BRIGHTSTAR INFORMATION TECHNOLOGY GROUP INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003

OR

[ ] 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: 000-23889

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

BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)

DELAWARE 76-0553110
(STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

6601 OWENS DRIVE, SUITE 115, PLEASANTON, CALIFORNIA 94588
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (925) 251-0000

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

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 [ ].

The number of shares of Common Stock of the Registrant, par value $.001
per share, outstanding at August 10, 2003 was 15,284,288.

PART 1, ITEM 1. FINANCIAL STATEMENTS

BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
($000'S, EXCEPT PER SHARE DATA)

See notes to condensed consolidated financial statements.

2

BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($000'S, EXCEPT PER SHARE DATA)

See notes to condensed consolidated financial statements.

3

BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
($000'S, EXCEPT PER SHARE DATA)
FOR THE SIX MONTHS ENDED JUNE 30, 2003

See notes to condensed consolidated financial statements.

4

BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($000'S, EXCEPT PER SHARE DATA)

See notes to condensed consolidated financial statements.

5

BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
($000, EXCEPT SHARE AND PER SHARE DATA)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("U.S. GAAP") for interim financial information and the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by U.S. GAAP for
complete financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included in the financial
statements. Operating results for the six-month period ended June 30, 2003, are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2003. The balance sheet at December 31, 2002, has been
derived from the audited financial statements at that date but does not include
all of the information and footnotes required by U.S. GAAP for complete
financial statements. For additional information, refer to the financial
statements and footnotes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 2002.

The preparation of the condensed financial statements in conformity with U.S.
GAAP 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 condensed financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.

Basic income (loss) per share is based upon the weighted average number of
common shares outstanding during the period. Diluted income (loss) per share 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 are excluded from the computation if their effect is anti-dilutive.
Potentially dilutive securities excluded because of their anti-dilutive effect
are approximately 8.0 million shares and 6.5 million shares at June 30, 2003 and
June 30, 2002, respectively.

Pro forma disclosures required under SFAS 148 are presented below. The pro forma
compensation cost may not be representative of that expected in future years.

Compensation cost for the quarter ended June 30, 2003 and 2002 was calculated in
accordance with the binomial model, using the following weighted average
assumptions: (i) expected volatility of 123%; (ii) expected dividend yield of
0%; (iii) expected option term of 10 years; (iv) risk-free rates of return of
1.74% and (v) expected forfeiture rates of 40% for both periods.

6

2. LIQUIDITY AND CREDIT FACILITY

On December 16, 2002, the Company entered into an agreement with BFI Business
Finance ("BFI"), a Santa Clara, California-based business-credit company, for a
two-year working capital line of credit for $750, to replace our existing credit
facility with Comerica Bank. Under the BFI agreement, available borrowings will
be up to 85% of accounts receivable, after reduction for ineligible accounts.
The interest rate on outstanding balances will be at prime plus 4% per annum,
plus a monthly administrative fee of 0.50% per month calculated on the average
daily balance outstanding. The minimum monthly interest and administrative fee
charged to the Company will be not less than $1 per month for the first six
months, escalating to $2 per month for the next three months and then finally to
$4 per month for the remaining term of the agreement.

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 experienced a significant decline in
available liquidity in 2001 and 2002. The Company improved its liquidity by
securing private placement financing in July 2001, by generating positive cash
flow from operations, by reaching settlement agreements with all of its legacy
creditors, and by replacing its credit facility with Comerica Bank, which was
scheduled to expire on December 31, 2002, with the BFI facility in December
2002.

Under present circumstances, the Company believes that the planned results from
operations when combined with the proceeds from the new BFI credit facility will
be adequate to fund its operations through the first half of 2004.

On May 6, 2003, the Company retained the services of an investment-banking firm
to help the Company explore its strategic alternatives. The Company paid an
initial fee of $20 at the signing of the agreement and commenced making monthly
payments of $5 starting on June 15, 2003 and which, under the agreement, are
scheduled to continue through October 15, 2003. Additionally the Company will
issue warrants to purchase 125,000 shares of common stock, exercisable for a
period of five years at an exercise price of $0.035 per share, which was the
closing price of the Company's common stock on May 6, 2003. These warrants were
valued at $4 under the provisions of APB No. 14 and EITF 00-27 and were expensed
in the second quarter of 2003. The services of the investment-banking firm have
been terminated, effective August 21, 2003. The Company will continue to explore
its tactical and strategic alternatives.

3. ACCOUNTS RECEIVABLE

The majority of the Company's accounts receivables are due from Global 2000,
mid-market and public sector clients. Credit is extended based on an evaluation
of the customers' financial condition and, generally, collateral is not
required. The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of our customers to make required payments.
Management regularly evaluates the allowance for doubtful accounts. The
estimated losses are based on the aging of our receivable balances, a review of
significant past due accounts, and our historical write-off experience, net of
recoveries. If the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances would be required.

4. ACCRUED SALARIES AND OTHER EXPENSES

Accrued salaries and other expenses consist of the following:

7

5. CORPORATE LEGACY LIABILITIES

Corporate legacy liabilities consist of obligations that were incurred in years
prior to 2001. During 2001 the Company entered into settlement agreements or
issued notes in satisfaction of certain of these payables pursuant to a
restructuring plan offered to substantially all of its creditors. The following
chart represents what is left from those settlement agreements.

Corporate legacy liabilities consist of the following:

A promissory note was issued in conjunction with the Company's restructuring of
the legacy liabilities. The note is an unsecured long-term note that accrues
interest at 6.5% per annum. Principal and interest are due on January 3, 2005.
In the chart above, this note is considered a long-term liability.

6. CONVERTIBLE NOTES PAYABLE, NET

Convertible notes payable, net consists of the following:

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's
senior management. 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. The notes are entitled to simple
interest calculated at a rate per annum equal to 8%. Interest may be paid at the
option of the Company for the first year from the date of the notes
(subsequently extended for another year during the second quarter of 2002) by
issuing additional convertible notes and warrants with the same terms as above.
The Company has elected to pay interest due on the notes from inception through
June 30, 2003 by issuing additional notes and warrants. Starting in October
2003, the Company will pay the interest due on the notes in cash beginning with
the quarter ending September 30, 2003.

The Convertible Subordinated Promissory Notes, including the ones issued as
payment for interest due, are due and payable on July 1, 2004.

7. INCOME TAXES

As a result of historical losses, the Company has recorded a valuation allowance
to offset all of its net deferred tax assets recorded at June 30, 2003. The
valuation allowance, which was approximately $10,500 as of December 31, 2002,
relates to deferred tax assets established for net operating loss carryforwards
generated through June 30, 2003 and other temporary differences. The Company
does not expect to recognize tax benefits on prior or future losses or other
temporary differences until such time that it is more likely than not that tax
benefits will be realized by the Company. At December 31, 2002, the Company had
a net operating loss carryforward of approximately $12,700 for federal income
tax purposes, which will expire in years 2018 through 2022.

8

8. CHANGE IN ACCOUNTING PRINCIPLE

As of January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Intangible Assets". Thus, effective
January 1, 2002, the Company ceased amortizing goodwill recorded in past
business combinations. The implementation of the goodwill impairment test under
SFAS No. 142 requires a two-step approach, which is performed at the reporting
unit level, as defined in SFAS No. 142. Step one identifies potential
impairments by comparing the fair value of the reporting unit to its carrying
amount. Step two, which is only performed if there is a potential impairment,
compares the carrying amount of the reporting unit's goodwill to its implied
value, as defined in SFAS No. 142. If the carrying amount of the reporting
unit's goodwill exceeds the implied fair value of that goodwill, an impairment
loss is recognized for an amount equal to that excess.

The Company completed the first step of the transitional impairment test
required by SFAS No. 142 during the quarter ended June 30, 2002. The Company
consists of a single reporting unit. Therefore, this step required the Company
to assess the fair value of the Company and compare that value to its
shareholders' equity. In determining fair value, the Company considered the
guidance in SFAS No. 142, including the Company's market capitalization, control
premiums, discounted cash flows and other indicators of fair value. Based on
this analysis, goodwill recorded as of January 1, 2002 in the amount of $11,648
was impaired. The Company then completed step two, impairment test, pursuant to
SFAS No. 142, under which we compared the value of our goodwill based on the
Company's stock price as of December 31, 2001 with the value of the goodwill. As
a result of the impairment test, a goodwill impairment loss of $9,900 was
recognized in the fourth quarter of 2002, which is when the test was completed,
and recorded as of the first quarter of 2002 as a change in accounting
principle.

During 2002, as part of the Company's implementation of SFAS No. 142, the
Company also wrote off $45 related to an intangible asset. The reduction was
also included in the change in accounting principle amount.

The net effect of these restatements was a $9,945 decrease in the net income for
the quarter ended March 31, 2002.

9. NET (LOSS) INCOME PER SHARE

The following table sets forth the computation of basic and diluted earnings per
share:

(1) Diluted EPS for the six-month period ended June 30, 2003 excludes "as
converted" treatment of the Series 1 Convertible Subordinated Promissory
Notes as their inclusion would be anti-dilutive.

(2) Diluted EPS for the six-month period ended June 30, 2003 excludes the effect
of approximately 1.4 million employee stock options as their inclusion would
be anti-dilutive.

10. LITIGATION

The Company is from time to time involved in litigation incidental to its
business. The Company believes that the results of such litigation will not have
a material adverse effect on the Company's financial condition.

11. SIGNIFICANT CUSTOMERS

For the second quarter of 2003, the Company had a single customer that accounted
for approximately 58% of total revenue. For the first half of 2003, this
customer accounted for approximately 59% of the total revenue. This customer
also accounted for approximately 49% of the total outstanding accounts
receivable balance as of June 30, 2003.

For the second quarter of 2002, the Company had three unrelated customers that
accounted for approximately 30%, 29% and 8% of total revenue, respectively. For
the first half of 2002, these three customers accounted for approximately 27%,
22% and 10% of total revenue, respectively. These three customers also accounted
for approximately 17%, 24% and 13%, respectively, of the total outstanding
accounts receivable balance as of June 30, 2002.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

BrightStar Information Technology Group, Inc. ("BrightStar" or "the Company")
provides information technology ("IT") services for its customers. We help
organizations maximize their competitive advantage through the implementation
and /or management of leading edge enterprise level applications from SAP and
PeopleSoft by focusing primarily on serving clients in the healthcare and
government markets. BrightStar has approximately 46 employees and full-time
contractors and has its headquarters in the San Francisco Bay Area with field
offices in Addison, Texas, and Quincy, Massachusetts.

The Company also offers arrangements for companies to outsource their software
application support and management requirements. Outsourcing lets companies
focus on their core business competencies and gives them a viable alternative to
building the internal team required to implement, maintain and enhance today's
sophisticated business applications.

The timing of revenue is difficult to forecast because the Company's sales cycle
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 generally
can be changed or terminated without a significant 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 demand of 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.

Cost of revenue consists primarily 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.

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.

10

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 for interim financial information. 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 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. Costs reimbursed by its
customers are included in revenue for the periods in which costs are 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 and all other acquisitions in 1998 is no longer being
amortized due to the Company adopting Statement of Financials Accounting
Standards (SFAS) No. 142 as of January 1, 2002.

Income taxes -- The Company accounts for income taxes under 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 March 31, 2003. 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.

RESULTS OF OPERATIONS

Revenue for the second quarter and first half of 2003 decreased from $2.4
million to $1.4 million and from $5.3 million to $2.8 million or 42% and 47%,
respectively, compared to the second quarter and first half of 2002 as a result
of a continued reduction in the demand for enterprise software consulting
services. The 2003 second quarter revenue was approximately 2% higher than the
prior sequential quarter ended March 31, 2003.

Gross profit as a percentage of revenue for the second quarter and first half of
2003 decreased from 32% to 29% compared to second quarter and first half of 2002
as a result of a reduction in consultant utilization and a change in the mix of
services provided to our clients. The 2003 second quarter gross profit as a
percentage of revenue was approximately even with that of the prior sequential
quarter ended March 31, 2003.

The Company's reductions in selling, general and administrative expenses are the
result of the execution of the turnaround plan, which included reductions in
office space, sales personnel and related costs, management overhead and
discretionary expenses.

LIQUIDITY AND CAPITAL RESOURCES

On December 16, 2002, the Company entered into an agreement with BFI Business
Finance ("BFI"), a Santa Clara, California-based business-credit company, for a
two-year working capital line of credit for $0.75 million, to replace our
existing credit facility with Comerica Bank. Under the BFI agreement, available
borrowings will be up to 85% of accounts receivable, after reduction for
ineligible accounts. The interest rate on outstanding balances will be at prime
plus 4% per annum, plus an additional monthly administrative fee of 0.50%
calculated on the average daily balance outstanding. The minimum monthly
interest and administrative fee charged to the Company will be not less than
$1,000 per month for the first six months, escalating to $2,375 per month for
the next three months and then finally to $3,750 per month for the remaining
term of the agreement.

11

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 experienced a significant decline in available
liquidity in 2001 and 2002. The Company improved its liquidity by securing
private placement financing in July 2001, by generating positive cash flow from
operations, by reaching settlement agreements with all of its legacy creditors,
and by replacing its credit facility with Comerica Bank, which was scheduled to
expire on December 31, 2002, with the BFI facility in December 2002.

Under present circumstances, the Company believes that the planned results from
operations when combined with the proceeds from the new BFI credit facility will
be adequate to fund its operations through the first half of 2004.

On May 6, 2003, the Company retained the services of an investment banking firm
to help the Company explore its strategic alternatives. The Company paid an
initial fee of $20,000 at the signing of the agreement and commenced making
monthly payments of $5,000 starting on June 15, 2003 and which, under the
agreement, are scheduled to continue through October 15, 2003. Additionally the
Company will issue warrants to purchase 125,000 shares of common stock,
exercisable for a period of five years at an exercise price of $0.035 per share,
which was the closing price of the Company's common stock on May 6, 2003. These
warrants were valued at $4,000 under the provisions of APB No. 14 and EITF 00-27
and were expensed in the second quarter of 2003. The services of the investment
banking firm have been terminated, effective August 21, 2003. The Company will
continue to explore its tactical and strategic alternatives.

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 of existing government programs and the cost of attracting
and retaining highly skilled personnel.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes from the information previously reported
under Item 7A of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2002.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures. Our chief executive
officer and our principal accounting officer, after evaluating the effectiveness
of the company's "disclosure controls and procedures" (as defined in the
Securities Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of a date
(the "Evaluation Date") within 90 days before the filing date of this quarterly
report, have concluded that as of the Evaluation Date, our disclosure controls
and procedures were adequate and designed to ensure that material information
relating to us and our consolidated subsidiaries would be made known to them by
others within those entities.

(b) Changes in internal controls. There were no significant changes in our
internal controls or to our knowledge, in other factors that could significantly
affect our disclosure controls and procedures subsequent to the Evaluation Date.

12

PART II - OTHER INFORMATION

ITEM 1. Legal proceedings

There have been no material changes from the information previously reported
under Item 3 of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2002.

ITEM 6. Exhibits and reports on Form 8-K

31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.

32.1 Certification Pursuant to 18 U.S.C. Section 1360, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned there unto duly authorized.

BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.

Date: August 13, 2003. BY: /s/ Joseph A. Wagda
-----------------------------------------
Joseph A. Wagda
Chairman, Chief Executive Officer and
Interim Chief Financial Officer

BY: /s/ Paul C. Kosturos
-----------------------------------------
Paul C. Kosturos
Vice President Finance, Principal
Accounting Officer and Secretary

INDEX TO EXHIBITS