GREY GLOBAL GROUP INC - 10-K Annual Report

Back to GetFilings.com

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

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 0-7898
GREY GLOBAL GROUP INC.
(Exact name of registrant as specified in its charter)

DELAWARE 13-0802840
(State or other jurisdiction of incorporation (I.R.S. Employer Identification Number)
or organization)

777 THIRD AVENUE, NEW YORK, NEW YORK 10017
(Address of principal executive offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
212-546-2000

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

COMMON STOCK, PAR VALUE $0.01 PER SHARE
(TITLE OF CLASS)

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 and (2) has been subject to the filing
requirements for the past 90 days. Yes [X] No [ ]

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Act). Yes [X] No [ ]

The aggregate market value of the voting stock held by non-affiliates of
the registrant was $720,508,722 at June 30, 2003.

The registrant had 1,143,139 shares of its Common Stock, par value $0.01
per share, and 232,108 shares of its Limited Duration Class B Common Stock, par
value $0.01 per share, outstanding at March 1, 2004.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the annual proxy statement to be furnished in connection with
the registrant's 2004 annual meeting of stockholders are incorporated by
reference into Part III.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

PART I.

ITEM 1. BUSINESS.

Grey Global Group Inc. ("Grey" or the "Company") commenced operations in
1917, was incorporated in New York in 1925 as Grey Advertising Inc. and
reincorporated in Delaware in 1974. The Company changed its name to Grey Global
Group Inc. in 2000.

Grey is one of the world's largest advertising, communications and
marketing service companies. It operates in 83 countries around the world
providing its clients with services and expertise over a broad range of
communications disciplines including mass market advertising, media planning and
buying, direct marketing, healthcare marketing, public relations and public
affairs, sales promotion, graphic design, corporate communications, event
marketing, interactive communications, channel marketing and retail advertising
support, and product branding.

Grey services a diverse client base in all product categories including
fast moving consumers goods, pharmaceutical products, automobiles, entertainment
and communications, technology and telecommunications, and retail. Grey has
maintained client relationships over long periods of time. It has been providing
service to its ten largest clients, on average, for more than 23 years. One
client, The Procter & Gamble Company, which has been a client of the Company for
more than forty years, represented approximately 10.6% of the Company's
consolidated revenue in 2003. The loss of this client would likely have an
adverse effect on the results of the Company. No other client represented more
than 5% of revenue in 2003. The Company and its subsidiaries (consolidated and
nonconsolidated) employed approximately 10,500 people at the end of 2003,
including eight executive officers.

The Company faces risks normally associated with a global marketing
communications firm including general economic and market conditions; the
credit-worthiness of its clients; competition for client assignments and
talented staff; and the risks associated with extensive international
operations. While the Company has no reason to believe that its international
operations as a whole are jeopardized in any material respect, they bear certain
risks, including those of currency fluctuations, political instability and
exchange controls, which do not affect its domestic operations.

While the Company operates on a global basis, for purposes of presenting
certain financial information in accordance with accounting principles generally
accepted in the United States, its operations are deemed to be conducted in
three geographic areas and relevant information for these areas for the last
three years is summarized in the Notes to the Company's Consolidated Financial
Statements.

The Company's website address is www.greyglobalgroup.com. The Company makes
available free of charge on its website its annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments
to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act as soon as reasonably practicable after such material is
electronically filed with or furnished to the Securities and Exchange
Commission.

FORWARD LOOKING STATEMENTS

In connection with the provisions of the Private Securities Litigation
Reform Act of 1995 (the "Reform Act"), the Company may include Forward Looking
Statements (as defined in the Reform Act) in oral or written public statements
issued by or on behalf of the Company. These Forward Looking Statements may
include, among other things, plans, objectives, projections, anticipated future
economic performance or assumptions and the like that are subject to risks and
uncertainties. Actual results or outcomes may differ materially from those
discussed in the Forward Looking Statements. Important factors which may cause
actual results to differ include, but are not limited to, the following: the
unanticipated loss of a material client or key personnel, delays or reductions
in client budgets, shifts in industry rates of compensation, government
compliance costs or litigation, unanticipated natural disasters, terrorist
attacks, war, technological developments, deterioration of creditworthiness of
clients or suppliers, changes in the general economic conditions, changes in
exchange rates, changes in interest rates and/or consumer spending either in the
North American

2

or non-North American markets in which the Company operates, unanticipated
expenses, client preferences which can be affected by competition, and/or
changes in the competitive frame, and the ability to project risk factors which
may vary.

EXECUTIVE OFFICERS OF GREY

AS OF MARCH 1, 2004

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

(a) All executive officers are elected annually by the Board of Directors of
Grey ("Board"). Each executive officer has been with Grey for a period
greater than five years. There exists no family relationship between any of
Grey's directors or executive officers and any other director or executive
officer or person nominated or chosen to become a director or executive
officer.

ITEM 2. PROPERTIES.

Substantially all offices of the Company are located in leased premises.
The Company's principal office is at 777 Third Avenue, New York, New York, where
it occupies approximately 439,000 square feet of space. The Company's lease
covering this space expires at the end of 2009. The Company also has leases
covering other offices, including in Amsterdam, Atlanta, Auckland, Beijing,
Brussels, Buenos Aires, Copenhagen, Dusseldorf, Hong Kong, Istanbul, Jakarta,
Johannesburg, Kuala Lumpur, London, Los Angeles, Madrid, Melbourne, Mexico City,
Milan, New York, Oslo, Paris, San Francisco, San Juan, Sao Paolo, Stockholm,
Tokyo, Toronto and Washington D.C.

The Company considers all space leased by it to be adequate for the
operation of its business and does not foresee any significant difficulty in
meeting its space requirements.

ITEM 3. LEGAL PROCEEDINGS.

In the Company's judgment, it is not involved in any material pending legal
proceedings other than ordinary routine litigation incidental to the business of
the Company.

3

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.

The Common Stock is traded on the NASDAQ Stock Market's National Market and
listed on the NASDAQ Stock Market under the symbol GREY.

As of March 1, 2004, there were 360 holders of record of the Common Stock
and 165 holders of record of the Limited Duration Class B Common Stock.

The following table sets forth certain information about dividends paid and
the bid prices on the NASDAQ Stock Market during the periods indicated with
respect to the Common Stock:

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

* Such over-the-counter market quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily represent
actual transactions.

4

ITEM 6. SELECTED FINANCIAL DATA.

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

(a) After giving effect to amounts attributable to redeemable preferred stock
and for diluted earnings per common share to the assumed (i) exercise of
dilutive stock options, (ii) issuance of shares pursuant to the Company's
Senior Management Incentive Plan and (iii) conversion of the 8 1/2%
Convertible Subordinated Debentures. On December 31, 2003, the 8 1/2%
Convertible Subordinated Debentures were converted into 25,564 shares of
Common Stock and 25,564 shares of Limited Duration Class B Common Stock. For
2003, net income was adjusted by interest savings, net of tax, on the
assumed conversion of the 8 1/2% Convertible Subordinated Debentures.

(b) Due to the anti-dilutive result of the diluted earnings per share
calculation for 2001, basic and diluted earnings per share are the same.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

OVERVIEW

Grey ranks among the largest global communications companies in the world.
Grey operates branded business units in many communications disciplines
including general advertising, public relations/public affairs, direct
marketing, internet communications, healthcare marketing, brand strategy and
design, and on-line and off-line media services.

The challenging market environment which we have had in North America the
last few years seemed to abate as 2003 progressed. In 2003, the Company
experienced its third year of difficult trading conditions in Europe. In 2003,
the Company saw revenue grow by 9.0%, its net income rise by 59.2% and its
diluted earnings per share go up by 65.8%. The increase in revenue was
attributable mostly to the strengthening of foreign currencies against the
United States dollar; exchange rate movements, however, did not have a material
impact on net income. Improved performance was achieved despite the Company
incurring losses in Scandinavia in 2003 significantly greater than those
incurred in 2002.

5

YEAR ENDED 2003 COMPARED TO YEAR ENDED 2002

REVENUE

The following chart shows the breakdown of the Company's 2003 and
2002 revenue by area:

In 2003, the weakening of the United States dollar against selected foreign
currencies was responsible for the majority of the growth in revenue; the impact
of such currency movements is summarized in the following:

Revenue at the Company's Scandinavian operations was down $15.6 million in
2003 compared to 2002; of this reduction, only $300,000 was attributable to
currency fluctuations. This drop was due to weak market conditions, poor
performance of our operating units in the region and the result of closing
certain operations. Absent the effect of exchange rate movements, revenue
decreases in Eastern Europe and The Netherlands were more than offset by
increases in The United Kingdom, Brazil, Mexico, Argentina and Hong Kong.

EXPENSES

As shown in the chart set forth below, compensation expenses were up at a
rate slightly greater than the rate of increase in revenue. This is mostly
because of the increased variable, incentive compensation earned and/or granted
in 2003 reflecting the overall increased profit performance of the Company.
Other operating costs grew at a pace less than the increase in revenue because
of the Company's continued focus on cost containment.

Inflation did not have a material impact on revenue or expenses in 2003 or
2002.

6

OTHER INCOME/EXPENSE

Other Income/Expense for 2003 compared to 2002 is set forth below:

Interest expense increased because of the impact of the issuance in the
fourth quarter of the Company's 5% contingent convertible subordinated
debentures. Interest income remained essentially the same as 2002. The amount of
cash that was invested was generally higher during 2003, especially in the
fourth quarter with the inclusion of the proceeds from the issuance in the
fourth quarter of the Company's 5% contingent convertible subordinated
debentures. The interest income benefit of the additional cash was offset by the
lower rate environment in 2003. Other income increased primarily because of the
sale of a majority-owned subsidiary in Germany, resulting in a gain of
approximately $2.5 million.

INCOME OF CONSOLIDATED COMPANIES BEFORE TAXES ON INCOME ("PRE-TAX PROFIT")

The Company's pre-tax profit rose by $23.1 million (up 53.8%) during 2003.
A majority of the increase was attributable to improved performance in North
America where both cost containment and revenue growth helped increase pre-tax
profit by 57.9%. The pre-tax profit in Europe increased modestly in 2003 but was
significantly affected by very poor results from the Company's operations in
Scandinavia. The pre-tax profit in Asia/Latin America more than doubled to $9.4
million because of revenue growth and improved margins.

The 2003 results were negatively affected by a pre-tax loss of $20.6
million in the Company's Scandinavian operations, which was $17.3 million
greater than the $3.3 million pre-tax loss incurred in the previous year. Absent
exchange rate movement the pre-tax loss would have been $17.6 million. Through a
series of start-ups, tactical acquisitions and the adoption of other growth
strategies, the Company's operations in Scandinavia became the largest marketing
communications group in the region. Beginning in 2001, the Company's
Scandinavian operations struggled in a region where market conditions were very
weak and weakened further, where structural change (such as effecting personnel
reductions) is expensive and there is a long lead time before the benefits of
cost reductions are fully realized. In 2003, even business units which had
historically performed well suffered greatly; as noted above, revenue in the
region, absent exchange rate movements, dropped by $15.6 million from 2002. The
Company has reviewed all of its Scandinavian operations and has merged or closed
a number of them, and sold one, recognizing a $2.1 million loss on the sale. The
Company has replaced its executive and senior financial management in
Scandinavia, and is continuing to reorganize selected business units which
remain challenged.

TAXES

The effective tax rate for 2003 increased to 52.9% from 50.1% in 2002. The
increase in the tax rate was directly attributable to losses incurred in
Scandinavia for which no tax benefit was recorded. Given the magnitude of the
losses, an addition was made to the valuation allowance for prior period losses
in Scandinavia for which tax benefit had been recognized previously. This result
was partially offset by reductions to the valuation allowance for prior period
operating losses in other international operations where business has improved.

MINORITY INTEREST/EQUITY ACCOUNTING

Minority interest decreased by $1.3 million in 2003 principally because of
changes in the net income at a number of consolidated companies, the acquisition
of additional equity in the Company's media subsidiary in the United Kingdom and
the sale of a majority-owned German subsidiary. Equity in earnings of non-
consolidated companies did not move significantly between 2002 and 2003.

7

NET INCOME

The Company reported net income of $29.1 million for 2003 compared to $18.3
million in 2002. This growth was achieved after a net loss of $22.4 million
incurred in respect of the Company's Scandinavian operations for 2003.

YEAR ENDED 2002 COMPARED TO YEAR ENDED 2001

REVENUE

The following chart shows the breakdown of the Company's 2002 and 2001
revenue by area:

The slight decrease in revenue in 2002 reflects generally weak economic
conditions in selected Northern European and Latin American countries offset by
a growth performance of the International operations and the positive impact of
a weakening dollar.

EXPENSES

Salaries and employee related expenses decreased in 2002 reflecting the
continued commitment of the Company to align its costs with its revenue and the
elimination of certain costs, principally the result of the write-off of
leasehold improvements and fixed assets related to disposal of more than 160,000
square feet of leased space in the fourth quarter of 2001, and the absence of
goodwill amortization expense in 2002 compared with amortization of $14.4
million in 2001.

8

Inflation did not have a material effect on revenue or expenses in 2002 or
2001.

OTHER INCOME/EXPENSE

Other Income/Expense -- net decreased in 2002 reflecting the absence of a
non-cash charge taken in 2001 for the write-down of investments in
Internet-related early stage businesses and certain marketable securities.
Interest income was lower because of reduced cash balances as well as lower
interest rates.

TAXES

The effective tax rate returned to historical levels with an effective tax
rate of 50.1% in 2002, consistent with the tax rate in 2001, exclusive of the
non-cash charge incurred in 2001.

MINORITY INTEREST/EQUITY ACCOUNTING

Minority interest decreased by $1.0 million in 2002. Equity in earnings of
nonconsolidated affiliated companies increased $2.0 million in 2002. The changes
in 2002 and in 2001 were primarily due to changes in the level of profits of
consolidated and nonconsolidated companies.

NET INCOME

The Company reported net income of $18.3 million in 2002 as compared to a
net loss of $24.4 million in 2001.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents were $510.4 million and $351.0 million at
December 31, 2003 and 2002, respectively, and the Company's investments in
marketable securities were $2.6 million and $7.2 million at December 31, 2003
and 2002, respectively. Working capital increased by $138.9 million to $44.1
million at December 31, 2003 versus a deficit of $94.8 million at December 31,
2002. The increases in cash and working capital result, primarily, from the net
proceeds of approximately $145.0 million related to the sale of the 5%
contingent convertible subordinated debentures. The continued high level of cash
and cash equivalents reflects the Company's ongoing focus on cash management.

Domestically, the Company had available $110.0 million credit under an
annual revolving credit facility from a syndicate of JPMorgan Chase Bank, HSBC
Bank USA, Fleet National Bank, Barclays Bank PLC, North Fork Bank and City
National Bank at December 31, 2003 and 2002, respectively. This facility was
utilized during both 2003 and 2002 to secure lines of credit for certain of the
Company's international subsidiaries. There was no outstanding borrowing under
this facility at December 31, 2003. There was $10.0 million outstanding at
December 31, 2002. The borrowings under this facility bore interest rates of
4.9% and 5.3% for the years ended December 31, 2003 and 2002, respectively. The
commitment and related fees paid for the facility were $200,000 and $100,000 in
2003 and 2002, respectively.

Other credit facilities are available to the Company in foreign countries
in connection with short-term borrowings and bank overdrafts used in the normal
course of business. Amounts outstanding under such facilities at December 31,
2003 and 2002 were $70.5 million and $57.0 million, respectively. The changes in
the level of short-term borrowing and bank overdrafts are primarily due to
timing differences on collection from clients, and related payments to media and
other vendors.

Historically, cash flows from operations, bank and other borrowings have
been sufficient to meet the Company's dividend, capital expenditure, acquisition
and working capital needs. The Company expects that

9

such sources will be sufficient to meet its near-term cash requirements and will
enable the Company to meet its longer-term obligations.

The Company's business historically has been seasonal with greater business
activity in the second and fourth quarters, particularly the fourth quarter. As
a result, cash and cash equivalents, accounts receivable, accounts payable and
accrued expenses are typically higher on the Company's year-end balance sheet
than at the end of any of the preceding three quarters.

SUMMARY OF SIGNIFICANT CONTRACTUAL OBLIGATIONS

The following summarizes the Company's estimated contractual obligations at
December 31, 2003, and the effect such obligations are expected to have on its
liquidity and cash flow in future periods.

ESTIMATED CONTRACTUAL OBLIGATIONS

The Company has $44.3 million of cash, marketable securities and other
investments set aside to fund certain of the deferred compensation obligations
shown above. Those assets are on the balance sheet included in other assets.

In addition to the contractual obligations set forth in the table, the
Company makes commitments when it purchases media time and space from various
media suppliers on behalf of its clients. The liability for the media is
generally recorded on the Company's balance sheet when the client is billed,
usually in the month that the underlying advertising appears. As part of the
general practice in the industry, the Company frequently is required to reserve,
or commit to purchase, media time and space with the media suppliers well before
a commercial is aired or a publication reaches the market. The duration of these
commitments vary depending on the type of media purchased and the terms of the
particular purchase. The duration of any commitment may be as short as a few
days or as long as a year. These commitments are only entered following the
specific authorization of clients who, in turn, commit to reimburse the Company.
In practice, clients fulfill their commitments to the Company enabling it, in
turn, to fulfill its commitments. There are, however, instances where a client
may seek to alter its commitments to purchase media. It is generally industry
practice that media suppliers seek to accommodate the client's wishes, in part,
because the media suppliers wish to work to maintain good, on-going relations
with important clients, such as the Company represents, and large buyers of
media like the Company.

10

At December 31, 2003, the amount of Company's media commitments not
recorded on its balance sheet was $1,048.7 million, of which $357.0 million was,
as of that date, cancelable by the terms of those commitments. The
Company-guards against loss in respect of its media commitments in various ways.
The Company considers the creditworthiness of its clients and sets relevant
terms of business appropriately, and may purchase credit insurance in certain
instances. In certain markets, the Company is also protected on its commitments
if a client does not fulfill its underlying obligations by the rule of
sequential liability, which generally provides that a buyer of media is not
required to pay a media supplier unless such buyer has been paid by its client.

The Company estimates that it will be required to make future payments to
acquire additional shares of subsidiary companies or to complete earn-out
agreements (collectively, "Agreements") pursuant to certain acquisition
arrangements not reflected as liabilities on its consolidated balance sheet of
approximately $54.2 million. Of such amount, 38.4% is estimated to be paid over
the period from 2004 through 2007 and the remainder to be paid from 2008 and
beyond. The foregoing information is estimated and the actual payments made will
be dependent on future events primarily related to the attainment of earnings
goals, specified operating margin and revenue targets or a combination thereof
in respect of a number of subject companies. Other factors which must be
considered in making the estimate include the fulfillment and amendment of
certain contractual obligations by third parties, the movement of exchange
rates, the timing of when the Company or other parties choose to exercise
certain contractual rights and other variables.

Many of the Agreements do not provide for maximum or minimum amounts
payable. Therefore, there is no definitive range of the amounts payable in the
future. The estimated amounts payable were computed using assumptions as to
earnings bases, dividend rates, earnings growth rates and other factors deemed
to be reasonable for the underlying situations. If the Company were to increase
the earnings assumptions used in estimating the amounts payable uniformly by
10%, the estimated amounts payable would increase to $64.7 million; if the
earnings assumptions were decreased uniformly by 10%, the estimated amounts
payable would decrease to $43.7 million.

The Company has two loans outstanding from the Prudential Insurance Company
of America. The first loan of $75.0 million from December 1997 bore interest at
the rate of 6.94% and was originally repayable in three equal annual
installments, commencing in December 2003. This loan was renegotiated in March
2003, with a fixed interest rate of 7.41%, and principal repayments of $25.0
million in March, 2007, 2008 and 2009, respectively. The second loan of $50.0
million was drawn in November 2000, bears interest at the rate of 8.17% and is
repayable in two equal annual installments, commencing in November 2006.

The loans and the availability of the Company's committed lines of credit
contain certain covenants related to the Company's capital, debt load and cash
flow. As of December 31, 2003 and December 31, 2002, the Company was in
compliance with these covenants.

On October 28, 2003, the Company sold $125 million principal amount of its
5% contingent convertible subordinated debentures, due 2033 ("Debentures"), to
JP Morgan Securities Inc. ("Initial Purchaser") in a transaction exempt from the
registration requirements of the Securities Act of 1933. On November 7, 2003,
the Company sold an additional $25 million principal amount of Debentures
pursuant to an overallotment option held by the Initial Purchaser. The total net
proceeds of the offering were $145 million. The Debentures are convertible into
shares of Common Stock at an initial conversion price of $961.20 per share
provided that any one of several contingencies are met, including that the
Common Stock trades above $1,153.44 for specified periods of time. The
Debentures are subordinate to the other debt of the Company. The fair value of
the Debentures at year end was $156 million. The Company is using the proceeds
of the issuance for working capital and other general corporate purposes.

CRITICAL ACCOUNTING POLICIES

The Company's discussion and analysis of financial condition and results
from operations are based on the consolidated financial statements which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of financial statements in conformity with
generally accepted accounting principles requires the Company 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

11

financial statements. Estimates also affect the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates. The Company's critical accounting policies include:

REVENUE RECOGNITION

Revenue derived from advertising placed with media is recognized based upon
the publication or broadcast dates. Revenue resulting from expenditures billable
to clients is recognized when the service is performed and billed. Media revenue
and revenue resulting from expenditures billable to clients is clearly defined
and determinable. Labor based revenue is recognized in the month of service as
service is provided throughout the life of each contract. At the end of the
reporting period, labor based contracts are examined to determine what was
earned and what is collectible on such earned amounts for the purposes of
recognizing revenue amounts appropriate for the period. Revenue from
performance-based incentive fees is recorded at the end of a contract period
when the amount to be received can be reasonably estimated.

ACQUISITIONS AND IMPAIRMENT OF GOODWILL

The Company, from time to time, makes acquisitions that complement its core
capabilities and strategies, enhance its existing client service infrastructure
and/or provide additional support for current clients. The price of the
acquisitions may be in excess of the fair value of the net tangible assets
acquired. The Company accounts for these acquisitions in accordance with
Statement of Financial Accounting Standards No. 141, Business Combinations.
Normally, acquired client and employment relationships are short term in nature
or cancelable at will, and an acquired entity will have a minimum of tangible
assets over which to allocate purchase price. Therefore, a substantial portion
of the purchase price is allocated to goodwill.

The Company assesses the fair value and recoverability of intangible
assets, almost exclusively goodwill, in accordance with Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets, which was
adopted January 1, 2002. When assessing potential impairment of goodwill, the
fair value of all business units at the regional levels of North America and
Europe is compared to the carrying value of those business units. For the
purposes of the analysis, Asian and Latin American business units are combined
with the respective North American and European regions reflecting the fact that
investments in the Asian and Latin American regions are principally needed to
support multi-national clients serviced in North America and Europe. If
impairment is indicated, the excess of the carrying value of the goodwill over
fair value of the business units is written-off. The Company completed its
annual impairment test of goodwill and intangible assets with indefinite lives
as of March 31, 2003, and no impairment was identified nor were there any
impairment indicators subsequent to March 31, 2003.

The 2001 results on a historical basis do not reflect the provisions of FAS
142. Had the Company adopted FAS 142 on January 1, 2001, the historical net
income and basic and diluted net income per common share would have been changed
to the adjusted amounts indicated below:

FIXED ASSETS

Fixed assets fall into three main categories; furniture and fixtures,
computer equipment and leasehold improvements. Depreciation of furniture and
fixtures, and computer equipment is computed principally by the straight-line
method over the useful life of the asset, normally five to ten years for
furniture and fixtures, and three to five years for computer equipment.
Amortization of leasehold improvements is provided for on a

12

straight-line basis principally over the terms of the related leases but not in
excess of the useful lives of the underlying assets.

SALARIES AND EMPLOYEE RELATED EXPENSES

The Company records salaries and employee related expenses as a period cost
when incurred. Salary expense is generally recorded in the period that the
salary is paid. Discretionary bonuses are estimated and accrued as short-term
liabilities each period. Bonuses are paid shortly after year end. Stock and
other incentive plans and contractual bonuses are clearly identifiable and
determinable, and are generally accrued when earned by the employee.

DEFERRED TAXES

The Company recognizes deferred tax assets based on the differences between
the financial statement carrying amounts and the tax bases of assets and
liabilities. The net deferred tax assets are regularly reviewed for
recoverability and a valuation allowance is established, based upon historical
losses, projected future taxable income and the expected timing of the reversals
of existing temporary differences. As of December 31, 2003, the Company had
$53.7 million of deferred tax assets net of a valuation reserve of $25.4
million, which it believes to be appropriate.

For further detail on accounting policies, please refer to the Notes to the
Company's Consolidated Financial Statements.

FASB STATEMENTS

In January 2003, the FASB issued FASB Interpretation No. 46 "Consolidation
of Variable Interest Entities" an Interpretation of ARB No. 51 ("FIN 46"), which
requires variable interest entities (often referred to as special purpose
entities or SPEs) to be consolidated if certain criteria are met. FIN 46 was
effective as of January 31, 2003 for variable interest entities created after
that date and other variable interest entities in the first quarter of 2004. The
adoption of FIN 46 is not expected to have a material impact the Company's
consolidated financial statements.

In December 2002, the Financial Accounting Standard Board, issued Statement
of Financial Accounting Standards No. 148 ('FAS 148'), Accounting for
Stock-Based Compensation - Transition and Disclosure which amends Statement of
Financial Accounting Standards No. 123 ("FAS 123"), Accounting for Stock-Based
Compensation . FAS 148 provides alternative methods of transition to FAS 123's
fair value method of accounting for stock-based employee compensation and amends
the disclosure provisions of FAS 123. While the statement does not require
companies to account for employee stock options using the fair value method, the
Company adopted FAS 123 effective January 1, 2003, using the prospective method
as provided for in FAS 123 and adopted the disclosure requirements of FAS 148,
for 2003.

On May 15, 2003, the FASB issued Statement of Financial Accounting
Standards No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity ("FAS 150"). This Statement
establishes standards for classifying and measuring as liabilities certain
financial instruments that embody obligations of the issuer, and have
characteristics of both liabilities and equity. FAS 150 represents a significant
change in practice in the accounting for a number of financial instruments,
including mandatorily redeemable equity instruments. Effective July 1, 2003, the
Company's redeemable preferred stock was classified as a liability.
Additionally, the change in the redemption value of the Company's redeemable
preferred stock and dividend payments to its holder, which were previously
recorded as changes in retained earnings, have been recorded from July 1, 2003
as increases or decreases to interest expense. The adoption of FAS 150 affected
working capital and net income in 2003. The adoption of FAS 150 will not affect
earnings per share computations. The earnings per share calculations, through
June 30, 2003 included an adjustment to net income for the change in the
redemption value of preferred stock; FAS 150 requires the change in redemption
value to be recorded as increases or decreases to interest expense, thereby,
eliminating the need for the adjustment.

13

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's results may be affected by currency exchange rate
fluctuations given the Company's extensive international operations. Generally,
the foreign currency exchange risk is limited to net income of each operation
because the Company's revenues and expenses, by country, are almost exclusively
denominated in the local currency of each respective country with both revenue
and expense items matched.

Occasionally, the Company enters into foreign currency contracts for known
cash flows related to repatriation of earnings from its international
subsidiaries or identified liabilities in foreign currencies. The term of each
such foreign currency contract entered into in 2003 was for less than three
months and the amount open at December 31, 2003 was not material. At December
31, 2002, there were no foreign currency contracts open. The Company had no
derivative contracts outstanding at December 31, 2003 or 2002, respectively.

The Company has investments in private equity securities, corporate bonds
and equity securities that may be subject to changes in general economic
conditions and fluctuations in interest rates. Excess funds are generally
invested in short term liquid securities and money market funds.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The information required by this Item is presented in this report beginning
on Page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

ITEM 9A. CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures. The Company's management, with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Company's disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Exchange Act) as of the end of the period covered by this report. Based on
such evaluation, the Company's Chief Executive Officer and Chief Financial
Officer have concluded that, as of the end of such period, the Company's
disclosure controls and procedures are effective.

(b) Internal Controls Over Financial Reporting. There have not been any
changes in the Company's internal control over financial reporting (as such term
is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
last fiscal quarter to which this report relates that have materially affected,
or are reasonably likely to materially affect, the Company's internal control
over financial reporting.

PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Information with respect to the directors of Grey is incorporated herein by
reference to the Company's proxy statement ("Proxy Statement") to be sent to its
stockholders in connection with its 2003 Annual Meeting and will be included
under the caption "Election of Director". Information with respect to Grey's
executive officers is set forth in Part I of this report. The Company has
adopted the Grey Global Group Inc. Code of Ethics - Senior Officers, a copy of
which is annexed as an Exhibit to this Form 10-K, which applies to the Company's
principal executive officer, principal financial officer and principal
accounting officer. Any waiver or amendment of the Code of Ethics will be
disclosed on the Company's website or as otherwise permitted under applicable
law.

ITEM 11. EXECUTIVE COMPENSATION.

The information required by this Item is incorporated herein by reference
to the Proxy Statement and will be included under the caption "Management
Remuneration and Other Transactions".
14

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information required by this Item is incorporated herein by reference
to the Proxy Statement and will be included under the captions "Election of
Director" and "Voting Securities".

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by this Item is incorporated herein by reference
to the Proxy Statement and will be included under the captions "Election of
Director" and "Voting Securities".

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item is incorporated herein by reference
to the Proxy Statement and will be included under the caption "Relationship with
Independent Auditors".

PART IV.

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a) (1) (2) The information required by this subsection of this Item is
presented in the index to Financial Statements on Page F-1. (3) The information
required by this subsection of this Item is provided in the Index of Exhibits at
Page E-1 of this report. Such index provides a listing of exhibits filed with
this report and those incorporated herein by reference.

(b) The Company filed reports on Form 8-K, dated October 21, 2003, October
23, 2003 and October 28, 2003 reporting items 5 and 7, "Other Events" and
"Financial Statements, Pro Forma Financial Information and Exhibits,"
respectively.

The Company filed a report on Form 8-K, dated October 22, 2003, reporting
Items 7 and 9, "Financial Statements, Pro Forma Financial Information and
Exhibits" and "Regulation FD Disclosure", respectively.

The Company filed reports on Form 8-K, dated November 11, 2003 and
February 27, 2004, reporting Items 5, 9, and 12. "Other Events", Regulation FD
Disclosure" and "Disclosure of Results of Operations and Financial Conditions,"
respectively.

The Company filed a report on Form 8-K, dated January 8, 2004, reporting
Item 5, "Other Events".

The Company filed a report on Form 8-K, dated March 2, 2004, reporting
Items 9 and 12, "Regulation FD Disclosure" and "Disclosure of Results of
Operations and Financial Conditions", respectively.

(c) The information required by this subsection of this Item is presented
following the Financial Statements. All schedules except for Financial Statement
Schedule II - Valuation and Qualifying Accounts are not required under the
related instructions or are inapplicable and, therefore have been omitted.

15

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

GREY GLOBAL GROUP INC.

By: /s/ EDWARD H. MEYER
------------------------------------
Edward H. Meyer,
Chairman, Chief Executive
Officer & President

Dated: March 15, 2004

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of Registrant and in
the capacities and on the date indicated.

16

ANNUAL REPORT ON FORM 10-K

ITEM 8, ITEM 15(A)(1) AND (2)

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

LIST OF FINANCIAL STATEMENTS

YEAR ENDED DECEMBER 31, 2003

GREY GLOBAL GROUP INC.

NEW YORK, NEW YORK

FORM 10-K -- ITEM 8, ITEM 15(A)(1) AND (2)

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES

INDEX TO FINANCIAL STATEMENTS

The following consolidated financial statements of Grey Global Group Inc.
and consolidated subsidiary companies are included in Item 8:

Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets--December 31, 2003 and 2002..... F-3
Consolidated Statements of Operations--Years Ended December
31, 2003, 2002 and 2001................................... F-5
Consolidated Statements of Common Stockholders' Equity--
Years Ended December 31, 2003, 2002 and 2001.............. F-6
Consolidated Statements of Cash Flows-- Years Ended December
31, 2003, 2002 and 2001................................... F-9
Notes to Consolidated Financial Statements-- December 31,
2003...................................................... F-11
Schedule II - Valuation and Qualifying Accounts--Years Ended
December 31, 2003, 2002 and 2001.......................... F-34

F-1

REPORT OF INDEPENDENT AUDITORS

The Stockholders and Board of Directors
Grey Global Group Inc.

We have audited the accompanying consolidated balance sheets of Grey Global
Group Inc. and consolidated subsidiary companies as of December 31, 2003 and
2002, and the related consolidated statements of operations, common
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2003. Our audits also included the financial statement
schedule listed in the Index at Item 15 (c). These financial statements and the
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Grey Global Group Inc. and consolidated subsidiary companies at December 31,
2003 and 2002, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 2003, in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.

As discussed in Note A, the Company changed its method for accounting for
stock compensation and its accounting for goodwill and other intangibles
effective January 1, 2003 and January 1, 2002, respectively. In addition, as
also discussed in Note A, the Company changed the accounting for its redeemable
Preferred Stock effective July 1, 2003.

ERNST & YOUNG LLP

New York, New York
February 26, 2004

F-2

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements.
F-3

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)

See notes to consolidated financial statements.
F-4

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS

See notes to consolidated financial statements.
F-5

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

See notes to consolidated financial statements.

F-6

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

See notes to consolidated financial statements.

F-7

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

See notes to consolidated financial statements.

F-8

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

F-9

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

See notes to consolidated financial statements

F-10

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and its majority owned subsidiaries. Certain of the Company's international
operations are consolidated on an up to three month lag as permitted by
accounting principles generally accepted in the United States. Material
intercompany balances and transactions have been eliminated in consolidation.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires the Company 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. Estimates also impact the reported amounts of revenue
and expenses during the reporting period. Actual results could differ from those
estimates.

REVENUE AND ACCOUNTS RECEIVABLE

Revenue derived from advertising placed with media is recognized based upon
the publication or broadcast dates. Revenue resulting from expenditures billable
to clients is recognized when the services are performed and billed. Labor based
revenue is recognized in the month of service. Revenue from performance-based
incentive fees is recorded at the end of a contract period when the amount to be
received can be reasonably estimated. Payroll costs are expensed as incurred.
Accounts receivable include both the revenue recognized as well as actual media
and production costs which are paid for by the Company and rebilled to clients.

CASH EQUIVALENTS

The Company considers all highly liquid investments with a maturity of
three months or less from the purchase date to be cash equivalents. The carrying
amount of cash equivalents approximates fair value because of the short
maturities of these instruments.

SALARIES AND EMPLOYEE RELATED EXPENSES

The Company records salaries and employee related expenses as a period cost
when incurred. Salary expense is generally recorded in the period the salary is
paid. Discretionary bonuses are estimated and accrued as short-term liabilities
each period. Bonuses are paid shortly after year end. Stock and other incentive
plans and contractual bonuses are identifiable and determinable, and are
generally accrued when earned by the employee.

INVESTMENTS IN AND ADVANCES TO NONCONSOLIDATED AFFILIATED COMPANIES

The Company carries its investments in nonconsolidated affiliated companies
on the equity method.

The following data relates to the Company's investments in nonconsolidated
subsidiaries that met the criteria for a significant subsidiary as set forth in
Rule 1.02(w) of Regulation S-X either individually or in the

F-11

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

aggregate. Summarized financial information based on audited and unaudited
financial statements as of and for the twelve months ended December 31, 2003,
2002 and 2001 is as follows:

KPE Inc., AS-Grey OY, GCI Ringpress and the aggregate of other of the
Company's non-consolidated subsidiaries have been accounted for under the equity
method. KPE Inc., an internet services provider, was acquired in 2001 by a
professional administrator to liquidate it on behalf of its creditors. The
foregoing data for KPE Inc. is unaudited and comes from its internal statements
which did not value assets or liabilities in such a manner as to reflect its
liquidity or commercial difficulties. In 2001, the Company wrote off its entire
investment in KPE Inc. and has no continuing liabilities or obligations. The
Company has a minority interest in AS-Grey OY which has been, and continues to
be, the Company's affiliate in Finland. GCI Ringpress GmbH is a public relations
subsidiary in Germany. Its financial statements were consolidated into the
Company's financial statements beginning in 2002.

FIXED ASSETS

Fixed assets fall into three main categories: furniture and fixtures,
computer equipment and leasehold improvements. Depreciation of furniture and
fixtures, and computer equipment is computed principally by the

F-12

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

straight-line method over the useful life of the asset, normally five to ten
years for furniture and fixtures, and three to five years for computer
equipment. Amortization of leasehold improvements is provided for on a
straight-line basis principally over the terms of the related leases but not in
excess of the useful lives of the underlying assets.

FOREIGN CURRENCY TRANSLATION

All balance sheet accounts of the Company's international operations are
translated at the exchange rate in effect at each year end and statement of
operation accounts are translated at the weighted average exchange rates
prevailing during the year. Resulting translation adjustments are recorded as a
component of other comprehensive income (loss). Foreign currency transaction
gains and losses are reported as part of net income. During 2003, 2002 and 2001,
foreign currency transaction gains and losses were not material.

GOODWILL

Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142 ("FAS 142"), Goodwill and Other Intangible Assets.
FAS 142 addresses financial accounting and reporting for acquired goodwill and
other intangible assets. Under FAS 142 the excess of purchase price over the
underlying fair value of the net assets of consolidated subsidiaries and
nonconsolidated investments are recorded as goodwill by the Company. Other
intangible assets are recognized separately from goodwill if at acquisition they
can be separated from the entity and are available for sale or exchange, or
control over future economic benefits through legal or contractual rights can be
demonstrated. Goodwill is deemed to have an indefinite life and is reviewed
annually or upon indications of impairment. Intangible assets with determinable
lives are amortized over their useful life.

The amount of goodwill associated with consolidated subsidiaries and
nonconsolidated investments was:

As part of the annual evaluation, the fair value of the business units, on
the regional levels of North America and Europe, is compared to the carrying
value of those business units. For the purposes of the calculation, Asian and
Latin American business units are combined with the respective North American
and European regions reflecting the fact that investments in the Asian and Latin
American regions are principally needed to support multi-national clients in
North America and Europe. If impairment is indicated, the excess of the carrying
value of the goodwill over fair value of the business units is written-off. The
Company completed its annual impairment test of goodwill and intangible assets
with indefinite lives as of March 31, 2003, and no impairment was identified nor
were there impairment indicators subsequent to March 31, 2003.

F-13

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The 2001 results on a historical basis do not reflect the provisions of FAS
142. Had the Company adopted FAS 142 on January 1, 2001, the historical net
income and basic and diluted net income per common share would have been the
adjusted amounts indicated below:

INCOME TAXES

The Company uses the liability method of accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities,
and are measured using enacted tax rates and laws that will be in effect when
the differences are expected to reverse. The Company provides for appropriate
foreign withholding taxes on unremitted earnings of consolidated and
nonconsolidated foreign companies.

MARKETABLE SECURITIES

The Company has designated all its marketable securities as
available-for-sale. Available-for-sale securities are carried at fair value,
based on publicly quoted market prices, with unrealized gains and losses
reported as other comprehensive income (loss). Securities are written-off or
written-down to their realizable value when other than temporary impairments are
indicated.

INVESTMENT SECURITIES

Investment securities are primarily investments in private companies and
are included in Other Assets. Because quoted market prices are not available,
such investments are recorded at cost net of impairment write-downs, if
necessary. Reductions in the estimated fair market value of these investments
for periods of longer that six months are considered other than temporary and
are then expensed.

STOCK-BASED COMPENSATION

In December 2002, the Financial Accounting Standard Board, issued Statement
of Financial Accounting Standards No. 148 ("FAS 148"), Accounting for
Stock-Based Compensation - Transition and Disclosure which amends Statement of
Financial Accounting Standards No. 123 ("FAS 123"), Accounting for Stock-Based
Compensation. FAS 148 provides alternative methods of transition to FAS 123's
fair value method of accounting for stock-based employee compensation and amends
the disclosure provisions of FAS 123. While the statement does not require
companies to account for employee stock options using the fair value method, the
Company adopted FAS 123, effective January 1, 2003, using the prospective method
as provided for in FAS 123 and to adopt the disclosure requirements of FAS 148
in 2003.

Compensation expense is recorded for options granted based of their fair
market value at the date of grant. The excess of the fair market value of
restricted stock over the cash consideration received is amortized as
compensation over the period of restriction.

The future obligation to issue stock, pursuant to the Company's Senior
Management Incentive Plan, is included in Paid-in Additional Capital and results
in periodic charges to compensation.

F-14

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Pro forma information regarding net income and earnings per common share
has been determined as if the Company had accounted for its employee stock
options under the fair value method. The approximate fair value for these
options was estimated at the date of grant using a Black-Scholes option
valuation model with the following weighted average assumptions for the years
2002 and 2001, respectively; risk-free interest rates of 4.96% and 4.73%;
dividend yields of 0.61% and 0.65%; volatility factors of the expected market
price of the Company's Common Stock of .30 and .32; and a weighted-average
expected life for the options of 7.0 years for 2002, and 10 years for 2001.

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restriction
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 employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. For purposes of
pro forma disclosures, the estimated fair value of the options is amortized to
expense over the options' vesting period. The Company's pro forma information
follows:

EARNINGS PER COMMON SHARE

On May 15, 2003, the FASB issued Statement of Financial Accounting
Standards No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity ("FAS 150"). This Statement
establishes standards for classifying and measuring as liabilities certain
financial instruments that embody obligations of the issuer, and have
characteristics of both liabilities and equity. FAS 150 represents a significant
change in practice in the accounting for a number of financial instruments,
including mandatorily redeemable equity instruments. As required by FAS 150
since July 1, 2003 the Company's redeemable Preferred Stock has been classified
as a liability. Additionally, the change in the redemption value of the
Company's redeemable Preferred Stock and dividend payments to the preferred
shareholder which were previously recorded as changes in Retained Earnings, from
July 31, 2003 are recorded as increases or decreases to interest expense. The
adoption of FAS 150 impacts, therefore, working capital and net income. The
adoption of FAS 150, however, does not affect the calculation of earnings per
share. The earnings per share calculation before the application of FAS 150
included an adjustment to net income for the change in the redemption value of
preferred stock, which is now be designated as interest expense eliminating the
need for the adjustment.

F-15

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The computation of basic earnings per common share is based on the weighted
average number of common shares outstanding and for diluted earnings per common
share includes adjustments for the effect of the assumed exercise of dilutive
stock options, the shares issuable pursuant to the Company's Senior Management
Incentive Plan (see Notes to Consolidated Financial Statements) and through the
date of conversion on December 31, 2003, the assumed conversion of the 8 1/2%
Convertible Subordinated Debentures. Shares issuable upon conversion of the 5%
Contingent Convertible Subordinated Debentures are excluded from the computation
of diluted earnings per common share since the Company has determined that the
contingent conditions for conversion have not been met.

For the purpose of computing basic earnings per common share through June
30, 2003, the Company's net income is reduced by dividends on the redeemable
Preferred Stock and increased or decreased by the change in redemption value of
the redeemable Preferred Stock. Upon adoption of FAS 150 for periods after July
1, 2003 and beyond the change in redemption value is recorded as increase or
decreases to interest expense, thereby eliminating the need for the adjustment.
For the purpose of computing diluted earnings per common share, net income is
also adjusted by the interest savings, net of tax, on the assumed conversion of
the Company's 8 1/2% Convertible Subordinated Debentures which were converted on
December 31, 2003.

RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the FASB issued FASB Interpretation No. 46 "Consolidation
of Variable Interest Entities" an Interpretation of ARB No. 51 ("FIN 46"), which
requires variable interest entities (often referred to as special purpose
entities or SPEs) to be consolidated if certain criteria are met. FIN 46 is
effective as of January 31, 2003 for variable interest entities created after
that date and other variable interest entities in the first quarter of 2004. The
Company currently does not believe the impact of adopting FIN 46 for such
investment interests will have a material impact on its consolidated financial
statements.

B. INTERNATIONAL OPERATIONS

The following financial data is applicable to the Company's consolidated
international subsidiaries:

Consolidated retained earnings at December 31, 2003 and 2002 include equity
in unremitted earnings of nonconsolidated international companies of
approximately $14.0 million and $13.3 million respectively.

F-16

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

C. OTHER EXPENSE -- NET

Details of other (expense) income -- net are:

D. FIXED ASSETS

Components of fixed assets-at cost are:

During the year ended December 31, 2001, the Company recorded a non-cash
charge of $5.4 million for the write-off of leasehold improvements and fixed
assets related to the disposal of more than 160,000 square feet of leased space.

E. ACQUISITIONS AND RELATED COSTS

For the years ended December 31, 2003, 2002 and 2001, the Company completed
a number of acquisitions which enhanced its core advertising agency capabilities
in selected markets and expanded its presence in specialized communications
areas. Furthermore, the Company increased its stakes in majority-owned
subsidiaries in certain markets. All acquisitions and increased investments were
accounted for under the purchase method. The purchase price and corresponding
goodwill in connection with a number of the acquisitions may be increased by
contingent payouts to certain of the sellers depending on the future performance
of the acquired entities.

Aggregate purchase price of:

None of the acquisitions in 2003, 2002 or 2001 were significant on an
individual basis and the results of the operations from these acquired entities
for the period were not material. Pro-forma results of operations for 2003, 2002
and 2001 would not be materially different from the reported results.

The Company estimates that it will be required to make future payments to
acquire additional shares of subsidiary companies or to complete earn-out
agreements (collectively, "Agreements") pursuant to certain

F-17

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

acquisition arrangements not reflected as liabilities on its consolidated
balance sheet of approximately $54.2 million. Of such amount, 38.4% is estimated
to be paid over the period from 2004 through 2007 and the remainder to be paid
from 2008 and beyond. The foregoing information is estimated and the actual
payments made will be dependent on future events primarily related to the
attainment of earnings goals, specified operating margins and revenue targets or
a combination thereof in respect of a number of subject companies. Other factors
which must be considered in making the estimate include the fulfillment and
amendment of certain contractual obligations by third parties, the movement of
exchange rates, the timing of when the Company or other parties choose to
exercise certain contractual rights and other variables.

Many of the Agreements do not provide for maximum or minimum amounts
payable. Therefore, there is no definitive range of the amounts payable in the
future. The estimated amounts payable were computed using assumptions as to
earnings bases, dividend rates, earnings growth rates and other factors deemed
to be reasonable for the underlying situations. If the Company were to increase
the earnings assumptions used in estimating the amounts payable uniformly by
10%, the estimated amounts payable would increase to $64.7 million; if the
earnings assumptions were decreased uniformly by 10%, the estimated amounts
payable would decrease to $43.7 million.

F. MARKETABLE SECURITIES AND OTHER INVESTMENT SECURITIES

The marketable securities and other investment securities, by type of
investment, held by the Company at December 31, 2003 and 2002 are as follows:

F-18

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company uses the specific identification method when determining the
cost of the securities sold or the amount reclassified out of accumulated
comprehensive income into earnings.

The reduction in 2003 and 2002 in unrealized losses is attributable to the
sale and write-down of certain marketable securities. At December 31, 2003 and
2002, the Company's investments in marketable securities classified as long-term
had an average maturity of approximately 2.02 and 7.30 years, respectively.

During the year ended December 31, 2001, the Company took a non-cash charge
in the amount of $21.6 million for the write-down of investments in
Internet-related early stage businesses and certain marketable securities.

G. CREDIT ARRANGEMENTS AND LONG-TERM DEBT

On October 28, 2003, the Company sold $125 million principal amount of its
5% contingent convertible subordinated debentures, due 2033 ("Debentures"), to
JP Morgan Securities Inc. ("Initial Purchaser") in a transaction exempt from the
registration requirements of the Securities Act of 1933. On November 7, 2003,
the Company sold an additional $25 million principal amount of Debentures
pursuant to an overallotment option held by the Initial Purchaser. The total net
proceeds of the offering were approximately $145 million. The Debentures are
convertible into shares of Common Stock at an initial conversion price of
$961.20 per share provided that any one of several contingencies are met,
including that the Common Stock trades above $1,153.44 for specified periods of
time. The Debentures are subordinate to the other debt of the Company. The fair
value of the Debentures at year end 2003 was approximately $156 million. The
proceeds from the sale of the Debentures will be used for working capital and
other general corporate purposes.

At December 31, 2003 and 2002, the Company had a revolving line of credit
("revolver") totaling $110.0 million. The Company had no amounts drawn on the
revolver as of December 31, 2003. The amount drawn down on the revolver at
December 31, 2002 was $10.0 million. The Company had other lines of credit
available to it in foreign countries in connection with short-term borrowing and
bank overdrafts utilized in the ordinary course of business. The Company had
$70.5 million and $57.0 million outstanding under other uncommitted lines of
credit at December 31, 2003 and 2002, respectively. The weighted average
interest rate for the borrowings under the uncommitted lines of credit was 4.9%
and 5.3% at December 31, 2003 and 2002, respectively. The carrying amount of the
debt outstanding under both the committed and uncommitted lines of credit
approximates fair value because of the short maturities of the underlying notes.
Consistent with industry practices in a number of countries, the Company, from
time to time, directly or through a local media buying operation, is required to
guarantee payment to the media suppliers in the form of performance bonds,
letters of credit or other similar financial instruments which relate to
liabilities shown in the accounts payable section of the Consolidated Balance
Sheet.

Occasionally, the Company enters into foreign currency contracts for known
cash flows related to the repatriation of earnings from its international
subsidiaries. The terms of each foreign currency contract entered into in 2003
were for less than three months and the amount open at December 31, 2003 was not
material. At December 31, 2002, there were no foreign currency contracts open.
The Company had no derivative contracts outstanding at December 31, 2003 and
2002, respectively.

The Company has two outstanding loans from the Prudential Insurance Company
of America ("Prudential"). The first loan of $75.0 million from December 1997
had a fixed interest rate of 6.94% with the principal originally repayable in
equal installments of $25.0 million in December 2003, 2004 and 2005. This loan
was renegotiated in March 2003, with a fixed interest rate of 7.41%, with
principal repayments of $25.0 million in December 2007, 2008 and 2009,
respectively. The second loan of $50.0 million drawn in November 2000 has a
fixed interest rate of 8.17% and is repayable in two equal installments of $25.0
million in November 2006 and 2007. The fair value of the renegotiated first loan
and second loan is estimated to be $130.0 million and

F-19

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$128.2 million at December 31, 2003 and 2002, respectively. This estimate was
determined using a discounted cash flow analysis using current interest rates
for debt having similar terms and remaining maturities.

The term loans and the revolver contain certain covenants related to the
Company's capital, debt load and cash flow. As of December 31, 2003 and December
31, 2002, the Company was in compliance with these covenants.

On December 31, 2003 ("Conversion Date"), Mr. Edward H. Meyer, the Chairman
and Chief Executive Officer of the Company, converted $3.025 million in
principal amount of the Company's 8 1/2% Convertible Subordinated Debentures
("8 1/2% Debentures"), due December 31, 2003, which constituted the entire
principal amount of the 8 1/2% Debentures originally purchased by Mr. Meyer on
December 10, 1983. In accordance with the terms of the 8 1/2% Debentures, the
Company issued to Mr. Meyer, 51,128 shares, comprised of 25,564 shares of Common
Stock and 25,564 shares of Limited Duration Class B Common Stock. The 8 1/2%
Debentures were issued in exchange for cash and Mr. Meyer's $3.0 million, 9%
promissory note, payable on December 31, 2004 (included in Other Assets at
December 31, 2003 and 2002). During each of the years 2003, 2002 and 2001, the
Company paid to Mr. Meyer interest of $257,000 pursuant to the terms of the
8 1/2% Debentures and he paid to the Company interest of $270,000 pursuant to
the terms of the 9% promissory note.

Long-term debt at December 31, 2003 and 2002 is as follows:

The scheduled maturity of long-term debt is as follows:

During 2003 and 2002, the Company borrowed against the cash surrender value
of the life insurance policies that it owns on the life of its Chairman and
Chief Executive Officer. The amounts borrowed at December 31, 2003 and 2002 are,
respectively, $27.2 million with an interest rate of 7.40% and $25.9 million
with an interest rate of 7.40%. The amounts borrowed are carried as a reduction
of the related cash surrender value included in Other Assets. Of the amounts
borrowed in 2003 and 2002, $1.2 million was used in each year to pay premiums on
the underlying life insurance policies and in 2002 the Company also received
$800,000 in cash.

For the years 2003, 2002 and 2001, the Company made interest payments on
all third party debt of $16.8 million, $15.7 million and $15.5 million,
respectively.

F-20

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

H. REDEEMABLE PREFERRED STOCK

As of December 31, 2003 and 2002, the Company had outstanding 20,000 shares
of Series I Preferred Stock, and 5,000 shares each of Series II and Series III
Preferred Stock (collectively, "Preferred Stock"). The holder of the Preferred
Stock is the Chairman and Chief Executive Officer of the Company. The terms of
each class of Preferred Stock, including the basic economic terms relating
thereto, are essentially the same. The redemption date ("Redemption Date") for
the Preferred Stock is fixed at April 7, 2004. On the Redemption Date, the
holder of the Preferred Stock must tender for redemption at least one-third of
the Preferred Stock owned and may tender such additional shares of Preferred
Stock as he elects. If all of the Preferred Stock is not tendered, the remaining
shares will be redeemed in equal amounts on the first and second anniversaries
of the Redemption Date.

Each share of Preferred Stock is to be redeemed by the Company at a price
equal to the book value per share attributable to one share of Common Stock and
one share of Class B Common Stock (subject to certain adjustments) upon
redemption, less a fixed discount established upon the issuance of the Preferred
Stock. The holder of the Preferred Stock is entitled to receive cumulative
preferential dividends at the annual rate of $.25 per share, and to participate
in dividends on one share of the Common Stock and one share of Class B Common
Stock to the extent such dividends exceed the per share preferential dividend.
In connection with his ownership of the Preferred Stock, the holder issued to
the Company full recourse promissory notes totaling $763,000 (included in Other
Assets at December 31, 2003 and 2002) with a maturity date of April 2004. The
interest paid by the holder to the Company in 2003, 2002 and 2001 pursuant to
the terms of these notes was approximately $69,000 in each year.

In accordance with the terms of the respective Certificates of Designation
and Terms of each Series of Preferred Stock, the Board of Directors determined
the change in redemption value would not reflect a 1994 write-off of goodwill
but rather reflect amortization as if the Company had continued to write-off
goodwill in accordance with historical amortization schedules.

Following the distribution of the Limited Duration Class B Common Stock
("Class B Common Stock"), the holder of the Preferred Stock became entitled to
eleven votes per share on all matters submitted to the vote of stockholders. The
holder of the Series I Preferred Stock is entitled, as well, to vote as a single
class to elect or remove one-quarter of the Board of Directors, to approve the
merger or consolidation of the Company or the sale by it of all or substantially
all of its assets, and to approve the authorization or issuance of any other
class of Preferred Stock having equivalent voting rights. The rights described
in this paragraph expire on the Redemption Date.

In the event of the liquidation of the Company, the holder of the Preferred
Stock is entitled to a preferential liquidation distribution of $1.00 per share
in addition to all accrued and unpaid preferential dividends.

The total carrying value, and therefore aggregate redemption value, of the
Preferred Stock (applicable to those shares outstanding at each respective year
end) increased by $2.4 million in 2003 and by $1.5 million in 2002,
respectively. Since July 1, 2003 the increases in redemption value of the
redeemable Preferred Stock has been recorded as interest expense in accordance
with FAS 150 which is discussed in Note B in the Notes to Consolidated Financial
Statements.

I. COMMON STOCK

The Company has authorized and outstanding two classes of common equity,
Common Stock and Class B Common Stock. Each class of common equity has a par
value of $0.01. The Class B Common Stock has the same dividend and liquidation
rights as the Common Stock, and a holder of Class B Common Stock is entitled to
ten votes per share on all matters submitted to stockholders. The shares of
Class B Common Stock are restricted as to transferability and upon transfer,
except to specified limited classes of transferees, will

F-21

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

convert into shares of Common Stock which have one vote per share. The Class B
Common Stock will automatically convert to Common Stock on April 3, 2006.

J. STOCK INCENTIVE PLAN

The Company's 1994 Stock Incentive Plan ("Stock Incentive Plan") is the
Company's active restricted stock and stock option plan. Under the Stock
Incentive Plan, awards in the form of incentive or nonqualified stock options or
restricted stock are available to be granted through June 2004 to officers and
other key employees. A maximum of 500,000 shares of Common Stock is available
for grant under the Stock Incentive Plan. Stock options cannot have an exercise
price less than 100% of the fair market value of the shares on the date of
grant. A committee of the Board of Directors ("Committee") determines the terms
and conditions under which the awards may be granted, vest or are exercisable.
Stock options must be exercised within ten years of the date of grant or such
shorter period as may be fixed by the Company. Shares of restricted stock may be
sold to participants at a purchase price determined by the Committee (which may
be less than fair market value per share).

Transactions involving nonqualified options under the Stock Incentive were:

There were 124,291, 121,736, and 115,121 stock options exercisable and
251,914, 260,119, and 265,775 stock options available for grant at December 31,
2003, 2002 and 2001, respectively. The weighted average fair value of the stock
options granted during 2003, 2002 and 2001 was $236, $258 and $296,
respectively.

F-22

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The remaining weighted average contractual life and weighted average
exercise price of stock options outstanding at December 31, 2003 and the
weighted average exercise price for stock options exercisable at December 31,
2003 are as follows:

3,659, 5,593 and 2,063 shares of restricted stock were issued at a price of
$1.00 per share in 2003, 2002, and 2001, respectively. All restricted stock is
issued with restrictions as to transferability with various expiration dates
between two and five years and is subject to forfeiture. In 2003, restrictions
on 7,581 shares of restricted stock lapsed and 117 shares were forfeited by
holders and held in Treasury. In 2002, restrictions on 3,857 shares of
restricted stock lapsed, and no shares were forfeited and held in Treasury.

Compensation to employees under the Stock Incentive Plan of $5.1 million in
2003, $4.9 million in 2002 and $3.7 million in 2001, representing the excess of
the market value of restricted stock, at the date of issuance, over any cash
consideration received, is carried as a reduction of Paid-In Additional Capital
and is charged to income ($2.4 million in 2003, $2.6 million in 2002 and $1.9
million in 2001) over the related period of service for the respective
employees.

F-23

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

K. COMPUTATION OF EARNINGS PER COMMON SHARE

The following table shows the amounts used in computing earnings per common
share and the effect on income and the weighted average number of shares of
dilutive potential common stock.

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

(1) For the years ended December 31, 2003 and 2002 the weighted average number
of shares issuable pursuant to the Senior Management Incentive Plan included
in the diluted earnings per share calculations were 12,486 and 20,211,
respectively. Due to the anti-dilutive result of the diluted earnings per
share calculation for 2001, shares issuable pursuant to the terms of the
Senior Management Incentive Plan were excluded from the calculation.

(2) For the year ended December 31, 2001, the assumed exercise of stock options,
issuances under stock incentive plans and the assumed conversion of the
8 1/2% Convertible Subordinated Debentures each had an anti-dilutive effect.
As such, these items have been excluded from the diluted earnings per share
calculation.

(3) On December 31, 2003, the 8 1/2% Convertible Subordinated Debentures were
converted into 25,564 shares of Common Stock and 25,564 shares of Limited
Duration Class B Common Stock. For 2003, net income was adjusted by interest
savings, net of tax, on the assumed conversion of the 8 1/2% Convertible
Subordinated Debentures.

(4) Diluted earnings per common share have not been adjusted for the assumed
conversion of the 5% Contingent Convertible Subordinated Debentures because
the Company has determined that the contingent conditions for conversion
have not been met.

F-24

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

L. INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes. At December 31, 2003 and
2002, the Company had deferred tax assets and deferred tax liabilities as
follows:

The components of income (loss) of consolidated companies before taxes on
income are as follows:

Provisions (benefits) for Federal, foreign, state and local income taxes
consisted of the following:

The Company has not recognized a tax benefit on capital losses relating to
the write-down of investments as the realization thereof is not certain.

F-25

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The effective tax rate varied from the statutory Federal income tax rate as
follows:

During the years 2003, 2002 and 2001, the Company made income tax payments
of $20.7 million, $17.4 million and $28.2 million, respectively.

The tax benefit resulting from the difference between compensation expense
deducted for tax purposes and compensation expense charged to income for
restricted stock and nonqualified stock options is recorded as an increase to
Paid-in Additional Capital.

At December 31, 2003, the Company had cumulative net operating losses
attributable to foreign subsidiaries of approximately $116.0 million. Of this
amount, $88.2 million can be carried forward indefinitely. No material amount of
the remainder will expire before 2005. Since a portion of the benefits may fail
to be realized, a valuation allowance has been reflected.

M. RETIREMENT PLANS, DEFERRED COMPENSATION, EXECUTIVE OFFICER LOANS, LEASES AND
CONTINGENCIES

1. The Company's Profit Sharing Plan is available to eligible employees of
Grey and qualifying subsidiaries meeting certain eligibility requirements. This
plan provides for contributions by the Company at the discretion of the Board of
Directors, subject to maximum limitations, as well as employee pre-tax
contributions. The Company also maintains a noncontributory Employee Stock
Ownership Plan covering eligible employees of the Company and qualifying
subsidiaries, under which the Company may make contributions in stock or cash to
an Employee Stock Ownership Trust ("ESOT") in amounts each year as determined at
the discretion of the Board of Directors. The Company contributed stock to the
ESOT for 2003 and 2002. The Company did not contribute to the ESOT for 2001.

The Company and the ESOT have certain rights to purchase shares from
participants whose employment has terminated. In addition to the two plans noted
above, a number of subsidiaries maintain separate profit sharing and retirement
arrangements. Furthermore, the Company also provides additional retirement and
deferred compensation benefits to certain executive officers and employees. The
Company maintains a Senior Management Incentive Plan ("Plan") in which deferred
compensation is granted to senior executive or management employees deemed
important to the continued success of the Company. The Plan has operated as an
ongoing series of individual plans each with terms of five years. The latest
plan in the series commenced in 2003 and provides for awards to be made through
2007. Awards generally vest to participants after the conclusion of the fifth
year of continued employment following admission to the plan, including the year
the participant was admitted. The amount recorded as an expense related to the
Plan amounted to $6.1 million, $5.4 million and $0 in 2003, 2002 and 2001,
respectively. Approximately $2.4 million, $2.3 million and $0 of plan expense
incurred in 2003, 2002 and 2001, respectively, will be payable in Common Stock
in accordance with the terms of the Plan. The awards payable in Common Stock
were converted into an equivalent number of shares of Common Stock, based on the
average of the market values on the last 15 business days of the calendar year.
The net increase to Paid-in Additional Capital for the 2003 Plan is $2.4 million
and relates to

F-26

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the future obligation to issue Common Stock. At December 31, 2003, approximately
4,941 shares are payable in Common Stock pursuant to the Plan of which 864 were
vested.

2. The Company has entered into an employment agreement with its Chairman
and Chief Executive Officer providing for a fixed term through December 31,
2004. This agreement further provides for the deferral of certain compensation
otherwise payable to the Chairman and Chief Executive pursuant to his employment
agreement and the payment of such deferred compensation into a trust, commonly
referred to as a grantor trust, for which HSBC Bank USA serves as trustee. The
purpose of the trust arrangement is to ensure the Company's ability to deduct
compensation paid to the Chairman and Chief Executive Officer without the
application of Section 162(m) of the Internal Revenue Code ("Section"). The
Section, under certain circumstances, denies a tax deduction to a publicly held
corporate employer for certain compensation expenses in excess of $1.0 million
per year to certain of its executives. Amounts deferred and paid into the
grantor trust, as adjusted for the earnings and gains or losses on the trust
assets, will be paid to the Chairman and Chief Executive Officer or to his
estate, as the case may be, following the expiration of his employment
agreement, or the termination of his employment by reason of death or
disability. In 1998, the Company began making payments to the grantor trust
which are to be used to fund a pension obligation payable to the Chairman and
Chief Executive Officer over the eleven year period following the normal
expiration of his current employment agreement ("pension period"). The initial
pension deposit was for $1.04 million with annual pension deposits of $360,000
ratably paid through 2002; commencing in 2003 the annual rate of the pension
deposits increased to $610,000. The amount of the pension to be paid to the
Chairman and Chief Executive Officer will depend on, and be limited to, the
funds in the grantor trust during the pension period. In addition, upon
termination of his employment prior to the commencement of the pension period or
upon his death, any undistributed funds in the grantor trust would be paid to
him or his estate, as the case may be, in satisfaction of any future obligations
with respect to this pension.

At December 31, 2003 and 2002, the value of the assets in the grantor trust
was $37.6 million and $32.2 million, respectively, and is included in Other
Assets and the Company's related deferred compensation obligation for the same
amount is included in Other Liabilities.

Amounts charged to expense related to the foregoing plans and benefits
aggregated $33.4 million in 2003, $36.0 million in 2002 and $28.9 million in
2001.

3. An executive officer has an outstanding loan with the Company amounting
to $500,000 as of December 31, 2003 and December 31, 2002, respectively, which
is reflected in Other Assets. The $500,000 loan will be forgiven on December 31,
2004, assuming continued employment of the executive officer through that date.

In connection with a 1992 exercise of stock options, the Company received a
cash payment of $67,000 and a note from the Chairman and Chief Executive Officer
of the Company in the amount of $3.17 million, due in December 2001, bearing
interest at the rate of 6.06%, the then current, comparable U.S. Treasury Note
rate. In addition, and in accordance with the terms of the option agreement, the
holder of the options issued to the Company a promissory note in the principal
amount of $2.34 million bearing interest at the same U.S. Treasury Note rate of
6.06%, payable in December 2001, to settle his obligation to provide the Company
with funds necessary to pay the required withholding taxes due upon the exercise
of the options. A portion of the second note ($1.56 million) equal to the tax
benefit received by the Company upon exercise and the full amount of the note
for $3.17 million is reflected in a separate component of common stockholders'
equity. Both notes were modified in 2001 to extend their due dates to November
2006 and change the interest rate to the comparable U.S. Treasury Note rate at
the time of extension of 3.93%. The interest paid to the Company by the holder
pursuant to the terms of the two notes issued in connection with the option
exercise was $217,000 in 2002 and $334,000 in 2001 and 2000.

F-27

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. Rental expense amounted to approximately $80.1 million in 2003, $76.0
million in 2002, and $73.0 million in 2001. Approximate minimum rental
commitments, excluding escalations qualifying as contingent rentals, under
non-cancelable operating leases are as follows:

N. QUARTERLY FINANCIAL DATA (UNAUDITED)

A summary of the quarterly unaudited results of operations for the years
ended December 31, 2003 and 2002 follows:

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

(1) Income of consolidated companies before taxes on income and other expense -
net.

(2) Rounding differences may arise upon accumulation of quarterly per share
data.

F-28

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

O. INDUSTRY SEGMENT AND RELATED INFORMATION

The Company is not engaged in more than one industry segment. The Company
is domiciled in the United States and evaluates performance by geographic region
based on profit or loss before income taxes. Revenue is attributed to the
geographic region that generates billings. Revenue, operating profit, interest
income/expense, and related identifiable assets at December 31, 2003, 2002 and
2001, are summarized below according to geographic region:

Revenue from one client amounted to 10.6%, 10.2% and 9.2% of the
consolidated total in 2003, 2002 and 2001, respectively. Revenue from the United
States amounted to 93.4%, 94.0% and 93.7% of the North American total in 2003,
2002 and 2001, respectively.

F-29

P. SUBSEQUENT EVENT

On January 5, 2004, Edward H. Meyer, the Company's Chairman and Chief
Executive Officer, exercised non-qualified stock options to purchase 40,000
shares of Common Stock at an aggregate exercise price of $5.94 million. The
options, which had been issued in 1995 pursuant to the Company's 1994 Stock
Incentive Plan, were set to expire on January 5, 2004. In accordance with the
terms of the Stock Incentive Plan, Mr. Meyer elected to pay the exercise price
through the delivery of shares of Common Stock owned by him and has delivered to
the Company, in satisfaction thereof, and in satisfaction of the tax withholding
obligations from the option exercise, an aggregate of 21,090 shares of Common
Stock (plus cash in lieu of delivery of a fractional share).

F-30

SCHEDULE II

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS

ALLOWANCE FOR DOUBTFUL ACCOUNTS - deducted from Receivables in the
Consolidated Balance Sheet:

F-31

INDEX TO EXHIBITS