BRIGHTSTAR INFORMATION TECHNOLOGY GROUP INC - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 0-6920

BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 76-0553110
(State or other jurisdiction (IRS Employer
of incorporation organization) or Identification No.)

4900 HOPYARD ROAD, SUITE 200
PLEASANTON, CALIFORNIA 94588
(925) 251-0000
(Address, including zip code, area code with phone number
of the registrant's principal executive offices)

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.001 PAR VALUE

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].

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

The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant at March 21, 2002 based on the $0.07 per share
closing price for the registrant's common stock on The OTC Bulletin Board market
was approximately $747,531. For purposes of this computation, all officers,
directors and 10% beneficial owners of the registrant are deemed to be
affiliates. Such determination should not be deemed an admission that such
officers, directors or 10% beneficial owners are, in fact, affiliates of the
registrant.

The number of shares of the registrant's common stock outstanding as of
March 29, 2002 was 15,264,288.

DOCUMENTS INCORPORATED BY REFERENCE

The Company's definitive proxy statement in connection with the Annual Meeting
of Stockholders to be held on June 18, 2002, to be filed with the Commission
pursuant to Regulation 14A, is incorporated by reference into Part III of this
Report.

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PART I

ITEM 1: BUSINESS

THE COMPANY

BrightStar Information Technology Group, Inc. (BrightStar or the Company)
provides information technology services for Global 2000, mid-market and public
sector clients. We help companies maximize their competitive advantage through
the implementation and /or management of leading edge enterprise level
applications and business processes, including enterprise resource planning,
customer relationship management, and business process management software
solutions. BrightStar has established a strong vertical business presence in
healthcare, energy, technology, and state and local government. BrightStar has
approximately 70 employees and full-time contractors and has its headquarters in
the San Francisco Bay Area with field offices in Dallas, Texas, and Quincy,
Massachusetts.

We also offer an attractive arrangement for companies to outsource their
application management. Outsourcing lets companies focus on their core business
objectives and gives them a viable alternative to building the internal team
required to implement, maintain and enhance today's sophisticated business
applications. BrightStar is able to provide other companies with an
"Applications Team" that is flexible and agile in terms of expanding and
contracting on demand, both in terms of team size and team skills.

For ENTERPRISE RESOURCE PLANNING ("ERP"), we implement and support SAP and
PeopleSoft applications, covering a complete range of business processes, from
manufacturing and finance to human resources, procurement and supply chain
planning. Our ERP solutions are tailored to fit the specific needs of individual
organizations, helping them to automate business processes across the enterprise
through the creation of a single data environment that spans departments and job
functions. BrightStar is an `SAP Services Partner' with SAP, the world's leading
provider of ERP applications. An SAP Services Partner is recognized by SAP as an
independent third party services firm that has the capability of providing
implementation and support services to SAP's customers.

Our CUSTOMER RELATIONSHIP MANAGEMENT ("CRM") practice assists companies in
attaining competitive advantage by improving their visibility into all the
varied contacts made with their customers. We offer implementation and support
services for CRM solutions offered primarily by SAP, Siebel Systems, and
PeopleSoft. These applications enable organizations to optimize their resources
and offer superior service to their customers through the integrated management
of traditional, as well as Web-based, channels for sales, marketing, and
customer service.

To help companies provide universal access to their information resources,
we also provide training and other consulting services related to Actuate
software. Actuate provides an effective platform for retrieving business
information from corporate databases and delivering it as interactive web pages
and Excel spreadsheets.

Finally, we have recently launched a new initiative in the emerging market
for BUSINESS PROCESS MANAGEMENT ("BPM"). BPM solutions enable customers to
directly address and improve company-wide business processes. These solutions
involve the identification of process improvements as well as the implementation
of systems that help to automate and monitor process activities and performance
measurement. In this market, BrightStar is planning to provide the consulting
and programming services to develop the process improvement recommendations and
to implement leading-edge BPM software solutions offered by selected BPM
software providers.

To provide our services, we recruit and employ project managers, skilled
senior-level consultants, engineers and other technical personnel with both
business as well as technical expertise. We believe this combination of business
and technical expertise, the breadth and depth of our solution offerings and our
ability to deliver these solutions in both the traditional consulting and
implementation model, as well as the application outsourcing model, are sources
of differentiation for the Company in the market for information technology
services and critical factors in its success.

Since BrightStar's formation as a public company in 1998, BrightStar has
always been a quality IT service provider. However, during the course of the
last three years, the Company has made decisions to discontinue certain services
and launch others, based on market conditions and BrightStar's strategy and
position in the various markets. BrightStar exited the Controls and
Infrastructure Support businesses in 1999 and 2000, (which in total accounted
for revenues of approximately $24 million for 1999) and also sold its web
hosting business in 2001, (which accounted for revenues of approximately $0.1
million for 2000), because we did not feel these

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services were core businesses for BrightStar. The Company also sold its
Australian subsidiary in 2000, (which accounted for revenues of approximately
$17 million for 2000), to generate needed cash as well as to focus solely on the
domestic US marketplace. All of these divested operations experienced losses for
the Company in the years before they were sold. From inception to today,
BrightStar has emphasized its core ERP practices in the SAP and PeopleSoft
markets, as well as its applications outsourcing services for key major accounts
in the healthcare and local government arenas. In 2002, the Company is
initiating a new business thrust into the growing BPM market, to supplement its
core businesses. Through the restructuring actions of the last few years,
management believes that BrightStar is now sized properly for its business
level, and positioned in the right services markets that can form the foundation
for future success.

INFORMATION ABOUT OPERATING SEGMENT

We operate in the Information Technology Services Business segment.

Among the leading positive factors affecting the demand for Information
Technology Services is the transition to packaged software solutions, the
emergence of new technologies and the increased bandwidth and usability of the
Internet through the World Wide Web. These new technologies enable the creation
and utilization of more functional and flexible applications that can increase
productivity, reduce costs and improve customer service. Negative conditions
affecting demand in the Information Technology Services segment include the
retrenchment of venture capital investment in new Internet business enterprises,
which began in 2000 and continued through 2001, the maturity of many
packaged-software applications, especially ERP, and the retrenchment in capital
spending that began in 2001.

Managing the transition to a new generation of e-business applications is
placing a significant burden on many corporate IT departments. Many
organizations do not have the expertise to implement the new technologies and
they are reluctant or unable to expand their IT departments and re-deploy their
in-house personnel. Consequently, many organizations are outsourcing the design,
implementation and hosting of their new applications to acquire the necessary
expertise and accelerate deployment.

CUSTOMERS AND MARKETS

Our marketing efforts focus on mid-sized to large companies who have a need
for high quality consulting services to improve their use of enterprise
applications and access to corporate information. We have developed expertise in
the vertical markets of healthcare, energy, technology and state and local
governments. We are continuing to leverage this knowledge throughout these
business sectors. Many of our key relationships have existed for several years
and have involved numerous activities and projects.

BrightStar has two long term and current relationships that represented
approximately 27% of BrightStar's business in 2001. At Santa Clara Valley
Transit Authority (VTA), a San Jose California based light rail and bus
operator, BrightStar provides a team of SAP consultants to enhance and maintain
their SAP application. VTA has chosen to rely on BrightStar to provide these
specialized skills to maintain a high level of support and service to its
hundreds of application users. Our business with VTA represented approximately
17% of annual revenue. Another substantial business commitment is with Arkansas
Blue Cross Blue Shield (ABCBS) where BrightStar provides a team of application
developers and project management to support their Medicare claims processing
systems. Our business with ABCBS represented approximately 10% of annual
revenue. One of our newest customers in 2001 was SBS Technologies, Inc., where
we are currently completing the implementation of a CRM solution. Revenue from
SBS Technologies, Inc. represented approximately 12% of our 2001 revenue.

CONSULTING RESOURCES

Our success depends in large part upon our ability to attract, train,
motivate and retain highly skilled technical employees. Qualified technical
employees are in great demand and are likely to remain a limited resource for
the foreseeable future. We dedicate resources to recruiting professionals with
information technology consulting and industry experience. None of our employees
are subject to a collective bargaining arrangement. The Company considers its
relationships with its employees to be good.

COMPETITION

Market share in the IT industry was initially concentrated among large
computer manufacturers but the industry has become increasingly competitive and
fragmented. IT services are provided by numerous firms including multinational
accounting firms, systems consulting and implementation firms, software
application vendors, general management consulting firms and data processing
outsourcing companies. By selling consulting resources for today's sophisticated
enterprise applications, BrightStar is competing

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against all players in the market space. These range from the Big 5 accounting
firms, (such as Deloitte & Touche, KPMG, PricewaterhouseCoopers, etc.) to small
private and public companies like BrightStar. In many instances, we also compete
directly with larger services providers such as MPS Group and Solbourne, Inc.

BrightStar strives to exercise competitive advantage in the market for IT
services primarily in two ways. First, the Company has excellent customer
references in our target markets. While the Big 5 accounting firms have these
references as well, many of the smaller competitors do not. Second, BrightStar
undertakes to provide high quality consultants at cost-effective billing rates,
which the Company can support due to its low overhead cost structure. While the
small services firms may have BrightStar's low overhead cost, the larger
competitors such, as the Big 5 firms do not.

DIRECTORS AND EXECUTIVE OFFICERS OF BRIGHTSTAR

The following table and notes thereto identify and set forth information
about the Company's Directors and two executive officers:

Joseph A. Wagda has been a Director of BrightStar since April 2000 and
became Chief Executive Officer, effective October 2, 2000. Mr. Wagda was elected
Chairman of the Board of Directors on March 21, 2001. From 1997, Mr. Wagda has
been engaged in a variety of venture capital and distressed investments, as an
investor, manager, independent consultant and attorney, including serving as
President of Altamont Capital Management, Inc. and in leadership positions with
several single-purpose investment entities. He also is currently a director of
Abraxas Petroleum Corporation (Amex: ABP), a public oil and gas company and
Zierer Visa Service, Inc., a private company engaged in the international travel
services business. Previously, Mr. Wagda was President and CEO of American
Heritage Group, a modular homebuilder that was restructured in 1997, and a
Senior Managing Director and co-founder of the Price Waterhouse corporate
finance practice. He also served with the finance staff of Chevron Corporation
and in the general counsel's office at Ford Motor Company. Mr. Wagda has a B.S.
degree from Fordham College, an M.B.A., with distinction, from the Johnson
School of Management, Cornell University and a J.D., with honors, from Rutgers
Law School.

Kenneth A. Czaja, joined BrightStar to be our Vice President - Finance and
Chief Financial Officer, effective May 1, 2001. Subsequently he was promoted to
Executive Vice President. He has had a 27-year business career as a financial
executive in positions of increasing responsibility with a variety of technology
companies, including Xerox Corporation, Silicon Compiler Systems, Inc. and Wyse
Technology Inc. Most recently, Mr. Czaja was Vice President, Finance and CFO at
Intellicorp, Inc. (Nasdaq: INAI), a software and services company that provides
BPM, CRM and e-business solutions for the SAP customer market. Mr. Czaja has an
M.S. degree, with a concentration in finance and accounting, from Georgia
Institute of Technology and a B.A. in physics from Columbia University.

W. Barry Zwahlen has been a director with BrightStar since July 2000. Mr.
Zwahlen presently is the Managing Partner of Information Management Associates,
a retained executive search firm, which he founded in 1986. Mr. Zwahlen focuses
his practice on the recruitment of CIO and CTO candidates for technology clients
and the recruitment of executive level information technology consultants for
systems integration professional services firms. Mr. Zwahlen serves on the
Board's Audit Committee and is Chairman of the Compensation Committee.

Jennifer T. Barrett became a director of BrightStar at the closing of our
initial public offering in 1998. Since 1974, she has served in various
capacities with Acxiom Corporation, a leading data processing and related
computer-based services and software products company. She is currently Acxiom's
Chief Privacy Officer. Ms. Barrett serves on the Board's Audit and Compensation
Committees.

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Thomas A. Hudgins became a director on April 20, 2001. He cofounded and,
until recently, served as Managing Director of Polaris Group, Inc., a corporate
finance and mergers and acquisitions advisory firm. Prior to forming Polaris he
was cofounder, Executive Vice President and Secretary of BrightStar until
January 1999. From 1967 to 1997, he was Executive Vice President and cofounder
of Delta-X Corp., a leading developer, manufacturer and marketer of software and
electronic automation equipment for the international oil and gas industry. He
is a past president of the Houston Chapter of the American Institute of
Industrial Engineers, a member of the Society of Petroleum Engineers and a
Registered Professional Engineer. Mr. Hudgins is Chairman of the Board's Audit
Committee.

RECENT DEVELOPMENTS

The Company's operating line of credit with Comerica Bank expired on January
25, 2002. Since there was an outstanding balance on the line as of January 25,
2002, Comerica declared the Company to be in default under the terms of the
agreement. However, Comerica has subsequently agreed to forebear on any actions
to collect the outstanding balances and to allow the Company to borrow under the
loan until June 30, 2002, subject to certain conditions. Available borrowings
under this newly extended arrangement are to start at 60% of eligible accounts
receivables, after reduction for ineligible accounts, with subsequent reductions
of 2% each month starting in May 2002. The total borrowing base after reductions
for ineligible accounts and the borrowing base percentage is limited to a
maximum of $850,000. Comerica retains the right to decline to make advances at
any time during this period. The interest rate on outstanding balances is prime
plus 4% as of January 26, 2002, and will increase an additional 1% per month,
beginning February 2002.

On February 12, 2002, the compensation committee of the board of directors
voted to take the actions that resulted in the repricing of 0.9 million existing
stock options and the awarding of approximately 1.1 million new options to
participants under the Company's long-term incentive plans. The exercise price
of all affected options after the repricing is $0.05 per share, which was based
on fair market value as determined by the Board of Directors based upon the
prior 20-day average closing price. In addition, the compensation committee
voted to take actions that resulted in restricted stock issuances totaling 2.0
million shares. Of the 2.0 million shares, fifty percent of them, or 1.0 million
shares, vested immediately, with the remaining 1.0 million shares vesting over a
2-year term. The 2.0 million shares consisted of 1.5 million and 0.5 million
shares to Mr. Wagda and Mr. Czaja, respectively. Previous stock options granted
to Mr. Wagda and Mr. Czaja were cancelled.

ITEM 2: PROPERTIES

BrightStar's principal executive offices are located at 4900 Hopyard Road,
Suite 200, Pleasanton, California 94588. The Company's lease on these premises
covers approximately 5,600 square feet and expires December 31, 2003.

The Company also operates through leased facilities in:

o Dallas, TX

o Quincy, MA

Substantially all of the Company's services are performed on-site at
customer locations. BrightStar anticipates that additional space will be
required as its business expands above a certain level; however, we also believe
that our current infrastructure can support a substantially larger revenue base
due to the nature and location of our services. We also believe that, if and
when needed, we will be able to obtain additional suitable space.

ITEM 3: LEGAL PROCEEDINGS

As of December 31, 2000, the Company had accrued approximately $600,000
relating to litigation exposure. This amount included estimated costs to settle
legal claims related primarily to two separate lawsuits brought against the
Company for damages related to software development and implementation services
provided by the Company. During the third quarter of 2001, the Company was able
to relieve approximately $200,000 in litigation exposure by negotiating
settlements with the respective parties. As a result of these settlements, the
Company incurred an obligation of approximately $125,000, which will be paid by
the Company in the form of long-term notes due and payable on January 3, 2005.
The difference of approximately $75,000 between the amount accrued and the
amount settled was recorded as a gain on settlements in the third quarter. The
Company has also been able to settle the remaining lawsuit, which resulted in no
cash payment or long-term liability. The resulting gain of $300,000 was recorded
in the fourth quarter.

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As of December 31, 2001, two legal claims exist, both filed in 2001 against
the Company. One legal claim is against our insolvent subsidiary, BRBA, Inc.,
for facility rents and related costs associated with the early termination of a
facility lease. The initial claim (Court case number 01-10344D in the county of
Dallas, Texas) resulted in a default judgment in a court order dated December
21, 2001 in favor of the landlord for approximately $48,000, which was the
amount of the rent owed to the landlord as of the court order date, and the
landlord has indicated that they will be filing additional suits against BRBA as
further rent obligations are not paid. An estimate of this liability is included
in the Company's consolidated balance sheet. The other legal claim (Proceeding
number 01-3540 under Bankruptcy court case number 300-34446-BJH-11 in the
Northern District of Texas) is for amounts received as a so-called preference
payment from a former customer who made a bankruptcy filing in 2000. The Company
does not believe the claim has merit and therefore the Company has not recorded
any liability associated with this so-called preference claim.

As a result of a previous settlement, Unaxis Trading Limited was issued
250,000 shares of our common stock on February 15, 2001. Pursuant to the
settlement agreement, if, prior to a sale of these shares by Unaxis, the Company
has not exercised its right, between January 1, 2002 and February 1, 2002, to
call the shares for $1.60 per share, Unaxis could exercise its right to put the
shares to the Company for a price of $2.00 per share during the 15 day period
commencing on February 1, 2002. Unaxis agreed to return the 255,000 shares of
common stock to us, including 5,000 additional shares granted to Unaxis
representing penalty shares relating to the registration rights associated with
the settlement, in return for a $120,000 cash payment. In satisfaction of this
settlement, the Company incurred an obligation to pay $50,000 to its insurance
carrier via a long-term note, due and payable on January 3, 2005. During the
third quarter, the amount recorded on the books, of approximately $118,000, was
reclassified from common stock and additional paid in capital to common stock
receivable in anticipation of the completion of this agreement. The Company
completed the transaction in December of 2001 and eliminated the common stock
receivable and reclassified such amount to treasury stock.

In addition to the litigation noted above, the Company is from time to time
involved in litigation incidental to its business. The Company believes that the
results of such litigation, in addition to amounts discussed above, will not
have a materially adverse effect on the Company's financial condition.

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS IN FOURTH QUARTER OF
2001

None.

PART II

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

The Company's Common Stock is currently traded on The OTC Bulletin Board
Market under the symbol "BTSR.OB." The following table sets forth for the
quarterly periods indicating the range of high and low sales prices for the
Company's Common Stock for 2000 and 2001.

The Company has never declared nor paid cash dividends on its Common Stock.
The Company's credit facility contains restrictions on the Company's ability to
pay cash dividends. The Company currently intends to retain future earnings, if
any, to fund the development and growth of its business and does not anticipate
paying any cash dividends in the foreseeable future.

As of March 21, 2002, there were 99 shareholders of record of the Company's
Common Stock and a total of 2,774 shareholders, including shareholders who held
their shares in the names of certain financial institutions.

SALES OF UNREGISTERED SECURITIES.

Set forth below is certain information concerning all issuances of
securities by BrightStar within the past three years that were not registered
under the Securities Act.

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1. On January 11, 1999, pursuant to the Agreement and Plan of Exchange (the
"Share Exchange") dated as of December 15, 1997, among BrightStar, BIT Group
Services, Inc. ("BITG"), BIT Investors, LLC ("BITI"), and the holders of the
outstanding capital stock of BITG, the Company issued 11,575 shares of common
stock to the holder of the Series A-1 Class A Units of BITI.

2. On January 11, 1999, BrightStar issued to the beneficiaries of the SCS
Unit Trust an aggregate of 441,400 shares of common stock in consideration of
the transfer to BrightStar by SCS Unit Trust of substantially all the assets of
the SCS Unit Trust.

3. On March 10, 2000, pursuant to an agreement with Strong River
Investments, Inc., and Montrose Investments Ltd. (collectively, the
"Purchasers"), the Company sold to the Purchasers 709,555 shares of the
Company's common stock (the "Shares") for $7.5 million, or $10.57 per share (the
"Transaction"). In connection with the purchase of the Shares, the Company
issued two warrants to the Purchasers. One warrant had a five-year term during
which the Purchasers could purchase up to 157,500 shares of the Company's common
stock at a price of $12.00 per share. The second warrant covered an adjustable
amount of shares of the Company's common stock. Pursuant to the terms of the
adjustable warrants, the holders thereof elected to fix the number of common
shares issuable under such warrants at 1,525,000 shares in the aggregate. Such
shares were issued on September 29, 2000 at an exercise price of $0.001 per
share. The Company also issued to Wharton Capital Partners Ltd. ("Wharton"), as
compensation for Wharton's services as placement agent in connection with the
Transaction, a warrant with a five-year term during which Wharton may purchase
up to 45,000 shares of the Company's common stock at a price of $12.00 per
share. The proceeds of this transaction were used for general corporate
purposes.

4. On June 23, 2000, the Company issued 668,468 shares of common stock to
the prior owners of Integrated Systems Consulting (ISC) as payment for the
remaining amount due of $2.5 million in connection with the 1999 acquisition of
ISC.

5. On January, 16, 2001, the prior owners of Cogent Technologies LLC
("Cogent") were issued 1,020,000 shares of our common stock in partial
settlement of a claim by them related to the unpaid balance of the purchase
price for the assets and business of Cogent and amounts due under employment
agreements with us.

6. On February 15, 2001, Kevin J. Murphy was issued 100,000 shares of our
common stock in connection with the commencement of his employment with the
Company.

7. On February 15, 2001, certain of our former employees were issued 346,831
shares of our common stock in satisfaction of remaining severance payment
obligations under prior employment agreements with the Company.

8. On February 15, 2001, Unaxis Trading Limited was issued 250,000 shares of
our common stock in settlement of litigation between the Company and certain
affiliates of Unaxis. Pursuant to the settlement agreement (which was agreed
upon in principle, on November 3, 2000), if, prior to a sale of these shares by
Unaxis, the Company has not exercised its right, between January 1, 2002 and
February 1, 2002, to call the shares for $1.60 per share, Unaxis may exercise
its right to put the shares to the Company for a price of $2.00 per share during
the 15 day period commencing on February 1, 2002. During December 2001, the
Company bought the shares back from Unaxis for a $120,000 payment.

9. On May 4, 2001, 257,400 shares of our common stock were issued to various
shareholders in satisfaction of our obligations to pay penalties to them under
the terms of various registration rights agreements.

10. On July 26, 2001, the Company issued and sold approximately $1.1 million
of convertible notes to a group of investors, including members of BrightStar
senior management. The notes are convertible into common stock, at the option of
the investors, at a fixed price of $0.23 per share, subject to anti-dilution
provisions. In addition, the investors received approximately 718,000 warrants,
exercisable at $0.50 per share. The notes are mandatorily convertible, at the
Company's option, into common stock at $0.23 per share, subject to anti-dilution
provisions, if: (i) the market price of the Company's common stock, determined
on a 20-day moving average basis, equals or exceeds $0.50; and (ii) the
investors may lawfully sell all of the common stock issuable upon conversion and
the common stock issuable upon exercise of Warrants held by the investor, either
under an effective registration statement, or under Rule 144; and (iii) at least
$2.3 million of the our past due payables have been restructured. In addition,
70,000 warrants are issuable to Brewer Capital Group, LLC, which acted as
placement agent for the transaction, at an exercise price of $1.00 per share.
The net proceeds of this transaction were used for general corporate purposes.

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11. In November 2001, the Company engaged a financial advisor to assist the
Company in obtaining additional long-term financing. As part of the financial
advisor's compensation for this engagement, and in addition to a $25,000
retainer fee paid to the advisor, the Company has committed to the issuance of
warrants to purchase 100,000 shares of the Company's common stock at an exercise
price of $0.05 per share. These warrants will expire in November 2004.

12. On Feb. 15, 2002, 1,500,000 shares and 500,000 shares of common stock
were issued to Joseph A. Wagda and Kenneth A. Czaja, respectively, in connection
with their employment with the Company.

All of the above sales and issuances of securities by the Company were
exempt from registration under the Securities Act pursuant to Section 4(2)
thereof as transactions not involving any public offering. The Company bases
this conclusion on an analysis of the facts in each instance, taking into
account such factors as the number of purchasers, whether each purchaser is an
accredited investor or appears to have such knowledge and experience in
financial and business matters so as to be capable of evaluating the merits and
risks of the prospective investment, and whether each purchaser is a senior
management employee of the Company or the Company otherwise has a pre-existing
relationship with the purchaser. In no case were any securities offered or sold
by any form of general solicitation or general advertising, nor is the Company
aware of any instance in which the securities were acquired with a view to the
resale or distribution thereof.

ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data for BrightStar is derived
from the Company's Financial Statements and related notes thereto. The following
selected consolidated financial data should be read in connection with
BrightStar's Financial Statements and related notes thereto and other financial
information included elsewhere in this Form 10-K report.

BrightStar was organized in July 1997 and completed its initial public
offering (IPO) on April 16, 1998. Concurrent with the IPO, Brightstar (a)
acquired the outstanding capital stock of Brian R. Blackmarr and Associates,
Inc. ("Blackmarr"), Integrated Controls, Inc. ("ICON"), Mindworks Professionals
Education Group, Inc. ("Mindworks"), Software Innovators, Inc. ("SII"), Zelo
Group, Inc. ("ZELO") (b) acquired substantially all the net assets of Software
Consulting Services America, LLC ("SCS America") and SCS Unit Trust ("SCS
Australia") and together with Blackmarr, ICON, Mindworks, SII, Zelo, SCS America
and SCS Australia, (collectively the "Founding Companies") and (c) executed a
share exchange with BIT Investors, LLC ("BITI") and senior management of
BrightStar for all outstanding common stock of BIT Group Services, Inc.
("BITG"). BrightStar and the Founding Companies are hereinafter collectively
referred to as the "Company." The acquisitions were accounted for using the
purchase method of accounting, with Blackmarr being reflected as the "accounting
acquirer."

The following tables present selected historical data for Blackmarr, the
accounting acquirer, for the year ended September 30, 1997. The 1998 data
presented in the following table for the Company is comprised of (i) the results
of operation of Blackmarr for the year ending December 31, 1998, (ii) the
results of operations of the Founding Companies for the periods subsequent to
their acquisitions and (iii) the results of the operations of companies acquired
by BrightStar after the initial public offering.

The Blackmarr results have been derived from (i) the audited financial
statements of Blackmarr for the year ended September 30, 1997 and the year ended
December 31, 1998.

Total fully diluted shares consist of the following:

Common stock outstanding as of March 21, 2002 includes 2,000,000 shares
issued to the Company's executives in February, 2002, related to their
employment (as explained in Item 11, Executive Compensation).

Total fully diluted shares does not include the 255,000 treasury stock
shares. These treasury stock shares are considered issued but not outstanding.

Employee/director stock options as of March 22, 2002 are repriced at $0.05
per share except for approximately 440,000 shares that are priced in the range
of $1.00 to $6.00 per share. Other common stock warrants totaling 184,285 shares
are exercisable at prices ranging from $0.05 to $6.00 per share.

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

Critical Accounting Policies and Estimates

Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses BrightStar's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, management evaluates its
estimates and judgments. Management bases its estimates and judgments on
historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

Management believes the following critical accounting policies, among
others, affect its more significant judgments and estimates used in preparation
of its consolidated financial statements.

Revenue recognition -- The Company provides services to customers for fees
that are based on time and materials or occasionally, fixed fee contracts.
Revenue for fixed fee contracts is recognized ratably over the contract term
based on the percentage-of-completion

9

method. Costs incurred to date as a percentage of total estimated costs are used
to determine the percentage of the contract that has been completed throughout
the contract life.

Goodwill -- Goodwill is the cost in excess of amounts assigned to
identifiable assets acquired less liabilities assumed. Goodwill recorded in
conjunction with the Founding Companies and all other acquisitions in 1998 is
being amortized over 40 years on a straight-line basis. Goodwill associated with
the acquisition of ISC is being amortized over 20 years on a straight-line
basis. Management determined the twenty-year life for ISC goodwill based upon
the nature of ISC's SAP software consulting practice, along with the assembled
workforce of highly skilled consultants and the demand for information
technology services. The realizability and period of benefit of goodwill is
evaluated periodically to assess recoverability, and, if warranted, impairment
or adjustments to the period benefited would be recognized. The Company uses an
estimate of the future undiscounted net cash flows when testing for impairment.
In our opinion, goodwill is appropriately valued at December 31, 2001.

Income taxes -- The Company accounts for income taxes under Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
SFAS No. 109 requires an asset and liability approach to accounting for income
taxes. The Company provides deferred income taxes for temporary differences that
will result in taxable or deductible amounts in future years. A valuation
allowance is recognized if it is anticipated that some or all of a deferred tax
asset may not be realized. Based on the Company's net losses for the previous
years, the Company has recorded a valuation allowance for deferred taxes as of
December 31, 2001. In the event that the Company were to determine that it would
be able to realize its deferred tax assets in the future, an asset would be
recorded, which in turn would increase income in the period such determination
was made.

The following Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in connection with BrightStar's
Consolidated Financial Statements and related notes thereto and other financial
information included elsewhere in the Form 10-K report.

RESULTS OF OPERATIONS

The Company reported net losses of $0.21, $5.94 and $1.16 per basic and
diluted share for the years ended December 31, 2001, 2000 and 1999,
respectively. The results of operations for 2001, 2000 and 1999 reflect the
impact of the following items:

Goodwill

In July of 1996, the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin No. 97 ("SAB 97") relating to business combinations
immediately prior to an initial public offering. SAB 97 requires that these
combinations be accounted for using the purchase method of accounting and
requires that one of the companies be designated as the accounting acquirer.
Accordingly, for financial statement purposes, Blackmarr was designated as the
acquiring company because its shareholders, in the aggregate, acquired more
common stock than the former shareholders of any of the other Founding Companies
in conjunction with the acquisitions. The excess of the aggregate purchase price
paid for the Founding Companies other than Blackmarr over the fair value of the
net assets acquired by BrightStar was recorded as goodwill. In addition,
goodwill of $4.6 million was recorded attributable to the issuance of 437,681
shares of Common Stock to BITI unit holders. The goodwill was amortized over a
40-year period through December 31, 2001. Goodwill associated with the purchase
of ISC was being amortized over a 20-year period through December 31, 2001.

In the third quarter of 2000 and continuing into the fourth quarter the
Company considered impairment of goodwill. In evaluating goodwill impairment the
Company segregated enterprise level goodwill from goodwill attributable to
specific assets. Goodwill of $22.6 million attributable to specific assets, was
written-off in connection with the disposal of our Australian subsidiary's
assets; and $1.4 million was written off in connection with the closure of
Cogent Technologies LLC. The remaining goodwill, of approximately $32.4 million,
was deemed enterprise level goodwill as it relates to the remaining U.S.
operations, which is operated as a single, integrated business unit. Enterprise
level goodwill was deemed impaired due to the deterioration in the Company's
business, the overall declining market for information technology services,
including project-based ERP and e-commerce services, and also the reduction in
the Company's workforce, backlog, and its falling common stock share market
price. In considering the methodology to assess the carrying value of enterprise
level goodwill, management evaluated it using a market value approach and an
undiscounted cash flow approach. The market value approach was deemed preferable
based upon the uncertainty of the cash flows at that time. Under the market
value approach, management used the trading price of the Company's common stock
around the December 31, 2000, financial statement date. During January 2000, the
per share trading price was approximately $13.00. By the end of December 2000,
the per share trading price was less than $1. This analysis yielded a market
value for the enterprise level goodwill of approximately $12.0 million
(approximately 12,000,000 shares outstanding at $1 per share), resulting in the
$18.4 million impairment

10

charge taken in 2000. Management deemed it unnecessary to reduce the
amortization period for the goodwill based upon the long-term need for the
information technology services provided by the Company.

On July 20, 2001 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Intangible Assets". SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001: however, certain provisions of this Statement apply to
goodwill and other intangible assets acquired between July 1, 2001 and the
effective date of SFAS No. 142. Major provisions of SFAS No. 142 and their
effective dates for the Company are as follows:

- Goodwill, as well as intangible assets with indefinite lives,
acquired after June 30, 2001 will not be amortized. Effective
January 1, 2002, all previously recognized goodwill and intangible
assets with indefinite lives will no longer be subject to
amortization.

- Effective January 1, 2002, goodwill and intangible assets with
indefinite lives will be tested for impairment annually and whenever
there is an impairment indicator.

The Company has amortized goodwill acquired prior to July 1, 2001, under its
current method through December 31, 2001. Thereafter annual and quarterly
goodwill amortization of approximately $350,000 and $87,500, respectively, will
no longer be recognized. By December 31, 2002 the Company will have completed a
transitional fair value based impairment test of goodwill as of January 1, 2002.
The Company has not determined the effect, if any, of the adoption of the fair
value based impairment test under SFAS 142.

In applying the current accounting principles related to goodwill, the
Company has considered if there has been any current impairment of goodwill as
of December 31, 2001. We performed our analysis of future cash flows based on
the benefits of cost reductions recently implemented and future projected
revenue levels assuming various levels of growth, including a 10% per year
revenue-growth case. Based on this analysis we believe that the current value of
goodwill is recoverable, and therefore no impairment has been incurred and no
adjustment is necessary.

Discontinued Operations

During the fourth quarter of 1999, the Company recorded losses related to
the discontinuance of its Training, Controls, and Infrastructure Support
businesses. The loss on discontinued operations of $7.4 million in 1999
includes: 1) $5.8 million (including $0.7 million of taxes) recorded to write
down the Company's net investment in its Controls business and to record $0.8
million of estimated operating losses to be incurred after the decision to
dispose of the business; 2) $1.0 million (including $0.1 million of taxes)
recorded upon the sale of the Mindworks division of the Company's training
business, and 3) $0.6 million (net of $0.3 million of tax benefits) of operating
losses from discontinued operations incurred during 1999. Additionally, as a
result of the sale of its controls division in September 2000, the Company
recorded a charge of $0.9 million, with the remaining items being settled in the
second quarter of 2001. The Company recorded no gain or loss on the
discontinuance of its Texas training business or its infrastructure support
business. The Company has made necessary reclassifications to properly reflect
the discontinued operations in its consolidated financial statements. In 2001,
the Company recorded a net gain of $17,000 associated with the settling of
accounts receivable balances remaining from 2000. Subsequent to the sale of the
Controls Business, the Company changed the name of Integrated Controls, Inc. to
BrightStar Louisiana, Inc.

Restructuring Charges

In June of 2000, the Company announced that revenue and earnings for the
second quarter and the remainder of the calendar year would be lower than
expected and that the Company was realigning its operations to improve operating
margins by reducing expenses associated with underutilized office space and
personnel.

As a result of the realignment, the Company recorded a restructuring charge
of $2.5 million in the second quarter of 2000. Of the

11

total charge, approximately $1.0 million was reserved for ongoing lease
obligations for facilities that were closed and $0.5 million was recorded to
write-down related fixed assets. The remainder of the charge relates to the
severance of approximately 90 employees, or 15% of the Company's workforce.
Approximately $1.7 million of the charge applied to obligations funded by cash
disbursements, of which approximately $1.0 million was disbursed for severance
and $0.3 million was disbursed for rents during 2000. The remaining charge
relates to $0.2 million of longer-term severance obligations and related costs
and $0.7 million of rents, net of sublease income to be paid related to leases,
which expire through April 2003. During the fourth quarter of 2000, the Company
reduced the restructuring reserve by $0.3 million as a result of favorable lease
settlements.

Restructuring continued during the fourth quarter of 2000 and into 2001. The
Company replaced the entire senior management team and significantly reduced
management overhead. Beginning in the third quarter and continuing into the
fourth quarter of 2001, the Company continued with year-over-year reductions in
selling, general and administrative expenses, which were the result of the
execution of the austerity plan adopted in the third quarter of 2001. The
restructuring included reductions in office space, sales personnel and related
costs, management overhead and discretionary expenses. For the year 2001 the
Company incurred approximately $2 million of additional restructuring costs,
(consisting of approximately $0.4 million relating to employee costs for
approximately 30 employees, including severance obligations, and $1.6 million
relating to losses on the write down or disposal of nonessential equipment, the
write-offs of leasehold improvements and office closure expenses (including
accelerated expenses from lease terminations) as a result of actions taken by
the Company to reduce its expense base in response to the general reduction in
our level of business, as well as the specific loss of a significant customer
that filed for bankruptcy.

Remaining amounts recorded as accrued restructuring costs at December 31,
2001 relate primarily to ongoing severance and lease obligations, which have
extended payment terms.

The categories of the 2001 and 2000 restructuring charges and the subsequent
utilization are summarized below:

Stock Compensation Expense

In connection with the IPO and the acquisition of the Founding Companies,
certain directors and members of management received 648,126 shares of common
stock. These shares, valued at $11.70, were recorded as deferred compensation
and were charged to stock compensation expense over a one-year period based upon
the terms of a stock repurchase agreement between the Company and related
shareholders. Total stock compensation expense recorded during 1999 in
conjunction with the above was $468,000.

Revenue

The Company provides services to its customers for fees that are based on
time and materials or occasionally, fixed fee contracts. Accordingly, revenue is
recognized as consulting services are performed. Deferred revenue primarily
represents the excess of amounts billed over the contract amount earned.

The timing of revenue is difficult to forecast because the Company's sales
cycle for certain of its services can be relatively long and is subject to a
number of uncertainties, including customers' budgetary constraints, the timing
of customers' budget cycles, customers' internal approval processes and general
economic conditions. In addition, as is customary in the industry, the Company's
engagements are generally terminable without a customer penalty. The Company's
revenue and results of operations may fluctuate significantly from quarter to
quarter or year to year because of a number of factors, including, but not
limited to, changes in the demand for IT services, the effect of changes in
estimates to complete fixed fee contracts, the rate of hiring and the
productivity of revenue generating personnel; the availability of qualified IT
professionals; the significance of customer engagements commenced and completed
during a quarter; the number of business days in the quarter; changes in the
relative mix of the Company's services; changes in the pricing of the Company's
services; the timing and the rate of entrance into new geographic or IT
specialty markets; departures or temporary absences of key revenue-generating
personnel; the structure and timing of acquisitions; and general economic
factors.

12

Revenue decreased from $61.6 million to $19.5 million or 68% in 2001
compared to 2000 and decreased from $103.4 million to $61.6 million or 40% in
2000 compared to 1999 as a result of a number of factors. First, there has been
a general market reduction in the demand for ERP and e-commerce consulting
services. The IT services market experienced a surge in demand up to the 1999
timeframe as a result of the Y2K requirements. BrightStar management believes
that after 1999, most customers decided to significantly decrease their
ERP-related IT services to compensate for the unusually high level of IT
spending the previous couple of years. This market softness was subsequently
compounded when the e-commerce market started softening in 2000. Finally, the
Company believes many companies cancelled or postponed their IT projects after
the September 11, 2001 terrorist incident. Another factor contributing to the
annual revenue declines was the discontinuance of some of its operations (as
detailed in the section on Discontinued Operations). While management believes
it was in the best interest of the Company, the discontinuances (especially the
Australian operations, which accounted for $17 million in revenue for 2000)
resulted in a further reduction in revenue.

Cost of Revenue

Cost of revenue primarily consists of salaries (including non-billable and
training time) and benefits for consultants. The Company generally strives to
maintain its gross profit margins by offsetting increases in salaries and
benefits with increases in billing rates, although this is subject to the market
conditions at the time. In addition, the Company tries to increase or decrease
the number of consultants used by the Company to provide its services, including
third party contractors, as the amount of billable work (and resultant revenue)
changes. In other words, the Company continually strives to minimize the amount
of unbillable consulting resources or bench. As revenues declined over the past
couple of years, the Company reduced its consulting resources accordingly.

Gross profit as a percentage of revenue for 2001 remained unchanged at 31%
compared to 2000. Even though revenues dropped in 2001 compared to 2000, the
Company's overall reduction in nonbillable resources throughout 2001 enabled it
to maintain the previous year's gross profit percentage.

Gross profit as a percentage of revenue increased for 2000 from 26% to 31%
compared to 1999 due to improved utilization of billable consultants combined
with the completion of two low margin fixed price engagements in 1999.

Operating Expenses

Selling, general and administrative expenses (SG&A) primarily consist of
costs associated with (i) corporate overhead, (ii) sales and account management,
(iii) telecommunications, (iv) human resources, (v) recruiting and training, and
(vi) other administrative expenses.

SG&A expenses for 2001 decreased from $27.4 million to $6.1 million or 78%
compared to 2000. The decrease was due to the Company's year-over-year
reductions in selling, general and administrative expenses, as a result of the
execution of our turnaround plan, including reductions in office space, sales
personnel and related costs, management overhead and discretionary expenses.

SG&A expenses for 2000 increased from $26.8 million to $27.4 million or 2%
compared to 1999. The increase represents continued investments in the Company's
sales force and corporate infrastructure through the third quarter of 2000,
offset by significant reductions in expenses in the fourth quarter of 2000
resulting from the initiation of a turnaround plan designed to restore
profitability and positive cash flows.

Extraordinary Gains

For the year ended December 31, 2001, the Company recorded extraordinary
gains, which related to the early extinguishment of balance sheet obligations.
The Company was able to settle corporate legacy liabilities for cash payments
totaling less than $0.3 million, resulting in an extraordinary gain of $1.2
million, including the settlement of the $0.9 million payable to stockholders
and the $0.5 million Prosap obligation.

MARKET RISK

Market risk represents the risk of loss that may impact the financial
position, results of operations or cash flows of the Company due to adverse
changes in market prices and rates.

The Company during the 2001 year-end and previous years was potentially
exposed to market risk because of changes in foreign

13

currency exchange rates as measured against the U.S. dollar and currencies of
the Company's former operations in Australia. Since the A$7.5 million contingent
earn-out resulting from the sale of our Australian subsidiary is denominated in
Australian dollars, the Company's financial position, results of operations, and
cash flows are potentially affected by fluctuations in exchange rates. The
Company in 2001 realized no market risk associated with the earn-out provision
in 2001, since it was determined that there was no earn-out to be paid in 2001.
The Company does not anticipate that near-term changes in exchange rates will
have a material impact on future earnings, fair values or cash flows of the
Company.

The Company's debt bears interest at variable rates; therefore, the
Company's results of operations would only be affected by interest rate changes
to the debt outstanding. An immediate 10 percent change in interest rates would
not have a material effect on the Company's results of operations over the next
fiscal year.

LIQUIDITY AND CAPITAL RESOURCES

The Company's liabilities as of December 31, 2001, reflect approximately
$2.8 million of past-due liabilities, which have been reported as legacy
liabilities in the financial statements. Due to our current and foreseeable
liquidity issues, we may be unable to make any of these payments in cash.

The Company relies primarily on the timeliness and amount of accounts
receivable collections to fund cash disbursements. As a result of prior losses
and prior negative cash flows, the Company has experienced a significant decline
in available liquidity, which has had an adverse impact on the ability of the
Company to meet its immediate and future obligations and to continue as a going
concern. The Company has improved its liquidity by securing private placement
financing, by reaching settlement agreements with most of its creditors, and by
restructuring its credit facility with Comerica Bank, which matured on January
25, 2002. Since there was an outstanding balance on the line as of January 25,
2002, Comerica declared the Company to be in default under the terms of the
agreement. However, Comerica has subsequently agreed to forebear on any actions
to collect the outstanding balances and to allow the Company to borrow under the
loan until June 30, 2002, subject to certain conditions. Available borrowings
under this newly extended arrangement are to start at 60% of eligible accounts
receivables, after reduction for ineligible accounts, with subsequent reductions
of 2% each month starting in May 2002. The total borrowing base after reductions
for ineligible accounts and the borrowing base percentage is limited to a
maximum of $850,000. Comerica retains the right to decline to make advances at
any time during this period. The interest rate on outstanding balances is prime
rate plus 4% as of January 26, 2002, and will increase 1% per month beginning in
February 2002. Subject to the terms of the new agreement, the Company's
borrowing availability as of March 22, 2002 was approximately $635,000.

On July 26, 2001, the Company completed a private placement through the
issuance of approximately $1.1 million of convertible notes to a group of
investors, including members of BrightStar senior management. Related party
notes from then-current senior management totals $0.2 million. The notes are
secured on a junior basis by substantially all of the assets of the Company and
its operating subsidiaries, and are convertible into common stock, at the option
of the investors, at a fixed price of $0.23 per share, subject to anti-dilution
provisions. In addition, the investors received approximately 718,000 warrants,
exercisable at $0.50 per share. The notes are mandatorily convertible, at the
Company's option, into common stock at $0.23 per share, subject to anti-dilution
provisions, if; (i) the market price of the Company's common stock, determined
on a 20-day moving average basis, equals or exceeds $0.50; and (ii) the investor
may lawfully sell all of the common stock issuable upon conversion and the
common stock issuable upon exercise of Warrants held by the investor, either
under an effective registration statement, or, under Rule 144; and (iii) at
least $2.3 million of past due payables have been restructured. The notes are
entitled to simple interest calculated at a rate per annum equal to 8%. For the
first year from the date of the Notes, interest may be paid at the option of the
Company by issuing additional convertible debt with the same terms as above. The
Company chose to do this for the interest due on the notes from inception
through December 31, 2001. In addition, 70,000 warrants were issued to the
placement agent for the transaction at an exercise price of $1.00 per share.
Warrants issued to investors were valued at $142,000 under the provisions of APB
No.14 and EITF 00-27, and will be amortized as additional interest expense over
the life of the debt. Amortization expense for the year ended December 31, 2001
amounted to $19,000.

Under present circumstances, the Company believes it has sufficient cash
resources to meet its operating requirements at least through the end of the
second quarter of 2002. Beyond the second quarter of 2002, the Company believes
that the planned results from operations when combined with proceeds from
additional structured financing, if obtained, restructuring of its remaining
past-due liabilities or continued forbearance of its creditors, including
Comerica, and replacement of its Comerica credit facility, would be adequate to
fund its current operations. However, there can be no assurance that the
Company's efforts to increase revenue and reduce operating costs will result in
operating profits or positive cash flows from operations, that the Company's
collection efforts with respect to its accounts receivable will be successful,
that the Company will be able to obtain new financing on terms acceptable to the

14

Company or at all, that the Company's remaining creditors, including Comerica,
will continue to forbear or will accept restructuring of the amounts owed to
them, or that the Comerica Bank credit facility can be replaced on a timely
basis or at all. In November 2001 the Company engaged a financial advisor to
assist the Company in obtaining additional long-term debt or equity financing.

FORWARD-LOOKING INFORMATION

Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements, other than statements of historical facts,
included in this MD&A regarding the Company's financial position, business
strategy and plans, and objectives of management of the Company for future
operations, are forward-looking statements. These forward-looking statements
rely on a number of assumptions concerning future events and are subject to a
number of uncertainties and other factors, many of which are outside of the
Company's control, that could cause actual results to materially differ from
such statements. While the Company believes that the assumptions concerning
future events are reasonable, it cautions that there are inherent difficulties
in predicting certain important factors, especially the timing and magnitude of
technological advances; the prospects for future acquisitions; the possibility
that a current customer could be acquired or otherwise be affected by a future
event that would diminish their information technology requirements; the
competition in the information technology industry and the impact of such
competition on pricing, revenues and margins; the degree to which business
entities continue to outsource information technology and business processes;
uncertainties surrounding budget reductions or changes in funding priorities or
existing government programs; and the cost of attracting and retaining highly
skilled personnel.

RISK FACTORS

OUR FAILURE TO MATERIALLY IMPROVE OUR LIQUIDITY IN THE IMMEDIATE FUTURE WOULD
SUBSTANTIALLY HARM OUR OPERATIONS AND MAY RENDER US UNABLE TO CONTINUE AS A
GOING CONCERN.

Our continued survival is dependent upon material amounts of creditor
forbearance, including Comerica Bank, and additional capital in the immediate
future. Although we are attempting to reduce operating losses (and generate
operating profits) through cost reductions, cash generated by operations and
available credit facilities will not, by themselves, be sufficient in the near
term to meet our cash needs, without continued cooperation from our creditors,
including Comerica Bank. Our working capital credit facility with Comerica Bank
matured on January 25, 2002. Since there was an outstanding balance on the line
as of January 25, 2002, Comerica declared the Company to be in default under the
terms of the agreement. However, Comerica has subsequently agreed to forebear on
any actions to collect the outstanding balances and to allow the Company to
borrow under the loan until June 30, 2002, subject to certain conditions.
Comerica retains the right to decline to make advances at any time during the
period. We have been pursuing other alternatives to replace the Comerica
facility when it expires, but we have not yet been successful. We are also
attempting to arrange new long term financing, but there is no certainty that
additional financing will be available on favorable terms, or at all. If we are
unable to arrange additional debt and/or equity financing and/or creditor
forbearance, our operations will likely be substantially harmed and we may be
unable to continue as a going concern. In addition, our auditors issued a going
concern report modification on the 2001 audited financial statements.

As a result of our need for additional capital, we are considering our
strategic alternatives. Transactions that we may consider include an investment
in our Company by another company or by an individual or a group of investors, a
merger, a sale of the Company or a sale of a portion of our operations. There is
no assurance that any such transaction could be carried out before we become
unable to continue as a going concern. In addition, the raising of additional
equity capital may result in limitations on the tax benefits relating to the
utilization of net operating loss carry forwards.

FAILURE OF OUR COMPANY TO FULFILL THE CONDITIONS NECESSARY TO OBTAIN A LISTING
ON THE NASDAQ SMALL CAP MARKET OR ANOTHER NATIONAL SECURITIES MARKET COULD HAVE
AN ADVERSE IMPACT ON THE COMPANY'S FUTURE STOCK PRICE.

In January of 2001, we were notified by Nasdaq that we no longer met the net
tangible asset test to maintain our listing on the Nasdaq National Market and
they requested that we take corrective action. In addition, because our stock
had closed below a dollar per share for a substantial period of time, and the
market value of our public float did not meet the minimum requirement, we
received additional notices from Nasdaq that, unless we demonstrated compliance
with these rules, we would receive a written notification that our securities
would be delisted.

15

The Company was subsequently transferred from the Nasdaq National Market to
the Nasdaq SmallCap Market effective April 20, 2001, and received a conditional
exception from meeting certain of the Nasdaq SmallCap Market's continued listing
standards. First, the Company, by May 1, 2001, was required to file a proxy
statement that sought shareholder authority to do a reverse stock split.
Secondly, it was required to meet the $1.00 minimum bid price standard for at
least ten consecutive days starting no later than June 28, 2001. Thirdly, it was
required to file a Form 10-Q by May 15, 2001 demonstrating at least $8.0 million
of shareholder equity at March 31, 2001 (in lieu of meeting the $2.0 million net
tangible asset test, which the Company does not currently meet). Finally, it
must be in compliance with all other applicable listing standards by June 28,
2001. The Company met the May 1 and May 15 deadline requirements but to date has
declined to undertake the authorized reverse split required by Nasdaq to help it
meet the minimum-bid-price requirement and retain it's listing on the Nasdaq
SmallCap Market. On July 23, 2001, the Company was transferred to the OTC
Bulletin Board Market.

There is no assurance that the Company will be able to meet the requirements
for a future listing on Nasdaq or another national securities market. If we are
unable to obtain a national market listing, the future liquidity of our shares
and their trading price could be adversely affected.

OUR LIMITED OPERATING HISTORY, INCLUDING THE UNCERTAINTY OF OUR FUTURE
PERFORMANCE AND ABILITY TO MAINTAIN OR IMPROVE OUR FINANCIAL AND OPERATING
SYSTEMS, MAKES IT DIFFICULT TO EVALUATE OUR BUSINESS.

Our Company was organized in July 1997 and we completed our initial public
offering in April 1998. Our limited operating history, which includes the
roll-up of multiple businesses and related financial and operating systems, and
a number of restructuring actions, makes it difficult to evaluate our business.
In addition, beginning in the fourth quarter of 2000, the Company recruited a
completely new executive management team and replaced virtually the entire sales
force. Two senior members of the new management team, were separated from the
Company in the fourth quarter of 2001. The limited history of the performance of
the Company of remaining management and sales team, the uncertainty of our
future performance and ability to maintain or improve our financial, sales and
operating systems, procedures and controls increase the risk that the value of
our common stock may decline.

WE MAY BE UNABLE TO MAINTAIN OR IMPROVE OUR PROFITABILITY BY INCREASING NET
SALES, EXPANDING THE RANGE OF OUR SERVICES OR ENTERING NEW MARKETS.

There can be no assurance that we will be able to maintain or improve the
profitability and/or expand the net sales of our business and any subsequently
acquired businesses. Various factors, including demand for outsourcing services
and enterprise-level software application implementation services, and our
ability to expand the range of our services and to successfully enter new
markets, may affect our ability to maintain or increase the net sales of our
business or any subsequently acquired businesses. Many of these factors are
beyond the control of our company. In addition, in order to effectively manage
growth, we must expand and improve our operational, financial and other internal
systems and attract, train, motivate and retain qualified employees. In many
cases, we may be required to fund substantial expenditures related to growth and
client acquisition initiatives in advance of potential revenue streams generated
from such initiatives. Expenditures related to our growth and client acquisition
initiatives may negatively affect our operating results, and we may not realize
any incremental revenue from our growth and client acquisition efforts.

FAILURE OF OUR MANAGEMENT TO SUCCESSFULLY MANAGE INTERNAL GROWTH COULD
NEGATIVELY IMPACT OUR ABILITY TO MAINTAIN OR INCREASE OUR REVENUES.

If our management does not effectively handle internal growth or our new
employees do not achieve anticipated performance levels, we may fail to maintain
or increase our revenues.

IF WE ARE UNABLE TO ATTRACT, TRAIN AND RETAIN HIGHLY QUALIFIED PERSONNEL, THE
QUALITY OF OUR SERVICES MAY DECLINE AND WE MAY NOT SUCCESSFULLY EXECUTE OUR
INTERNAL GROWTH STRATEGIES.

Our success depends in large part upon our ability to attract, train,
motivate and retain highly skilled and experienced technical employees.
Qualified technical employees are in great demand and are likely to remain a
limited resource for the foreseeable future. Other providers of technical
staffing services, systems integrators, providers of outsourcing services,
computer consulting firms and temporary personnel agencies provide intense
competition for IT professionals with the skills and experience required to
perform the services offered by our Company. Competition for these professionals
has increased in recent years, and we expect such competition will continue to
increase in the foreseeable future. There can be no assurance that we will be
able to attract and retain sufficient

16

numbers of highly skilled technical employees in the future. The loss of
technical personnel or our inability to hire or retain sufficient technical
personnel could impair our ability to secure and complete client engagements and
could harm our business.

THE UNPREDICTABILITY OF OUR QUARTERLY OPERATING RESULTS MAY CAUSE THE PRICE OF
OUR COMMON STOCK TO DECLINE.

Our revenue and results of operations will fluctuate significantly from
quarter to quarter, or year to year, because of a number of factors which may
lead to reduced prices for our common stock, including but not limited to:

o the utilization of billable consultants;

o changes in the demand for IT services;

o the rate of hiring and the productivity of revenue-generating
personnel;

o the availability of qualified IT professionals;

o the significance of client engagements commenced and completed
during a quarter;

o the ability to complete fixed fee engagements in a timely and
profitable manner;

o the decision of our clients to retain us for expanded or ongoing
services;

o the number of business days in a quarter;

o changes in the relative mix of our services;

o changes in the pricing of our services;

o the timing and rate of entrance into new geographic or vertical
industry markets;

o departures or temporary absences of key revenue-generating
personnel;

o the structure and timing of acquisitions; and

o general economic factors.

The timing of revenue is difficult to forecast because our sales cycle for
some of our services can be relatively long and is subject to a number of
uncertainties, including clients' budgetary constraints, the timing of clients'
budget cycles, clients' internal approval processes and general economic
conditions. In addition, as is customary in the industry, our engagements
generally are terminable without client penalty. An unanticipated termination of
a major project could result in a higher than expected number of unassigned
persons or higher severance expenses as a result of the termination of the
under-utilized employees. Due to all of the foregoing factors, we believe
period-to-period comparisons of our revenue and operating results should not be
relied on as indicators of future performance, and the results of any quarterly
period may not be indicative of results to be expected for a full year.

ANY ACQUISITIONS WE MAKE COULD RESULT IN DIFFICULTIES IN SUCCESSFULLY MANAGING
OUR BUSINESS AND CONSEQUENTLY HARM OUR FINANCIAL CONDITION.

As an integral part of our business strategy, we will seek to expand by
acquiring additional information technology related businesses. We cannot
accurately predict the timing, size and success of our acquisition efforts and
the associated capital commitments. We expect to face competition for
acquisition candidates, which may limit the number of acquisition opportunities
available to us and may lead to higher acquisition prices. There can be no
assurance that we will be able to identify, acquire or profitably manage
additional businesses or successfully integrate acquired businesses, if any,
into our Company, without substantial costs, delays or other operational or
financial difficulties. In addition, acquisitions involve a number of other
risks, including:

o failure of the acquired businesses to achieve expected results;

17

o diversion of management's attention and resources to acquisitions;

o failure to retain key customers or personnel of the acquired
businesses; and

o risks associated with unanticipated events, liabilities or
contingencies.

Client dissatisfaction or performance problems at a single acquired firm
could negatively affect the reputation of our Company. The inability to acquire
complementary IT services businesses on reasonable terms or successfully
integrate and manage acquired companies, or the occurrence of performance
problems at acquired companies could result in dilution, unfavorable accounting
charges and difficulties in successfully managing our business.

OUR INABILITY TO OBTAIN CAPITAL, USE INTERNALLY GENERATED CASH OR DEBT, OR USE
SHARES OF OUR COMMON STOCK TO FINANCE FUTURE ACQUISITIONS OR SETTLE CURRENT
OBLIGATIONS COULD IMPAIR THE GROWTH AND EXPANSION OF OUR BUSINESS.

Reliance on internally generated cash or debt to complete acquisitions could
substantially limit our operational and financial flexibility. The extent to
which we will be able or willing to use shares of our common stock to consummate
acquisitions will depend on our market value from time to time and the
willingness of potential sellers to accept it as full or partial payment.
Additionally, to facilitate raising additional equity or debt financing, we may
be required to settle existing material financial obligations through the
issuance of our common stock. Using shares of our common stock for this purpose
may result in significant dilution to then existing stockholders. To the extent
that we are unable to use our common stock to make future acquisitions, our
ability to grow through acquisitions may be limited by the extent to which we
are able to raise capital for this purpose through debt or additional equity
financings. No assurance can be given that we will be able to obtain the
necessary capital to finance a successful acquisition program or our other cash
needs. If we are unable to obtain additional capital on acceptable terms, we may
be required to reduce the scope of expansion. In addition to requiring funding
for acquisitions, we may need additional funds to implement our internal growth
and operating strategies or to finance other aspects of our operations. Our
failure to (i) obtain additional capital on acceptable terms, (ii) to use
internally generated cash or debt to complete acquisitions because it
significantly limits our operational or financial flexibility, or (iii) to use
shares of our common stock to make future acquisitions may hinder our ability to
actively pursue our acquisition program.

BECAUSE THE IT SERVICES MARKET IS HIGHLY COMPETITIVE AND HAS LOW BARRIERS TO
ENTRY, WE MAY LOSE MARKET SHARE TO LARGER COMPANIES THAT ARE BETTER EQUIPPED TO
WEATHER A DETERIORATION IN MARKET CONDITIONS DUE TO INCREASED COMPETITION.

The market for IT services is highly competitive and fragmented, is subject
to rapid change and has low barriers to entry. We compete for potential clients
with systems consulting and implementation firms, multinational accounting
firms, software application firms, service groups of computer equipment
companies, facilities management companies, general management consulting firms,
programming companies and technical personnel and data processing outsourcing
companies. Many of these competitors have significantly greater financial,
technical and marketing resources and greater name recognition than our Company.
In addition, we compete with our clients' internal management information
systems departments. We believe the principal competitive factors in the IT
services industry include:

o responsiveness to client needs;

o availability of technical personnel;

o speed of applications development;

o quality of service;

o price;

o project management capabilities;

o technical expertise; and

18

o ability to provide a wide variety of IT services.

We believe that our ability to compete also depends in part on a number of
factors outside of our control, including:

o the ability of our competitors to hire, retain and motivate
qualified technical personnel;

o the ownership by competitors of software used by potential clients;

o the development of software that would reduce or eliminate the need
for certain of our services;

o the price at which others offer comparable services; and

o the extent of our competitors' responsiveness to client needs.

We expect that competition in the IT services industry could increase in the
future, partly due to low barriers to entry. Increased competition could result
in price reductions, reduced margins or loss of market share for us and greater
competition for qualified technical personnel. There can be no assurance that we
will be able to compete successfully against current and future competitors. If
we are unable to compete effectively, or if competition among IT services
companies results in a deterioration of market conditions for IT services
companies, we could lose market share to our competitors.

OUR FAILURE TO MEET A CLIENT'S EXPECTATIONS IN THE PERFORMANCE OF OUR SERVICES,
AND THE RISKS AND LIABILITIES ASSOCIATED WITH PLACING OUR EMPLOYEES AND
CONSULTANTS IN THE WORKPLACES OF OTHERS COULD GIVE RISE TO NUMEROUS CLAIMS
AGAINST US.

Many of our engagements involve projects that are critical to the operations
of our clients' businesses and provide benefits that may be difficult to
quantify. Our failure or inability to meet a client's expectations in the
performance of our services could result in a material adverse change to the
client's operations and therefore could give rise to claims against us or damage
our reputation. In addition, we are exposed to various risks and liabilities
associated with placing our employees and consultants in the workplaces of
others, including possible claims of errors and omissions, misuse of client
proprietary information, misappropriation of funds, discrimination and
harassment, theft of client property, other criminal activity or torts and other
claims. Our Company has experienced a number of material claims of these types
and there can be no assurance that we will not experience such claims in the
future.

In addition, a percentage of our projects are billed on a fixed-fee basis.
While very small at present, as a result of competitive factors or other
reasons, we could increase the number and size of projects billed on a fixed-fee
basis. Our failure to estimate accurately the resources and related expenses
required for a fixed-fee project, or failure to complete contractual obligations
in a manner consistent with the project plan upon which a fixed-fee contract is
based, could give rise to additional claims.

OUR FAILURE TO KEEP PACE WITH THE RAPID TECHNOLOGICAL CHANGES IN THE INFORMATION
TECHNOLOGY INDUSTRY OR NEW INDUSTRY STANDARDS MAY RENDER OUR SERVICE OFFERINGS
OBSOLETE.

Our success will depend in part on our ability to enhance our existing
products and services, to develop and introduce new products and services and to
train our consultants in order to keep pace with continuing changes in IT,
evolving industry standards and changing client preferences. There can be no
assurance that we will be successful in addressing these issues or that, even if
these issues are addressed, we will be successful in the marketplace. In
addition, products or technologies developed by others may render our services
noncompetitive or obsolete. Our failure to address these issues successfully
could cause our revenues to decrease and impede our growth.

OUR FAILURE TO RETAIN ANY OF OUR KEY MANAGEMENT PERSONNEL, TO HIRE COMPARABLE
REPLACEMENTS OR TO ENFORCE NON-COMPETE AGREEMENTS AGAINST FORMER MANAGEMENT
MEMBERS COULD HARM THE IMPLEMENTATION OF OUR GROWTH STRATEGIES.

Our success will depend on the continuing efforts of our executive officers
and will likely depend on the senior management of any significant businesses we
acquire in the future. Each of our employment agreements with certain of our
present and former senior management and other key personnel provides that the
employee will not compete with us during the term of the agreement and following
the termination of the agreement for a specified term (ranging from one to three
years). In most states, however, a covenant not to compete will be enforced only
to the extent it is necessary to protect a legitimate business interest of the
party seeking

19

enforcement, does not unreasonably restrain the party against whom enforcement
is sought and is not contrary to the public interest. This determination is made
based on all the facts and circumstances of the specific case at the time
enforcement is sought. Thus, there can be no assurance that a court will enforce
such a covenant in a given situation. Failure to retain any of our key
management personnel and to attract and retain qualified replacements could harm
the implementation of our growth strategies.

OUR CERTIFICATE OF INCORPORATION AND DELAWARE LAW CONTAIN ANTI-TAKEOVER
PROVISIONS THAT COULD DETER TAKEOVER ATTEMPTS, EVEN IF A TRANSACTION WOULD BE
BENEFICIAL TO OUR STOCKHOLDERS.

Our certificate of incorporation, as amended, and provisions of Delaware law,
could make it difficult for a third party to acquire us, even though an
acquisition might be beneficial to our stockholders. Our certificate of
incorporation authorizes our board of directors to issue, without stockholder
approval, one or more series of preferred stock having such preferences, powers
and relative, participating, optional and other rights (including preferences
over the common stock with respect to dividends, distributions and voting
rights) as our board of directors may determine. The issuance of this
"blank-check" preferred stock could render more difficult or discourage an
attempt to obtain control of our Company by means of a tender offer, merger,
proxy contest or otherwise. In addition, our certificate of incorporation
contains a prohibition of stockholder action without a meeting by less than
unanimous written consent. This provision may also have the effect of inhibiting
or delaying a change in control of our Company.

INFLATION

Due to the relatively low levels of inflation experienced in the last three
years, inflation did not have a significant effect on the results of operations
of any of the Founding Companies or BrightStar in those periods.

UNCERTAINTIES

Nature of Projects

Periodically, the Company enters into contracts which are billed on a fixed
fee basis. The Company's failure to estimate accurately the resources and
related expenses required for a fixed fee project or failure to complete
contractual obligations in a manner consistent with the project plan upon which
the fixed fee contract is based could have a material adverse effect on the
Company.

Many of the Company's engagements involve projects that are critical to the
operations of its clients' businesses and provide benefits that may be difficult
to quantify. The Company's failure or inability to meet a client's expectations
in the performance of its services could result in a material adverse change to
the client's operations and therefore could give rise to claims against the
Company or damage the Company's reputation. In addition, the Company is exposed
to various risks and liabilities associated with placing its employees and
consultants in the workplaces of others, including possible claims of errors and
omissions, misuse of client proprietary information, misappropriation of funds,
discrimination and harassment, theft of client property, other criminal activity
or torts and other claims. While BrightStar has no outstanding claims of this
type at this time, there can be no assurance that the Company will not
experience such claims in the future. If claims are successfully brought against
the Company as a result of the Company's performance on a project, or if the
Company's reputation is damaged, there could be a material adverse effect on the
Company. Additionally, the Company could continue to experience adverse effects
resulting from the integration of acquired companies.

Reorganization

We have undergone significant managerial and operational changes in
connection with our recent corporate reorganizations. Although we believe the
reorganizations will provide long-term benefits, there can be no assurance that
these efforts will be successful. In addition, although the Company believes it
has recognized substantially all of the costs of the reorganization, additional
costs may be incurred as the reorganization proceeds.

ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of loss that may impact the financial
position, results of operations or cash flows of the Company due to adverse
changes in market prices and rates. The Company in the year ended 2001 and
previous years was exposed to market risk because of changes in foreign currency
exchange rates as measured against the U.S. dollar and currencies of the
Company's subsidiaries and prior operations in Australia. In 2001 this risk was
associated only with the contingent realization of an earn-out

20

provision associated with the sale in 2000 of our Australian subsidiary. There
was no realization of the earn-out provision in the year ended 2001.

The Company's credit facility with Comerica Bank bears interest at variable
rates; therefore, the Company's results of operations would only be affected by
interest rate changes to the bank debt outstanding. An immediate 10 percent
change in interest rates would not have a material effect on the Company's
results of operations over the next fiscal year.

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements are included as an exhibit as
described in Item 14.

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

None

PART III

Pursuant to Paragraph G(3) of the General Instructions to Form 10-K,
portions of the information required by Part III of Form 10-K are incorporated
by reference from the Company's Proxy Statement to be filed with the Commission
in connection with the 2002 Annual Meeting of Stockholders ("the Proxy
Statement").

ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

For information with respect to Directors and Executive Officers, see Part
I of this Annual Report on Form 10-K.

ITEM 11: EXECUTIVE COMPENSATION

The following table contains information concerning compensation earned by
the Chief Executive Officer and the next four highly compensated officers of
BrightStar for 2001.

SUMMARY COMPENSATION TABLE

For the year ended December 31, 2001, Mr. Wagda and Mr.Czaja were awarded
bonuses of $45,000 and $15,000 respectively. Mr. Wagda and Mr. Czaja elected to
receive 750,000 and 250,000 shares of the Company's common stock, respectively,
effective February 15, 2002, as full payment of the bonuses.

Mr. Wagda's salary amount for the year ended December 31, 2000, consists of
amounts earned while he was an independent contractor to the Company. Mr. Wagda
became an employee of the Company in the year ended December 31, 2001.

Mr. Murphy's salary includes $125,000 as severance payments based on a
settlement agreement reached with Mr. Murphy. Included in Mr. Murphy's bonus is
$100,000, which was a signing bonus for joining the Company. The bonus also
includes $44,000, which represents the fair market value of 100,000 shares of
common stock issued to Mr. Murphy in connection with the commencement of his
employment with the Company.

Mr. Turner's base salary amount includes one month of severance of $17,500.
The remaining $125,000 amount payable under his separation agreement was paid in
2002.

The employees identified in the above table were all hired in 2001.

21

STOCK OPTIONS

The following table contains information concerning the grant of stock
options to each of our named executive officers included in the Summary
Compensation Table during 2001 (under our 2000 and 1997 plans and outside the
plans).

STOCK OPTION GRANTS IN LAST FISCAL YEAR

(1) Based on Black-Scholes model and assumes a risk free interest rate of 5.50%,
price volatility of 114% and a dividend yield of 0%.

(2) On February 15, 2002, the compensation committee voted to take actions that
resulted in restricted stock awards to Mr. Wagda and Mr. Czaja of 750,000
and 250,000 shares, respectively. In return for the granting of these
shares, all stock options previously granted to Mr. Wagda and Mr. Czaja
totaling 780,060 and 500,000 shares (including 300,000 option shares granted
to Mr. Czaja on February 12, 2002), respectively, were cancelled. The
restricted stock grants were issued inside the Company's 1997 and 2000 Long
Term Incentive Plans ("the Plans") and vest monthly over a 2-year period.
The compensation committee also voted to issue fully-vested restricted stock
outside the Plans to Mr. Wagda and Mr. Czaja of 750,000 and 250,000 shares,
respectively, in full satisfaction of cash bonuses awarded for 2001.

(3) Upon the separation of Mr. Turner and Mr. Murphy, all options previously
granted were cancelled.

AGGREGATED OPTION EXERCISES IN 2001 AND YEAR-END OPTION VALUES

The following table sets forth information for each of our named executive
officers included in the Summary Compensation Table with respect to options to
purchase our Common stock held as of December 31, 2001.

- ----------

(1) No stock appreciation rights (SARs) were outstanding during 2001

(2) The fair market value of our common stock at the close of business on
December 31, 2001 was $0.06 per share.

(3) Options expired upon termination of employment.

22

EMPLOYMENT AGREEMENTS

Mr. Wagda performed services for the Company in 2000 and 2001 subject to a
contract between the Company and Altamont Capital Management Inc. ("Altamont"),
a company controlled by Mr. Wagda. The Company owed Altamont $101,130 for
services performed by Mr. Wagda through September 15, 2000. This obligation was
subsequently satisfied by converting the debt into convertible notes issued
pursuant to the terms of the private placement completed on July 26, 2001. From
September 16, 2000, the Company paid a retainer of $20,000 per month for the
first 80 hours of Mr. Wagda's services each month. For each hour in excess of 80
hours per month, Mr. Wagda received 300 options to purchase common stock at
$1.00 per share. The agreement with Altamont was terminated in January 2001, at
which time Mr. Wagda became an employee of the Company, effective February 1,
2001. Mr. Wagda's agreement with the Company provided for a base salary of
$20,000 per month. In addition, Mr. Wagda was granted 228,210 incentive stock
options to purchase common stock at $1.00 per share, in exchange for 228,210
options previously awarded as non-qualified options. Mr. Wagda was granted a
total of an additional 101,850 options in February and March 2001. Effective May
1, 2001, Mr. Wagda's base salary was increased to an annual rate of $275,000 per
year, pursuant to a new agreement. Mr. Wagda was also eligible to receive a
bonus of up to 200% of his cash compensation paid in 2001 at the discretion of
the Board of Directors. Additionally, the Compensation Committee re-priced the
330,060 options earned by Mr. Wagda through March 31, 2001 to a strike price of
$0.29 per share and granted him an additional 450,000 options at a $0.29 strike
price, which vested daily through 2001. Mr Wagda's employment may be terminated
without cause upon three's month notice, subject to a minimum term of employment
through December 31, 2001. On February 15, 2002, Mr. Wagda was given a two-year
employment contract. The terms of the agreement, which are being finalized,
include annual salary compensation of $300,000 beginning May 1, 2002 and
$350,000 beginning May 1, 2003, 12 months severance if terminated without cause
or upon a change of control, the grant of the restricted stock and the surrender
of all existing options described earlier and a bonus of up to 200% of base
salary based on the achievement of specified performance goals. Mr. Wagda is
eligible to participate in all of the Company's employee benefit plans.

Mr. Ober entered into an Executive Employment Agreement in connection with
our initial public offering. Mr. Ober resigned effective October 2, 2000. In
discharge of its severance obligations to him, the Company paid Mr. Ober
$125,000 in cash in 2000 and issued him a long-term note for $175,000 as of
January 11, 2002. The note is an unsecured obligation that accrues interest at
6.5% per month, with principle and accrued interest payable on January 2, 2005.

Mr. Murphy entered into a three-year employment contract with the Company on
January 16, 2001. Mr. Murphy was separated from the Company on October 2, 2001.
Mr. Murphy received a cash payment in 2001 in the amount of $125,000 in
satisfaction of all severance amounts payable under his original employment
contract.

Mr. Turner entered into a three-year employment contract with the Company on
January 16, 2001. Mr. Turner was separated from the Company on November 30,
2001. Mr. Turner received cash payments in 2001 and 2002 totaling $142,500 in
satisfaction of all severance amounts payable under his original employment
contract.

Mr. Christeson entered into an employment agreement with the Company in
April 1999. The agreement provided for a base salary of $165,000, and a bonus of
up to 30% of his base salary, if certain individual and Company objectives are
met. Mr. Christeson resigned effective April 30, 2001. At the time of Mr.
Christeson's separation from the Company, he was granted 25,000 options with an
exercise price of $0.30 per share, subject to certain vesting provisions. Mr.
Christeson forfeited his then existing 75,000 options pursuant to the provisions
of his option agreement.

Mr. Czaja entered into an employment agreement with the Company in April
2001. Mr. Czaja's agreement provided for a base salary of $175,000. Effective
May 1, 2002, Mr. Czaja's annual salary will be $200,000. Mr. Czaja also is
eligible to receive a bonus of up to a total of 50% of his base salary based
upon the achievement of certain operating results of the Company. Mr. Czaja's
employment may be terminated without cause upon six month's notice and is
entitled to six months severance if terminated upon a change of control.

ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table contains certain information regarding beneficial
ownership of our common stock as of March 21, 2002 by (i) persons known to us to
be the beneficial owner of more than 5% of our common stock, and their
respective addresses (ii) each of our current directors, (iii) the Chief
Executive Officer and each of our other executive officers, and (iv) all
directors and executive officers as a group.

23

- ----------

o Less than 1%

(1) Represents shares held directly and indirectly and with sole voting and
investment power, except as noted, or with voting and investment power
shared with a spouse.

(2) Each of Harlan B. Korenvaes, Kenneth M. Hirsh, Laurence H. Lebowitz, William
E. Rose, Richard L. Booth, David C. Haley and Jamiel A. Akhtar may be deemed
to have voting control as the members of HBK Management LLC, the general
partner of HBK Partners II L.P., which is the general partner of HBK
Investments L.P. HBK is the investment management company for Montrose
Investments Ltd.

(3) Includes immediately exercisable options to purchase 150,000 shares of
common stock, for Ms. Barrett, Mr. Zwahlen and Mr. Hudgins.

(4) Includes options that will be exercisable immediately or within 60 days to
purchase 25,000 and 38,889 shares of common stock for Messrs. Christeson and
Krause, respectively. It includes convertible common stock of 671,108,
359,972, 157,487, 44,997 and 112,492 for Messrs. Wagda, Murphy, Turner,
Czaja and Krause, respectively. It also includes common stock warrants in
conjunction with the convertible notes of 100,638, 53,996, 23,624, 6,750 and
16,544 for Messrs. Wagda, Murphy, Turner, Czaja and Krause, respectively.
Mr. Christeson resigned from the Company in April, 2001.

ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company was obligated to pay Altamont Capital Management, Inc.
("Altamont"), a company wholly owned by Joseph A. Wagda and his spouse, $101,130
for services performed by Mr. Wagda as a consultant to the Company prior to Mr.
Wagda joining the Company as Chief Executive Officer. This debt was satisfied in
July 2001 by converting it into a convertible note payable, as part of the
Company's private placement offering completed on July 26, 2001.

In December 2000, the Company became obligated to pay to Strong River
Investments, Inc. and Montrose Investments Ltd. approximately $900,000, in the
aggregate, in respect of certain registration obligations of the Company. This
debt was satisfied in December 2001 by paying a cash settlement in the amount of
$100,000 for the total release of this claim.

As part of the private placement completed on July 26, 2001 members of
senior management, including Messrs Wagda, Czaja and Krause participated in the
offering. Notes held by Messrs. Wagda, Czaja, Krause and Altamont totaled
approximately $186,000.

24

PART IV

ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

1. Consolidated Financial Statements

The following financial statements and notes thereto, and related
Independent Auditors Report, are filed as part of this Form 10-K as follows:

Independent Auditors' Reports

Consolidated Balance Sheets at December 31, 2001 and 2000.

Consolidated Statements of Operations for the Years Ended December 31,
2001, 2000 and 1999.

Consolidated Statement of Stockholders' Equity for the Years Ended
December 31, 2001, 2000 and 1999.

Consolidated Statements of Cash Flows for the Years Ended December 31,
2001, 2000 and 1999.

Notes to Consolidated Financial Statements.

2. Financial Statement Schedule

The following financial statement schedule of the Company and the related
Independent Auditors Report are filed as part of this Form 10-K.

[X] Schedule II -- Valuation And Qualifying Accounts

All other financial statement schedules have been omitted because such
schedules are not required or the information required has been presented in the
aforementioned financial statements.

3. Exhibits

The exhibits listed in the accompanying index to exhibits are filed or
incorporated by reference as part of this Annual Report on Form 10-K.

(b) Reports on Form 8-K

The Company filed a current report on Form 8-K on August 2, 2001, which
announced the $1.1 million private placement and extension of the bank
credit facility.

25

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form 10-K and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Pleasanton, State of California, on the 27th day of March 2002.

BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.

By: /s/ Joseph A. Wagda
----------------------------------------------
Joseph A. Wagda
Chief Executive Officer
(Principal Executive Officer)

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on March 27, 2002:

26

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders
BrightStar Information Technology Group, Inc.

We have audited the accompanying consolidated balance sheets of BrightStar
Information Technology Group, Inc., a Delaware corporation, as of December 31,
2001 and 2000, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of BrightStar
Information Technology Group, Inc. as of December 31, 2001 and 2000, and the
consolidated results of its operations and its consolidated cash flows for each
of the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1 to
the financial statements, the Company's recurring losses from operations and
resulting continued dependence on external sources of financing, the
availability of which is uncertain, raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

/s/ GRANT THORNTON LLP

San Jose, California
February 15, 2002, except for the information
in the last paragraph of Note 7, as to which
the date is March 26, 2002.

27

BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

See notes to consolidated financial statements.

28

BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

See notes to consolidated financial statements

29

BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)

See notes to consolidated financial statements

30

BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

See notes to consolidated financial statements

31

BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:

See notes to consolidated financial statements

32

BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation -- BrightStar Information Technology Group, Inc., (the
"Company" or "BrightStar") is a provider of application outsourcing and system
integration services.

The Company's financial statements have been presented on the basis that it
is a going concern, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. For the years
ended December 31, 2001, 2000, and 1999, the Company incurred losses from
continuing operations of $3,911, $58,228, and $2,568, respectively.
Additionally, at December 31, 2001, the Company had an accumulated deficit of
$91,397 and negative working capital of $2,201. The Company believes that its
continuing focus on aligning its cost structure with its existing revenue base
will result in the attainment of profitable operations and positive cash flows.
In addition, the Company currently is negotiating with financial institutions to
replace its line of credit with Comerica Bank, which matured on January 25, 2002
Comerica declared the Company to be in default of its loan due to a remaining
outstanding balance on that date. Subsequently, Comerica has agreed to forebear
on taking any action to collect on the loan and has agreed to allow BrightStar
to borrow against its line of credit until June 30, 2002. However, Comerica
retains the right to decline to make advances at any time during this period.
The Company believes that it will obtain a credit facility to replace its
Comerica loan that will be sufficient to fund its working capital needs (see
Note 7). If the Company is unable to arrange additional financing, its
operations will likely be substantially harmed, and the Company may be unable to
continue as a going concern.

Principles of consolidation - The consolidated financial statements for the
years ended December 31, 2001, 2000 and 1999 include the accounts of the Company
and its wholly-owned subsidiaries. Companies that had operations for the year
ended December 31, 2001, include BrightStar Information Technology Services,
Inc., BRBA, Inc., (formally B.R. Blackmarr and Associates), BrightStar
Louisiana, Inc., Software Consulting Services of America and Software
Innovators, Inc. All significant inter-company accounts and transactions are
eliminated in the consolidation.

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

Property and equipment -- Property and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation and amortization are
computed using the straight-line method over their estimated useful lives
ranging from three to seven years. Leasehold improvements are amortized over the
shorter of the lease term or the assets' useful life. Expenditures for repairs
and maintenance that do not improve or extend the life of assets are expensed as
incurred.

Goodwill -- Goodwill is the cost in excess of amounts assigned to
identifiable assets acquired less liabilities assumed. Goodwill recorded in
conjunction with the Founding Companies (Companies acquired concurrently with
the closing of BrightStar's initial public offering) and all other acquisitions
in 1998 is being amortized over 40 years on a straight-line basis. Goodwill
associated with the acquisition of ISC in 1999 is being amortized over 20 years
on a straight-line basis. Management determined the twenty-year life for ISC
goodwill based upon the nature of ISC's SAP software consulting practice, along
with the assembled workforce of highly skilled consultants and the demand for
information technology services. The realizability and period of benefit of
goodwill is evaluated periodically to assess recoverability, and, if warranted,
impairment or adjustments to the period benefited would be recognized. Total
amortization of goodwill from continuing operations for 2001, 2000 and 1999
amounted to $352, $1,376 and $1,423, respectively. See the "Recent
pronouncements" paragraph in Note 1 for the treatment of goodwill for the years
beginning on January 1, 2002. See also Note 6.

Income taxes -- The Company accounts for income taxes under Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
SFAS No. 109 requires an asset and liability approach to accounting for income
taxes. The Company provides deferred income taxes for temporary differences that
will result in taxable or deductible amounts in future years. A valuation
allowance is recognized if it is anticipated that some or all of a deferred tax
asset may not be realized. Income tax receivables are recognized for the actual
amounts refundable.

33

Revenue recognition -- The Company provides services to customers for fees
that are based on time and materials or occasionally, fixed fee contracts.
Accordingly, revenue is recognized as consulting services are performed.
Deferred revenue primarily represents the excess of amounts billed over contract
amounts earned.

Concentration of credit risk - Concentration of credit risk is limited to
trade receivables and is subject to the financial conditions of major clients.
The Company does not require collateral or other security to support client's
receivables. The Company conducts periodic reviews of its clients' financial
condition and customer payment practices to minimize collection risk on trade
receivables.

Earnings per share (EPS) --Basic EPS is calculated using income available to
common shareholders divided by the weighted average number of common shares
outstanding during the year. Diluted EPS is computed using the weighted average
number of common shares and potentially dilutive securities outstanding during
the period. Potentially dilutive securities include incremental common shares
issuable upon the exercise of stock options, warrants and conversion of notes
payable. Potentially dilutive securities, consisting of 4,857,537 shares
issuable upon conversion of notes, 912,921 shares issuable upon exercise of
warrants, and 2,304,507 shares issuable upon exercise of stock options as of
December 31, 2001, are excluded from the computation as their effect is
anti-dilutive. Treasury shares of 255,000 at December 31, 2001 have also been
excluded from the computation from the date of reacquisition.

Stock based compensation -- The Company applies Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", in its accounting
for stock options issued to employees and board members. No compensation expense
is recognized for stock options issued to employees under the Company's stock
option plans when the option price for grants equals or exceeds the quoted
market price of the Company's Common Shares at the date of grant. The Company
has adopted the disclosure-only provisions of SFAS No. 123 with respect to
options issued to employees. Compensation expense associated with stock options
and warrants issued to non-employees is recognized in accordance with SFAS No.
123.

Options that are modified are treated as variable awards and accounted for
under Financial Accounting Standards Board Interpretation ("FIN") No. 44. The
Company records any increase of the fair market value of the underlying stock at
the end of each quarter over the repriced stock option price as compensation
expense in the appropriate quarter. As of December 31, 2001, the Company has
recorded no compensation expense for the repriced stock options since the new
exercise prices were above the market price at the end of each quarter in 2001.

Fair value of financial instruments - The carrying amounts of certain
financial instruments, including cash, accounts receivable, accounts payable,
and accrued expenses approximate fair value due to the short-term nature of
these items. The fair value is not readily determinable for the bank credit
facility, legacy liabilities and convertible notes payable, which are
collectively carried at $4,169 and $7,138 as of December 31, 2001 and 2000,
respectively, because of the past due nature of the legacy liabilities and the
lack of comparable credit facilities readily available to the Company.

Recent pronouncements - In July 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141,
"Business Combinations", and SFAS No. 142, "Goodwill and Intangible Assets".
SFAS No. 141 is effective for all business combinations completed after June 30,
2001. SFAS No. 142 is effective for fiscal years beginning after December 15,
2001; however, certain provisions of this Statement apply to goodwill and other
intangible assets acquired between July 1, 2001 and the effective date of SFAS
No. 142. Major provisions of these statements and their effective dates for the
Company are as follows:

- All business combinations initiated after June 30, 2001 must use the
purchase method of accounting. The pooling of interest method of
accounting is prohibited, except for transactions initiated before
July 1, 2001.

- Goodwill, as well as intangible assets with indefinite lives,
acquired after June 30, 2001 will not be amortized. Effective
January 1, 2002, all previously recognized goodwill and intangible
assets with indefinite lives will no longer be subject to
amortization.

- Effective January 1, 2002, goodwill and intangible assets with
indefinite lives will be tested for impairment annually and whenever
there is an impairment indicator.

The Company is required to adopt SFAS 142 as of January 1, 2002. By December
31, 2002 the Company will have completed a transitional fair value based
impairment test of goodwill as of January 1, 2002. The Company has not
determined the effect, if any, of the adoption of the fair value based
impairment test under SFAS 142. Effective January 1, 2002, the Company will no
longer take an amortization expense of approximately $350 per year.

Restatement of prior year financial statements -- As a result of a $643
understatement of income tax refunds receivable, the Company has restated its
December 31, 2000 consolidated financial statements. The adjustment increases
income tax receivable and reduces income tax expense and accumulated deficit at
December 31, 2000. The receivable results from the Company's ability to carry
back net operating losses to years where income taxes were paid, primarily 1998
and 1999. As of December 31, 2001, $538 has

34

been received with the remaining $105 anticipated to be received in the second
quarter of 2002.

The Company has also restated the December 31, 2000 financial statements for
the write-off of the cumulative translation adjustment of $118. The cumulative
translation adjustment, previously reported in the stockholders' equity section
as of December 31, 2000, reflected the unrealized adjustments resulting from
translating the financial statements of the Australian subsidiary. The
adjustment increases the loss on disposal of the Australian operations.

The net effect of these restatements was a $525 decrease to the consolidated
net loss for the year ended December 31, 2000.

Reclassifications -- Certain reclassifications have been made to conform the
prior years' financial statement amounts to the current year classifications.

(2) ACQUISITION

On May 28, 1999, the Company purchased Integrated Systems Consultants, LLC
("ISC") pursuant to an Asset Purchase Agreement (the "Agreement"), dated as of
April 1, 1999. ISC is a provider of SAP consulting services based in Phoenix,
Arizona. The aggregate consideration for this transaction was $3,000, of which
$500 was paid in cash upon closing and $2,500, which consisted of $1,500 due in
June 2000 and $1,000 of contingent consideration paid subject to achievement of
ISC earnings up through the twelve months ended March 31, 2000, was paid through
the issuance of 668,468 shares of common stock in June 2000. The $1,000
contingent consideration was treated as an addition to the purchase price per
APB No. 16, "Business Combinations". The Company has allocated the entire
purchase price and other acquisition costs to goodwill. The purchase of ISC was
an asset purchase agreement only. Other than goodwill, the only assets acquired
were insignificant, consisting of two laptop computers and some consulting
services contracts. Management determined that the nature of the acquisition of
ISC was consistent with the objective started when the Company was created in
April 1998. ISC was acquired to add to the critical mass of highly skilled
consulting professionals able to perform information technology services in a
variety of applications. The demand for such qualified technical professionals
outstripped supply at that time. During the period when the acquisition was
consummated, the demand for IT services was peeking as a result of a variety of
factors, including the Year 2000 issue. The ISC acquisition was therefore a
strategic acquisition for BrightStar. Consequently, management deemed the
purchase price of ISC to be solely related to the intangible skills of the
consultants and attributed the purchase price accordingly. The pro forma results
of operations, assuming the acquisition occurred on January 1, 1999, would not
be materially different from the operating results reported.

Acquisition payables, which are included on the balance sheet in the account
"Corporate legacy liabilities", (see Note 9), consists of the following as of
December 31,

The Cogent acquisition liability, relating back to the purchase of Cogent on
June 30, 1998 which consisted of the purchase price along with severance
agreements for three of the original employees of Cogent, was settled in 2001 by
issuing 1,270,000 shares of common stock, at a fair market value of $0.88 per
share in full satisfaction of the amount owed to the owners of Cogent for the
original purchase. Of the 1,270,000 shares, 250,000 shares related to shares
being issued under certain registration rights agreements. The $500 accrual
relating to the Prosap acquisition as of December 31, 2000 was settled for $155.

(3) DISCONTINUED OPERATIONS

In October 1999, the Company's management approved a plan to discontinue the
operations of its Training, Controls and Infrastructure Support businesses. Each
of the underlying businesses were acquired by the Company as part of its IPO in
April 1998. The Company believes that the continued investment in the Training,
Controls, and Infrastructure Support businesses is not consistent with its
long-term strategic objectives. Accordingly, these businesses are reported as
discontinued operations and the consolidated financial statements have been
reclassified to segregate operating results and net assets of the businesses.
Managements' plan to discontinue the operations of each of the businesses
includes the following:

35

Training Business

In completing the sale and closure of the training business, the Company:

o Sold Mindworks Professional Education Group, Inc. (Mindworks), to its
former owners. The sale of Mindworks was completed in December 1999 for
approximately $1,100. The Company recorded a pre-tax loss on the sale of
Mindworks of $900 ($1,000 or $0.12 per share including taxes). The loss
includes the associated write-off of net goodwill totaling $1,600.

In conjunction with the sale of Mindworks back to the original owners,
the Company has two outstanding notes (Note A & B) with them for a total
of $270. Note A is for $120, which has a principal payment due in
November 2002 and requires monthly interest payments of $1. Note B is
for $150 and is due and payable in November 2004. Both notes carry an
interest rate of 10.25%. The Company has received the monthly interest
payments due under Note A and recorded them as interest revenue. The
Company has no recourse against the buyers of Mindworks in case of
nonpayment of the notes. Therefore, the Company has recorded an
allowance to offset these notes until the Company can determine if these
notes are collectible.

o Closed its training business in Texas in October 1999. The Company
recorded no gain or loss upon closing the Texas training operations.

Controls Business

The Company sold its Controls Business, which was a component of Integrated
Controls, Inc., in September 2000. In 1999, the Company recorded an estimated
pre-tax loss on the disposal of the Controls business of $5,100 ($5,800
including taxes, or $0.67 per share) including a provision of $800 for estimated
operating losses until disposal. In 2000, the Company recorded a charge of $900
associated with the sale. In 2001, the Company recorded a net gain of $17
associated with the settling of accounts receivable balances remaining from
2000. Subsequent to the sale of the Controls Business, the Company changed the
name of Integrated Controls, Inc. to BrightStar Louisiana, Inc.

Infrastructure Support Business

The Infrastructure Support Business was engaged in hardware sales and
consulting services relative to systems infrastructure and security. The Company
recorded no gain or loss on the discontinuance of the business in December 1999.

Summary operating results and financial data for the discontinued operations
for 2001, 2000 and 1999 are as follows:

(4) BUSINESS RESTRUCTURING

In June 2000, the Company announced that it was realigning its operations to
improve operating margins by reducing expenses associated with underutilized
office space and personnel.

As a result of the realignment, the Company recorded a restructuring charge
of $2,525 in the second quarter of 2000. Of the total charge, approximately
$1,000 was reserved for ongoing lease obligations for facilities that were
closed and $500 was recorded to write-down related fixed assets. The remainder
of the charge relates to the severance of approximately 90 employees, or 15% of
the

36

Company's workforce. Approximately $1,700 of the charge applies to obligations
funded by cash disbursements, of which approximately $1,000 was disbursed for
severance and $300 was disbursed for rents during 2000. The remaining charge
relates to longer term severance obligations and related costs amounting to
$200, and $700 of rents, net of sublease income, to be paid related to leases
which expire through April 2003. During the fourth quarter of 2000, the Company
reduced the restructuring reserve by $288 resulting from favorable lease
settlements.

Beginning in the third quarter and continuing into the fourth quarter of
2001, the Company continued with year-over-year reductions in selling, general
and administrative expenses, which were the result of the execution of the
austerity plan adopted in the third quarter of 2001. The restructuring included
reductions in office space, sales personnel and related costs, management
overhead and discretionary expenses. For the year 2001, the Company incurred
approximately $2,011 of additional restructuring costs, (consisting of
approximately $448 relating to employee costs for approximately 30 employees,
including severance obligations, and $1,563 relating to losses on the write-down
or disposal of nonessential equipment, the write-offs of leasehold improvements
and office closures expenses, including accelerated expenses from lease
terminations) as a result of actions taken by the Company to reduce its expense
base in response to the general reduction in business levels, as well as the
specific loss of a significant customer that filed for bankruptcy.

The activity and ending balances for the restructuring reserve accrual
consist of the following as of December 31:

The categories of the remaining restructuring reserve accrual consist of the
following as of December 31:

The amounts listed above are included in the following accounts to conform
to the current year presentation as of December 31:

Restructuring amounts charged to earnings consist of the following for the
years ended December 31:

Also, as part of the Company's restructuring plan, on December 13, 2000, the
Company completed the sale of its Australian subsidiary, BrightStar Information
Technology, Ltd., for A$10,000 (US $5,500). Of the total purchase price, A$2,500
(US $1,400) was paid upon closing, with the remainder due upon completion of a
contingent earn-out for the twelve month period ended December 31, 2001. The
sale of the company resulted in essentially no gain or loss. No consideration
from the earn-out provision was recorded as part of the original sale. In
anticipation of this sale, the Company recorded a $22,600 charge to write down
Australian goodwill in the third quarter of 2000. All other assets of the
Australian company were written off the books when the Australian company was
sold in the fourth quarter of 2000.

37

(5) PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

During the fourth quarter of 2001, the Company incurred a loss on the
disposal of fixed assets of approximately $740 relating to the closures of
office space and the subsequent write-off of leasehold improvements and the
selling of non-essential computer equipment and furniture. This loss is before
proceeds of $9 received from the sale of the equipment. The loss on the
disposals was a result of the restructuring plan and therefore is included in
the restructuring costs recorded in the fourth quarter of 2001 (see Note 4).

(6) GOODWILL

Goodwill consists of the cost in excess of amounts assigned to identifiable
assets acquired, less liabilities assumed. The realizability and period of
benefit of goodwill is evaluated periodically to assess recoverability, and, if
warranted, impairment or adjustments to the period benefited are recognized.

During 2000, the Company reduced the carrying value of its remaining
goodwill to $12,000. In evaluating goodwill impairment, the Company segregated
enterprise level goodwill from goodwill attributable to specific assets.
Goodwill attributable to specific assets was written-off in connection with the
disposal of the Australian subsidiary's assets and closure of Cogent
Technologies LLC. In total, the specific write-offs amounted to $24,000, of
which $1,400 and $22,600 related to Cogent and Australia, respectively. The
remaining goodwill of approximately $32,400 was deemed to be enterprise level
goodwill as it relates to the remaining U.S. operations, which is operated as a
single, integrated business unit. Enterprise level goodwill was deemed impaired
due to the deterioration in the Company's business, the overall declining market
for information technology services, including project-based ERP and e-commerce
services, and also the reduction in the Company's workforce, backlog, and its
falling common stock share market price. In considering the methodology to
assess the carrying value of enterprise level goodwill, management evaluated it
using the market value approach and an undiscounted cash flows approach. The
market value approach was deemed preferable based upon the uncertainty of the
cash flows at the time. Under the market value approach, management used the
trading price of the Company's common stock around the December 31, 2000
financial statement date. This analysis yielded a market value for the
enterprise level goodwill of approximately $12,000, (approximately 12 million
shares outstanding at $1 per share), resulting in the $18,400 impairment charge
taken in 2000. Management deemed it unnecessary to reduce the amortization
period for the goodwill based upon the long-term need for the information
technology services provided by the Company.

For the year ended December 31, 2001, the Company has considered if there
has been any current impairment of goodwill. Company management performed its
analysis of future cash flows based on the benefits of cost reductions recently
implemented and future projected revenue levels assuming various levels of
growth, including a 10% per year revenue-growth case. Based on this analysis the
Company believes that the current value of goodwill is recoverable, and
therefore no impairment has been incurred in 2001 and no adjustment was
necessary.

(7) CREDIT FACILITY

Effective March 29, 1999, the Company established a $15,000 credit facility
(the "Credit Facility") with Comerica Bank. Under the terms of the agreement,
the Credit Facility would be used for working capital needs, including issuance
of letters of credit, and for general corporate purposes. Borrowings under the
Credit Facility bore an interest rate of prime plus 0.25%. The Company paid a
commitment fee on unused amounts of the Credit Facility amounting to 0.375% per
annum based on the average daily amount by which the commitment amount exceeded
the principal amount outstanding during the preceding month. Interest was
payable monthly on prime rate borrowings and quarterly or at the end of the
applicable interest period for the Eurodollar rate borrowings.

The Credit Facility was secured by liens on substantially of all the
Company's assets (including accounts receivable) and a pledge of all of the
outstanding capital stock of the Company's domestic operating subsidiaries. The
Credit Facility also required that the Company comply with various loan
covenants, including (i) maintenance of certain financial ratios, (ii)
restrictions on additional indebtedness and (iii) restrictions on liens,
guarantees and payments of dividends. As of, and during the year ended December
31, 2000, the Company was not in compliance with certain financial covenants.
Comerica Bank waived the defaults.

38

The Credit Facility expired on March 31, 2001. Upon expiration of the
Credit Facility, Comerica Bank agreed to continue lending to the Company under
the terms of a $3,000 Demand Note, secured by liens on substantially all the
Company's assets (including accounts receivable) and a pledge of all of the
outstanding capital stock of the Company's domestic operating subsidiaries. The
Demand Note carried interest at the Bank's prime rate (4.75% at December 31,
2001), plus 4%. Available borrowings under the Demand Note are reduced monthly
by 2% of eligible accounts receivable. On July 26, 2001, the Demand Note was
converted to a term note having a maturity of January 25, 2002. Comerica also
adjusted the covenants pertaining to the line of credit to consist of only one
covenant; at all times the Company must maintain an effective net worth of not
less than $9,000. Effective net worth is defined as the borrower's net worth
defined by GAAP plus the principal amount of the subordinate debt outstanding.
As of December 31, 2001, the Company was in compliance with the bank's covenant
requirements. Since there was an outstanding balance on the line as of January
25, 2002, Comerica declared the Company to be in default under the terms of the
agreement. However, Comerica has subsequently agreed to forebear on any actions
to collect the outstanding balances and to allow the Company to borrow under the
loan until June 30, 2002, subject to certain conditions. Effective March 26,
2002, available borrowings under this newly extended arrangement are to start at
60% of eligible accounts receivable, after reduction for ineligible accounts,
with subsequent reductions of 2% each month starting in May 2002. The total
borrowing base after reductions for ineligible accounts and the borrowing base
percentage is limited to a maximum of $850. Comerica retains the right to
decline to make advances at any time during this period. The interest rate on
outstanding balances is prime plus 4% as of January 25, 2002, and will increase
by an additional 1% per month, beginning February 2002. Total eligible accounts
receivable as of December 31, 2001 amounted to $1,732.

(8) ACCRUED SALARIES AND OTHER EXPENSES

Accrued salaries and other expenses consist of the following:

(9) CORPORATE LEGACY LIABILITIES

Corporate Legacy Liabilities consists of non-operating accounts payable that
were incurred when the Company had a substantially higher volume of revenue and
expense activity and generally relate to liabilities for contracts that were
entered into in years prior to 2001. Due to the Company's financial situation,
the Company is currently in the process of restructuring these payables by
offering a restructuring plan to the creditors. Corporate legacy liabilities are
split between the long-term and short-term classifications depending on which
option the creditor has accepted. At December 31, 2001 approximately $404 of
legacy liabilities unrelated to the Company's insolvent subsidiary remained to
be restructured.

Corporate legacy liabilities consist of the following as of December 31:

Promissory notes were issued in conjunction with the Company's restructuring
of the legacy liabilities. The notes are unsecured long term notes that accrue
interest at 6.5% per annum. Principal and interest are due on January 3, 2005.
In the chart above, these notes are considered to be long-term liabilities. In
addition, 70% of the amount due legacy liability creditors who elected to
receive such a promissory note under certain conditions is also classified as a
long-term liability. All other amounts due legacy liability creditors, including
30% of the amount due those legacy liability creditors who elected to receive
promissory notes under certain conditions, are classified as short-term
liabilities.

39

Included in the December 31, 2000 balances was an amount payable to a
stockholder for $900. During the year ended 2000, the Company became obligated
to pay selected investors approximately $900, in the aggregate, which represents
penalties for failure to perform certain obligations relating to registration
with the SEC of common stock acquired in connection with their original
investments. This liability was settled in the fourth quarter of 2001 for $100
and the resulting gain was recorded as an extraordinary gain on the early
extinguishments of debt. See also Note 12.

(10) LEGACY LIABILITIES OF INSOLVENT SUBSIDIARY

Legacy liabilities of insolvent subsidiary relate to amounts owed by one of
the Company's subsidiaries, BRBA, Inc ("BRBA"). BRBA ceased operations in the
fourth quarter of 2001 and is insolvent. BRBA has one remaining asset of
potentially material value, a bankruptcy claim against one of its customers for
cancellation of a data processing center agreement. This claim is one of many
unsecured claims against BRBA's customer and it is unlikely that the customer
will be able to pay more than a small amount, if any, in respect of these
claims. The Company has not recorded an asset related to the claim. All of
BRBA's assets are collateral for obligations owed to Comerica under the
Company's credit facility. BRBA has liabilities of approximately $8,700,
including the liabilities reported on the balance sheet, $1,467, as well as an
inter-company payable to its BrightStar parent, of approximately $7,200. This
inter-company payable is eliminated in the consolidation.

The Office of the Comptroller of Public Accounts in the state of Texas is
currently auditing BRBA for potential sales tax liability for the years ending
1997 through 2000. The Comptroller's office filed a preliminary audit findings
report in December 2001 for approximately $7,000, including approximately $2,000
in penalties and interest. The tax assessment was, in effect, based on all of
the subsidiary's revenues. This preliminary assessment was prepared by the
Comptroller's office without having reviewed all the appropriate documentation.
The Company has subsequently obtained access to most of the required documents
of BRBA and the Company has filed a request for re-determination and appeal with
the state of Texas on behalf of BRBA. Management estimates the actual net BRBA
sales tax liability to be approximately $600.

Legacy liabilities of insolvent subsidiary consist of the following as of
December 31:

(11) CONVERTIBLE NOTES PAYABLE, NET

Convertible notes payable, net consists of the following as of December 31,
2001:

Series 1 Convertible Subordinated Promissory Notes $ 1,118
Less fundraising and warrant costs:
Fundraising costs, net of amortization
47
Warrant costs associated with convertible notes, net of
amortization 123
----------
Subtotal fundraising costs 170
----------
Notes payable, net $ 948
==========

On July 26, 2001, the Company completed a private placement through the
issuance of approximately $1,100 of convertible notes, (Series 1 Convertible
Subordinated Promissory Notes) to a group of investors, including members of
BrightStar senior management. Related party notes from current senior management
totals $186. The notes are secured on a junior basis by substantially all of the
assets of the Company and its operating subsidiaries, and are convertible into
common stock, at the option of the investors, at a fixed price of $0.23 per
share, subject to anti-dilution provisions. In addition, the investors received
approximately 718,000 warrants, exercisable at $0.50 per share. The notes are
mandatorily convertible, at the Company's option, into common stock at $0.23 per
share, subject to anti-dilution provisions, if; (i) the market price of the
Company's common stock, determined on a 20-day moving average basis, equals or
exceeds $0.50; and (ii) the investor may lawfully sell all of the common stock
issuable upon conversion and the common stock issuable upon exercise of Warrants
held by the investor, either under an effective registration statement, or under
Rule 144; and (iii) at least $2,300 of legacy liabilities have been
restructured. The notes are entitled to simple interest calculated at a rate

40

per annum equal to 8%. For the first year from the date of the notes, interest
may be paid at the option of the Company by issuing additional convertible debt
with the same terms as above. The Company chose to do this for the interest due
on the notes from inception through December 31, 2001. In addition, 70,000
warrants were issued to the placement agent for the transaction at an exercise
price of $1.00 per share. Warrants issued to investors were valued at $142 under
the provisions of APB No.14 and EITF 00-27, and will be amortized as additional
interest expense over the life of the debt. Amortization expense for the year
ended December 31, 2001 amounted to $19.

(12) EXTRAORDINARY GAINS

Extraordinary gains recorded in 2001 relate to the early extinguishment of
debts. The Company was able to settle legacy liabilities for cash payments
totaling $255, resulting in a extraordinary gain of $1,157, including the
settlement of the $900 stockholders payable and the $500 Prosap obligation.

(13) STOCKHOLDERS' EQUITY

Capital Stock

Authorized capital shares of the Company include 3,000,000 shares of
preferred stock and 35,000,000 shares of common stock. Rights, preferences and
other terms of the preferred stock will be determined by the board of directors
at the time of issuance. No preferred stock was outstanding at December 31,
2001.

Common Stock Warrants and Options

Stock Options -- During 1998 and 2000, the 1997 and 2000 Long-Term Incentive
Plans (the "Plans") were established, which provide for the issuance of
incentive and non-qualified stock options, restricted stock awards, stock
appreciation rights or performance stock awards. The total number of shares that
may be issued under the Plans is 4,000,000 shares, of which only 3,930,000
shares may be granted for incentive stock options and 70,000 for nonqualified
stock options. Options, which constitute the only issuance under the incentive
plans as of December 31, 2001, have been generally granted at the fair value or
above of the Company's common stock on the date of grant. The Company also
granted stock options to individuals during the year that are considered grants
outside of the Plans. The Plans do not allow the granting of stock options to
independent consultants and therefore such grants are considered outside of the
Plans. The Plans also currently limit the amount of stock options granted to any
one individual in any one year to 200,000 shares. This limit was increased to
1,000,000 shares by the Board of Directors on February 12, 2002. Any grants of
stock options over the 200,000 share limit to any individual are considered
grants outside of the Plans as well. The following table summarizes the Plans'
stock option activity:

(a) 10,000, 170,000 and 2,124,507 options are outstanding at $13.00, $3.00 -
$7.00 and $0.29 - $1.00, respectively.

(b) 10,000, 170,000 and 1,461,840 options are exercisable at $13.00, $3.00 -
$7.00 and $0.29 - $1.00, respectively.

41

Grants outside the Plans consist of 40,000 options with an exercise price of
$1.00 per share to the son of Mr. Wagda, the Company's CEO, who worked as an
independent contractor for the Company on special projects during the fourth
quarter of 2000 and the first quarter of 2001. His compensation consisted of
cash payments of $18,600 for 2001 and the 40,000 options. The remaining options
of 580,060 belong to Mr. Wagda, as part of his compensation package. All of Mr.
Wagda's options were cancelled in connection with the restricted stock issuance
made to him in February 2002.

Pro forma disclosures required under SFAS No. 123 are presented below. The
pro forma compensation cost may not be representative of that expected in future
years.

Compensation cost for 2001, 2000 and 1999 was calculated in accordance
with the binomial model, using the following weighted average assumptions: (i)
expected volatility of 114%, 192% and 110%; (ii) expected dividend yield of 0%
in all three years; (iii) expected option term of 10 years in all three years;
(iv) risk-free rates of return of 5.50%, 6.00% and 5.86%; and (v) expected
forfeiture rates of 38%, 11% and 11%, respectively.

On February 12, 2002, the compensation committee of the board of directors
voted to take actions that resulted in the repricing of approximately 900,000
existing stock options to current employees, included above, and the awarding of
approximately 1,100,000 new options with respect to active participants under
the Company's long-term incentive plans. The exercise price of all affected
options is $0.05 per share, which is based on fair market value as determined by
the Board of Directors based upon the prior 20-day average closing price. The
Company will treat these repriced stock options as variable awards and will
account for them under FIN 44 starting in the first quarter of 2002. According
to FIN 44, the Company will record any increase of the fair market value of the
underlying stock over the repriced stock option exercise price as compensation
expense in the appropriate quarter.

Also on February 15, 2002, the compensation committee voted to take actions
that resulted in restricted stock awards to Mr. Wagda and Mr. Czaja of 1,500,000
and 500,000 shares, respectively. In return for the granting of these shares,
the stock options granted to Mr. Wagda and Mr. Czaja totaling 780,060 and
500,000 options (including 300,000 options granted to Mr. Czaja on February 12,
2002), respectively, were cancelled. The restricted stock grants provided for
half of the stock to be issued in lieu of the cash bonuses awarded for 2001 and
be vested immediately outside the Company's Plans and for the remaining shares
to be issued inside the Plans and to vest monthly over a 2 year period.

Recent Sales of Unregistered Securities.

Set forth below is certain information concerning all issuances of
securities by BrightStar within the past three years that were not registered
under the Securities Act.

1. On January 11, 1999, pursuant to the Agreement and Plan of Exchange (the
"Share Exchange") dated as of December 15, 1997, among BrightStar, BIT Group
Services, Inc. ("BITG"), BIT Investors, LLC ("BITI"), and the holders of the
outstanding capital stock of BITG, the Company issued 11,575 shares of common
stock to the holder of the Series A-1 Class A Units of BITI.

2. On January 11, 1999, BrightStar issued to the beneficiaries of the SCS
Unit Trust an aggregate of 441,400 shares of common stock in consideration of
the transfer to BrightStar by SCS Unit Trust of substantially all the assets of
the SCS Unit Trust.

3. On March 10, 2000, pursuant to an agreement with Strong River
Investments, Inc., and Montrose Investments Ltd. (collectively, the
"Purchasers"), the Company sold to the Purchasers 709,555 shares of the
Company's common stock (the "Shares") for $7,500, or $10.57 per share (the
"Transaction"). In connection with the purchase of the Shares, the Company
issued two warrants to the Purchasers. One warrant had a five-year term during
which the Purchasers could purchase up to 157,500 shares of the Company's common
stock at a price of $12.00 per share. The second warrant covered an adjustable
amount of shares of the Company's common stock. Pursuant to the terms of the
adjustable warrants, the holders thereof elected to fix the number of common
shares issuable under such warrants at 1,525,000 shares in the aggregate. Such
shares were issued on September 29, 2000, at an exercise price of $0.001 per
share. The Company also issued to Wharton Capital Partners Ltd. ("Wharton"), as
compensation for Wharton's services as placement

42

agent in connection with the Transaction, a warrant with a five-year term during
which Wharton may purchase up to 45,000 shares of the Company's common stock at
a price of $12.00 per share.

4. On June 23, 2000, the Company issued 668,468 shares of common stock to
the prior owners of Integrated Systems Consulting (ISC) as payment for the
remaining amount of $2,500 due in connection with the 1999 acquisition of ISC.

5. On January 16, 2001, the prior owners of Cogent Technologies LLC
("Cogent") were issued 1,020,000 shares of our common stock in partial
settlement of a claim by them related to the unpaid balance of the purchase
price for the assets and business of Cogent and amounts due under employment
agreements with us.

6. On February 15, 2001, Kevin J. Murphy was issued 100,000 shares of our
common stock in connection with the commencement of his employment with the
Company.

7. On February 15, 2001, certain of our former employees were issued 346,831
shares of our common stock in satisfaction of remaining severance payment
obligations under prior employment agreements with the Company.

8. On February 15, 2001, Unaxis Trading Limited ("Unaxis") was issued
250,000 shares of our common stock in settlement of litigation between the
Company and certain affiliates of Unaxis. Pursuant to the settlement agreement
(which was agreed upon in principle, on November 3, 2000), if, prior to a sale
of these shares by Unaxis, the Company has not exercised its right to call the
shares for $1.60 per share, Unaxis may exercise its right to put the shares to
the Company for a price of $2.00 per share during the 15 day period commencing
on February 1, 2002. During December 2001, the Company purchased the shares back
from Unaxis for a $120 payment.

9. On May 4, 2001, 257,400 shares of our common stock were issued in
satisfaction of our obligations to pay penalties to them under the terms of
various registration rights agreements. The rest of the Cogent settlement,
consisting of 250,000 penalty shares is included therein.

10. On July 26, 2001, the Company issued and sold approximately $1,100 of
convertible notes to a group of investors, including members of BrightStar
senior management. The notes are convertible into common stock, at the option of
the investors, at a fixed price of $0.23 per share, subject to anti-dilution
provisions. In addition, the investors received approximately 718,000 warrants,
exercisable at $0.50 per share. The notes are mandatorily convertible, at the
Company's option, into common stock at $0.23 per share, subject to anti-dilution
provisions, if: (i) the market price of the Company's common stock, determined
on a 20-day moving average basis, equals or exceeds $0.50; and (ii) the
investors may lawfully sell all of the common stock issuable upon conversion and
the common stock issuable upon exercise of Warrants held by the investor, either
under an effective registration statement, or under Rule 144; and (iii) at least
$2,300 of the past due payables have been restructured. In addition, 70,000
warrants were issued to Brewer Capital Group, LLC, which acted as placement
agent for the transaction, at an exercise price of $1.00 per share. The net
proceeds of this transaction were used for general corporate purposes.

11. In November 2001, the Company engaged a financial advisor to assist the
Company in obtaining additional long-term financing. As part of the financial
advisor's compensation for this engagement, and in addition to a $25 retainer
fee paid to the advisor, the Company has committed to the issuance of warrants
to purchase 100,000 shares of the Company's common stock at an exercise price of
$0.05 per share. These warrants will expire in November 2004.

12. On February 15, 2002, 1,500,000 shares and 500,000 shares of common
stock were issued to Joseph A. Wagda and Kenneth A. Czaja, respectively, in
connection with their employment with the Company.

(14) INCOME TAXES

The components of income (loss) before income taxes from continuing
operations and the related income taxes provided for the years ended December
31, 2001, 2000, and 1999, are presented below:

The Company's deferred tax assets are reflected below as of December 31,
2001 and 2000, respectively:

At December 31, 2001, the Company has a net operating loss carryforward of
approximately $19,000 for federal income tax purposes, which will expire in
years 2018 through 2021. Utilization of the federal operating losses and credits
may be subject to substantial annual limitation due to the "change in ownership"
provisions of the Internal Revenue Code of 1986. The annual limitation may
result in the expiration of net operating losses and credits before utilization.

The table below reconciles the expected U.S. federal statutory tax to the
recorded income tax:

(15) EMPLOYEE BENEFIT PLANS

The Company has a 401(k) plan that covers substantially all of its U.S.
employees. The Company may provide matching contributions of up to 6% of the
employee's base salary. Employees would vest in Company contributions evenly
over five years from their date of employment. Employer matching and profit
sharing contributions are discretionary, and, to date, no matching or profit
sharing contributions have been made.

(16) LITIGATION

As of December 31, 2000, the Company had accrued $600 relating to its
litigation expense. This amount included estimated costs to settle legal claims
related primarily to two separate lawsuits brought against the Company for
damages related to software development and implementation services provided by
the Company. During the third quarter of 2001, the Company was able to relieve
approximately $200 in litigation exposure by negotiating settlements with the
respective parties. As a result of these settlements, the Company incurred an
obligation of approximately $125, which will be paid by the Company in the form
of long-term notes due and payable on January 3, 2005. The difference of
approximately $75 between the amount accrued and the amount settled was recorded
as a gain on settlements in the third quarter. The Company was also able to
settle the remaining lawsuit, which resulted in no cash payment or long-term
liability. The resulting gain of $300 was recorded in the fourth quarter. As of
December 31, 2001, two legal claims were pending, both filed in 2001. One legal
claim is against our insolvent subsidiary, BRBA, Inc., for facility rents and
related costs associated with the early termination of a facility lease. The
initial claim resulted in a default judgment in a court order dated December 21,
2001 in favor of the landlord for approximately $48, which was the

44

amount of the rent owed to the landlord as of the court order date, and the
landlord has indicated that they will be filing additional suits against BRBA as
further rent obligations are not paid. An estimate of this liability of $144 is
included in the Company's consolidated balance sheet as Legacy Liabilities of
Insolvent Subsidiary. The other legal claim is for amounts received as a
so-called preference payment from a former customer who made a bankruptcy filing
in 2000. The Company does not believe the claim has merit and therefore the
Company has not recorded any liability associated with this so-called preference
claim.

As a result of a previous settlement, Unaxis Trading Limited was issued
250,000 shares of the Company's common stock on February 15, 2001. Pursuant to
the settlement agreement, if, prior to a sale of these shares by Unaxis, the
Company had not exercised its right, between January 1, 2002 and February 1,
2002, to call the shares for $1.60 per share, Unaxis may exercise its right to
put the shares to the Company for a price of $2.00 per share during the 15 day
period commencing on February 1, 2002. Unaxis agreed to return the 255,000
shares of common stock to us, including 5,000 additional shares granted to
Unaxis representing penalty shares relating to the registration rights
associated with the settlement, in return for a $120 cash payment. In
satisfaction of this settlement, the Company has incurred an obligation to pay
$50 to its insurance carrier via a long-term note, due and payable on January 3,
2005. During the third quarter, the amount recorded on the books, of
approximately $118, was reclassified from common stock and additional paid in
capital and was recorded as common stock receivable in anticipation of the
completion of this agreement. The Company completed the transaction in December
of 2001 and eliminated the common stock receivable and reclassified the amounts
to treasury stock.

In addition to the litigation noted above, the Company is from time to time
involved in litigation incidental to its business. The Company believes that the
results of such litigation, in addition to amounts discussed above, will not
have a material adverse effect on the Company's financial condition. The
Company's policy is to accrue its estimate of legal defense costs associated
with litigation matters at the time the exposure is identified.

(17) COMMITMENTS AND CONTINGENCIES

The Company leases office space and computer and office equipment under
various operating lease agreements that expire at various dates through December
2005. Minimum future commitments under these agreements for the years ending
December 31 are: 2002, $187; 2003, $154; 2004, $9; and 2005, $8.

Rent expense was $1,444, $2,464, and $4,048 during the periods ended
December 31, 2001, 2000, and 1999, respectively.

Employment Agreements -- As of December 31, 2001, the Company had entered
into employment agreements with Mr. Wagda, CEO and Mr. Czaja, CFO which provided
for minimum compensation levels and incentive bonuses, along with provisions for
termination of benefits in certain circumstances and for certain severance
payments in the event of a change in control. As of December 31, 2001, Mr. Wagda
is entitled to an annual salary of $275 and also eligible to receive a bonus of
up to 200% of his cash compensation paid at the discretion of the Board of
Directors. On February 15, 2002, Mr. Wagda was given a 2-year employment
contract. The terms of the agreement, which are being finalized, currently
contemplates annual salary compensation of $300 beginning May 1, 2002 and $350
beginning May 1, 2003, 12 months severance if terminated without cause or upon
change of control, and a bonus of up to 200% of base salary based on achievement
of specified performance goals. Mr. Czaja entered into an employment agreement
with the Company in April 2001. Mr Czaja's agreement provided for a base salary
of $175. Effective May 1, 2002, Mr. Czaja's annual salary will be $200. Mr.
Czaja also is eligible to receive a bonus of up to a total of 50% of his base
salary based upon the achievement of certain operating results of the Company.
Mr. Czaja's employment may be terminated without cause upon six months notice
and is entitled to six months severance if terminated upon a change of control.

(18) SIGNIFICANT CUSTOMERS AND GEOGRAPHIC INFORMATION

Revenues from three unrelated customers accounted for approximately 17%, 12%
and 10%, respectively, of total revenue in 2001. Two of the customers accounted
for approximately 20% and 13%, respectively, of the total outstanding accounts
receivable balance as of December 31, 2001. Another customer accounted for
approximately 14% of the total outstanding accounts receivable balance as of
December 31, 2001. The Company did not have any customer, individually or
considered as a group under common ownership that accounted for 10% of revenues
or accounts receivable as of or for the years ended December 31, 2000 and 1999.

The Company operates in a single segment as a provider of IT services. From
April 16, 1998, until the sale of the Company's Australian operations in
December 2000, the Company operated in primarily two geographic regions. Prior
to April 16, 1998 and subsequent to December 2000, the Company primarily
operated in the United States. Specific information related to the Company's
geographic areas are found in the following table:

45

(19) QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS (UNAUDITED)

Quarterly consolidated results of operations consist of the following as of
December 31;

Restatements recorded in the third quarter of 2000 relate to the
understatement of income tax refunds totaling $643. See Note 1 for more
information relating to the restatement.

Restatements recorded in the fourth quarter of 2000 relate to write-off
of the cumulative translation adjustment totaling $118. See Note 1 for
more information relating to the restatement.

46

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE II

To the Board of Directors and Stockholders
BrightStar Information Technology Group, Inc.

In connection with our audit of the consolidated financial statements of
BrightStar Information Technology Group, Inc., referred to in our report dated
February 15, 2002, except for the information in the last paragraph of Note 7,
as to which the date is March 26, 2002, which is included in the annual report
on Form 10-K, we have also audited Schedule II for the years ended December 31,
2001, 2000 and 1999. In our opinion, this schedule presents fairly, in all
material respects, the information required to be set forth therein.

/s/ Grant Thornton LLP

San Jose, California
February 15, 2002

47

INDEX TO EXHIBITS

These Exhibits are numbered in accordance with the Exhibit Table of Item 601
of Regulation S-K:

(a) The following documents are filed as part of this report:

48

10.1 -- BrightStar 1997 Long-Term Incentive Plan (Incorporated by
reference from Exhibit 10.1 to Amendment No. 1 to
BrightStar's Registration Statement on Form S-1 filed
February 27, 1998 (File No. 333-43209)).

10.2 -- Agreement and Plan of Exchange by and among BrightStar and
the holders of the outstanding capital stock of Brian R.
Blackmarr and Associates, Inc. (Incorporated by reference
from Exhibit 10.2 to BrightStar's Registration Statement on
Form S-1 filed December 24, 1997 (File No. 333-43209)).

10.3 -- Agreement and Plan of Exchange by and among BrightStar and
the holders of the outstanding capital stock of Integrated
Controls, Inc. (Incorporated by reference from Exhibit 10.3
to BrightStar's Registration Statement on Form S-1 filed
December 24, 1997 (File No. 333-43209)).

10.4 -- Agreement and Plan of Exchange by and among BrightStar and
the holders of the outstanding capital stock of Mindworks
Professional Education Group, Inc. (Incorporated by
reference from Exhibit 10.4 to BrightStar's Registration
Statement on Form S-1 filed December 24, 1997 (File No.
333-43209)).

10.5 -- Agreement and Plan of Exchange by and among BrightStar,
Software Consulting Services America, LLC and the holders of
the outstanding ownership interests of Software Consulting
Services America, LLC (Incorporated by reference from
Exhibit 10.5 to BrightStar's Registration Statement on Form
S-1 filed December 24, 1997 (File No. 333-43209)).

10.6 -- Agreement and Plan of Exchange by and among BrightStar and
Software Consulting Services Pty. Ltd., in its capacity as
Trustee of the Software Consulting Services Unit Trust and
the holders of all of the outstanding ownership interests in
the Software Consultants Unit Trust (Incorporated by
reference from Exhibit 10.6 to BrightStar's Registration
Statement on Form S-1 filed December 24, 1997 (File No.
333-43209)).

10.7 -- Agreement and Plan of Exchange by and among BrightStar and
the holders of the outstanding capital stock of Software
Innovators, Inc. (Incorporated by reference from Exhibit
10.7 to BrightStar's Registration Statement on Form S-1
filed December 24, 1997 (File No. 333-43209)).

10.8 -- Agreement and Plan of Exchange by and among BrightStar and
the holder of the outstanding capital stock of Zelo Group,
Inc., and Joel Rayden (Incorporated by reference from
Exhibit 10.8 to BrightStar's Registration Statement on Form
S-1 filed December 24, 1997 (File No. 333-43209)).

10.9 -- Form of Employment Agreement between BrightStar and Marshall
G. Webb, Thomas A. Hudgins and Daniel M. Cofall
(Incorporated by reference from Exhibit 10.9 to Amendment
No. 1 to BrightStar's Registration Statement on Form S-1
filed February 27, 1998 (File No. 333-43209)).

10.10* -- Employment Agreement between Software Consulting Services
America, Inc., and Michael A. Ober.

10.11* -- Office Lease dated November 11, 1998, between Principal Life
Insurance Company and BrightStar.

10.12* -- Employment Agreement dated January 31, 1999, between
BrightStar and Donald Rowley.

10.13 -- Employment Agreement between Brian R. Blackmarr and
Associates, Inc. and Brian R. Blackmarr (Incorporated by
reference from Exhibit 10.10 to Amendment No. 1 to
BrightStar's Registration Statement on Form S-1 filed
February 27, 1998 (File No. 333-43209)).

10.14 -- Letter Agreement dated August 14, 1997, between BITG and
McFarland, Grossman and Company, Inc., and amended as of
March 17, 1998 (Incorporated by reference from Exhibit 10.11
to Amendment No. 2 to BrightStar's Registration Statement on
Form S-1 filed March 24, 1998 (File No. 333-43209)).

10.15 -- Letter Agreement dated September 26, 1997, between BITG and
Brewer-Gruenert Capital Advisors, LLC, and amended as of
December 15, 1997 (Incorporated by reference from Exhibit
10.12 to BrightStar's Registration Statement on Form S-1
filed December 24, 1997 (File No. 333-43209)).

10.16 -- Loan Agreement dated October 16, 1997, between BITI and BITG
(Incorporated by reference from Exhibit 10.13 to Amendment
No. 1 to BrightStar's Registration Statement on Form S-1
filed February 27, 1998 (File No. 333-43209)).

10.17* -- Stock Repurchase Agreement between BrightStar and Marshall
G. Webb, Daniel M. Cofall, and Thomas A. Hudgins.

49

10.18* -- Agreement Regarding Repurchase of Stock by and among
BrightStar, George M. Siegel, Marshall G. Webb, Thomas A.
Hudgins, Daniel M. Cofall, Mark D. Diggs, Michael A. Sooley,
Michael B. Miller, and Tarrant Hancock.

10.19* -- Amendment to Agreement and Plan of Exchange dated as of June
5, 1998, and BrightStar and the holder of the outstanding
capital stock of Zelo Group, Inc., and Joel Rayden.

10.20* -- Deed of Variation dated as of April 17, 1998, by and among
BrightStar and Software Consulting Services Pty. Ltd., and
Kentcom Pty. Ltd., Salvatore Fazio, Pepper Tree Pty. Ltd.,
Christopher Richard Banks, Cedarman Pty. Ltd, Stephen Donald
Caswell, Quicktrend Pty. Ltd., Desmond John Lock, Kullamurra
Pty. Ltd., Robert Stephen Langford, KPMG Information
Solutions Pty. Ltd., and Data Collection Systems Integration
Pty. Ltd.

10.21* -- Asset Purchase Agreement dated as of June 30, 1998, among
BrightStar, Cogent Acquisition Corp., Cogent Technologies,
LLC and the holders of all the outstanding membership
interest of Cogent Technologies, LLC.

10.22* -- Asset Purchase Agreement dated as of August 31, 1998, among
BrightStar, Software Consulting Services America, Inc., TBQ
Associates, Inc., and the holders of all the outstanding
capital stock of TBQ Associates, Inc.

10.23 -- Stock Purchase Agreement dated as of September 30, 1998,
among BrightStar, BrightStar Group International, Inc., and
the holders of the outstanding capital stock of PROSAP AG
(Incorporated by reference from Exhibit 2.1 to the Current
Report on Form 8-K of BrightStar dated November 10, 1998.

10.24* -- Factoring Agreement and Security Agreement dated January 22,
1999, among Metro Factors, Inc., dba Metro Financial
Services, Inc., Brian R. Blackmarr and Associates, Inc.,
Software Consulting Services America, Inc., Software
Innovators, Inc., and Integrated Controls, Inc.

10.25* -- Guaranty dated January 22, 1999, by BrightStar for the
benefit of Metro Factors, Inc., dba Metro Financial
Services, Inc.

10.26* -- Severance Agreement and Release effective November 20, 1998,
between BrightStar and Thomas A. Hudgins.

10.27* -- Severance Agreement and Release effective January 31, 1999,
between BrightStar and Daniel M. Cofall.

10.28* -- Severance Agreement and Release effective January 31, 1999,
between BrightStar and Marshall G. Webb.

10.29* -- Revolving Credit Agreement dated March 29,1999, between
BrightStar and Comerica Bank.

10.30* -- Form of subsidiaries guaranty dated March 29,1999, between
BrightStar subsidiaries and Comerica Bank.

10.31* -- Security Agreement (Negotiable collateral) dated March
29,1999, between BrightStar and Comerica Bank.

10.32* -- Security Agreement (all assets) dated March 29, 1999,
between BrightStar and Comerica Bank.

10.33* -- $15,000,000 Revolving Note dated March 29, 1999, from
BrightStar to Comerica Bank

10.34* -- Asset Purchase Agreement Among BrightStar Information
Technology Group, Inc., Software Consulting Services
America, Inc., Integrated Systems Consulting, LLC and the
individuals owning all of the membership interests of
Integrated Systems Consulting, LLC dated as of April 1,
1999.

10.35* -- Securities Purchase Agreement among BrightStar Information
Technology Group, Inc., Strong River Investments, Inc., and
Montrose Investments LTD.

21.1* -- List of Subsidiaries of the Company.

23.1 -- Consent of Grant Thornton LLP.

* Exhibits have been previously filed.

50