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

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FORM 10-K

Commission file number: 0-22010

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THOMAS GROUP, INC.
(Exact name of registrant as specified in our charter)

 

 

Securities registered pursuant to Section 12(b) of the Act:

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         Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý

         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No ý

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

         Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if, any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

         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. ý

         Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer," and "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act:

         Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

         As of June 30, 2009, the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of the voting stock held by non-affiliates of the registrant was $2,597,119 based on the NASDAQ Global Market Closing Price of $0.88 per share.

         As of March 30, 2010, there were 10,457,765 shares of the registrant's common stock outstanding.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

        Various sections contained or incorporated by reference in this Annual Report on Form 10-K include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the context of the statement and generally arise when we are discussing our beliefs, estimates or expectations. Such statements may contain the words "believe," "anticipate," "expect," "estimate," "intend," "project," "could," "should," "may," "will be," "will likely continue," "will likely result," or words or phrases of similar meaning. These statements are not historical facts or guarantees of future performance but instead represent only our belief at the time the statements were made regarding future events. In particular, statements under Item 1. Business, Item 1A. Risk Factors and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements, including but not limited to statements regarding our expectations regarding the sufficiency of our liquidity sources and the expected impact of legal proceedings with which we may become involved. All forward-looking statements are based largely on the expectations of management and are subject to a number of risks and uncertainties which may cause actual results and outcomes to differ materially from what we express or forecast in these forward-looking statements. In evaluating these statements, you should consider the risks and uncertainties discussed under Item 1A. Risk Factors in this Annual Report on Form 10-K, as well as the following list of some but not all of the factors that could cause actual results or events to differ materially from anticipated results or events:

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difficulty in obtaining new consulting engagements that generate revenues sufficient to allow us to return to profitability;



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the possibility that we may not generate cash flow from operations sufficient to meet our cash needs over time;



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the potential for receiving a "going concern" opinion from our independent public accounting firm if our business does not improve during 2010;



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the possibility of being delisted from the Nasdaq Capital Market as a result of our failure to maintain compliance with applicable listing standards;



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a prolonged economic downturn;



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further disruption in our relationships with major customers;



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an inability to successfully sustain sufficient cost containment initiatives;



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the competitive environment of the industry in which we operate; and



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an inability to attract, hire, develop, train and retain experienced consultants.

        These forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Annual Report on Form 10-K, and we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based.

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PART I

ITEM 1.    Business.

Overview

        We are a professional services firm that executes and implements process improvements and culture change management operations strategies to produce improved operational and financial performance for our clients globally. We are a Delaware corporation founded in 1978 and headquartered in Irving, Texas.

        Through our proprietary Process Value Management™, or PVM™, methodology, our consultants refine processes throughout an organization to give our clients a competitive advantage that increases revenues, lowers costs, and generates cash. With our more than 30 years of change management experience, innovation, and knowledge leadership, we have demonstrated our ability to apply this methodology in hundreds of clients in both the private and the public sector.

        Process Value Management is our proprietary methodology to identify, prioritize, and quantify the amount and timing of cross-functional business improvement opportunities. The PVM approach and methodology is designed to help an organization increase overall effectiveness by focusing on performance drivers throughout the organization like speed (cycle time), quality (first pass yield), and productivity. The PVM approach and methodology is widely applicable to almost all types of enterprises, including government entities, military organizations, for-profit companies in many industries, and not-for-profit enterprises, to help drive sustainable improvements in operations and reduced costs.

        For marketing purposes, in 2009 we were organized into four practices. These practices, which focus our marketing efforts into client industry sectors, are

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Aerospace and Defense Contractors,



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Government (including all branches of the U.S. military),



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Healthcare, and



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Transportation and Logistics.

        In the future we may create additional practices as we see potential market opportunities, or we may combine or eliminate practices in response to market conditions. Our practice leaders and principals are responsible for sales and marketing to prospective clients.

        Through the years, we have developed a number of service offerings that employ the PVM approach and methodology to drive productivity improvements within multiple areas of our clients' enterprises. Although we continue to provide solutions to client problems in many areas of need, over the past two years we have refined our offerings to focus our marketing more often on specific solutions in

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Culture and Change Management,



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Finance and Administration,



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Marketing and Sales,



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Operations,



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Product and Service Innovation, and



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Supply Chain Management.

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Culture and Change Management

        Our clients often seek our services and guidance to manage cultural and other changes within their organizations. Our services in this area involve changing basic values, norms, and beliefs among stakeholders in order to improve organizational performance. Sometimes the changes that an organization needs to make in order to improve processes and drive better performance are hindered by cultural barriers that are hidden and embedded in the organization's culture. Our culture change consultants use a proprietary methodology to allow the organization to determine if a barrier is related to a certain subject matter, process, or cultural position. Once identified, we assist the organization by using the techniques of Process Value Management to implement the changes and new behaviors required throughout the change management process and implementation plan.

Finance and Administration

        We provide services that enable our clients' finance and administration functions to improve performance, deliver enterprise-wide profit improvement, and increase shareholder value. We assist companies to redefine the role of finance and administration and transform it from a backward-looking, number-crunching organization to one that is future-oriented and focused on providing value through deeper analysis and insight.

        We use Process Value Management to focus our clients' finance and administration functions more on integrating processes end-to-end within the organization and extended through its outside network of key partners, suppliers, and customers. In many cases, these efforts enable our clients to turn fixed costs into variable costs and reduce overall costs through efficient global transaction processing, with integrated processes and systems.

Marketing and Sales

        We provide services designed to enable our clients' marketing and sales functions not only to increase cash flow, but also to control associated selling, general and administrative costs, streamline processes, and improve performance across all sales, marketing and service activities.

        We employ our proprietary Process Value Management methodology to help our clients increase overall marketing and sales effectiveness. The PVM approach and methodology focuses on marketing and sales performance drivers like speed (cycle time), quality (first pass yield), and productivity.

Operations

        We provide services designed to improve our clients' operational processes to transform raw materials, labor and capital into finished goods and services. By employing our Process Value Management methodology, we help our clients improve their operations management throughout their organization by focusing on supply chain strategy, processes and supporting systems.

Product and Service Innovation

        We provide our clients with product and service innovation solutions to reduce the time in which new ideas get turned into revenue by reducing time-to-market activities and corresponding costs.

        Our methodologies focus on the drivers of overall time-to-market performance: speed (cycle time), quality, and productivity. This approach is designed to enable our clients to develop and implement well-defined and aligned processes and procedures that increase product and service innovation program efficiency.

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Supply Chain Management

        We provide solutions and services that improve our clients' ability to manage their supply chain. Supply chain management is the process of planning, implementing, and controlling operations of the supply chain while satisfying customer requirements as efficiently as possible. The process includes all internal functions, the logistics, distribution, sourcing, customer service, sales, manufacturing, and finance departments of an organization. However, it also involves external suppliers that provide finished products, components, parts and assemblies, and their delivery.

        We have industry experience in supply chain transformation across multiple enterprises, including automotive, white goods, consumer goods, retail, machine tools, aerospace and defense, and many others. We believe our pragmatic, performance-oriented approach enables us to identify key improvement opportunities and deliver tangible results quickly.

        Well-defined and aligned processes and procedures increase supply chain program efficiency. Our solutions focus on processes to improve results, whether focused on a single activity or an entire enterprise.

Contractual Arrangements and Revenue Recognition

        We perform services and provide solutions for clients pursuant to contracts that typically have terms of two weeks to one year or longer. We are compensated for our professional services and solutions in one or more of three ways:

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fixed fees,



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task-based fees, or



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incentive fees.

        Our fee type and structure for each client engagement depends on a number of variables, including the size of the client, the complexity and geographic dispersion of its business, the extent of the opportunity for us to improve the client's processes and other factors. Some of our contracts are cancellable with little notice. We do not report bookings or backlog because we believe the uncertainties associated with cancelable contracts, particularly in our commercial business, may render such information misleading.

        The majority of our revenue is derived from fixed fee and task-based fee contracts.

        Fixed fee revenue is recognized on the proportional performance model (which approximates the percentage completion method), based on direct labor hours expended and, when applicable, the completed performance model. In order to calculate the completion ratio on a given project, time and effort to date are divided by the total estimated time and effort for the entire project. This ratio is then multiplied by the total fixed fee to be earned on the project, resulting in the amount of revenue earned to date. A few of our fixed fee contracts, primarily assessments, are recognized using the completed contract performance model as these contracts are generally one to six weeks in duration and conclude with a presentation or agreed upon deliverable to the clients' management. Revenues attributable to fixed fees were 69%, 42% and 11% of consolidated revenue for the years ended December 31, 2009, 2008, and 2007, respectively.

        Task-based fees are recognized as revenue when the relevant task is completed, usually on a monthly basis. Revenues attributable to task-based fees were 11%, 49% and 88% of consolidated revenue for the years ended December 31, 2009, 2008, and 2007, respectively.

        Incentive fees are tied to improvements in a variety of client performance measures typically involving cycle time, asset utilization and productivity. Incentive fee revenue is recognized in the period in which the related client improvements are achieved and we obtain the client's acceptance. Our

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incentive fee agreements with our clients define in advance the performance improvement standards that will form the basis for the payment of incentive fees. In order to mitigate the risk of disputes arising over the achievement of performance improvements, which drive incentive fees, we obtain customer agreement to these achievements prior to recognizing revenue. Typically these contracts are for commercial customers and they provide for a base fee and an additional incentive fee earned according to a formula in the contract. Incentive fees are affected by our clients' business performance and prevailing economic conditions. Revenues attributable to incentive fees were 7%, 2% and 0% of consolidated revenue for the years ended December 31, 2009, 2008, and 2007, respectively. As of March 30, 2010, we had no contractual agreements that included incentive fees. While incentive fees are not currently a significant portion of our revenue, earlier in our history they were more significant. As we attempt to diversify our business in the future to include more commercial work, incentive fees could again become a more significant portion of our revenue.

        Reimbursement revenue represents our clients' repayment of our mutually agreed upon travel expenses as incurred. All billable travel expenses are submitted to and approved by the client. Revenues attributable to reimbursement were 13%, 7% and 1%, for the years ended December 31, 2009, 2008, and 2007, respectively. For some clients, the fixed fee or task-based fee is inclusive of travel. In these cases, the travel expense is included in cost of sales.

        Consulting contracts typically are awarded by both government entities and private organizations on the basis of sole-source negotiations, that is, direct negotiation between the client and a single vendor such as Thomas Group, or on the basis of competitive bidding, generally in response to a Request for Proposal, or RFP. Whenever possible, we prefer to work under sole source contract arrangements. Competitive bids can require extensive time, effort and cost to submit a qualified bid, and the outcome is unpredictable. In many competitive bid situations, we compete against far larger companies with far greater resources to devote to the proposal process. In some cases, we team with another company that has capabilities complementary to ours in order to increase the competitiveness of our bid. In some other cases, we use an intermediary who has the capability to respond more effectively in this process. For several years we worked extensively on engagements with two divisions of the U.S. Navy, each governed by a separate contractual agreement. One of these contracts expired March 31, 2008 and the other expired April 30, 2008. For the year ended December 31, 2007 these two contracts represented approximately 85% of our revenue, and for the year ended December 31, 2008 they represented approximately 44% of our revenue. To date, we have not replaced much of the revenue that was previously generated through these expired government contracts. We continue to work on smaller programs with the U.S. Navy as well as with the U.S. Army. We are actively working to expand our business with the entire U.S. military as well as other departments within the U.S. government.

        Contracts related to these U.S. government engagements often are executed within the United States government's budget cycle and may be fully funded for up to one year at a time. They may be renewed annually for successive one-year periods if the life of the engagement extends beyond one fiscal year. For our engagements with the U.S. government, we contract either directly with the government through our listing with the General Services Administration or we use an intermediary that acts as a prime contractor providing contracting and administrative services for the majority of our government programs.

Financial Information about Segments and Geographic Areas

        We operate in one industry segment. Additional financial information about our segment and information related to the geographic areas in which we operate appears in Note 12 to our Consolidated Financial Statements included in this report.

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        We currently do business in Europe through an unaffiliated agent, Carpe Diem Consulting GmbH, which uses our proprietary methods to sell and deliver services to clients in Europe. The contracts for these assignments are entered into directly between us and the client. We are responsible for the fulfillment of the contract, and we bill the client directly. We pay Carpe Diem Consulting for the man-days worked on the engagements by their personnel at a negotiated rate and share incentive fees, if any, earned from these engagements. We conduct this business through Thomas Group Global LLC, a wholly owned Delaware limited liability company.

        From time to time, we also do business in other areas of the world in addition to the U.S. and Europe. For example, during 2009 and 2008 we also performed services in South America.

Clients

        Historically, most of our clients have been large, diversified commercial or government enterprises in North America, Europe, South America and Asia. For several years prior to May 2008, however, the majority of our revenue was derived from engagements with the U.S. Navy, both directly and through an intermediary. As discussed above, in March and April 2008 our two largest engagements with the U.S. Navy ended. During the remainder of 2008 and 2009, we added new clients, both with the U.S. government and with commercial entities, but these engagements were not sufficient to offset the loss of revenue from our prior contracts for the U.S. Navy.

        For 2010, we are focused on diversifying our client base by delivering our solutions in North America, both to the U.S. government and to commercial entities. We also expect to engage in some business in Europe, and perhaps elsewhere, on an opportunistic basis.

        While we believe our methodologies are applicable to any organization, we have developed a significant amount of subject matter expertise relevant to specific industries and governmental entities. Consequently, we can leverage our consultants' prior executive experiences to obtain business and determine appropriate client project teams. Our goal is to diversify our business among our various practice areas—Government, Aerospace and Defense Contractors, Transportation and Logistics, and Healthcare. We are actively pursuing new business in each of these areas.

        For the year ended December 31, 2009, the four clients who accounted for more than 10% of our revenue were Carl Zeiss Vision International GmbH, Amtrak, Mantech (U.S. Navy) and Boston Scientific.

Competition

        The consulting services industry in which we operate is highly competitive and significantly fragmented. We compete with a large number of diverse service providers, including business operations consulting firms, such as Huron Consulting Group; financial consulting firms, such as FTI Consulting, Inc.; management consulting firms, such as McKinsey & Company, Booz & Company and Booz Allen Hamilton; accounting firms; technical and economic advisory firms; regional and specialty consulting firms and internal professional resources of existing and potential clients. In addition, since there are relatively low barriers to entry into the consulting services market, we expect new entrants into the operations management consulting field to result in continued and additional future competition. We seek to compete by differentiating ourselves on the basis of our results-driven culture, the experience of our consultants and a hands-on approach to problem solving. Most of our competitors have significantly greater financial resources, professional staffs, industry expertise, and name recognition than we have. Competitive pressures could reduce our market share or require us to reduce the price of our services and solutions, either of which could harm our business and results of operations. Furthermore, there can be no assurance that we will be able to compete successfully with our existing or new competitors.

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        Our PVM approach and proprietary methodologies are trade secrets not capable of being patented, and there can be no assurance that our competitors will not acquire or develop substantially similar methodologies or that our clients will not adopt our methodologies without our assistance. Therefore, there can be no assurance that we will not be subject to competition from others using methodologies that are substantially similar to our own.

Employees

        At December 31, 2009, we had a total of 52 employees, consisting of 17 full-time consultants, 8 sales and marketing employees, 12 administrative employees and 15 consultants on furlough. When on furlough, consultants continue to receive company benefits, but are not paid any salary unless they are called back to work. They can be called back based on their individual qualifications to work on either short term sales efforts and marketing projects or client engagements.

        We are highly selective in our hiring of consultants. We recruit primarily experienced professionals with operational expertise. We believe these highly sought after professionals choose to work for us because of the credentials, experience and reputation of our consultants, the opportunity to work on a diverse range of matters and our strong reputation. We also develop and support our consultants in their career progression through training and development programs designed to match the skill sets of our consultants with the needs of our clients.

        Our compensation plan includes competitive base salary, incentives and benefits. The Compensation and Corporate Governance Committee of our Board of Directors, at its discretion, determines the incentives and equity based compensation to be granted to our officers and employees. Our chief executive officer and senior management recommend performance compensation for our consultants, for our sales professionals and any other incentives granted to employees for approval by the Compensation and Corporate Governance Committee.

        We have entered into nondisclosure and non-competition agreements with our current and former employees. There can be no assurance that these agreements will deter any of our employees from disclosing confidential information to third parties or from using such information to compete with us in the future.

        Our employees are not represented by a labor union and are not subject to any collective bargaining agreement. We consider our employee relations to be good.

Intellectual Property

        We are dedicated to providing industry leading operations and process improvement solutions to our clients and fostering a culture of continuous learning for our consultants. Our PVM approach and proprietary methodologies have been developed at great expense, have required considerable effort on the part of skilled professionals and are considered trade secrets. Therefore, only in certain circumstances will we grant clients a limited license to make internal use of certain of our proprietary methodologies. We maintain our trade secrets in strict confidence and include nondisclosure provisions as part of our standard engagement. Despite our efforts to protect proprietary trade secrets from unauthorized use or disclosure, such as use of nondisclosure and non-competition agreements with our current and former employees, our current or former employees or others may attempt to disclose, obtain or use our trade secrets. Since our PVM approach and proprietary methodologies and solutions are trade secrets not capable of being patented, there can be no assurance that our competitors will not acquire or develop substantially similar methodologies or that our clients will not adopt our methodologies without our assistance.

        We have secured federal registration for the service marks Total Cycle Time® and TCT®. These registrations expire from August 2012 to May 2015. We also have secured federal service mark

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registration for several other marks important to our business. We also have made filings in several European countries in an effort to secure protection of our marks in those countries. We consider each of these service marks to be significant to our business.

        The implementation of a successful process improvement program requires the proper selection, application, and management of process improvement tools. In addition to our proprietary tools, we often use the following non-proprietary tools when providing services to our clients:

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Hoshin Kanri—a step-by-step planning, implementation, and review process for the management of change in critical business processes



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Kaizen—an approach described by this Japanese term which means "small, incremental, continuous improvement," and the English translation of which is "continuous or continual improvement"



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Lean—an approach designed to result in a lean organization that delivers the exact product in the exact quantity with the exact quality that its customers need exactly when they need it



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Metrics—an approach that defines and employs a critical set of metrics that guide, measure, and prioritize activity to optimize impact on strategic objectives



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Six Sigma—a set of tools that addresses problems of process variability and capability

        These tools are not unique to Thomas Group; however, the methodology used to select, deploy and measure the tools is as important to a program's success as are the tools themselves.

        Through our proprietary Process Value Management methodology, our consultants seek to utilize the appropriate process improvement tools to predict the financial benefits that will be obtained through deployment of those tools in our client's organization.

Available Information

        We are required to file reports with the Securities and Exchange Commission, or SEC, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. The public may read and copy any materials filed with the SEC by us at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Our filings with the SEC are submitted electronically and can be accessed via the SEC's website at http://www.sec.gov.

Company Website

        Information about us can be obtained by accessing our website at http://www.thomasgroup.com. Our website contains an investor information section that provides links to our SEC reports and filings. Such reports and filings are available free of charge as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. We are not incorporating the information on that website into this report, and the website and the information appearing on the website are not included in, and are not a part of, this report.

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ITEM 1A.    Risk Factors.

        An investment in our common stock involves a very high degree of risk. You should carefully consider the following risk factors when evaluating an investment in our common stock. The risks described below are not the only ones that we face. Additional risks that we do not yet know of or that we currently think are immaterial also may impair our business operations. If any of the following risks actually occurs, our business, financial condition or results of operations could be materially and adversely affected. In such case, the trading price of our common stock could decline, and you could lose all or part of your investment. You should also refer to the other information set forth in this report, including our Consolidated Financial Statements and the related notes.

We are currently unprofitable, and if we fail to generate new client relationships that result in significant sources of revenue, our business will suffer materially.

        During March and April of 2008, two of our multi-year contracts with the U.S. Navy expired. These contracts accounted for approximately 85% of our revenue in 2007 and 44% of our revenue in 2008. Our revenue for 2009 decreased significantly as compared to 2008 and 2007, due in large part to these contract expirations. In response to the loss of these contracts, we have implemented cost-containment initiatives, reorganized our management structures, enhanced our product and service offerings and implemented enhanced business development processes. To date, however, we have not been able to replace a significant portion of the revenue lost due to these contract expirations.

        As a result of the loss of these contracts, our inability to develop new client relationships in sufficient volume, and our inability to reduce Cost of Sales and Selling, General and Administrative Costs sufficiently to offset the decline in revenue, we were unprofitable in 2009. Although we continue to reduce or contain costs, if we are unable to develop significant new client relationships and generate increased revenue from new consulting engagements to allow us to return to profitability in 2010, our ability ultimately to recover will be adversely affected. There can be no assurance that we will ultimately be successful in increasing revenues and reducing or containing costs sufficiently to return to profitability.

Our current cash resources might not be sufficient to meet our cash needs over time. We continue to believe that our cash balances and expected tax refunds, together with cash generated from operating activities, will be sufficient to provide funds that are adequate for our operating needs through March 31, 2011. However, if we are unable to generate positive cash flows sufficient to fund our needs, our business, financial condition and results of operations could be materially and adversely affected.

        During 2008 and 2009, we experienced net losses. We have developed a revised business plan for 2010 including an internal forecast of cash needs. We believe that existing cash resources and cash generated from current operations will be sufficient to satisfy our operating cash needs at least through March 31, 2011.

        If we are unable to achieve the revenue in our forecast, or if our costs are higher than we forecasted, then we may not have sufficient liquidity to allow us to recover in the future. If we cannot consistently generate the required cash flows from operating activities, we will need to meet the additional operating shortfalls with existing cash on hand, or implement or seek alternative strategies. There can be no assurance that existing cash will be sufficient, that we will have timely access to the capital or credit markets if needed, or that any of our other strategies can be implemented on satisfactory terms, on a timely basis, or at all to allow us sufficient time to return to profitability.

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If we are unable to return to profitability during 2010, we may receive a "going concern" opinion from our independent auditors at the end of 2010. This could materially and adversely affect our potential to sign contracts with new clients, further limiting our opportunity to return to profitability.

        Management believes that, as of December 31, 2009, we met the requirements of U.S. generally accepted accounting principles, or GAAP, for a "going concern," which contemplates the realization of assets and discharge of liabilities in the ordinary course of business. Management has prepared the financial statements included in this Form 10-K on that basis. Accordingly, the financial statements do not include any adjustments to reflect the possible future effects that may result from the outcome of various uncertainties described in these risk factors and elsewhere in this Form 10-K. If we are unable to develop sufficient new business from existing and new clients to allow us to return to profitability, we may no longer meet this requirement as of the end of 2010. In that event, the report of our independent registered accounting firm with respect to our financial statements for the year ended December 31, 2010 may contain an explanatory paragraph with respect to our ability to continue as a going concern. Such a statement may make it more difficult for us to sign new contracts with clients and to obtain necessary capital or credit, and may have other effects that further adversely impact our ability to return to profitability.

A prolonged economic downturn could have a material adverse effect on our results of operations.

        Beginning in the third quarter of 2008, the U.S. economy has experienced a significant downturn. Our results of operations generally are affected by the level of business activity of our clients, which in turn is affected by the level of economic activity in the industries and markets they serve. Budgets for consulting services typically decrease during times of adverse economic conditions. A decline in the level of business activity of our clients has negatively affected our ability to secure new client engagements, increased the likelihood of existing client engagement contract cancellations, and reduced our utilization rates, all of which has had a material adverse impact on our ability to generate revenue and on our operating results. In addition, the current economic downturn has caused some clients to reduce or defer their expenditures for consulting services, making our recovery more difficult. We have implemented and will continue to implement cost-savings initiatives to closely manage our expenses; however, current and future savings initiatives will not permit us to return to profitability without significant revenues from new contracts or new clients.

The current credit market conditions are unstable and unpredictable and they are impacting the economy in uncertain ways. This situation may negatively impact our ability to generate the additional revenues required for us to return to profitability.

        Beginning in the fall of 2008, credit markets in the U.S. and worldwide became unstable and unpredictable and credit became difficult to obtain for many companies and organizations. In response many companies and organizations reduced discretionary spending, including spending on consulting services.

        Although we believe our consulting services are a cost effective way for companies to reduce costs and improve operational efficiency, in periods of economic uncertainty prospective clients may not be willing to commit to projects that are typically three to 12 months or longer in duration.

        Unless the current credit markets stabilize in the near future, the current instability and uncertainty may make it more difficult for us to sign new consulting contracts with new or former clients and may negatively impact our ability to return to profitability.

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We are currently not in compliance with Nasdaq rules for continued listing on the Nasdaq Capital Market and are at risk of being delisted, which may decrease the liquidity of our common stock and subject us to the SEC's penny stock rules.

        On September 16, 2009, we received two Nasdaq Staff Deficiency Letters indicating that we no longer complied with (i) the minimum bid price requirements as set forth in Listing Rule 5450(a)(1) of the Nasdaq Stock Market, which requires that listed securities maintain a minimum closing bid price of $1.00 per share, and (ii) the minimum market value of publicly held shares as set forth in Listing Rule 5450(b)(1)(C), which requires that the market value of publicly held shares be at least $5,000,000. After considering the alternatives, on December 1, 2009, we voluntarily submitted to the Nasdaq Stock Market an application to transfer the listing of our common stock from the Nasdaq Global Market to the Nasdaq Capital Market. Our request was approved effective December 11, 2009.

        On March 16, 2010, we received notification from the Nasdaq Stock Market that we had not regained compliance with the Nasdaq Listing Rules requiring that we maintain a minimum closing bid price of $1.00 per share. Failure to regain compliance may result in the delisting of the Company's common stock from the Nasdaq Capital Market. On March 23, 2010, we filed a request for a hearing before a Nasdaq Listing Qualifications Panel to appeal the Nasdaq Stock Market's determination. This action will automatically stay the delisting of our common stock until the Listing Qualification Panel issues its decision. Under the Nasdaq Listing Rules, the Panel may, in its discretion, determine to continue our listing pursuant to an exception to the Nasdaq Listing Rules for a maximum of 180 calendar days from the date of the Staff's notification, or through September 13, 2010, to allow us additional time to comply with the Listing Rules. However, there can be no assurances that the Panel will do so or that we ultimately will be able to comply with the Listing Rules. The date for the hearing is April 28, 2010.

        If we are delisted from the Nasdaq Capital Market, our common stock may be traded over-the-counter on the OTC Bulletin Board or on the "pink sheets." These alternative markets, however, are generally considered to be less efficient than the Nasdaq Capital Market. Many over-the-counter stocks trade less frequently and in smaller volumes than securities traded on the Nasdaq markets, which would likely have a material adverse effect on the liquidity of our common stock. If our common stock is delisted from the Nasdaq Capital Market, there may be a limited market for our stock, trading in our stock may become more difficult and our share price could decrease even further. In addition, the trading of our common stock on over-the-counter markets will materially adversely affect our access to the capital markets and our ability to raise capital through alternative financing sources on terms acceptable to us or at all. Securities that trade over-the-counter are no longer eligible for margin loans, and a company trading over-the-counter cannot avail itself of federal preemption of state securities or "blue sky" laws, which adds substantial compliance costs to securities issuances, including those pursuant to employee option plans, stock purchase plans and private or public offerings of securities. If our securities are delisted and transferred to either the OTC Bulletin Board or the pink sheets, there may also be other negative implications, including the potential loss of confidence by suppliers, customers and employees.

        In addition, our common stock may become subject to penny stock rules. The SEC generally defines "penny stock" as an equity security that has a market price of less than $5.00 per share, subject to certain exceptions. We are not currently subject to the penny stock rules because our common stock qualifies for an exception to the SEC's penny stock rules for companies that have an equity security that is quoted on the Nasdaq Stock Market. However, if we were delisted, our common stock would become subject to the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell our common stock. If our common stock were considered penny stock, the ability of broker-dealers to sell our common stock and the ability of our stockholders to sell their shares in the secondary market would be limited and, as a result, the market liquidity for our common

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stock would be adversely affected. We cannot assure that trading in our securities will not be subject to these or other regulations in the future.

We are a small company with a thinly traded stock, and two of our stockholders control more than 66% of our stock. Between early 2008 and mid-January 2010, we repurchased stock in the open market, which has further reduced the "public float" of shares available for trading on a daily basis. As a result, a stockholder's liquidity may be seriously limited.

        We recently completed a Rule 10b5-1 plan under which we repurchased shares of our common stock in market transactions between April 2008 and mid-January 2010. These repurchases may have provided additional liquidity for our stockholders during that time period. Currently, we have no plans to resume stock repurchases under this plan or otherwise, so Company repurchases will no longer be a potential source of additional liquidity for our stockholders.

        Our largest two stockholders (who are also members of our Board of Directors) collectively own over 66% of the outstanding shares of our common stock. The average daily trading volume for shares of our common stock is limited, often less than 9,000 shares per day. As a result, a stockholder may not be able to quickly or efficiently liquidate his/her position in our common stock.

        Combined, these factors may result in limited stockholder liquidity.

Our engagements may be terminated by our clients on short notice.

        The majority of our contracts can be terminated by our clients without cause, with short notice (typically 30 days) and without penalty. When contracts are terminated unexpectedly, the costs associated with the lost revenue may not be reduced in a timely manner. Following an unexpected termination, we may not be able to rapidly deploy our consultants to other projects, which would result in under-utilization of resources. In addition, because much of our work is project- based rather than recurring in nature, we may not be able to replace cancelled contracts and maintain our utilization rates with new business. Consequently, our revenue and results of operations in subsequent periods may suffer.

We derive a portion of our revenue from contracts awarded through a competitive bidding process. If we are unable to win new awards consistently over any extended period, our business could be adversely affected.

        A portion of our contracts are awarded through a competitive bidding process. The competitive bidding process increases competition and pricing pressure, and we may be required to decrease our profit margins on our professional services and solutions in order to win a contract over our competitors. If we are unable to win new contract awards consistently over any extended period or if the proportion of our contracts obtained through a competitive bidding process increases further, our business will be adversely affected and cause our results of operations to differ materially from those anticipated. In addition, upon the expiration of a contract, if the client requires further services and solutions of the type provided by the contract, there may be a competitive re-bidding process. There can be no assurance that we will win any particular bid, or that we will be able to replace business lost upon expiration or completion of a contract.

We derive our revenue from a limited number of engagements and our revenue could be adversely affected by the loss of a significant client or the cancellation of a significant engagement.

        Historically we have derived a significant portion of our revenue from a limited number of engagements. From year to year, revenue from one or more individual clients may exceed 10% of our revenue for such period. For the year ended December 31, 2009, four clients each represented more than 10% of our revenue. If contracts with major clients are not renewed upon termination or if any of our significant engagements is reduced in scope or cancelled, we would lose a significant amount of

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revenue. In general, the volume of work we perform for any particular client varies from year to year due to the specific engagement nature of our business. A client accounting for a significant portion of our revenue in one year may not comprise a significant portion of our revenue in the following year due to completion of the project, early termination of the project or a reduction of the scope of our engagement in the following year. Thus, in order to maintain revenue or grow revenue, we generally have to sell new engagements to new clients. During 2009 we had difficulty doing so, and there can be no assurance that we will be able to do so more productively in 2010.

A portion of our revenue is derived from government client engagements and this exposes us to various risks inherent in government contracts and the government contracting process.

        We perform work for various government entities and agencies. As a result, our business is susceptible to special risks inherent in government contracts and the government contracting process, including the following:

•

Government entities fund projects annually through congressionally appropriated monies pursuant to the government budgeting cycle beginning on October 1 of each year. While in some cases our government engagements may be planned and executed as multi-year projects, the initial contract term is typically one year or less, running through the next September 30 after the contract is signed, and may contain options to annually extend the term through the end of the project. Extensions are generally awarded each October 1 through the end of the project in conjunction with the government budgeting cycle. Our government clients reserve the right to change the scope of or terminate these projects with limited notice for lack of approved funding and at their convenience. Occasionally, congressional approval for appropriations extends beyond October 1. In such a case, we typically obtain short-term extensions to fund the project until congressional approval is obtained.



•

If the government budget is not approved by the beginning of a government budgeting cycle, work on existing projects may be halted or new engagements may be delayed until the budget is approved and signed. In such cases, funding for these engagements may be further delayed due to a backlog of contracts to be issued by the various government contracting offices, resulting in further delays in revenue for us.



•

Our government clients reserve the right to audit our contract costs, including allocated indirect costs, and conduct inquiries and investigations of our business practices with respect to our government contracts. Such an audit may result in prospective adjustments to previously agreed rates for our work and affect our future margins.



•

If a government client discovers improper or illegal activities in the course of audits or investigations, we may become subject to civil and criminal penalties and administrative sanctions, which may include termination of contracts, forfeiture of profits, suspension of payments, fines and suspensions or debarment from doing business with related or other government entities.



•

Government contracts, and the proceedings surrounding them, are often subject to more extensive scrutiny and publicity than commercial contracts. The number and terms of new government contracts signed can be affected significantly by political and economic factors, such as pending elections, changes in administrations, and revisions to government policies. Negative publicity related to our government contracts, regardless of its accuracy, may damage our business by affecting our ability to compete for new contracts.



•

We may have difficulty finding suitable professionals to enable us to comply with such regulations due to the unique experience qualifications for our consultants for some engagements.

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•

Many of our government clients are affected by the timing and duration of military conflicts in which the United States is involved. Funds intended for future contract renewals could be re-appropriated and may not be available for our services and solutions as a result of the fiscal needs of other areas of the military during times of conflict.



•

Government personnel who make decisions with respect to the award of military and other government contracts move in and out of such decision-making positions. We must expend significant effort educating such decision makers about our business and capabilities, and developing and maintaining relationships with decision makers at appropriate levels within our client organizations. If we fail to successfully identify, educate and maintain relationships with appropriate decision makers within our clients' organizations, our ability to compete for new contracts, and therefore our business generally, may suffer.

        The impact of any of the occurrences or conditions described above could affect not only our business with the particular government entity involved, but also other related and unrelated government entities. Depending on the size of the project or the magnitude of the costs, penalties or negative publicity involved, any of these occurrences or conditions could have a material adverse effect on our business and results of operations.

Failure to maintain strong relationships with our contracting intermediaries could result in less favorable contract terms and a decline in our revenue.

        In prior years we have derived substantial revenue from government engagements in which we utilized a contracting intermediary. Although we also contract directly with the federal government through our listing with the General Services Administration, we evaluate, on a project-by-project basis, whether to use an intermediary to act as a prime contractor and provide contracting and administrative services. We expect to continue to use intermediaries as prime contractors for certain contracts with the federal government or with other governmental or public entities when appropriate. In such cases, we will enter into agreements with such intermediaries that define the terms of our arrangement such as payment terms and specific deliverables. Future terms with contracting intermediaries may be less favorable than the terms under which we currently operate. Financial difficulties of an intermediary could cause a delay in remission of government funds to us and force us to seek other intermediaries.

We enter into fixed, task-based and incentive fee engagements with our clients and unexpected costs, delays or failures to achieve anticipated cost reductions or performance improvements could make our contracts less profitable.

        We charge for our professional services and solutions based on fixed fee arrangements, task-based fees or incentive fees. Fixed fee contracts require us to price our contracts by estimating our expenditures in advance. Our ability to properly estimate the costs and timing for completing client projects is critical to the profitability of our fixed fee contracts. Task-based contracts also require us to estimate our expenditures in advance, and an appropriate billing amount is assigned to each completed task or deliverable based on the estimated cost for each specific task. Incentive fees are based on client-specific measures, such as the achievement of specified process improvements, cost reductions or designated goals. We must estimate our costs to deliver such client-specific measures and design the incentive calculation accordingly to achieve our desired profit margin. Our cost, pricing and margin estimates reflect our professional judgment regarding our costs and the efficiencies of our consultants and processes. Any increased or unexpected costs, delays or failures to achieve anticipated cost reductions or performance improvements in connection with the performance of these engagements, including delays caused by factors outside our control, could make these contracts less profitable or unprofitable, which would have an adverse effect on our results of operations. Furthermore, incentive fees are affected by the client's business performance and prevailing economic conditions, both of

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which are beyond our control, which may cause variability in revenue and profit margins earned on such contracts and may limit our ability to forecast our future revenue.

Our revenue and operating results may fluctuate significantly from quarter to quarter, and fluctuations in operating results could cause our stock price to decline.

        Our revenue and operating results may vary significantly from quarter to quarter due to a number of factors. In future quarters, operating results may be below the expectations of market analysts or investors, and the price of our common stock may decline. Factors that could cause quarterly fluctuations include:

•

the beginning and ending of significant contracts during a quarter;



•

the number, size and scope of our ongoing engagements;



•

variations in the amount of revenue attributable to incentive fees;



•

our ability to recruit and retain qualified professionals;



•

the extent to which our consultants can be reassigned efficiently from one engagement to another;



•

fluctuations in demand for our professional services and solutions resulting from budget cuts, project delays, cyclical downturns or similar events;



•

the occurrence and duration of conflicts involving the United States military, which could cause delays or changes in program operations related to our government clients;



•

clients' decisions to divert resources to other projects;



•

collectability of receivables; and



•

reductions in the prices of services and solutions offered by our competitors.

Our gross margins and profitability will suffer if we are not able to maintain our pricing and utilization rates and control our costs.

        Our gross margin is largely a function of the fees we are able to charge for our services and solutions and the efficiency with which we are able to utilize our consultants. Accordingly, if we are not able to generate sufficient revenue or to maintain the pricing for our services and solutions or to maintain an appropriate utilization rate for our consultants without corresponding cost reductions, our gross margins and profitability will be negatively impacted.

        Our ability to generate revenue and our pricing for our professional services and solutions is affected by a number of factors, including:

•

our clients' perceptions of our ability to add value through our services and solutions;



•

introduction of new services or solutions by us or our competitors;



•

competition for a specific contract;



•

pricing policies of our competitors; and



•

market demand for our services and solutions and general economic conditions.

        Our utilization rates are also affected by a number of factors, including:

•

the number and size of our client engagements;



•

unanticipated changes in the duration or scope of client engagements;

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•

our ability to transition consultants from completed projects to new engagements;



•

our ability to forecast demand for our services and solutions and thereby maintain an appropriate headcount in each area of expertise; and



•

our ability to manage attrition.

The consulting services industry is highly competitive and actions by competitors could render our services and solutions less competitive, causing revenue and profit margin to decline.

        The consulting services industry in which we operate is highly competitive and significantly fragmented. We compete with a large number of diverse service providers, including business operations consulting firms, financial consulting firms, management consulting firms, accounting firms, technical and economic advisory firms, regional and specialty consulting firms and internal professional resources of existing and potential clients. In addition, since there are relatively low barriers to entry into the consulting services market, we expect new entrants into our operations management consulting field to result in continued and additional future competition. Some of our competitors have significantly greater financial resources, professional staffs, industry specific expertise and name recognition than we do. Competitive pressures could reduce our market share or require us to reduce the price of our services and solutions, either of which could harm our business and results of operations. In addition, our ability to compete depends on a number of factors outside of our control, including:

•

the prices at which others offer competitive services, including aggressive price competition and discounting on individual engagements;



•

the ability of our competitors to undertake more extensive marketing campaigns;



•

the extent, if any, to which our competitors develop proprietary tools that improve their ability to compete;



•

the ability of our clients and potential clients to perform the services themselves; and



•

the extent of our competitors' responsiveness to client needs.

        We may not be able to compete effectively on these or other factors. If we are unable to compete effectively, our market position, and therefore our revenue and results of operations, could decline.

If we are unable to attract, hire, develop, train and retain experienced consultants and sales professionals, our competitive position and financial performance could suffer.

        Our business consists primarily of the delivery of professional services and solutions and our success depends upon the efforts, abilities and project execution of our business consultants. Our consultants have highly specialized skills. If key consultants leave and we are unable to replace them with suitable candidates, we could experience difficulty in managing the affected client engagements. Professionals with requisite credentials and experience qualified to be our consultants are in great demand and we face significant competition for these professionals from our competitors, academic institutions, government entities, research firms and other organizations, including our clients. In addition, we rely on our sales professionals to develop business opportunities and client relationships. We face significant competition for these sales professionals from our competitors. Competing employers for both consultants and sales professionals may be able to offer greater compensation and benefits or more attractive lifestyle choices, career paths or geographic locations than we do.

        Typically, our consultants have close relationships with the clients they serve. Our agreements with our clients typically include non-solicitation arrangements. If a client hires one of our consultants in violation of the non-solicitation provisions, we will consider any legal remedies we may have on a

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case-by-case basis. However, we may decide preserving cooperation and a professional relationship with our clients, or other concerns, outweigh the benefits of any possible legal recovery. Therefore, we may determine not to pursue legal action. Furthermore, our employment agreements with our employees, including consultants and sales professionals, typically include non-competition provisions. However, many states, including Texas, generally interpret non-competition clauses narrowly. Therefore, if a consultant or salesperson leaves and goes into business in competition with us or joins a competitor, we may not have reasonably available legal recourse and our client relationships could suffer. Our inability to attract, hire, develop, train and retain consultants or sales professionals could limit our ability to accept or complete engagements and adversely affect our competitive position and financial performance.

It may be difficult for us to differentiate the professional services and solutions we offer to our clients from those offered by our competitors.

        Many of our competitors offer consulting services that are similar to those provided by our consultants. Although we strive to differentiate our services and solutions by using experienced professionals to deliver improvements using our proprietary PVM approach and methodology, there can be no guarantee that potential clients will find such differentiation persuasive. If we cannot effectively differentiate our services and solutions from those offered by our competitors, our sales efforts could be adversely affected, and therefore our revenue and our results of operations could decline.

We must continually enhance our services and solutions to meet the changing needs of our clients or face the possibility of losing future business to competitors.

        Our future success will depend in part upon our ability to enhance existing services and solutions and to introduce new services and solutions to meet the requirements of our clients in a rapidly developing and evolving market. For example, certain clients may require a different methodology from what our consultants typically utilize. In such cases, we may have to train our consultants to utilize different methodologies. Some of our competitors have significantly greater financial resources, professional staffs and expertise in certain methodologies than we do. Our competitors may be able to respond more quickly to changes in client requirements. If we are unable to anticipate or respond adequately to our clients' needs, our revenue could decline and our results of operations could suffer.

Maintaining our reputation is critical to our future success.

        We have invested significant time and resources in building our reputation and name recognition. Our ability to gain market acceptance of the Thomas Group brand and to secure new engagements depends heavily on our reputation and our ability to provide high quality, reliable and cost-effective services and solutions. Some of our engagements come from former or existing clients or from referrals by former or existing clients. Consequently, if we fail to perform our services and solutions in a manner meeting our clients' expectations, our reputation may be damaged and our ability to attract new business or new consultants, our competitive position and our results of operations could suffer.

If we are unable to grow, or if we fail to manage growth or fluctuations in the size of our business successfully, our revenue and results of operations could be adversely affected.

        Any failure on our part to grow or to manage growth or fluctuations in the size of our business successfully could adversely affect our revenue and results of operations. We expect over time to grow our operations by expanding into other areas of the government and by strengthening our position in certain commercial sectors. Expanding our position in these areas will likely require extensive management attention and may increase our overall selling, general and administrative expenses. We also may expand by hiring additional consultants, either individually or as members of existing groups,

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or acquiring complementary businesses. Alternatively, from time to time, we may need to take labor force resizing actions to account for fluctuations in the level of our business. These activities could result in the diversion of management's time, attention and resources from managing and marketing our company. We also could encounter difficulties in integrating persons from other firms with diverse professional backgrounds, experiences and organizational cultures into our own organization. Expansion creates new and increased management and training responsibilities for our employees. Expansion also increases demands on our internal systems, procedures and controls and on our managerial, administrative, financial, marketing and other resources. If we do not manage growth or fluctuations in the size of our business effectively, our business, financial condition and results of operations could be adversely affected.

Our engagements could result in professional liability, which could be very costly and damage our reputation.

        Our engagements typically address complex business challenges which require us to exercise professional judgment. As a result, we are subject to the risk of professional liability. If a client questions the quality of our work, the client could bring a lawsuit to recover damages or contest its obligation to pay our fees. Litigation alleging that we performed negligently or breached our obligations to a client could expose us to significant legal liabilities and, regardless of the merits or outcome, could be very costly and could distract our management and damage our reputation. Although our engagement agreements typically include provisions designed to limit our exposure to legal claims, they may not protect us under some circumstances. In addition, we carry professional liability insurance to cover many of these types of claims, but policy limits and breadth of coverage may be inadequate to cover any particular claim or all claims plus the cost of our legal defense. For example, we provide services and solutions on engagements in which the impact on a client may substantially exceed the limits of our errors and omissions insurance coverage. If we are found to have professional liability with respect to work performed on such an engagement, we may not have sufficient insurance to cover the entire liability. Liability in excess of our insurance limits would have to be borne directly by us and could seriously harm our profitability, financial position and reputation.

Inability to protect intellectual property could harm our competitive position and financial performance.

        We have only a limited ability to protect our intellectual property rights, which are important to our success. Our PVM approach and proprietary methodologies are trade secrets not capable of being patented, and there can be no assurance our competitors will not acquire or develop substantially similar methodologies or that our clients will not adopt our methodologies without our assistance. Despite our efforts to protect our proprietary trade secrets from unauthorized use or disclosure, such as use of nondisclosure and non-competition agreements with our current and former employees, our current or former employees or others may attempt to disclose, obtain or use our trade secrets. The steps we have taken to protect our proprietary trade secrets may not prevent misappropriation, particularly in foreign countries where laws or law enforcement practices may not protect intellectual property rights as fully as in the United States. The unauthorized use of our trade secrets or use of substantially similar methodologies and solutions by our competitors or others could harm our competitive position and financial performance.

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If we fail to maintain adequate internal control over financial reporting, if we are unable to timely complete our assessment of the effectiveness of our internal control over financial reporting, or if our independent registered public accounting firm concludes that we have a material weakness in internal control not identified by management when required to opine on our assessment of internal control over financial reporting (beginning with the year ending December 31, 2010), we may be subject to regulatory sanctions, a loss of public confidence, and other negative consequences. Also, the trading price of our stock could be negatively impacted.

        Section 404 of the Sarbanes-Oxley Act of 2002 and related SEC rules require us to perform an assessment of the effectiveness of our internal control over financial reporting and to publicly disclose the assessment in our Annual Report on Form 10-K. These rules will also require that we obtain an attestation of management's assessment from our independent registered public accounting firm beginning with the year ended December 31, 2010. We dedicated significant management, financial and other resources in connection with our compliance with these rules in 2009. These efforts include a review of our existing internal control structure. Effective internal controls assist us in providing reliable financial reports and to effectively detect and prevent fraud. However, we are now a much smaller company. As we have reduced our general and administrative staff, it has become more difficult to achieve and maintain the existing internal control structure, and to afford the costs of doing so.

        If we fail to achieve and maintain the adequacy of our internal controls for the year ending December 31, 2010, we may not be able to conclude, on an ongoing basis, that we have effective internal controls over financial reporting in accordance with the Sarbanes-Oxley Act of 2002.

        If we are unable to conclude that we have effective internal controls, or to obtain an attestation from our independent registered accounting firm at December 31, 2010 as presently required, we may experience a loss of investor confidence in the reliability of our financial statements. This could harm our ability to sign new contracts with clients and our ability to obtain financing for the business, and may negatively impact the trading price of our common stock.

Operating internationally exposes us to special risks and factors that could negatively impact our business or operations and could result in increased expenses and declining profit margin.

        We currently operate primarily in the United States and have smaller operations in Europe and South America. If our revenue from international operations does not exceed the expense associated with establishing and maintaining our international operations, our results of operations could suffer. International operations create special risks, including the following:

•

local legal and regulatory requirements, such as import/export controls, content requirements, trade restrictions, tariffs and foreign taxes, sanctions, data privacy laws and labor regulations, may impair our ability to operate efficiently or expatriate foreign profits;



•

enforcing agreements with clients and collecting accounts receivable may be more difficult in certain foreign jurisdictions;



•

foreign intellectual property laws may make enforcement of our intellectual property rights in foreign countries more difficult;



•

increased competition from local consultants may hamper our marketing and sales opportunities in certain locations;



•

general economic and political conditions in the foreign countries in which we operate could have an adverse impact on our earnings from operations in those countries;



•

fluctuations in currency exchange rates, may affect demand for our services and solutions and may adversely affect the profitability in United States dollars of services and solutions provided by us in foreign markets where payment for our services is made in the local currency; and

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•

more burdensome employee benefit requirements may impair our ability to maintain appropriate gross profit margins.

We may not pay dividends in the future.

        We ceased paying dividends after the payment for the quarter ended December 31, 2007, which was paid in January 2008. The payment of future cash dividends, if any, will be at the discretion of our Board of Directors after taking into account various factors, including our financial condition, results of operations, cash flow, the level of our capital expenditures, restrictive covenants in our credit facility (if any), future business prospects and any other matters that our Board of Directors deems relevant. We currently have no plans to pay dividends in the future.

We may need additional capital in the future, and this capital may not be available to us. The raising of additional capital may dilute existing stockholders' ownership.

        We may need to raise additional funds through public or private debt or equity financings in order to:

•

fund operating losses;



•

expand our operations;



•

develop new services and solutions;



•

respond to competitive pressures; or



•

pursue strategic acquisitions.

        Any additional capital raised through the sale of equity may dilute our existing stockholders' ownership percentage. Based on our current forecast, we believe that existing cash resources and cash generated from current operations will be sufficient to satisfy our operating cash needs at least through March 31, 2011.

        Our inability to raise additional financing, if needed, could have adverse consequences to our existing stockholders and to us. Any future decreases in our operating income, cash flow, or stockholders' equity may further impair our future ability to raise additional funds to finance operations. Any additional financing we may need may not be available on terms favorable to us, or at all.

Our certificate of incorporation, bylaws, and Delaware law may discourage an acquisition of our company.

        Provisions of our certificate of incorporation, bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. In addition, our directors and significant stockholders Gen. John T. Chain, Jr. and Mr. Edward P. Evans currently have and may continue to have a significant ownership interest in our common stock which would make it difficult for a third party to acquire a majority of our outstanding common stock, without their consent.

ITEM 1B.    Unresolved Staff Comments.

        None.

ITEM 2.    Properties.

        We lease approximately 26,000 square feet of office space at our principal executive office in Irving, Texas under a lease which expires in March 2012.

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ITEM 3.    Legal Proceedings.

        We may become subject to various claims and other legal matters, such as collection matters initiated by us in the ordinary course of conducting our business. We believe neither such claims and other legal matters nor the cost of prosecuting or defending such claims and legal matters will have a material adverse effect on our results of operations, financial condition or cash flows. No material claims are currently pending; however, no assurances can be given that future claims, if any, will not be material.

ITEM 4.    Removed and Reserved

PART II

ITEM 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market for Registrant's Common Equity

        Our common stock is listed on the Nasdaq Capital Market under the symbol "TGIS." On September 16, 2009, we received two Nasdaq Staff Deficiency Letters indicating that we no longer complied with (i) the minimum bid price requirements as set forth in Listing Rule 5450(a)(1) of the Nasdaq Stock Market, which requires that listed securities maintain a minimum closing bid price of $1.00 per share, and (ii) the minimum market value of publicly held shares as set forth in Listing Rule 5450(b)(1)(C), which requires that the market value of publicly held shares be at least $5,000,000. After considering the alternatives, on December 1, 2009, we voluntarily submitted to the Nasdaq Stock Market an application to transfer the listing of our common stock from the Nasdaq Global Market to the Nasdaq Capital Market. Our request was approved effective December 11, 2009.

        On March 16, 2010, we received notification from the Nasdaq Stock Market that we had not regained compliance with the Nasdaq Listing Rules requiring that we maintain a minimum closing bid price of $1.00 per share. Failure to regain compliance may result in the delisting of the Company's common stock from the Nasdaq Capital Market. On March 23, 2010, we filed a request for a hearing before a Nasdaq Listing Qualifications Panel to appeal the Nasdaq Stock Market's determination. This action will automatically stay the delisting of our common stock until the Listing Qualification Panel issues its decision. Under the Nasdaq Listing Rules, the Panel may, in its discretion, determine to continue our listing pursuant to an exception to the Nasdaq Listing Rules for a maximum of 180 calendar days from the date of the Staff's notification, or through September 13, 2010, to allow us additional time to comply with the Listing Rules. However, there can be no assurances that the Panel will do so or that we ultimately will be able to comply with the Listing Rules. The date for the hearing is April 28, 2010.

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        The stock prices set forth below represent the highest and lowest sales prices per share of our common stock for the indicated quarters as reported on the Nasdaq Capital Market, or the Nasdaq Global Market, as applicable, as well as the dividends declared during these periods:

Holders of Record

        As of December 31, 2009, there were approximately 75 holders of record of our common stock, not including holders who own stock in "street name".

Dividends

        On February 19, 2008, our Board of Directors suspended the payment of future quarterly dividends. Payment of future cash dividends is at the discretion of our Board of Directors after taking into account various factors, including our financial condition, results of operations, cash flow, the level of our capital expenditures, restrictive covenants in our credit facility, future business prospects and any other matters that our Board of Directors deems relevant.

        We paid dividends of $0.10 per share on January 12, 2007, April 13, 2007, July 13, 2007 and October 12, 2007. On December 6, 2007, our Board of Directors declared a dividend of $0.10 payable to shareholders of record as of December 31, 2007. This dividend was paid on January 12, 2008.

Equity Compensation Plan Information

        Information regarding our equity compensation plans is set forth in Item 12 in Part III of this Annual Report on Form 10-K, which information is incorporated herein by reference.

Issuer Repurchases of Shares

        In January and October of 1999, we announced two stock repurchase plans for up to 250,000 and 500,000 shares, respectively, to be purchased on the open market. In August 2000, we announced an additional stock repurchase plan of up to 750,000 shares to be purchased on the open market. On March 6, 2008, we announced that our Board of Directors authorized us to repurchase the then-remaining 505,450 shares from time to time, subject to market conditions. In October 2008, our Board of Directors approved an expansion of our stock repurchase program, authorizing us to repurchase up to an additional 300,000 shares from time to time, subject to market conditions.

        During the first quarter of 2008, we established a written plan pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, which provides for the purchase of shares of our common stock in support of our announced share repurchase program. During the year ended December 31, 2009, we repurchased 281,797 shares for total aggregate consideration of $258,404, or an average of $0.92 per share including commissions and fees.

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        As of January 26, 2010, we completed the authorized repurchase of 805,450 shares under the Plan at a total cost of $1,259,640, or an average of $1.56 per share including commissions and fees.

        The table below shows information on the stock repurchases for the fourth quarter of 2009:

ITEM 6.    Selected Financial Data.

        The following table presents selected consolidated financial information that has been prepared based on our audited consolidated financial statements for each of the fiscal years in the five-year period ended December 31, 2009. The financial statements for each of the fiscal years ended December 31, 2009, 2008, 2007, 2006 and 2005 have been audited by Hein & Associates LLP, an independent registered public accounting firm.

        This information should be read in conjunction with our consolidated financial statements and the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Annual Report on Form 10-K. Historical operating and statistical information may not be indicative of our future performance.

        Our audited financial statements included herein and the following selected historical financial data for the five-year period ended on that date reflect the effects of our reclassification of the assets, liabilities and results of operations of our operations in Switzerland as discontinued operations. Such operations were liquidated in 2005.

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        The results for 2005 reflect the restatement prior to the end of 2006 related to a self-reported investigation of historical stock option practices and related accounting during the period 1988 to 2006.

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ITEM 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations.

        The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes appearing elsewhere or incorporated by reference in this Annual Report on Form 10-K. This discussion contains forward- looking statements. Actual results could differ materially from the results discussed in the forward-looking statements. Please see "Special Note Regarding Forward-Looking Statements" and "Risk Factors" for a discussion of some of the uncertainties, risks and assumptions associated with these statements.

Overview

        We are a professional services firm that executes and implements process improvements and culture change management operations strategies to produce improved operational and financial performance for our clients globally. We are a Delaware corporation founded in 1978 and headquartered in Irving, Texas.

        Through our proprietary Process Value Management™, or PVM™, methodology, our consultants refine processes throughout an organization to give our clients a competitive advantage that increases revenues, lowers costs, and generates cash. With our more than 30 years of change management experience, innovation, and knowledge leadership, we have demonstrated our ability to apply this methodology in a wide variety of organizations.

        Process Value Management is our proprietary methodology to identify, prioritize, and quantify the amount and timing of cross-functional business improvement opportunities. The PVM approach and methodology is designed to help an organization increase overall effectiveness by focusing on performance drivers throughout the organization like speed (cycle time), quality (first pass yield), and productivity. The PVM approach and methodology is widely applicable to almost all types of enterprises, including government entities, military organizations, for-profit companies, and not-for-profit enterprises, to help drive sustainable improvements in operations and reduced costs.

        For marketing purposes, in 2009 we were organized into four practices. These practices, which focus our marketing efforts into client industry sectors, are

•

Aerospace and Defense Contractors,



•

Government (including all branches of the U.S. military),



•

Healthcare,



•

Transportation and Logistics

        In the future we may create additional practices as we see potential market opportunities in other areas, or we may combine or eliminate practices when necessary to meet market conditions. Our practice leaders and principals are responsible for sales and marketing to prospective clients. We perform services and provide solutions for clients pursuant to contracts that generally have terms of

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two weeks to one year, although some contracts may be for a longer term. We are compensated for our professional services and solutions in one or more of three ways:

•

fixed fees,



•

task-based fees, or



•

incentive fees.

        Our fee type and structure for each client engagement depends on a number of variables, including the size of the client, the complexity and geographic dispersion of its business, the extent of the opportunity for us to improve the client's processes and other factors. Some of our contracts are cancellable with little notice. We do not report backlog because we believe the uncertainties associated with cancelable contracts, particularly in our commercial business, may render such information misleading.

        The majority of our revenue is derived from fixed fee and task-based fee contracts.

        Fixed fee revenue is recognized on the proportional performance model (which approximates the percentage completion method), based on direct labor hours expended and, when applicable, the completed performance model. In order to calculate the completion ratio on a given project, time and effort to date are divided by the total estimated time and effort for the entire project. This ratio is then multiplied by the total fixed fee to be earned on the project, resulting in the amount of revenue earned to date. A few of our fixed fee contracts, primarily assessments, are recognized using the completed contract performance model as these contracts are generally one to six weeks in duration and conclude with a presentation or agreed upon deliverable to the clients' management. Revenues attributable to fixed fees were 69%, 42% and 11% of consolidated revenue for the years ended December 31, 2009, 2008, and 2007, respectively.

        Task-based fees are recognized as revenue when the relevant task, as defined in the contract, is completed, usually on a monthly basis. Revenues attributable to task-based fees were 11%, 49% and 88% of consolidated revenue for the years ended December 31, 2009, 2008, and 2007, respectively.

        Incentive fees, in some cases, may be earned based on improvements in a variety of client performance measures typically involving cycle time, asset utilization and productivity. Incentive fee revenue is recognized in the period in which the related client improvements are achieved and we obtain the client's acceptance. Our incentive fee agreements with our clients define in advance the performance improvement standards that will form the basis for the payment of incentive fees. In order to mitigate the risk of disputes arising over the achievement of performance improvements, which drive incentive fees, we obtain customer agreement to these achievements prior to recognizing revenue. Typically these contracts are for commercial customers and they provide for a base fee and an additional incentive fee earned according to a formula in the contract. Incentive fees are affected by our clients' business performance and prevailing economic conditions. Revenues attributable to incentive fees were 7%, 2% and 0% of consolidated revenue for the years ended December 31, 2009, 2008, and 2007, respectively. As of December 31, 2009, we had no contractual agreements that provided for incentive fees in addition to fixed fees. While incentive fees are not currently a significant portion of our revenue, earlier in our history they have been more significant. As we attempt to diversify our business in the future to include more commercial work, incentive fees could again become a more significant portion of our revenue.

        Reimbursement revenue represents our clients' repayment of our mutually agreed upon travel expenses as incurred. All billable travel expenses are submitted to and approved by the client. Revenues attributable to reimbursement were 13%, 7% and 1%, for the years ended December 31, 2009, 2008, and 2007, respectively. For some clients, the fixed fee or task-based fee is inclusive of travel. In these cases, the travel expense is included in cost of sales.

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        Cost of sales represents the direct costs involved in providing services and solutions to our clients. The components include, but are not limited to, direct labor and benefit costs, support costs such as telecommunications and computer costs, travel costs and other costs incurred in providing services and solutions to our clients.

        Selling, general and administrative expenses include the costs of all labor and other goods and services necessary for our selling and marketing efforts, human resource support, accounting and finance services, legal and other professional services, facilities and equipment, information technology and telecommunications support and services, and other corporate functions. Selling, general and administrative expenses also include depreciation and amortization on the fixed assets used to support these functions.

        On February 19, 2008, our Board of Directors suspended the payment of future quarterly dividends. Payment of future cash dividends is at the discretion of our Board of Directors after taking into account various factors, including our financial condition, results of operations, cash flow, the level of our capital expenditures, restrictive covenants in our credit facility, future business prospects and any other matters that our Board of Directors deems relevant.

        We paid dividends of $0.10 per share on January 12, 2007, April 13, 2007, July 13, 2007 and October 12, 2007. On December 6, 2007, our Board of Directors declared a dividend of $0.10 payable to shareholders of record as of December 31, 2007. This dividend was paid on January 12, 2008.

Critical Accounting Policies and Estimates

        The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the accompanying financial statements and related notes. Management bases its estimates and assumptions on historical experience, observance of industry trends and various other sources of information and factors. Actual results could differ from these estimates. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially could result in materially different results under different assumptions and conditions.

Revenue Recognition

        Revenue is recognized when realizable and earned generally as services and solutions are provided over the life of a contract. Fixed fee revenue is recognized using a proportional performance model (which approximates the percentage completion method), based on direct labor hours expended and, when applicable, the completed performance model. Task-based, or deliverable-based, fees are recognized when the relevant task or deliverable is completed. Incentive fee revenue is recognized in the period in which the related improvements are achieved. Our incentive fee agreements with our clients define in advance the performance improvement standards that will form the basis of our incentive fees earned. We do not recognize incentive fee revenue until the client has agreed that performance improvements have in fact been achieved.

Unbilled Receivables

        Although fixed fee revenue recognition generally coincides with billings, as an accommodation to our clients, we may structure fee billings to increase in the latter stages of a program. In such instances, amounts collectible for services and solutions provided, but not yet billed, are represented in unbilled receivables.

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Deferred Revenue

        We occasionally receive advance payments of a portion of our fees. Advance payments are classified as deferred revenue upon receipt and recorded as revenue when earned.

Deferred Taxes

        Income taxes are calculated using the asset and liability method required by ASC 740-10-25, Income Taxes. Deferred income taxes are recognized for the tax consequences resulting from timing differences by applying enacted statutory tax rates applicable to future years. These timing differences are associated with differences between the financial and the tax basis of existing assets and liabilities. Under ASC 740-10, a statutory change in tax rates will be recognized immediately in deferred taxes and income. Net deferred taxes are recorded both as a current deferred income tax asset and as other long-term liabilities based upon the classification of the related timing difference. A valuation allowance is recognized if, based on the weight of available evidence, it is more likely than not that some portion or all of a deferred tax asset will not be realized. All available evidence, both positive and negative, is considered when determining the need for a valuation allowance. Judgment is used in considering the relative impact of negative and positive evidence. The weight given to the potential effect of negative and positive evidence is commensurate with the extent to which it can be objectively verified. In accordance with ASC 740-10, evidence, such as operating results during the most recent three-year period, is given more weight than our expectations of future profitability, which are inherently uncertain.

        In addition to timing differences arising from operating assets and liabilities, we also record deferred tax assets for the tax benefits of net operating losses and foreign tax credits. For United States federal tax purposes, at December 31, 2002, we had net operating loss carryovers of approximately $4.2 million. Under the limitations of Section 382 of the Internal Revenue Code, discussed below, $0.7 million was used to offset United States taxable income in 2003. In 2004, $0.2 million expired under Section 382, but $8.1 million in United States net operating loss was generated, resulting in a balance of $11.4 million at December 31, 2004. In 2005, we used $8.1 million of the net operating loss to offset United States taxable income and used $0.2 million of the net operating loss carryforward limited under Section 382, resulting in a net operating loss carryforward balance of $3.1 million at December 31, 2005. In each of fiscal years 2006 and 2007, we used $0.2 million of the net operating loss carryforward balance, resulting in a $2.9 million balance at December 31, 2006, and a $2.8 million balance at December 31, 2007 and December 31, 2008. As of December 31, 2009, we had a $2.8 million net operating loss carryforward balance.

        In assessing the realizability of deferred tax assets, we considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. During 2006 we determined that a valuation allowance was appropriate on only approximately $117,000 of the net operating loss carryforward, due to annual limitations under Section 382. Therefore, we removed $1.8 million of the valuation allowance. As of December 31, 2008, we reduced the valuation allowance by $59,000 as a result of another revaluation of this account, resulting in a $58,000 balance at year end. As of December 31, 2009, the valuation allowance is $58,000.

        Our assessment included a review of the critical assumptions affecting the ultimate realizability of this deferred tax asset. For 2009 we will be able to claim a refund of Federal income taxes paid in prior years. Generally, in order for us to be able to utilize the tax deductions that give rise to the balance of this deferred tax asset, we will need to generate adequate profits in the future. As a result, and particularly in light of our net losses in recent periods, it is management's view that the most critical assumption affecting the realizability of this deferred tax asset is the assumption that we will be able to return to sustained profitability. In order to achieve such profitability, we will need to generate additional revenue from new clients and to continue the recent success of reducing costs and operating

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with a lower cost structure. We believe that our 30-year history of success in delivering high quality services to our clients, our recent efforts to diversify our product and service offerings to appeal to a broader range of potential customers, and our recent success at reducing and managing costs are all positive factors in assessing the likelihood of our future profitability. Although it is impossible to predict with certainty when or if we will return to profitability, management is committed to this outcome and believes that we will be able ultimately to achieve this goal. Therefore, we have concluded as of this point in time that it is more likely than not that we will be able to utilize this deferred tax asset.

        If future analyses of the positive and negative evidence indicate that it is more likely than not that some portion or all of the net deferred tax asset will not be realized, a partial or full valuation allowance may be required, which could have a negative effect on net income in the period that it becomes more likely than not that deferred tax assets will not be realized.

        We also follow the guidance under ASC 740-10-25, which prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Tax law is subject to varied interpretation, and whether a tax position will ultimately be sustained may be uncertain. Under ASC 740-10-25, tax positions are initially recognized in the financial statements when it is more likely than not that the position will be sustained upon examination by the tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and all relevant facts. ASC 740-10-25 also requires additional disclosures about unrecognized tax benefits associated with uncertain income tax positions and a reconciliation of the change in the unrecognized benefit. In addition, ASC 740-10-25 requires interest to be recognized on the full amount of deferred benefits for uncertain tax positions. An income tax penalty is recognized as expense when the tax position does not meet the minimum statutory threshold to avoid the imposition of a penalty. As of December 31, 2009, we did not have any liabilities or associated interest under ASC 740-10-25.

        We adopted the provisions of ASC 740-10-25, Accounting for Uncertainty in Income Taxes, on January 1, 2007. As a result of the implementation of ASC 740-10-25, we recognized a $40,000 increase in the liability for unrecognized tax benefits, which was recorded as a reduction of retained earnings in our Consolidated Balance Sheets at January 1, 2007. The liability for unrecognized tax benefits was subsequently reversed upon settlement with the IRS during a routine audit. We see no significant changes to the facts and circumstances underlying our reserves and allowances. We recognize deductible interest accrued related to tax penalties as interest expense in our Consolidated Statements of Operations and we recognize non-deductible accrued interest and penalties as income tax expense in our Consolidated Statements of Operations. Non-deductible penalties and interest were $100, $14,000 and $72,000 for the years 2009, 2008 and 2007, respectively.

        We are currently subject to the statutes of limitations for federal and state income taxes in the states in which we perform our services. The last year that is now closed for audit for Federal income taxes is 2007. Our Federal income tax return for the year ended December 31, 2007 was audited by the Internal Revenue Services in 2009. There were no changes to the taxes due as a result of this audit.

Accumulated Other Comprehensive Loss

        Translation of the financial statements of our operations in Europe and Asia resulted in accumulated translation adjustments of approximately $682,000 at December 31, 2004 that was required to be carried on the balance sheet as a separate component of stockholders' equity. During 2005, we liquidated our subsidiaries in Switzerland resulting in a reclassification of a $713,000 accumulated other comprehensive loss to the income statement. During 2007, we liquidated our Hong Kong subsidiary

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resulting in a $31,000 accumulated other comprehensive gain to the income statement. As of December 31, 2009, we had no accumulated other comprehensive gain on the balance sheet.

Performance Share Awards

        Our performance share awards are accounted for in accordance with the provisions of ASC 718, Stock Compensation. In accordance with ASC 718, compensation expense is recognized over the applicable period of service for performance share awards that are deemed by management to be reasonably achievable.

Government Contracts

        For the last several years we have worked extensively on engagements with two divisions of the U.S. Navy, each governed by a separate contractual agreement. One of these contracts expired March 31, 2008 and the other expired April 30, 2008. For the year ended December 31, 2007 these two contracts represented approximately 85% of our revenue, and for the year ended December 31, 2008 they represented approximately 44% of our revenue. To date, we have not fully replaced the revenue that was previously generated through these expired government contracts. We continue to work on smaller programs with the U.S. Navy as well as the U.S. Army. We are actively working to expand our business with the entire U.S. military as well as other departments within the U.S. government.

Results of Operations

        The following sets forth certain operating data as a percentage of revenue for the periods presented:

Years Ended December 31, 2009 and 2008

Revenue

        Total revenue decreased $15.6 million, or 62%, to $9.6 million in 2009, from $25.1 million in 2008. The overall decrease in revenues is due primarily to a decrease in our government business due to the ending of some of our U.S. Navy programs following the government's decision to consolidate these programs into a single contracting vehicle for which we were not named as a provider. The decrease is also due to having a lower volume of commercial contracts, along with the contracts having a lower contract value for the year ended December 31, 2009. Typically, our initial customer engagement consists of a paid assessment followed by a longer, more extensive program. During 2009, we recorded

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revenues on 38 assessments and programs from 27 different customers compared to 48 assessments and programs with 32 different customers during 2008.

        Fixed fee revenues decreased $3.8 million, or 36%, to $6.6 million, or 69% of revenue, in 2009 from $10.4 million, or 41% of revenue, in 2008. The decrease in fixed fee revenues is attributable to the lower number of active commercial contracts, along with the contracts having a lower contract value for the year ended December 31, 2009. During 2009, we derived fixed fee revenues from 33 assessments and programs from 25 different customers, versus 38 programs and assessments from 23 different customers in 2008. In 2009, we recorded fixed fee revenues from eight customers with multiple engagements, versus five customers with multiple engagements in 2008.

        Task-based revenues decreased $11.4 million, or 92%, to $1.0 million, or 11% of revenue, in 2009, from $12.4 million, or 49% of revenue, in 2008. The decrease in task-based revenues relates to the decrease in the number of active programs with the United States government. During 2009, we derived task-based revenues on five assessments and programs from two customers, versus seven assessments and programs from six customers in 2008. In both 2009 and 2008, we recorded task-based revenues from two customers with multiple engagements.

        Incentive fee revenues increased $0.2 million, or 31%, to $0.7 million, or 7% of revenue, in 2009, from $0.5 million, or 2% of revenue, in 2008. Although we continue to offer a portion of our fees contingent on performance based metrics, our more recent customers have preferred fixed fee or task-based arrangements.

        Reimbursement revenues decreased $0.5 million, or 29%, to $1.3 million, or 13% of revenues, in 2009, from $1.8 million, or 7%, in 2008. The decrease in the number of commercial contracts is primarily responsible for the increase in reimbursement revenues.

        North America region revenue decreased $14.3 million, or 69%, to $6.6 million in 2009, from $20.9 million in 2008. Revenues from United States government contracts decreased $10.6 million, or 81%, to $2.5 million from $13.1 million in 2008. Revenues from contracts with commercial clients in the United States decreased $4.2 million, or 69%, to $4.1 million from $8.3 million in 2008.

        Our South America region revenue decreased $0.56 million, or 97% to $0.02 million in 2009, from $0.58 million in 2008.

        Our Europe region revenue decreased $0.7 million, or 20%, to $3.0 million in 2009, from $3.7 million in 2008.

        Our Asia/Pacific region had no revenue in 2009 and 2008. During the second quarter of 2008, we closed our office in the Asia/Pacific region.

Gross Profit

        Gross profit for 2009 decreased $6.7 million to $3.4 million, or 36% of revenue, from $10.1 million, or 40% of revenue, in 2008. Costs of sales, which is a component of gross profit, consists of direct labor, travel, and other direct costs incurred by our consultants to provide services to our clients and to complete client related projects, including training. The drop in year-to-date gross margins is related to the slowdown of our government and commercial programs during 2009 and to lower utilization rates of our consultants in 2009.

Selling, General and Administrative

        Selling, general and administrative expense for 2009 decreased $7.9 million to $10.7 million, or 112% of revenue, from $18.6 million, or 74% of revenue, in 2008. The $7.9 million decrease is related primarily to a $1.7 million decrease in stock-based compensation, a $2.5 million decrease in payroll costs related to reduction in the support staff, $0.5 million decrease in severance and recruiting costs

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related to the reduction in our labor force during the second quarter of 2008, a $1.3 million decrease in sales commission and executive bonus, a $0.3 million decrease in bad debt allowance, a $0.3 million decrease in travel expenses, a $0.2 million decrease in outside consultants, a $0.2 million decrease in equipment rent, a $0.2 million decrease in depreciation expense, a $0.2 million decrease in legal expenses and insurance costs, and a $0.5 million decrease in other costs due to a decline in activity.

Income Taxes

        During 2009, we recorded income tax benefit of $2.6 million compared to $2.5 million during 2008. Our effective tax rate for 2009 was 38%, compared to 30% in 2008. The increase in tax benefit and resulting increase in effective rate is due primarily to the operating loss during the year 2009 and state net operating loss adjustments.

        From 2001 to 2005, we had provided a valuation allowance for the full amount of our net deferred tax assets. During 2006, however, we determined that a valuation allowance was appropriate on only approximately $117,000 of the net operating loss carryforward, due to annual limitations under Section 382 of the Internal Revenue Code of 1986, as amended, and therefore we removed $1.8 million of the valuation allowance. At December 31, 2008, we further reduced the valuation allowance by $59,000 to $58,000 as a result of another revaluation of this account. As of December 31, 2009, the valuation allowance is $58,000.

        We continue to provide a valuation allowance of approximately $58,000 against our net deferred tax assets against net operating loss carryforwards subject to annual limitation under Section 382. While the factors listed above were considered in assessing the sufficiency of a valuation allowance, there is no assurance an adjustment to the valuation allowance would not need to be made in the future if information about future years change. Any change in the valuation allowance would impact our income tax provision and net income in the period in which such a determination is made.

Years Ended December 31, 2008 and 2007

Revenue

        Total revenue decreased $30.8 million, or 55%, to $25.1 million in 2008, from $55.9 million in 2007. The overall decrease in revenues was comprised of a net decrease in revenue from our U.S. government clients due to a reduced number of active contracts and the natural ending of two of our U.S. Navy programs in the first quarter of 2008. The decrease in revenues was partially offset by gains in commercial revenues, which were derived primarily from new programs and program expansions among our commercial clients. Typically, our initial customer engagement consists of a paid assessment followed by a longer, more extensive program. During 2008, we recorded revenues on 45 assessments and programs from 32 different customers compared to 38 assessments and programs with 22 different customers during 2007. There were two assessments completed or started in 2008 that, as of December 31, 2008, had not yet led to a subsequent assessment or program.

        Fixed fee revenues increased $4.6 million, or 79%, to $10.4 million, or 42% of revenue, in 2008 from $5.8 million, or 10% of revenue, in 2007. The increase in fixed fee revenues is attributable to the rise in the number of active commercial contracts. During 2008, we derived fixed fee revenues from 38 assessments and programs from 23 different customers, versus 29 programs and assessments from 19 different customers in 2007. In 2008, we recorded fixed fee revenues from five customers with multiple engagements, versus four customers with multiple engagements in 2007.

        Task-based revenues decreased $36.8 million, or 75%, to $12.4 million, or 49% of revenue, in 2008, from $49.2 million, or 88% of revenue, in 2007. The decrease in task-based revenues relates to the decrease in the number of active programs with the United States government. During 2008, we derived task-based revenues on seven assessments and programs from six customers, versus nine

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assessments and programs from three customers in 2007. In both 2008 and 2007, we recorded task-based revenues from two customers with multiple engagements.

        Incentive fee revenue was $0.5 million, or 2% of revenues, in 2008. We had no incentive revenues for 2007. Although we continue to offer a portion of our fees contingent on performance based metrics, our more recent customers have preferred fixed fee or task-based arrangements.

        Reimbursement revenues increased $1.0 million, or 116%, to $1.8 million, or 7% of revenues, from $0.8 million, or 2%, in 2007. The increase in the number of commercial contracts is primarily responsible for the increase in reimbursement revenues.

        North America region revenue decreased $35.0 million, or 62%, to $20.8 million in 2008, from $55.4 million in 2007. Revenues from United States government contracts decreased $36.4 million, or 74%, to $13.1 million from $49.5 million in 2007. Revenues from contracts with commercial clients in the United States increased $2.4 million, or 41%, to $8.3 million from $5.9 million in 2007.

        Our South America region revenue was $0.6 million in 2008. We had no revenue in South America in 2007.

        Our Europe region revenue increased $3.2 million, or 724%, to $3.7 million in 2008, from $0.4 million in 2007.

        Our Asia/Pacific region had no revenue in 2008 compared to $24,000 in 2007. The decrease is due to our inability to continue programs initiated in 2007 and to generate new programs in 2008. During the second quarter of 2008, we closed our office in the Asia/Pacific region.

Gross Profit

        Gross profit for 2008 decreased $18.8 million to $10.1 million, or 40% of revenue, from $28.9 million, or 52% of revenue, in 2007. Costs of sales, which is a component of gross profit, consists of direct labor, travel, and other direct costs incurred by our consultants to provide services to our clients and to complete client related projects, including training. The drop in year-over-year gross profit is due to the decrease in our utilization rates related to a slowdown of our government programs beginning in April 2008.

Selling, General and Administrative

        Selling, general and administrative expense for 2008 increased $0.2 million, or 1%, to $18.6 million from $18.4 million in 2007. The $0.2 million increase is related primarily to a $1.8 million increase in costs incurred in utilizing unassigned consultants to work on sales efforts, as compared to the prior year when a majority of these individuals were working on billable client projects, a $0.3 million increase in stock-based compensation, $0.5 million in severance costs related to the reduction in our labor force during the second quarter of 2008, and a $0.3 million increase in bad debt allowance. This increase was partially offset by a $1.0 million decrease in sales commission and employee bonus, a $0.4 million decrease in payroll costs related to reduction in the sales staff, $1.0 million decrease in professional expenses related primarily to the review of our historical stock option practices in the first half of 2007, a $0.4 million decrease in the cost of outside contractors used due to the decline in activity, and a $0.1 million decrease in other costs due to the decline in activity and the number of consultants we employed as compared to the same period in 2007.

Income Taxes

        During 2008, we recorded income tax benefit of $2.5 million compared to income tax expense of $4.0 million during 2007. Our effective tax rate for 2008 was 30%, compared to 36% in 2007. The decrease in tax expense and resulting effective rate is due primarily to the operating loss during the year 2008 and the decrease in the valuation allowance explained below.

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        From 2001 to 2005, we had provided a valuation allowance for the full amount of our net deferred tax assets. During 2006, however, we determined that a valuation allowance was appropriate on only approximately $117,000 of the net operating loss carryforward, due to annual limitations under Section 382 of the Internal Revenue Code of 1986, as amended, and therefore we removed $1.8 million of the valuation allowance. At December 31, 2008, we further reduced the valuation allowance by $59,000 to $58,000 as the result of another revaluation of this account.

        We continue to provide a valuation allowance of approximately $58,000 against our net deferred tax assets against net operating loss carryforwards subject to annual limitation under Section 382. While the factors listed above were considered in assessing the sufficiency of a valuation allowance, there is no assurance an adjustment to the valuation allowance would not need to be made in the future if information about future years change. Any change in the valuation allowance would impact our income tax provision and net income in the period in which such a determination is made.

Quarterly Results

        The following table sets forth certain unaudited operating results for each of the four quarters in the two years ended December 31, 2009. This information has been prepared on the same basis as the audited financial statements and, in our opinion, includes all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the information for the periods presented.

Liquidity and Capital Resources

        For the year 2009, net cash used for operating activities was $3.0 million, compared to $1.1 million used for the year 2008. This increase in net cash used is due primarily to our operating loss for the year 2009, a decrease in our accrued liabilities, and the reversal of stock based compensation expense, offset by collection of our accounts receivable and receipt of income tax refund for 2008 during the year.

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        For each of years 2009 and 2008, net cash used for investing activities was $0.1 million, consisting of computer and software purchases.

        Cash used for financing activities for the year 2009 was $0.3 million, consisting primarily of stock repurchases under our stock repurchase program, compared to $2.5 million used in the year 2008, related to the $1.2 million payment of dividends for the fourth quarter of 2007 which were paid in 2008, the $1.0 million purchase of stock under our stock repurchase plan, and the $0.2 million net tax effect of stock issuances.

        Pursuant to a resolution of the Board of Directors to repurchase up to 505,450 shares, on March 6, 2008 we entered into a Rule 10b5-1 repurchase plan to establish a systematic program authorizing a stockbroker to execute repurchases in accordance with the terms of the Rule 10b5-1 plan. After a waiting period, repurchases commenced on April 7, 2008. In October 2008, our Board of Directors approved an expansion of our stock repurchase program, authorizing us to repurchase up to an additional 300,000 shares from time to time, subject to market conditions.

        During the year ended December 31, 2009, we repurchased 281,797 shares for a total of $258,404, or an average of $0.92 per share including commissions and fees.

        As of January 26, 2010, we completed the authorized repurchase of 805,450 shares under the Plan at a total cost of $1,259,640, or $1.56 per share including commissions and fees.

$5.5 million former Credit Facility with JPMorgan Chase Bank, N.A.

        On December 15, 2006, we entered into a credit agreement with JPMorgan Chase Bank, N.A. to be used for ongoing working capital needs and general corporate purposes. We did not draw on this credit facility and at December 31, 2008, we had a zero balance on such credit facility. The obligations under this credit facility were secured by first priority liens on all of our accounts and proceeds thereof. This credit facility also imposed certain affirmative and negative covenants on our operations and business. This credit facility matured on March 31, 2009. At that time, based on our projected forecast for 2009 and 2010, we did not anticipate the continued need for this credit facility. As a result, we did not request a renewal or extension upon its expiration on March 31, 2009. All liens were removed upon expiration of this credit agreement.

Our Liquidity Plan

        Since the expiration of our two large U.S. Navy contracts in 2008, our ability to generate cash from operations has been, and will continue to be, determined primarily by our ability to generate substantial new revenue. Our ability to generate this required new revenue will be affected by prevailing economic conditions, among other factors. We have taken steps to reduce our costs in many areas, and we will continue to do so to the maximum extent we believe is prudent. If future cash flows and capital resources are insufficient to meet our obligations and commitments, we may be forced to reduce or delay activities and capital expenditures, or obtain additional equity capital or take other steps to refinance our business.

        Our ability to achieve positive gross margins, control costs and generate cash flow from operations in the future will determine our ability to arrange debt facilities in the future. We regularly evaluate our business to enhance our liquidity position. Our cash balance at December 31, 2009 was $5.0 million, or $0.47 per diluted share. We expect to receive Federal income tax refunds in the first half of 2010 of approximately $2.7 million. For the past several years, we have had a line of credit available to us, but we have not drawn on it for over three years. Based on our current forecast of revenues and expenses for 2009 and 2010, and in part to reduce costs, we did not request an extension of our line of credit when it expired on March 31, 2009. Thus, our available liquidity is limited to our existing working capital, the proceeds from our anticipated tax refund, and cash flow that we will be

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able to generate from operations in 2010. We currently believe we have sufficient liquidity to sustain our operations at least through March 31, 2011.

Inflation

        Although our operations are influenced by general economic conditions, we do not believe inflation had a material effect on the results of operations during the years ended December 31, 2009, 2008 or 2007. However, there can be no assurance our business will not be affected by inflation in the future.

Off-Balance Sheet Arrangements

        At December 31, 2009, and 2008, we had no obligations that would qualify to be disclosed as off-balance sheet arrangements.

Contractual Obligations

        The amounts of our contractual obligations at December 31, 2009, as well as the maturity of these commitments, are as follows:

        Long-term debt obligations:    At December 31, 2009, we had no long-term debt obligations.

        Capital lease obligations:    At December 31, 2009, we had no capital lease obligations.

        Operating lease obligations:    Operating lease obligations consist of office rental commitments for our offices in Irving, Texas and various equipment leases for copiers, postage meters and laptop computers are maintained under operating leases.

        Purchase obligations:    Purchase obligations include legally binding contracts for goods or services, primarily maintenance agreements for software and equipment, telecommunications contracts, and contracts for other services that ranged from one year to three years in duration at inception of the agreement.

ITEM 8.    Financial Statements and Supplementary Data.

        See Index to Consolidated Financial Statements on page F-1. Supplementary quarterly financial information for us is included in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."

ITEM 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

        Not applicable.

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ITEM 9A(T).    Controls and Procedures.

        Based on the evaluation of our disclosure controls and procedures as of the end of the period covered by this annual report, our Chief Executive Officer and our Chief Financial Officer have concluded that, in their judgment, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us, including our subsidiaries, in the reports we file, or submit under the Securities Exchange Act of 1934, is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management's control objectives. The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions, regardless of how remote.

Management's Report on Internal Control over Financial Reporting

        Management is responsible for establishing and maintaining adequate internal control over financial reporting. This internal control system has been designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of our published financial statements.

        All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

        Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2009. To make this assessment, management used the criteria for effective internal control over financial reporting described in Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as of December 31, 2009, our internal control over financial reporting is effective based on those criteria.

        This Annual Report on Form 10-K does not include an attestation report from our independent registered public accounting firm regarding internal control over financial reporting pursuant to temporary rules of the SEC that permit us to provide only management's report in this Annual Report on Form 10-K.

Changes in Internal Control over Financial Reporting

        There was no change in our internal control over financial reporting during our fourth quarter of 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B.    Other Information.

        There was no information required to be disclosed in a report on Form 8-K in the fourth quarter of 2009 which was not reported.

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PART III

ITEM 10.    Directors and Executive Officers of the Registrant.

        The information required by this Item 10 is incorporated herein by reference to our Proxy Statement for our 2010 Annual Meeting of Stockholders, which will be filed on or before April 30, 2010.

        We make available free of charge on our Internet web site (http://www.thomasgroup.com) the Code of Business Conduct and Ethics applicable to all of our employees including our principal executive officer, principal financial officer and principal accounting officer. We will make immediate disclosure by a current report on Form 8-K and on our web site of any change to, or waiver from, the Code of Business Conduct and Ethics for our principal executive and senior financial officers. We will also provide to any person without charge, upon request, a copy of such code of ethics. Please send your written request to: Thomas Group, Attn: CFO, 5221 N. O'Connor Blvd, Suite 500, Irving, TX 75039.

ITEM 11.    Executive Compensation.

        The discussion under "Executive Compensation" in our Proxy Statement for our 2010 Annual Meeting is incorporated herein by reference.

ITEM 12.    Security Ownership of Certain Beneficial Owners and Management.

        The discussion under "Security Ownership of Certain Beneficial Owners and Management" in our Proxy Statement for our 2010 Annual Meeting of Stockholders is incorporated herein by reference.

        The following table provides information related to the number of shares to be issued upon exercise of all outstanding options, warrants and rights and the number of shares available for future issuance under our equity compensation plans at December 31, 2009.

EQUITY COMPENSATION PLAN INFORMATION

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ITEM 13.    Certain Relationships and Related Transactions.

        The discussion under "Certain Relationships and Related Transactions" in our Proxy Statement for our 2010 Annual Meeting is incorporated herein by reference.

ITEM 14.    Principal Accounting Fees and Services.

        The discussion under "Principal Accounting Fees and Services" in our Proxy Statement for our 2010 Annual Meeting is incorporated herein by reference.

PART IV

ITEM 15.    Exhibits and Financial Statement Schedules.

 

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SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, we have duly caused this Form 10-K to be signed on our behalf by the undersigned, thereunto duly authorized, in the City of Irving, State of Texas, on March 30, 2010.

POWER OF ATTORNEY

        Each individual whose signature appears below constitutes and appoints Michael E. McGrath such person's true and lawful attorney-in-fact and agent with full power of substitution and re-substitution, for such person and in such person's name, place, and stead, in any and all capacities, to sign any and all amendments to this Form 10-K and to file the same with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto such attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that such attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this Form 10-K has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated.

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ANNUAL REPORT ON FORM 10-K
ITEM 8, and 15(a)(1) and (c)
LIST OF FINANCIAL STATEMENTS
CERTAIN EXHIBITS
FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2009
THOMAS GROUP, INC.
IRVING, TEXAS

FORM 10-K—ITEM 15(a)(1)
Thomas Group, Inc.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

        The following consolidated financial statements of Thomas Group, Inc. are included in response to Item 8:

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
Thomas Group, Inc.
Irving, TX

        We have audited the accompanying consolidated balance sheets of Thomas Group, Inc. as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of Thomas Group, Inc.'s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Thomas Group, Inc. at December 31, 2009 and 2008 and the consolidated results of operations and cash flows of Thomas Group, Inc. for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.

        We were not engaged to examine management's assertion about the effectiveness of Thomas Group, Inc.'s internal control over financial reporting as of December 31, 2009 included in Management's Report on Internal Control over Financial Reporting and, accordingly, we do not express an opinion thereon.

/s/ HEIN & ASSOCIATES LLP

Dallas, Texas
March 30, 2010

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THOMAS GROUP, INC. CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements.

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THOMAS GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to consolidated financial statements.

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THOMAS GROUP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

See accompanying notes to consolidated financial statements.

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THOMAS GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to consolidated financial statements.

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THOMAS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2009

Note 1 Summary of Significant Accounting Policies

        (a)   The Company—Thomas Group, Inc. is a professional services firm that executes and implements process improvements and culture change management operations strategies to produce improved operational and financial performance for our clients globally. Through our proprietary Process Value Management™, or PVM™, methodology, our consultants refine processes throughout an organization to give our clients a competitive advantage that increases revenues, lowers costs, and generates cash. With our more than 30 years of change management experience, innovation, and knowledge leadership, we have demonstrated our ability to apply this methodology in a wide variety of organizations.

        The Company was incorporated under the laws of the State of Delaware in June 1978.

        (b)   Basis of Presentation—The accompanying consolidated financial statements include the accounts of the Company and our wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated. Certain amounts from prior years have been reclassified to conform to the 2009 presentation.

        (c)   Earnings Per Share—Basic earnings (loss) per share is based on the number of weighted average shares outstanding. Diluted earnings (loss) per share includes the effect of dilutive securities such as stock options, stock warrants, and restricted stock awards expected to vest.

        The following table reconciles basic earnings (loss) per share to diluted earnings (loss) per share under the provisions of Financial Accounting Standards Board ("FASB") ASC 260-10-55, Earnings Per Share.

        Total stock options and unvested restricted stock awards outstanding in 2009, 2008 and 2007 not included in the diluted earnings per share computation due to their antidilutive effects are

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THOMAS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2009 (Continued)

Note 1 Summary of Significant Accounting Policies (Continued)

approximately 135,334, 103,679, and 26,000, respectively. Such options and warrants are excluded due to exercise prices exceeding the average market value of our common stock in 2009, 2008 and 2007.

        (d)   Liquidity—For the last several years we have worked on engagements with two divisions of the U.S. Navy, each governed by a separate contractual agreement. One of these contracts expired March 31, 2008 and the other expired April 30, 2008. For the year ended December 31, 2008 these two contracts represented approximately 44% of our revenue, and for the year ended December 31, 2007 they represented approximately 85% of our revenue. The expiration of these contacts resulted in a significant decline in revenue in 2008 and 2009, and a net loss for the year ended December 31, 2009. Our cash balance was $5,003,867 at December 31, 2009, and we expect to receive tax refunds from Federal income taxes of approximately $2.7 million during the first half of 2010. Based on our forecasts of results for 2010, we project that the cash balance plus the tax refunds should provide sufficient liquidity to meet our needs through March 31, 2011 although circumstances may change to negatively impact our forecast. In this event, we could be required to seek other sources of liquidity prior to that date. There can be no assurance that such additional liquidity would be available or available on terms acceptable to us.

        (e)   Management's Estimates and Assumptions—The presentation of financial statements in conformity with U.S. generally accepted accounting principles, or "GAAP", requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. We review all significant estimates affecting the financial statements on a recurring basis and record the effect of any necessary adjustments prior to issuance of the financial statements. We consider revenue recognition, the allowance for bad debt, and the valuation allowance for deferred taxes, to be the most significant estimates.

        (f)    Advertising—We expense the costs of advertising as incurred. Advertising expense was $0.01 million for the year ended December 31, 2009, $0.05 million for the year ended December 31, 2008 and $0.1 million for the year ended December 31, 2007.

        (g)   Property and Equipment—Property and equipment are stated at cost less accumulated depreciation. We record impairment losses on long-lived assets used in operations when events and circumstances indicate the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets.

        Depreciation is calculated on an accelerated declining balance or straight-line basis over the estimated useful lives of the various assets as follows:

        (h)   Revenue—We generally derive our revenue from fees for the implementation of business operations improvement programs delivered by our consultants. Total revenue consists of fees and other billings derived from fixed fees, task-based fees, incentive fees and reimbursed travel expenses. Our fee type and structure for each client engagement depends on a number of variables, including the size of

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THOMAS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2009 (Continued)

Note 1 Summary of Significant Accounting Policies (Continued)

the client, the complexity and geographic dispersion of its business, the extent of the opportunity for us to improve the client's processes and other factors.

        Fixed fee revenue is recognized on the proportional performance model (which approximates the percentage completion method), based on direct labor hours expended and, when applicable, the completed performance model. In order to calculate the completion ratio on a given project, time and effort to date are divided by the total estimated time and effort for the entire project. This ratio is then multiplied by the total fixed fee to be earned on the project, resulting in the amount of revenue earned to date. A few of our fixed fee contracts, primarily assessments, are recognized using the completed contract performance model as these contracts are generally one to six weeks in duration and conclude with a presentation or agreed upon deliverable to the clients' management. Task-based fees are recognized as revenue when the relevant task is completed, usually on a monthly basis.

        Incentive fees are tied to improvements in a variety of client performance measures typically involving cycle time, asset utilization and productivity. Incentive fee revenue is recognized in the period in which the related client improvements are achieved and we obtain the client's acceptance. Our incentive fee agreements with our clients define in advance the performance improvement standards that will form the basis for the payment of incentive fees. In order to mitigate the risk of disputes arising over the achievement of performance improvements, which drive incentive fees, we obtain customer agreement to these achievements prior to recognizing revenue.

        (i)    Unbilled Receivables—Although fixed fee revenue recognition generally coincides with billings, as an accommodation to our client, we may structure fee billings to increase in the latter stages of a program. In such instances, revenues recognized for services provided but not yet billed are recorded as unbilled receivables.

        (j)    Deferred Revenue—We occasionally receive advance payments of a portion of our fees. Advance payments are classified as deferred revenue upon receipt and recorded as revenue when earned.

        (k)   Income Taxes—Income taxes are calculated using the asset and liability method required by ASC 740-10-25, Income Taxes. Deferred income taxes are recognized for the tax consequences resulting from timing differences by applying enacted statutory tax rates applicable to future years. These timing differences are associated with differences between the financial and the tax basis of existing assets and liabilities. Under ASC 740-10, a statutory change in tax rates will be recognized immediately in deferred taxes and income. Net deferred taxes are recorded both as a current deferred income tax asset and as other long-term liabilities based upon the classification of the related timing difference. A valuation allowance is recognized if, based on the weight of available evidence, it is more likely than not that some portion or all of a deferred tax asset will not be realized. All available evidence, both positive and negative, is considered when determining the need for a valuation allowance. Judgment is used in considering the relative impact of negative and positive evidence. The weight given to the potential effect of negative and positive evidence is commensurate with the extent to which it can be objectively verified. In accordance with ASC 740-10, evidence, such as operating results during the most recent three-year period, is given more weight than our expectations of future profitability, which are inherently uncertain.

        In addition to timing differences arising from operating assets and liabilities, we also record deferred tax assets for the tax benefits of net operating losses and foreign tax credits. For United States

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THOMAS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2009 (Continued)

Note 1 Summary of Significant Accounting Policies (Continued)

Federal tax purposes, at December 31, 2002, we had net operating loss carryovers of approximately $4.2 million. Under the limitations of Section 382 of the Internal Revenue Code, discussed below, $0.7 million was used to offset United States taxable income in 2003. In 2004, $0.2 million expired under Section 382, but an $8.1 million in United States net operating loss was generated, resulting in a balance of $11.4 million at December 31, 2004. In 2005, we used $8.1 million of the net operating loss to offset United States taxable income and used $0.2 million of the net operating loss carryforward limited under Section 382, resulting in a net operating loss carryforward balance of $3.1 million at December 31, 2005. In each of fiscal years 2006 and 2007, we used $0.2 million of the net operating loss carryforward balance, resulting in a $2.9 million balance at December 31, 2006, and a $2.8 million balance at December 31, 2007 and December 31, 2008. As of December 31, 2009, we had a $2.8 million net operating loss carryforward balance.

        In assessing the realizability of deferred tax assets, we considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. During 2006 we determined that a valuation allowance was appropriate on only approximately $117,000 of the net operating loss carryforward, due to annual limitations under Section 382. Therefore, we removed $1.8 million of the valuation allowance. As of December 31, 2008, we reduced the valuation allowance by $59,000 as the result of another revaluation of this account, resulting in a $58,000 balance at year end. As of December 31, 2009, the valuation allowance is $58,000.

        Our assessment included a review of the critical assumptions affecting the ultimate realizability of this deferred tax asset. For 2009 we will be able to claim a refund of Federal income taxes paid in prior years. Generally, in order for us to be able to utilize the tax deductions that give rise to the balance of this deferred tax asset, we will need to generate adequate profits in the future. As a result, and particularly in light of our net losses in recent periods, it is management's view that the most critical assumption affecting the realizability of this deferred tax asset is the assumption that we will be able to return to sustained profitability. In order to achieve such profitability, we will need to generate additional revenue from new clients and to continue the recent success of reducing costs and operating with a lower cost structure. We believe that our 30-year history of success in delivering high quality services to our clients, our recent efforts to diversify our product and service offerings to appeal to a broader range of potential customers, and our recent success at reducing and managing costs are all positive factors in assessing the likelihood of our future profitability. Although it is impossible to predict with certainty when or if we will return to profitability, management is committed to this outcome and believes that we will be able ultimately to achieve this goal. Therefore, we have concluded as of this point in time that it is more likely than not that we will be able to utilize this deferred tax asset.

        If future analyses of the positive and negative evidence indicate that it is more likely than not that some portion or all of the net deferred tax asset will not be realized, a partial or full valuation allowance may be required, which could have a negative effect on net income in the period that it becomes more likely than not that deferred tax assets will not be realized.

        We also follow the guidance under ASC 740-10-25, which prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Tax law is subject to varied interpretation, and whether a tax position will ultimately be sustained may be uncertain. Under ASC 740-10-25, tax positions are initially recognized in the financial statements when it is more likely than not that the

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THOMAS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2009 (Continued)

Note 1 Summary of Significant Accounting Policies (Continued)

position will be sustained upon examination by the tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and all relevant facts. ASC 740-10-25 also requires additional disclosures about unrecognized tax benefits associated with uncertain income tax positions and a reconciliation of the change in the unrecognized benefit. In addition, ASC 740-10-25 requires interest to be recognized on the full amount of deferred benefits for uncertain tax positions. An income tax penalty is recognized as expense when the tax position does not meet the minimum statutory threshold to avoid the imposition of a penalty. As of December 31, 2009, we did not have any liabilities or associated interest under ASC 740-10-25.

        (l)    Cash and Cash Equivalents—Cash equivalents consist of highly liquid investments with original maturities of three months or less.

        (m)  Accounts Receivable and Allowance for Doubtful Accounts—We record trade receivables related to billings to our clients for operations and process improvement services. Trade receivables normally have terms of 30 to 60 days. We have no interest provision for past due trade accounts receivable. Trade accounts receivable are considered past due when the amount due is still uncollected at the time the terms per the trade receivable have expired. An allowance for doubtful accounts is provided when considered necessary based on periodic evaluation of estimated collectability, nature of dispute (if any), and credit history of the client. Amounts more than 120 days past due are charged to bad debt expense. For the year ended December 31, 2009, we wrote off $16,000 in receivables which were charged to bad debt expense. In the year ended December 31, 2008, we wrote off $338,000 in receivables.

        (n)   Concentration of Credit Risk—Financial instruments that potentially subject us to concentrations of credit risk consist solely of trade receivables for which the carrying value equals fair value as determined by actual billings, offset by any applicable reserves or allowances. We encounter a certain amount of credit risk as a result of a concentration of unsecured receivables among a few significant clients. The trade receivables (in dollars and as a percentage of total receivables) from such significant customers are set forth below.

        As of December 31, 2009 and 2008, allowances assessed against trade receivables were $0.01 million.

        As of December 31, 2009, we had cash balances in demand deposit accounts with one large U.S. bank and one European bank in excess of the insured amounts. In total, the amount on deposit in our accounts with these banks was $0.9 million, of which $0.3 million was in excess of the amounts insured under FDIC insurance or the temporary Transaction Account Guarantee Program. Short term working capital in excess of operating needs is invested in a short term money market fund which invests in U.S. government securities sponsored by one of the U.S. banks referenced above. The amounts

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THOMAS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2009 (Continued)

Note 1 Summary of Significant Accounting Policies (Continued)

invested in this money market fund totaled $4.1 million at December 31, 2009. The funds in the money market fund are not guaranteed or insured.

        (o)   Foreign Currency Translation—Our reporting and functional currency is the United States dollar. Monetary assets such as cash in other currencies are remeasured at the period end exchange rate. Accounts receivable and accounts payable are translated based on the rate at the time the transaction is recorded. Revenue and expense transactions are measured at the average exchange rate for the period. The resulting remeasurement adjustment is recorded as foreign exchange gain or loss in the statement of operations. We recorded a $20,000 remeasurement gain, a $58,000 remeasurement gain, and a $244 remeasurement loss for the years ending December 31, 2009, 2008, and 2007, respectively. There is no translation adjustment to the separate component of stockholders' equity or adjustment to comprehensive income.

        Prior to the liquidation of our foreign operations and the change of our reporting and functional currency to the United States dollar for all operations, all adjustments resulting from the translation of foreign currency financial statements were recorded and reported as a separate component of stockholders' equity titled "Accumulated other comprehensive loss." Generally accepted accounting principles require these amounts to be reclassified to the income statement and recorded as a non-cash charge to operations upon discontinuance of the operations causing such currency adjustments. During 2007, we liquidated our Hong Kong subsidiary resulting in a $31,000 accumulated other comprehensive gain on the income statement.

        (p)   Comprehensive Income—Comprehensive income includes all changes in equity except those resulting from investments by stockholders and distributions to stockholders.

        (q)   Stock Based Compensation—We grant performance share awards, restricted stock and incentive and non-qualified stock options to certain of our directors, officers, and employees. We have reserved 2,000,000 shares of common stock for issuance under our stock and incentive plans, of which 886,666 remain authorized and available for grant.

        On March 1, 2008, the Compensation and Corporate Governance Committee of our Board of Directors (the "Compensation Committee") and our Board of Directors, upon the Compensation Committee's recommendation, approved a new incentive compensation plan titled the 2008 Omnibus Stock and Incentive Plan for Thomas Group, Inc. (the "2008 Omnibus Plan").

        The 2008 Omnibus Plan provides a means for us to grant awards to officers, employees or consultants in the form of options, restricted shares, performance awards, and stock appreciation rights. A total of 1,000,000 shares of our common stock was reserved for issuance pursuant to awards to be made under the 2008 Omnibus Plan. The 2008 Omnibus Plan received stockholder approval at our 2008 Annual Meeting of Stockholders held on June 26, 2008.

        (r)   Recent Accounting Pronouncements—On January 1, 2008, we adopted ASC 820, Fair Value Measurements and Disclosures, except for nonfinancial assets and nonfinancial liabilities. The objective of ASC 820 is to increase consistency and comparability in fair value measurements and to expand disclosures about fair value measurements. ASC 820 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. ASC 820 applies under other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. The adoption of this statement did not have a material effect on our reported financial position or

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THOMAS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2009 (Continued)

Note 1 Summary of Significant Accounting Policies (Continued)

results of operations. On January 1, 2009 we adopted ASC 820 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The adoption of this additional provision of this statement did not have a material effect on our reported financial position or results of operations.

        On January 1, 2008, we adopted ASC 825-10-25, Financial Instruments, which permits entities to choose to measure many financial instruments and certain other items at fair value. Most of the provisions of ASC 825-10-25 apply only to entities that elect the fair value option. The adoption of this statement did not have a material effect on our reported financial position or results of operations as we did not elect the fair value option for any eligible financial assets or liabilities not already carried at fair value.

        In May 2009, we adopted ASC 855, Subsequent Events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, ASC 855 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The adoption of ASC 855 had no impact on the financial statements.

        Effective July 1, 2009, we adopted ASC 105, Generally Accepted Accounting Principles. ASC 105-10 establishes the FASB Accounting Standards Codification (the "Codification" or "ASC") as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. All guidance contained in the Codification carries an equal level of authority. The Codification superseded all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification is non-authoritative. The FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates ("ASUs"). The FASB will not consider ASUs as authoritative in their own right. ASUs will serve only to update the Codification, provide background information about the guidance and provide the bases for conclusions on the change(s) in the Codification. References made to FASB guidance throughout this document have been updated for the Codification. The Codification does not change or alter existing GAAP, therefore, the adoption of ASC 105 did not have a material impact on our condensed consolidated financial statements.

        In October 2009, the FASB issued Accounting Standard Update No. 2009-13 on Topic 605, Revenue Recognition—Multiple Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force. The objective of this Update is to address the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. Vendors often provide multiple products or services to their customers. Those deliverables often are provided at different points in time or over different time periods. This Update provides amendments to the criteria in Subtopic 605-25 for separating consideration in multiple-deliverable arrangements. The amendments in this Update establish a selling price hierarchy

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THOMAS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2009 (Continued)

Note 1 Summary of Significant Accounting Policies (Continued)

for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor specific objective evidence nor third-party evidence is available. The amendments in this Update also will replace the term fair value in the revenue allocation guidance with selling price to clarify that the allocation of revenue is based on entity-specific assumptions rather than assumptions of a marketplace participant. This Update is effective for fiscal years beginning on or after June 15, 2010. We are currently evaluating the impact, if any, that this new accounting update may have on our consolidated financial statements.

Note 2 Liquidity and Financing Agreements

        For several years prior to May 2008, a majority of our revenue and cash flow from operations was derived from engagements with two divisions of the U.S. Navy, each governed by a separate contractual agreement. One of these contracts expired March 31, 2008 and the other expired April 30, 2008. For the year ended December 31, 2008 these two contracts represented approximately 44% of our revenue, and for the year ended December 31, 2007 they represented approximately 85% of our revenue. The expiration of these contacts resulted in a significant decline in revenue in 2008 and 2009, and a net loss for the year ended December 31, 2009.

        Our cash balance was $5,003,867 at December 31, 2009, and we expect to receive tax refunds from Federal income taxes of approximately $2.7 million during the first half of 2010. Based on our forecast of results for 2010, we project that the cash balance plus the tax refunds should provide sufficient liquidity to meet our needs through March 31, 2011, although circumstances may change to negatively impact our forecast. In this event, we could be required to seek other sources of liquidity during this period. There can be no assurance that such additional liquidity would be available, or available on terms acceptable to us.

        On December 15, 2006, we entered into a credit agreement with JPMorgan Chase Bank, N.A. This credit agreement formed the basis of a $5.5 million revolving line of credit which matured on March 31, 2009. Interest on the outstanding amount under the credit facility was payable either quarterly or at the end of the applicable LIBOR interest period elected by the Company, at a rate equal to, at our option, either (i) the bank's prime rate then currently in effect minus 1.5% or (ii) the LIBOR rate plus 1.25%. Our obligations under the credit facility were secured by a security interest in our accounts and related collateral as well as a security interest in our equity ownership of all subsidiaries. We did not request an extension of our line of credit when it expired on March 31, 2009. All liens on our assets were released upon expiration of the credit agreement. As of December 31, 2009, we had a note payable of $149,000 for insurance premiums for 2010.

        Total interest expense for 2009 was $3,000, for fees related to our credit facility. Total interest expense for 2008 was $8,000, comprised of $14,000 for fees related to our credit facility, $(13,000) for the write off of excess interest on tax penalties related to the review of our historical stock option granting procedures and $7,000 for interest on Federal and state tax.

        Total interest expense for 2007 was $27,000, comprised of $14,000 for fees related to our credit facility and $13,000 for interest on tax penalties related to the review of our historical stock option granting procedures.

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THOMAS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2009 (Continued)

Note 3 Property and Equipment

        During the year ended December 31, 2009, we identified approximately $381,000 in fixed assets with related accumulated depreciation of approximately $379,000, which were no longer utilized. We recorded a loss of approximately $2,000 upon disposal of these assets.

Note 4 Accounts Payable and Accrued Liabilities

Note 5 Accrued Wages and Benefits

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THOMAS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2009 (Continued)

Note 6 Note Payable

Note 7 Other Income

        Other income for the year ended December 31, 2009 included the collection of a bad debt written off in 2008 of $0.2 million. We also received credits for audit adjustments on insurance premiums of $0.1 million. We also received payment of $0.06 million from the liquidation of a former subsidiary in Europe. There was no other income for the year ended December 31, 2008 and 2007.

Note 8 Income Taxes

        The domestic and foreign source components of income (loss) from continuing operations before taxes are as follows:

        The reconciliation of income tax from continuing operations computed at the United States federal statutory tax rate to our effective income tax rate is as follows:

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THOMAS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2009 (Continued)

Note 8 Income Taxes (Continued)