1. Significant accounting policies:

1. Basis of presentation:

The accompanying financial statements have been prepared on a going concern basis which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business and do not reflect adjustments that might result if the Company cannot continue as a going concern. The Company incurred a significant operating loss in fiscal 2000 primarily as a result of the loss of one of its major product lines and the reduced market demand for certain other products. The Company again incurred an operating loss for the year ended December 31, 2001 and for the three months ended March 31, 2002.

In 2001, the Company secured a line of credit to finance its inventory and accounts receivable and also realized net proceeds from the sale of capital stock and warrants. This financing however is not sufficient and the Company will require additional financing before the end of the 2002 fiscal year.

The above matters raise substantial doubt about the Company's ability to continue as a going concern. The Company's ability to continue as a going concern will depend on its obtaining additional financing and its return to profitable operations.

2. Principles of consolidation:

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.

3. 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.

4. 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.

5. Prepaid expenses:

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

6. Other assets:

1. Significant accounting policies (continued):

7. Equipment and leasehold improvements:

1. Impairment of long-lived assets and long-lived assets to be disposed of:

Management reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows, undiscounted and without interest charges, expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

2. Foreign currency translation:

8. Grand Toys Ltd. and Grand Concepts Inc., which ceased operations on January 29, 2002, wholly-owned Canadian subsidiaries, use the Canadian dollar as their functional currency and translate their 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.

2. 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.

10. Earnings per share:

1. On September 4, 2001, the Company completed a one-for-four reverse stock split. For purposes of earnings per share calculations and all share amounts, the comparative numbers of shares have been restated to reflect the reverse split.

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

Notes to Consolidated Financial Statements

1. Significant accounting policies (continued):

10. Earning per share, continued:

3. Diluted earnings per share give effect to all potentially dilutive common shares that existed at March 31, 2002.

11. Advertising and promotion:

All costs associated with advertising and promoting products are expensed in the period incurred. Total expense for the period ended March 31, 2002 and 2001 amounted to approximately $210,990 and $103,422.

12. 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.

13. 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. The statement requires only additional disclosures in the consolidated financial statements; it does not affect the Company's financial position or results of operations.

14. Use of estimates:

2. Loan receivable:

7. Capital stock

The number of common shares has been adjusted for transactions that occurred prior to September 4, 2001, to give effect to the one-for-four reverse stock split, which reduced the number of outstanding common shares to 1,284,619 at that date and the number of authorized shares from 50,000,000 to 12,500,000.

1. 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 March 31, 2002.

Notes to Consolidated Financial Statements

5. Capital stock, continued:

2. 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. In the event the stockholders approve the conversion, a total of 3,660,000 common shares would be issued.
3. Share transactions:

• December 2001:

• January 2002:

• February 2002:

2. The Company was named in a lawsuit for breach of contract in a licensing dispute, for recovery totaling in excess of $600,000. A defense was filed against the plaintiff, and management had reserved, at December 31, 2000, $550,000 in the event the results were unfavorable. In March 2001, the Company received a favorable court judgment, and reversed the accrual, in full, by the third quarter of 2001.
3. The Company's Canadian subsidiary is also contingently liable for an outstanding letter of credit of $250,000 as at March 31, 2002. the short-term deposit has been pledged as collateral fort this letter of credit.

7. Segment information:

1. Operating and geographic information:

The Company operates primarily in one segment which includes the distribution of toys and related items. Approximately 87% of total sales are to Canadian customers. The majority of long-lived assets are located in Canada.

2. Other information:

Sales of toys purchased from the Company's two largest manufacturers and suppliers of toys in aggregate accounted for 66% of gross sales for the quarter ended March 31, 2002. The Company's two largest suppliers accounted for 57% of gross sales for the quarter ended March 31, 2001.

8. Financial instruments:

1. Foreign currency risk management:

1. Fair values:

14. Financial instruments, continued:

3. Credit risk and economic dependence:

4. Interest rate risk:

15. Comparative Figures:

The following should be read in conjunction with the consolidated financial statements included in this 10-Q and the December 31, 2001 Annual Report.

Forward-looking statements.

This Form 10-Q contains forward-looking statements about events and circumstances that have not yet occurred. For example, statements including terms such as the Company "expects" or "anticipates" are forward-looking statements. Investors should be aware that the Company's actual results may differ materially from the Company's expressed expectations because of risks and uncertainties about the future. The Company will not necessarily update the information in this Form 10-Q if and when any forward-looking statement later turns out to be inaccurate. Risks and uncertainties that may affect the Company's future results and performance include, but are not limited to, the following: intense competition and pricing pressures in the toy industry; the general consolidation in the toy industry; whether the Company's general strategy with respect to the toy industry and the Company's implementation of that strategy will correctly anticipate key trends in the toy industry; the Company's ability to retain its product lines; the Company's relationships with retailers and other issues with respect to the Company's distribution channels. Additional information about factors that could affect future results and events is included elsewhere in this Form 10-Q, in the Company's fiscal 2001 Form 10-K and in other reports filed with the Securities and Exchange Commission.

In our audited financial statements for the years ended December 31, 2001 and 2000 we recognized that we had certain issues which raised substantial doubt about the Company's ability to continue as a going concern. The reasons cited were our recurring losses and the cancellation of our line of credit in 2000. This was noted in KPMG's audit report on those financial statements. In 2001, we implemented a plan to stem our losses and return to profitability and secured lines of credit. However, these lines of credit are not sufficient to meet all of our financial needs and we might not be able to successfully implement our new operational plan. If doubts about our ability to continue as a going concern persist, it may have an adverse impact on investors' willingness to invest in our stock which would negatively impact the price and liquidity of our shares.

We incurred net losses of $1,371,492 for the year ended December 31, 2001, $10,156,713 for the year ended December 31, 2000. We have not reported an annual profit since December 31, 1997. We have recently begun to implement a plan to return to profitability. Over the course of 2001 we have focused on products with higher profit margins and have reduced expenses. This has resulted in improved performance but we have not achieved profitability for the year ending December 31, 2001 and, in spite of these efforts, there can be no assurance that we will become profitable on an annual basis.

Net sales consist of sales of products to customers after deduction of customer cash discounts, freight and warehouse allowances, and volume rebate allowances. Sales are recorded when the merchandise is shipped.

The cost of goods sold for products imported as finished goods includes the cost of the product in the appropriate domestic currency, duty and other taxes, and freight and brokerage charges. Royalties to Grand Canada suppliers not contingent upon the subsequent sales of the suppliers' products are included in the price paid for such products.

Major components of selling, general and administrative expenses include: payroll and fringe benefits; advertising expense, which includes the cost of production of television commercials and the cost of air time; advertising allowances paid to customers for cooperative advertising programs; and royalty expense. Royalties include payments by Grand Canada to licensors of character properties and to manufacturers of toy products if such payments are contingent upon subsequent sales of the products. Royalties are usually a percentage of the price at which the product is sold and are payable once a sale is made.

Accounts receivable are receivables net of an allowance for doubtful accounts. The allowance is adjusted periodically to reflect the current status of receivables. Management believes that current reserves for doubtful accounts are adequate. Sales of products to retailers and distributors are on an irrevocable basis. Consistent with industry practices, Grand Canada may make exceptions to this policy on a case-by-case negotiated basis. Inventory is comprised of finished goods at landed cost.

The following table sets forth consolidated operations data as a percentage of net sales for the periods indicated:

On a quarterly basis management reviews its inventory of products and makes an assessment of its realizable value. The factors considered include current market prices, the demand for and the seasonality of its products. If circumstances change (i.e. unexpected shift in market demand, pricing, trends etc.) there could be a material impact on the net realizable value of inventory.

Net loss for the first quarter 2002 was $570,464 or $0.42 per share as compared to a net loss of $585,117 or $0.72 per share for the first quarter of 2001.

Despite the increases in net sales and gross profit, net loss improved marginally by 4.12% as a percentage of sales over the same quarter of last year. An increase in total operating expenses offset the increased gross profit.

Net sales increased for the first three months of 2002 by $344,869 or by 15.56% to $2,561,685 from $2,216,816 for the first quarter of 2001. During the quarter, gross profit also increased as a result of the Company's emphasis on profitable sales and tighter inventory control.

The increase in the current quarter is due to the Spider-Man, Lord of the Rings, Disney/Universal product lines and Uno product lines.

Spider-Man the evergreen, perennially popular line of action adventure figures from the classis comic book hero has been dramatically enhanced by the release of Spider-Man the movie and additional lines of product based on the movie characters.

Similarly, Lord of the Rings action figure toys based on the characters for the wildly successful movie adaptation of J.R. Tolkien's classic novel line captured the imagination of children.

The line of records and audiotapes is a new distribution opportunity acquired early in January 2002.

Uno specialty game product line, produced by our Sababa subsidiary, is a new introduction generated from the recently acquired Mattel license for these products.

Gross profit for the Company increased during the first three months of 2002 by $279,640 compared to the prior period. As a percentage of sales, gross profit increased from 31.68% in the first quarter of 2001 to 38.33% in the first quarter of 2002. Gross profit increased as a result of the sales and product mix in the first quarter 2002. In addition the increased gross profit in the first quarter of 2002 resulted from the Company's continued emphasis on higher margin sales and minimized sales of discontinued products by tighter inventory control.

The increase in selling, general and administrative expenses of $262,754 to $1,473,467, in the first quarter of 2002, from $1,210,713 in the first quarter, of 2001, was due to an increase in advertising and co-operative advertising, royalty and insurance expenses.

Other material expenses in the quarter were:

Of the above expenses, $81,051 are of a non-recurring nature.

Selling, general and administrative expenses as a percentage of sales, were higher in 2002, a 2.91% increase, as compared to 2001. The Company continues to conduct reviews of all aspects of its operations to reduce costs and improve profitability.

During the quarter the Company incurred interest on the following:

The legal settlement interest is of a non-recurring nature.

Net loss was $585,117 for the first quarter of 2001 compared to a net loss of $823,094 for the first quarter of 2000. The decrease in loss was primarily due to the increase in gross profit and a reduction in selling, general and administrative, depreciation and interest expenses.

Net sales decreased by $1,275,051 or by 36% over net sales of the first quarter of 2000. The lower net sales volume in 2001 was attributed to the loss in 2000, of the Tiger Electronics product line, which was purchased by Hasbro in 1999. In 2000, the product mix consisted primarily of electronics, which were at a higher sales dollar value.

The increased gross profit in 2001 results from the Company's emphasis on higher margin sales. In addition commissions on FOB sales increased as compared to the same quarter of 2000. In 2000, the lower gross profit percentage was associated with the clearance of the Tiger Electronics product line.

The decrease in selling, general and administrative expenses of $377,886 compared to those of the first quarter of 2000 was mainly due to decreases in advertising and salary expenses and aggregate decreases in other expenses, as a result of the cost cutting measures implemented. The Company is currently conducting an intensive review of all aspects of its operations to reduce costs and improve profitability.

As a result of the complete write off of deferred financing and intangibles in 2000, depreciation and amortization expense decreased significantly in the first quarter of 2001.

The Company generally finances its operations through borrowings from Montcap Financial Inc., by cash flow from operations, and sales of equity securities. The inflow of funds in 1999, due to options and warrants being exercised resulted in virtually all short-term bank debt being eliminated by December 31, 1999 and a cash position maintained through June 30, 2001, as a result of a private sale of common stock and the receipt of income taxes recoverable.

In March 2001, the Company received gross proceeds of $500,000 from a private sale of its Common Stock and warrants.

In June 2001, the Company secured a line of credit up to $627,825 with drawdowns based upon specified percentages of its accounts receivable. The line of credit was secured by the accounts receivable of the Company.

In October 2001, the Company increased its credit facility up to $1,569,563 with drawdowns based upon specified percentages of accounts receivable and inventory and the value of its equipment. All the assets of the Company secure the line of credit.

In December 2001, the Company issued Series B Convertible Redeemable Preferred Stock for a total of $915,000 of which $800,000 was received in December 2001, and the balance in January 2002.

During 2001, we secured a new line of credit to finance our inventory and accounts receivable and we also realized net proceeds from the sale of our common stock and warrants. This source of financing, however, will not be sufficient to fully implement our business plan. To the extent that we will be required to fund operating losses, our financial position will deteriorate. There can be no assurance that we will be able to find significant additional financing at all or on terms favorable to us. If equity securities are issued in connection with a financing, dilution to our stockholders may result, and if additional funds are raised through the incurrence of debt, we may be subject to restrictions on our operations and finances. Furthermore, if we do incur additional debt, we may be limiting our ability to repurchase capital stock, engage in mergers, consolidations, acquisitions and asset sales, or alter our lines of business or accounting methods, even though these actions would otherwise benefit our business

Accounts receivable at March 31, 2002 were $1,502,495 compared to $1,386,333 at December 31, 2001. The sales were mainly to mass retailers. Inventory at March 31, 2002 increased to $1,929,679 from $1,838,770 at December 31, 2001.

Working capital increased from $1,111,171 at December 31, 2001 to $1,477,484 at March 31, 2002. Net cash used for operating activities was $674,179 in 2002 compared to net cash used by operating activities of $349,296 in 2001. Cash for additions to equipment and leasehold improvements was $13,480 in 2002 compared to $5,508 for 2001.

The Company's accounts receivable level is subject to significant seasonal variations due to the seasonality of sales. As a result, the Company's working capital requirements are greatest during its third and fourth quarters. In addition, to the extent accounts receivable, inventories, guarantees and advance payments increase as a result of growth of the Company's business, the Company could require additional working capital to fund its operations.

Sources of such funding include cash flow from operations, drawings on the financing facilities, or sales of additional equity or debt securities by the Company.

If the funds available to the Company for current cash and cash equivalents are not sufficient to meet the Company's cash needs, the Company may from time to time seek to raise capital from additional sources, including project-specific financing, additional public or private debt or equity financing.

We believe that in order to achieve our long-term expansion objectives and to enhance our competitive position in the U.S. market, we will need additional financial resources over the next several years. The precise amount and timing of our future financing needs cannot be determined at this time and will depend upon a number of factors, including the demand for our products and the management of our working capital. We may not be able to obtain additional financing on acceptable terms or at all. If we are unable to obtain sufficient capital, we could be required to curtail our expansion.

In December 2001, David Mars and Stephen Altro, directors of the Company, purchased shares of Series B Convertible Redeemable Preferred Stock. David Mars invested $195,000 and received 195,000 shares at $1.00 each and 585,000 warrants to purchase Common Stock at an exercise price of $0.01 each. In March 2002, Mr. Mars invested an additional $200,000 and received 200,000 shares at $1.00 each and 600,000 warrants to purchase Common Stock at an exercise price of $0.01 each. Stephen Altro invested $200,000 and received 200,000 shares at $1.00 each and 600,000 warrants to purchase Common Stock at an exercise price of $0.01 each. The conversion of these shares is subject to shareholder approval.

The Company has determined that the new pronouncements that will come into effect in the year 2002 will not have an impact on the financial statements.

The Company is exposed to certain market risks, which arise from transactions entered into the normal course of business. The Company's primary exposures are changes in interest rates with respect to its debt and foreign currency exchange fluctuations.

INTEREST RATE RISK The interest payable on the Company's revolving lines-of-credit are variable based on the prime rate, and therefore, affected by changes in market interest rates. The Company does not use derivative financial instruments.

FOREIGN CURRENCY RISK While the Company's product purchases are transacted in United States dollars; most transactions among the suppliers and subcontractors are effected in HK dollars. Accordingly, fluctuations in Hong Kong monetary rates may have an impact on the Company's cost of goods. Furthermore, appreciation of Chinese currency values relative to the Hong Kong dollar could increase the cost to the Company of the products manufactured in the People's Republic of China, and thereby have a negative impact on the Company. As well since the majority of the Company's sales are in Canadian dollars, the Company is at risk with regards to the conversion of Canadian dollars to US dollars to pay its suppliers. Therefore, fluctuations in the conversion rate may have an impact on the Company. The Company may use derivative financial instruments solely to hedge the effects of such currency fluctuations.

During the quarter ended March 31, 2002, there were no other material developments to any legal proceedings which have been previously reported by the Company.

Other than discussed above or in Note 16 to the Company's December 31, 2001 Consolidated Financial Statements, the Company is not a party to, nor is it aware of, any other pending litigation of a material nature.

On February 26, 2002, the Company issued 242,213 shares of Common Stock in the settlement of a liability. Refer to note 7 of the Financial Statements included herein, for additional information.

None

On March 14, 2002, the Company held its 2001 annual meeting of stockholders. At the meeting, the following actions took place:

None

No exhibits or reports on Form 8-K were filed during the quarter ended March 31, 2002.

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

Dated: May 15, 2002 GRAND TOYS INTERNATIONAL, INC.

By: /s/ R. Ian Bradley