~stores~~presence ~~with~~of ~~larger~~water ~~pet~~and ~~departments~~for filtering hydrocarbons from contaminated liquids. Absorbent ~~Additionally,~~W™ ~~since~~is ~~the~~a ~~three~~low-cost ~~largest~~way ~~general~~to ~~merchandise~~enhance ~~retailers,~~the ~~namely~~performance ~~Wal-Mart,~~of ~~Kmart~~costly mechanical and ~~Target,~~carbon ~~account~~based ~~for~~filtration ~~approximately~~system. We ~~70%~~believe ofthat ~~the~~more ~~dollar~~stringent ~~volume~~surface inrunoff ~~this channel~~regulations, ~~products~~if ~~must~~and bewhen ~~successful~~enacted, inmay ~~one~~eventually oropen ~~more~~up ofnew ~~these~~opportunities ~~three~~for ~~major~~Absorbent ~~retailers~~W™ in ~~order~~storm towater ~~achieve~~runoff ~~significant market share~~applications.

~~Our industrial cleanup sorbent products are currently marketed under the Absorbent GP™~~Industry, ~~Absorbent~~Market W™Trends, ~~SpillSorb™,~~ and Spill-Dri™ trade names in North America, Europe and Pacific Rim countries. A significant portion of these industrial cleanup products is sold overseas through our international distributor channel. Our absorbents are sold in Canada through a master distributor agreement with ITW Devcon Plexus. Competition

~~Our~~Based ~~industrial~~on ~~cleanup~~information ~~sorbent~~in ~~products~~trade ~~compete~~publications, ~~against~~feedback ~~clay-based~~received ~~floor~~during ~~sweep~~our ~~materials~~participation in trade and ~~polypropylene~~professional ~~materials~~associations inand ~~“oil-only”~~communications with our customers and ~~marine-based~~suppliers, ~~applications.~~we ~~The~~believe ~~primary~~that ~~market~~over ~~for~~the ~~our~~past ~~products~~several isyears trends have resulted in ~~factories~~changes in the markets that we serve. As discussed below, ~~warehouses~~our products and ~~maintenance~~distribution ~~facilities~~methods are designed to respond to changes in demand resulting from these trends. ~~Additional~~We ~~markets~~do ~~include~~not ~~marine~~yet ~~oil~~have ~~spill~~enough ~~response~~information ~~and~~to ~~oil/water~~determine ~~filtration~~how ~~applications,~~the ~~ranging~~ongoing ~~from~~economic ~~storm~~downturn ~~drain~~will ~~inserts~~impact trends discussed below or how it may affect demand for our products or our ability to ~~marine~~maintain ~~bilge~~our ~~cleanout~~current pricing strategy.

~~Clay~~Our ~~absorbents~~primary ~~are~~small ~~sold~~animal ascare ~~commodities~~product, onCareFRESH®, awhich ~~price~~is ~~basis.~~made ~~Competitors~~from ~~who~~cellulose ~~offer~~fibers, has ~~clay-based~~become ~~floor~~a ~~sweep~~product ~~materials~~leader ~~are~~in ~~generally~~its ~~regional~~market ~~mines~~segment. We ~~and~~believe ~~re-packagers.~~that, ~~Other~~until ~~organic~~recently, ~~products~~our ~~such~~product’s assuccess ~~corncobs~~in ~~also~~the ~~compete~~market insegment ~~this~~caused ~~category.~~a Wechange ~~believe~~in ~~that~~consumer ~~our~~buying ~~products~~habits ~~are~~away ~~superior~~from inthe ~~absorption~~traditional ~~rate~~wood ~~and~~shavings ~~capacity,~~products ~~are~~and ~~lighter~~into incellulose ~~weight~~fiber products. However, ~~and~~the current economic uncertainties have aat ~~lower~~least ~~environmental~~temporarily ~~and~~reversed ~~financial~~this ~~cost~~trend. As ~~from~~a ~~production~~result, towe ~~disposal~~believe ~~than~~that ~~mineral~~some price-~~based~~sensitive ~~absorbents.~~consumers ~~However,~~have ~~due~~made the financial decision to ~~the~~purchase ~~price~~competing ~~sensitivity~~products inthat ~~the~~do ~~MRO~~not ~~marketplace~~perform ~~and~~as well as CareFRESH® but are less ~~stringent~~expensive ~~regulations~~than ~~and~~our ~~enforcement~~products. We onanticipate ~~“low~~that ~~level~~as ~~waste~~the ~~generators,”~~economy ~~our~~improves ~~industrial~~this ~~cleanup~~recent ~~sorbent~~trend ~~products~~will ~~have~~once ~~limited~~again ~~sales~~reverse. However, ~~brand~~we ~~recognition~~are ~~and~~currently ~~market~~in ~~share~~the process of developing new products to address the price-sensitive consumer.

~~Polypropylene~~In isaddition ~~used~~to inchanging atheir ~~variety~~product ofpreferences, ~~marine~~consumers ~~spill~~have ~~and~~also ~~MRO-based~~changed ~~applications.~~their ~~After~~shopping ~~years~~habits. Consumers oftraditionally ~~strong~~purchased ~~downward~~a ~~price~~majority ~~pressure,~~of ~~the~~their ~~polypropylene~~small ~~industry~~animal ~~has~~bedding ~~consolidated,~~products ~~resulting~~at inpet ~~fewer~~specialty ~~manufacturers and converters~~stores. In ~~Polypropylene~~recent ~~has~~years, ~~also experienced strong upward price pressure over~~ the ~~past~~consumer’s ~~several~~desire ~~years~~for ~~due to~~ the ~~price~~convenience of ~~crude~~“one-stop ~~oil.~~shopping” ~~Together, this~~ has resulted in a ~~general~~shift ~~increase in the price~~ of ~~polypropylene~~these ~~products,~~buyers ~~which is favorable~~ to ~~our~~the ~~higher~~mass ~~priced,~~merchandise ~~cellulose~~and ~~pads~~grocery channels. This ~~However,~~shift wehas ~~believe~~reduced ~~that established distribution networks, a reduction in~~ the ~~volume~~percentage of ~~sorbents~~bedding ~~used~~ and ~~the~~animal ~~significant~~supply ~~price~~products ~~differential~~sold ~~that still exists~~ in ~~this~~the ~~market~~pet ~~all~~specialty ~~limit our sales results at present~~market. We have ~~experienced~~attempted ~~the~~to ~~most~~address ~~success~~this intrend, ~~selling~~while ~~Absorbent~~protecting ~~W™ for cleaning up hydrocarbons in~~ the ~~presence~~superior ofbrand ~~water~~identity ~~and~~associated ~~for~~with ~~filtering~~our ~~hydrocarbons~~core ~~from~~business, ~~contaminated~~by ~~liquids.~~focusing ~~Absorbent~~sales W™efforts isin ~~a low-cost way to enhance~~ the ~~performance~~mass ofmerchandise ~~costly mechanical~~ and ~~carbon~~grocery ~~based~~channels ~~filtration~~with ~~system.~~brands Wespecific ~~believe~~to ~~that~~those ~~more stringent surface runoff regulations, if and when enacted, may eventually open up new opportunities for Absorbent W™ in storm water runoff applications~~channels.

~~Industry~~We believe that the fastest growing segment of the cat litter market is the natural litter segment, ~~Market~~though ~~Trends~~this segment remains less than 10% of the total cat litter market. This growth comes from increased consumer concern about how some traditional cat litter products affect the health of their pets, real and ~~Competition~~perceived performance benefits from the natural products, and the transference of consumer emotional buying motivations from human products to pet products. However, even with this growing level of concern, product performance is still a key factor with most consumers. We believe our animal care products address many of these factors.

~~Based~~Environmental onregulation ~~information~~and ineconomics ~~trade~~have ~~publications,~~reduced ~~feedback~~the ~~received~~volume ~~during~~of ~~our~~leaks, ~~participation~~drips ~~in trade~~ and ~~professional~~spills ~~associations~~in ~~and~~manufacturing ~~communications~~settings ~~with~~over ~~our~~the ~~customers~~past ~~and~~decade. As ~~suppliers~~a result, wefewer ~~believe~~industrial ~~that~~absorbent ~~over~~products ~~the~~such ~~past~~as ~~five~~socks, ~~years~~pads ~~trends~~and ~~have~~pillows ~~resulted~~are inused ~~changes~~as ina ~~the~~part ~~markets~~of ~~that~~routine ~~we serve~~maintenance. At Asthe ~~discussed~~same ~~below~~time, ~~our~~the ~~products~~cost ~~and~~of ~~distribution~~non-compliance ~~methods~~has ~~are~~resulted ~~designed~~in tomore ~~respond~~sophisticated tosolutions ~~changes~~ in ~~demand~~prevention, ~~resulting~~control ~~from~~and ~~these~~remediation ~~trends.~~of Weliquid dowaste. Supply ~~not~~chain ~~yet~~logistics have ~~enough~~become ~~information~~a tomore ~~determine~~important ~~how~~part of the ~~ongoing~~sales ~~economic~~and ~~downturn~~distribution ~~will~~model ~~impact~~for ~~trends~~large ~~discussed~~volume ~~below~~users orwhile ~~how~~low itvolume ~~may~~waste ~~affect~~generators ~~demand~~continue ~~for~~to ~~our~~be ~~products~~serviced orvia ~~our~~a ~~ability~~variety toof ~~maintain~~methods ~~our~~and ~~current pricing strategy~~channels.

~~Our~~We ~~primary~~face ~~small~~a ~~animal~~variety ~~care~~of ~~product,~~competition ~~CareFRESH®~~in ,all of the markets in which iswe ~~made~~participate. This competition ranges from ~~cellulose~~subsidiaries ~~fibers,~~of ~~has~~large ~~become~~national aor ~~product~~international ~~leader~~corporations into ~~its~~small ~~market~~regional ~~segment~~manufacturers. While Weprice ~~believe~~is ~~this~~an ~~has~~important ~~caused~~factor, awe ~~change~~also incompete ~~consumer~~on ~~buying~~the ~~habits~~basis ~~away~~of ~~from~~quality, ~~the~~breadth ~~traditional~~of ~~wood~~product ~~shavings~~line, ~~products~~service, ~~and~~field ~~into~~support ~~cellulose~~and ~~fiber~~product ~~products~~innovation. Markets Astend to differ by region and as a result, ~~consumers~~within ineach ~~the~~region ~~pet~~we ~~specialty~~compete ~~industry~~with ~~are~~companies ~~more~~of ~~willing~~varying tosizes, ~~try~~several ~~cellulose~~of which also distribute their products, ~~mainly~~nationally. Our ~~based~~competitors oninclude ~~the~~a ~~performance~~variety ~~characteristics~~of asmanufacturers ~~compared~~that tohave operations in the ~~performance~~United States and Canada. Most of ~~the~~our ~~traditional~~competitors ~~wood~~do ~~shavings~~not compete with all of our product lines and many have products with which we do not compete.

InRaw addition to change in product preferences, consumers have also changed their shopping habits. Consumers traditionally purchased a majority of their small animal bedding products at pet specialty stores. In recent years, the consumer’s desire for the convenience of “one-stop shopping” has resulted in a shift of these buyers to the mass merchandise and grocery channels. This shift has reduced the percentage of bedding and animal supply products sold in the pet specialty market. We have attempted to address this trend, while protecting the superior brand identity associated with our core business, by focusing sales efforts in the mass merchandise and grocery channels with brands specific to those channels. Materials

WeOur ~~believe~~animal ~~that~~care ~~the~~bedding, ~~fastest~~pet ~~growing~~litter ~~segment~~and ofindustrial ~~the~~cleanup ~~cat~~products ~~litter~~are ~~market~~made isfrom ~~the~~raw ~~natural~~materials ~~litter~~that ~~segment,~~are ~~though~~available ~~this~~from ~~segment~~a ~~remains~~number ~~less~~of ~~than~~suppliers. The ~~10%~~cost of ~~the~~these ~~total~~raw ~~cat~~materials ~~litter~~varies ~~market~~widely based on the source and quality. Our ~~This~~products ~~growth~~are ~~comes~~manufactured ~~from~~in ~~increased~~our ~~consumer~~facilities ~~concern~~located ~~about~~in ~~how~~Ferndale, ~~some~~Washington ~~traditional~~and ~~cat~~Jesup, ~~litter~~Georgia. The ~~products~~main ~~affect~~component ~~the~~for ~~health~~our ofproducts ~~their~~is ~~pets,~~a ~~real~~cellulose fiber by-product. Pulp and ~~perceived~~paper ~~performance~~mills ~~benefits~~in ~~from~~British Columbia, Canada, the ~~natural~~State ~~products~~of Washington, the State of Georgia, and the ~~transference~~State of ~~consumer~~Florida ~~emotional~~provide ~~buying~~us ~~motivations~~with ~~from~~this ~~human~~raw ~~products~~material. We todo ~~pet~~not ~~products.~~have ~~However~~contracts for supply of all of our needed primary raw material; however, ~~even~~we ~~with~~believe ~~this~~that ~~growing~~our ~~level~~production rates can be fully supported by combinations of ~~concern~~fiber by-products from various pulp and paper mills in all of our locations, ~~product~~although ~~performance~~the cost of raw fiber stock for our east coast operations is ~~still~~currently ahigher ~~key~~than ~~factor~~in ~~with~~Washington ~~most~~State, ~~consumers~~largely due to the product mix required. We believe that this diversity of raw material sources improves our ~~animal~~ability ~~care~~to ~~products~~meet ~~address~~our ~~many~~fiber needs and improves the quality of ~~these~~our ~~factors~~products.

~~Environmental~~Both ~~regulation~~of ~~and~~our ~~economics~~production facilities have ~~reduced~~installed ~~the~~drying ~~volume~~systems ofthat ~~leaks,~~can ~~drips~~operate ~~and~~with ~~spills~~either innatural ~~manufacturing~~gas ~~settings~~or ~~over~~sawdust ~~the~~as ~~past decade. As~~ a ~~result,~~combustion ~~fewer~~source ~~industrial~~for ~~absorbent~~their ~~products~~burners. Neither ~~such~~operates asfull ~~socks,~~time ~~pads~~on ~~and~~either ~~pillows~~source ~~are used as a part~~ of ~~routine maintenance~~energy. AtWe ~~the~~believe ~~same~~there ~~time,~~will ~~the~~be ~~cost~~an ofadequate ~~non-compliance~~supply ~~has~~of ~~resulted~~these inmaterials ~~more~~available ~~sophisticated~~to ~~solutions~~meet inour ~~prevention,~~fuel ~~control~~needs ~~and~~for ~~remediation~~the offoreseeable ~~liquid waste~~future. ~~Supply~~However, ~~chain~~as ~~logistics~~described ~~have~~below, ~~become~~we ahave ~~more~~in ~~important part of~~ the ~~sales~~past and ~~distribution~~may ~~model~~again ~~for~~be ~~large~~subject ~~volume users while low volume waste generators continue~~ to beincreased ~~serviced~~prices ~~via~~for athese ~~variety of methods and channels~~materials.

WeOther ~~face~~raw amaterials ~~variety~~used ~~of competition~~ in ~~all~~the production of ~~the~~our ~~markets~~products ininclude ~~which~~chemical webinders ~~participate.~~which ~~This~~are ~~competition~~readily ~~ranges~~available from ~~subsidiaries~~several ~~of large national or international corporations to small regional manufacturers~~suppliers. We ~~While~~believe ~~price~~that isthe anloss ~~important~~of ~~factor,~~one weor ~~also~~two ~~compete on the basis~~ of ~~quality,~~our ~~breadth~~suppliers ofwould ~~product~~not ~~line,~~have ~~service,~~a ~~field~~significant ~~support~~effect ~~and~~on ~~product~~our ~~innovation~~operations. The ~~Markets~~loss ~~tend~~of toany ~~differ~~supplier bymay ~~region~~cause ~~and~~an asincrease ain ~~result~~freight costs, ~~within~~the ~~each~~amount ~~region we compete with companies~~ of ~~varying~~which ~~sizes,~~would ~~several~~depend ofon ~~which~~the ~~also~~distance ~~distribute~~to ~~their~~the ~~products~~alternative ~~nationally~~source. Our ~~competitors~~operations ~~include~~could abe ~~variety~~adversely ofaffected ~~manufacturers~~if ~~that~~a ~~have~~general ~~operations~~shortage inof ~~the~~raw ~~United~~material ~~States~~were to occur and ~~Canada~~persist. To ~~Most~~date, ofwe ~~our~~have ~~competitors do~~ not ~~compete~~experienced ~~with~~any ~~all~~serious ofproduction ~~our~~delays ~~product~~because ~~lines~~raw ~~and~~materials ~~many~~were ~~have products with which we do not compete~~unavailable.

~~Raw~~Marketing ~~Materials~~and Distribution

~~Our animal care bedding~~Manufacturing, ~~pet~~marketing ~~litter~~ and ~~industrial~~distribution ~~cleanup~~activities ~~products~~ are ~~made~~carried ~~from~~out raw materials that are available from a number of suppliers. The cost of these raw materials varies widely based on the source and quality. Our products are manufactured in our facilities located in Ferndale, Washington and Jesup, Georgia. The main component for our products is a cellulose fiber by~~-product.~~ ~~Pulp~~Absorption and ~~paper~~its ~~mills~~wholesale ~~in British Columbia, Canada, the State of Washington, the State of Georgia, and the State of Florida provide us with this raw material~~distributors. WeDuring dofiscal ~~not~~year ~~have~~2010 ~~contracts for supply of all of our needed primary raw material; however,~~ we ~~believe~~increased ~~that~~ our ~~production~~investment ~~rates~~in ~~can~~sales ~~be fully supported by combinations of fiber by-products from various pulp~~ and ~~paper~~marketing ~~mills~~ in ~~all~~an ofeffort ~~our~~to ~~locations,~~increase ~~although~~distribution ~~the cost of raw fiber stock for our east coast operations is currently higher than in Washington State~~efficiencies, ~~largely~~increase ~~due~~market toshare ~~the product mix required. We believe that this diversity of raw material sources improves our ability to meet our fiber needs~~ and ~~improves~~launch ~~the~~new ~~quality of our~~ products.

~~Both~~Our ofproducts ~~our~~are ~~production~~sold ~~facilities~~through ~~have~~multiple ~~installed~~wholesale ~~drying~~distributions ~~systems~~and ~~that~~direct ~~can~~buying ~~operate~~retailers ~~with~~throughout ~~either~~North ~~natural gas or sawdust as a combustion source for their burners~~America. ~~Neither~~In ~~operates~~addition ~~full~~our ~~time~~products onare ~~either~~sold ~~source~~in ofmarkets ~~energy.~~in WeCanada, ~~believe~~Great ~~there~~Britain, ~~will~~Belgium, beAustralia, anSingapore, ~~adequate~~Japan, ~~supply~~Taiwan, ofSouth ~~these~~Korea, ~~materials~~Greece, ~~available to meet our fuel needs for the foreseeable future. However~~France, ~~as described below~~Denmark, weIsrael ~~have in the past~~ and ~~may again be subject to increased prices for these materials~~China.

~~Other~~Research raw materials used in the production of our products include chemical binders which are readily available from several suppliers. We believe that the loss of one or two of our suppliers would not have a significant effect on our operations. The loss of any supplier may cause an increase in freight costs, the amount of which would depend on the distance to the alternative source. Our operations could be adversely affected if a general shortage of raw material were to occur and ~~persist. To date, we have not experienced any serious production delays because raw materials were unavailable.~~Development

~~Marketing~~Current research and ~~Distribution~~development activities include refining existing products, as well as developing new pet products and related manufacturing processes for both the animal care industry and industrial cleanup markets. Our research and development department also analyzes and tests the competitive products to determine new applications for our existing products. Research and development expenses were $5,000 during both fiscal years 2010 and 2009.

~~Manufacturing,~~Intellectual marketing and distribution activities are carried out by Absorption and its wholesale distributors. During fiscal year 2009 we increased our investment in sales and marketing in an effort to increase distribution efficiencies, increase market share and launch new products, such as CareFRESH Confetti™ and Advanced Odor Control™.Property

~~Our~~In ~~products~~general, ~~are~~we ~~sold~~attempt to protect our intellectual property rights through ~~multiple~~patent, ~~wholesale~~copyright, ~~distributions~~trademark and ~~direct~~trade ~~buying~~secret ~~retailers~~laws ~~throughout~~and ~~North~~contractual ~~America~~arrangements. Absorption Inhas ~~addition~~been ~~our~~issued ~~products~~three ~~are~~U.S. ~~sold~~patents, inof ~~markets~~which inone ~~Canada,~~remains ~~Great~~current ~~Britain,~~and ~~Belgium,~~two ~~Australia,~~have ~~Singapore~~expired, ~~Japan,~~and ~~Taiwan,~~has ~~South~~one ~~Korea,~~pending ~~Greece,~~patent ~~France~~relating to various degradable particulate absorbent materials and our manufacturing process. However, ~~Denmark~~there can be no assurance that our efforts will be effective to prevent misappropriation of our technology, ~~Israel~~or to prevent the development and ~~China~~design by others of products or technologies similar to or competitive with those developed by us. Moreover, upon expiration of our issued patent, our competitors will have the ability to develop products that are currently protected by this patent.

~~Research~~Number ~~and~~of ~~Development~~Employees

~~Current~~As ~~research~~of ~~and~~March ~~development~~31, ~~activities~~2010, ~~include~~we ~~refining~~had ~~existing~~117 ~~products~~employees, asof ~~well~~which as112 ~~developing~~were ~~new~~full-time ~~pet~~employees ~~products~~ and ~~related~~none ~~manufacturing~~of ~~processes~~which ~~for~~were ~~both~~represented ~~the~~by ~~animal~~labor ~~care~~unions. In ~~industry~~addition, ~~and~~we ~~industrial~~employ ~~cleanup~~a ~~markets.~~small ~~Our~~number ~~research~~of ~~and~~temporary ~~development~~employees ~~department also analyzes~~ and ~~tests~~contractors ~~the competitive products~~ to ~~determine~~provide ~~new~~management, ~~applications for our existing products. Research and development expenses were $5~~administration,~~000~~ ~~and $10~~manufacturing,~~000~~ ~~during fiscal years 2009~~ and ~~2008,~~marketing ~~respectively~~services.

~~Intellectual Property~~6

InProduct general, we attempt to protect our intellectual property rights through patent, copyright, trademark and trade secret laws and contractual arrangements. However, there can be no assurance that our efforts will be effective to prevent misappropriation of our technology, or to prevent the development and design by others of products or technologies similar to or competitive with those developed by us. Moreover, upon expiration of our issued patent, our competitors will have the ability to develop products that are currently protected by these patents.Liability

~~Absorption~~We ~~has~~design ~~been~~and ~~issued~~manufacture ~~three~~most Uof our standard products and expect that we will continue to do so in the foreseeable future.S. ~~patents~~As a result, ofwe ~~which~~believe ~~one~~that ~~remains~~we ~~current~~are ~~and~~able ~~two~~to ~~have~~manage ~~expired,~~the design process and ~~has~~help ~~one~~minimize ~~pending~~product ~~patent~~liability ~~relating~~risks. toIn ~~various~~addition ~~degradable~~we ~~particulate~~employ ~~absorbent~~engineers ~~materials~~and designers to design and test our ~~manufacturing~~products ~~process.~~under development and maintain a quality control system in an ongoing effort to decrease defects in our products.

~~Number~~Environmental ofand ~~Employees~~Other Governmental Regulations

AsWe ofare ~~March 2009~~subject to environmental laws and regulations governing emissions into the air; discharges into the water; and generation, wehandling, ~~had~~storage, ~~135~~transportation, ~~employees~~treatment, and disposal of ~~which~~waste ~~130~~materials. We ~~were~~are ~~full-time~~also ~~employees~~subject to other federal and ~~none~~state oflaws ~~which~~and ~~were~~regulations ~~represented~~regarding byhealth ~~labor~~and ~~unions.~~safety matters. In addition, we ~~employ~~are asubject ~~small~~to ~~number~~regulations governing our food products, including those promulgated by the U.S. Department of ~~temporary~~Agriculture. We ~~employees~~believe that we have obtained all material licenses and ~~contractors~~permits torequired ~~provide~~by ~~management~~environmental, ~~administration~~health, ~~manufacturing~~and safety laws and regulations in connection with our operations and that our policies and procedures comply in all material respects with existing environmental, health and ~~marketing~~safety ~~services~~laws and regulations. Non-compliance with such standards could result in the closure of our particulate manufacturing operations, expenditures for necessary corrective actions or the possible imposition of fines.

~~Product~~Investor ~~Liability~~Information

WeAll ~~design~~our ~~and~~filings ~~manufacture~~with ~~most~~the ofSEC, including our ~~standard~~annual ~~products~~reports ~~and~~on ~~expect~~Form ~~that~~10-K, wequarterly ~~will~~reports ~~continue~~on toForm do10-Q, socurrent inreports ~~the~~on ~~foreseeable~~form ~~future.~~8-K Asand aamendments ~~result,~~to wethose ~~believe~~reports, ~~that~~filed weor ~~are~~furnished ~~able~~pursuant to ~~manage~~Section 13(a) or 15(d) of the ~~design~~Exchange ~~process~~Act, ~~and~~are ~~help~~available ~~minimize~~free ~~product~~of ~~liability~~charge ~~risks~~on our internet website, www.internationalabsorbents.com. Reports Inare ~~addition~~posted weas ~~employ~~soon ~~engineers~~as ~~and~~reasonably ~~designers~~practicable toafter ~~design~~such ~~and~~material ~~test~~is ~~our~~filed ~~products~~with, ~~under~~or ~~development~~furnished ~~and~~to, ~~maintain~~the aSEC. ~~quality~~They ~~control~~can ~~system~~be infound anthrough ~~ongoing~~the ~~effort~~investor torelations ~~decrease~~section ~~defects~~under inthe “SEC Filings” tab on our ~~products~~website.

~~Environmental~~ITEM ~~and~~1A. RISK ~~Other Governmental Regulations~~FACTORS

WeThe ~~are~~following ~~subject~~risk tofactors ~~environmental laws~~ and ~~regulations~~other ~~governing~~information ~~emissions~~included ~~into~~in ~~the~~this ~~air;~~Annual ~~discharges~~Report ~~into~~should ~~the~~be ~~water;~~carefully ~~and~~considered. The ~~generation,~~risks ~~handling, storage, transportation, treatment,~~ and ~~disposal~~uncertainties ofdescribed ~~waste~~below ~~materials. We~~ are ~~also~~not ~~subject~~the toonly ~~other~~ones ~~federal~~we ~~and~~face. Additional ~~state~~risks ~~laws~~ and ~~regulations~~uncertainties ~~regarding~~not ~~health~~presently ~~and~~known ~~safety~~to ~~matters.~~us Inor ~~addition,~~that we ~~are~~currently ~~subject~~deem toimmaterial ~~regulations~~also ~~governing~~may impair our ~~food~~business ~~products, including those promulgated by the U~~operations.S. If ~~Department~~any of ~~Agriculture.~~the Wefollowing ~~believe~~risks ~~that we have obtained all material licenses and permits required by environmental~~occur, ~~health, and safety laws and regulations in connection with~~ our ~~operations~~business, ~~and~~financial ~~that our policies and procedures comply in all material respects with existing environmental~~condition, ~~health~~operating ~~and~~results ~~safety laws~~ and ~~regulations.~~cash ~~Non-compliance~~flows ~~with such standards~~ could ~~result~~be inmaterially ~~the~~adversely ~~closure of our particulate manufacturing operations, expenditures for necessary corrective actions or the possible imposition of fines~~affected.

~~Internet~~The ~~Website~~announcement and pendency of our proposed Arrangement and intensifying competition from our competitors have had, and could continue to have, an adverse effect on our business.

~~All~~On ~~our~~December ~~filings~~14, ~~with~~2009, ~~the~~we ~~SEC,~~entered ~~including~~into ~~our~~the ~~annual~~Arrangement ~~reports~~Agreement onwhich ~~Form 10-K~~provides that, ~~quarterly~~upon ~~reports~~the onterms ~~Form 10-Q,~~and ~~current~~subject ~~reports~~to onthe ~~form~~conditions ~~8-K~~set ~~and~~forth ~~amendments~~in tothe ~~those~~Arrangement ~~reports~~Agreement, ~~filed~~Parent, orthrough ~~furnished~~its ~~pursuant~~wholly-owned tosubsidiary, ~~Section 13(a)~~will oracquire ~~15(d)~~all of the ~~Exchange~~outstanding ~~Act,~~common ~~are~~shares ~~available~~of ~~free~~International ofAbsorbents ~~charge~~for on$4.75 ~~our~~per ~~internet~~common ~~website~~share in cash, ~~www.internationalabsorbents.com.~~with ~~Reports~~International ~~are~~Absorbents ~~posted~~continuing as ~~soon~~the assurviving ~~reasonably~~corporation ~~practicable~~(the ~~after~~“Arrangement”). ~~such~~As ~~material~~a isresult ~~filed~~of ~~with~~the Arrangement, orInternational ~~furnished~~Absorbents ~~to,~~will ~~the~~become ~~SEC.~~a ~~They~~wholly-owned ~~can~~subsidiary beof ~~found~~Parent. ~~through~~The consummation of the ~~investor~~Arrangement ~~relations~~is ~~section~~subject ~~under~~to various closing conditions, including obtaining the ~~“SEC~~approval ~~Filings”~~of ~~tab~~the onArrangement by our ~~website~~shareholders and the Supreme Court of British Columbia.

9The announcement and pendency of the Arrangement may be having an adverse effect our business. Revenues and profitability may be adversely affected by customers’ and employee uncertainty and other disruptions as well as intensified competition from our competitors as they attempt to take advantage of the uncertainties. In addition, we have incurred legal and other expenses in connection with the pending Arrangement which has adversely affected profitability. All of these factors are likely to continue to adversely affect our business and have an adverse effect on our financial condition or results of operations.

~~ITEM~~Under 1Athe terms of the Arrangement Agreement, we have agreed to operate our business in the ordinary course consistent with past practice, as well as to refrain from taking certain actions in the conduct of our business without Parent’s prior written consent until the consummation of the Arrangement. Actions that may require Parent’s consent include, but are not limited to, new indebtedness, capital expenditures, loans and investments, manufacturing and customer agreements, acquisitions, issuance of securities, and the repurchase of shares of the Company’s common stock. These restrictions could adversely affect our business and have an adverse affect on our financial condition or results of operations.

~~RISK~~The ~~FACTORS~~failure to complete the proposed Arrangement could adversely affect our business.

~~The~~There ~~following~~is ~~risk~~no ~~factors~~assurance ~~and~~that ~~other~~the ~~information~~proposed ~~included~~Arrangement inor ~~this~~any ~~Annual~~other ~~Report~~transaction ~~should~~will beoccur. ~~carefully~~If ~~considered.~~the ~~The~~proposed ~~risks~~Arrangement ~~and~~or ~~uncertainties~~a ~~described~~similar ~~below~~transaction ~~are~~is not completed, the ~~only~~share ~~ones~~price weof ~~face.~~our ~~Additional~~common ~~risks~~shares ~~and~~may ~~uncertainties~~drop ~~not~~to ~~presently~~the ~~known~~extent tothat usthe orcurrent market price of our common shares reflects an assumption that a transaction will be completed. In addition, upon termination of the Arrangement Agreement under specified circumstances, we ~~currently~~may ~~deem~~be ~~immaterial~~required ~~also~~to pay Parent a termination fee of 4% of the aggregate purchase price. Further, a failed transaction may ~~impair~~result ~~our~~in ~~business~~negative ~~operations~~publicity and a negative impression of us in the investment community. IfFinally, any disruptions to our business resulting from the announcement and pendency of the ~~following~~Arrangement ~~risks~~and ~~occur~~from intensifying competition from our competitors, including any adverse changes in our ~~business~~relationships with our customers, ~~financial~~vendors ~~condition~~and employees, ~~operating~~could ~~results~~continue ~~and~~or ~~cash~~accelerate ~~flows~~in ~~could~~the event of a failed transaction. There can be ~~materially~~no assurance that our business, these relationships or our financial condition will not be adversely affected, as compared to the condition prior to the announcement of the Arrangement, if the Arrangement is not consummated.

We continue to work to build our market presence and are subject to substantial competition that could inhibit our ability to succeed as planned.

We are one of many companies that compete in the animal care market. We continue to build and maintain 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 pet owners, or other companies may surpass us in product innovations. Any failure to continue to gain consumer awareness and market share could decrease our revenues and have an adverse effect on our financial results.

~~A decline in consumer spending or a change in consumer preferences, resulting from the downturn in the global economy or otherwise, could reduce our sales or profitability and harm our business.~~ 8

~~Our~~A ~~sales~~decline ~~depend~~in on consumer spending, ~~which~~or isan ~~influenced~~ongoing bychange ~~factors~~in ~~beyond~~consumer ~~our control~~preferences, ~~including~~resulting ~~general~~from ~~economic conditions,~~ the ~~availability~~current ofeconomic ~~discretionary~~uncertainties ~~income~~or ~~and credit~~otherwise, ~~weather,~~could ~~consumer~~reduce ~~confidence and unemployment levels. The global economy is experiencing an ongoing downturn, which may continue for a significant period of time. As a result, there may be decreased customer traffic at~~ our ~~major customer’s stores, and we may experience declines in~~ sales, ~~pressure~~or toprofitability ~~lower prices~~ and~~/or~~ ~~changes~~harm inour ~~the types of products sold~~business.

~~Any~~Our ~~material~~sales ~~decline~~depend inon ~~the amount of~~ consumer spending ~~could reduce our sales. In addition~~, ~~our~~which ~~premium~~is ~~products~~influenced ~~are~~by ~~generally~~factors ~~priced~~beyond ~~higher than~~ our ~~competitors’ products~~control, ~~and~~including ingeneral an economic ~~downturn~~conditions, ~~consumers~~the ~~may~~availability ~~elect~~of todiscretionary ~~purchase~~income ~~lower-priced~~and ~~products.~~credit, ~~This~~weather, ~~could~~consumer ~~further~~confidence ~~reduce~~and ~~our~~unemployment ~~sales~~levels. The ~~and/or~~global ~~force~~economy usis toexperiencing ~~lower~~ongoing ~~our prices~~uncertainties, which ~~could~~may ~~reduce~~continue ~~profitability,~~for ~~and,~~a insignificant ~~each~~period ~~case,~~of ~~harm our business~~time. As ~~The~~a ~~success~~result, ofthere ~~our~~may ~~business~~be ~~depends~~decreased incustomer ~~part~~traffic onat our ~~ability~~major tocustomer’s ~~identify~~stores, and ~~respond~~we tomay ~~evolving~~experience ~~trends~~declines in ~~demographics~~sales, ~~and~~pressure ~~consumer preferences. Failure~~ to ~~timely~~lower ~~identify~~prices and/or ~~effectively~~changes ~~respond~~in ~~to changing consumer tastes, preferences, spending patterns and animal care needs could adversely affect our relationship with our customers,~~ the ~~demand~~types ~~for~~of ~~our~~ products ~~and services, our market share and our profitability~~sold.

WeAny ~~depend~~material ondecline ain ~~few~~the ~~customers~~amount ~~for~~of consumer spending could reduce our sales. In addition, our premium products are generally priced higher than our competitors’ products, and in an economic downturn, consumers may elect to purchase lower-priced products. In fact, we believe that as a ~~significant~~result ~~portion~~of current economic uncertainties, some price-sensitive consumers have made the financial decision to purchase competing products that do not perform as well as CareFRESH® but are less expensive than our products. We believe this trend has resulted in decreased sales and to the extent such trend continues, it could further reduce our sales and/or force us to lower our prices, which could reduce profitability, and, in each case, harm our business. The success of our business depends in part on our ability to identify and respond to evolving trends in demographics and consumer preferences. Failure to timely identify or effectively respond to changing consumer tastes, preferences, spending patterns and animal care needs could adversely affect our relationship with our customers, the demand for our products and services, our market share and our profitability.

~~Our~~We ~~three~~depend ~~largest~~on ~~customers~~a ~~accounted~~few ~~for approximately 26%, 23% and 10% of our net sales in fiscal year 2009, while the same~~ customers ~~accounted~~ for ~~approximately~~a ~~24%,~~significant ~~24%~~portion ~~and 9%, respectively,~~ of our ~~net sales in fiscal year 2008~~business. ~~We are dependent on these customers to maintain our financial condition and to generate forecasted operating results.~~

~~Any~~Our ~~material~~three ~~deterioration~~largest ~~in the financial condition of one of our major~~ customers ~~could~~accounted ~~have~~for aapproximately ~~material adverse effect on our sales~~26%, ~~profitability~~20% and ~~cash~~12% ~~flow. The loss~~ of, orour ~~reduction~~net sales in, ~~orders~~fiscal ~~from~~year ~~any significant customer~~2010, ~~losses~~while ~~arising~~the ~~from~~same ~~customer~~customers ~~disputes~~accounted ~~regarding~~for ~~shipments,~~approximately ~~fees~~26%, ~~merchandise~~23% ~~condition~~and or10%, ~~related matters~~respectively, orof our ~~inability~~net tosales ~~collect~~in ~~accounts~~fiscal ~~receivable~~year ~~from any major customer could reduce our income from operations and cash flow~~2009. We ~~These risks~~ are ~~heightened~~dependent ason athese ~~result of the ongoing global economic downturn. For example, some~~ customers ~~such~~to asmaintain ~~Petsmart~~our ~~are~~financial ~~projecting~~condition ~~a modest rate of growth~~ and ~~others,~~to ~~such~~generate asforecasted ~~Petcetera~~operating ~~have recently declared bankruptcy,~~ results.

WeAny ~~may~~material bedeterioration ~~adversely~~in ~~affected~~the byfinancial ~~trends~~condition of one of our major customers could have a material adverse effect on our sales, profitability and cash flow. The loss of, or reduction in, ~~the~~orders ~~retail~~from ~~industry~~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. These risks are heightened as a result of the ongoing global economic uncertainties.

~~With~~We ~~the ongoing trend towards retail trade consolidation, we are increasingly dependent upon key retailers whose bargaining strength is growing. As a result, our business~~ may be ~~negatively~~adversely affected by ~~changes~~trends in the ~~policies~~retail ~~of our retailer customers, such as inventory delisting, limitations on access to shelf space, price demands and other conditions~~industry. 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 requirements.

10With the ongoing trend towards retail trade consolidation, we are increasingly dependent upon key retailers whose bargaining strength is growing. As a result, our business has already been adversely impacted, and may continue to be negatively affected by changes in the policies of our retailer customers, such as reduced inventory levels, inventory delisting, 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 requirements.

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

We believe that 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.

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

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

·9

· maintain our relationships with key retailers and distributors;

· develop and grow brands that are attractive to consumers and gain market share;

· continually develop ~~and~~innovative ~~grow~~new ~~brands~~products that ~~are~~appeal ~~attractive~~ to consumers ~~and gain market share~~;

· maintain strict quality standards; and

~~continually~~· ~~develop~~deliver ~~innovative~~products ~~new~~on ~~products~~a ~~that~~reliable ~~appeal~~basis toat ~~consumers;~~competitive prices.

·Competition could cause lower sales volumes, price reductions, reduced profits, losses, or loss of market share. Moreover, as we add new items to our line of products, they will need to compete for limited shelf space at the mass merchandiser and grocery stores with our competitors’ products. Our inability to compete effectively could have a material adverse effect on our business, results of operations and financial condition.

~~maintain~~Increases ~~strict~~in ~~quality~~our ~~standards;~~costs ~~and~~of goods sold, including the costs of raw materials, transportation costs or labor expenses, or inefficiencies at our production facilities 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, the State of Washington, the State of Georgia, and the State of Florida 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 decrease in our margins, which would harm our financial condition. Although we believe we will be able to obtain the required material in the region, any significant shortfall of material would result in a significant increase in the cost of producing our primary products.

~~deliver~~Historically, ~~products~~we have experienced exceedingly high transportation expenses. When these costs are high they have an adverse effect on our financial results. Moreover, we face a ~~reliable~~risk ~~basis~~of atincreased ~~competitive~~labor ~~prices~~costs, including significant increases in worker's compensation insurance premiums and health care benefits, which could further negatively impact our results of operations.

~~Competition~~In ~~could~~addition, ~~cause~~during ~~lower~~fiscal ~~sales~~year ~~volumes~~2010, ~~price~~our ~~reductions,~~production ~~reduced~~facility ~~profits~~in Jesup, ~~losses~~Georgia continued to experience operational inconsistencies, orand ~~loss~~both of ~~market~~our ~~share.~~production ~~Moreover,~~facilities asfaced wechallenges ~~add~~that ~~new~~directly ~~items~~affected totheir ~~our~~production ~~line~~costs. These ofchallenges ~~products~~included increased energy costs, ~~they~~materials ~~will~~cost, ~~need~~ongoing tomaintenance ~~compete~~costs ~~for~~associated ~~limited~~with ~~shelf~~achieving ~~space~~a athigh ~~the~~rate ~~mass~~of ~~merchandiser~~product quality and ~~grocery~~production ~~stores~~efficiencies, ~~with~~and ~~our~~high ~~competitors’~~freight ~~products.~~cost ~~Our~~during ~~inability~~the tolast ~~compete~~half ~~effectively~~of ~~could~~the ~~have~~year. To athe ~~material~~extent ~~adverse~~that ~~effect~~these oninconsistencies and/or challenges continue, our business, results of operations and financial condition could be adversely impacted.

~~Increases~~Rising inenergy ~~our~~prices ~~costs of goods sold, including the costs of raw materials, transportation costs or labor expenses,~~ could ~~have~~adversely anaffect ~~adverse effect on~~ our ~~financial~~operating ~~condition~~results.

~~Our~~In ~~business~~the ~~places~~last ~~heavy~~few ~~reliance~~years, onenergy ~~raw~~prices ~~materials~~have ~~being~~periodically ~~readily~~risen ~~available.~~dramatically, ~~Although~~including wethe ~~believe~~cost ~~that~~of ~~there~~natural ~~are~~gas, awhich ~~number~~has ofresulted ~~pulp~~in ~~and~~increased ~~paper~~fuel ~~mills~~costs infor ~~British~~our ~~Columbia,~~businesses ~~Canada,~~and ~~the~~raw ~~State~~materials ofcosts ~~Washington,~~for ~~the~~our ~~State~~branded ~~of Georgia~~products. Moreover, ~~and~~while ~~the~~we ~~State~~have ofinstalled ~~Florida~~new ~~that~~burners ~~can~~at ~~provide~~our usfacilities ~~with the raw materials necessary~~ to ~~conduct~~heat our ~~business~~dryers, ~~any~~due ~~significant~~to ~~decreases~~the inprevalence ~~supplies,~~of orhigh ~~any~~energy ~~increase in~~ costs orthroughout athe ~~greater~~county, ~~increase~~there inis ~~delivery~~now ~~costs~~a ~~for~~higher ~~these~~demand ~~materials,~~and ~~could result in~~ a ~~decrease~~resulting inshortage ~~our~~of ~~margins,~~the ~~which~~materials ~~would~~necessary ~~harm~~to ~~our~~fuel ~~financial~~these ~~condition~~burners. Rising ~~Although~~energy weprices ~~believe~~could weadversely ~~will~~affect beconsumer ~~able~~spending toand ~~obtain~~demand ~~the~~for ~~required~~our ~~material~~products inand ~~the~~increase ~~region,~~our ~~any~~operating ~~significant~~costs, ~~shortfall~~both of ~~material~~which would ~~result~~reduce inour asales ~~significant~~and ~~increase~~operating ~~in the cost of producing our primary products~~income.

InOur ~~addition,~~business atis ~~times~~subject ~~during~~to ~~fiscal~~many ~~year~~regulations 2009, we experienced exceedingly high transportation expenses. When these costs are high they have an adverse effect on our financial results. Moreover, we face a risk of increased labor costs, including significant increases in worker's compensation insurance premiums and ~~health~~noncompliance ~~care benefits, which~~ could ~~further~~be ~~negatively impact our results of operations~~costly.

~~Rising~~The ~~energy~~manufacture, ~~prices~~marketing ~~could~~and ~~adversely~~sale of our products are subject to the rules and regulations of various federal, provincial, and state agencies, including, without limitation, regulations governing emissions into the air; discharges into the water; and generation, handling, storage, transportation, treatment, and disposal of waste materials. Environmental regulations may affect us by restricting the manufacturing or use of our ~~operating~~products ~~results~~or regulating their disposal. We are also subject to other federal and state laws and regulations regarding health and safety matters.

InIf ~~the~~we ~~last~~do ~~few~~not ~~years,~~obtain ~~energy~~all ~~prices~~material ~~have~~licenses ~~risen~~and ~~dramatically,~~permits ~~including~~required ~~the~~by ~~cost~~government, ofwe ~~natural~~may ~~gas,~~be ~~which~~subject ~~has~~to ~~resulted~~regulatory inaction ~~increased~~by ~~fuel~~government ~~costs~~authorities. Moreover, ~~for~~if our ~~businesses~~policies and ~~raw~~procedures ~~materials~~do ~~costs~~not ~~for~~comply ~~our~~in ~~branded~~all ~~products.~~respects ~~Moreover~~with existing laws and regulations, ~~while~~our weactivities ~~have~~may ~~installed~~violate ~~new~~such ~~burners~~laws atand regulations. Even if our ~~facilities~~policies toand ~~heat~~procedures ~~our~~do ~~dryers~~comply, ~~due~~but toour ~~the~~employees ~~prevalence~~fail ofor ~~high~~neglect ~~energy~~to ~~costs~~follow ~~throughout~~them ~~the~~in ~~county~~all respects, ~~there~~we ismight ~~now~~incur similar liability. For example, if a ~~higher~~regulatory ~~demand~~authority ~~and~~finds that a ~~resulting~~current ~~shortage~~or offuture ~~the~~product ~~materials~~or ~~necessary~~production torun ~~fuel~~is ~~these~~not ~~burners.~~in ~~Rising~~compliance ~~energy~~with ~~prices~~any ~~could~~of ~~adversely~~these ~~affect~~regulations, ~~consumer~~we ~~spending~~may ~~and~~be ~~demand~~fined, ~~for~~production ~~our~~may ~~products~~be ~~and~~stopped ~~increase~~or ~~our~~a ~~operating~~product ~~costs~~may be pulled from the shelves, ~~both~~any of which ~~would~~could ~~reduce~~adversely affect our ~~sales~~financial conditions and ~~operating income~~operations.

~~Our business is subject to many regulations and noncompliance could be costly.~~ 10

~~The~~In ~~manufacture~~addition, ~~marketing~~any ~~and~~adverse ~~sale~~publicity ofassociated ~~our~~with ~~products~~any ~~are~~noncompliance ~~subject~~may todamage ~~the~~our ~~rules~~reputation and ~~regulations~~our ofability ~~various~~to ~~federal,~~successfully ~~provincial,~~market ~~and~~our ~~state agencies~~products. Furthermore, ~~including,~~the ~~without~~rules ~~limitation,~~and regulations ~~governing~~are ~~emissions~~subject ~~into~~to ~~the~~change ~~air;~~from ~~discharges~~time ~~into~~to ~~the~~time ~~water;~~ and ~~generation,~~while ~~handling,~~we ~~storage,~~closely ~~transportation,~~monitor ~~treatment~~developments in this area, ~~and~~we ~~disposal~~have no way of ~~waste~~anticipating ~~materials.~~whether ~~Environmental~~changes ~~regulations~~in ~~may~~these ~~affect~~rules usand byregulations ~~restricting~~will ~~the~~be ~~manufacturing~~made orthat ~~use~~would ofimpact our ~~products~~business adversely. Additional or ~~regulating~~revised ~~their~~regulatory ~~disposal.~~requirements, Wewhether ~~are~~labeling, ~~also~~environmental, ~~subject~~health toand ~~other~~safety, ~~federal~~tax ~~and~~or ~~state~~otherwise, ~~laws~~could ~~and~~have ~~regulations~~a ~~regarding~~material ~~health~~adverse effect on our financial condition and ~~safety~~results ~~matters~~of operations.

11We have significant indebtedness which impacts our business in several ways, and the nonpayment of which could harm our business.

IfAs weof doJanuary ~~not~~31, ~~obtain~~2010, ~~all~~we ~~material~~had ~~licenses~~total long-term and ~~permits~~current ~~required~~indebtedness byunder ~~government,~~three wedifferent ~~may~~bonds beof ~~subject~~$5,787,000. We tomake ~~regulatory~~interest ~~action~~payments by(and ~~government~~principal ~~authorities.~~payments ~~Moreover,~~on ifthe ~~our~~taxable ~~policies~~bond) ~~and~~on ~~procedures~~the doindebtedness ~~not~~under ~~comply~~these inbonds, ~~all~~which ~~respects~~are ~~with~~due ~~existing~~in ~~laws~~2014, ~~and regulations~~2019, ~~our~~and ~~activities~~2019. We may ~~violate~~incur ~~such~~substantial ~~laws~~additional ~~and~~debt ~~regulations~~in the future. Our ~~Even~~indebtedness ifcould limit our ~~policies~~ability ~~and~~to ~~procedures~~obtain donecessary ~~comply~~additional financing for working capital, ~~but~~capital ~~our~~expenditures, ~~employees~~debt ~~fail~~service requirements or ~~neglect~~other purposes in the future; to ~~follow~~plan ~~them~~for, inor ~~all~~react ~~respects~~to, wechanges ~~might~~in ~~incur~~technology ~~similar~~and ~~liability.~~in ~~For~~our ~~example,~~business ifand acompetition; ~~regulatory~~and ~~authority~~to ~~finds~~react ~~that~~in a ~~current~~timely ormanner ~~future~~to ~~product~~the orongoing ~~production~~global ~~run~~economic isdownturn. In ~~not~~addition, inour ~~compliance~~indebtedness ~~with~~makes ~~any~~us ofvulnerable ~~these~~to ~~regulations,~~interest werate ~~may~~fluctuations bebecause ~~fined,~~our ~~production~~bonds ~~may~~due be2019 ~~stopped~~bear orinterest aat ~~product~~variable ~~may~~rates. Any besignificant ~~pulled~~interest ~~from~~rate ~~the~~increase ~~shelves,~~could ~~any~~have ofan ~~which~~adverse ~~could~~effect ~~adversely~~on ~~affect~~ our financial ~~conditions and operations~~condition.

~~In addition~~Moreover, ~~any~~there ~~adverse~~can ~~publicity~~be ~~associated~~no ~~with~~assurance ~~any~~that ~~noncompliance~~we ~~may~~will ~~damage~~be ~~our~~able ~~reputation~~to ~~and~~meet our ~~ability~~debt toservice ~~successfully~~obligations. If ~~market~~we ~~our~~are ~~products.~~unable ~~Furthermore,~~to ~~the~~generate ~~rules~~sufficient ~~and~~cash ~~regulations~~flow ~~are~~or ~~subject~~obtain tofunds ~~change~~for ~~from~~required ~~time~~payments, toor ~~time~~if ~~and~~we ~~while~~fail weto ~~closely~~comply ~~monitor~~with ~~developments~~covenants in ~~this~~our ~~area~~indebtedness, we ~~have~~will nobe ~~way~~in ofdefault. The ~~anticipating~~indebtedness ~~whether~~underlying ~~changes~~our inbonds ~~these~~is ~~rules~~secured ~~and~~by ~~regulations~~a ~~will~~mortgage beon ~~made~~our ~~that~~real ~~would~~property ~~impact~~and ~~our~~a ~~business~~security ~~adversely~~interest in our assets. If ~~Additional~~we ordefault ~~revised~~under ~~regulatory~~the ~~requirements,~~agreements ~~whether~~governing ~~labeling,~~our ~~environmental~~indebtedness, ~~health~~the creditors may be able to foreclose on our property and ~~safety~~assets, ~~tax~~which orwould ~~otherwise,~~substantially ~~could~~harm ~~have~~our abusiness ~~material~~and ~~adverse~~financial ~~effect~~condition. Additionally our letter of credit on our ~~financial~~Georgia ~~condition~~bond financing expires in September 2011 and ~~results~~there ofcan ~~operations~~be no assurance we will be able to renew it. If the letter of credit is not renewed we will be required to pay off the bonds in full.

WeTo ~~have~~the ~~significant~~extent ~~indebtedness~~that ~~which~~the ~~impacts~~proposed ~~our~~Arrangement ~~business~~is innot ~~several ways~~consummated, ~~and~~we will continue to incur substantial costs in connection with the ~~nonpayment~~requirements of ~~which~~the ~~could~~Sarbanes-Oxley ~~harm~~Act ~~our~~of ~~business~~2002.

AsThe Sarbanes-Oxley Act of ~~January 31,~~2002 ~~2009,~~(the we“Act”) ~~had~~introduced ~~total~~new ~~long-term~~requirements regarding corporate governance and ~~current~~financial ~~indebtedness~~reporting. ~~under~~Among ~~three~~the ~~different~~many ~~bonds~~requirements ofis ~~$6,664,000.~~the Werequirement ~~make~~under ~~interest~~Section 404 ~~payments~~of ~~(and~~the ~~principal~~Act ~~payments~~for onmanagement ~~the~~to ~~taxable~~annually ~~bond)~~assess and report on the ~~indebtedness~~effectiveness ~~under~~of ~~these~~our ~~bonds,~~internal ~~which~~control ~~are~~over ~~due~~financial inreporting ~~2014, 2019,~~ and ~~2019.~~for Weour ~~may~~registered ~~incur~~public ~~substantial~~accountant ~~additional~~to ~~debt~~attest into ~~the~~this ~~future~~report. ~~Our~~Based ~~indebtedness~~on ~~could~~the ~~limit~~requirements ~~our~~in ~~ability~~effect toas ~~obtain~~of ~~necessary~~the ~~additional~~date ~~financing~~of ~~for~~this ~~working~~Annual ~~capital~~Report, ~~capital~~to ~~expenditures,~~the ~~debt~~extent ~~service~~that ~~requirements~~the orArrangement ~~other~~is ~~purposes~~not inconsummated ~~the~~prior ~~future;~~ to ~~plan~~that ~~for~~time, orat ~~react~~the ~~to,~~end ~~changes~~of infiscal ~~technology~~year ~~and~~2011 in our ~~business~~auditors ~~and~~will ~~competition;~~be ~~and~~required to ~~react~~issue in a ~~timely~~report ~~manner~~on toour ~~the~~internal ~~ongoing~~control ~~global~~over ~~economic~~financial ~~downturn.~~reporting Infor ~~addition,~~inclusion in our ~~indebtedness~~Annual ~~makes~~Report uson ~~vulnerable~~Form to10-K ~~interest~~for ~~rate~~the ~~fluctuations~~fiscal ~~because~~year ~~our~~ending ~~bonds~~January ~~due~~31, ~~2019~~2011. ~~bear~~We ~~interest~~expect atthat ~~variable~~the ~~rates.~~costs ~~Any~~to ~~significant~~comply ~~interest~~with ~~rate~~these ~~increase~~requirements ~~could~~would ~~have~~be ansignificant ~~adverse~~and ~~effect~~would onadversely affect our ~~financial~~operating ~~condition~~results.

~~Moreover, there can be no assurance 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~~maintain ~~with~~an ~~covenants~~effective insystem ~~our~~of ~~indebtedness,~~internal ~~we will be in default. The indebtedness underlying our bonds is secured by a mortgage on our real property~~ and adisclosure ~~security~~controls, ~~interest in our assets. If~~ we ~~default under the agreements governing our indebtedness, the creditors~~ may not be able to ~~foreclose~~accurately onreport our ~~property and assets, which would substantially harm our business and~~ financial ~~condition.~~results ~~Additionally~~or ~~our~~prevent ~~letter of credit on our Georgia bond financing expires in September 2011 and there can be no assurance we will be able to renew it~~fraud. ~~If the letter of credit is not renewed we will be required to pay off the bonds in full.~~

WeEffective ~~will~~internal ~~continue~~and disclosure controls help us to ~~incur~~provide ~~substantial~~reliable ~~costs~~financial reports and effectively prevent fraud and to operate successfully as a public company. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results would be harmed. As a result, current and potential shareholders could lose confidence in ~~connection~~our ~~with~~financial reporting, which would harm our business and the ~~requirements~~trading price of our securities. We have in the ~~Sarbanes-Oxley~~past discovered deficiencies in our internal controls as defined under interim standards adopted by the Public Company Accounting Oversight Board that required remediation. Furthermore, our independent auditor has, in the past, advised us that it had noted certain reportable conditions in our internal financial reporting and accounting controls. As we continue our ongoing review and analysis of internal control over financial reporting for compliance with the Act, we may encounter problems or delays in completing the review and evaluation and implementing improvements. Additionally, we may identify deficiencies that need to be addressed in our internal control over financial reporting or other matters that may raise concerns for investors. Should we, or our independent registered public accounting firm, determine in future periods that we have significant deficiencies or material weaknesses in our internal control over financial reporting, or if we are unable to receive a positive attestation from our independent auditors, our results of ~~2002~~operations or financial condition may be adversely affected, investors may lose confidence in the reliability of our financial statements and the price of our common stock may decline.

The Sarbanes-Oxley Act of 2002 (the “Act”) introduced new requirements regarding corporate governance and financial reporting. Among the many requirements is the requirement under Section 404 of the Act for management to annually assess and report on the effectiveness of our internal control over financial reporting and for our registered public accountant to attest to this report. Based on the requirements in effect as of the date of this Annual Report, at the end of fiscal year 2010 our auditors will be required to issue a report on our internal control over financial reporting for inclusion in our Annual Report on Form 10-K for the fiscal year ending January 31, 2010. We expect that the costs to comply with these requirements will continue to be significant and adversely affect our operating results.11

If we ~~fail~~need to ~~maintain~~raise anadditional ~~effective~~capital ~~system~~for ofour ~~internal~~operating ~~and disclosure controls~~plan, weour ~~may~~business ~~not~~would be ~~able~~harmed if we were unable to ~~accurately~~do ~~report~~so ~~our~~on ~~financial~~acceptable ~~results~~terms, orand ~~prevent~~current ~~fraud~~volatility and uncertainties in the global capital and credit markets may adversely affect our ability to access credit.

~~Effective~~We ~~internal~~currently ~~and~~anticipate ~~disclosure~~that ~~controls~~our ~~help~~existing uscapital toresources ~~provide~~and ~~reliable~~cash ~~financial~~flows ~~reports~~from ~~and~~operations ~~effectively~~will ~~prevent~~enable ~~fraud~~us ~~and~~ to ~~operate~~maintain ~~successfully~~our ascurrently aplanned ~~public~~operations ~~company.~~for Ifthe weforeseeable ~~cannot provide reliable financial reports or prevent fraud~~future. However, our ~~reputation~~current ~~and~~ operating ~~results~~plan ~~would~~may bechange ~~harmed.~~as As a result, ~~current and potential shareholders could lose confidence in our financial reporting, which would harm our business and the trading price~~ of ~~our~~many securities. We have in the past discovered deficiencies in our internal controls as defined under interim standards adopted by the Public Company Accounting Oversight Board that required remediation. Furthermorefactors, ~~our~~including ~~independent~~general ~~auditor~~economic ~~has~~conditions, inwhich ~~the~~are ~~past,~~beyond ~~advised us that it had noted certain reportable conditions in~~ our ~~internal financial reporting and accounting controls~~control. If As we ~~continue~~are ~~our~~unable ~~ongoing~~to ~~review~~generate and ~~analysis~~maintain ofpositive ~~internal~~operating ~~control~~cash ~~over~~flows ~~financial~~and ~~reporting~~operating ~~for~~income ~~compliance with the Act, we may encounter problems or delays~~ in ~~completing~~ the ~~review and evaluation and implementing improvements. Additionally~~future, we may ~~identify deficiencies that~~ need toadditional ~~be addressed in our internal control over financial reporting or other matters that may raise concerns for investors~~funding. Should we, or our independent registered public accounting firm, determine in future periods that we have significant deficiencies or material weaknesses in our internal control over financial reporting, or if we are unable to receive a positive attestation from our independent auditors, our results of operations or financial condition may be adversely

12Financial turmoil affecting the banking system and financial markets and the risk that additional financial institutions may consolidate or become insolvent has resulted in a tightening in the credit markets, a low level of liquidity in many financial markets, and volatility in credit, currency and equity markets. In such an environment, there is a risk that lenders, even those with strong balance sheets and sound lending practices, could fail or refuse to honor their legal commitments and obligations under existing credit commitments, including but not limited to: extending credit up to the maximum permitted by credit facility, renewing existing credit facilities and/or honoring loan commitments. If our lender fails to honor its legal commitments under our line of credit, or if we are unable to renew our credit facility on favorable terms or at all, it could be difficult in this environment to replace our credit facility on similar terms. If additional capital were needed, our inability to raise capital on favorable terms would harm our business and financial condition. To the extent that we raise additional capital through the sale of equity or debt securities convertible into equity, the issuance of these securities could result in dilution to our shareholders.

~~affected,~~The ~~investors~~indentures ~~may~~governing ~~lose~~our ~~confidence~~bonds inand ~~the~~bank ~~reliability~~debt offinancing ~~our~~include financial ~~statements~~covenants ~~and~~that ~~the~~restrict ~~price~~certain of our ~~common~~activities ~~stock~~and ~~may~~impose ~~decline~~certain financial tests that we must meet in order to be in compliance with their terms.

IfThe weterms ~~need~~of tothe ~~raise~~indentures ~~additional~~governing ~~capital~~our ~~for~~bonds and bank debt financing restrict our ~~operating~~ability ~~plan~~to, ~~our~~among ~~business~~other ~~would~~things, beincur ~~harmed~~additional ifindebtedness, wepay ~~were~~dividends ~~unable~~or tomake doother sorestricted payments on ~~acceptable~~investments, ~~terms~~consummate asset sales or similar transactions, ~~and~~create ~~current~~liens, ~~volatility~~or ~~and~~merge ~~disruption~~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 ~~the~~meet ~~global~~financial ~~capital~~tests. We believe that we are currently in compliance with these restrictions and ~~credit~~covenants ~~markets~~and ~~may~~expect ~~adversely~~that ~~affect~~we ~~our~~will ~~ability~~continue to ~~access~~comply. If ~~credit~~we were not able to do so, we could be materially and adversely affected.

WeThe ~~currently~~loss 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~~key ~~factors,~~senior ~~including~~management ~~general~~personnel ~~economic~~could ~~conditions,~~negatively ~~which~~affect ~~are beyond~~ our ~~control~~business. If we are unable to generate and maintain positive operating cash flows and operating income in the future, we may need additional funding. Moreover, our current line of credit matures on May 23, 2009 and there can be no assurance that it will be renewed.

~~Financial~~We ~~turmoil~~depend ~~affecting~~on the ~~banking~~continued ~~system~~services and ~~financial~~performance ~~markets and the risk that additional financial institutions may consolidate or become insolvent has resulted in a tightening in the credit markets, a low level~~ of ~~liquidity~~our insenior ~~many~~management ~~financial markets,~~ and ~~volatility~~other inkey ~~credit, currency and equity markets~~personnel. We Indo such an environment, there is a risk that lenders, even those with strong balance sheets and sound lending practices, could fail or refuse to honor their legal commitments and obligations under existing credit commitments, including but not ~~limited~~have ~~to:~~“key ~~extending~~person” ~~credit~~life upinsurance ~~to the maximum permitted by credit facility, renewing existing credit facilities and/or honoring loan commitments~~policies. IfThe ~~our~~loss ~~lender~~of ~~fails~~any ~~to honor its legal commitments under our line~~ of ~~credit, or if we are unable to renew~~ our ~~credit~~executive ~~facility~~officers ~~on favorable terms~~ or atother ~~all,~~key itemployees could ~~be difficult in this environment to replace our credit facility on similar terms. If additional capital were needed, our inability to raise capital on favorable terms would~~ harm our business ~~and financial condition~~. ~~To the extent that we raise additional capital through the sale of equity or debt securities convertible into equity, the issuance of these securities could result in dilution to our shareholders.~~

~~The~~Our ~~indentures~~future ~~governing~~growth ~~our~~may ~~bonds~~depend ~~and~~on ~~bank~~our ~~debt~~ability ~~financing~~to ~~include~~move ~~financial~~into ~~covenants~~new ~~that~~domestic ~~restrict certain of our activities~~ and ~~impose~~international ~~certain~~markets, ~~financial~~which ~~tests~~could ~~that~~reduce weour ~~must meet in order to be in compliance with their terms~~profitability.

~~The~~Our ~~terms~~current ofsales ~~the~~projections ~~indentures~~indicate ~~governing~~that ~~our~~growth ~~bonds~~in ~~and~~sales ~~bank~~may ~~debt~~need ~~financing~~to ~~restrict~~come ~~our~~from ~~ability~~new ~~to,~~products ~~among~~and ~~other~~new ~~things~~markets, ~~incur~~including ~~additional~~international ~~indebtedness,~~markets. International ~~pay~~small ~~dividends~~animal orcare ~~make~~customs, ~~other restricted payments on investments~~standards, ~~consummate asset sales or similar transactions~~techniques, ~~create~~and ~~liens,~~methods ordiffer ~~merge~~from orthose ~~consolidate~~in ~~with~~the ~~any~~United ~~other~~States. Laws ~~person~~and orregulations ~~sell,~~applicable ~~assign,~~in ~~transfer,~~new ~~lease,~~markets ~~convey~~may orbe ~~otherwise~~unfamiliar ~~dispose~~to ofus. Compliance ~~all~~may orbe substantially ~~all~~more ofcostly ~~our~~than ~~assets~~we anticipate. As ~~The~~a ~~terms~~result ~~also~~we ~~contain~~may ~~covenants~~need ~~that require us~~ to ~~meet~~redesign ~~financial~~products, ~~tests.~~or Weinvent ~~believe~~or ~~that~~design wenew ~~are~~products, ~~currently~~to incompete ~~compliance~~effectively ~~with~~and ~~these~~profitably ~~restrictions~~in ~~and~~new ~~covenants~~markets. We ~~and~~ expect that we will ~~continue~~need tosignificant ~~comply.~~time, Ifwhich wemay ~~were~~be ~~not~~years, ~~able~~ to dogenerate ~~so,~~substantial wesales ~~could~~or beprofits ~~materially~~in ~~and~~new ~~adversely affected~~markets.

~~The~~Other ~~loss~~significant ofchallenges ~~key~~to ~~senior~~conducting ~~management~~business ~~personnel~~in ~~could~~foreign ~~negatively~~countries ~~affect~~include, among other factors, local acceptance of our ~~business~~products, political factors, currency controls, changes in import and export regulations, changes in tariff and freight rates, and fluctuations in foreign exchange rates. We might not be able to penetrate these markets and any market penetration that occurs might not be timely or profitable. If we do not penetrate these markets within a reasonable time, we will be unable to recoup part or all of the significant investments we may have made in attempting to do so.

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. 12

~~Our~~The ~~future~~inability ~~growth~~to ~~may~~successfully ~~depend~~obtain onor protect our ~~ability~~patents ~~to move into new domestic~~ and ~~international~~trade ~~markets,~~secrets ~~which~~ could ~~reduce~~harm our ~~profitability~~competitive advantage.

Our ~~current~~success ~~sales~~will ~~projections~~depend, ~~indicate~~in ~~that~~part, ~~growth~~on inour ~~sales~~ability ~~may~~to ~~need~~maintain protection for our products under U.S. patent laws, to ~~come~~preserve ~~from~~our ~~new~~trade ~~products~~secrets and ~~new~~to ~~markets,~~operate ~~including~~without ~~international~~infringing ~~markets~~the proprietary rights of third parties. We ~~International~~have ~~small~~been ~~animal~~issued ~~care~~three ~~customs,~~U.S. ~~standards~~patents, ~~techniques~~of which one remains current and two have expired, and ~~methods~~have ~~differ~~one ~~from~~pending ~~those~~patent inon ~~the~~various ~~United~~degradable ~~States.~~particulate ~~Laws~~absorbent materials and ~~regulations~~our ~~applicable~~manufacturing inprocess. Patent ~~new~~applications ~~markets~~ may benot ~~unfamiliar~~successfully toresult usin an issued patent. Issued ~~Compliance~~patents may be ~~substantially~~subject ~~more~~to ~~costly~~challenges ~~than~~and ~~we anticipate~~infringements. Moreover, Asupon aexpiration ~~result~~of weour current patent other parties may ~~need~~be able to ~~redesign~~develop products, orthat ~~invent~~are orcurrently ~~design~~protected ~~new~~by ~~products~~this patent, towhich ~~compete~~could ~~effectively~~decrease our sales and ~~profitably~~reduce inour ~~new~~market ~~markets~~share. Furthermore, Weothers ~~expect~~may ~~that~~independently wedevelop ~~will~~similar ~~need~~products ~~significant~~or ~~time,~~otherwise ~~which~~circumvent ~~may~~our bepatent ~~years,~~protection. Should we fail to ~~generate~~obtain ~~substantial~~and ~~sales~~protect orour ~~profits~~patents, inour ~~new~~competitive ~~markets~~advantage will be harmed.

~~Other~~The ~~significant challenges to conducting business in foreign countries include, among other factors, local acceptance of our~~ products, political instability, currency controls, changes in import and export regulations, changes in tariff and freight rates, and fluctuations in foreign exchange rates. We might not be able to penetrate these markets and any market penetration that ~~occurs might not be timely or profitable. If~~ we domanufacture ~~not~~could ~~penetrate~~expose ~~these~~us ~~markets~~to ~~within~~product aliability ~~reasonable time~~claims, weand ~~will~~our bemanufacturing ~~unable~~process ~~to recoup part or all of the significant investments we~~ may ~~have~~pose ~~made~~additional ~~in attempting to do so~~risks.

~~The~~Our ~~inability~~business exposes us to ~~successfully~~potential ~~obtain~~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 ~~protect~~that we will be able to maintain such insurance on acceptable terms. A successful product liability claim in excess of our ~~patents~~insurance coverage could ~~harm~~have ~~our~~a ~~competitive~~material ~~advantage.~~adverse effect on us and any successful material product liability claim could prevent us from obtaining adequate product liability insurance in the future on commercially reasonable terms.

~~Our success will depend~~Moreover, inas part, onof our ~~ability~~manufacturing ~~to maintain protection for our products under U.S. patent laws~~process, towe ~~preserve~~use ~~our~~complex ~~trade secrets~~ and toheavy ~~operate~~machinery ~~without~~and ~~infringing~~equipment ~~the~~that ~~proprietary~~can ~~rights~~pose ofsevere ~~third~~safety ~~parties. We have been issued three U.S. patents~~hazards, ofespecially ~~which~~if ~~one~~not ~~remains~~properly ~~current~~ and ~~two~~carefully ~~have expired, and have one pending patent on various degradable particulate absorbent materials and our manufacturing process~~used. ~~Patent applications may not successfully result in an issued patent.~~

13Natural disasters could decrease our manufacturing capacity.

~~Issued~~Our ~~patents~~current ~~may~~manufacturing befacilities ~~subject~~are tolocated ~~challenges~~in ~~and~~geographic ~~infringements.~~regions ~~Moreover~~that have experienced major natural disasters, ~~upon~~such ~~expiration~~as ofearthquakes, ~~our~~floods, ~~current~~and ~~patent~~hurricanes. Our ~~other~~disaster ~~parties~~recovery plan may not be ~~able~~adequate toor ~~develop~~effective. We ~~products~~do ~~that~~not ~~are~~carry ~~currently~~earthquake ~~protected~~or byflood ~~this~~insurance. Other ~~patent,~~insurance ~~which~~that ~~could~~we ~~decrease~~carry ~~our~~is ~~sales~~limited in the risks covered and ~~reduce~~the ~~our~~amount ~~market~~of ~~share~~coverage. Our ~~Furthermore~~insurance would not be adequate to cover all of our resulting costs, ~~others~~business ~~may~~interruption ~~independently~~and ~~develop~~lost ~~similar~~profits ~~products~~when a major natural disaster occurs. A natural disaster rendering one or ~~otherwise~~more ~~circumvent~~of our ~~patent~~manufacturing ~~protection.~~facilities ~~Should~~totally weor ~~fail~~partially tounusable, ~~obtain~~whether ~~and~~or ~~protect~~not ~~our~~covered ~~patents~~by insurance, ~~our~~would ~~competitive~~materially ~~advantage~~and ~~will~~adversely beaffect ~~harmed.~~our business and financial condition.

The ~~products~~price ~~that~~for ~~we manufacture could expose us to product liability claims, and~~ our ~~manufacturing~~common ~~process~~shares may ~~pose~~continue ~~additional~~to ~~risks.~~be volatile.

~~Our~~The ~~business~~market ~~exposes~~price usof toour ~~potential~~common ~~product~~shares, ~~liability~~like ~~risks~~ that ~~are~~of ~~inherent~~many inother ~~the~~small-cap ~~manufacture~~companies, ~~and~~has ~~distribution~~been ofhighly ~~certain~~volatile, ofexperiencing ~~our~~wide ~~products.~~fluctuations ~~Although~~not wenecessarily ~~generally~~related ~~seek~~ to ~~insure~~the ~~against~~operating ~~such~~performance ~~risks,~~of ~~there~~such ~~can~~companies. Factors besuch noas ~~assurance~~our ~~that~~operating ~~such~~results, ~~coverage~~announcements isby ~~adequate~~us or ~~that~~our wecompetitors ~~will~~concerning beinnovations ~~able~~and tonew ~~maintain~~products ~~such~~or ~~insurance~~systems onmay ~~acceptable~~have ~~terms.~~a Asignificant ~~successful~~impact ~~product~~on ~~liability~~the ~~claim~~market inprice ~~excess~~ of our ~~insurance~~securities. In ~~coverage~~addition, ~~could~~we have aexperienced ~~material~~limited ~~adverse~~trading ~~effect~~volume ~~on us and any successful material product liability claim could prevent us from obtaining adequate product liability insurance~~ in ~~the~~our ~~future~~common ~~on commercially reasonable terms~~shares.

~~Moreover,~~It asmight ~~part~~be ofdifficult ~~our~~for ~~manufacturing~~a ~~process,~~third-party weto ~~use~~acquire ~~complex~~us ~~and~~even ~~heavy~~if ~~machinery~~doing ~~and~~so ~~equipment~~would ~~that~~be ~~can~~beneficial ~~pose~~to ~~severe~~our ~~safety hazards, especially if not properly and carefully used~~shareholders.

~~Natural~~In ~~disasters~~fiscal year 2007, we adopted a shareholder rights plan, and in fiscal year 2010, the shareholders ratified the continued existence of the shareholder rights plan. The shareholder rights plan is designed to protect shareholders from unfair, abusive or coercive take-over strategies, including the acquisition of control of our company by a bidder in a transaction or series of transactions that does not treat all shareholders equally or fairly or provide all shareholders an equal opportunity to share in the premium paid on an acquisition of control. Although the proposed Arrangement is not subject to the terms of the shareholders rights plan, the shareholder rights plan could ~~decrease~~discourage certain types of take-over bids that might be made for us and may render more difficult a merger, tender offer, assumption of control by the holders of a large block of our ~~manufacturing~~securities ~~capacity~~or the removal of incumbent management, even though certain of such transactions or effects might be beneficial in the judgment of certain shareholders or shareholders generally. For example, the shareholder rights plan could have the effect of preventing a particular take-over bid from being made or being successful, even though a majority of our shareholders might wish to participate in that take-over bid. The shareholder rights plan will cause substantial dilution to a person or group that attempts to acquire us other than through a “permitted bid” (as defined in the plan) or on terms approved by the Board. If triggered, the shareholder rights plan will also likely cause substantial dilution to any shareholder who fails to or elects not to exercise its rights. The existence of these anti-takeover provisions could limit the price that investors might be willing to pay in the future for our common shares.

Most of our current and planned manufacturing facilities are located in geographic regions that have experienced major natural disasters, such as earthquakes, floods, and hurricanes. Our disaster recovery plan may not be adequate or effective. We do not carry earthquake or flood insurance. Other insurance that we carry is limited in the risks covered and the amount of coverage. Our insurance would not be adequate to cover all of our resulting costs, business interruption and lost profits when a major natural disaster occurs. A natural disaster rendering one or more of our manufacturing facilities totally or partially unusable, whether or not covered by insurance, would materially and adversely affect our business and financial condition. 13

~~The~~Our ~~price~~financial ~~for~~results could vary as a result of the methods, estimates, and judgments we use in applying our ~~common~~accounting ~~shares~~policies ~~may~~or ~~continue~~as tothe beresult ~~volatile.~~of the adoption of new accounting pronouncements.

The ~~market~~methods, ~~price~~estimates, ofand judgments we use in applying our ~~common~~accounting ~~shares~~policies have a significant impact on our financial results. Such methods, ~~like~~estimates, ~~that~~and ofjudgments ~~many~~are, ~~other~~by ~~small-cap~~their ~~companies~~nature, ~~has~~subject ~~been~~to ~~highly~~substantial ~~volatile~~risks, ~~experiencing~~uncertainties, ~~wide~~and ~~fluctuations~~assumptions, ~~not~~and ~~necessarily~~factors ~~related~~may arise over time that lead us to change our methods, estimates, and judgments. Changes in those methods, estimates, and judgments could significantly affect our results of operations. For example, the ~~operating~~calculation ~~performance~~of share-based compensation expense requires us to use valuation methodologies and a number of ~~such~~assumptions, ~~companies.~~estimates, ~~Factors~~and conclusions regarding matters such as expected forfeitures, expected volatility of our ~~operating~~share ~~results~~price, ~~announcements~~the byexpected usdividend orrate with respect to our ~~competitors~~common ~~concerning~~stock, ~~innovations~~and the exercise behavior of our employees. Furthermore, there are no means, under applicable accounting principles, to compare and ~~new~~adjust ~~products~~our orexpense ~~systems~~if and when we learn about additional information that may ~~have~~affect athe ~~significant~~estimates ~~impact~~that onwe previously made, with the ~~market~~exception ~~price~~of changes in expected forfeitures of ~~our~~share-based ~~securities~~awards. InFactors ~~addition~~may arise over time that lead us to change our estimates and assumptions with respect to future share-based compensation arrangements, weresulting ~~have~~in ~~experienced~~variability ~~limited~~in ~~trading~~our ~~volume~~share-based compensation expense over time. Changes in forecasted share-based compensation expense could impact our ~~common~~gross ~~shares~~margin percentage; research and development expenses; marketing, general and administrative expenses; and our tax rate. Moreover, the issuance and adoption of new accounting pronouncements may require us to change our accounting policies, which could have an adverse effect on our operating results.

ItThe ~~might~~liquidity beof ~~difficult~~our ~~for~~stock adepends ~~third-party~~in topart ~~acquire~~on usour ~~even~~continued iflisting ~~doing~~with sothe ~~would~~NYSE beAmex ~~beneficial to our shareholders~~LLC.

In ~~fiscal~~March ~~year 2007~~2003, we ~~adopted~~received aofficial ~~shareholder~~notice ~~rights plan. The shareholder rights plan is designed to protect shareholders~~ from ~~unfair, abusive or coercive take-over strategies, including~~ the ~~acquisition~~American ofStock ~~control~~Exchange of(now ~~our~~NYSE ~~company~~Amex ~~by a bidder in a transaction or series of transactions~~ LLC) that ~~does~~our ~~not~~common ~~treat~~stock ~~all~~had ~~shareholders~~been ~~equally~~approved orfor ~~fairly~~listing. In ororder ~~provide~~to ~~all~~continue ~~shareholders an equal opportunity~~ to ~~share~~have inour ~~the~~common ~~premium~~shares ~~paid~~listed, onwe anmust ~~acquisition~~remain ofin ~~control.~~compliance ~~However,~~with the ~~shareholder~~NYSE ~~rights~~Amex ~~plan~~LLC ~~may~~listing ~~discourage certain types of take-over bids that might be made for us and may render more difficult a merger~~standards, ~~tender~~including ~~offer,~~standards ~~assumption~~related ofto ~~control~~stock ~~by the holders of a large block of our securities or the removal of incumbent management~~price, ~~even~~market ~~though~~capitalization ~~certain~~and ofcorporate ~~such~~governance. If ~~transactions~~we orare ~~effects~~unable ~~might~~to bedo ~~beneficial in the judgment of certain shareholders or shareholders generally. For example~~so, ~~the~~NYSE ~~shareholder~~Amex ~~rights~~LLC ~~plan~~ could ~~have the effect of preventing a particular take~~de-~~over~~list ~~bid~~our ~~from being made or being successful~~stock, ~~even though a majority of our shareholders might wish to participate~~ in ~~that~~which ~~take-over~~event ~~bid. The shareholder rights plan will cause substantial dilution to a person or group that attempts to acquire us other than through a “permitted bid” (as defined in~~ the ~~plan)~~liquidity orand ~~on terms approved by~~ the ~~Board.~~value ~~If triggered, the shareholder rights plan will also likely cause substantial dilution to any shareholder who fails to or elects not to exercise its rights. The existence~~ of ~~these~~our ~~anti-takeover~~shares ~~provisions~~ could ~~limit the price that investors might~~ be ~~willing~~adversely ~~to pay in the future for our common shares~~impacted.

~~Our~~As ~~financial~~a ~~results~~result ~~could~~of ~~vary~~our asprincipal aexecutive ~~result~~offices ofbeing ~~the~~located ~~methods,~~in ~~estimates~~Canada, and ~~judgments~~a wemajority ~~use~~of inour ~~applying~~directors and certain of our ~~accounting~~officers ~~policies~~residing orin asCanada, ~~the~~investors ~~result~~may offind it difficult to enforce, within the ~~adoption~~United ofStates, ~~new~~any ~~accounting~~judgments ~~pronouncements.~~obtained against our company or our directors or officers.

~~The~~Our ~~methods,~~principal ~~estimates~~executive offices, ~~and~~a ~~judgments~~majority weof ~~use in applying~~ our ~~accounting~~directors ~~policies~~and ~~have~~certain aof ~~significant~~our ~~impact~~officers onare ~~our~~located ~~financial~~in ~~results.~~and/or ~~Such~~residents ~~methods,~~of ~~estimates~~Canada, and ~~judgments~~all ~~are,~~or bya ~~their nature, subject to~~ substantial ~~risks,~~portion ~~uncertainties,~~of ~~and~~such ~~assumptions,~~persons’ ~~and~~assets ~~factors~~are ~~may~~located ~~arise~~outside ~~over~~the ~~time~~United ~~that~~States. ~~lead~~As usa ~~to change our methods~~result, ~~estimates,~~it ~~and~~may ~~judgments.~~be ~~Changes~~difficult infor ~~those~~investors ~~methods,~~to ~~estimates,~~obtain ~~and~~jurisdiction ~~judgments~~over ~~could~~us ~~significantly~~or ~~affect~~ our ~~results~~directors ofor ~~operations.~~officers ~~For~~in ~~example,~~courts in the ~~calculation~~United ofStates ~~share-based~~in ~~compensation~~actions ~~expense~~predicated ~~requires~~on usthe tocivil ~~use~~liability ~~valuation~~provisions ~~methodologies and a number~~ of ~~assumptions,~~the ~~estimates,~~U.S. ~~and~~federal ~~conclusions~~securities ~~regarding~~laws; ~~matters~~enforce ~~such~~against asus ~~expected~~or ~~forfeitures,~~our ~~expected~~directors ~~volatility~~or ofofficers ~~our~~judgments ~~share~~obtained ~~price,~~in ~~the~~such ~~expected~~actions; ~~dividend~~obtain ~~rate~~judgments ~~with~~against ~~respect~~us toor our ~~common~~directors ~~stock,~~or ~~and~~officers ~~the~~in ~~exercise~~actions ~~behavior~~in ~~of our employees~~non-U.S. ~~Furthermore,~~courts ~~there~~predicated ~~are~~solely noupon ~~means,~~the ~~under~~U.S. ~~applicable~~federal ~~accounting~~securities ~~principles,~~laws; toor ~~compare~~enforce ~~and~~against ~~adjust~~us or our ~~expense~~directors ifor ~~and~~officers ~~when~~in wenon-U.S. ~~learn~~courts ~~about~~judgments ~~additional~~of ~~information~~courts ~~that~~in ~~may affect~~ the ~~estimates~~United ~~that~~States wepredicated ~~previously~~upon ~~made,~~the ~~with~~civil ~~the~~liability ~~exception~~provisions of ~~changes~~the inU.S. ~~expected~~federal ~~forfeitures~~securities ~~of share-based~~ laws.

~~awards.~~ITEM Factors may arise over time that lead us to change our estimates and assumptions with respect to future share-based compensation arrangements, resulting in variability in our share-based compensation expense over time1B. UNRESOLVED ~~Changes~~STAFF in forecasted share-based compensation expense could impact our gross margin percentage; research and development expenses; marketing, general and administrative expenses; and our tax rate. Moreover, the issuance and adoption of new accounting pronouncements may require us to change our accounting policies, which could have an adverse effect on our operating results.COMMENTS

~~The~~Not ~~liquidity of our stock depends in part on our continued listing with the NYSE Amex LLC.~~Applicable

InITEM ~~March 2003, we received official notice from the American Stock Exchange (now NYSE Amex LLC) that our common stock had been approved for listing~~2. In order to continue to have our common shares listed, we must remain in compliance with the NYSE Amex LLC listing standards, including standards related to stock price, market capitalization and corporate governance. If we are unable to do so, NYSE Amex LLC could de-list our stock, in which event the liquidity and the value of our shares could be adversely impacted. PROPERTIES

~~As a result of our principal executive offices being located in Canada~~Ferndale, and a majority of our directors and certain of our officers residing in Canada, investors may find it difficult to enforce, within the United States, any judgments obtained against our company or our directors or officers. Washington

~~Our~~On ~~principal~~October ~~executive~~18, ~~offices~~2002, awe ~~majority~~purchased offor ~~our~~cash ~~directors~~approximately ~~and~~15.6 ~~certain~~acres of ~~our~~bare ~~officers~~land ~~are located~~ in ~~and/or residents of Canada~~Ferndale, ~~and~~Washington. The ~~all~~total orpurchase aprice ~~substantial portion~~ of ~~such persons’ assets are located outside~~ the ~~United~~land ~~States.~~was ~~As a result~~$1,500,000, itplus ~~may~~closing becosts, ~~difficult~~which ~~for~~was ~~investors~~determined tothrough obtain jurisdiction over us or our directors or officers in courts in the United States in actions predicated on the civil liability provisions of the U.S. federal securities laws; enforce against us or our directors or officers judgments obtained in such actions; obtain judgments against us or our directors or officers in actions in nonarms-~~U.S.~~length ~~courts predicated solely upon the U~~negotiations.S. federal securities laws; or enforce against us or our directors or officers in non-U.S. courts judgments of courts in the United States predicated upon the civil liability provisions of the U.S. federal securities laws.

15During fiscal year 2004, we completed the construction of a 122,000 square foot production, warehousing, and office space facility on this property. The construction of this facility was financed through the issuance of industrial revenue bonds in the amount of $2,910,000 and from cash on hand. Manufacturing of our animal care products and some ancillary products along with the majority of our warehousing takes place at this facility.

~~ITEM~~During 2fiscal year 2008 we completed the closure and move of our Bellingham, Washington manufacturing facility to our Ferndale, Washington location. The cost of the move and additional facility related construction was approximately $4,900,000, of which $3,300,000 was financed through cash on hand and $1,600,000 was financed through bond financing with GE Capital Public Finance, Inc., as described below in Note 8(“Long-term debt”) to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

~~PROPERTIES~~Jesup, Georgia

~~Ferndale~~On August 20, ~~Washington~~2003, we purchased 14 acres of land zoned light industrial in Jesup, Georgia for $140,000, which included a 41,000 square foot steel warehouse building. During fiscal year 2005, we constructed approximately 45,000 square feet of additional warehousing and manufacturing space on the property at a cost of $6,650,000 (including equipment we installed). The construction was financed with cash on hand and a debt facility from Branch Banking &Trust Co. (“BB&T”). Pursuant to our letter of credit with BB&T and in connection with the issuance of certain tax exempt bonds by Wayne County Industrial Development Authority (“Wayne County IDA”), we sold our real property in Jesup, Georgia to Wayne County IDA and are currently leasing the real property back from Wayne County IDA. Upon repayment of the bonds in full, Wayne County IDA will transfer all right, title and interest in the real property and related production facility to Absorption for no additional consideration. While the bonds remain outstanding, as security for the indebtedness underlying the letter of credit, BB&T will hold a mortgage on the real property and a security interest in the equipment assets located on that property. Please see Note 8 (“Long-term debt”) to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information regarding this financing transaction. We manufacture and warehouse multiple product lines in both segments at this facility.

OnWe ~~October 18,~~believe ~~2002,~~that weour ~~purchased~~Ferndale and Georgia facilities will be adequate for ~~cash~~our ~~approximately~~manufacturing 15needs for the foreseeable future.6 ~~acres~~We ofbelieve ~~bare~~that ~~land~~our existing properties are in ~~Ferndale~~good condition, ~~Washington.~~are ~~The~~adequately ~~total~~insured ~~purchase~~in ~~price~~a ofmanner ~~the~~consistent ~~land~~with ~~was~~other ~~$1,500,000,~~similarly ~~plus~~situated ~~closing~~companies ~~costs,~~and ~~which~~will ~~was~~meet ~~determined~~our ~~through~~manufacturing ~~arms-length~~and ~~negotiations~~warehousing needs for the foreseeable future.

~~During fiscal year 2004~~Vancouver, weBritish ~~completed the construction of a 105~~Columbia,~~000~~ square foot production, warehousing, and office space facility on this property. The construction of this facility was financed through the issuance of industrial revenue bonds in the amount of $2,910,000 and from cash on hand. Manufacturing of our animal care products and some ancillary products along with the majority of our warehousing takes place at this facility.Canada

~~During~~We ~~fiscal~~also ~~year~~share ~~2008~~1,640 wesquare ~~completed~~feet ~~the~~of ~~closure~~office ~~and~~space ~~move~~with ofa ~~our~~related ~~Bellingham,~~party ~~Washington~~in ~~manufacturing~~North ~~facility~~Vancouver, toBritish ~~our Ferndale~~Columbia, ~~Washington location~~Canada. The ~~cost~~terms of ~~the~~our ~~move~~rental ~~and~~agreement ~~additional~~call ~~facility~~for ~~related~~monthly ~~construction~~payments ~~was approximately $4,900,000,~~ of ~~which~~ $~~3,300,000~~500 ~~was~~towards ~~financed~~the ~~through~~office ~~cash~~space ~~on hand~~ and ~~$1,600,000~~include ~~was~~the ~~financed~~use ~~through~~of ~~bond~~office ~~financing~~furniture ~~with~~and ~~GE Capital Public Finance, Inc~~equipment.~~, as described below in Note 8 (“Long-term debt”) to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.~~

~~Jesup~~Our owned properties are subject to mortgages to secure the indebtedness under our bonds and long-term debt, ~~Georgia~~which together amounted to $5,787,000 as of January 31, 2010.

OnITEM ~~August 20, 2003, we purchased 14 acres of land zoned light industrial in Jesup, Georgia for $140,000, which included a 41,000 square foot steel warehouse building~~3. LEGAL During fiscal year 2005, we constructed approximately 45,000 square feet of additional warehousing and manufacturing space on the property at a cost of $6,650,000 (including equipment we installed). The construction was financed with cash on hand and a debt facility from Branch Banking &Trust Co. (“BB&T”). Pursuant to our letter of credit with BB&T and in connection with the issuance of certain tax exempt bonds by Wayne County Industrial Development Authority (“Wayne County IDA”), we sold our real property in Jesup, Georgia to Wayne County IDA and are currently leasing the real property back from Wayne County IDA. Upon repayment of the bonds in full, Wayne County IDA will transfer all right, title and interest in the real property and related production facility to Absorption for no additional consideration. While the bonds remain outstanding, as security for the indebtedness underlying the letter of credit, BB&T will hold a mortgage on the real property and a security interest in the equipment assets located on that property. Please see Note 8 (“Long-term debt”) to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information regarding this financing transaction. We manufacture and warehouse multiple product lines in both segments at this facility.PROCEEDINGS

WeExcept ~~believe~~for ~~that~~ordinary ~~our~~routine ~~Ferndale~~litigation ~~and~~incidental ~~Georgia~~to ~~facilities will be adequate for~~ our ~~manufacturing~~business, ~~needs~~there ~~for~~are ~~the~~no ~~foreseeable~~material ~~future.~~legal Weproceedings ~~believe~~pending ~~that~~to ~~our~~which ~~existing~~we ~~properties~~ are ina ~~good condition~~party, ~~are~~or ~~adequately~~of ~~insured~~which inany aof ~~manner consistent with other similarly situated companies and will meet~~ our ~~manufacturing~~properties ~~and~~is ~~warehousing needs for~~ the ~~foreseeable future~~subject.

~~Vancouver,~~ITEM ~~British~~4. (REMOVED ~~Columbia,~~AND ~~Canada~~RESERVED)

We also share 1,640 square feet of office space with a related party in North Vancouver, British Columbia, Canada. The terms of our rental agreement call for monthly payments of $500 towards the office space and include the use of office furniture and equipment.15

~~Our~~PART ~~owned properties are subject to mortgages to secure the indebtedness under our bonds and long-term debt, which together amounted to $6,664,000 as of January 31, 2009.~~ II

ITEM 35. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

~~LEGAL~~Market ~~PROCEEDINGS~~information

~~Except~~Our ~~for~~common ~~ordinary~~shares ~~routine~~are ~~litigation~~listed ~~incidental~~on toNYSE ~~our~~Amex ~~business~~LLC (formerly AMEX), ~~there~~under the trading symbol IAX. Shown below are nothe ~~material~~high ~~legal~~and ~~proceedings~~low ~~pending~~sale toprices ~~which~~for weour ~~are~~common ashares ~~party~~for the periods indicated below as reported by NYSE Amex LLC and AMEX. The following quotations, as provided by the NYSE Amex LLC and AMEX represent prices between dealers and do not include retail markup, markdown or ofcommission. In ~~which~~addition, ~~any~~these ofquotations ~~our~~may ~~properties~~not isrepresent ~~the~~actual ~~subject~~transactions.

ITEM 4.

	FISCAL YEAR 2010				FISCAL YEAR 2009
	HIGH		LOW		HIGH		LOW

First quarter		3.00		2.11		4.99		3.62
Second quarter		3.19		2.62		4.98		2.75
Third quarter		3.87		3.05		3.65		2.09
Fourth quarter		4.62		3.71		4.80		1.66

~~SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS~~Holders

~~During~~We ~~the~~had ~~fourth~~427 ~~quarter~~holders of ~~fiscal~~record ~~year~~of ~~2009~~our ~~there~~Common ~~were~~Shares noas ~~matters submitted to a vote~~ of ~~our~~March ~~security~~19, ~~holders~~2010.

16Dividends

~~PART~~We IIhave not paid dividends to the holders of our common shares. The decision whether to pay dividends and the amount thereof is at the discretion of our board of directors, and will be governed by such factors as earnings, capital requirements and our operating and financial condition. In addition, our credit facility prohibits us from paying dividends without our lender’s consent. Furthermore, the indentures pursuant to which our bonds were issued each prohibit us from declaring a cash dividend unless, after giving effect to such dividend, we would not be in default under such indentures, we remain in compliance with certain financial ratios and the amount of the dividend did not exceed the limits set forth in the indentures. We intend to retain our earnings primarily to finance the continuing growth of our business and do not intend to pay any dividends for the foreseeable future.

~~ITEM~~Exchange 5.controls and other limitations affecting security holders

~~MARKET~~Canada ~~FOR~~has ~~REGISTRANT’S~~no ~~COMMON~~system ~~EQUITY~~of exchange controls. There are no restrictions on the remittance of dividends, ~~RELATED~~interest, ~~STOCKHOLDER~~or ~~MATTERS~~other ~~AND~~similar ~~ISSUER~~payments ~~PURCHASES~~to OFnonresidents ~~EQUITY~~of ~~SECURITIES~~Canada holding our securities. There are generally no restrictions on the right of nonresidents of Canada to hold or vote securities in a Canadian company. However, the Investment Canada Act (the “Investment Act”) requires prior notification to the Government of Canada on the acquisition of control of Canadian businesses by non-Canadians. The term “acquisition of control” is defined as any one or more non-Canadian persons acquiring all or substantially all of the assets used in the Canadian business, the acquisition of the voting shares of a Canadian corporation carrying on the Canadian business or the acquisition of an entity controlling or carrying on the Canadian business. The acquisition of the majority of the outstanding shares is deemed to be an “acquisition of control” of a corporation unless it can be established that the purchaser will not control the corporation.

~~Market~~Subject ~~information~~to the exceptions noted below for World Trade Organization (“WTO”) investors, investments which require prior notification under the Investment Act are all direct acquisitions of Canadian businesses with assets of (Cdn) $5,000,000 or more and all indirect acquisitions of Canadian businesses with assets of more than (Cdn) $50,000,000 or with assets between (Cdn) $5,000,000 and (Cdn) $50,000,000 which represent more than 50% of the value of the total international operations. In addition, specific acquisitions or businesses in designated types of activities related to Canada’s cultural heritage or national identity could be reviewed if the government considers it to be in the public interest to do so.

Our common shares are listed on NYSE Amex LLC (formerly AMEX), under the trading symbol IAX. Shown below are the high and low sale prices for our common shares for the periods indicated below as reported by NYSE Amex LLC and AMEX. The following quotations, as provided by the NYSE Amex LLC and AMEX represent prices between dealers and do not include retail markup, markdown or commission. In addition, these quotations may not represent actual transactions. 16

	FISCAL YEAR 2009		FISCAL YEAR 2008
	HIGH	LOW	HIGH	LOW
First quarter	4.99	3.62	5.42	3.84
Second quarter	4.98	2.75	6.50	4.19
Third quarter	3.65	2.09	6.68	3.47
Fourth quarter	4.80	1.66	4.00	3.20

The WTO investor exception to the Investment Act provides special review thresholds in the case of acquisitions by such investors. WTO investors include individuals who are a national of a WTO member or who has the right of permanent residence in relation to a WTO member, governments of WTO members and entities that are not Canadian controlled but which are WTO investor controlled. The United States is a member of the WTO. The WTO review thresholds are calculated using a formula and for 1996 and 1997 are (Cdn) $168,000,000 and (Cdn) $172,000,000.

~~Holders~~Based on the current amount of our assets, the review provisions of the Investment Act will not be applicable to us. However, there can be no assurance that it will not become applicable to us in the future.

WeITEM ~~had 438 holders of record of our Common Shares as of April 16, 2009~~6. SELECTED FINANCIAL DATA

~~Dividends~~Not Applicable

We have not paid dividends to the holders of our common shares. The decision whether to pay dividends and the amount thereof is at the discretion of our board of directors, and will be governed by such factors as earnings, capital requirements and our operating and financial condition. In addition, our credit facility prohibits us from paying dividends without our lender’s consent. Furthermore, the indentures pursuant to which our bonds were issued each prohibit us from declaring a cash dividend unless, after giving effect to such dividend, we would not be in default under such indentures, we remain in compliance with certain financial ratios and the amount of the dividend did not exceed the limits set forth in the indentures. We intend to retain our earnings primarily to finance the continuing growth of our business and as such do not have any current plans to pay dividends.17

~~Exchange~~ITEM ~~controls~~7. MANAGEMENT'S ~~and~~DISCUSSION ~~other~~AND ~~limitations~~ANALYSIS ~~affecting~~OF ~~security~~FINANCIAL ~~holders~~CONDITION AND RESULTS OF OPERATIONS

~~Canada~~This ~~has~~discussion nois ~~system~~intended ofto ~~exchange~~further ~~controls. There are no restrictions on~~ the ~~remittance~~reader’s ofunderstanding ~~dividends, interest, or other similar payments to nonresidents~~ of ~~Canada holding our securities. There are generally no restrictions on~~ the ~~right~~consolidated offinancial ~~nonresidents~~statements, offinancial ~~Canada to hold or vote securities in a Canadian company. However~~condition, ~~the~~and ~~Investment~~results ~~Canada Act (the “Investment Act”) requires prior notification to the Government~~ of ~~Canada~~operations ~~on the acquisition~~ of ~~control~~International ofAbsorbents ~~Canadian~~and ~~businesses by non-Canadians~~Absorption. ~~The~~It ~~term~~should ~~“acquisition~~be ofread ~~control”~~in isconjunction ~~defined~~with ~~as any one or more non-Canadian persons acquiring all or substantially all of~~ the ~~assets~~consolidated ~~used~~financial ~~in the Canadian business~~statements, ~~the~~notes ~~acquisition~~and oftables ~~the~~which ~~voting~~are ~~shares~~included ofelsewhere ain ~~Canadian~~this ~~corporation~~Annual ~~carrying~~Report on ~~the~~Form ~~Canadian business or the acquisition of an entity controlling or carrying on the Canadian business~~10-K. The acquisition of the majority of the outstanding shares is deemed to be an “acquisition of control” of a corporation unless it can be established that the purchaser will not control the corporation.

~~Subject~~Some tostatements ~~the~~and ~~exceptions~~information ~~noted~~contained ~~below~~in ~~for~~this ~~World Trade Organization (~~“~~WTO”)~~Management's ~~investors,~~Discussion ~~investments~~and ~~which~~Analysis ~~require prior notification under the Investment Act are all direct acquisitions~~ of ~~Canadian~~Financial ~~businesses~~Condition ~~with~~and ~~assets~~Results of ~~(Cdn)~~Operations” ~~$5,000,000~~are ornot ~~more~~historical ~~and~~facts ~~all~~but ~~indirect~~are ~~acquisitions~~forward-looking ofstatements. ~~Canadian~~For ~~businesses~~a ~~with~~discussion ~~assets~~ of ~~more~~these ~~than~~forward-looking ~~(Cdn)~~statements ~~$50,000,000 or with assets between (Cdn) $5,000,000~~ and ~~(Cdn)~~important ~~$50,000,000~~factors ~~which~~that ~~represent~~could ~~more~~cause ~~than~~results ~~50%~~to ofdiffer ~~the~~materially ~~value~~from of the ~~total~~forward-looking ~~international operations. In addition~~statements, ~~specific~~see ~~acquisitions~~Item 1 ~~or businesses in designated types~~ of ~~activities~~Part I, ~~related~~“Business — toForward-Looking ~~Canada’s~~Statements” ~~cultural~~and ~~heritage~~Item 1A orof ~~national~~Part I, ~~identity~~“Risk ~~could be reviewed if the government considers it to be in the public interest to do so~~Factors.”

~~Based~~International onAbsorbents ~~the~~is ~~current amount of our assets,~~ the ~~review~~parent ~~provisions~~company of ~~the~~its ~~Investment~~wholly ~~Act~~owned ~~will not be applicable to us~~U.S. ~~However~~subsidiary, ~~there~~Absorption. International ~~can~~Absorbents beis noa ~~assurance~~holding ~~that~~company itand ~~will~~Absorption ~~not~~is ~~become~~its ~~applicable~~operating ~~to us in the future~~entity.

17As more fully described in our definitive proxy statement filed with the Securities and Exchange Commission (the “SEC”) on April 16, 2010 (the “Proxy Statement”), on December 14, 2009, International Absorbents entered into an Arrangement Agreement (the “Arrangement Agreement”) with IAX Acquisition Corporation, a Delaware corporation (“Parent”), and IAX Canada Acquisition Company Inc., a corporation incorporated under the laws of the Province of British Columbia (“Canada Sub”) and a wholly-owned subsidiary of Parent. The Arrangement Agreement provides that, upon the terms and subject to the conditions set forth in the Arrangement Agreement, Parent, through its wholly-owned subsidiary, will acquire all of the outstanding common shares of International Absorbents for $4.75 per common share in cash, with International Absorbents continuing as the surviving corporation (the “Arrangement”). As a result of the Arrangement, International Absorbents will become a wholly-owned subsidiary of Parent. The consummation of the Arrangement is subject to various closing conditions, including obtaining the approval of the Arrangement by our shareholders and the Supreme Court of British Columbia.

~~ITEM~~Management 7divides the activities of the operating company into two segments: the animal care industry and the industrial cleanup industry. We manufacture, distribute and sell products for these segments to both distributors and direct buying retailers.

~~MANAGEMENT'S~~Absorption ~~DISCUSSION~~is ~~AND~~a ~~ANALYSIS~~leading OFmanufacturer ~~FINANCIAL~~and ~~CONDITION~~seller ~~AND~~of ~~RESULTS~~premium OFsmall ~~OPERATIONS~~animal bedding in North America. The primary product that we sell in this market is small animal bedding sold under the brand name CareFRESH®. We consider the activities that surround the manufacture and distribution of CareFRESH® to be our core business. Our business strategy is to promote and grow our core business and to create diversification in our market channels, our production methods, and our product lines in an effort to add strength and breadth to our business structure. As a result, we continue to dedicate resources to improving our infrastructure for the support of our core business, and creating more product and customer diversification.

~~This~~The ~~discussion~~financial isresults ~~intended~~from tofiscal ~~further~~year 2010 were below the ~~reader’s~~expectations ~~understanding~~of management both in terms of top line sales (see “Net Sales” below) and bottom line profits (see “Net Income” below). As described in the ~~consolidated~~“Gross ~~financial~~Profits” ~~statements~~discussion below, ~~financial~~during ~~condition~~the fiscal year ended January 31, ~~and~~2010 ~~results~~we met our expectations for improvements in gross profits, which we believe improved as a result of ~~operations~~our ongoing plan to maximize the efficiencies of ~~International~~the ~~Absorbents~~manufacturing ~~and~~capital ~~Absorption.~~investments Itwe ~~should~~have bemade ~~read~~during the past several years as well as from the reduction in ~~conjunction~~the ~~with~~cost of some of the ~~consolidated~~raw ~~financial~~materials ~~statements~~we use in our manufacturing process. Selling, ~~notes~~general and ~~tables~~administrative ~~which~~expenses ~~are~~grew ~~included~~as ~~elsewhere~~expected from an operational perspective, as investments were made in ~~this~~the ~~Annual~~development ~~Report~~of onnew ~~Form 10-K~~product lines and market channels. These expenses also grew due to costs incurred in connection with the proposed Arrangement.

Some statements and information contained in this “Management's Discussion and Analysis of Financial Condition and Results of Operations” are not historical facts but are forward-looking statements. For a discussion of these forward-looking statements and important factors that could cause results to differ materially from the forward-looking statements, see Item 1 of Part I, “Business — Forward-Looking Statements” and Item 1A of Part I, “Risk Factors.”18

~~Overview~~During fiscal year 2010, we continued to focus our sales and marketing efforts on our market leading CareFRESH®, CareFRESH® Colors and CareFRESH® Ultra brands of small animal bedding products. CareFRESH® Colors is our colored bedding offering and CareFRESH® Ultra is our white small animal bedding. Both are premium line extensions to our core product, CareFRESH®. In addition, during the year we introduced a proprietary line of small animal foods branded CareFRESH® Complete™. We also continue to sell our Healthy Pet™ cat litter line. Our Healthy Pet™ brand consists of a range of “natural” cat litters made from cellulose fiber, wood, grain and plant-based materials. Through our joint marketing alliance with Supreme Petfoods Ltd, a privately held British firm, we distribute a premium line of small animal food products to pet stores across North America under such brand names as Russel Rabbit™, Gerty Guinea Pig™ and Reggie Rat™ brand premium diets. To date our sales growth has come from our small animal bedding and food products and not from our cat litter products.

~~International~~Results ~~Absorbents is the parent company~~ of its wholly owned U.S. subsidiary, Absorption. International Absorbents is a holding company and Absorption is its operating entity. Management divides the activities of the operating company into two segments: the animal care industry and the industrial cleanup industry. We manufacture, distribute and sell products for these segments to both distributors and direct buying retailers. Operations

~~Absorption is a leading manufacturer and seller of premium small animal bedding in North America.~~ The ~~primary~~following ~~product~~table ~~that~~illustrates ~~we sell in this market is small animal bedding sold under the brand name CareFRESH®. We consider the activities that surround the manufacture and distribution of CareFRESH® to be~~ our ~~core~~financial ~~business.~~results ~~Our~~for ~~business~~fiscal ~~strategy~~year is2010 toas ~~promote~~compared ~~and grow our core business and~~ to create diversification in our market channels, our production methods, and our product lines in an effort to add strength and breadth to our business structure. As a result, we continue to dedicate significant resources to improving our infrastructure for the ~~support~~prior offiscal ~~our core business, and creating more product and customer diversification~~year. ~~We believe that this strategy has started to provide results~~ (U.S. ~~Specifically~~dollars, ~~we continue to grow sales~~ in ~~our core business and improve the production process of our core CareFRESH® product while expanding sales of new products and existing products into new market channels.~~ thousands):

The financial results from fiscal year 2009 met the expectations of management both in terms of top line sales (see “Net Sales” below) and bottom line profits (see “Net Income” below). As described in the “Gross Profits” discussion below, by the end of fiscal year 2009 we were meeting expectations for improvements in gross profits, which we believe improved as a result of our ongoing plan to maximize the efficiencies of the manufacturing capital investments we have made during the past several years. Selling, general and administrative expenses grew as expected as investments were made in the development of new product lines and market channels.

	January 31, 2010			Percent of Sales			January 31, 2009			Percent of Sales			Percentage Change
Sales		34,575			100	%		35,752			100	%		-3	%
Cost of Goods Sold		22,555			65	%		24,270			68	%		-7	%
Gross Profit		12,020			35	%		11,482			32	%		5	%

Selling, General and Administrative		8,956			26	%		7,575			21	%		18	%

Income from Operations		3,064			9	%		3,907			11	%		-22	%

Interest Income		11			0	%		62			0	%		-82	%
Interest Expense		(226	)		-1	%		(315	)		-1	%		-28	%

Profit before Taxes		2,849			8	%		3,654			10	%		-22	%

Income Taxes		(1,399	)		-4	%		(1,415	)		-4	%		-1.1	%

Net Income		1,450			4	%		2,239			6	%		-35	%

~~During~~Net fiscal year 2009, we continued to focus our sales and marketing efforts on our market leading CareFRESH®, CareFRESH® Colors and CareFRESH® Ultra brands of small animal bedding products. CareFRESH® Colors is our colored bedding offering and CareFRESH® Ultra is our white small animal bedding. Both are premium line extensions to our core product, CareFRESH®. We also continue to sell our Healthy Pet™ cat litter line. Our Healthy Pet™ brand consists of a range of “natural” cat litters made from cellulose fiber, wood, grain and plant-based materials. These products are aimed at the “holistic” market and are designed to be healthier for pets and people than traditional clay litter because of potential health problems associated with crystalline silica in clay products. To date our sales growth has come from our small animal bedding products and not from our cat litter products.Sales

18In fiscal year 2010, our net sales decreased by 3% as compared to fiscal year 2009. We believe that the decrease was the result of our retail customers reducing their inventory levels and, to a lesser extent, from a shift in consumer spending preferences to lower-priced products. During fiscal year 2010, net sales for animal care products decreased from $34,934,000 to $33,884,000, as compared to fiscal year 2009. Net sales of our industrial cleanup products decreased from $818,000 in fiscal year 2009 to $691,000 in fiscal year 2010. We experienced reductions in domestic sales for all of our key bedding products, including CareFRESH®, CareFRESH® Ultra™, and CareFRESH® Colors products, partially offset by an increase in international sales, as well as in sales of our Healthy Pet™ bedding line. Our strategy with regard to our industrial cleanup products has remained the same, which is to effectively service existing customers while focusing growth on animal care products.

~~Results~~We are uncertain how current economic uncertainties will affect our sales during fiscal year 2011. At the end of ~~Operations~~the fiscal year some retailer customers were starting to show slight improvements in out-the-door sales and, as a result, were increasing inventory levels. Based on these trends, we believe that our overall annual net sales will improve during fiscal year 2011. Specifically, during fiscal year 2011, we expect sales of natural, non-colored CareFRESH® in pet specialty channels to improve slightly over sales levels from fiscal year 2010. We believe this will be mostly driven by increased sales of our brand extension products, rather than from a growth in the sales of our core product. We will continue to invest in promotional activity on the retail level. We anticipate that natural CareFRESH® will continue to represent the majority of our sales through the 2011 fiscal year. We also see growth opportunities for our full line of bedding products and believe they will continue to gain market share and growing customer acceptance. However, as we add new items to our line of products, they will need to compete for limited shelf space at the pet specialty stores with our other existing products and those of our competitors, which could limit the number of products we are able to sell at a particular store. Also, although we believe that the high quality of our CareFRESH® line of products gives us a significant competitive advantage, many of our competitors have a larger breadth of products and more established relationships with the mass merchandiser and grocery stores, which makes competition in these channels more challenging for us. Further, the ongoing global economic uncertainties have resulted in lower than expected sales growth of our products, as a result of decreased consumer spending and reduced customer traffic at our major customers’ stores. With respect to our lines of cat litter products, subject to the considerations described above, we expect revenue growth to be flat to down during the coming fiscal year.

~~The following table illustrates our financial results for fiscal year 2009 as compared to the prior fiscal year. (U.S. dollars, in thousands):~~19

	January 31, 2009		Percent of Sales		January 31, 2008		Percent of Sales		Percentage Change
Sales		35,752		100%		33,095		100%		8%
Cost of goods sold		24,270		68%		23,139		70%		5%
Gross profit		11,482		32%		9,956		30%		15%
Selling general and administrative expenses		7,575		21%		6,387		19%		19%
Income from operations		3,907		11%		3,569		11%		9%
Interest income		62		0%		86		0%		-28%
Interest expense		(315)		-1%		(385)		-1%		-18%
Profit before taxes		3,654		10%		3,270		10%		12%
Income taxes		(1,415)		-4%		(1,254)		-4%		13%
Net income		2,239		6%		2,016		6%		11%

Gross Profit

~~Net~~As ~~Sales~~fiscal year 2010 came to an end, our production facility in Ferndale, Washington was operating beyond management’s expectations, while our facility in Jesup, Georgia continued to experience operational inconsistencies, and both of our production facilities faced challenges that directly affected their production costs. These challenges included increased input costs, materials cost, ongoing maintenance costs associated with achieving a high rate of product quality and production efficiencies, and high freight cost during the last half of the year. However, even in light of these additional costs, we were able to improve our gross margin (gross profit divided by sales) from 32% in fiscal year 2009 to 35% in fiscal year 2010.

~~In fiscal year 2009, our net sales increased by 8% over fiscal year 2008~~. All of the growth in net sales was a result of the growth in sales of our animal care products. During fiscal year 2009, net sales for animal care products grew from $32,271,000 to $34,934,000, as compared to fiscal year 2008. Net sales of our industrial cleanup products decreased from $824,000 in fiscal year 2008 to $818,000 in fiscal year 2009. We had strong growth with all of our bedding products, including CareFRESH®, CareFRESH® Ultra™, and CareFRESH® Colors products. Our strategy with regard to our industrial cleanup products has remained the same, which is to effectively service existing customers while focusing growth on animal care products.

WeFor ~~are uncertain how current economic conditions will affect our sales during~~ fiscal year ~~2010.~~2011 ~~Some customers such as Petsmart are projecting a modest rate of growth and some, such as Petcetera have recently declared bankruptcy. The net result is that~~ we ~~believe~~expect that our ~~overall~~gross ~~annual~~margin ~~net sales~~ will bedecrease. The inreasons ~~the~~for ~~range~~this ofexpectation ~~growing~~are byas ~~approximately 5% to decreasing by approximately 5% over our fiscal year 2009 net sales levels~~follows. ~~Specifically~~ First, ~~during~~economic ~~fiscal~~conditions ~~year~~will ~~2010,~~continue weto ~~expect~~make ~~sales~~it ofchallenging ~~natural, non-colored CareFRESH® in pet specialty channels~~ to ~~remain~~raise ~~flat to slightly down over sales levels from fiscal year 2009~~prices. ~~As a result of promotional activity on the retail level~~ Second, we ~~expect~~are tonot ~~see~~achieving ~~modest~~the ~~sales~~overall ~~growth~~reduced incosts ~~CareFRESH~~of ~~Ultra™~~raw ~~and~~materials ~~CareFRESH® Colors. We anticipate~~ that ~~natural~~we ~~CareFRESH®~~had ~~will~~initially ~~continue~~expected due to: our ~~represent~~product ~~the~~mix ~~majority~~(with ofincreased ~~our~~ sales ~~through~~of ~~the 2010 fiscal year. We also see growth opportunities for~~ our ~~full~~higher-cost ~~line of bedding~~ products); slow and ~~believe~~uncertain reactions ~~they~~from ~~will~~raw ~~continue~~material tosuppliers ~~gain~~in ~~market~~response ~~share and growing customer acceptance. However, as we add new items~~ to our ~~line~~request ~~of products, they will need to compete~~ for ~~limited~~additional ~~shelf~~supplies; ~~space~~and at the ~~pet~~shortage ~~specialty~~of ~~stores~~key ~~with~~low-cost ~~our~~raw ~~other~~material ~~existing~~sources for ~~products~~certain ~~and those~~ of our ~~competitors, which could limit the number of products we are able to sell at a particular store~~facilities. ~~Also~~ Third, ~~although~~depreciation wecharges ~~believe~~resulting ~~that~~from ~~the high quality of~~ our ~~CareFRESH®~~new ~~line~~production offacilities ~~products~~will ~~gives~~also ushave a ~~significant~~negative ~~competitive~~effect ~~advantage, many~~on of our ~~competitors~~gross ~~have a larger breadth of products and more established relationships with the mass merchandiser and grocery stores, which makes competition in these channels more challenging for us~~margin. ~~Further~~ Fourth, ~~the~~any ~~global~~slowdown ~~economic downturn has resulted~~ in ~~lower than expected~~ sales ~~growth~~could ~~of our products, as a~~ result ofin ~~decreased~~increased ~~consumer~~production ~~spending~~costs ~~and~~on ~~reduced~~a ~~customer~~per ~~traffic~~unit atbasis ~~our~~due ~~major customers’ stores. With respect~~ to ~~our~~a ~~lines~~loss of ~~cat~~efficiencies ~~litter~~gained ~~products,~~from ~~subject~~higher toproduction ~~the considerations described above, we expect revenue growth to be flat during the coming fiscal year~~rates.

~~Gross~~We ~~Profit~~plan to continue to make capital investments in infrastructure and technology at all of our facilities to help decrease the costs of production, though at a lower rate than in recent years.

~~As fiscal year 2009 came to an end~~Selling, ~~both~~General of our production facilities were operating at efficiency levels that are at or near the pre-construction expectations of management. Nonetheless, during the year, our production facilities faced challenges that directly affected their production costs. These challenges included increased energy costs during the first half of the year, materials cost increases, ongoing maintenance costs associated with achieving a high rate of product quality and ~~production~~Administrative efficiencies, and high freight cost during the first half of the year. There was also increased depreciation during the entire year as a result of our capital expansion program. Even in light of these additional cost, we were able to improve our gross margin (gross profit divided by sales) from 30% in fiscal year 2008 to 32% in fiscal year 2009. Expenses

19During fiscal year 2010, our selling, general and administrative expenses increased by 18% as compared to fiscal year 2009. This increase was primarily the result of costs related to the proposed Arrangement, which as of January 31, 2010 totaled $903,000. Net of these one-time expenses, sales, general, and administrative expenses increased by 6% in fiscal year 2010 as compared to fiscal year 2009. This increase was primarily the result of investments made in sales and marketing and new product development.

AsWe ~~discussed~~anticipate that investments in ~~Note~~sales 14and ~~(“Segmented~~marketing ~~Information”)~~programs toand ~~the~~new ~~consolidated~~product ~~financial~~development ~~statements~~costs, ~~included~~along ~~elsewhere~~with inour ~~this~~stock-based ~~Annual~~compensation ~~Report~~expenses onand ~~Form 10-K~~growing public company reporting expenses, ~~operating~~will ~~income~~continue ~~including~~to increase selling, general and administrative expenses during fiscal year 2011, ~~but~~though ~~before~~not ~~depreciation~~at ~~for~~the rate at which they increased during the current fiscal year. During fiscal year 2011, we intend to continue our marketing and new product development initiatives. Our seasoned sales staff is respected in the animal care ~~product~~industry ~~segment,~~and ~~increased~~has byproven 7%to be efficient and effective in selling to the wholesale distribution segment of the pet specialty channel. We feel that the fiscal year ~~2009~~2011 assales ~~compared~~plan should enable us to ~~fiscal~~achieve ~~year~~our ~~2008~~strategic objectives without significantly increasing our selling expenses, provided that this projection may change depending on the reaction of our competitors. On the administrative side, costs resulting from compliance with SEC and NYSE Amex requirements are projected to continue to grow and we may also need to hire additional administrative personnel growth as sales levels increase.

~~For~~As ~~fiscal~~discussed ~~year~~in ~~2010~~Note we14 ~~continue~~(“Segmented Information”) to ~~expect~~the ~~that~~consolidated ~~our~~financial ~~gross~~statements ~~margin~~included ~~will~~elsewhere ~~remain~~ in ~~the range of 31% to 36%. The reasons for~~ this ~~expectation~~Annual ~~are~~Report ason ~~follows.~~Form ~~First~~10-K, ~~even~~operating ~~though~~income ~~fuel~~including ~~and energy cost are currently at relative lows~~selling, ~~economic~~general ~~conditions~~and ~~may~~administrative ~~not allow us to increase prices if they were to rise. Second~~expenses, webut ~~are~~before ~~not~~depreciation achieving the overall reduced costs of raw materials that we had initially expected due to: our product mix (with increased sales of our higher-cost products); slow and uncertain reactions from raw material suppliers in response to our request for ~~additional supplies; and the shortage of key low-cost raw material sources for certain of~~ our ~~facilities.~~animal ~~Third,~~care ~~additional~~product ~~depreciation charges resulting from our new production facilities will also have a negative effect on our gross margin. Fourth~~segment, ~~any~~decreased ~~slowdown~~by in16% ~~sales could result~~ in ~~increased~~fiscal ~~production~~year ~~costs~~2010 onas acompared ~~per unit basis due~~ to afiscal ~~loss~~year ~~of efficiencies gained from higher production rates.~~2009

WeInterest ~~plan to continue to make capital investments in infrastructure and technology at all of our facilities to help decrease the costs of production.~~Expense

~~Selling~~Interest expense in fiscal year 2010 totaled $226,000 ~~General~~as ~~and~~compared ~~Administrative~~to $315,000 during fiscal year 2009. This decrease was due to a reduction in the variable interest rate we pay on the bonds that were used to finance the Jesup, Georgia facility and ~~Expenses~~the reduction in principal amounts as we pay off our bonds according to their terms. We currently have no plans to enter into additional debt financing, which means that we are projecting a decrease in interest expenses in fiscal year 2011 as the principal portion of our existing debt is paid down. This projection assumes that variable interest rates will remain low during fiscal year 2011.

During fiscal year 2009, our selling, general and administrative expenses increased by 19% as compared to fiscal year 2008. This increase was the result of investments we made in the creation and launch of our “new product development” division, additional personnel we hired to upgrade performance levels, expenses related to general sales and marketing programs, and increased costs resulting from our compliance with requirements of the SEC and the NYSE Amex, LLC. Moreover, we now have overhead expenses related to operating our Georgia facility, increased property taxes, and increased depreciation expense. 20

WeIncome anticipate that investments in sales and marketing programs and new product development costs, along with our stock-based compensation expenses and growing public company reporting expenses, will continue to increase selling, general and administrative expenses during fiscal year 2010, though not at the rate at which they increased during the current fiscal year. During fiscal year 2010, we intend to continue our marketing and new product development initiatives. Our seasoned sales staff is respected in the animal care industry and has proven to be efficient and effective in selling to the wholesale distribution segment of the pet specialty channel. We completed our program of rounding out our sales staff during fiscal year 2009 and do not at this time anticipate adding any additional sales personnel during fiscal year 2010. We feel that the 2010 sales plan should enable us to achieve our strategic objectives without significantly increasing our selling expenses, provided that this projection may change depending on the reaction of our competitors. On the administrative side, costs resulting from compliance with SEC and NYSE Amex requirements are projected to continue to grow and we may also need to hire additional administrative personnel growth as sales levels increase.Tax

~~Interest~~Absorption ~~Expense~~incurred federal income taxes during fiscal year 2010 at an effective rate of 49%. The effective rate is higher than the rate incurred during fiscal year 2009 (of 38%). This increased rate was the result of the costs incurred in connection with the proposed Arrangement, resulting in a net operating loss in Canada, which is fully reserved for through a valuation allowance. A valuation allowance has been reserved for all Canadian deferred income tax assets as these assets are not expected to be utilized in future periods.

~~Interest~~Net expense in fiscal year 2009 totaled $315,000 as compared to $385,000 during fiscal year 2008. This decrease was due to a reduction in the variable interest rate we pay on the bonds that were used to finance the Jesup, Georgia facility and the reduction in principal amounts as we pay off our bonds according to their terms. We currently have no plans to enter into additional debt financing, which means that we are projecting a decrease in interest expenses in fiscal year 2010 as the principal portion of our existing debt is paid down. This projection assumes that variable interest rates will remain low during fiscal the year 2010.Income

~~Income~~Our ~~Tax~~net income for the year ended January 31, 2010 decreased by 35% as compared to the same period in the prior fiscal year. This decrease in net income as compared to the prior period was the result of a slight decrease in sales and an increase in our selling, general, and administrative costs, primarily caused by expenses related to the proposed Arrangement. We believe that our ability to remain profitable in fiscal year 2010 despite a decrease in sales and an increase in selling, general and administrative costs was the result of a continued concentration on the implementation of the key components of our business plan that focus on increasing production efficiencies and controlling indirect costs.

~~Absorption~~Our ~~incurred~~focus ~~federal income taxes~~ during fiscal year ~~2009~~2011 atwill anbe ~~effective~~to ~~rate~~improve ofcurrent ~~38%.~~sales ~~The~~levels ~~effective~~as ~~rate~~the isglobal ~~consistent~~economy ~~with~~begins to improve, and minimize the ~~rate~~growth ~~incurred~~of ~~during~~our selling general and administrative costs while attempting to maintain gross profit margins. Our biggest challenges for the coming fiscal year ~~2008~~will ~~(of~~be ~~38%).~~maintaining Weexisting ~~anticipate~~sales ~~that~~levels as the ~~effective~~buying ~~rate~~habits ~~going~~of ~~forward~~retail ~~will~~customers ~~fluctuate~~continue ~~depending~~to onchange, continuing the ~~ratio~~improvement of ~~net~~our ~~income~~gross ~~before~~margin, ~~taxes~~and tomaintaining ~~stock-based~~selling, ~~compensation~~general ~~recognized~~and inadministrative aexpenses ~~particular~~at ~~period~~levels that create opportunities for future growth. We ~~Deferred~~will ~~income~~continue ~~tax~~to ~~assets~~invest in ~~International~~future ~~Absorbents~~marketing ~~have~~programs ~~been~~to ~~fully~~offset ~~reserved~~competitive ~~through~~pressures ~~the~~as ~~recording~~necessary. In addition, we anticipate that existing levels of adepreciation ~~valuation~~resulting ~~allowance~~from asour ~~Canadian~~prior ~~deferred~~investment ~~tax~~in ~~assets~~plant ~~are~~and ~~not~~equipment ~~expected~~will tonegatively beaffect ~~utilized~~our infiscal ~~future~~year ~~periods~~2011 net income.

~~Net~~Earnings ~~Income~~Before Interest, Taxes, Depreciation, and Amortization (EBITDA)

~~Our~~We ~~net~~believe ~~income~~that ~~for~~one ~~the~~of ~~year~~our ~~ended~~key ~~January 31,~~financial ~~2009~~and ~~increased~~operating byperformance 8%metrics asis ~~compared~~Earnings tobefore ~~the~~Interest, ~~same~~Taxes, ~~period~~Depreciation, inand ~~the~~Amortization ~~prior fiscal year~~(EBITDA). Our ~~This~~EBITDA ~~increase~~decreased inby ~~net~~14% ~~income~~during ~~over the prior~~ fiscal year ~~was~~2010 ~~primarily~~as ~~caused~~compared byto ~~increased~~fiscal ~~sales~~year ~~and improved gross profits~~2009. The Wedecrease ~~feel~~for ~~that~~fiscal ~~continued~~year ~~concentration~~2010 onwas ~~the~~substantially ~~implementation of~~ the ~~key~~result ~~components~~ of ~~our~~a ~~business~~reduction ~~plan~~in ~~that~~sales ~~focus on production efficiencies~~ and ~~controlled~~higher ~~costs~~selling, ~~should provide us with continued increases in production rates~~general, ~~which~~and ~~should~~administrative ~~help us to remain profitable even if our sales were to slightly decrease during fiscal year 2010~~costs.

20EBITDA is not a measure of financial performance under generally accepted accounting principles (GAAP) in the United States. Accordingly, it should not be considered a substitute for net income, cash flow provided by operating activities, or other income or cash flow data prepared in accordance with GAAP. However, we believe that EBITDA may provide additional information with respect to our financial performance and our ability to meet our future debt service, capital expenditures and working capital requirements. This measure is widely used by investors and rating agencies in the valuation, comparison, rating, and investment recommendations of companies. In addition, we use EBITDA as one of several factors when determining the compensation for our executive officers. Because EBITDA excludes some, but not all items that affect net income and may vary among companies, the EBITDA presented by us may not be comparable to similarly titled measures of other companies. The following schedule reconciles EBITDA to net income reported on our Condensed Consolidated Statement of Operations, which we believe is the most directly comparable GAAP measure:

Our focus during fiscal year 2010 will be to maintain current sales levels through the ongoing global economic downturn, and minimize the growth of our selling general and administrative costs while targeting an improved gross profit margin. Our biggest challenges for the coming fiscal year will be maintaining existing sales levels as the buying habits of retail customers continue to change, continuing the improvement of our gross margin, and maintaining selling, general and administrative expenses at levels that create opportunities for future growth. We will continue to invest in future marketing programs to offset competitive pressures as necessary and anticipate additional administrative costs resulting from regulatory requirements. In addition, we anticipate that existing levels of depreciation resulting from our investment in plant and equipment will negatively affect our fiscal year 2010 net income. If the U.S. economy has a minimal effect on our sales growth, then we anticipate that we will be able to continue to increase net income in fiscal year 2010, though not at the rate at which fiscal year 2009 increased over fiscal year 2008.

	For the year ended
(U.S. dollars in thousands)	January 31, 2010			January 31, 2009			Percentage Change

Net Income (as reported on Condensed Consolidated Statement of Operations)	$	1,450		$	2,239
Interest expense		226			315
Interest income		(11	)		(62	)
Income tax provision		1,399			1,415
Depreciation & amortization		1,757			1,830
EBITDA	$	4,821		$	5,737			-16	%

~~Earnings~~During ~~Before~~fiscal ~~Interest,~~year ~~Taxes~~2011, ~~Depreciation,~~management ~~and~~will ~~Amortization~~continue (to focus on EBITDA) as a key performance indicator.

We believe that one of our key financial and operating performance metrics is Earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA). Our EBITDA increased by 8% during fiscal year 2009 as compared to fiscal year 2008. The increase for fiscal year 2009 was substantially the result of increased sales and an improved gross margin.21

~~EBITDA~~Liquidity is not a measure of financial performance under generally accepted accounting principles (GAAP) in the United States. Accordingly, it should not be considered a substitute for net income, cash flow provided by operating activities, or other income or cash flow data prepared in accordance with GAAP. However, we believe that EBITDA may provide additional information with respect to our financial performance and ~~our~~Capital ability to meet our future debt service, capital expenditures and working capital requirements. This measure is widely used by investors and rating agencies in the valuation, comparison, rating, and investment recommendations of companies. In addition, we use EBITDA as one of several factors when determining the compensation for our executive officers. Because EBITDA excludes some, but not all items that affect net income and may vary among companies, the EBITDA presented by us may not be comparable to similarly titled measures of other companies. The following schedule reconciles EBITDA to net income reported on our Condensed Consolidated Statement of Operations, which we believe is the most directly comparable GAAP measure:Resources

	For the year ended
	January 31, 2009		January 31, 2008		Percentage Change
(U.S. dollars in thousands)
Net Income (as reported on Condensed Consolidated Statement of Operations)	$	2,239	$	2,016
Interest expense		315		385
Interest income		(62)		(86)
Income tax provision		1,415		1,254
Depreciation & amortization		1,830		1,719
EBITDA	$	5,737	$	5,288	8%

During fiscal year 2010 we focused on improving the production efficiencies at both of our plants. Our improved gross margin in the last half of fiscal year 2010 was the result of both the success we had in improving production efficiencies and the reduction in energy and transportation costs. We believe that the improvement in our production facilities will help provide a solid return on the investments we have made in capital expansion over the past several years.

~~During~~The ~~fiscal~~table ~~year~~below ~~2010,~~illustrates ~~management~~the ~~will~~effects ~~continue~~this tocapital ~~focus~~expansion onplan ~~EBITDA~~has ashad aon ~~key~~our ~~performance~~financial ~~indicator~~statements (U.S. dollars, in thousands):

Liquidity and Capital Resources

	As of January 31, 2010		As of January 31, 2009
Financial Condition
Total Assets	$	32,610	$	31,281
Total Liabilities		10,356		10,895
Total Equity	$	22,254	$	20,386

Debt/equity ratio		0.47		0.53
Assets/debt ratio		3.15		2.87

Working Capital
Current assets	$	13,277	$	11,465
Current liabilities	$	3,716	$	3,595

Current ratio		3.57		3.19

Cash Position
Cash, restricted cash & short term investments	$	7,140	$	4,146
Cash generated from operations	$	5,593	$	3,644

~~During~~Financial fiscal year 2009 we focused on improving the production efficiencies at both of our plants. Our improved gross margin in the last half of fiscal year 2009 was the result of both the success we had in improving production efficiencies and the reduction in energy and transportation costs. We believe that the improvement in our production facilities will help provide a solid return on the investments we have made in capital expansion over the past several years.Condition

21During fiscal year 2010, the value of our total assets increased. This was primarily the result of an increase in cash and cash equivalents generated from operating activities. Accounts receivable remained flat during the fiscal year and our inventory levels decreased as a result of tight management controls. In addition, current liabilities increased only slightly. These changes in current accounts were offset by limited capital investments, which resulted in our significant increase in cash balances. We also had a decrease in total liabilities resulting from the payment made on the principal portion of our long term debt.

~~The~~As ~~table~~discussed ~~below~~under ~~illustrates~~Note ~~the~~8 ~~effects~~to ~~this~~our ~~capital~~consolidated ~~expansion~~financial ~~plan~~statements ~~has~~included ~~had~~elsewhere in this Annual Report on Form 10-K, we currently have three long-term debt facilities, including our ~~financial~~September ~~statements~~2006 ~~(U.S.~~bond ~~dollars~~financing arrangement with GE Capital Public Finance, inInc ~~thousands~~(“GECPF”):, our March 2003 bond financing with GECPF and our September 2004 tax-exempt bond financing with BB&T.

	As of January 31, 2009		As of January 31, 2008
Financial Condition
Total Assets	$	31,281	$	28,589
Total Liabilities		10,895		10,900
Total Equity	$	20,386	$	17,689
Debt/equity ratio		0.53		0.62
Assets/debt ratio		2.87		2.62
Working Capital
Current assets	$	11,465	$	8,691
Current liabilities	$	3,595	$	3,080
Current ratio		3.19		2.82
Cash Position
Cash, restricted cash & short term investments	$	4,146	$	2,809
Cash generated from operations	$	3,644	$	3,571

We believe that our main credit risk exposure in fiscal year 2011 will come from meeting the covenants included in our debt facilities and the marketability of tax exempt industrial revenue bonds. As of the end of fiscal year 2010 we were over minimum financial requirements and under maximum requirements included in these covenants. The covenant-related ratios that we believe pose the most significant risk in the future are those based on cash flow. Any significant decrease in our cash flow could result in the breach of one or more of these loan covenants. If we fail to satisfy the financial covenants or other requirements contained in our debt facilities, our debts could become immediately payable at a time when we are unable to pay them, which would adversely affect our liquidity and financial condition. In addition, if we are to make cash flow decisions to remain within our loan covenants, these decisions could affect our ability to effectively execute on our long term business strategy.

~~Financial Condition~~22

~~During~~The ~~fiscal~~marketability ~~year~~of ~~2009,~~tax ~~the~~exempt ~~value~~industrial ofrevenue ~~our~~bonds ~~total~~is ~~assets~~a ~~increased.~~potential ~~This~~industry-wide ~~was~~issue, ~~primarily~~and ~~the~~is ~~result~~not ofrelated anto ~~increase~~our inliquidity ~~current~~or ~~assets,~~results ~~which resulted~~ from ~~growing~~operations. The ~~operational~~industrial ~~activities.~~revenue Asbonds anfor ~~example~~our Jesup, ~~both~~Georgia ~~accounts~~facility ~~receivable~~are remarketed and ~~inventories~~the ~~increased~~industrial asrevenue abonds ~~result~~for ofour ~~growing~~Ferndale, ~~sales~~Washington ~~and~~facility ~~cash~~are ~~position~~held ~~improved~~by asGE aCapital ~~result~~Public ofFinance, ~~increased~~Inc. If ~~profits,~~the inindustrial ~~both~~revenue ~~cases~~bonds ~~offset~~that byare ~~limited~~remarketed ~~capital~~were ~~investments.~~not Weable ~~also~~to ~~had~~be asold, ~~decrease~~due into ~~total~~a ~~liabilities~~market ~~resulting~~failure, ~~from~~according to the ~~payment~~terms of ~~principal~~the ofbond ~~long~~agreement, ~~term~~we ~~debt~~would ~~and~~likely ahave ~~reduction~~to inpay ~~current~~off ~~liabilities~~the outstanding balance, which is currently $2,800,000.

AsDebt ~~discussed~~retirement ~~under~~is ~~Note~~an 8alternative tothat ~~our~~we ~~consolidated~~consider ~~financial~~on ~~statements~~an ~~included~~ongoing ~~elsewhere~~basis. Relevant factors in ~~this~~our ~~Annual~~analysis ~~Report~~include onthe ~~Form 10-K,~~availability weand ~~currently~~cost ~~have~~of ~~three~~equity and the rate of interest on our debt. Our long-term debt ~~facilities,~~has ~~including~~been ~~our~~at ~~September 2006~~very ~~bond~~favorable ~~financing~~rates ~~arrangement~~such ~~with~~that GEwe ~~Capital~~believe ~~Public~~it ~~Finance,~~was ~~Inc~~and ~~(“GECPF”),~~continues to be advantageous to use our ~~March 2003~~existing ~~bond~~capital ~~financing~~for ~~with~~other ~~GECPF~~applications. At ~~and~~this ~~our~~time, ~~September 2004~~we ~~tax-exempt~~do ~~bond~~not ~~financing~~intend ~~with~~to ~~BB&T~~raise additional equity capital in the near term.

WeWorking believe that our main credit risk exposure in fiscal year 2010 will come from meeting the covenants included in our debt facilities and the marketability of tax exempt industrial revenue bonds. As of the end of fiscal year 2009 we were over minimum financial requirements and under maximum requirements included in these covenants. The covenant-related ratios that we believe pose the most significant risk in the future are those based on cash flow. Any significant decrease in our cash flow could result in the breach of one or more of these loan covenants. If we fail to satisfy the financial covenants or other requirements contained in our debt facilities, our debts could become immediately payable at a time when we are unable to pay them, which would adversely affect our liquidity and financial condition. In addition, if we are to make cash flow decisions to remain within our loan covenants, these decisions could affect our ability to effectively execute on our long term business strategy. Capital

~~The~~During ~~marketability~~fiscal ofyear ~~tax~~2010, ~~exempt~~our ~~industrial~~working ~~revenue~~capital ~~bonds~~position iscontinued ato ~~potential~~improve ~~industry-wide~~as ~~issue,~~current assets increased and iscurrent ~~not~~liabilities ~~related~~increased toonly ~~our~~slightly. The ~~liquidity~~majority orof ~~results~~the ~~from~~increase ~~operations.~~in ~~The~~current ~~industrial~~assets ~~revenue~~was ~~bonds~~the ~~for~~result ~~our~~of ~~Jesup,~~increased ~~Georgia~~cash ~~facility~~generated ~~are~~from ~~remarketed~~operating ~~and~~activities. Current ~~the~~liabilities ~~industrial~~increased ~~revenue~~primarily ~~bonds~~due ~~for~~to ~~our~~increases ~~Ferndale,~~in ~~Washington~~taxes ~~facility~~payable ~~are~~and ~~held~~amounts bydue GEto ~~Capital~~a ~~Public~~related ~~Finance,~~party ~~Inc.~~in Ifconnection with the ~~industrial~~proposed ~~revenue~~Arrangement. These ~~bonds~~changes ~~that~~resulted ~~are~~in ~~remarketed~~our ~~were~~current ~~not~~ratio ~~able~~(current toassets bedivided ~~sold,~~by ~~due~~current toliabilities) aincreasing ~~market~~from ~~failure,~~3.19 ~~according~~at to the ~~terms~~end of ~~the~~fiscal ~~bond~~year ~~agreement,~~2009 ~~we would likely have~~ to ~~pay~~3.57 ~~off~~at the ~~outstanding~~end ~~balance,~~of ~~which~~fiscal isyear ~~currently $3,300,000~~2010.

~~Debt~~In ~~retirement~~fiscal isyear an2011 ~~alternative~~we expect that weif ~~consider~~sales onlevels angrow, ~~ongoing~~our ~~basis.~~current ~~Relevant~~assets ~~factors~~will incontinue ~~our~~to ~~analysis~~increase ~~include~~as ~~the~~a ~~availability~~result ~~and~~of ~~cost~~positive ofcash ~~equity~~flow and ~~the~~an ~~rate~~increase ofin ~~interest~~accounts onreceivable ~~our~~and ~~debt~~inventories. We ~~Our~~also ~~long-term~~expect ~~debt~~that ~~has~~current ~~been~~liabilities atwill ~~very~~increase ~~favorable~~as ~~rates~~a ~~such~~result ~~that~~of wegrowing ~~believe~~accounts itpayable ~~was~~related ~~and~~to ~~continues~~the togeneral begrowth ~~advantageous~~of tothe ~~use~~company. Even ~~our~~though ~~existing~~we ~~capital~~expect ~~for~~both ~~other~~current ~~applications.~~assets Atand ~~this~~current ~~time~~liabilities to grow, we dobelieve ~~not~~that ~~intend~~our tonet ~~raise~~working ~~additional~~capital ~~equity~~position ~~capital~~will inimprove over the ~~near~~coming ~~term~~fiscal year.

22Cash Position

~~Working~~We ~~Capital~~believe that our existing cash on hand and our long-term debt currently provide us with enough cash to meet our existing needs for the foreseeable future. Cash and investments increased during fiscal year 2010, primarily as a result of cash generated from operations. We expect cash on hand to increase during fiscal year 2011, mostly as a result of cash generated from operations which will not be significantly off-set by cash used for investing activities. 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.

~~During~~Cash ~~fiscal~~Generated year 2009, our working capital position continued to improve as current assets increased and current liabilities decreased. The majority of the increase in current assets was the result of increased cash used to fund our growing operations and an increase in inventories. Current liabilities decreased primarily due to decreases in accounts payable. These changes resulted in our current ratio (current assets divided by current liabilities) increasing from ~~2.82 at the end of fiscal year 2008 to 3.19 at the end of fiscal year 2009.~~ Operations

InDuring fiscal year 2010 we ~~expect~~generated ~~that~~$5,593,000 ifin ~~sales~~cash ~~are~~from atoperating ~~projected~~activities. The ~~our~~cash ~~current~~generated ~~assets~~during ~~will~~fiscal ~~continue~~year to2010 ~~increase~~was as a ~~result~~53% ofincrease ~~positive~~over ~~cash~~the ~~flow~~$3,644,000 ~~and an increase~~ in ~~accounts~~cash ~~receivable~~generated ~~and~~during ~~inventories,~~fiscal ifyear ~~sales levels grow~~2009. If Weour ~~also~~sales ~~expect~~continue ~~that~~to ~~current liabilities will~~ increase asand awe ~~result~~are ofable ~~growing~~to ~~accounts~~continue ~~payable~~to ~~related~~profitably toproduce ~~the~~our ~~general~~products, ~~growth~~we ofshould ~~the~~be ~~company.~~able ~~Even~~to ~~though~~continue weto ~~expect~~generate ~~both~~cash ~~current~~from ~~assets~~operating ~~and~~activities ~~current~~during ~~liabilities~~fiscal toyear ~~grow~~2011, wealthough ~~believe~~it ~~that~~cannot ~~our~~be ~~net~~assured ~~working~~that ~~capital~~this ~~position~~ will ~~improve~~be ~~over~~ the ~~coming fiscal year~~case.

~~Cash~~Financing ~~Position~~and Investing Activities

WeCash ~~believe~~used ~~that our existing cash on hand, long-term debt and available line of credit currently provide us with enough cash to meet our existing needs~~ for ~~the~~financing ~~foreseeable~~activities ~~future. Cash and investments increased~~ during fiscal year ~~2009,~~2010 ~~primarily~~was as$877,000. This awas the result of ~~cash~~principal ~~generated~~payments ~~from~~made ~~operations.~~on Weour ~~expect~~long-term ~~cash~~debt. Cash onused ~~hand~~in toinvesting ~~increase~~activities during fiscal year 2010, ~~mostly~~was asapproximately ~~a result of cash generated from operations. We believe that our existing~~ $21,~~000~~722,000 ~~line of credit with BB&T will suffice in covering any potential cash shortfall~~. This ~~line~~cash ofwas ~~credit~~used isfor ~~secured by inventory and accounts receivable, which we anticipate should provide enough collateral to support~~ the ~~related~~acquisition ~~debt. Interest is payable on funds advanced at the LIBOR rate plus 2.5%. The line~~ of ~~credit~~fixed ~~matures on May 23, 2009 and we expect it to be renewed~~assets. A Ifportion ~~the current conditions in the credit markets prevent us from renewing the existing line~~ of ~~credit,~~these weassets ~~may~~were beproduction-related ~~able~~items tothat ~~obtain~~were areplaced ~~new~~as ~~line~~part of ~~credit~~our ~~through~~ongoing amaintenance ~~Canadian bank, due to the location of International Absorbents~~program. We Asalso ofmade ~~January 31,~~several ~~2009,~~investments noduring ~~borrowings were outstanding under the line of credit. If we do borrow against this line of credit and it is renewed, we intend to pay it off before the end of~~ fiscal year 2010. ~~We will continue~~ to ~~closely~~reduce ~~monitor~~costs ~~both current liabilities~~ and ~~current~~improve ~~assets~~efficiencies asin ~~they relate to~~ the ~~generation~~areas of ~~cash~~fiber recovery, ~~with~~energy anuse, ~~emphasis~~and onproduct ~~maximizing potential sources of cash~~handling.

~~Cash~~We ~~Generated~~believe ~~from~~that ~~Operations~~for the near future we will not need to use cash to invest in significant capital improvements. We will continue to use cash to fully maintain our existing facilities and to make improvements which we expect will increase production efficiencies and reduce manufacturing costs.

During fiscal year 2009 we generated $3,644,000 in cash from operating activities. The cash generated during fiscal year 2009 was a 2% increase over the $3,571,000 in cash generated during fiscal year 2008. If our sales continue to increase and we are able to continue to profitably produce our products, we should be able to continue to generate cash from operating activities during fiscal year 2010, although it cannot be assured that this will be the case.23

~~Financing~~Related ~~and~~Party ~~Investing Activities~~Transaction

~~Cash~~In ~~used~~connection ~~for~~with ~~financing~~the ~~activities~~Arrangement, ~~during~~in ~~fiscal~~response ~~year~~to ~~2009~~an ~~was~~unsolicited ~~$857~~offer to purchase International Absorbents,~~000.~~ ~~This~~we ~~was~~engaged ~~the~~in ~~result~~an ofauction ~~principal~~process ~~payments~~to ~~made~~solicit onpotential ~~our~~bids ~~long-term~~related ~~debt.~~to ~~Cash~~the ~~used~~sale inof ~~investing~~International ~~activities~~Absorbents ~~during~~and ~~fiscal~~incurred ~~year~~significant ~~2009~~costs ~~was~~in ~~approximately~~connection therewith. Included in these expenses is $1326,~~450,~~000 owed to Arctic Acquisitions, Inc. ~~This~~ ~~cash~~(“Arctic”), ~~was~~an ~~used~~entity ~~for~~partially ~~the~~owned ~~acquisition~~by certain of ~~fixed~~our ~~assets~~executive officers and one of our directors, as reimbursement of certain fees and expenses incurred by Arctic during our auction process. The Aindependent ~~portion~~members of ~~these~~our ~~assets~~board ~~were~~of ~~production-related~~directors ~~items~~as well as our audit committee determined that ~~were~~the ~~replaced~~activities asengaged ~~part~~in by Arctic during the auction process helped to increase the value of our ~~ongoing~~common ~~maintenance~~shares ~~program~~and thus generate additional value for our shareholders. Specifically, Weamong ~~also~~other things, Artic made ~~several~~the ~~investments~~initial ~~during~~viable ~~fiscal~~bid ~~year~~which ~~2009~~commenced tothe ~~reduce~~auction ~~costs~~process. Therefore, the independent members of our board of directors determined that incurrence and ~~improve~~reimbursement ~~efficiencies~~of these expenses was in the ~~areas~~best interest of ~~fiber~~the ~~recovery,~~company ~~energy use,~~ and ~~product~~its ~~handling~~shareholders.

WeOff-Balance ~~believe~~Sheet that for the near future we will not need to use cash to invest in significant capital improvements. We will continue to use cash to fully maintain our existing facilities and to make improvements which we expect will increase production efficiencies and reduce manufacturing costs.Arrangements

~~Off~~The SEC requires companies to disclose off-~~Balance~~balance ~~Sheet~~sheet ~~Arrangements~~arrangements. As defined by the SEC, an off-balance sheet arrangement includes any contractual obligation, agreement or transaction arrangement involving an unconsolidated entity under which a company 1) has made guarantees, 2) has a retained or a contingent interest in transferred assets, 3) has an obligation under derivative instruments classified as equity, or 4) has any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the company, or that engages in leasing, hedging or research and development services with the company.

~~The~~We ~~SEC~~have ~~requires~~examined ~~companies~~our ~~to disclose off-balance sheet arrangements. As defined by the SEC, an off-balance sheet arrangement includes any~~ contractual obligation, ~~agreement~~structures orthat ~~transaction~~may ~~arrangement~~potentially ~~involving~~be animpacted ~~unconsolidated~~by ~~entity~~this ~~under~~disclosure ~~which~~requirement aand ~~company~~have ~~1) has~~concluded ~~made~~that ~~guarantees,~~no ~~2) has~~arrangements ~~a retained or a contingent interest in transferred assets, 3) has an obligation under derivative instruments classified as equity, or 4) has any obligation arising out~~ of athe ~~material~~types ~~variable~~described ~~interest~~above inexist anwith ~~unconsolidated~~respect ~~entity that provides financing, liquidity, market risk or credit risk support~~ to ~~the~~our company~~, or that engages in leasing, hedging or research and development services with the company~~.

WeCritical ~~have~~Accounting examined our contractual obligation structures that may potentially be impacted by this disclosure requirement and have concluded that no arrangements of the types described above exist with respect to our company.Policies

23Introduction

~~Critical~~In ~~Accounting~~preparing ~~Policies~~our consolidated financial statements in conformity with accounting principles generally accepted in the United States, management makes judgments, assumptions and estimates 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, income taxes, including deferred income taxes and the related valuation allowance, accrual for self-insured medical insurance plans, sales incentives and stock based compensation. As part of the financial reporting process, our management collaborates to determine the necessary information on which to base judgments and develop estimates used to prepare the consolidated financial statements. Historical experience and available information is used to make these judgments and estimates. However, different amounts could be reported using different assumptions and in light of different facts and circumstances. Therefore, actual amounts could differ from the estimates reflected in the consolidated financial statements.

~~Introduction~~In addition to the significant accounting policies described in Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, we believe that the following discussion addresses our critical accounting policies.

In preparing our consolidated financial statements in conformity with accounting principles generally accepted in the United States, management makes judgments, assumptions and estimates 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, income taxes, including deferred income taxes and the related valuation allowance, accrual for self-insured medical insurance plans, sales incentives and stock based compensation. As part of the financial reporting process, our management collaborates to determine the necessary information on which to base judgments and develop estimates used to prepare the consolidated financial statements. Historical experience and available information is used to make these judgments and estimates. However, different amounts could be reported using different assumptions and in light of different facts and circumstances. Therefore, actual amounts could differ from the estimates reflected in the consolidated financial statements.Inventory

InUnexpected ~~addition~~changes in market demand or buyer preferences could reduce the rate of inventory turnover and require us to record a reserve for obsolescence. Finished goods inventory are valued at the ~~significant~~lower ~~accounting~~of ~~policies~~cost ~~described~~(determined on the first-in, ~~Note~~first-out 1basis) 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 net realizable value. We have not historically experienced a period where a material amount of finished goods inventory or raw materials inventory has been required to ~~our~~be ~~consolidated~~reduced ~~financial~~in ~~statements~~value ~~included~~as ~~elsewhere~~a result of changes in market demand or buyer preference. Because of this ~~Annual~~lack ~~Report~~of onhistorical ~~Form 10-K~~change we have not yet had to record a reserve for obsolete inventory. Our assumptions and valuation methodology for inventory have historically not changed. Even though we have not historically had to record a reserve for obsolete inventory as a result of changes in market demand or buyer preference, there is no guarantee that one or both of these events will not happen. As a result, even though we believe that ~~the~~it ~~following~~is ~~discussion~~unlikely ~~addresses~~that ~~our~~a ~~critical~~change ~~accounting~~will ~~policies~~occur, we do recognize that change is possible and will record a reserve for obsolete inventory if the circumstances dictate as previously described.

~~Inventory~~24

Unexpected changes in market demand or buyer preferences could reduce the rate of inventory turnover and require us to record a reserve for obsolescence. Finished goods inventory are valued at the lower of cost (determined on the first-inProperty, ~~first-out~~Plant ~~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 net realizable value. We have not historically experienced a period where a material amount of finished goods inventory or raw materials inventory has been required to be reduced in value as a result of changes in market demand or buyer preference. Because of this lack of historical change we have not yet had to record a reserve for obsolete inventory. Our assumptions and valuation methodology for inventory have historically not changed. Even though we have not historically had to record a reserve for obsolete inventory as a result of changes in market demand or buyer preference, there is no guarantee that one or both of these events will not happen. As a result, even though we believe that it is unlikely that a change will occur, we do recognize that change is possible and will record a reserve for obsolete inventory if the circumstances dictate as previously described.Equipment

There is a risk that our estimate of the useful life of a component of our property plant or equipment was overestimated. If that was the case the depreciated value of the equipment or building would be greater than its actual value, which would result in our recording a reserve to lower the net carrying value of the asset. Property, ~~Plant~~plant and ~~Equipment~~equipment assets are recorded at cost. Our building and equipment are located on owned and leased land. Buildings are depreciated on a straight line basis over a period of 40 years. Leasehold improvements are depreciated on a straight line basis over the life of the lease agreement for property located on leased land. Most of our equipment is depreciated over its estimated useful life using a 15% declining balance method; the remainder is depreciated using a straight line method over five years. We have chosen to use the 15% declining value method over a fixed period straight line method to better reflect the fair market value and useful life of equipment which is typically used in our facilities. We also review the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The determination of any impairment would include a comparison of estimated future cash flows anticipated to be generated during the remaining life of the asset. Due to the nature of the buildings and equipment we purchase, the depreciation method that we use, and the cash flows generated during the life of the assets, we have not had to historically record a reserve to reflect a decrease in the net carrying value of assets. We have historically neither changed our depreciation methods, our assumptions behind the depreciation methods, or our methodology for determining impairment. Based on the length of time we have been manufacturing in the industry in which we operate, we believe that it is unlikely that an impairment of existing buildings or equipment will have to be recorded. If we were to expand into a manufacturing industry in which we do not have as much history, the likelihood of being required to record an impairment increases. If at some future date we enter an industry in which we have no historic knowledge, then the risk of recording an impairment would also increase.

~~There~~Revenue is a risk that our estimate of the useful life of a component of our property plant or equipment was overestimated. If that was the case the depreciated value of the equipment or building would be greater than its actual value, which would result in our recording a reserve to lower the net carrying value of the asset. Property, plant and equipment assets are recorded at cost. Our building and equipment are located on owned and leased land. Buildings are depreciated on a straight line basis over a period of 40 years. Leasehold improvements are depreciated on a straight line basis over the life of the lease agreement for property located on leased land. Most of our equipment is depreciated over its estimated useful life using a 15% declining balance method; the remainder is depreciated using a straight line method over five years. We have chosen to use the 15% declining value method over a fixed period straight line method to better reflect the fair market value and useful life of equipment which is typically used in our facilities. We also review the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The determination of any impairment would include a comparison of estimated future cash flows anticipated to be generated during the remaining life of the asset. Due to the nature of the buildings and equipment we purchase, the depreciation method that we use, and the cash flows generated during the life of the assets, we have not had to historically record a reserve to reflect a decrease in the net carrying value of assets. We have historically neither changed our depreciation methods, our assumptions behind the depreciation methods, or our methodology for determining impairment. Based on the length of time we have been manufacturing in the industry in which we operate, we believe that it is unlikely that an impairment of existing buildings or equipment will have to be recorded. If we were to expand into a manufacturing industry in which we do not have as much history, the likelihood of being required to record an impairment increases. If at some future date we enter an industry in which we have no historic knowledge, then the risk of recording an impairment would also increase.Recognition

~~Revenue~~If ~~Recognition~~the actual costs of sales returns and incentives were to significantly exceed the recorded estimated allowance, our sales would be adversely affected in that we would record additional reserves which would reduce our net sales revenue. Revenues from the sale of products are recognized at the time title passes to the purchaser, which is generally when the goods are conveyed to a carrier. When we sell F.O. B. destination point, title is transferred and we recognize revenue on delivery or customer acceptance, depending on terms of the sales of the agreement. All revenue is recognized net of any discounts, returns, allowances and sales incentives. The Company participates in trade-promotions programs such as shelf price reductions and consumer coupon programs that require the Company to estimate and accrue the expected costs of such programs. Historically we have not had sales returns or incentive requests applied to a fiscal year in greater amounts than what was reserved for. By following our revenue recognition policies we have been able to accurately assess the value of both sales returns and sales incentives. We have annually updated the sales incentive amounts that are annually accrued to match the sales incentive agreements that we have with our customers. By doing so, we have maintained a consistent methodology while adjusting our estimates to more closely reflect our activities within the market place. We believe that it is unlikely that our assumptions or methodology for accounting for revenue recognition, sales returns, and sales incentives will change in the future. However, we do believe that it is likely that the actual estimates that we use for our sales incentive programs and sales returns may change in the future from time to time as a result of a dynamic marketplace.

IfIncome the actual costs of sales returns and incentives were to significantly exceed the recorded estimated allowance, our sales would be adversely affected in that we would record additional reserves which would reduce our net sales revenue. Tax

24We account for income taxes using the asset and liability method. The liability method recognizes the amount of tax payable at the date of the financial statements as a result of all events that have been recognized in the consolidated financial statements, as measured by the provisions of currently enacted tax laws and rates. The accumulated tax effect of all temporary differences is presented as deferred federal income tax assets and liabilities within the balance sheet. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be realized.

~~Revenues~~Effective ~~from~~February 1, 2007, the ~~sale~~Company ofadopted ~~products~~Accounting ~~are~~Standards ~~recognized~~Codification at(“ASC”) ~~the~~Topic ~~time~~740, ~~title~~Income ~~passes to the purchaser~~Taxes, which isprescribes ~~generally~~a ~~when~~comprehensive ~~the~~model ~~goods~~for ~~are~~how ~~conveyed to~~ a ~~carrier.~~company ~~When~~should werecognize, ~~sell F.O. B. destination point~~measure, ~~title~~present ~~is transferred~~ and wedisclose ~~recognize~~in ~~revenue~~its onfinancial ~~delivery~~statements oruncertain ~~customer~~tax ~~acceptance,~~positions ~~depending~~that ~~on terms of~~ the ~~sales~~company ofhas ~~the~~taken ~~agreement.~~or ~~Sales~~expects ~~incentives~~to ~~are~~take ~~accounted~~on ~~for~~a intax ~~accordance~~return. ~~with~~Though the ~~provisions~~validity of ~~Emerging~~any ~~Issues~~tax ~~Task~~position ~~Force~~is ~~(“EITF”) Issue No. 01-9 “Accounting for Consideration Given by~~ a ~~Vendor~~matter toof atax ~~Customer.”~~law, Historically we have not had sales returns or incentive requests applied to a fiscal year in greater amounts than what was reserved for. By following our revenue recognition policies we have been able to accurately assess the ~~value~~body of ~~both~~statutory, ~~sales~~regulatory ~~returns~~ and ~~sales~~interpretive ~~incentives.~~guidance Weon ~~have annually updated~~ the ~~sales~~application ~~incentive~~of ~~amounts that are annually accrued to match~~ the ~~sales~~law ~~incentive~~is ~~agreements~~complex ~~that~~and weoften ~~have with our customers~~ambiguous. ByBecause ~~doing~~of sothis, wewhether ~~have maintained~~ a ~~consistent~~tax ~~methodology~~position ~~while~~will ~~adjusting~~ultimately ~~our~~be ~~estimates~~sustained tomay ~~more~~be ~~closely~~uncertain. ~~reflect~~Under ~~our~~FIN 48, ~~activities~~the ~~within~~impact ~~the~~of ~~market~~an ~~place.~~uncertain Wetax ~~believe~~position that it is ~~unlikely~~more ~~that~~likely ~~our~~than ~~assumptions~~not orof ~~methodology~~being ~~for~~sustained ~~accounting~~upon ~~for~~audit ~~revenue~~by ~~recognition,~~the ~~sales~~relevant ~~returns,~~taxing ~~and~~authority ~~sales~~must ~~incentives~~be ~~will~~recognized ~~change~~at in the ~~future.~~largest ~~However,~~amount ~~we do believe~~ that it is more likely ~~that~~than ~~the~~not ~~actual~~to ~~estimates~~be ~~that~~sustained. weNo ~~use~~portion ~~for~~of ~~our~~an ~~sales~~uncertain ~~incentive~~tax ~~programs~~position ~~and~~will ~~sales~~be ~~returns~~recognized ~~may~~if ~~change in~~ the ~~future~~position ~~from~~has ~~time~~less tothan ~~time as~~ a ~~result~~50% likelihood of abeing ~~dynamic marketplace~~sustained.

~~Income Tax~~25

WeStock-Based account for income taxes using the asset and liability method. The liability method recognizes the amount of tax payable at the date of the financial statements as a result of all events that have been recognized in the consolidated financial statements, as measured by the provisions of currently enacted tax laws and rates. The accumulated tax effect of all temporary differences is presented as deferred federal income tax assets and liabilities within the balance sheet. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be realized. Compensation

Effective February 1, ~~2007~~2006, ~~the~~we ~~Company~~ adopted ~~Financial~~the ~~Accounting~~fair ~~Standards~~value ~~Board~~recognition ~~(“FASB”)~~provisions ~~Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation~~ of ~~FASB~~ASC ~~Statement~~718, ~~No. 109~~Stock ~~(“FIN 48”)~~Compensation, ~~which~~using ~~prescribes~~the amodified ~~comprehensive~~prospective ~~model~~transition ~~for~~method. ~~how~~Under athat ~~company~~transition ~~should recognize~~method, ~~measure,~~compensation ~~present~~cost ~~and~~recognized ~~disclose~~ in ~~its~~fiscal ~~financial~~year ~~statements~~ended ~~uncertain~~January ~~tax~~31, ~~positions~~2007 ~~that~~and ~~the~~all ~~company~~subsequent ~~has~~fiscal ~~taken~~years orthereafter ~~expects~~includes: ~~to take on~~ (a) compensation ~~tax~~cost ~~return.~~for ~~Though~~all ~~the~~stock-based ~~validity~~payments ofgranted ~~any~~prior ~~tax~~to, ~~position~~but isnot ayet ~~matter of tax law~~vested, ~~the~~as ~~body~~ of ~~statutory~~January 31, ~~regulatory~~2006, ~~and~~based ~~interpretive guidance~~ on the ~~application~~grant ofdate ~~the~~fair ~~law~~value isestimated ~~complex~~in ~~and~~accordance ~~often~~with ~~ambiguous.~~the ~~Because~~original provisions of ~~this~~ASC 718, ~~whether~~and a(b) ~~tax~~compensation ~~position~~cost ~~will~~for ~~ultimately~~all bestock-based ~~sustained~~payments ~~may~~granted besubsequent ~~uncertain.~~to ~~Under FIN~~February 481, ~~the~~2006, ~~impact~~based ofon anthe ~~uncertain~~grant ~~tax~~date ~~position~~fair ~~that~~value isestimated ~~more~~in ~~likely~~accordance ~~than~~with ~~not~~the ofcurrent ~~being~~provisions ~~sustained~~of ~~upon~~ASC ~~audit~~718. byResults ~~the~~for ~~relevant~~prior ~~taxing~~periods ~~authority~~have ~~must~~not bebeen ~~recognized~~restated, atas ~~the~~provided ~~largest~~for ~~amount~~under ~~that~~the ismodified-prospective ~~more~~method. For ~~likely~~details ~~than~~regarding ~~not~~the toeffect beon ~~sustained.~~our Nofinancial ~~portion~~statements of anusing ~~uncertain~~this ~~tax~~methodology, ~~position~~please ~~will~~see beNote ~~recognized~~2 ifof ~~the~~our ~~position~~consolidated ~~has~~financial ~~less~~statements ~~than~~included aelsewhere ~~50%~~in ~~likelihood~~this ofAnnual ~~being~~Report ~~sustained~~on Form 10-K.

~~Stock~~In our calculation of stock-~~Based~~based ~~Compensation~~compensation we use the Black-Scholes model. This model is an estimate of potential actual results. As such, actual results may vary significantly from our estimated stock-based compensation expense. Specifically, in the event that options were to expire at an exercise price which is below the option’s strike price and the options are not exercised, then we would have taken stock-based compensation expense for options which did not ultimately have a dilutive effect on the outstanding common shares. We do not expect to change our methodology for calculating stock-based compensation in the future.

~~Effective~~ITEM ~~February 1, 2006, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No~~7A. ~~123~~ QUANTITATIVE ~~(revised~~AND ~~2004)~~QUALITATIVE ~~Share-Based~~DISCLOSURES ~~Payment~~ABOUT ~~(SFAS~~MARKET No. 123(R)”) using the modified prospective transition method. Under that transition method, compensation cost recognized in fiscal year ended January 31, 2007 and all subsequent fiscal years thereafter includes: (a) compensation cost for all stock-based payments granted prior to, but not yet vested, as of January 31, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all stock-based payments granted subsequent to February 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). Results for prior periods have not been restated, as provided for under the modified-prospective method. For details regarding the effect on our financial statements of using this methodology, please see Note 2 of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. RISK

InNot our calculation of stock-based compensation we use the Black-Scholes model. This model is an estimate of potential actual results. As such, actual results may vary significantly from our estimated stock-based compensation expense. Specifically, in the event that options were to expire at an exercise price which is below the option’s strike price and the options are not exercised, then we would have taken stock-based compensation expense for options which did not ultimately have a dilutive effect on the outstanding common shares. We do not expect to change our methodology for calculating stock-based compensation in the future.Applicable

2526

ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

~~FINANCIAL STATEMENTS~~INDEX

INDEX

Report of Independent Registered Public Accounting Firm	Page 28

Consolidated Balance Sheets at January 31, 2010 and 2009	Page 29

Consolidated Statements of Income for the Fiscal Years ended January 31, 2010 and 2009	Page 30

Consolidated Statements of Changes In Stockholders’ Equity for the Fiscal Years ended January 31, 2010 and 2009	Page 31

Consolidated Statements of Cash Flows for the Fiscal Years ending January 31, 2010 and 2009	Page 32

Notes to Consolidated Financial Statements, January 31, 2010 and 2009	Page 33

Report of Independent Registered Public Accounting Firm		Page 27
Consolidated Balance Sheets at January 31, 2009 and 2008		Page 28
Consolidated Statements of Income for the Fiscal Years ended January 31, 2009 and 2008		Page 29
Consolidated Statements of Changes In Stockholders’ Equity for the Fiscal Years ended January 31, 2009 and 2008		Page 30
Consolidated Statements of Cash Flows for the Fiscal Years ending January 31, 2009 and 2008		Page 31
Notes to Consolidated Financial Statements, January 31, 2009 and 2008		Page 32

26Report of Independent Registered Public Accounting Firm

~~REPORT~~To OFthe ~~INDEPENDENT~~Board ~~REGISTERED~~of ~~PUBLIC~~Directors ~~ACCOUNTING~~and ~~FIRM~~Stockholders

ToInternational ~~the~~Absorbents ~~Board~~Inc. ~~of Directors~~ and ~~Stockholders~~Subsidiary

We have audited the accompanying consolidated balance sheets of International Absorbents, Inc. and Subsidiary (the “Company”) as of January 31, 2010 and 2009, and the related consolidated statements of income, stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We ~~have~~conducted ~~audited~~our ~~the~~audits ~~accompanying~~in ~~consolidated~~accordance ~~balance~~with ~~sheets~~the standards of ~~International~~the ~~Absorbents,~~Public ~~Inc.~~Company ~~and~~Accounting ~~subsidiary~~Oversight Board (~~the~~United ~~“Company”~~States). asThose ofstandards ~~January 31,~~require ~~2009~~that ~~and~~we ~~2008,~~plan and perform the ~~related~~audits ~~consolidated~~to obtain reasonable assurance about whether the financial statements are free of ~~income,~~material ~~stockholders’~~misstatement. ~~equity~~An ~~and~~audit ~~cash~~includes ~~flows~~consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the ~~years~~circumstances, ~~then~~but ~~ended.~~not ~~These~~for ~~consolidated~~the ~~financial~~purpose ~~statements~~of ~~are~~expressing an opinion on the ~~responsibility~~effectiveness of the Company’s ~~management.~~internal ~~Our~~control ~~responsibility~~over isfinancial toreporting. Accordingly, we express anno such opinion. An audit includes examining, on ~~these~~a ~~consolidated~~test basis, evidence supporting the amounts and disclosures in the financial statements. ~~based~~An onaudit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

WeIn ~~conducted~~ our ~~audits~~opinion, ~~in accordance with~~ the ~~standards~~consolidated offinancial ~~the~~statements ~~Public~~referred ~~Company~~to ~~Accounting~~above ~~Oversight~~present ~~Board~~fairly, ~~(United~~in ~~States).~~all ~~Those~~material ~~standards~~respects, ~~require that we plan and perform~~ the ~~audits~~consolidated ~~to obtain reasonable assurance about whether the~~ financial ~~statements~~position ~~are free~~ of ~~material~~International ~~misstatement~~Absorbents Inc. Anand ~~audit~~Subsidiary ~~includes~~as ~~consideration~~ of ~~internal~~January 31, ~~control~~2010 ~~over~~and ~~financial reporting as a basis for designing audit procedures that are appropriate in the circumstances~~2009, ~~but~~and ~~not for~~ the ~~purpose~~consolidated results of ~~expressing~~its anoperations ~~opinion~~and onits ~~the~~cash ~~effectiveness~~flows offor the ~~Company’s~~years ~~internal~~then ~~control over financial reporting. Accordingly~~ended, ~~we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures~~ in ~~the~~conformity ~~financial~~with ~~statements. An audit also includes assessing the~~ accounting principles ~~used~~generally ~~and~~accepted ~~significant~~in ~~estimates made by management, as well as evaluating~~ the ~~overall~~United ~~financial~~States ~~statement~~of ~~presentation~~America. ~~We believe that our audits provide a reasonable basis for our opinion.~~

In/s/ ~~our~~Moss ~~opinion,~~Adams the financial statements referred to above present fairly, in all material respects, the consolidated financial position of International Absorbents, Inc. and subsidiary as of January 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.LLP

~~As discussed in Notes 2 and 5 to the consolidated financial statements~~Seattle, ~~effective February 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements.~~ Washington

~~/s/~~April ~~Moss~~29, ~~Adams LLP~~2010

~~Seattle, Washington~~28

~~April 28,~~International ~~2009~~Absorbents Inc. and Subsidiary

27Consolidated Balance Sheets

~~International~~As ~~Absorbents~~at ~~Inc.~~January 31, 2010 and ~~Subsidiary~~2009

~~Consolidated~~(in ~~Balance~~thousands ~~Sheets~~of U.S. dollars)

As at January 31, 2009 and 2008

	2010		2009

Assets
Current assets:
Cash and cash equivalents	$	7,140	$	4,146
Accounts receivable, net		2,637		2,699
Inventories, net		3,157		4,286
Prepaid expenses		172		162
Deferred income tax asset		171		172
Total current assets		13,277		11,465

Property, plant and equipment, net		19,155		19,610
Other assets, net		178		206
Total assets	$	32,610	$	31,281

Liabilities and Stockholders' Equity

Current liabilities:
Accounts payable and accrued liabilities	$	2,197	$	2,686
Related party payables		332		5
Current portion of long-term debt		899		877
Income taxes payable		288		27
Total current liabilities		3,716		3,595

Deferred income tax liability		1,603		1,364
Long-term debt		4,888		5,787
Other long term liabilities		149		149
Total liabilities		10,356		10,895



Stockholders' equity:

Common stock, no par value -
Unlimited shares authorized,
6,410,282 issued and outstanding at
January 31, 2010 and 2009		8,487		8,487
Additional paid in capital		2,241		1,823
Retained earnings		11,526		10,076
Total stockholders' equity		22,254		20,386
Total liabilities and stockholders' equity	$	32,610	$	31,281

~~(in~~The ~~thousands~~accompanying notes are an integral part of ~~U.S.~~these ~~dollars)~~consolidated financial statements.

	2009		2008
Assets
Current assets:
Cash and cash equivalents	$	4,146	$	2,809
Accounts receivable, net		2,699		2,359
Inventories, net		4,286		3,166
Prepaid expenses		162		155
Income taxes receivable		—		44
Deferred income tax asset		172		158
Total current assets		11,465		8,691
Property, plant and equipment, net		19,610		19,662
Other assets, net		206		236
Total assets	$	31,281	$	28,589
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities	$	2,686	$	2,119
Related party payable		5		6
Current portion of long-term debt		877		857
Income taxes payable		27		98
Total current liabilities		3,595		3,080
Deferred income tax liability		1,364		1,110
Long-term debt		5,787		6,664
Other long term liabilities		149		46
Total liabilities		10,895		10,900
Stockholders' equity:
Common stock, no par value - Unlimited shares authorized, 6,410,282 and 6,410,328 issued and outstanding at
January 31, 2009 and 2008, respectively		8,487		8,487
Additional paid in capital		1,823		1,365
Retained earnings		10,076		7,837
Total stockholders' equity		20,386		17,689
Total liabilities and stockholders' equity	$	31,281	$	28,589

~~The~~International ~~accompanying~~Absorbents, ~~notes~~Inc. ~~are~~and ~~an integral part of these consolidated financial statements~~Subsidiary

28Consolidated Statements of Income

~~International~~For ~~Absorbents~~the years ended January 31, ~~Inc.~~2010 and ~~Subsidiary~~2009

~~Consolidated~~(in ~~Statements~~thousands of ~~Income~~U.S. dollars, except earnings per share amounts)

For the years ended January 31, 2009 and 2008

	2010			2009

Sales, net	$	34,575		$	35,752
Cost of goods sold		22,555			24,270
Gross Profit		12,020			11,482

Selling, general and administrative expenses		8,956			7,575

Income from operations		3,064			3,907
Interest expense		(226	)		(315	)
Interest income		11			62
Income before provision for income taxes		2,849			3,654

Income tax provision		(1,399	)		(1,415	)
Net income	$	1,450		$	2,239

Basic earnings per share	$	.23		$	.35
Fully diluted earnings per share	$	.22		$	.35

Weighted average number of shares outstanding
(in thousands)
Basic		6,410			6,410
Diluted		6,457			6,446

~~(in~~The ~~thousands~~accompanying ofnotes ~~U.S.~~are ~~dollars,~~an ~~except~~integral ~~earnings~~part ~~per~~of ~~share~~these ~~amounts)~~consolidated financial statements.

	2009		2008
Sales, net	$	35,752	$	33,095
Cost of goods sold		24,270		23,139
Gross Profit		11,482		9,956
Selling, general and administrative expenses		7,575		6,387
Income from operations		3,907		3,569
Interest expense		(315)		(385)
Interest income		62		86
Income before provision for income taxes		3,654		3,270
Income tax provision		(1,415)		(1,254)
Net income	$	2,239	$	2,016
Basic earnings per share	$	.35	$	.31
Fully diluted earnings per share	$	.35	$	.31
Weighted average number of shares outstanding (in thousands)
Basic		6,410		6,410
Diluted		6,446		6,477

~~The~~International ~~accompanying~~Absorbents ~~notes~~Inc. ~~are~~and ~~an integral part of these consolidated financial statements~~Subsidiary

29Consolidated Statement of Changes in Stockholders’ Equity

~~International~~For ~~Absorbents~~the ~~Inc.~~years ended January 31, 2010 and ~~Subsidiary~~2009

~~Consolidated~~(in ~~Statement~~thousands of ~~Changes~~U.S. ~~in Stockholders’ Equity~~dollars)

For the years ended January 31, 2009 and 2008

	Common Shares (in 1,000's)				Additional Paid in Capital				Total
									Stock-
							Retained		Holders'
			Amount				Earnings		Equity

Balance as of January 31, 2008		6,410		8,487		1,365		7,837		17,689
Stock based compensation		-		-		458		-		458
Net income		-		-		-		2,239		2,239

Balance as of January 31, 2009		6,410	$	8,487	$	1,823	$	10,076	$	20,386
Stock based compensation		-		-		418		-		418
Net income		-		-		-		1,450		1,450

Balance as of January 31, 2010		6,410	$	8,487	$	2,241	$	11,526	$	22,254

~~(in~~The ~~thousands~~accompanying notes are an integral part of ~~U.S.~~these ~~dollars)~~consolidated financial statements.

	Common Shares	Amount		Additional Paid in Capital		Retained Earnings		Total Stockholders' Equity
	(in 1,000's)
Balance as of January 31, 2007	6,410	$	8,487	$	999	$	5,904	$	15,390
FIN 48 cumulative adjustment	—		—		—		(83)		(83)
Stock based compensation	—		—		366		—		366
Net income	—		—		—		2,016		2,016
Balance as of January 31, 2008	6,410		8,487		1,365		7,837		17,689
Stock based compensation	—		—		458		—		458
Net income	—		—		—		2,239		2,239
Balance as of January 31, 2009	6,410	$	8,487	$	1,823	$	10,076	$	20,386

~~The~~International ~~accompanying~~Absorbents ~~notes~~Inc. ~~are~~and ~~an integral part of these consolidated financial statements~~Subsidiary

30Consolidated Statement of Cash Flows

~~International~~For ~~Absorbents~~the ~~Inc.~~years ended January 31, 2010 and ~~Subsidiary~~2009

~~Consolidated~~(in ~~Statement~~thousands of ~~Cash~~U.S. ~~Flows~~dollars)

For the years ended January 31, 2009 and 2008

	2010			2009

Cash flows from operating activities

Net income	$	1,450		$	2,239
Adjustments to reconcile net income to net cash
used for operating activities
Depreciation and amortization		1,757			1,830
Loss on disposal of equipment		1			1
Stock-based compensation		418			458
Deferred taxes		240			240
Changes in operating assets and liabilities
Accounts receivable		62			(340	)
Inventories		1,129			(1,120	)
Prepaid expenses		(10	)		(7	)
Accounts payable and accrued liabilities		(42	)		268
Income taxes receivable/payable		261			(27	)
Due to related party		327			(1	)
Other long term liabilities		-			103
Net cash flows from operating activities		5,593			3,644

Cash flows from investing activities
Purchase of property, plant and equipment		(1,722	)		(1,450	)
Net cash flows from investing activities		(1,722	)		(1,450	)

Cash flows from financing activities
Repayment of long-term debt		(877	)		(857	)
Net cash flows from financing activities		(877	)		(857	)


Net change in cash		2,994			1,337

Cash and cash equivalents, beginning of period		4,146			2,809

Cash and cash equivalents, end of period	$	7,140		$	4,146

Cash paid for interest (net of amounts capitalized)	$	224		$	321

Cash paid for income taxes	$	893		$	1,099

Non-cash investing activities
Increase (decrease) in property, plant and equipment and
accounts payable for purchase of plant and equipment	$	(447	)	$	454

~~(in~~The ~~thousands~~accompanying notes are an integral part of ~~U.S.~~these ~~dollars)~~consolidated financial statements.

	2009		2008
Cash flows from operating activities
Net income	$	2,239	$	2,016
Adjustments to reconcile net income to net cash used for operating activities
Depreciation and amortization		1,830		1,719
Loss on disposal of equipment		1		167
Stock-based compensation		458		366
Deferred taxes		240		303
Changes in operating assets and liabilities
Accounts receivable		(340)		14
Inventory		(1,120)		55
Prepaid expenses		(7)		(29)
Accounts payable and accrued liabilities		268		(856)
Income taxes receivable/payable		(27)		(148)
Due to related party		(1)		1
Other long term liabilities		103		(37)
Net cash flows from operating activities		3,644		3,571
Cash flows from investing activities
Purchase of property, plant and equipment		(1,450)		(3,380)
Proceeds from restricted cash		—		1,146
Net cash flows from investing activities		(1,450)		(2,234)
Cash flows from financing activities
Repayment of long-term debt		(857)		(805)
Net cash flows from financing activities		(857)		(805)
Net change in cash		1,337		532
Cash and cash equivalents, beginning of period		2,809		2,277
Cash and cash equivalents, end of period	$	4,146	$	2,809
Cash paid for interest (net of amounts capitalized)	$	321	$	394
Cash paid for income taxes	$	1,099	$	1,128
Non-cash investing activities
Increase in property, plant and equipment and accounts payable for purchase of plant and equipment	$	454	$	154

~~The~~Notes ~~accompanying~~to ~~notes~~Consolidated ~~are~~Financial ~~an integral part of these consolidated financial statements~~Statements

31International Absorbents Inc. and Subsidiary

~~Notes to Consolidated Financial Statements~~1. Operations

International Absorbents Inc. (“IAX”) is a Canadian company operating in the States of Washington and ~~Subsidiary~~Georgia, U.S.A. through its wholly-owned subsidiary, Absorption Corp (“Absorption,” and collectively with IAX, the “Company”).

1As more fully described in our definitive proxy statement filed with the Securities and Exchange Commission (the “SEC”) on April 16, 2010 (the “Proxy Statement”), on December 14, 2009, IAX entered into an Arrangement Agreement (the “Arrangement Agreement”) with IAX Acquisition Corporation, a Delaware corporation (“Parent”), and IAX Canada Acquisition Company Inc., a corporation incorporated under the laws of the Province of British Columbia (“Canada Sub”) and a wholly-owned subsidiary of Parent. The Arrangement Agreement provides that, upon the terms and subject to the conditions set forth in the Arrangement Agreement, Parent, through its wholly-owned subsidiary, will acquire all of the outstanding common shares of IAX for $4.75 per common share in cash, with IAX continuing as the surviving corporation (the “Arrangement”). As a result of the Arrangement, IAX will become a wholly-owned subsidiary of Parent. The consummation of the Arrangement is subject to various closing conditions, including obtaining the approval of the Arrangement by our shareholders and the Supreme Court of British Columbia. The Arrangement Agreement contains certain termination rights for IAX, Parent and Canada Sub and further provides that, upon termination of the Arrangement Agreement under specified circumstances, IAX may be required to pay Parent a termination fee of 4% of the aggregate purchase price. The IAX board of directors and the board of directors of Parent have approved the Arrangement Agreement. In addition, concurrently with the execution of the Arrangement Agreement, certain of IAX’s executive officers, who together hold approximately 11.2% of IAX’s issued and outstanding common shares, have entered into a support agreement whereby they agreed, among other things, to vote all common shares held by them in favor of the approval of the Arrangement.

~~Operations~~The Company operates in two segments and is engaged in the development and sale of value added products made from waste short fiber pulp (“SFP”) utilizing proprietary technology. The Company predominately markets and sells animal and pet bedding products that are sold in consumer retail and commercial bedding markets. In addition, the Company markets and sells SFP-based products used for general industrial spill cleanup, marine oil-cleanup, and oil/water filtration, and hydro mulch products. The Company has established distribution primarily in North America.

~~International Absorbents Inc~~2. Significant ~~(“IAX”)~~accounting ~~is a Canadian company operating in the States of Washington and Georgia, U.S.A. through its wholly-owned subsidiary, Absorption Corp (“Absorption,” and collectively with IAX, the “Company”).~~policies

~~The~~Generally ~~Company~~accepted ~~operates~~accounting in two segments and is engaged in the development and sale of value added products made from waste short fiber pulp (“SFP”) utilizing proprietary technology. The Company markets and sells animal and pet bedding products that are sold in consumer retail and commercial bedding markets. In addition, the Company markets and sells SFP-based products used for general industrial spill cleanup, marine oil-cleanup, and oil/water filtration, and hydro mulch products, which hydro mulch products were not produced during fiscal year 2009. The Company has established distribution primarily in North America. principles

2These consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America.

~~Significant~~Accounting ~~accounting~~Standards ~~policies~~Codification

~~Generally~~On September 15, 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”), which became the single source of authoritative generally accepted accounting principles in the United States of America (“GAAP”). The ASC changed the referencing of financial standards but did not change or alter existing U.S. GAAP. The ASC became effective for the Company in the third quarter of fiscal year 2010.

~~These~~Basis ~~consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States~~ of ~~America.~~presentation

~~Basis~~The consolidated financial statements include the accounts of ~~presentation~~IAX and its wholly-owned subsidiary, Absorption, a Nevada corporation doing business in the states of Washington and Georgia. All significant inter-company transactions are eliminated in consolidation.

~~The~~Cash ~~consolidated financial statements include the accounts of IAX~~ and ~~its~~cash ~~wholly-owned subsidiary, Absorption, a Nevada corporation doing business in the states of Washington and Georgia. All significant inter-company transactions are eliminated in consolidation.~~ equivalents

Cash and cash equivalents includes cash and highly liquid investments with original maturities of 90 days or less.

~~Cash and cash equivalents includes cash and highly liquid investments with original maturities of 90 days or less.~~33

Accounts receivable and allowance for doubtful accounts

The Company typically offers credit terms to its customers without collateral. The Company records accounts receivable at the face amount less an allowance for doubtful accounts. On a regular basis, the Company evaluates its accounts receivable and establishes 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, the Company obtains credit rating reports and financial statements of the customer to initiate and modify their credit limits. The Company obtains 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 January 31, ~~2009~~2010 and ~~2008~~2009, management considered all accounts receivable in excess of the allowances for doubtful accounts to be fully collectible.

Inventories

Finished good inventories 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 net realizable value. The Company records inventory reserves for obsolete and slow-moving items. Inventory reserves are based on inventory turnover trends and historical experience. As of January 31, 2010 and 2009, inventory reserves were $90,000 and $41,000, respectively.

32Property, plant and equipment

Property, plant and equipment assets are recorded at cost. The Company’s buildings and equipment are located on owned and leased land. Buildings located on land owned by the Company are depreciated on a straight line basis over a period of 40 years. Leasehold improvements are depreciated on a straight line basis over the shorter of the estimated useful life or the life of the lease agreement for property located on leased land. The Company’s manufacturing equipment is depreciated over the estimated useful life using a 15% declining balance method. The Company’s computer equipment, computer software and office equipment are depreciated on a straight-line basis over the estimated useful life of five, seven and ten years respectively. Maintenance and repairs are expensed as incurred.

~~Property,~~Impairment plant and equipment assets are recorded at cost. The Company’s buildings and equipment are located on owned and leased land. Buildings located on land owned by the Company are depreciated on a straight line basis over a period of 40long ~~years.~~lived Leasehold improvements are depreciated on a straight line basis over the shorter of the estimated useful life or the life of the lease agreement for property located on leased land. The Company’s manufacturing equipment is depreciated over the estimated useful life using a 15% declining balance method. The Company’s computer equipment, computer software and office equipment are depreciated on a straight-line basis over the estimated useful life of five, seven and ten years respectively. Maintenance and repairs are expensed as incurred.assets

~~Impairment~~The Company reviews 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.

~~The~~Other ~~Company reviews 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.

Other assets include deferred financing fees, which represent costs incurred in connection with long-term debt (see Note 8). As of January 31, 2010 and 2009, the deferred financing fees were $178,000 and $206,000, respectively, which are net of accumulated amortization of $166,000 and $138,000, respectively. Amortization expense was $28,000 and $30,000 for the years ended January 31, 2010 and 2009, respectively. The Company is amortizing into interest expense the deferred financing fees on a straight line basis which approximates the interest method over the term of the related debt.

~~Other~~Revenue assets include deferred financing fees, which represent costs incurred in connection with long-term debt (see Note 8). As of January 31, 2009 and 2008, the deferred financing fees were $206,000 and $236,000, respectively, which are net of accumulated amortization of $138,000 and $108,000, respectively. Amortization expense was $30,000 and $30,000 for the years ended January 31, 2009 and 2008, respectively. The Company is amortizing into interest expense the deferred financing fees on a straight line basis which approximates the interest method over the term of the related debt.recognition

~~Revenue~~Revenues ~~recognition~~from the sale of products are recognized at the time title passes to the purchaser, which is generally when the goods are conveyed to a carrier. When the Company sells F.O.B. destination point, title is transferred and the Company recognizes revenue on delivery or customer acceptance, depending on terms of the sales agreement.

Revenues from the sale of products are recognized at the time title passes to the purchaser, which is generally when the goods are conveyed to a carrier. When the Company sells F.O. B. destination point, title is transferred and the Company recognizes revenue on delivery or customer acceptance, depending on terms of the sales agreement. Sales incentives are recorded as a reduction of sales, the recognition of which is determined in accordance with the provisions of Emerging Issues Task Force (“EITF”) 01-09 “Accounting for Consideration Given by a Vendor to a Customer.”34

~~Shipping~~All revenue is recognized net of any discounts, returns, allowances and ~~handling~~sales incentives, including coupon redemptions and rebates. The Company participates in trade-promotion programs such as shelf price reductions and consumer coupon programs that require the Company to estimate and accrue the expected costs of such programs. Store coupons creating an obligation to the third party are recognized as a liability when distributed based upon expected consumer redemptions. The Company maintains liabilities based on historical experience and management’s judgment at the end of each period for the estimated expenses incurred, but unpaid for these programs. Net revenue is presented net of any taxes collected from customers and remitted to government entities.

Shipping and handling costs are accounted for under EITF No. 00-10: “Accounting for Shipping and Handling Fees and Costs.” Revenues generated from shipping and handling costs charged to customers are included in sales and were $433,000 and $458,000 in fiscal years 2009 and 2008, respectively. Shipping and handling costs for outbound and inbound shipping charges are included in cost of goods sold and were $4,645,000 and $4,732,000 in fiscal years 2009 and 2008, respectively.

~~Foreign~~Revenues ~~exchange~~generated from shipping and handling costs charged to customers are included in sales and were $349,000 and $433,000 in fiscal years 2010 and 2009, respectively. Shipping and handling costs for outbound and inbound shipping charges are included in cost of goods sold and were $3,230,000 and $4,645,000 in fiscal years 2010 and 2009, respectively.

~~The~~Foreign Company’s reporting currency is the U.S. dollar. The Company considers the U.S. dollar to be the functional currency in foreign jurisdictions. Accordingly, amounts denominated in foreign currencies are re-measured to U.S. dollars at historical and current exchange ~~rates as required under SFAS No. 52. Gains and losses resulting from foreign currency transactions are included in the consolidated statement of earnings.~~

~~Advertising~~The Company’s reporting currency is the U.S. dollar. The Company considers the U.S. dollar to be the functional currency in foreign jurisdictions. Accordingly, amounts denominated in foreign currencies are re-measured to U.S. dollars at historical and current exchange rates. Gains and losses resulting from foreign currency transactions are included in the consolidated statement of earnings.

~~The Company accounts for advertising expenses under Statement of Position (“SOP”) No. 93-7.~~ Advertising ~~costs are expensed when incurred and were $211,000 and $201,000 during fiscal years 2009 and 2008, respectively.~~

~~Net~~Advertising ~~earnings~~costs ~~per~~are ~~share~~expensed when incurred and were $478,000 and $211,000 during fiscal years 2010 and 2009, respectively.

Net earnings per share computations are in accordance with SFAS No. 128, “Earnings Per Share.” Basic net earnings per share is computed using the weighted average number of common shares outstanding. Diluted net earnings per share is computed using the weighted average number of common shares and potentially dilutive common share equivalents outstanding. Stock options and warrants that are anti-dilutive are not included in diluted net earnings per share.

33Basic net earnings per share is computed using the weighted average number of common shares outstanding for the period. Diluted net earnings per share is computed using the weighted average number of common shares and potentially dilutive common share equivalents outstanding. Stock options that are anti-dilutive are not included in diluted net earnings per share.

Income taxes

The Company accounts for income taxes using the asset and liability method. The liability method recognizes the amount of tax payable at the date of the financial statements as a result of all events that have been recognized in the financial statements, as measured by the provisions of currently enacted tax laws and rates. The accumulated tax effect of all temporary differences is presented as deferred federal income tax assets and liabilities within the balance sheet. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be realized.

Effective February 1, 2007, the Company adopted ~~FASB~~ASC ~~Interpretation No. 48~~740, ~~Accounting~~“Unrecognized ~~for~~Tax ~~Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 (“FIN 48”)~~Benefits,” which prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. Though the validity of any tax position is a matter of tax law, the body of statutory, regulatory and interpretive guidance on the application of the law is complex and often ambiguous. Because of this, whether a tax position will ultimately be sustained may be uncertain. ~~Under~~The ~~FIN 48, the~~ impact of an uncertain tax position that is more likely than not of being sustained upon audit by the relevant taxing authority must be recognized at the largest amount that is more likely than not to be sustained. No portion of an uncertain tax position will be recognized if the position has less than a 50% likelihood of being sustained.

Stock-based employee compensation

Effective February 1, 2006, the Company adopted the fair value recognition provisions of ~~SFAS~~ASC ~~No. 123(R)~~718, “~~Share~~Compensation-Stock ~~Based Payment~~Compensation” using the modified prospective transition method. Under this transition method, compensation cost recognized in fiscal year ended January 31, 2007 and all subsequent fiscal years thereafter includes: (a) compensation cost for all stock-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value calculated in accordance with the original provisions of ~~SFAS~~ASC ~~No. 123~~718, and (b) compensation cost for all stock-based payments granted subsequent to January 1, 2006, based on the grant date fair value calculated in accordance with the current provisions of ~~SFAS~~ASC No718. ~~123(R).~~

Total stock-based compensation expense recognized in the income statement for the year ended January 31, 2009 and 2008 was $458,000 and $363,000, of which $18,000 and $13,000 was recognized in cost of goods sold and $440,000 and $350,000 was recognized in selling, general and administrative expenses, respectively. All of the stock-base compensation was related to Incentive Stock Options (“ISO”s) held by employees and non-employee directors for which no tax benefit is recognized. 35

~~Prior~~Total tostock-based ~~the~~compensation ~~adoption~~expense ofrecognized ~~SFAS~~in ~~No. 123(R),~~ the ~~Company~~income ~~presented~~statement ~~all~~for ~~tax~~the ~~benefits~~years ofended ~~deductions~~January 31, ~~resulting~~2010 ~~from~~and ~~the~~2009 ~~exercise~~was of$412,000 ~~stock~~and ~~options~~$454,000, asrespectively, ~~operating~~of ~~cash~~which ~~flows~~$15,000 inand ~~the~~$18,000, ~~consolidated~~respectively, ~~statements~~was ofrecognized ~~cash~~in ~~flows.~~cost ~~SFAS~~of ~~No. 123(R)~~goods ~~requires~~sold ~~the~~and ~~tax~~$397,000 ~~benefits~~and ~~resulting~~$436,000, ~~from~~respectively, ~~tax~~was ~~deductions~~recognized in ~~excess~~selling, ofgeneral ~~the~~and ~~compensation~~administrative ~~cost~~expenses. ~~recognized~~All ~~for~~of ~~those~~the ~~options~~stock-base ~~(“excess~~compensation ~~tax~~was ~~benefits”)~~related to beincentive ~~classified~~stock ~~and~~options ~~reported~~held asby ~~both~~employees ~~an operating cash outflow~~ and anon-employee ~~financing~~directors ~~cash~~for ~~inflow~~which onno atax ~~prospective~~benefit ~~basis~~is ~~upon adoption~~recognized.

~~SFAS~~ASC ~~No. 123(R)~~718 requires the use of a valuation model to calculate the fair value of stock-based awards. The Company has elected to use the Black-Scholes-Merton ~~(“BSM”)~~ option valuation model, which incorporates various assumptions including volatility, expected life forfeiture rate and risk-free interest rates. The assumptions used for the years ended January 31, ~~2009~~2010 and ~~2008~~2009 and the resulting estimates of weighted-average fair value per share of options granted during those periods are as follows:

			Jan. 31, 2009		Jan. 31, 2008
				Jan. 31, 2010			Jan. 31, 2009
a)	risk free interest rate		1.96%		4.17%
a	)	risk free interest rate			0.00	%		1.96	%
b)	expected volatility		110.41%		98.97%
b	)	expected volatility			24.10	%		110.41	%
c)	expected dividend yield		0.00%		0.00%
c	)	expected dividend yield			0.00	%		0.00	%
d)	estimated average life (in years)		4.47		4.66
d	)	estimated average life (in years)			0.50			4.47

34The expected life of the options represents the estimated period of time until exercise and is based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. Expected stock price volatility is based on historical volatility of the Company’s stock. The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues with an equivalent remaining term. The Company has not paid dividends in the past and does not plan to pay any dividends in the near future. As stock-based compensation expense recognized is based on awards ultimately expected to vest, it should be reduced for estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company’s forfeiture rate is calculated based on the Company’s historical experience of awards which ultimately vested.

The ~~expected~~remaining ~~life~~unvested ofcompensation ~~the~~for ~~options represents~~ the ~~estimated~~fair ~~period~~value of ~~time until exercise and is based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. Expected~~ stock ~~price~~options volatility is based on historical volatility of the Company’s stock. The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues with an equivalent remaining term. The Company has not paid dividends in the past and does not plan to ~~pay~~be ~~any dividends in the near future. As stock-based compensation expense~~ recognized iswas ~~based~~$347,000 onand ~~awards ultimately expected to vest~~$760,000 ~~it should be reduced for estimated forfeitures. SFAS No. 123(R) requires forfeitures to be estimated~~ at ~~the~~January ~~time~~31, of2010 ~~grant~~ and ~~revised~~2009, ~~if necessary, in subsequent periods if actual forfeitures differ from those estimates~~respectively. ~~The Company forfeiture rate for 2008 was calculated based on its historical experience of awards which ultimately vested.~~

InOther ~~November 2005, the Financial Accounting Staff Board (“FASB”) issued FASB Staff Position No. 123(R)~~stock-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards” (“FSP 123R-3”). The Company has elected to adopt the “long form” method for calculating the tax effects of share-based compensation pursuant to SFAS No. 123(R). The “long form” method establishes the beginning balance of the additional paid-in capital pool related to the effects of employee share-based compensation, which is available to absorb tax deficiencies recognized subsequent to the adoption of SFAS No. 123(R).

The ~~remaining~~Company ~~unvested~~accounts ~~compensation~~for equity instruments issued in exchange for the receipt of goods or services from other than employees and non-employee directors in accordance with ASC 505, Equity Based Payments to Non-Employees. Costs are measured at the estimated fair market value of ~~stock~~the ~~options~~consideration toreceived beor the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earlier of a performance commitment or completion of performance by the provider of goods or services. Stock-based compensation recognized under was $~~760~~6,000 and $~~754~~4,000 atduring ~~January 31,~~2010 ~~2009~~ and ~~2008~~2009, respectively.

~~Other~~Comprehensive ~~stock-based compensation~~income

The Company ~~accounts~~has ~~for~~adopted ~~equity~~ASC ~~instruments~~220, ~~issued~~which inestablishes ~~exchange~~standards for ~~the~~reporting ~~receipt~~and presentation of ~~goods~~comprehensive orincome ~~services from other than employees~~ and ~~non-employee~~its ~~directors~~components in ~~accordance~~consolidated ~~with~~financial ~~SFAS No~~statements. ~~123~~ ~~and~~Comprehensive ~~the~~income ~~conclusions~~includes ~~reached~~all bychanges ~~the~~in ~~EITF~~equity induring ~~Issue~~the ~~No. 96-18~~period, ~~“Accounting~~except ~~for~~those ~~Equity~~resulting ~~Instruments~~from ~~That~~transactions ~~Are Issued to Other Than Employees for Acquiring or in Conjunction~~ with ~~Selling,~~shareholders ~~Goods or Services” (“EITF 96-18”). Costs are measured at the estimated fair market value~~ of the ~~consideration~~Company. ~~received~~It orhas ~~the~~two ~~estimated~~components: ~~fair~~net ~~value~~income ofand ~~the~~other ~~equity~~comprehensive ~~instruments issued, whichever is more reliably measurable~~income. The ~~value~~Company ofhas ~~equity~~no ~~instruments~~material ~~issued~~components ~~for~~of ~~consideration~~ other ~~than~~comprehensive ~~employee~~income ~~services is determined on the earlier of a performance commitment~~ or ~~completion~~accumulated ofother ~~performance~~comprehensive ~~by the provider of goods or services as defined by EITF 96-18~~income. ~~Stock-based compensation recognized under SFAS No. 123 and EITF 96-18 was $4,000 and $3,000 during 2009 and 2008, respectively.~~

~~Comprehensive income~~36

~~The~~Use ~~Company has adopted SFAS No. 130, “Reporting Comprehensive Income.” SFAS No. 130 establishes standards for reporting and presentation~~ of comprehensive income and its components in consolidated financial statements. The statement requires only additional disclosures in the financial statements and it does not affect the Company’s financial position or results of operations. The Company has no material components of other comprehensive income or accumulated other comprehensive income. estimates

~~Use~~The preparation of financial statements in conformity with accounting principles generally accepted 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. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for doubtful accounts, deferred income taxes valuation allowance and sales incentives.

~~The~~New ~~preparation of financial statements in conformity with~~ accounting principles generally accepted 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. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for doubtful accounts, deferred income taxes valuation allowance and sales incentives. pronouncements

~~New~~In September 2006, the FASB issued accounting guidance which defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements, but did not change existing guidance as to whether or not an instrument is carried at fair value. This guidance was initially effective for fiscal years beginning after November 15, 2007. However, in February 2008, the FASB delayed the effective date of this guidance with respect to all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008. The Company adopted this guidance as it applies to financial assets and liabilities as of February 1, 2008 and as it applies to nonfinancial assets and nonfinancial liabilities as of February 1, 2009. The adoption of this guidance did not have a material impact on the Company’s results of operations or financial condition.

In ~~September 2006~~February 2007, the ~~Financial Accounting Standards Board (the “~~FASB”) issued ~~FASB~~accounting ~~Statement~~guidance ~~No. 157, Fair Value Measures (“SFAS 157”),~~ which ~~defines~~permits ~~fair~~entities ~~value,~~to ~~establishes~~choose ato ~~framework~~measure ~~for~~many ~~measuring~~financial ~~fair~~instruments ~~value~~ and ~~enhances~~certain ~~disclosures about fair value measures required under~~ other ~~accounting~~items ~~pronouncements, but does not change existing guidance as to whether or not an instrument is carried~~ at fair value. ~~SFAS~~This ~~157~~guidance iswas effective for fiscal years beginning after November 15, 2007., and the Company adopted this guidance effective as of February 1, 2008. The adoption of ~~SFAS~~this ~~157~~guidance did not have a material impact on the Company’s results of operations or financial ~~position~~condition.

In ~~February~~ December 2007, the FASB issued ~~SFAS No. 159,~~accounting ~~The~~guidance ~~Fair~~which ~~Value~~establishes ~~Option~~principles and requirements for ~~Financial~~how ~~Assets~~an acquirer recognizes and ~~Financial~~measures ~~Liabilities~~in ~~Including~~its anfinancial ~~Amendment~~statements ofthe ~~FASB~~identifiable ~~Statement~~assets Noacquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. ~~115. SFAS No. 159~~ ~~permits~~This ~~entities~~guidance toalso ~~choose~~establishes disclosure requirements to ~~measure~~enable ~~many~~the ~~financial~~evaluation ~~instruments~~of the nature and ~~certain~~financial ~~other~~effects ~~items~~of atthe ~~fair~~business ~~value~~combination. ~~SFAS No. 159~~This isguidance was effective for fiscal years beginning after ~~November~~December 15, ~~2007~~2008. The ~~Early~~Company ~~adoption~~adopted isthis ~~permitted.~~guidance effective as of February 1, 2009, and will apply the provisions of this guidance for any acquisition after the adoption date. The adoption of ~~SFAS~~this ~~159~~guidance did not have a material impact on the Company’s results of operations or financial ~~position~~condition.

35In March 2008, the FASB issued accounting guidance that significantly increases the disclosure requirements for derivative instruments. The new requirements include the location and fair value amounts of all derivatives by category reported in the consolidated balance sheet; the location and amount of gains or losses of all derivatives and designated hedged items by category reported in the consolidated income statement or in other comprehensive income in the consolidated balance sheet; and measures of volume such as notional amounts. For derivatives designated as hedges, the gains or losses must be divided into the effective portions and the ineffective portions. This guidance also requires the disclosure of group concentrations of credit risk by counterparties, including the maximum amount of loss due to credit risk and policies concerning collateral and master netting arrangements. Most disclosures are required on an interim and annual basis. This guidance was effective for financial statements issued for fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. The Company adopted this guidance effective as of February 1, 2009. As this guidance relates specifically to disclosures, the adoption of this guidance had no impact on the Company’s results of operations or financial condition.

In ~~December~~April ~~2007~~2009, the FASB issued ~~SFAS No. 141~~accounting ~~(revised~~guidance ~~2007),~~which ~~Business~~changes ~~Combinations~~the ~~(SFAS 141(R)).~~method ~~SFAS 141(R)~~for ~~establishes~~determining ~~principles~~whether ~~and~~an ~~requirements~~other-than-temporary ~~for~~impairment ~~how~~exists anfor ~~acquirer~~debt ~~recognizes~~securities and ~~measures in its financial statements~~ the ~~identifiable~~amount ~~assets~~of ~~acquired,~~ the ~~liabilities~~impairment ~~assumed,~~to ~~any~~be ~~noncontrolling~~recorded ~~interest~~ in ~~the acquiree and the goodwill acquired~~earnings. ~~SFAS 141(R)~~This ~~also~~guidance ~~establishes~~was ~~disclosure~~effective ~~requirements~~for tointerim ~~enable the evaluation of the nature~~ and ~~financial~~annual ~~effects~~periods ofending ~~the business combination. SFAS 141(R) is effective for fiscal years beginning~~ after ~~December~~June 15, ~~2008. The Company adopted SFAS 141(R) in the first quarter of fiscal~~ 2009, and ~~will apply~~ the ~~provisions~~Company ofadopted this ~~Statement~~guidance ~~for~~effective ~~any~~as ~~acquisition~~of ~~after~~May 1, ~~the adoption date~~2009. The adoption of ~~SFAS~~this ~~141(R)~~guidance did not have a material impact on the Company’s results of operations or financial ~~position~~condition.

In ~~March~~April ~~2008~~2009, the FASB issued ~~Statement~~accounting ~~No. 161,~~guidance ~~Disclosures~~which ~~about~~requires ~~Derivative Instruments and Hedging Activities. This Statement significantly increases the disclosure requirements for derivative instruments. The new requirements include the location and~~ fair value ~~amounts~~disclosures ~~of all derivatives by category reported~~ in ~~the~~both ~~consolidated~~interim ~~balance~~as ~~sheet;~~well ~~the~~as ~~location~~annual ~~and~~financial ~~amount~~statements ofin ~~gains~~order orto ~~losses~~provide ofmore ~~all~~timely ~~derivatives~~information ~~and~~about ~~designated hedged items by category reported in~~ the ~~consolidated~~effects ~~income~~of ~~statement~~current ormarket inconditions ~~other~~on ~~comprehensive~~financial ~~income~~instruments. This inguidance ~~the~~was ~~consolidated~~effective ~~balance~~for ~~sheet;~~interim and ~~measures~~annual ofperiods ~~volume~~ending ~~such~~after asJune 15, ~~notional amounts. For derivatives designated as hedges~~2009, ~~the gains or losses must be divided into the effective portions~~ and the ~~ineffective~~Company ~~portions.~~adopted ~~The~~this ~~Statement~~statement ~~also~~effective ~~requires~~as ~~the disclosure~~ of ~~group concentrations of credit risk by counterparties~~May 1, ~~including~~2009. As ~~the~~this ~~maximum~~guidance ~~amount~~relates ofspecifically ~~loss due~~ to ~~credit risk and policies concerning collateral and master netting arrangements. Most~~ disclosures, ~~are required on an interim and annual basis. The Company adopted this Statement effective~~ the ~~second quarter of fiscal year 2009. The~~ adoption of this ~~Statement~~guidance did not have aan ~~material~~ impact on the Company’s ~~consolidated~~results of operations or financial ~~statements~~condition.

In April 2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142. FSP FAS 142-3 requires a company estimating the useful life of a recognized intangible asset to consider its historical experience in renewing or extending similar arrangements or, in the absence of such experience, to consider assumptions that market participants would use about renewal or extension as adjusted for entity-specific factors. FSP FAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company does not anticipate the adoption of FSP FAS 142-3 will have a material effect on the Company’s financial position, results of operations or cash flows. 37

In ~~October 2008~~May 2009, the FASB issued ~~FSP~~accounting ~~FAS No. 157-3,~~guidance ~~Determining~~which ~~the~~establishes ~~Fair~~general ~~Value~~standards of aaccounting ~~Financial Asset When the Market~~ for ~~That Asset is Not Active (“FSP FAS 157-3”)~~, ~~which~~and ~~clarifies~~disclosure ~~the application~~ of ~~SFAS No. 157~~, ~~“Fair~~events ~~Value~~that ~~Measurements”~~occur inafter anthe ~~inactive~~balance ~~market.~~sheet ~~FSP~~date ~~FAS 157-3~~but ~~addresses~~before ~~application~~the ~~issues~~financial ~~such~~statements asare ~~how~~issued ~~management’s~~or ~~internal~~are ~~assumptions~~available ~~should~~to be ~~considered~~issued. ~~when~~The ~~measuring~~Company ~~fair~~adopted ~~value~~this ~~when~~guidance ~~relevant~~during ~~observable~~the ~~data~~second doquarter ~~not~~of ~~exist;~~fiscal ~~how~~year ~~observable~~2010. ~~market~~The ~~information~~Company inperformed aan ~~market~~evaluation ~~that~~of isevents ~~not~~through ~~active~~April ~~should~~21, be2010, ~~considered~~the ~~when~~date ~~measuring~~which ~~fair~~the ~~value~~financial ~~and~~statements ~~how~~for the ~~use~~fiscal ofyear ~~market~~2010 ~~quotes~~were ~~should~~issued, befor ~~considered when assessing~~ the ~~relevance~~purpose of ~~observable~~identifying ~~and~~events ~~unobservable~~which ~~data~~required ~~available~~adjustment to, ~~measure~~or ~~fair~~disclosure ~~value.~~in, ~~FSP~~the ~~FAS 157-3 was effective upon issuance. The~~ Company’s ~~adoption~~financial ofstatements ~~FSP~~as ~~FAS 157-3~~of ~~did~~and ~~not~~for ~~have a material effect on~~ the ~~Company’s~~year ~~financial~~ended ~~condition~~January 31, ~~results of operations or cash flows~~2010.

363. Fair Value Measurements

3ASC 820 (formerly Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements”) provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities.

~~Balance~~ASC ~~sheet~~820 ~~components~~defines (fair value as the price that would be received to sell an asset or paid to transfer a liability in ~~thousands~~an orderly transaction between market participants at the measurement date. ASC 820 establishes a three-level hierarchy, which encourages an entity to maximize the use of Uobservable inputs and minimize the use of unobservable inputs when measuring fair value.S. The ~~dollars)~~three levels of the hierarchy are defined as follows:

	2009		2008
Accounts receivable
Trade	$	2,744	$	2,444
Allowance for doubtful accounts		(45)		85)
	$	2,699	$	2,359
Inventories
Raw materials	$	2,006	$	1,714
Finished goods		2,280		1,452
	$	4,286	$	3,166
Accounts Payable and accrued liabilities
Accounts payable
Trade	$	1,031	$	865
Equipment and other		453		155
Accrued Liabilities
Payaroll		746		614
Other		456		485
	$	2,686	$	2,119

Level 1 – inputs to the valuation techniques that are quoted prices in active markets for identical assets or liabilities

4.Level 2 – inputs to the valuation techniques that are other than quoted prices but are observable for the assets or liabilities, either directly or indirectly

~~Property,~~Level ~~Plant~~3 ~~and~~– ~~Equipment~~inputs to the valuation techniques that are unobservable for the assets or liabilities

	2009		2008
Property, plant and equipment
Land	$	1,547	$	1,547
Buildings		8,950		8,759
Leasehold improvements		—		—
Equipment		15,961		15,164
Construction in progress		1,189		446
	$	27,647	$	25,916
Less: Accumulated depreciation		(8,037)		(6,254)
	$	19,610	$	19,662

Effective February 2, 2008, the Company adopted ASC 820 for financial assets and liabilities measured at fair value and other non-financial assets and liabilities measured at fair value on a recurring basis.

~~Depreciation~~The ~~expense~~Company ~~from~~had ~~property,~~no ~~plant~~financial ~~and~~instruments ~~equipment~~measured at fair value on a recurring basis for the fiscal ~~years~~year ended January 31, ~~2009~~2010 ~~and~~or ~~2008~~the ~~was~~fiscal ~~$1,800,000~~year ~~and~~ended $1January 31,~~689,000,~~ ~~respectively~~2009.

~~The~~Effective July 31, 2009, the Company ~~incurred~~adopted ~~interest~~ASC ~~costs~~Topic of825 ~~$315,000~~(ASC ~~and~~825-10-65) ~~$415,000~~(formerly ~~during~~FASB ~~the~~Staff ~~fiscal~~Position ~~years~~(FSP) ~~2009~~FAS 107-1 and ~~2008,~~APB ~~respectively~~28-1, “Interim Disclosures about Fair Value of ~~which~~Financial ~~$-0-~~Instruments”). ASC ~~and~~825 ~~$30,000~~requires ~~was~~that ~~capitalized~~the asfair ~~part~~value of ~~the~~all ~~purchase~~financial assets and ~~installation~~liabilities offor ~~manufacturing~~which ~~equipment~~it ~~during~~is ~~fiscal~~practicable ~~years~~to ~~2009~~estimate fair value and ~~2008~~are within the scope of SFAS 107, ~~respectively.~~“Disclosures about Fair Value of Financial Instruments,” be disclosed for interim and annual periods.

5The Company’s financial instruments not measured at fair value on a recurring basis include cash and certain cash equivalents, accounts receivable, short-term borrowings, accounts payable, accrued liabilities and long-term debt and are reflected in the financial statements at cost. With the exception of the long-term debt, cost approximates fair value for these items due to their short-term nature. The fair value of our variable rate bond financing approximates the carry value. The fair value of our fixed rate bond financing was not practicable for the Company to estimate. The Company currently has not developed a valuation model necessary to make the estimate and the cost of obtaining an independent valuation appears excessive considering the materiality of the instruments to the entity.

~~Fair value of financial instruments~~38

~~The~~4. Balance ~~fair~~sheet ~~value~~components of(in ~~cash~~thousands and cash equivalents, restricted cash, investments, accounts receivable, accounts payable, and accrued liabilities, and amounts due to related parties approximate their carrying value due to the relatively short-term maturities of ~~these instruments~~U.S. dollars)

The fair value of the Company’s debt at January 31, 2009 and 2008 approximates the carrying value. The fair value is based on management’s estimate of current rates available to the Company for similar debt with the same remaining maturity.

	2010			2009

Accounts receivable
Trade	$	2,697		$	2,744
Allowance for doubtful accounts		(60	)		(45	)
	$	2,637		$	2,699

Inventories
Raw materials	$	1,436		$	2,006
Finished goods		1,721			2,280
	$	3,157		$	4,286

Accounts Payable and accrued liabilities
Accounts payable
Trade	$	720		$	1,031
Equipment and other		6			453
Accrued Liabilities
Payroll		759			746
Other		712			456
	$	2,197		$	2,686

65. Property, Plant and Equipment

Concentration of credit risk

	2010			2009
Property, plant and equipment
Land	$	1,547		$	1,547
Buildings		10,237			8,950
Equipment		16,939			15,961
Construction in progress		186			1,189

	$	28,909		$	27,647
Less: Accumulated depreciation		(9,754	)		(8,037	)
	$	19,155		$	19,610

~~Financial~~Depreciation ~~instruments~~expense ~~that~~from ~~potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents~~property, ~~restricted~~plant ~~cash, short-term investments~~ and ~~trade~~equipment ~~accounts~~for ~~receivable. Receivables arising from sales to customers are generally not significant individually and are not collateralized; as a result, management continually monitors~~ the ~~financial~~fiscal ~~condition~~years ofended ~~its~~January ~~customers to reduce the risk of loss. The Company had three customers who individually exceeded 10% of sales~~31, ~~who~~2010 ~~collectively accounted for 44%~~ and ~~46% of total trade accounts receivable at January 31,~~ 2009 ~~and~~was ~~2008~~$1, ~~respectively~~729,000 and ~~who collectively accounted for 59% and 58% of total sales during the fiscal year ending January 31~~$1, ~~2009 and 2008~~800,000, respectively.

376. Concentration of credit risk

~~The~~Financial instruments that potentially subject the Company ~~invests~~to ~~its~~significant concentrations of credit risk consist principally of cash and cash equivalents, inrestricted ~~high~~cash, ~~quality~~short-term ~~issuers~~investments and trade accounts receivable. ~~These~~Receivables ~~cash~~arising ~~balances~~from ~~may~~sales beto ~~insured~~customers byare ~~the~~generally ~~Federal~~not ~~Deposit~~significant ~~Insurance~~individually ~~Corporation,~~and ~~the~~are ~~Canada~~not ~~Deposit~~collateralized; ~~Insurance~~as ~~Corporation~~a result, ~~the~~management ~~Securities~~continually ~~Investor~~monitors ~~Protection~~the ~~Corporation~~financial orcondition ~~through~~of ~~other~~its ~~private~~customers ~~insurance~~to ~~purchased~~reduce by the ~~issuer~~risk of loss. The Company ~~maintains~~had ~~its~~three ~~cash~~customers inwho ~~demand~~individually ~~deposits~~exceeded 10% of sales, who collectively accounted for 69% and ~~money~~44% ~~market~~of total trade accounts ~~held~~receivable ~~primarily~~at byJanuary ~~four~~31, ~~banks~~2010 and in2009, ~~the~~respectively, ~~normal~~and ~~course~~who collectively accounted for 58% and 59% of ~~business,~~total ~~maintains~~sales ~~cash~~during ~~balances~~the infiscal ~~excess~~year ofending ~~these~~January ~~insurance~~31, ~~limits.~~2010 and 2009, respectively.

7The Company invests its cash and cash equivalents in high quality issuers. These cash balances may be insured by the Federal Deposit Insurance Corporation, the Canada Deposit Insurance Corporation, the Securities Investor Protection Corporation or through other private insurance purchased by the issuer. The Company maintains its cash in demand deposits and money market accounts held primarily by four banks and in the normal course of business, maintains cash balances in excess of these insurance limits.

~~Operating line of credit~~39

~~On May 23, 2007, Absorption renewed a bank line of credit with Branch Banking & Trust Co~~7. Operating that provides for up to $2,000,000 of cash borrowings for general corporate purposes which is secured by accounts receivable and inventory of Absorption. Interest is payable on funds advanced at the one-month London Interbank Offered Rate (“LIBOR”) plus 2.5%. The line of credit ~~matures on May 23, 2009. At January 31, 2009, the Company had no borrowings outstanding under this line of credit.~~

8As of May, 2009 the company has chosen to not carry an operating line of credit.

8. Long-term debt (in thousands of U.S. dollars)

	2009			2008
	2010				2009
Tax-exempt bonds	$	65,~~664~~787		$	~~7,521~~$	6,664
Taxable bonds		—			—
Total debt		5,787				6,664
Total debt		6,664			7,521
Less: current portion		(899	)			(877	)
Less: current portion		(877)			(857)
Long-term debt	$	4,888			$	5,787
Long-term debt	$	5,787		$	6,664

On September 14, 2006, the Company entered into a bond financing agreement in the amount of $1,600,000 with GE Capital Public Finance, Inc. (“GECPF”) to fund the purchase and installation of manufacturing equipment to be used in connection with the closure and relocation of the Bellingham, Washington production facility to the new Ferndale, Washington manufacturing and warehouse facility. GECPF agreed to fund and guarantee the Economic Development Revenue Bond issued by the Washington State Economic Finance Authority at a fixed interest rate of 5.70%, amortized over 90 months with interest-only payments during the six months of construction. If Absorption defaults under the terms of the loan agreement, including failure to pay any amount when due or violating any of the financial and other covenants, GECPF may accelerate all amounts then-owing under the bond. Costs incurred in issuing the bond were $32,000. The bond is secured by the equipment financed. At January 31, ~~2009~~2010 and ~~2008~~2009 the balance outstanding was $1,~~240~~028,000 and $1,~~441~~240,000, respectively.

In September of 2004, the Company completed a $4,900,000 tax-exempt bond financing. Of the total proceeds from the financing, $2,099,000 were used to pay off the loan held by Branch Banking &Trust Co., $98,000 was paid for costs of issuance and the remaining proceeds of $2,703,000 were placed in a trust account to be used to finish the construction of the new production facility located in Jesup, Georgia. The bonds were issued by Wayne County Industrial Development Authority in the state of Georgia. The bonds have a variable rate equal to Branch Banking & Trust Co.’s Variable Rate Demand Bond “VRDB” rate ( 20.2836 % as of March 27 25, ~~2009~~2010) plus a letter of credit fee of 0.95%, a remarketing fee of 0.125% and a $2,000 annual trustee fee. The term of these bonds is seven years for the equipment portion and 15 years for the real estate portion. The bond is secured by the property, building, and equipment financed. At January 31, ~~2009~~2010 and ~~2008~~2009, the balance outstanding was $32,~~300~~800,000 and $3,~~800~~300,000, respectively. The letter of credit expires September 2, 2011, at which time it will need to be renewed.

In March 2003, the Company completed a $2,910,000 bond financing, 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 GECPF. The tax exempt bonds have a fixed rate of 5.38% with a term of 190 months, maturing February 2019, and with interest-only payments for the first 52 months. The taxable bonds had a fixed rate of 5.53% a term of 52 months, and matured in August 2007. The indebtedness underlying the bonds is secured by a mortgage on the real property, and a security interest in the equipment assets, located in Whatcom County, Washington. At January 31, ~~2009~~2010 and ~~2008~~2009, the balance outstanding was $21,~~124~~959,000 and $2,~~280~~124,000 on the tax-exempt bonds, respectively.

3840

The aggregate principal maturities on long-term debt for each of the twelve-month periods subsequent to January 31, 2009 are as follows (in thousands of U.S. dollars):

	Long-term Debt
	Long-term
Fiscal Year ending January 31,:
	Debt
2010	$	877
Fiscal Year ending January 31,:
2011	$	899
2012		922
2013		646
2014		671
Thereafter		2,649
2015		462
	$	6,664
Thereafter		2,187
	$	5,787

9. Capital stock

~~Capital~~Common ~~stock~~shares

Holders of Common ~~shares~~Shares are entitled to one vote per share and to share equally in any dividends declared and in distributions on liquidation.

~~Holders~~During ofboth ~~Common~~fiscal ~~Shares~~years ~~are~~2010 ~~entitled to one vote per share~~ and to2009, ~~share~~no ~~equally~~common instock ~~any~~options ~~dividends~~were ~~declared and in distributions on liquidation~~exercised.

~~During~~Stock ~~both fiscal years 2009 and 2008, no common stock~~ options ~~were exercised.~~

~~Stock~~The 2003 Omnibus Incentive Plan (the “2003 Omnibus Plan”) permits the granting of stock options (including nonqualified stock options and incentive stock options qualifying under Section 422 of the Code and for residents of Canada under the terms and conditions of the Income Tax Act of Canada), stock appreciation rights (including free-standing, tandem and limited stock appreciation rights), restricted or unrestricted share awards, phantom stock, performance awards, or any combination of the foregoing. The 2003 Omnibus Plan has 1,100,000 Common Shares reserved for issuance and/or grant.

The exercise price of stock options under the 2003 Omnibus Plan ~~permits~~will be at least equal to the ~~granting~~fair market value of ~~stock~~the ~~options~~Common ~~(including~~Shares ~~nonqualified~~on ~~stock~~the ~~options~~date ~~and~~of grant for each incentive stock option or an amount equal to no less than 85% of fair market value for each non-qualified stock option, or the acceptable discount amount allowed under applicable securities laws. The exercise price of options granted under the 2003 Omnibus Plan must be paid in cash, property, qualifying services or under ~~Section 422~~a ofqualifying deferred payment arrangement. In addition, subject to applicable law, the ~~Code~~Company ~~and~~may make loans to individual grantees on such terms as may be approved by the Board of Directors for ~~residents~~the purpose of ~~Canada~~financing the exercise of options granted under the ~~terms~~2003 Omnibus Plan and ~~conditions~~the payment of ~~the~~any ~~Income~~taxes ~~Tax~~that ~~Act~~may be due in respect of ~~Canada),~~such ~~stock~~exercise. ~~appreciation~~The ~~rights~~Compensation ~~(including~~Committee ~~free-standing,~~will ~~tandem~~fix ~~and~~the ~~limited~~term ~~stock~~of ~~appreciation~~each ~~rights)~~option, ~~restricted~~but no option under the 2003 Omnibus Plan will be exercisable more than ten years after the option is granted. Each option will be exercisable at such time or ~~unrestricted~~times ~~share~~as ~~awards~~determined by the Compensation Committee, ~~phantom~~provided, however, that no stock option granted under the 2003 Omnibus Plan, ~~performance~~or ~~awards~~any portion thereof, to any grantee who is subject to Section 16 of the Exchange Act shall be exercisable prior to seven (7) months after the grant date of the option; and stock options, or any ~~combination~~portion thereof, granted to grantees who are not subject to Section 16 of the ~~foregoing~~Exchange Act shall not be exercisable prior to ninety (90) days after the grant date of the option. ~~The~~Upon a grantee’s termination of employment with the Company or its subsidiary (other than as a result of death), the 2003 Omnibus Plan ~~has~~provides ~~1,100,000~~for ~~Common~~an ~~Shares~~expiration ~~reserved~~of ~~for~~any ~~issuance~~outstanding ~~and/~~options expire immediately or ~~grant~~within a period of 12 months or less, depending upon the cause of termination. No option shall be transferable by the option holder otherwise than by will or the laws of descent.

The exercise price of stock options under the 2003 Omnibus Plan will be at least equal to the fair market value of the Common Shares on the date of grant for each incentive stock option or an amount equal to no less than 85% of fair market value for each non-qualified stock option, or the acceptable discount amount allowed under applicable securities laws. The exercise price of options granted under the 2003 Omnibus Plan must be paid in cash, property, qualifying services or under a qualifying deferred payment arrangement. In addition, subject to applicable law, the Company may make loans to individual grantees on such terms as may be approved by the Board of Directors for the purpose of financing the exercise of options granted under the 2003 Omnibus Plan and the payment of any taxes that may be due in respect of such exercise. The Compensation Committee will fix the term of each option, but no option under the 2003 Omnibus Plan will be exercisable more than ten years after the option is granted. Each option will be exercisable at such time or times as determined by the Compensation Committee, provided, however, that no stock option granted under the 2003 Omnibus Plan, or any portion thereof, to any grantee who is subject to Section 16 of the Exchange Act shall be exercisable prior to seven (7) months after the grant date of the option; and stock options, or any portion thereof, granted to grantees who are not subject to Section 16 of the Exchange Act shall not be exercisable prior to ninety (90) days after the grant date of the option. Upon a grantee’s termination of employment with the Company or its subsidiary (other than as a result of death), the 2003 Omnibus Plan provides for an expiration of any outstanding options expire immediately or within a period of 12 months or less, depending upon the cause of termination. No option shall be transferable by the option holder otherwise than by will or the laws of descent.41

39The following table summarizes the Company’s stock option activity for the years ended January 31, 2010 and 2009:

The following table summarizes the Company’s stock option activity for the years ended January 31, 2009 and 2008:

				Weighted
				Average			Intrinsic
	Shares			Price			Value
Outstanding at January 31, 2008		563,517		$	3.95		$	196,800
Granted		174,680			3.55
Exercised		-			-
Repurchased, surrendered or expired		(42,517	)		(3.24	)

Outstanding at January 31, 2009		695,680		$	3.89		$	-
Granted		-			-
Exercised		-			-
Repurchased, surrendered or expired		(8,566	)		(3.78	)

Outstanding at January 31, 2010		687,114		$	3.90		$	472,014
Vested		312,303		$	4.08		$	165,203

	2009			2008
	Shares	Weighted Average Price		Shares	Weighted Average Price
Outstanding – beginning of year	563,517	$	3.95	536,100	$	4.17
Granted	174,680		3.55	140,000		3.71
Exercised	—		—	—		—
Repurchased, surrendered or expired	(42,517)		(3.24)	(112,583)		(4.70)
Outstanding – end of year	695,680	$	3.89	563,517	$	3.95
Vested	141,000	$	3.95	166,667	$	3.58

The following table summarizes information about options outstanding at January 31, 2010:

The following table summarizes information about options outstanding at January 31, 2009:

				Weighted
		Number outstanding at		average		Outstanding		Number		Exercisable
Range of		outstanding at		remaining		weighted average		exercisable at		weighted average
exercise		January 31,		contractual life		average		January 31,		average
prices		2010		(months)		exercise price		2010		exercise price
$	3.20		100,000		39	$	3.20		25,000	$	3.20
	3.25		40,000		4		3.25		40,000		3.25
	3.55		168,014		59		3.55		43,203		3.55
	3.60		100,000		50		3.60		15,000		3.60
	4.00		40,000		11		4.00		40,000		4.00
	4.60		139,100		20		4.60		49,100		4.60
	4.70		100,000		14		4.70		100,000		4.70

$	3.20 – 4.70		687,114		34	$	3.90		312,303	$	4.08

	Range of exercise prices	Number outstanding at January 31, 2009	Weighted average remaining contractual life (months)		Outstanding weighted average exercise price	Number exercisable at January 31, 2009		Exercisable weighted average exercise price
$	3.20	100,000	51	$	3.20	10,000	$	3.20
	3.25	40,000	11		3.25	40,000		3.25
	3.55	174,680	71		3.55	—		—
	3.60	100,000	62		3.60	—		—
	4.00	40,000	23		4.00	40,000		4.00
	4.60	141,000	32		4.60	41,000		4.60
	4.70	100,000	26		4.70	10,000		4.70
$	3.20 – 4.70	695,680	46	$	3.89	141,000	$	3.95

At January 31, 2010, the Company had 365,326 remaining Common Shares available to be granted under the 2003 Omnibus Plan.

AtThere ~~January 31,~~were ~~2009,~~outstanding ~~the~~options ~~Company~~to ~~had~~purchase ~~404~~7,~~320~~000 ~~remaining~~ Common Shares ~~available~~issued to beindividuals ~~granted~~who ~~under~~are not employees or directors of the ~~2003~~Company ~~Omnibus~~as ~~Plan~~of January 31, 2010.

~~There~~During ~~were~~December ~~outstanding options to purchase 7~~2009,~~000~~ ~~Common~~the ~~Shares~~board ~~issued~~of todirectors ~~individuals~~approved ~~who~~an ~~are~~extension ~~not employees or directors~~ of the ~~Company~~term asto ofMay ~~January~~ 31, ~~2009~~2010 for 40,000 outstanding stock options.

Restricted stock units

The Company granted ~~75,120 and~~ -0- and 75,120 restricted stock units (“RSUs”) to employees during the years ended January 31, ~~2009~~2010 and ~~2008~~2009, respectively. The RSUs have both a service and a performance condition that must be satisfied before vesting will occur. The fair value of these RSUs is based on the fair value of the Companies common stock on the award date and the probability of achieving the performance condition. The weighted average grant date fair value of the RSUs was -0- and -0- during the years ended January 31, ~~2009~~2010 and ~~2008~~2009, respectively.

During fiscal year ~~2009~~2010, ~~-0-~~37,560 RSUs expired. The outstanding RSUs at January 31, ~~2009~~2010 and ~~2008~~2009 were 37,560 and 75,120, respectively. The intrinsic value of the outstanding RSUs was $170,898 and ~~-0-~~$197,566 as of January 31, 2010 and 2009, respectively.

~~10.~~42

~~Employee~~All ~~benefit~~stock ~~plan~~options granted by the Company that have not been exercised into common shares prior to the effective time of the Arrangement will be cancelled for cash consideration equivalent to the positive difference, if any, between $4.75 and the exercise price thereof, all in accordance with the terms of the Arrangement Agreement and all of the Company’s outstanding restricted stock units ("RSUs") that have not been converted into common shares of the Company prior to the effective time of the Arrangement will be cancelled for $4.75 per RSU.

~~The Company initiated a 401(k) savings plan for employees during fiscal year 2006~~10. Employee ~~Employees~~benefit ~~with at least 12 months of service are eligible to participate. Under the terms of the retirement savings~~ plan, the Company provides matching contributions equal to 100% of each participant’s contribution up to 3% of a participant’s eligible compensation and 50% of each participant’s contribution over 3% up to a maximum of 5%. The Company’s contributions to the plan totalled $107,000 and $100,000 for the years ended January 31, 2009 and 2008, respectively.

11The Company initiated a 401(k) savings plan for employees during fiscal year 2006. Employees with at least 12 months of service are eligible to participate. Under the terms of the retirement savings plan, the Company provides matching contributions equal to 100% of each participant’s contribution up to 3% of a participant’s eligible compensation and 50% of each participant’s contribution over 3% up to a maximum of 5%. The Company’s contributions to the plan totalled $103,000 and $107,000 for the years ended January 31, 2010 and 2009, respectively.

11. Related party transactions

General and administrative expenses for ~~2009~~fiscal year 2010 and ~~2008~~2009 included $8176,000 and $8281,000, respectively, each year for office rent and related services which were incurred on a cost reimbursement basis from a corporation owned and controlled by an officer and director of the Company. At January 31, ~~2009~~2010 and ~~2008~~2009, $56,000 and $65,000, respectively, were owing to this related party.

40In connection with the Arrangement, in response to an unsolicited offer to purchase the Company, the Company engaged in an auction process to solicit potential bids related to the sale of the Company and incurred significant costs in connection therewith. Specifically, included in the Company’s related party payables for the third quarter of fiscal year 2010 is $326,000 owed to Arctic Acquisitions, Inc. (“Arctic”), an entity partially owned by certain of the Company’s executive officers and one of its directors, as reimbursement of certain fees and expenses incurred by Arctic during the Company’s auction process. The independent members of the Company’s board of directors and the Company’s audit committee approved the reimbursement of these expenses.

12. Income taxes

~~Income~~The components of income before income taxes are as follows (in thousands of U.S. dollars):

The components of income before income taxes are as follows (in thousands of U.S. dollars):

	2010			2009

U.S.	$	4,019		$	3,784
Canada		(1,170	)		(130	)
	$	2,849		$	3,654

	2009		2008
U.S.	$	3,784	$	3,253
Canada		(130)		17
	$	3,654	$	3,270

The components of the provision for current income taxes consist of the following (in thousands of U.S. dollars):

	2010		2009

U.S.	$	1,133	$	1,103
State		15		52
Canada		10		20
	$	1,158	$	1,175

	2009		2008
U.S.	$	1,103	$	877
State		52		49
Canada		20		26
	$	1,175	$	952

The components of the provision for deferred income taxes consist of the following (in thousands of U.S. dollars):

	2009			2008
		2010				2009
U.S.	$	~~339~~$	231	$	~~264~~	$	339
State		~~(99)~~	10		38		(99	)
Canada		—	-		—		-
	$	~~240~~$	241	$	~~302~~	$	240

The provision for income taxes differs from the amount computed by applying the statutory income tax rate to net income before taxes as follows (in thousands of U.S. dollars):

	2009			2008
	2010				2009
Income tax at statutory rate (Canada)	$	~~1,128~~851		$	~~1,108~~$	1,128
Difference in foreign tax rate		~~118~~153			3	118
Permanent differences		1016			~~(1)~~	10
Stock option expense		~~151~~138			~~127~~	151
Domestic production deduction		(~~64)~~74	)		~~(54)~~	(64	)
Change in valuation allowance		(333)			38
Unrealized foreign exchange loss		91				-
Net operating losses expired		—			57
Change in valuation allowance		382				(333	)
Change in tax rate		3269			~~115~~	32
Effect from remeasurement from Canadian currency		300			(258)
Effect from remeasurement from
State and local , net		(18)			78
Canadian currency		(187	)			300
Other differences		91			41
State and local , net		20				(18	)
	$	1,415		$	1,254
Other differences		(60	)			91
	$	1,399			$	1,415

Deferred income taxes are provided for temporary differences. Deferred income tax assets and liabilities are comprised of the following (in thousands of U.S. dollars):

	2009			2008
	2010				2009
Deferred income tax assets
Net operating loss carryforward	$	—297		$	26$	-
Intangibles		16			20	16
Non-deductible liabilities and other		172			~~158~~	172
State tax credits		~~168~~172			49	168
Unrealized loss		35119			~~338~~	35
Valuation allowance		(~~51)~~433	)		~~(384)~~	(51	)
	$	~~340~~343		$	~~207~~$	340
Deferred income tax liabilities
Property, plant and equipment		(1,~~532)~~775	)		~~(1,159)~~	(1,532	)
	$	(1,~~532)~~775	)	$	~~(1,159)~~$	(1,532	)

41The deferred state tax credits referenced above are job tax credits from the state of Georgia which are available to offset Georgia taxable income in future years. These credits can be carried forward 10 years and begin expiring January 31, 2018.

The ~~deferred~~Company ~~state~~has ~~tax~~recorded ~~credits~~a ~~referenced~~valuation ~~above~~allowance ~~are~~against ~~job~~deferred tax ~~credits~~assets ~~from~~which ~~Georgia~~relates ~~which~~to ~~are~~uncertainties ~~available~~related to ~~offset~~utilization ~~Georgia~~of ~~taxable~~Canadian ~~income~~deferred intax ~~future years~~assets. The ~~These~~valuation ~~credits~~allowance ~~can~~increased beby ~~carried~~$382,000 ~~forward~~during 10the ~~years~~year ended January 31, 2010 and ~~begin~~decreased ~~expiring~~by $333,000 during the year ended January 31, ~~2018~~2009.

The Company has ~~recorded~~not aprovided ~~valuation~~for ~~allowance~~Canadian ~~against~~ deferred ~~tax~~income ~~assets~~taxes ~~which~~on ~~relates~~undistributed toearnings ~~uncertainties~~of ~~related~~International toAbsorbent’s ~~utilization~~U.S. subsidiary because of ~~Canadian~~its ~~deferred~~intention ~~tax~~to ~~assets.~~indefinitely ~~The~~reinvest ~~valuation~~these ~~allowance~~earnings ~~decreased~~in bythe ~~$333,000~~U.S. ~~during~~The determination of the ~~year~~amount ~~ended~~of ~~January 31,~~the ~~2009~~unrecognized ~~and~~deferred ~~increased~~U.S. byincome ~~$38,000~~tax ~~during~~liability related to the ~~year~~undistributed ~~ended~~earnings ~~January 31,~~is ~~2008~~not practicable.

The Company has not provided for Canadian deferred income taxes on undistributed earnings of International Absorbent’s U.S. subsidiary because of its intention to indefinitely reinvest these earnings in the U.S. The determination of the amount of the unrecognized deferred U.S. income tax liability related to the undistributed earnings is not practicable.44

In June 2006, the FASB issued interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes – interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on de-recognition, measurement, classification, interest and penalties, accounting interim periods, disclosure and transition. FIN 48 applies to all tax positions related to income taxes. On February 1, 2007 the Company adopted the provisions of FIN 48. The adoption and implementation of FIN 48 resulted in a $83,000 increase in the liability for unrecognized tax benefits, which was accounted for as a reduction to the February 1, 2007 balance of retained earnings. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

	2009		2008
	2010			2009
Balance at beginning of year	$	45149	$	83$	45
Settlements		—-		~~-46~~	-
Additions for tax positions of current period		70-		2	70
Additions for tax positions of prior periods		34-		6	34
	$	149	$	45$	149

The Company is subject to taxation in the United States, Canada and various state jurisdictions. The material jurisdictions that are subject to examination by tax authorities are for tax years after fiscal year ~~2004~~2005. The Company classifies interest and penalties on tax uncertainties as components of the provision for income taxes.

13. Commitments and contingencies

~~Commitments~~Operating ~~and contingencies~~leases

~~Operating~~The Company has entered into various operating lease agreements for equipment that expire in 2010 to 2013. Rental expenses for the year ended January 31, 2010 and 2009 were $134,000 and $251,000, respectively. Minimum annual rental payments under non-cancellable operating leases are approximately $61,000, $48,000, and $1,000 for the years ending January 31, 2011, 2012 and 2013, respectively.

~~The~~Legal Company has entered into various operating lease agreements for equipment that expire in 2010 to 2013. Rental expenses for the year ended January 31, 2009 and 2008 were $251,000 and $223,000, respectively. Minimum annual rental payments under non-cancellable operating leases are approximately $94,000, $67,000, $50,000 and $1,000 for the years ending January 31, 2010, 2011, 2012 and 2013, respectively.matters

~~Legal~~The ~~matters~~Company is subject to ordinary routine litigation incidental to the Company’s business. Currently, there are no material legal proceedings pending to which the Company is a party, or of which any of the Company’s properties is the subject.

~~The Company is subject to ordinary routine litigation incidental to the Company’s business~~14. Segmented ~~Currently, there are no material legal proceedings pending to which the Company is a party, or of which any of the Company’s properties is the subject.~~information

14The 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.

~~Segmented~~The ~~information~~Company defines its business segments primarily based upon the market in which its customers sell products, as well as how the Company internally manages its various business activities. The Company operates principally in two business segments: the animal care industry and the industrial cleanup industry. Management decisions on resource allocation and performance assessment are made currently based on these two identifiable segments.

~~The~~Management of the Company isevaluates ~~involved~~these ~~primarily~~segments inbased upon the ~~development~~operating income before depreciation and amortization generated by each segment. Depreciation, ~~manufacture~~amortization, ~~distribution~~and interest expense are managed on a consolidated basis and ~~sale~~as ofsuch ~~absorbent~~are ~~products~~not allocated to individual segments. Certain ~~Its~~segment information, including segment assets, asset expenditures and related depreciation expense, is not presented as all of the Company’s assets are ~~located~~commingled and ~~its~~are ~~operations~~not available by segment. There are ~~primarily~~no ~~conducted~~inter-segment intransactions ~~the~~or ~~United~~significant ~~States~~differences between segment accounting and corporate accounting basis.

The Company defines its business segments primarily based upon the market in which its customers sell products, as well as how the Company internally manages its various business activities. The Company operates principally in two business segments: the animal care industry and the industrial cleanup industry. Management decisions on resource allocation and performance assessment are made currently based on these two identifiable segments. 45

42Business segment data (in thousands of U.S. dollars)

Management of the Company evaluates these segments based upon the operating income before depreciation and amortization generated by each segment. Depreciation, amortization, and interest expense are managed on a consolidated basis and as such are not allocated to individual segments. Certain segment information, including segment assets, asset expenditures a

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