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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

OR

Commission File Number 1-10062

InterTAN, Inc.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (705) 728-6242

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 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  x  No  ¨

At January 31, 2003, 20,861,002 shares of the registrant’s common stock, par value $1.00 per share, were outstanding.

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INTRODUCTORY NOTE REGARDING FORWARD-LOOKING INFORMATION

Certain statements in this Report on form 10-Q constitute forward-looking statements that involve risks and uncertainties. The forward-looking statements include statements regarding:

Important factors that could cause actual results to differ materially from those indicated in the forward-looking statements include, but are not limited to:

These risks and uncertainties are beyond the ability of the Company to control, and in many cases the Company cannot predict the risks and uncertainties that could cause its actual results to differ materially from those indicated by the forward-looking statements.

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ITEM 1 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Consolidated Statements of Operations

(U.S. dollars in thousands, except per share data)

(Unaudited)

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

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Consolidated Balance Sheets

(U.S. dollars in thousands, except share amounts)

(Unaudited)

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

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Consolidated Statements of Cash Flows

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

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Notes to Consolidated Financial Statements

Note 1 Basis of Financial Statements

The accompanying unaudited financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X, “Interim Financial Statements”, and do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. The financial statements have been prepared in conformity with accounting principles and practices (including consolidation practices) as reflected in InterTAN, Inc.’s (“InterTAN” or the “Company”) Annual Report on Form 10-K for the fiscal year ended June 30, 2002, and, in the opinion of the Company, include all adjustments necessary for a fair presentation of the Company’s financial position as of December 31, 2002 and 2001 and the results of its operations for the three and six months ended December 31, 2002 and 2001 and its cash flows for the six months ended December 31, 2002 and 2001. Such adjustments are of a normal and recurring nature. Operating results for the three and six months ended December 31, 2002 are not necessarily indicative of the results that can be expected for the fiscal year ending June 30, 2003. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2002.

Note 2 New Accounting Standards

In June 2001, the Financial Accounting Standards Board (the “FASB”) issued Financial Accounting Standards No. 143 (“FAS 143”). FAS 143 requires that the Company recognize as a component of asset cost, the fair market value for an asset retirement obligation in the period in which it is incurred, if a reasonable estimate of fair market value can be made. FAS 143 is effective for fiscal years beginning after June 15, 2002. The Company adopted FAS 143 on July 1, 2002. The adoption of this standard did not have a material effect on the Company’s consolidated financial statements.

In August 2001, the FASB issued Financial Accounting Standards No. 144 (“FAS 144”) – “Accounting for the Impairment or Disposal of Long-Lived Assets”. This statement supersedes FAS 121 – “Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of” – and the accounting and reporting provisions of APB Opinion No. 30 – “Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” for the disposal of a segment of a business, as previously defined in that opinion. This standard changes the criteria for classifying an asset as held for sale, broadens the scope of businesses to be disposed of which qualify as discontinued operations and changes the timing of recognition of losses on such operations. FAS 144 is effective for fiscal years beginning after December 15, 2001. The Company adopted FAS 144 on July 1, 2002. The adoption of this standard did not have a material effect on the Company’s consolidated financial statements.

In July 2002, the FASB issued Financial Accounting Standards No. 146 (“FAS 146”) – “Accounting for Costs Associated with Exit or Disposal Activities”. This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) issue No. 94-3 – “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including certain costs incurred in a restructuring)”. FAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost was recognized at the date of the entity’s commitment to the exit plan. FAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The adoption of this standard will not have a material effect on the Company’s consolidated financial statements.

In November 2002 the Emerging Issues Task Force of the FASB issued Consensus No. 02-16 (“EITF 02-16”) – “Accounting by a Reseller for Cash Consideration Received from a Vendor” EITF 02-16 will require that

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certain allowances and other amounts received by resellers from vendors be treated as a reduction of the cost of inventory acquired from the vendor. EITF 02-16 also provides that amounts received from vendors that are contingent on certain target purchase levels being achieved should be recorded when it becomes apparent that the target will be achieved. EITF 02-16 is effective for fiscal years commencing after December 15, 2002 and with respect to agreements entered into after December 15, 2002. The Company will adopt EITF 02-16 effective July 1, 2003. Management is in the process of evaluating the effect of this new standard on the Company’s consolidated financial statements.

In January 2003, the FASB issued Financial Accounting Standards No. 148 (“FAS 148”) – “Accounting for Stock-Based Compensation – Transition and Disclosure”. FAS 148 gives entities that elect to adopt the fair market value method of accounting for stock options granted to employees provided for in FAS 123 three alternative transitional accounting methods. In addition, the opportunity to apply the fair market value method only to options granted after the adoption of the standard will not be available for fiscal years beginning after December 31, 2003. FAS 148 also provides that certain pro-forma and other information regarding stock options which is currently required only in an entities annual financial statements will now be required in interim reports as well. FAS 148 is effective for fiscal years ending after December 15, 2002 and for interim periods beginning after December 15, 2002. Management is in the process of evaluating the implications of this new standard on the Company’s consolidated financial statements. The new disclosures required for interim periods will be contained in the Company’s Quarterly Report on Form 10-Q for the three months ending March 31, 2003.

Note 3 Bank Debt

In December 2002 the Company’s Canadian subsidiary entered in a new credit facility (the “Credit Facility”) in the amount of C$85,000,000 (approximately $54,060,000 at December 31, 2002 exchange rates) with a major Canadian bank, replacing its existing asset-backed facility which had been in place since December 1997. The Credit Facility consists of two revolving renewable facilities and a five-year non-revolving term facility.

The first one-year renewable revolving facility is for C$30,000,000 (approximately $19,080,000 at December 31, 2002 rates of exchange.) This facility is intended for normal working capital requirements and is available throughout the year. The amount that can be used for letters of credit is limited to C$5,000,000 during fiscal year 2003 (approximately $3,180,000 at December 31, 2002 rates of exchange), increasing to C$8,000,000 and C$11,000,000 during fiscal years 2004 and 2005, respectively. Further increases of C$2,000,000 each are contemplated for fiscal years 2006 and 2007.

The second one-year renewable revolving facility is for C$45,000,000 (approximately $28,620,000 at December 31, 2002 rates of exchange.) This facility is for seasonal working capital requirements and is available only during the annual period of September 1 to January 31. This facility cannot be used for letters of credit and must be repaid in full each January 31.

Advances under these revolving facilities are limited to a borrowing base calculation tied to the Company’s accounts receivable and inventories. At December 31, 2002, no amounts were outstanding under either facility nor were any amounts committed in support of letters of credit. At December 31, 2002, C$73,983,000 (approximately $47,053,000 at December 31, 2002 rates of exchange) was available for use under these facilities.

The Credit facility also includes a five–year non-revolving term facility in the amount of C$10,000,000 (approximately $6,360,000 at December 31, 2002 rates of exchange.) This facility is intended for capital expenditures or the repurchase of the Company’s common stock. In December 2002, the Company drew down on this facility in full to finance the seventh share repurchase program announced in October 2002.

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Consequently, at December 31, 2002 C$10,000,000 (approximately $6,360,000 at December 31, 2002 rates of exchange) was outstanding under this facility. A repayment of C$2,000,0000 (approximately $1,272,000 at December 31, 2002 rates of exchange) is due December 17, 2003. Further repayments of C$2,000,000 are due on December 17, 2004 through December 17, 2007, inclusive.

The Credit Facility requires that the Company remain in compliance with certain financial ratios including the current ratio, fixed charge coverage ratio, tangible net worth and total adjusted debt to tangible net worth. The Company was in compliance with all of these covenants at December 31, 2002 and management does not anticipate any difficulty in remaining in compliance throughout the term of the facility. Borrowing rates under the facility range from Canadian prime plus 0.50% to prime plus 1.5%, based on the Company’s quarterly performance against predetermined fixed charge coverage ratios. Using the same criteria, the Company may borrow at Canadian bankers’ acceptance and LIBOR rates plus from 1.50% to 2.5%. Letters of credit are charged at rates ranging from 1.5% per annum to 2.5% per annum, using the same performance criteria. Using the same fixed charge coverage test, a standby fee of 0.25% to 0.50% is payable on the unused portion of the revolving credit facilities at that time.

Security granted by InterTAN Canada Ltd. to secure its obligations under the Credit Facility include a demand debenture with a face value of C$125,000,000, general security agreement, charge/mortgage on real property owned by it and a general assignment of accounts receivable. The obligations of InterTAN Canada Ltd. are further secured by a guarantee issued by InterTAN, Inc. of all future indebtedness, liability and obligations now or in the future owing by it to lenders under the Credit Facility.

The cost of establishing the Credit Facility, including professional fees and a loan origination fee were approximately C$1,000,000 (approximately $636,000 at December 31, 2002 exchange rates.) These costs have been allocated between the revolving and non-revolving facilities and will be amortized over the terms of the respective facilities.

Note 4 Restructuring Charge

During the first quarter of fiscal year 2002, the Company recorded a restructuring charge of $2,703,000, representing the cost of restructuring the Company’s Board of Directors and streamlining the Company’s Corporate Office and integrating it with InterTAN’s operating subsidiary, InterTAN Canada Ltd. During the fourth quarter of fiscal year 2002, the Company announced a further restructuring of its merchandising and marketing groups to streamline the decision making process and to optimize responsiveness. In connection with this restructuring, the Company recorded a charge of $209,000 during the fourth quarter.

The following is a summary of activity within the restructuring reserve during the six months ended December 31, 2002:

In conjunction with the restructuring undertaken during the first quarter of fiscal year 2002, the Company also expensed costs, primarily professional fees and related expenses, aggregating $510,000 incurred in connection

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with a study of various alternatives to enhance shareholder value. This amount was included in selling, general and administrative expenses during the first quarter of fiscal year 2002. In conjunction with the fourth quarter restructuring, the Company also recorded an inventory charge of $3,500,000 designed to expedite the acceleration of the Company’s transition towards a merchandise strategy focused on higher growth, primarily digital products. This inventory adjustment was charged to cost of products sold.

Note 5 Treasury Stock Repurchase Program

By June 30, 2002, the Company had completed five previously announced share repurchase programs. In addition, a sixth repurchase plan, announced in June 2002 had been partially completed. In total, under all six plans, 10,216,400 shares had been acquired by June 30, 2002 for total consideration of $110,045,000. During the first quarter of fiscal year 2003, a further 454,850 shares were acquired under the sixth plan at an aggregate cost of $4,957,904, or approximately $10.90 per share. On October 11, 2002, the Company announced a seventh stock repurchase program under which management is authorized, subject to market conditions, to purchase up to an additional 1,065,000 shares, approximately 5% of the shares then outstanding. During the three months ended December 31, 2002, 594,000 shares were acquired under this plan at an aggregate cost of $4,171,000, or approximately $7.02 per share.

Note 6 Net Income per Average Common Share

Basic earnings per share (“EPS”) is calculated by dividing the net income or loss for a period by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted.

Basic and diluted net income per average common share and a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation is set out below:

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At December 31, 2002 and 2001, the Company’s directors and employees held options to purchase 980,187 and 1,401,798 common shares, respectively, at prices ranging from $2.4792 to $11.875 and $2.4792 to $14.75, respectively. During the three months ended December 31, 2002 and 2001, all but 650,269 and 582,822 of such options were considered in calculating diluted EPS. These options were excluded because the option exercise price was greater than the average market price of the Company’s common stock during such periods. The dilutive effect of these options in future periods will depend on the average price of the Company’s common stock during such periods.

Note 7 Comprehensive Income

Comprehensive income is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. For the Company, comprehensive income includes net income and the net change in foreign currency translation effects. The comprehensive income for the three months ended December 31, 2002 and 2001 was $9,156,000 and $10,024,000, respectively. For the six month-periods ended December 31, 2002 and 2001, comprehensive income was $7,512,000 and $7,822,000, respectively.

Note 8 Income Taxes

The provision for domestic and foreign income taxes for the three and six–month periods ended December 31, 2002 was $6,483,000 and $8,205,000, respectively, representing Canadian income tax on the profits of the Company’s Canadian subsidiary. For the three and six-month periods ended December 31, 2001, the provision was $8,325,000 and $10,480,000, respectively. The effective rate of tax for the six-month period ended December 31, 2001 was unusually high because a full valuation allowance was recorded against the deferred tax asset arising from certain components of the restructuring charge that were not tax deductible.

During fiscal years 1999 and 2001, the Company reached agreements with the Canadian tax authorities, settling substantially all of its remaining outstanding Canadian tax issues. Because of the age of these issues and the terms of the settlements, there were complex interest computations to be made. At June 30, 2002, final statements summarizing amounts owing had not been received. Management estimated that at June 30, 2002, the liability to settle all outstanding Canadian tax issues was approximately $11,000,000 to $13,000,000. In

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October 2002, a payment of approximately $7,300,000 was made in satisfaction of a significant portion of these issues. This payment was net of the application of an overpayment of fiscal year 2002 income taxes of approximately $2,900,000, resulting in a reduction of the Company’s liability of approximately $10,200,000. Management estimates that its liability with respect to the remaining issues is approximately $2,000,000. Management further believes that it has a provision recorded sufficient to pay the estimated liability resulting from these issues; however, the amount ultimately paid could differ from management’s estimate.

The Company has one remaining issue in dispute with the Internal Revenue Service (“IRS”) in the United States. The Company disagrees with the position of the IRS on this issue and, on the advice of legal counsel, believes it has meritorious arguments in its defense and is in the process of vigorously defending its position. It is management’s determination that no additional provision need be recorded for this matter. However, should the IRS prevail in its position, the Company could potentially have an additional liability of approximately $2,100,000.

Note 9 Product Warranties

Products sold in the Company’s stores typically carry a one-year warranty. The Company also offers extended warranty plans to its customers. These contracts extend the warranty period beyond the original warranty period provided by the manufacturer and provide enhanced benefits. The term of these contracts, including the original warranty period, is typically three years. As the Company is the primary obligor on these contracts, all revenue on the sale of extended warranty plans is deferred and is amortized on a straight-line basis, over the term of the contract. The Company has certain recourse for a portion of the obligation against the manufacturer during the one-year warranty period covered by such manufacturer. The Company pays its sales associates a specific commission on the sale of extended warranty plans. These costs are also deferred and expensed ratably over the term of the contracts. The following is a summary of the activity in the deferred revenue and deferred charge accounts during the three and six-month periods ended December 31, 2002:

Note 10 Commitments and Contingencies

In connection with the sale of its former United Kingdom subsidiary during fiscal year 1999, the Company remains contingently liable as guarantor of certain leases of InterTAN U.K. Limited. At December 31, 2002 the remaining lease obligation assumed by the purchaser and guaranteed by the Company was approximately $16,000,000 and the average remaining life of such leases was approximately 4 years. If the purchaser were to default on the lease obligations, management believes the Company could reduce the exposure through assignment, subletting and other means. The Company has obtained an indemnity from the purchaser for an amount equal to management’s best estimate of the Company’s potential exposure under these guarantees. At December 31, 2002, the amount of this indemnity was approximately £5,000,0000 (approximately $7,800,000 at December 31, 2002 exchange rates.) The amount of this indemnity declines over time as the Company’s risk diminishes. It was reduced to £4,000,000 in January 2003 and by a further £1,000,000 each succeeding January, until it is reduced to zero in January 2007.

In April 2001, the Company sold its Australian subsidiary. The gain on disposal reported in fiscal year 2001 was based on management’s calculation of certain adjustments to be paid following completion of the sale. The purchaser has advised the Company that it disagrees with management’s calculation of those adjustments and has commenced legal action in support of its claim.

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Management believes that its calculation of the adjustments is appropriate and that there are strong arguments against the position adopted by the purchaser. The Company is in the process of vigorously defending its position. Should the purchaser prevail in this dispute, the Company would have an additional liability of approximately $2,000,000.

Under the terms of the sale agreement, during the two-year period following the sale, which ends April 30, 2003, the Company indemnified the purchaser against any inaccuracies in the financial statements of the former Australian subsidiary as of the date of sale relating to tax matters. This indemnity has a limit of A$4,000,000 (approximately $2,000,000). To date, no claims have been made under this tax indemnity.

Management believes there are authoritative arguments in support of the position that the gain on the sale of the Australian subsidiary is exempt from Australian capital gains tax by virtue of the tax treaty between the United States and Australia, and, accordingly, no Australian tax was recorded with respect to the sale. However, there can be no assurance that the Australian tax authorities will not challenge this position. If Australian tax were to apply to the gain on sale, the Company would have an additional liability of approximately $7,000,000, which the Company would vigorously dispute.

A claim has been made by a former employee for damages for wrongful dismissal in the amount of approximately $900,000. The Company is vigorously defending this action. The Company believes that the possible range of loss in this matter, if any, is substantially less than the amount claimed, and has made adequate provision for its best estimate of any liability which may ultimately arise from this matter.

Apart from these matters and the issues discussed in Note 8, there are no pending proceedings or claims, other than immaterial routine matters incidental to the Company’s business, to which the Company or any of its subsidiaries is a party, or to which any of its property is subject.

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ITEM 2—MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

InterTAN is engaged in the sale of consumer electronics products primarily through company-operated retail stores and dealer outlets in Canada. The Company’s retail operations are conducted through a wholly owned subsidiary, InterTAN Canada Ltd., which operates most of its retail units under the trade name “RadioShack.” The “RadioShack” trade name is used under license from RadioShack Corporation (“RadioShack U.S.A.”). In addition, the Company has entered into an agreement in Canada with Rogers Wireless Inc. (“Rogers”) to operate wireless telecommunications stores (“Rogers AT&T” stores) on its behalf. At December 31, 2002, 77 Rogers AT&T stores were in operation. During the fourth quarter of fiscal year 2002, the Company acquired selected assets of Battery Plus, a retailer of batteries and other specialty consumer electronics products. At December 31, 2002, 44 Battery Plus stores were in operation.

Comparability of results for the six-month period

  ended December 31, 2002 with the prior year

There were two special charges in the first quarter of fiscal year 2002 that significantly impacted the Company’s results of operations and affected the comparability of reported results for the six months ended December 31, 2001 with the results for the first six months of fiscal year 2003.

During the first quarter of fiscal year 2002, the Company recorded a restructuring charge of $2,703,000. See “Restructuring Charge”. During the first quarter of the prior year, the Company also expensed costs aggregation $510,000, primarily professional fees and related expenses, incurred in connection with a study of various alternatives to enhance shareholder value. Management estimates that the tax provision for the quarter was reduced by approximately $1,030,000 as a result of the deductibility for tax purposes of a portion of the restructuring costs. The comparability of results for the three months ended December 31, 2002 and 2001 are unaffected by these charges.

The tables below reflect the Company’s operating income and net income for the six month periods ended December 31, 2002 and 2001, adjusted to eliminate the restructuring charge and the professional fees during the six-month period ended December 31, 2001:

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These non-GAAP financial measures are presented because management believes they present the comparability of the results of the Company’s core business for the two periods on a more consistent basis. These pro-forma measures are intended to enhance the comparability of operating results only and are not intended to be measures of cash flow. The terms “operating income as adjusted” and “net income as adjusted” as used by the Company may not be comparable to similarly titled measures used by other entities. These non-GAAP measures should not be considered as an alternative to net income or cash flows from operating activities, which are determined in accordance with GAAP, as an indicator of operating performance or as a measure of liquidity.

Restructuring Charge

During the first quarter of fiscal year 2002, the Company recorded a restructuring charge of $2,703,000, representing the cost of restructuring the Company’s Board of Directors and streamlining the Company’s Corporate Office and integrating it with InterTAN’s operating subsidiary, InterTAN Canada Ltd. During the fourth quarter of fiscal year 2002, the Company announced a further restructuring of its merchandising and marketing groups to streamline the decision making process and to optimize responsiveness. In connection with this restructuring, the Company recorded a charge of $209,000 during the fourth quarter.

The following is a summary of activity within this reserve during the quarter:

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In conjunction with the restructuring undertaken during the first quarter of fiscal year 2002, the Company also expensed costs, primarily professional fees and related expenses, aggregating $510,000 incurred in connection with a study of various alternatives to enhance shareholder value. This amount was included in selling, general and administrative expenses during the first quarter of fiscal year 2002. In conjunction with the fourth quarter restructuring, the Company also recorded an inventory charge of $3,500,000 designed to expedite the acceleration of the Company’s transition towards a merchandise strategy focused on higher growth, primarily digital products. This inventory adjustment was charged to cost of products sold.

Foreign Exchange Effects

Profit and loss accounts, including sales, are translated from local currency values to U.S. dollars at monthly average exchange rates. During the second quarter of fiscal year 2003, the Canadian dollar was 0.9% stronger against the U.S. dollar relative to the comparable value during the second quarter of the prior year. As a result, the same local currency amounts in Canada translated into more U.S. dollars as compared with the prior year. For example, if local currency sales in Canada in the second quarter of fiscal year 2003 were the same as those in the second quarter of the prior year, the fiscal year 2003 income statement would reflect a 0.9% increase in sales when reported in U.S. dollars. For the six months ended December 31, 2002, the Canadian dollar was 0.1% stronger against the U.S. dollar than during the comparable period last year.

Sales Outlets

The Company’s sales outlets by type and geographic region is summarized in the following table:

Net Sales and Operating Revenues

Sales for the quarter in U.S. dollars were $137,381,000. In Canadian dollars, this represented a total sales performance that was more or less flat with the prior year. Comparable store sales, however, declined by 3% over the same period last year. This difference is explained primarily by the addition of 19 new Rogers AT&T stores and the acquisition of 44 Battery Plus stores. On a net basis, the Company also had 2 more company-operated RadioShack stores than at the same time last year, after closing 11 unprofitable stores. Sales, measured in U.S. dollars were modestly positive, reflecting a Canadian dollar that was about 1% stronger than during the second quarter last year. For the six months ended December 31, 2002, sales in local currency and U.S. dollars each increased by 2%, as there was little change in the value of the Canadian dollar between the two periods. Comparable store sales for the six months ended December 31, 2002 declined by 2% over the same period last year.

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The comparable store sales performance for the quarter was short of expectations, primarily because of soft computer and home satellite sales. Sales in these two categories declined by 32% and 30%, respectively, reflecting weak markets in both categories. In computers, unit sales were down 15%, with lower price levels accounting for the balance of the decline. The satellite market continues to be impacted by the activities of grey marketers, as the federal government has been slow to take enforcement action in response to the Supreme Court ruling a year ago. In home satellite, lower unit sales explained 19% of the reduction in sales, with the balance again explained by lower pricing. Management expects that sales in these two categories will continue to come under pressure, at least in the short run. Sales in the communication category declined 12%. The main component of this category is family radio and the market in general has seen a decline in demand for this product as it begins to approach maturity. The Company also experienced a sales decline in its traditional parts and accessory category. A number of initiatives have recently been introduced that will place more emphasis on this important part of the Company’s business.

Offsetting the disappointing results in these three categories during the quarter were very strong sales results in several of the Company’s core categories. Sales of digital cameras were particularly strong, with a gain of 58% over the prior year quarter, as the Company’s investment in and emphasis on this category in response to consumer demand continues to reap rewards. Important to the holiday selling quarter, sales of toys were up 24% over the prior year quarter. Demand for the newly introduced “micro” remote controlled cars was high and many of the Company’s other products in the toy line also performed well. Sales of video games and related gear and software were also very strong, showing an increase of 36% over last year. Effective promotion of bundled home theatre packages and DVD players contributed to a 13% sales gain in the audio/video category. Sales of batteries posted low double-digit growth, while sales of personal electronics and regular and wireless telephones showed modest single-digit sales gains.

After the sale compensation in the form of residuals and sales-based volume rebates for the quarter declined in local currency by about by 3% over the prior year. While residual income increased by 35%, the effects of this increase were substantially offset by a 10% decline in sales-based volume rebates, primarily as a result of a reduction in satellite loads. After-the sale compensation continues to be an important part of the Company’s business, representing 3% of gross revenue for the quarter.

While management expects continued improvement in many of the Company’s core categories, the effects of this improvement will, at least in the near term, be partially offset by ongoing pressure in the computer and home satellite markets. Consequently, management estimates that total sales for the third fiscal quarter of fiscal year 2003 will increase by approximately two to four percent.

Gross Profit

In U.S. dollars, gross profit dollars for the quarter increased by $408,000. For the six months ended December 31, 2002, gross profit dollars increased by $74,000. The following analysis summarizes the components of the changes in gross profit dollars for the second quarter of fiscal year 2003 and for the six months ended December 31, 2002 from the comparable prior year periods:

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For the past several quarters, the Company has experienced pressure on its gross margin percentage, primarily as a result of a shift in consumer demand towards products, primarily digital and other branded goods, which carry margins below traditional levels. While many of these products carry less than the Company’s traditional margins, management believes that the strategic shift in product preferences will continue and management will continue to position the Company for profitable sales growth in response to these changes in demand. This quarter, the gross margin percentage was approximately 14 basis points less than last year. Lower PC sales as a portion of the sales mix as well as a more guarded pricing policy during December contributed to a margin performance that was better than management had originally anticipated. For the six months ended December 31, 2002, the gross margin percentage declined by 66 basis points. Management estimates that the gross margin percentage during the third quarter could decline by up to 50 basis points.

Selling, General and Administrative Expenses

The following table provides a breakdown of selling, general and administrative expense (“SG&A”) by major category: