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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, 2010, 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 $1,807,571 based on the NASDAQ Capital Market Closing Price of $3.20 per share.

         As of March 24, 2011, there were 2,211,553 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 possibility that we may not be able to retain key personnel or to attract necessary replacements to enable our recovery;



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an inability to attract, hire, develop, train and retain experienced consultants necessary to meet client needs.



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a prolonged weak economic recovery or further downturn;



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the inability of the US government to pass a budget for the fiscal year ending September 30, 2011;



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disruption in our relationships with 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;



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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; and



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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 2011.

        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 sectors. We strive to provide measurable results for clients during our engagements, not just reports for actions to be implemented by the client following our departure from the client.

        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, we are organized into two business units, the Government Business Unit and the Commercial Business Unit. Our practice leaders and principals are responsible for sales and marketing to prospective clients.

        The Commercial Business Unit focuses on sales to aerospace firms, to industrial clients, transportation firms, and to healthcare entities including hospitals, medical practices and pharmaceutical firms.

        The Government Business unit is focused on sales to U.S. government agencies, to all branches of the military, and to state and local government entities.

        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.

        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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Operations, Improvement and Cost Reduction



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Culture and Change Management,



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Business Decision Processes,



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Product and Service Innovation,



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Physician Practice Management (in healthcare),



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Supply Chain Management,

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Finance and Administration, and



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Marketing and Sales.

Operations, Improvement and Cost Reduction

        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.

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.

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.

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.

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

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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.

        In addition to these areas of focus where we primarily employ PVM and related techniques to achieve results for clients, we also focus on the following areas:

Healthcare—Physician Practice Management

        We provide services to improve the patient services and financial performance of large physician practice management groups, especially those which are hospital owned. Our focus is on improving internal operations to find and remove the barriers that limit the effectiveness of the practice group in providing consistent, effective high quality service to patients throughout the multi-location organization as well as to identify and reduce those barriers to superior financial performance across all locations. In the case of a hospital owned physician practice, our work may also improve the performance of the supporting hospital.

Healthcare—Emergency Room Efficiency

        We provide services designed to improve patient care thorough identifying and reducing barriers to efficient operations of both the emergency room and the related hospital, and to facilitate effective cross functional management teams when appropriate. We develop and install metrics that allow the organization to measure and improve its on-going performance. Typically, we improve both the patient centered metrics and the financial performance of the emergency room operations and staff satisfaction.

Product Development

        Our work in product development is focused on increasing the productivity of product development organizations in complex environments while reducing costs and reducing time-to-market for new products. We help organizations develop new product development processes as well refine existing PACE® based product development processes to move to the next generation techniques.

Business Decision Processes

        Our work in business decision processes is focused on assisting organizations in making more effective decisions through training in decision making techniques and through creating a unified and consistent structure for the decisions makers within an organization to utilize to ensure that the decisions they are making are based on analysis, a structured decision process, and include factors

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designed to identify and effectively manage risk for the organization and for the decision maker. We develop customized training programs and implement structured decision making processes individualized for each client.

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 may render such information misleading.

        In the last few years, 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 77%, 69% and 42% of consolidated revenue for the years ended December 31, 2010, 2009, and 2008, 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 12%, 11% and 49% of consolidated revenue for the years ended December 31, 2010, 2009, and 2008, respectively.

        In the last few years, we have had relatively few engagements involving incentive fees. 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. 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 0%, 7% and 2% of consolidated revenue for the years ended December 31, 2010, 2009, and 2008, respectively. As of March 24, 2011, 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.

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        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 11%, 13% and 7%, for the years ended December 31, 2010, 2009, and 2008, 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.

        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. Last year and again in this current fiscal year, the U.S. government has failed to pass a budget bill to fund their operations on an annual basis or have not done so until later in the year than is normal. Instead it has relied on a series of shorter-term "continuing resolutions" to fund day to day operations. This has made it much more difficult for us as well as other government contractors to obtain contracts for new work with the U.S. government, due both to the rules related to such continuing resolutions as well as to the reluctance of contracting officers to commit to longer term projects that may not be funded by the next continuing resolution.

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.

        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.

        We also have a separate arrangement with Carpe Diem Consulting for work that they may do in Russia though a joint venture in which we do not participate in the ownership. We have licensed our trademarks and intellectual property to Carpe Diem to use in this market in exchange for a royalty based on revenue actually collected by the joint venture. Revenue from this arrangement is not expected to be significant.

        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. In these cases, we may perform this work directly.

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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.

        In 2010, we have focused on diversifying our client base by delivering our solutions in North America, both to the U.S. government and to commercial entities. Beginning November 2010, we concentrated our sales focus on government related organizations, although we will continue to pursue commercial business on an opportunistic basis for the short term. 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. We are actively pursuing new business in each of these areas.

        For the year ended December 31, 2010, the four clients who each accounted for more than 10% of our revenue were Amtrak, Trinity Millennium Group, Stanley Associates and Alpha Natural Resources.

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.

        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, 2010, we had a total of 28 employees, consisting of six full-time consultants, five sales and marketing employees, eight administrative employees and nine 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.

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        In addition to our staff of consultants, from time to time we supplement them with contractors who have specialized skills or knowledge required for specific client assignments. We maintain an active database of potential consultants and contractors for future engagements. Although the market for talented personnel is always competitive, because we focus on hiring senior managers and executives, we believe that we can attract the needed individuals as either employees or contractors to staff new engagements.

        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 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.

        While some of our competitors focus on the application of a single methodology to all client problems, we feel that the implementation of a successful process improvement program requires the proper selection, application, and management of appropriate process improvement tools. In addition

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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. For each client, we seek to measure the status of the organization when we begin an engagement, develop appropriate metrics to measure key drivers of the performance of the organization, manage the change process and measure our improved results at the end of our engagement, while leaving the organization with a metrics based process for continuous improvement following our departure.

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 2010 and 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 2010. 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 2011, 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, together with cash generated from operating activities, will be sufficient to provide funds that are adequate for our operating needs through March 31, 2012. 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 2010 and 2009, we experienced net losses. Our ability to generate additional cash from operations is determined primarily by our ability to generate substantial new revenue. We have developed a business plan for 2011 including an internal forecast of cash needs. Based on this plan, 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, 2012.

        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 2011, we may receive a "going concern" opinion from our independent auditors at the end of 2011. 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, 2010, 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 2011. In that event, the report of our independent registered accounting firm with respect to our financial statements for the year ended December 31, 2011 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 weak economic recovery or further 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. 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.

        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. Although the downturn appears to have stabilized and a slow recovery may have begun, this has not yet resulted in substantial new business for us. The prolonged weak economy has impacted almost all government entities, which has made obtaining new business in this target market more challenging.

The current credit market conditions are unpredictable and unfavorable for many companies, 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 the credit markets have stabilized in recent months, credit is still difficult to obtain for many entities.

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        Unless credit becomes more readily available, the current 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.

Although we believe we are currently in compliance with the listing requirements of the Nasdaq Capital Market, there is no assurance that we will continue to remain so. If we fail to remain in compliance, we will be exposed to possible delisting andthe liquidity of our stock may be further negatively impacted.

        We believe that we are currently in compliance with all of the listing requirements of the Nasdaq Capital Market. There is no assurance that we will continue to remain in compliance. There are several criteria for continued listing on the Nasdaq Capital Market. If we fail to meet any of them in the future, we may receive notice of our failure to meet the requirements. If we are unable to regain compliance during the permitted time frame following receipt of any such notice, we may risk being delisted by Nasdaq.

        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 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. Our reverse stock split reduced the number of shares outstanding by 80%. Additionally, one of our two major stockholders died on December 31, 2010. Ultimately his stock may be sold by the administrator of his estate. As a result, a stockholder's liquidity may be seriously limited and our stock price may volatile.

        In January 2010, we 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

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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 (one of whom is also a member of our Board of Directors) collectively own over 66% of the outstanding shares of our common stock. On December 31, 2010 the other of these two shareholders died after a brief illness. His shares are now owned by his estate. It is possible that the estate administrator may ultimately attempt to sell these shares. If the administrator attempts to sell these shares in the open market, it could result in increased volatility or a reduction in market price.

        The average daily trading volume for shares of our common stock is limited, often less than 6,000 shares per day. As a result, a stockholder may not be able to quickly or efficiently liquidate his/her position in our common stock, or may be subject to unpredictable swings in price as buyers or sellers are unable to find a ready market for transactions.

        Combined, these factors may result in limited stockholder liquidity and very volatile stock pricing.

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, 2010, 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 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

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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 2010 we had difficulty doing so, and there can be no assurance that we will be able to do so more productively in 2011.

Over half of our revenue is derived from government client engagements, and we are currently focusing our sales efforts on government engagements. 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:

•

In normal years, 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.



•

In recent years, including the current fiscal year ending September 30, 2011, the government has been unable to pass a budget on a timely basis. Instead it has used a series of short-term "continuing resolutions" to fund the government. For the current year, the government is also attempting to agree on a course of action to deal with the impact of the current recession which has resulted in much lower government revenues. This has increased uncertainty and made contracting for new projects extremely difficult due to the uncertainty inherent in this process as well as the rules with apply to these continuing resolutions.



•

The current economic recession while funding two wars overseas has resulted in record deficits for the federal government. Local governments have also been adversely affected by the economic downturn. Practically all governmental entities have suffered unprecedented declines in revenue while they continue to spend to stimulate the economy or maintain and expand needed services. This has resulted in record deficits for most governmental entities. This most probably will make it more difficult to begin new projects with these entities, even when we can drive significant savings or cost reductions.



•

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

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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 governmental regulations due to the unique experience qualifications required for our consultants for some engagements.



•

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

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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 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 be volatile and unpredictable.

        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 or may be volatile and unpredictable. Factors that could cause quarterly fluctuations include:

•

a shift to shorter term contracts by clients in response to the economic cycle;



•

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.

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        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;



•

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 ability of our competitors to fund more extensive sales organizations;



•

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.

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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 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 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 or other intellectual property, 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.

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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. Our current focus is on expanding our client base into new areas of the federal government and into new areas within the U.S. military. Expanding our position in these areas will likely require extensive management attention and may increase our overall selling, general and administrative expenses. Current budget issues in the federal government make obtaining new significant contracts more challenging than in any recent period. The result has been an increase in the number of short term contracts, which may or may not be extended upon termination. In some cases, when they are extended, it is only after a gap period of several weeks or months. This makes it more challenging to manage our resource pool of consultants and to manage the cost of them as demand changes. If we fail to do so, our 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,

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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.

If we fail to maintain adequate internal control over financial reporting or if we are unable to timely complete our assessment of the effectiveness of our internal control over financial reporting, we may be subject to a loss of public confidence and other negative consequences, and the trading price of our stock could be negatively impacted.

        On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act") was enacted and signed into law. The Dodd-Frank Act, among other things, amends Section 404 of the Sarbanes-Oxley Act of 2002 to provide that non-accelerated filers, including smaller reporting companies, are permanently exempt from the requirement to obtain an attestation of management's assessment of internal controls over financial reporting from the reporting company's independent registered public accounting firm. As a smaller reporting company, our management must still complete an internal assessment of our internal controls, but we are not required to seek attestation of our assessment from our independent registered public accounting firm. Effective internal controls assist us in providing reliable financial reports and to effectively detect and prevent fraud. As we have become a much smaller company with fewer general and administrative staff, however, it has become more difficult to achieve and maintain the existing internal control structure, and to afford the costs of doing so.

        While we intend to try to maintain effective internal controls, if we fail, 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 to obtain financing for the business. It may also 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 limited operations through a non-owned affiliate in Europe. 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;

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•

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



•

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, 2012.

        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 including Gen. John T. Chain, Jr. 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.

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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.

ITEM 3.    Legal Proceedings.

        Effective December 21, 2009, Earle Steinberg was removed from his role as CEO and President. His employment agreement (the "Agreement") provided for payment of his salary for six months following separation, under certain circumstances. We ceased making such payments to Mr. Steinberg as of February 1, 2010 and have disputed our continuing liability for the unpaid amount under the Agreement. On May 24, 2010, Mr. Steinberg filed suit against us in the District Court of Dallas County claiming breach of this Agreement and asserting a total claim of $206,000 plus attorney's fees. We intend to vigorously defend against this claim. However, this amount of potential liability (excluding legal fees) was accrued at December 31, 2009 and December 31, 2010.

        We have notified our employment liability insurance carrier of this claim, and we expect that much of our legal costs for this lawsuit will be covered by insurance, subject to a $50,000 deductible. We have expensed our legal costs to date in the period incurred. Through December 31, 2010, our legal costs in this matter have been $36,000.

        We are currently in negotiations to settle Mr. Steinberg's claims for a sum less than his asserted total claim, but that settlement has not been finalized as of March 24, 2011. If successful, such a anticipated settlement may result in a gain which will be recorded in 2011 when the settlement is finalized. There can be no assurance that such a settlement will be reached at this time.

        We may become subject to various other claims and legal matters, such as collection matters initiated by us in the ordinary course of conducting our business. As of the date of this Annual Report on Form 10-K, we believe neither such claims and legal matters nor the cost of prosecuting and/or defending such claims and legal matters will have a material adverse effect on our consolidated results of operations, financial condition or cash flows.

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 December 11, 2009 we transferred our listing to the Nasdaq Capital Market from the Nasdaq Global Market because 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. At that time we met the requirements for listing on the Nasdaq Capital Market, which has a lower requirement for the minimum market value of publicly held shares of $1,000,000, with the exception of maintaining a minimum closing bid price of $1 per share.

        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. In order to provide an additional opportunity to regain compliance, at our 2010 annual meeting of stockholders in June 2010, we received stockholder approval for a reverse stock

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split that reduced the number of shares of our common stock outstanding in an attempt to increase the price of our common stock. Our Board of Directors approved a reverse stock split effective as of the close of business on August 13, 2010, with an exchange ratio of five existing shares to one new share of our common stock. This reverse stock split was effective at 6:01 p.m. ET on August 13, 2010.

        As a result of the reverse stock split, every five shares of our issued and outstanding common stock, all treasury shares, and all unawarded or unvested shares under our approved stock plans were combined into one share of common stock. The reverse stock split did not change the number of authorized shares or par value of the common stock.

        On September 7, 2010, we received a letter from The Nasdaq Stock Market ("Nasdaq") confirming that we had regained compliance with Nasdaq's minimum $1.00 per share bid price requirement. The Nasdaq letter further stated that at that time we met the other applicable standards for Nasdaq listing, and that the Nasdaq Listing Qualifications Hearings Panel had determined to continue the listing of our common stock on The Nasdaq Stock Market. As of March 25, 2011, we are in compliance with all the applicable standards for continue listing on the Nasdaq Capital Market.

        The stock prices adjusted for the reverse stock split 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, 2010, there were approximately 71 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.

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Issuer Repurchases of Shares

        During the first quarter of 2008, we established a written plan pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, which provided for the purchase of our common stock in support of our announced share repurchase program. The purpose of this stock repurchase program was to reduce the dilution from potential stock incentive payments for new employees. After a waiting period, repurchases commenced on April 7, 2008. During the first quarter of 2010, we repurchased 5,349 shares for a total of $17,737, or an average of $3.31 per share including commissions and fees.

        As of January 31, 2010, we completed the authorized repurchase of 161,090 shares under the plan at a total cost of $1,259,640 or $7.81 per share. At this time we have no plans for additional stock repurchases.

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, 2010. The financial statements for each of the fiscal years ended December 31, 2010, 2009, 2008, 2007 and 2006 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.

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