GRAND TOYS INTERNATIONAL INC - 10-Q Quarterly Report

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FORM 10-Q
Securities and Exchange Commission

Washington, D.C. 20549

(Mark One)

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2003

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________.

Commission File No. 0-22372.

GRAND TOYS INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in its Charter)

Nevada 98-0163743

(State or other jurisdiction of (I.R.S. Employer

incorporation or organization Identification No.)

1710 Route Transcanadienne, Dorval, Quebec, Canada, H9P 1H7

(Address of principal executive offices)

(514) 685-2180

(Registrant's telephone number, including Area Code)

(Former name, former address and former fiscal year,

if changed since last report)

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

Yes X No _____

Indicate the number of shares outstanding of each of the Issuer's classes of common equity, as of August 14, 2003: 2,752,254.

GRAND TOYS INTERNATIONAL, INC.


Index to Quarterly Report on Form 10 - Q
Filed with the Securities and Exchange Commission
Period ended June 30, 2003

ITEMS IN FORM 10 - Q	PAGE

Part I - Financial Information Item 1. Consolidated Financial Statements:

Consolidated Balance Sheets
At June 30, 2003 and December 31, 2002

Consolidated Statements of Operations
For the three Month and Six Month Periods ended June 30, 2003 and 2002

Consolidated Statements of Stockholders' Equity and Comprehensive Income
For the Six Month Period ended June 30, 2003

Consolidated Statements of Cash Flows
For the Six Month Period ended June 30, 2003 and 2002

Notes to Consolidated Financial Statements

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risks
Item 4. Controls and Procedures

Part II - Other Information

Item 1. Legal proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K

Signatures

Certifications

GRAND TOYS INTERNATIONAL, INC.

Part I. - Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets

	June 30, 2003	December 31, 2002
	(Unaudited)
Assets

Current assets:
Short-term deposit (note 13(b))	$ 500,000	$ 500,000
Accounts receivable (net of allowance for
doubtful accounts of $14,842; 2002 - $12,677)	1,320,276	1,866,110
Current portion of loan receivable (note 2)	156,687	212,739
Due from employees and affiliated company	4,439	7,595
Inventory	2,158,190	1,148,220
Income taxes recoverable	4,024	-
Prepaid expenses (note 3)	568,906	453,951
Total current assets	4,712,522	4,188,615

Note receivable (note 9)	627,514	884,877

Loan receivable (note 2)	302,895	335,981

Other assets (note 4)	21,609	41,244


Equipment and leasehold improvements, net (note 5)	258,426	252,854



Total assets	$ 5,922,966	$ 5,703,571

GRAND TOYS INTERNATIONAL, INC.

Consolidated Balance Sheets

	June 30, 2003	December 31, 2002
	(Unaudited)
Liabilities and Stockholders' Equity

Current liabilities:
Bank indebtedness (note 6)	$ 465,760	$ 1,130,745
Trade accounts payable	869,463	880,028
Other accounts payable and accrued liabilities	503,835	335,157
Loan payable to a director (note 13(b))	257,438	250,000
Royalties payable	42,504	15,052
Total current liabilities	2,139,000	2,610,982

Deferred gain (note 9)	265,073	497,800

Minority interest	100	100

Stockholders' equity:
Capital stock (note 7):
Voting common stock, $0.001 par value:
12,500,000 shares authorized,
2,752,554 shares issued and outstanding	2,753	2,763
(2002-2,762,698 shares)
	2,753	2,763
Additional paid-in capital	22,624,972	22,634,617
Deficit	(18,439,184)	(19,080,756)
Accumulated other comprehensive income-
cumulative currency translation adjustment	(669,748)	(961,935)
	3,518,793	2,594,689

Commitments and contingencies (notes 12 and 13)

Total liabilities and stockholders' equity	$ 5,922,966	$ 5,703,571

See accompanying notes to unaudited consolidated financial statements.

GRAND TOYS INTERNATIONAL, INC.

Consolidated Statements of Operations, (Unaudited)

	For the three months ended		For the six months ended
		June 30,		June 30,
	2003	2002	2003	2002
Net sales	$ 2,647,658	$ 3,419,749	$ 5,598,753	$ 5,682,555

Cost of goods sold	1,396,821	2,148,916	3,086,339	3,594,187
Gross profit	1,250,837	1,270,833	2,512,414	2,088,368

Operating expenses:
General and administrative	737,448	786,155	1,310,304	1,567,875
Salaries and fringe benefits	378,927	503,989	673,629	951,733
Royalties	57,871	68,359	127,766	118,181
Bad debt expense	18,848	(2,023)	29,449	14,722
Depreciation and amortization	17,514	22,880	33,933	44,584
Foreign exchange (gain) loss	(31,577)	(10,380)	(90,720)	4,604
Interest expense	26,471	12,108	47,208	36,955
Interest revenue	(13,431)	(19,015)	(28,325)	(36,175)
	1,192,071	1,362,073	2,103,244	2,702,479
Earnings (loss) before income taxes	58,766	(91,240)	409,170	(614,111)

Income tax expense (recovery):	-	161	325	(15,664)
Earnings (loss) from continuing operations	58,766	(91,079)	408,845	(629,775)

Discontinued operations:
Gain on sale of discontinued operations	129,725	149,541	232,727	149,541
Loss from discontinued operations	-	(34,724)	-	(66,492)
Net earnings (loss)	$ 188,491	$ 23,738	$ 641,572	$ (546,726)
Earnings (loss) per share (note 10):

Continuing operations:
Basic	$ 0.02	$ (0.06)	$ 0.15	$ (0.43)
Diluted	0.01	(0.03)	0.07	(0.43)

Discontinued operations:
Basic	0.05	0.08	0.08	0.06
Diluted	0.02	0.04	0.04	0.06

Net earnings (loss):
Basic	0.07	0.02	0.23	(0.37)
Diluted	$ 0.03	$ 0.01	$ 0.11	$ (0.37)

See accompanying notes to unaudited consolidated financial statements.
GRAND TOYS INTERNATIONAL, INC.

Consolidated Statements of Stockholders' Equity and Comprehensive Income (Unaudited)

	Capital Stock	Additional Paid in Capital	Deficit	Accumulated other comprehensive income	Total

January 1, 2003	$2,763	$22,634,617	$ (19,080,756)	$ (961,935)	$2,594,689

Net earnings for the period	-	-	641,572	-	641,572
Foreign currency adjustment	-	-	-	292,187	292,187

Total comprehensive income					933,759

Reverse share issuance
(note 7(d))	(10)	(12,972)	-	-	(12,982)

Compensation expense	-	3,327	-	-	3,327
June 30, 2003	$2,753	$ 22,624,972	$ (18,439,184)	$ (669,748)	$ 3,518,793

See accompanying notes to unaudited consolidated financial statements.

GRAND TOYS INTERNATIONAL, INC.

Consolidated Statements of Cash Flows, (Unaudited)

For the six months ended June 30,

	2003	2002
Cash flows from operating activities:
Net earnings (loss) from continuing operations	$ 408,845	$ (629,775)
Adjustments for:
Depreciation and amortization	33,933	44,584
Compensation expense	1,615	(11,444)
Net change in operating working capital
items (note 11)	(54,194)	(4,471)
Net cash provided by (used for) operating activities from
continuing operations	390,199	(601,106)
Discontinued operations:
Net loss from discontinued operations	-	(66,492)
Adjustments for:
Gain on sale of discontinued operations, net of
cash received in July 2003	(113,331)	(149,541)
Depreciation	-	3,281
Net change in operating working capital items (note 11)	-	239,289
Net cash (used for ) provided by operating activities of
discontinued operations	(113,331)	26,537
Net cash provided by (used for) operating activities	276,868	(574,569)

Cash flows from financing activities:
(Decrease) increase in bank indebtedness	(713,704)	541,212
Decrease in loan payable to a director	(32,619)	-
Decrease in due from employees and affiliated company	4,121	(133)
Reversal of share issuance	(12,982)	-
Share issuance proceeds (note 7 (c))	-	115,000
Decrease in assets of discontinued operations	-	(130,372)
Other	1,512	16,543
Net cash (used for) provided by financing activities	(753,672)	542,250

Cash flows from investing activities:
Purchase of short term deposit (note 13(b))	-	(250,000)
Loan receivable	89,138	95,068
Proceeds of note receivable	370,694	-
Decrease in other assets	19,965	77,214
Decrease in other assets of discontinued operations	-	129,462
Additions to equipment and leasehold improvements	(2,993)	(19,425)
Net cash provided by investing activities	476,804	32,319
Net change in cash, being cash at end of year	$ -	$ -

See accompanying notes to unaudited consolidated financial statements.
GRAND TOYS INTERNATIONAL, INC.

Notes to Unaudited Consolidated Financial Statements

Grand Toys International, Inc., a Nasdaq SmallCap listed Company, is organized under the laws of the State of Nevada. Its principal business activity, through its wholly-owned Canadian subsidiary, is the distribution of toys and related items.

Significant accounting policies:

Basis of presentation:

These consolidated financial statements, presented in US dollars and in accordance with accounting principles generally accepted in the United States, include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated.

Revenue recognition:

Sales are recognized at the time of shipment of products. The Company estimates liabilities and records provisions for customer allowances as a reduction of revenue, when such revenue is recognized.

Inventory:

Inventory is valued at the lower of cost, determined by the first in, first out method, and net realizable value. The only significant class of inventory is finished goods.

Prepaid expenses:

Prepaid expenses primarily include insurance, advances on inventory purchases and current portion of royalties and product development costs.

Prepaid royalties relate to licensing agreements for character properties. These licensing agreements can extend up to three years. Total expense for the period ended June 30, 2003 was $127,767 (2002 - $118,181) and it is shown as royalty expense in the Statements of Operations.

Other assets:

Prepaid royalties are capitalized and written off over the term of the related agreements.

Product development costs for proprietary product lines are capitalized and written off over a period of twenty-four months, the estimated life of a new product. If a product is abandoned, the related costs are written off immediately.

GRAND TOYS INTERNATIONAL, INC.

Notes to Unaudited Consolidated Financial Statement

1. Significant accounting policies (continued):

Equipment and leasehold improvements:

Equipment and leasehold improvements are stated at cost less accumulated depreciation. Depreciation methods and annual rates adopted by the Company are as follows:

Asset

Method

Rate/period

Computer equipment

Declining balance

30%

Machinery and equipment

Declining balance

20%

Furniture and fixtures

Declining balance

20%

Trucks and automobiles

Declining balance

30%

Telephone equipment

Declining balance

30%

Leasehold improvements

Straight-line

Term of

lease plus one

renewal term

Foreign currency translation:

Grand Toys Ltd., a wholly-owned Canadian subsidiary, uses the Canadian dollar as its functional currency and translates its assets and liabilities into US dollars at the exchange rates prevailing at the balance sheet date and sales, expenses and cash flows are translated at the average exchange rate for the year. The resulting currency translation adjustments are accumulated and reported in other comprehensive income.

Other monetary assets and liabilities denominated in foreign currencies are translated at the exchange rates prevailing at the balance sheet date. Revenues and expenses denominated in foreign currencies are translated at the rates of exchange prevailing at the transaction dates. All exchange gains and losses are included in income.

Earnings per Share:

Basic earnings per share is determined by dividing the weighted average number of common shares outstanding during the period into net earnings (loss).

Diluted earnings per share gives effect to all potentially dilutive common shares that existed at June 30, 2003.

Advertising and Promotion:

All costs associated with advertising and promoting products are expensed in the period incurred. Total expense for the period ended June 30, 2003 and 2002 were $294,707 and $273,386. These expenses include media and cooperative advertising and are shown as part of general and administrative expenses in the financial statements.

Slotting fees are recorded as a deduction to gross sales. These fees are determined annually on a customer by customer basis.

GRAND TOYS INTERNATIONAL, INC.

Notes to Unaudited Consolidated Financial Statements

1. Significant accounting policies (continued):

Employee stock option plan:

The Company accounts for its employee stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. Financial Accounting Standards Board ("FASB") Statement No. 123, Accounting for Stock-Based Compensation, allows entities to continue to apply the provisions of APB Opinion No. 25 and requires pro-forma net earnings and pro-forma earnings per share disclosures for employee stock option grants as if the fair-value-based method defined in FASB Statement No. 123 had been applied. This disclosure is included in the notes to these statements.

Comprehensive income:

Comprehensive income consists of net income and cumulative currency translation adjustments and is presented in the consolidated statements of stockholders' equity and comprehensive income.

Use of estimates:

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Loan receivable:

The loan receivable is due from Limited Treasures Inc. ("Limited Treasures"). The loan is secured by accounts receivable and inventory and personal guarantees of the shareholders of Limited Treasures.

In June 2001, the Company was successful in obtaining judgement against Limited Treasures for $775,000 repayable over 42 months commencing June 2001, ending May 2005. Interest is charged at a rate of 9% per annum. In April 2003, the interest rate charged was revised to 6% per annum and the monthly payment was reduced to $15,000. As a result of these changes, the final payment in May 2005 will be $165,789.34.

Details are as follows:

June 30, 2003

December 31,2002

Amount due repayable in monthly payments of principal and

interest of $7,500 until November 30, 2001 and $21,124 per

month until March 2003 and $15,000 per month thereafter

$ 459,582

$ 548,720

Less current portion

156,687

212,739

$ 302,895

$ 335,981

GRAND TOYS INTERNATIONAL, INC.

Notes to Unaudited Consolidated Financial Statements

Prepaid expenses:

June 30, 2003

December 31,2002

Prepaid inventory

$ 71,095

$ 16,580

Royalties

114,324

141,067

Insurance

317,379

269,060

Other

66,108

27,244

$ 568,906

$ 453,951

Other assets:

June 30, 2003

December 31,2002

Prepaid royalties

$134,502

$179,630

Product development costs

4,850

5,605

139,352

185,235

Less current portion, included in prepaid expenses

117,743

143,991

$ 21,609

$41,244

Equipment and leasehold improvements:

June 30, 2003

December 31, 2002

Cost

Accumulated

depreciation

Cost

Accumulated

depreciation

Computer equipment

$1,424,392

$1,262,692

$1,214,122

$1,054,679

Machinery and equipment

521,702

491,546

449,837

418,560

Furniture and fixtures

536,625

514,229

459,682

437,709

Trucks and automobiles

90,688

90,164

77,461

76,935

Telephone equipment

55,903

47,460

48,595

40,183

Leasehold improvements

279,935

244,728

239,106

207,883

$2,909,245

$2,650,819

$2,488,803

$2,235,949

Net book value

$ 258,426

$ 252,854

GRAND TOYS INTERNATIONAL, INC.

Notes to Unaudited Consolidated Financial Statements

Bank indebtedness:

The Company has a line of credit to finance its inventory and accounts receivable providing for advances of up to $2,542,000 (Cdn$3,425,000). An additional amount of $56,000 (Cdn$75,000) was advanced in 2001 to the Company based on the value of certain of its equipment. The receivable loan has a discount fee of 2% and both the inventory loan and the equipment loan bear interest at Canadian prime plus 7.5%. The latter is being repaid through monthly capital repayments of $1,400 (Cdn$1,875). The agreement is for a period of one year and is renewed automatically, unless prior notice is given by either party.

The loan is secured by a first ranking movable hypothec in the principal amount of $2,968,500 (Cdn $4,000,000) on the universality of all present and future assets of the Company and the assignment of insurance.

The Company had approximately $1,143,953 of credit available as at June 30, 2003.

There are no debt covenants or cross-default provisions.

Capital stock

Authorized capital also includes 5,000,000, $0.001 par value preferred shares, issuable in series with such designation, rights and preferences as may be determined from time to time by the Board of Directors. There are no shares issued and outstanding at June 30, 2003.

Each Series B Preferred share will automatically be converted, upon approval by the stockholders, into one share of the Company's common stock at an exercise price of $1.00 per share and a warrant to purchase three shares of the Company's common stock at an exercise price of $0.01 per share.

Share transactions:

January 2002

115,000 shares of Series B convertible redeemable preferred stock were issued pursuant to the December 2001 private sale of convertible preferred stock for a total consideration of $115,000, increasing capital stock by $115.

February 2002

As a result of the settlement of the outstanding shortfall on share conversions, 242,213 common shares were issued, increasing capital stock by $242.

June 2002

At the June 2002 Annual Meeting, the stockholders approved the issuance of 915,000 shares of Common Stock and warrants to purchase 2,745,000 shares of Common Stock issuable upon the exercise of warrants upon the conversion of 915,000 shares of the Series B Convertible Redeemable Preferred Stock, which by terms were automatically convertible into Common Stock upon such approval. Accordingly, on such date, the 915,000 shares of Series B Convertible Redeemable Preferred Stock were converted into 915,000 shares of Common Stock and 2,745,000 of warrants.

July 2002

57,787 common shares were issued, on settlement of consulting fees, increasing capital stock by $58.

185,768 common shares were issued in partial satisfaction for outstanding legal fees, increasing capital stock by $186.

October 2002

10,144 shares were issued as a result of the settlement of an outstanding payable, increasing capital stock by $10.

December 2002

66,667 shares were issued as a result of the settlement of an outstanding payable, increasing capital stock by $67.

April 2003

10,144 shares were cancelled as a result of a court settlement.

A summary of the number of shares of common stock outstanding and share transactions since January 1, 2002 is as follows:

January 1, 2002

1,285,119

Share issuance on settlement of shortfall on share conversion

242,213

Share issuance related to private placement

915,000

Share issuance on settlement of consulting fees

57,787

Share issuance on settlement of outstanding liabilities

262,579

December 31, 2002

2,762,698

Reversal of share issuance related to the settlement of an outstanding liability

(10,144)

June 30, 2003

2,752,554

Stock options and warrants:

The Company's amended and restated employee stock option plan (the "Option Plan") provides for the issuance of up to 300,000 options to acquire common stock of the Company. Stock options granted under the Option Plan may be Incentive Stock Options under the requirements of the Internal Revenue Code, or may be Non-statutory Stock Options which do not meet such requirements. Options may be granted under the Option Plan to, in the case of Incentive Stock Options, all employees (including officers) of the Company, or, in the case of Non-statutory Stock Options, all employees (including officers) or non-employee directors of the Company.

Under the option plan, the exercise price of each option granted has been equal to the market price of the Company's stock on the grant date, and an option's maximum term is ten years.

GRAND TOYS INTERNATIONAL, INC.

Notes to Unaudited Consolidated Financial Statements

Changes in options and warrants are as follows:

Option Plan

Other stock options

Warrants

Total

Weighted-average exercise price per share

January 1, 2003

124,935

196,000

3,157,143

3,478,078

$ 0.46

Granted

1,750

-

-

1,750

2.34

Cancelled

(1,375)

-

-

(1,375)

1.25

Options outstanding

at June 30, 2003

125,310

196,000

3,157,143

3,478,453

$ 0.47

Options exercisable

at June 30, 2003

9,325

126,000

55,000

190,325

$ 3.25

The following table summarizes information about options and warrants outstanding and exercisable at June 30, 2003:

Options outstanding

Options exercisable

Range of exercise prices

Number

Weighted-average

exercise price

Weighted-average

remaining contractual

life (yrs)

Number

Weighted-average

exercise price

$0.01 - $1.96

3,078,310

$0.12

8.40

171,075

$0.98

$2.12 - $2.99

383,643

2.13

1.23

2,750

2.52

$5.62 - $11.00

1,000

7.78

7.08

1,000

7.78

$16.00 - $87.60

15,500

28.13

4.87

15,500

28.13

3,478,453

$0.47

7.59

190,325

$3.25

Pro-forma information regarding net earnings and earnings per share is required by FASB Statement No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The pro-forma earnings (losses) utilizing the fair value assumptions noted below for the six-month period ended June 30, 2003 and the years 2002 and 2001 would be $638,220, $(4,988,982) and $(1,831,049) respectively. Furthermore, pro-forma earnings (loss) per share would be $0.23, $(2.42) and $(1.55) respectively.

The fair value for options granted to employees and non-employees was estimated at the grant date using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 4.92% (5.63% in 2002, and 2.57% in 2001) volatility factor of the expected market price of the Company's common stock of 149% (149% in 2002 and 154% in 2001) and a weighted average expected life of the option of 3 years, (3 years in 2002 and 2001), with no dividends. The weighted-average grant date fair values of options and warrants granted for June 30, 2003 and the years 2002 and 2001 are $1.91, $1.47 and $1.14, respectively.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect their fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options.

In 2002, compensation expense in the amount of $35,200 was recorded relating to options granted to a non-employee.

Discontinued operations:

On June 14, 2002, the Company sold its investment in its wholly-owned subsidiary, Sababa Toys Inc. ("Sababa") to the subsidiary's management for $1,065,716. Consideration received by the Company was a promissory note secured by the shares of Sababa.

The promissory note will be repaid from the excess cash after collecting the existing accounts receivable and selling inventories, net of existing liabilities as at June 14, 2002; 10% of net sales of inventories acquired after the date of sale; and any balance owing will be due on June 30, 2005.

As of June 14, 2002, the Company recorded a gain on the sale of $761,584, of which $612,006 was deferred. At December 31, 2002, $497,800 had been deferred and $263,784 was recorded in the statement of operations since cash was collected on the promissory note. At June 30, 2003, the deferred gain was $265,073. The gain of $232,727 recognized in the statement of operations is the amount earned in the six months ended June 30, 2003.

The statement of operations for Sababa for the six months ended June 30, 2002 has been classified as discontinued operations.

Details of the statement of operations of Sababa, for the period ended June 30, 2002 are as follows:

June 30 , 2002)

(6 months

Net sales

$ 536,120

Cost of goods sold

238,979

Gross profit

297,141

Expenses:

Operating

359,411

Depreciation

3,281

Interest expense

616

Total expenses

363,308

Loss before income taxes

(66,167)

Income tax expense

325

Net loss

$ (66,492)

GRAND TOYS INTERNATIONAL, INC.

Notes to Unaudited Consolidated Financial Statements

Earnings per share:

Income

(numerator)

Shares

(denominator)

Per Share

Amount

Quarter ended June 30, 2003

Basic EPS

Earnings from continuing operations

$58,766

2,752,254

$0.02

Earnings from discontinued operations

129,725

2,752,254

0.05

Earnings applicable to common

stockholders

188,491

2,752,254

0.07

Diluted EPS

Earnings from continuing operations

58,766

5,690,853

0.01

Earnings from discontinued operations

129,725

5,690,853

0.02

Earnings applicable to common

stockholders and assumed

conversions

$188,491

5,690,853

$0.03

Income

(numerator)

Shares

(denominator)

Per Share

Amount

Six months ended June 30, 2003

Basic EPS

Earnings from continuing operations

$408,845

2,752,254

$ 0.15

Earnings from discontinued operations

232,727

2,752,254

0.08

Earnings applicable to common

stockholders

641,572

2,752,254

0.23

Diluted EPS

Earnings from continuing operations

408,845

5,690,853

0.07

Earnings from discontinued operations

232,727

5,690,853

0.04

Earnings applicable to common

stockholders and assumed

conversions

641,572

5,690,853

0.11

Income

(numerator)

Shares

(denominator)

Per Share

Amount

Quarter ended June 30, 2002

Basic EPS

From continuing operations

$ (91,079)

1,547,442

$(0.06)

Discontinued operations

114,817

1,547,442

0.08

Earnings available to common

stockholders

23,738

1,547,442

0.02

Diluted EPS

From continuing operations

(91,079)

2,603,137

(0.03)

Discontinued operations

114,817

2,603,137

0.04

Earnings available to common

stockholders and assumed

conversions

$23,738

2,603,137

$ 0.01

Income

(numerator)

Shares

(denominator)

Per Share

Amount

Six months ended June 30, 2002

Basic and Diluted EPS

From continuing operations

$ (629,775)

1,461,165

$ (0.43)

Discontinued operations

83,049

1,461,165

0.06

Earnings available to common

stockholders

(546,726)

1,461,165

(0.37)

Options and warrants to purchase 93,375 shares for the quarter ended June 30, 2003 (June 2002 - 511,768) of the Company's common stock were not included in the diluted earnings per share calculation as their effect is anti-dilutive.

Options and warrants to purchase 93,375 shares for the period ended June 30, 2003 (June 2002 - 3,409,328) of the Company's common stock were not included in the diluted earnings per share calculation as their effect is anti-dilutive.

GRAND TOYS INTERNATIONAL, INC.

Notes to Unaudited Consolidated Financial Statements

Changes in op

Asset	Method	Rate/period

Computer equipment	Declining balance	30%
Machinery and equipment	Declining balance	20%
Furniture and fixtures	Declining balance	20%
Trucks and automobiles	Declining balance	30%
Telephone equipment	Declining balance	30%
Leasehold improvements	Straight-line	Term of
		lease plus one
		renewal term

	June 30, 2003	December 31,2002
Amount due repayable in monthly payments of principal and
interest of $7,500 until November 30, 2001 and $21,124 per
month until March 2003 and $15,000 per month thereafter	$ 459,582	$ 548,720
Less current portion	156,687	212,739
	$ 302,895	$ 335,981

	June 30, 2003	December 31,2002
Prepaid inventory	$ 71,095	$ 16,580
Royalties	114,324	141,067
Insurance	317,379	269,060
Other	66,108	27,244
	$ 568,906	$ 453,951

	June 30, 2003	December 31,2002
Prepaid royalties	$134,502	$179,630
Product development costs	4,850	5,605
	139,352	185,235
Less current portion, included in prepaid expenses	117,743	143,991
	$ 21,609	$41,244

	June 30, 2003		December 31, 2002
	Cost	Accumulated depreciation	Cost	Accumulated depreciation
Computer equipment	$1,424,392	$1,262,692	$1,214,122	$1,054,679
Machinery and equipment	521,702	491,546	449,837	418,560
Furniture and fixtures	536,625	514,229	459,682	437,709
Trucks and automobiles	90,688	90,164	77,461	76,935
Telephone equipment	55,903	47,460	48,595	40,183
Leasehold improvements	279,935	244,728	239,106	207,883
	$2,909,245	$2,650,819	$2,488,803	$2,235,949

Net book value	$ 258,426		$ 252,854

January 1, 2002	1,285,119
Share issuance on settlement of shortfall on share conversion	242,213
Share issuance related to private placement	915,000
Share issuance on settlement of consulting fees	57,787
Share issuance on settlement of outstanding liabilities	262,579
December 31, 2002	2,762,698
Reversal of share issuance related to the settlement of an outstanding liability	(10,144)
June 30, 2003	2,752,554

	Option Plan	Other stock options	Warrants	Total	Weighted-average exercise price per share
January 1, 2003	124,935	196,000	3,157,143	3,478,078	$ 0.46

Granted	1,750	-	-	1,750	2.34
Cancelled	(1,375)	-	-	(1,375)	1.25
Options outstanding
at June 30, 2003	125,310	196,000	3,157,143	3,478,453	$ 0.47

Options exercisable
at June 30, 2003	9,325	126,000	55,000	190,325	$ 3.25

	Options outstanding			Options exercisable
Range of exercise prices	Number	Weighted-average exercise price	Weighted-average remaining contractual life (yrs)	Number	Weighted-average exercise price

$0.01 - $1.96	3,078,310	$0.12	8.40	171,075	$0.98
$2.12 - $2.99	383,643	2.13	1.23	2,750	2.52
$5.62 - $11.00	1,000	7.78	7.08	1,000	7.78
$16.00 - $87.60	15,500	28.13	4.87	15,500	28.13

	3,478,453	$0.47	7.59	190,325	$3.25

	June 30 , 2002)
	(6 months
Net sales	$ 536,120
Cost of goods sold	238,979
Gross profit	297,141
Expenses:
Operating	359,411
Depreciation	3,281
Interest expense	616
Total expenses	363,308
Loss before income taxes	(66,167)
Income tax expense	325
Net loss	$ (66,492)

	Income (numerator)	Shares (denominator)	Per Share Amount

Quarter ended June 30, 2003
Basic EPS
Earnings from continuing operations	$58,766	2,752,254	$0.02
Earnings from discontinued operations	129,725	2,752,254	0.05
Earnings applicable to common
stockholders	188,491	2,752,254	0.07

Diluted EPS
Earnings from continuing operations	58,766	5,690,853	0.01
Earnings from discontinued operations	129,725	5,690,853	0.02
Earnings applicable to common
stockholders and assumed
conversions	$188,491	5,690,853	$0.03