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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



FORM 10-K

ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009.ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from
 to


Commission file number: 0-22010



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

Delaware

72-0843540(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)




5221 North O'Connor Boulevard,
Suite 500, Irving, Texas

75039-3714(Address of principal executive offices)

(Zip Code)




(972) 869-3400(Registrant's telephone number, including area code)


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

Title of Each Class

Name of each exchange on which registeredCommon stock, par value $.01 per share

The NASDAQ Stock Market LLC
(NASDAQ Capital Market)




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:

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company ý


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

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

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

Documents incorporated by referencePortions of the registrant's definitive proxy statement pertaining to the 2010 Annual Meeting of Stockholders to be filed on or before April 30, 2010 are incorporated by reference into Part III of
this Annual Report on Form 10-K.




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TABLE OF CONTENTS



PagePART ISpecial Note Regarding Forward-Looking Statements

1Item 1.

Business

2Item 1A.

Risk Factors

9Item 1B.

Unresolved Staff Comments

20Item 2.

Properties

20Item 3.

Legal Proceedings

21Item 4.

Removed and Reserved

21PART IIItem 5.

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

21Item 6.

Selected Financial Data

23Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

25Item 8.

Financial Statements and Supplementary Data

36Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

36Item 9A(T).

Controls and Procedures

37Item 9B.

Other Information

37PART IIIItem 10.

Directors and Executive Officers of the Registrant

38Item 11.

Executive Compensation

38Item 12.

Security Ownership of Certain Beneficial Owners and Management

38Item 13.

Certain Relationships and Related Transactions

39Item 14.

Principal Accounting Fees and Services

39PART IVItem 15.

Exhibits and Financial Statement Schedules

39Signatures

42Index to Consolidated Financial Statements

F-1


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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:



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

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PART I

ITEM 1.Business.

Overview

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

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

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

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



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

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



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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.



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

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



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.



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.



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

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

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

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

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

Contractual Arrangements and Revenue Recognition

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



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

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

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

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

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

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

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

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

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

Financial Information about Segments and Geographic Areas

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

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

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

Clients

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

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

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

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

Competition

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

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

Employees

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

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

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

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

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

Intellectual Property

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

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

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

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



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

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

Available Information

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

Company Website

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

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ITEM 1A.Risk Factors.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Combined,
these factors may result in limited stockholder liquidity.

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

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

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

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

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

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

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

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

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



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

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

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

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

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

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

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

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



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

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

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



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



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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:



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

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

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

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

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

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

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

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

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

Maintaining our reputation is critical to our future success.

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

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

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

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

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

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

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

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

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

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

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

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

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

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



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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:



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

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

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

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

ITEM 1B.Unresolved Staff Comments.

None.

ITEM 2.Properties.

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

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ITEM 3.Legal Proceedings.

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

ITEM 4.Removed and Reserved

PART II

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

Market for Registrant's Common Equity

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

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

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

Quarter Ended

Dividends
Declared

High

LowDecember 31, 2009

$
0

$
1.23

$
0.51September 30, 2009

$
0

$
1.90

$
0.55June 30, 2009

$
0

$
0.97

$
0.66March 31, 2009

$
0

$
1.20

$
0.39December 31, 2008

$
0

$
1.89

$
0.29September 30, 2008

$
0

$
3.69

$
1.42June 30, 2008

$
0

$
3.01

$
2.14March 31, 2008

$
0

$
7.96

$
2.02


Holders of Record

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

Dividends

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

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

Equity Compensation Plan Information

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

Issuer Repurchases of Shares

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

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

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

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

Period

Total Number of
Shares Purchased

Average Price
Paid per Share*

Total Number of
Shares Purchased
as Part of Publicly
Announced
Plans or Programs

Maximum Number
of Shares that may
yet be Purchased
under the
Plans or ProgramsOctober 2009


79,224

$
1.20


79,224


49,326November 2009


12,132

$
0.99


12,132


37,194December 2009


10,450

$
0.70


10,450


26,744


*includes
fees and commissions


ITEM 6.Selected Financial Data.

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

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

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

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

Year Ended December 31,2009

2008

2007

2006

2005In thousands, except per share and share dataRevenue

$
9,553

$
25,121

$
55,869

$
59,478

$
43,062Operating expenses


16,873


33,682


45,341


44,571


34,793
(a)Operating income (loss)


(7,320
)

(8,561
)

10,528


14,907


8,269Other income (expense), net


425


296


530


362


(13
)Income (loss) from continuing operations before income taxes


(6,895
)

(8,265
)

11,058


15,269


8,256Income taxes (benefit)


(2,619
)

(2,450
)

4,012


3,764


311Income (loss) from continuing operations before the cumulative effect of a change in accounting principle


(4,276
)

(5,815
)

7,046


11,505


7,945Gain (loss) on discontinued operations, net of related income tax expense (benefit) effect of $0, $0, $0, $0, and $58 for the years 2009, 2008, 2007, 2006
and 2005, respectively











1


(1,212
)Income (loss) before the cumulative effect of a change in accounting principle


(4,276
)

(5,815
)

7,046


11,506

$
6,733Cumulative effect of a change in accounting principle, net of related income tax benefit of $0.5 in 2005














(10
)Net income (loss)

$
(4,276
)
$
(5,815
)
$
7,046

$
11,506

$
6,723Per share of common stock:Basic earnings per share:Income (loss) from continuing operations

$
(0.40
)
$
(0.53
)
$
0.64

$
1.06

$
0.76Loss on discontinued operations, net of tax














(0.12
)Net income (loss)

$
(0.40
)
$
(0.53
)
$
0.64

$
1.06

$
0.64Diluted earnings per share:Income (loss) from continuing operations

$
(0.40
)
$
(0.53
)
$
0.63

$
1.04

$
0.75Loss on discontinued operations, net of tax














(0.12
)Net Income (loss)

$
(0.40
)
$
(0.53
)
$
0.63

$
1.04

$
0.63Dividends per share:

$


$


$
0.40

$
0.30

$
0.05Weighted average shares:Basic


10,617,620


10,977,300


10,990,225


10,812,117


10,512,703Diluted


10,617,620


10,977,300


11,191,271


11,065,088


10,702,375


(a)Includes
$0.6 million in losses related to renewal of a contract subleasing excess office space to a third party.


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Year ended December 31,2009

2008

2007

2006

2005Balance Sheet DataWorking capital

$
8,092

$
13,211

$
19,323

$
16,787

$
8,188Total assets

$
11,578

$
17,154

$
25,939

$
24,043

$
13,031Long-term obligations, including current maturities

$
126

$
202

$
238

$
103

$
274Total stockholders' equity

$
10,086

$
15,251

$
21,544

$
18,663

$
8,494


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

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

Overview

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

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

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

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



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

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



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

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

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

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

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

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

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

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

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

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

Critical Accounting Policies and Estimates

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

Revenue Recognition

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

Unbilled Receivables

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

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Deferred Revenue

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

Deferred Taxes

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

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

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

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

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

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

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

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

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

Accumulated Other Comprehensive Loss

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

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

Performance Share Awards

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

Government Contracts

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

Results of Operations

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

Percentage of Revenue
For Year Ended December 31,2009

2008

2007Revenue


100.0%


100.0%


100.0%Cost of sales


64.5%


59.9%


48.3%Gross profit


35.5%


40.1%


51.7%Selling, general and administrative


112.2%


74.2%


32.9%Operating income (loss)


(76.7%
)

(34.1%
)

18.8%Interest income (expense), net


0.1%


1.2%


1.0%Other income


4.4%





Income (loss) from continuing operations before income taxes


(72.2%
)

(32.9%
)

19.8%Income taxes


(27.4%
)

(9.8%
)

7.2%Net income (loss)


(44.8%
)

(23.1%
)

12.6%


Years Ended December 31, 2009 and 2008

Revenue

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

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

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

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

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

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

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

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

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

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

Gross Profit

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

Selling, General and Administrative

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

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

Income Taxes

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

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

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

Years Ended December 31, 2008 and 2007

Revenue

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

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

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

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

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

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

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

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

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

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

Gross Profit

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

Selling, General and Administrative

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

Income Taxes

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

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Table of Contents

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

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

Quarterly Results

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

2009

2008For the Three Months Ended

For the Three Months EndedMar. 31

June 30

Sept. 30

Dec. 31

Mar. 31

June 30

Sept. 30

Dec. 31In thousands, except per share dataRevenue

$
3,288

$
2,619

$
2,098

$
1,547

$
12,438

$
5,378

$
3,832

$
3,474Gross profit


1,442


886


712


355


5,993


1,980


1,094


995Operating income (loss)


(1,920
)

(2,264
)

(1,883
)

(1,254
)

463


(3,016
)

(3,271
)

(2,736
)Net income (loss)

$
(1,225
)
$
(1,354
)
$
(1,024
)
$
(673
)
$
366

$
(1,893
)
$
(2,285
)
$
(2,003
)Earnings (loss) per share:Basic

$
(0.11
)
$
(0.13
)
$
(0.10
)
$
(0.06
)
$
0.03

$
(0.17
)
$
(0.21
)
$
(0.19
)Diluted

$
(0.11
)
$
(0.13
)
$
(0.10
)
$
(0.06
)
$
0.03

$
(0.17
)
$
(0.21
)
$
(0.19
)Weighted average shares:Basic


10,678


10,667


10,614


10,511


11,073


11,076


10.973


10,787Diluted


10,678


10,667


10,614


10,511


11,320


11,076


10,972


10,787Stock Price(a):High

$
0.85

$
0.88

$
1.39

$
0.63

$
3.00

$
2.33

$
1.83

$
0.55Low

$
0.73

$
0.88

$
1.18

$
0.56

$
2.02

$
2.20

$
1.47

$
0.29Close

$
0.82

$
0.88

$
1.30

$
0.62

$
2.53

$
2.21

$
1.60

$
0.51


(a)These
stock prices represent the highest and lowest sales prices per share of our common stock as reported on the NASDAQ Global Market prior to
December 11, 2009 and the NASDAQ Capital Market beginning December 11, 2009. Our common stock is listed on the NASDAQ Capital Market under the symbol "TGIS."


Liquidity and Capital Resources

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

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

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

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

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

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

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

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

Our Liquidity Plan

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

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

35

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

Inflation

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

Off-Balance Sheet Arrangements

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

Contractual Obligations

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

Payment due inContractual Obligations

Total

2010

2011

2012

Later Yearsin thousandsLong-term debt obligations

$


$


$


$


$
Capital lease obligations














Insurance note payable


149


149








Operating lease obligations


1,518


767


613


138


Purchase obligations


502


400


88


14


Deferred rent obligations


211


85


101


25


Total

$
2,380

$
1,401

$
802

$
177

$



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

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

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

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

ITEM 8.Financial Statements and Supplementary Data.

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

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

Not applicable.

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Table of Contents

ITEM 9A(T).Controls and Procedures.

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

Management's Report on Internal Control over Financial Reporting

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

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

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

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

Changes in Internal Control over Financial Reporting

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

ITEM 9B.Other Information.

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

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Table of Contents

PART III

ITEM 10.Directors and Executive Officers of the Registrant.

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

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

ITEM 11.Executive Compensation.

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

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

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

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

EQUITY COMPENSATION PLAN INFORMATION

(a)

(b)

(c)Plan Category

Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights

Weighted-average exercise
price of outstanding options,
warrants and rights

Number of securities
remaining available for
future issuance under equity
compensation plans
(excluding securities reflected
in column (a))Equity compensation plans approved by security holders


135,334
(1)(2)
$
1.01


886,666Equity compensation plans not approved by security holders








Total


135,334

$
1.01


886,666


(1)These
plans include the Thomas Group, Inc. 1988, 1992 and 1997 Stock Option Plans and the Non-Employee Director Plan, the 2005 Omnibus
Stock and Incentive Plan, and the 2008 Omnibus Stock and Incentive Plan.(2)The
number of shares is subject to adjustments for changes resulting from stock dividends, stock splits, recapitalizations and similar events.


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Table of Contents




ITEM 13.Certain Relationships and Related Transactions.

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

ITEM 14.Principal Accounting Fees and Services.

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

PART IV

ITEM 15.Exhibits and Financial Statement Schedules.

(a)(1)

See "Index to Consolidated Financial Statements" on page F-1 of this Annual Report on Form 10-K.(a)(2)

The financial statement schedules required by this item are included in the accompanying notes to the consolidated financial statements beginning on page F-7 of this Annual Report on Form 10-K.(a)(3)

Documents filed as part of this Annual Report on Form 10-K are listed sequentially by subsection in the Exhibit Index at Part IV, Item 15(b).(b)

Documents filed as part of this Annual Report on Form 10-K are listed sequentially by subsection in the following Exhibit Index.




Exhibit Number

Description3.1

Amended and Restated Certificate of Incorporation of Thomas Group, Inc. filed July 10, 1998, with the State of Delaware Office of the Secretary of State (filed as Exhibit 3.1 to our Annual Report on
Form 10-K for the year ended December 31, 1998 and incorporated herein by reference).3.2

Amended and Restated By-Laws dated May 30, 2001 (filed as Exhibit 3.2 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001 and incorporated herein by
reference).3.3

Amendment No. 1 to Amended and Restated By-Laws dated March 25, 2009 (filed as Exhibit 3.1 to our Current Report on Form 8-K filed March 26, 2009 and incorporated herein by reference).4.1

Specimen Certificate evidencing Common Stock (filed as Exhibit 4.1 to our 1993 Registration Statement on Form S-1 (file No. 33-64492) and incorporated herein by reference).10.1

Credit Agreement dated December 15, 2006 between Thomas Group, Inc. and JPMorgan Chase, N.A. (filed as Exhibit 10.1 to our Current Report on Form 8-K filed December 22, 2006 and incorporated
herein by reference).10.2

Amendment No. 1 to Loan Agreement dated February 13, 2007 between Thomas Group, Inc. and JPMorgan Chase, N.A. (filed as Exhibit 10.3 to our Annual Report on Form 10-K for the year ended
December 31, 2007 and incorporated herein by reference).10.3

Amendment No. 2 to Loan Agreement dated June 13, 2007 between Thomas Group, Inc. and JPMorgan Chase, N.A. (filed as Exhibit 10.4 to our Annual Report on Form 10-K for the year ended
December 31, 2007 and incorporated herein by reference).


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Table of Contents

Exhibit Number

Description10.4

Amendment No. 3 to Loan Agreement dated November 9, 2007 between Thomas Group, Inc. and JPMorgan Chase, N.A. (filed as Exhibit 10.5 to our Annual Report on Form 10-K for the year ended
December 31, 2007 and incorporated herein by reference).10.5

2005 Omnibus Stock and Incentive Plan for Thomas Group, Inc. dated December 19, 2005, as amended December 23, 2005 (filed as Exhibit 10.1 to our Current Report on Form 8-K filed December 27,
2005 and incorporated herein by reference).10.6

Net Profit Restricted Share Award agreement for James T. Taylor dated December 20, 2005 (filed as Exhibit 10.2 to our Current Report on Form 8-K filed December 27, 2005 and incorporated herein by
reference).10.7

Share Price Restricted Share Award agreement for James T. Taylor dated December 23, 2005 (filed as Exhibit 10.4 to our Current Report on Form 8-K filed December 27, 2005 and incorporated herein by
reference).10.8

Amendment to the Amended and Restated Note and Warrant Purchase Agreement between Thomas Group Inc., General John T. Chain, Jr. and Edward P. Evans dated April 27, 2007 (filed as Exhibit 10.1 to our Current
Report on Form 8-K filed May 3, 2007 and incorporated herein by reference).10.9

Second Amendment to Note and Warrant Purchase Agreement, dated February 19, 2008, by and among Thomas Group Inc., John T. Chain, Jr. and Edward P. Evans (filed as Exhibit 10.1 to our Current Report on
Form 8-K filed February 25, 2008 and incorporated herein by reference).10.10

Employment Agreement, dated February 19, 2008, by and between Thomas Group, Inc. and Michael E. McGrath (filed as Exhibit 10.2 to our Current Report on Form 8-K filed February 25, 2008 and
incorporated herein by reference).10.11

2008 Omnibus Stock and Incentive Plan of Thomas Group, Inc (filed as Exhibit 10.1 to our Current Report on Form 8-K filed March 6, 2008 and incorporated herein by reference).10.12

Employment Agreement, dated March 4, 2008, by and between Thomas Group, Inc. and Earle Steinberg (filed as Exhibit 10.2 to our Current Report on Form 8-K filed March 6, 2008 and incorporated
herein by reference).10.13

Restricted Share Award dated March 1, 2008 granted to Michael E. McGrath (filed as Exhibit 10.3 to our Current Report on Form 8-K filed March 6, 2008 and incorporated herein by reference).10.14

Performance Share Award dated March 1, 2008 granted to Michael E. McGrath (filed as Exhibit 10.4 to our Current Report on Form 8-K filed March 6, 2008 and incorporated herein by reference).10.15

Restricted Share Award dated March 10, 2008 granted to Earle Steinberg (filed as Exhibit 10.1 to our Current Report on Form 8-K filed March 11, 2008 and incorporated herein by reference).10.16

Performance Share Award dated March 10, 2008 granted to Earle Steinberg (filed as Exhibit 10.1 to our Current Report on Form 8-K filed March 11, 2008 and incorporated herein by reference).10.17

Amendment to the Employment Agreement, dated March 3, 2009, by and between Thomas Group, Inc. and Michael E. McGrath (filed as Exhibit 10.1 to our Current Report on Form 8-K filed March 5, 2009
and incorporated herein by reference).


40

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Table of Contents

Exhibit Number

Description10.18

Second Amendment to Employment Agreement, dated March 2, 2010, by and between Thomas Group, Inc. and Michael E. McGrath (filed as Exhibit 10.1 to our Current Report on Form 8-K filed March 11,
2010 and incorporated herein by reference).10.19

Restricted Share Award dated March 9, 2010 granted to Michael E. McGrath (filed as Exhibit 10.2 to our Current Report on Form 8-K filed March 11, 2010 and incorporated herein by reference).10.20

Cancellation dated March 9, 2010 related to Performance Share Award dated March 1, 2008 granted to Michael E. McGrath (filed as Exhibit 10.3 to our Current Report on Form 8-K filed March 11, 2010
and incorporated herein by reference).*
21

Subsidiaries of the Company.*
23

Consent of Hein & Associates LLP.*
31.1

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1

Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2

Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


*Filed
herewith


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Table of Contents

SIGNATURES

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

THOMAS GROUP, INC.By:

/s/ MICHAEL E. MCGRATH Michael E. McGrath Executive Chairman, President and Chief Executive Officer


POWER OF ATTORNEY

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

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

Signature

Capacity

Date/s/ MICHAEL E. MCGRATH Michael E. McGrath

Executive Chairman, President and Chief Executive Officer (Principal Executive Officer)

March 30, 2010/s/ FRANK TILLEY Frank Tilley

Vice President and Interim Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

March 30, 2010/s/ JOHN T. CHAIN, JR. John T. Chain, Jr.

Director

March 30, 2010/s/ EDWARD P. EVANS Edward P. Evans

Director

March 30, 2010/s/ DORSEY R. GARDNER Dorsey R. Gardner

Director

March 30, 2010/s/ DAVID B. MATHIS David B. Mathis

Director

March 30, 2010


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Table of Contents

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

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

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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



Report of Independent Registered Public Accounting Firm

F-2Consolidated Balance Sheets as of December 31, 2009, and 2008

F-3Consolidated Statements of Operations for the fiscal years ended December 31, 2009, 2008 and
2007

F-4Consolidated Statements of Stockholders' Equity for the fiscal years ended December 31, 2009, 2008 and
2007

F-5Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2009, 2008 and
2007

F-6Notes to Consolidated Financial Statements

F-7


F-1

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

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

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

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

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

/s/ HEIN& ASSOCIATESLLP

Dallas,
Texas
March 30, 2010

F-2

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Table of Contents

THOMAS GROUP, INC. CONSOLIDATED BALANCE SHEETS

December 31,2009

2008In thousands, except share dataASSETSCurrent AssetsCash and cash equivalents

$
5,004

$
8,349Trade accounts receivable, net of allowance of $5 and $11 at December 31, 2009, and 2008, respectively


849


1,432Unbilled receivables


378


456Deferred tax asset, net of allowance of $4 and $16 at December 31, 2009 and 2008, respectively


111


466Income tax receivable


2,835


3,650Other current assets


281


559Total Current Assets


9,458


14,912Property and equipment, net of accumulated depreciation of $2,110 and $2,140 at December 31, 2009, and 2008, respectively


618


881Deferred tax asset, net of allowance of $54 and $42 at December 31, 2009 and 2008, respectively


1,471


1,330Other assets


31


31$
11,578

$
17,154LIABILITIES AND STOCKHOLDERS' EQUITYCurrent LiabilitiesAccounts payable and accrued liabilities

$
725

$
892Accrued wages and benefits


478


740Income taxes payable


14


69Note payable


149


Total Current Liabilities


1,366


1,701Other long-term obligations


126


202Total Liabilities


1,492


1,903Commitments and ContingenciesStockholders' EquityCommon stock, $.01 par value; 25,000,000 shares authorized; 13,843,541 and 13,793,541 shares issued and 10,484,509 and 10,716,306 shares outstanding at
December 31, 2009, and 2008, respectively

$
138

$
138Additional paid-in capital


30,761


31,392Retained earnings


2,949


7,225Treasury stock, 3,359,032 and 3,077,235 shares at December 31, 2009 and 2008, respectively, at cost


(23,762
)

(23,504
)Total Stockholders' Equity


10,086


15,251$
11,578

$
17,154


See
accompanying notes to consolidated financial statements.

F-3

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Table of Contents

THOMAS GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31,2009

2008

2007In thousands, except per share and share dataConsulting revenue before reimbursements

$
8,293

$
23,339

$
55,042Reimbursements


1,260


1,782


827Total revenue


9,553


25,121


55,869Cost of sales before reimbursable expenses


4,897


13,277


26,151Reimbursable expenses


1,260


1,782


827Total cost of sales


6,157


15,059


26,978Gross profit


3,396


10,062


28,891Selling, general and administrative


10,716


18,623


18,363Operating income (loss)


(7,320
)

(8,561
)

10,528Other income


420





Interest income, net of expense


5


296


530Income (loss) before income taxes


(6,895
)

(8,265
)

11,058Income tax expense (benefit)


(2,619
)

(2,450
)

4,012Net income (loss)

$
(4,276
)
$
(5,815
)
$
7,046Earnings (loss) per share:Basic

$
(0.40
)
$
(0.53
)
$
0.64Diluted

$
(0.40
)
$
(0.53
)
$
0.63Weighted average shares:Basic


10,617,620


10,977,300


10,990,225Diluted


10,617,620


10,977,300


11,191,271


See
accompanying notes to consolidated financial statements.

F-4

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Table of Contents

THOMAS GROUP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Common Stock





Accumulated
Other
Comprehensive
Income (Loss)

Treasury StockAdditional
Paid-In Capital

Retained
EarningsShares

Amount

Shares

Amount

TotalIn thousands, except share dataBalance as of January 1, 2007


13,490,630

$
135

$
30,476

$
10,480

$
31


2,553,876

$
(22,459
)
$
18,663Exercise of stock options


6,488





63














63Issuance of restricted stock grants for common stock


96,423


1


(391
)













(390
)Deferred compensation from restricted stock grants








829














829Tax benefit of options exercised








(151
)













(151
)Cumulative effect of change in accounting for uncertain tax positions











(40
)










(40
)Dividends











(4,445
)










(4,445
)Foreign currency translation adjustment reclassified to net gain, net of tax (Note 1(o))














(31
)







(31
)Net Income











7,046











7,046Balance as of December 31, 2007


13,593,541

$
136

$
30,826

$
13,041

$



2,553,876

$
(22,459
)
$
21,544Exercise of stock options


100,000


1


(236
)













(235
)Issuance of restricted stock grants for common stock


100,000


1


1,081














1,080Tax benefit of options exercised








(279
)













(279
)Share repurchase

















496,909


(984
)

(984
)Acquisition of treasury stock for taxes on exercise of stock options

















26,450


(61
)

(61
)Net Income (loss)











(5,815
)










(5,815
)Balance as of December 31, 2008


13,793,541

$
138

$
31,392

$
7,225

$



3,077,235

$
(23,504
)
$
15,251Exercise of stock options


50,000Issuance of restricted stock grants for common stock








(586
)













(586
)Tax benefit of options exercised








(45
)













(45
)Share repurchase

















281,797


(258
)

(258
)Acquisition of treasury stock for taxes on exercise of stock optionsNet Income (loss)











(4,276
)










(4,276
)Balance as of December 31, 2009


13,843,541

$
138

$
30,761

$
2,949

$



3,359,032

$
(23,762
)
$
10,086


See accompanying notes to consolidated financial statements.

F-5

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Table of Contents

THOMAS GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31,2009

2008

2007In thousands of dollarsCash Flows from Operating Activities:Net income (loss)

$
(4,276
)
$
(5,815
)
$
7,046Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:Depreciation


357


500


441Amortization





19


19(Gain)/loss on disposal of assets


(3
)




18Bad debt expense


16


338


Foreign currency translation (gain) loss


(63
)

115


(31
)Stock based compensation expense (reversal)


(586
)

846


829Other


(19
)

(58
)

Change in operating assets and liabilities:(Increase) decrease in trade accounts receivable


623


7,614


2,831(Increase) decrease in unbilled receivables


77


(185
)

81(Increase) decrease in deferred tax asset


214


76


(2
)(Increase) decrease in other assets


279


(411
)

99Increase (decrease) in accounts payable and accrued liabilities


(461
)

(1,409
)

(443
)Increase (decrease) in other liabilities


(37
)

(3
)

Increase (decrease) in short-term note payable


149





(Increase) decrease in income tax receivable


815


(2,784
)

Increase (decrease) in income taxes payable


(55
)

70


(1,505
)Net cash (used in) provided by operating activities


(2,970
)

(1,087
)

9,383Cash Flows From Investing Activities:Proceeds from sale of assets


5





13Capital expenditures


(97
)

(126
)

(884
)Net cash used in investing activities


(92
)

(126
)

(871
)Cash Flows From Financing Activities:Issuance (repurchase) of common stock


(258
)

(1,044
)

1Proceeds from exercise of stock options


1





(461
)Dividends





(1,163
)

(4,395
)Tax effect of option exercises


(45
)

(279
)

(151
)Net cash used in financing activities


(302
)

(2,486
)

(5,006
)Effect of exchange rate changes on cash


19


58


Net change in cash


(3,345
)

(3,641
)

3,506Cash and cash equivalentsBeginning of year


8,349


11,990


8,484End of year

$
5,004

$
8,349

$
11,990


See
accompanying notes to consolidated financial statements.

F-6

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Table of Contents

THOMAS GROUP, INC.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2009

Note 1Summary of Significant Accounting Policies

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

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

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

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

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

Income
(Numerator)

Shares
(Denominator)

Per Share
AmountIn thousands, except per share dataYear Ended December 31, 2009Basic earnings (loss) per share

$
(4,276
)

10,618

$
(0.40
)Effect of dilutive securities:Options








Diluted earnings (loss) per share

$
(4,276
)

10,618

$
(0.40
)Year Ended December 31, 2008Basic earnings (loss) per share

$
(5,815
)

10,977

$
(0.53
)Effect of dilutive securities:Options








Diluted earnings (loss) per share

$
(5,815
)

10,977

$
(0.53
)Year Ended December 31, 2007Basic earnings (loss) per share

$
7,046


10,990

$
0.64Effect of dilutive securities:Options





201


(0.01
)Diluted earnings (loss) per share

$
7,046


11,191

$
0.63


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

F-7

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Table of Contents

THOMAS GROUP, INC.

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

Note 1Summary of Significant Accounting Policies (Continued)

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

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

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

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

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

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

Furniture and fixtures

5-7 YearsEquipment

3-7 YearsLeasehold improvements

2-10 YearsComputer software

3 Years


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

F-8

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Table of Contents

THOMAS GROUP, INC.

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

Note 1Summary of Significant Accounting Policies (Continued)

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

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

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

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

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

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

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

F-9

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Table of Contents

THOMAS GROUP, INC.

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

Note 1Summary of Significant Accounting Policies (Continued)

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

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

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

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

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

F-10

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Table of Contents

THOMAS GROUP, INC.

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

Note 1Summary of Significant Accounting Policies (Continued)

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

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

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

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

December 31, 2009

December 31, 2008$ thousands

% of AR

$ thousands

% of ARClient A

$
267


31
%
$
85


4
%Client B

$
86


10
%
$



0
%Client C

$
62


7
%
$
192


9
%Client D

$
58


7
%
$
314


16
%


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

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

F-11

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Table of Contents

THOMAS GROUP, INC.

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

Note 1Summary of Significant Accounting Policies (Continued)

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

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

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

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

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

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

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

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

F-12

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Table of Contents

THOMAS GROUP, INC.

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

Note 1Summary of Significant Accounting Policies (Continued)

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

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

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

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

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

F-13

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Table of Contents

THOMAS GROUP, INC.

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

Note 1Summary of Significant Accounting Policies (Continued)

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

Note 2Liquidity and Financing Agreements

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

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

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

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

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

F-14

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Table of Contents

THOMAS GROUP, INC.

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

Note 3Property and Equipment

December 31,2009

2008In thousands of dollarsEquipment

$
864

$
1,044Furniture and fixtures


541


541Leasehold improvements


990


990Computer software


333


4462,728


3,021Less accumulated depreciation and amortization


(2,110
)

(2,140
)$
618

$
881


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

Note 4Accounts Payable and Accrued Liabilities

December 31,2009

2008In thousands of dollarsAccounts payable trade

$
462

$
571Accrued travel


61


133Other accrued liabilities


202


188$
725

$
892


Note 5Accrued Wages and Benefits

December 31,2009

2008In thousands of dollarsAccrued salaries and benefits

$
478

$
410Accrued bonuses and sales commissions





330$
478

$
740


F-15

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Table of Contents

THOMAS GROUP, INC.

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

Note 6Note Payable

December 31,2009

2008In thousands of dollarsNote payable

$
149


$
149





Note 7Other Income

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

Note 8Income Taxes

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

Years Ended December 31,2009

2008

2007In thousands of dollarsDomestic sources

$
(7,697
)
$
(8,670
)
$
11,389Foreign sources


802


405


(331
)$
(6,895
)
$
(8,265
)
$
11,058


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

Years Ended December 31,2009

2008

2007In thousands of dollarsIncome taxes at statutory rate

$
(2,344
)
$
(2,808
)
$
3,747Effect on taxes resulting from:State taxes


(219
)

81


247Utilization of federal and foreign net operating losses, less benefit received








AMT credit adjustment


(30
)

30


Change in valuation allowance





(59
)

Non-deductible compensation and other


(26
)

306


18Income tax expense (benefit)

$
(2,619
)
$
(2,450
)
$
4,012


F-16

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Table of Contents

THOMAS GROUP, INC.

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

Note 8Income Taxes (Continued)

Federal,
state and foreign income tax expense (benefit) from continuing operations consists of the following:

Years Ended December 31,2009

2008

2007In thousands of dollarsCurrent tax expense (benefit):Federal

$
(2,500
)
$
(2,734
)
$
3,477State


(358
)

131


383$
(2,858
)
$
(2,603
)
$
3,860Deferred tax expense (benefit):Federal


209


161


160State


30


(8
)

(8
)239


153


152$
(2,619
)
$
(2,450
)
$
4,012


Significant
components of our net deferred tax assets (liabilities) for federal and state income taxes are as follows:

December 31,2009

2008In thousands of dollarsDeferred tax assets:Current:Accrued expenses

$
106

$
362Allowance for doubtful accounts


2


120Net operating loss carryforward


7


Valuation allowance


(4
)

(16
)Net current deferred tax asset


111


466Non-current:Depreciation


(20
)

(9
)Deferred rent


43


Minimum tax credit carryforward


197


Net operating loss carryforward


1,300


1,124Deferred compensation


5


257Valuation allowance


(54
)

(42
)Net non-current deferred tax asset


1,471


1,330Total deferred tax assets


1,582


1,796Net deferred tax asset

$
1,582

$
1,796


At
December 31, 2009, we had $2.8 million of United States federal net operating loss carryforwards. These carryforwards are subject to a $0.2 million
Section 382 annual limitation expiring

F-17

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Table of Contents

THOMAS GROUP, INC.

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

Note 8Income Taxes (Continued)

2022.
At December 31, 2009, we had approximately $6.1 million of state net operating loss carryforwards, expiring at various times.

From
2001 to 2005, we had provided a valuation allowance for the full amount of the net deferred tax assets. During 2006, however, we determined that a valuation allowance was only
appropriate on approximately $117,000 of the net operating loss carryforwards, due to annual limitations under Section 382 of the Internal Revenue Code of 1986, as amended, and therefore, we
removed $1.8 million of the valuation allowance. During 2008, we removed approximately $59,000 of the valuation allowance. As of December 31, 2009, we had approximately $58,000 of the
valuation allowance. These carryforwards are subject to a $0.2 million Section 382 annual limitation expiring 2022. We continue to provide a valuation allowance of approximately $58,000
against our net deferred tax assets against net operating loss carryforwards subject to annual limitation under Section 382. While the factors listed above were considered in assessing the
sufficiency of a valuation allowance, there is no assurance an adjustment to the valuation allowance would not need to be made in the future if information about future years change. Any change in the
valuation allowance would impact our income tax provision and net income in the period in which such a determination is made.

Note 9Income Taxes

We adopted the provisions of ASC 740 related to accounting for uncertain tax positions on January 1, 2007. As a result of the implementation of ASC 740, we recognized a $40,000
increase in the liability for unrecognized tax benefits, which was recorded as a reduction of retained earnings in our Consolidated Balance Sheets at January 1, 2007. The liability for
unrecognized tax benefits was subsequently realized and paid upon settlement with the IRS during a routine audit, and therefore, we have not recorded any liability for uncertain tax provisions. We see
no significant changes to the facts and circumstances underlying ours reserves and allowances.

We
recognize deductible interest accrued related to tax penalties as interest expense in our Consolidated Statements of Operations and we recognize non-deductible accrued
interest and penalties as income tax expense in our Consolidated Statements of Operations. During 2009, we had $100 in non-deductible penalties and interest.

We
are subject to the statutes of limitations for federal and state income taxes in the states in which we perform our services.

Note 10Employee Benefit Plans

We sponsor a 401(k) retirement plan. We may match a portion of the participants' contributions or make profit-sharing contributions. Participants vest in our contributions ratably over
five years and may join when hired. Matching contributions were $49,000, $587,000 and $958,000 for the years ending December 31, 2009, 2008, and 2007, respectively. We made no profit sharing
contributions in any of these years.

F-18

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Table of Contents

THOMAS GROUP, INC.

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

Note 11Commitments and Contingencies

Operating lease commitments

We lease office space and various types of office equipment under non-cancelable operating leases. Rent expense related to
these operating leases totaled $0.7 million in 2009, $1.0 million in 2008, and $1.1 million for 2007.

In
June 2006, we entered into a lease agreement for our current office space in Irving, Texas. The lease agreement became effective September 1, 2006, and expires on
March 31, 2012. Minimum lease payments required under non-cancelable operating lease arrangements, including office leases, subsequent to December 31, 2008, are as follows:

Operating
LeasesIn thousands
of dollars2010

$
7672011


6132012


138Thereafter


Total minimum lease payments

$
1,518


Contingencies

At times we have become subject to various claims and other legal matters, such as collection matters initiated by us, in the course of
conducting our business. We believe neither such claims and other legal matters nor the cost of prosecuting or defending such claims and other legal matters will have a material adverse effect on our
consolidated results of operations, financial condition or cash flows.

Note 12Segment, Geographical and Major Customer Information

Segment and Geographical Information

We provide services within one industry segment. During 2007, we conducted business primarily in North America, and had limited
operations in Europe and Asia/Pacific. During 2009 and 2008, we continued to conduct business primarily in North America, but we increased our business in Europe

F-19

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Table of Contents

THOMAS GROUP, INC.

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

Note 12Segment, Geographical and Major Customer Information (Continued)

and
had one client in South America. The geographical revenue and long-lived asset information is shown below:

North
America

South
America

Europe

Asia/Pacific

TotalIn thousandsYear ended December 31, 2009:Revenue

$
6,578

$
17

$
2,958




$
9,553Income/(loss) from continuing operations before income taxes

$
(7,697
)
$
17

$
785




$
(6,895
)Long-lived assets

$
618










$
681Year ended December 31, 2008:Revenue

$
20,860

$
573

$
3,688




$
25,121Income/(loss) from continuing operations before income taxes

$
(6,220
)
$
115

$
290




$
(5,815
)Long-lived assets

$
881










$
881Year ended December 31, 2007:Revenue

$
55,397




$
448

$
24

$
55,869Income/(loss) from continuing operations before income taxes

$
11,389




$
(191
)
$
(140
)
$
11,058Long-lived assets

$
1,254










$
1,254


Major Customer Information

During 2009, one client accounted for approximately $1.8 million, or 27%, of North America revenues and another client accounted
for approximately $1.4 million, or 22%, of North America revenues. A third client accounted for approximately $1.0 million, or 15%, of North America revenues. One client accounted for
approximately $2.3 million, or 76%, of Europe revenues and another client accounted for approximately $0.3 million, or 11%, of Europe revenues. One client accounted for approximately
$0.02 million, or 100%, of South America revenues.

During
2008, one client accounted for approximately $6.9 million, or 33%, of North America revenues and another client accounted for approximately $4.2 million, or 20%, of
North America revenues. A third client accounted for approximately $3.4 million, or 16%, of North America revenues. One client accounted for approximately $3.1 million, or 85%, of Europe
revenues and another client accounted for approximately $0.4 million, or 11%, of Europe revenues. One client accounted for approximately $0.6 million, or 100%, of South America revenues.

During
2007, one client accounted for approximately $24.8 million, or 44%, of North America revenues. Another client accounted for approximately $23.0 million, or 41%, of
North America revenues. One client accounted for approximately $25,000, or 100%, of Asia/Pacific revenues. One client accounted for approximately $405,000, or 90%, of Europe revenues.

There
were no other clients from whom revenue exceeded 10% of any one geographical region's revenues in the years ended December 31, 2009, 2008, and 2007.

F-20

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Table of Contents

THOMAS GROUP, INC.

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

Note 12Segment, Geographical and Major Customer Information (Continued)

Our
two largest clients in the years ended December 31, 2008 and 2007 were two divisions of the U.S. Navy, and our engagements with these clients were governed by two separate
contracts. One of these contracts expired March 31, 2008 and the other expired April 30, 2008. For 2008 these contracts together accounted for $11.1 million in revenue. Due in
significant part to the expiration of these contracts, our inability to promptly generate new client engagements sufficient to replace the lost revenue, and our inability to reduce our fixed costs by
a proportional amount, we incurred a net loss of $4.3 million for the year ended December 31, 2009 and $5.8 million for the year ended December 31, 2008. If we are unable
in 2010 to generate new client engagements that are sufficient to offset a substantial part of this lost revenue, it is probable that we will incur a loss in 2010 as well.

Note 13Related Party Transactions

None

Note 14Stock Based Awards

Options and Restricted Stock Awards

On December 12, 2006, at a special meeting of stockholders, stockholders owning approximately 65% of the outstanding common
stock voted to approve the 2005 Omnibus Stock and Incentive Plan (the "2005 Omnibus Plan") and the awards thereunder. This approval reserved 1,000,000 shares of our common stock to become available
for awards as options, stock appreciation
rights, restricted shares or performance awards. Pursuant to the 2005 Omnibus Plan, awards for 650,000 shares of restricted stock were initially granted to employees in 2005 with vesting occurring
over a three to five year period, dependent on achieving various profit levels and market price per share. During the year ended December 31, 2006, awards for an additional 50,000 shares of
restricted stock were granted to employees and during the year ended December 31, 2007 awards for an additional 30,000 shares of restricted stock were granted to employees. These awards
automatically terminate and expire on the earlier of (i) the date on which all restricted shares have become vested shares, or (ii) the date the holder's full-time employment
with us is terminated for any reason, and upon the date of such separation all restricted shares which have not previously vested will be permanently forfeited. The 2005 Omnibus Plan will terminate on
December 20, 2015.

On
March 1, 2008, the Compensation and Corporate Governance Committee of the Company's Board of Directors (the "Compensation Committee") and the Company's Board of Directors, upon
the Compensation Committee's recommendation, approved a new incentive compensation plan titled the 2008 Omnibus Stock and Incentive Plan for Thomas Group, Inc. (the "2008 Omnibus Plan"). The
2008 Omnibus Plan provides a means for the Company to grant awards to officers, employees or consultants in the form of options, restricted shares, performance awards and stock appreciation rights. A
total of 1,000,000 shares of the Company's common stock was reserved for issuance pursuant to awards to be made under the 2008 Omnibus Plan. The 2008 Omnibus Plan received stockholder approval at the
Company's 2008 Annual Meeting of Stockholders, held on June 26, 2008. The 2008 Omnibus Plan will terminate on March 1, 2018.

On
March 1, 2008, the Compensation Committee granted Michael McGrath, the Company's newly appointed Executive Chairman, an initial award of 100,000 restricted shares of the
Company's common stock which vested upon the date of grant, and a performance share award entitling Mr. McGrath to receive up to 350,000 shares of the Company's common stock if certain
conditions related to the

F-21

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Table of Contents

THOMAS GROUP, INC.

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

Note 14Stock Based Awards (Continued)

Company's
profitability are satisfied. The initial restricted share award was granted pursuant to the 2005 Omnibus Plan. The performance share award was granted pursuant to the 2008 Omnibus Plan.

In
December 2009, we determined that the Company would not achieve the annual profit goal for 2009 that was required for Mr. McGrath's performance share award to vest with respect
to 2009. It was also determined to be highly unlikely that the Company will meet the minimum profitability target required in 2010 for the "catch up" provision of Mr. McGrath's performance
share award to be effective. Since we determined that the "catch up" performance targets were unlikely to be achieved in 2010, the previously recognized compensation cost for Mr. McGrath for
2008 and 2009 was reversed in December 2009. Subsequent to year end on March 9, 2010 and with the consent of Mr. McGrath, the Compensation and Corporate Governance Committee of our Board
of Directors cancelled all of Mr. McGrath's performance share award granted in 2008.

On
March 10, 2008, the Compensation Committee granted Earle Steinberg, the Company's newly appointed President and Chief Executive Officer, an initial award of 50,000 restricted
shares of the
Company's common stock which vested on March 10, 2009, the one year anniversary of their grant, and a performance share award entitling Mr. Steinberg to receive up to 380,000 shares of
the Company's common stock if certain conditions related to the Company's profitability are satisfied. The initial restricted share award was granted pursuant to the 2005 Omnibus Plan. The performance
share award was granted pursuant to the 2008 Omnibus Plan.

Effective
December 21, 2009, Earle Steinberg was removed by the Board of Directors from his role as CEO and President. His employment agreement provided for payment of his salary
for six months following separation, under certain circumstances. This amount of potential liability was accrued at December 31, 2009. We ceased payments to Mr. Steinberg as of
February 1, 2010 and have disputed our continuing liability for future payments under the employment agreement. He is no longer eligible for any outstanding performance stock awards as of
December 21, 2009. Thus, all accrued stock based compensation cost for 2008 and 2009 was reversed in December 2009 and all of the performance share awards were cancelled.

Effective
October 1, 2005, we adopted the fair value recognition provisions of ASC 718,Stock Compensationusing the modified
prospective application method. The expected lives of stock options and grants are estimated using the term of the awards granted and historical experience. The expected lives of the restricted stock
awards are based on the anticipated time to maturity of the individual awards, typically between one and five years. This information is summarized as follows:

2009

2008

2007Dividend yield


114
%

0
%

4
%Expected volatility


74
%

74
%

68
%Risk free interest rate


2.5
%

3.4
%

5
%Expected life (years)


5


5


5


The
performance share awards are valued on the earliest date when all of the performance criteria and other required factors relating to the award are known. Compensation expense is
recognized over the applicable period of service. The fair value of performance share awards is determined based on the closing price on the date when all of the factors related to the award are
known. Generally this is

F-22

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Table of Contents

THOMAS GROUP, INC.

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

Note 14Stock Based Awards (Continued)

when
the targets for annual performance are determined and approved by the Company's Board of Directors.

A
summary of the status of our stock options to employees as of December 31, 2009, 2008, and 2007 and changes in the years then ended is presented below.

2009

2008

2007Common Option Shares

Shares

Weighted
Average
Exercise
Price

Shares

Weighted
Average
Exercise
Price

Shares

Weighted
Average
Exercise
PriceOutstanding at beginning of year


46,825

$
6.70


267,149

$
7.85


356,248

$
9.12Adjustments














(4,316
)

77.52Exercised














(6,488
)

9.28Forfeited


(32,825
)

5.4


(220,324
)

8.10


(78,295
)

9.67Outstanding at end of year


14,000


9.72


46,825


6.70


267,149

$
7.85Options exercisable at year-end


14,000

$
9.72


46,825

$
6.70


267,149

$
7.85Weighted average grant-date fair value of options granted




$





$





$



The
following table summarizes information about stock options outstanding at December 31, 2009.

Options Outstanding and ExercisableCommon OptionsWeighted Average
Remaining
Contractual
Life (Years)Exercise Price

Outstanding and
Exercisable

Weighted Average
Exercise Price$0.52-6.47


1,200


1.09

$
2.6610.13-10.38


12,000


0.14


10.3310.53-11.22


800


0.07


11.05$0.52-11.22


14,000


0.21

$
9.72


Due
to the decline in stock price during 2009, the intrinsic value was approximately $150 for stock options outstanding and exercisable as of December 31, 2009 that had an
exercise price exceeding the closing stock price on December 31, 2009, compared to $500 for stock options outstanding and exercisable as of December 31, 2008. There were no stock options
exercised during 2009 and 2008.

We
had no outstanding non-vested options during 2009, 2008 or 2007.

F-23

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Table of Contents

THOMAS GROUP, INC.

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

Note 14Stock Based Awards (Continued)

Stock
based compensation expense for the years ended December 31, 2009, 2008 and 2007 was $(0.6) million, $1.1 million, and $0.8 million respectively. The restricted
stock awards are summarized below:

2009

2008

2007Restricted Stock Awards

Shares

Weighted
Average
Exercise
Price

Intrinsic
value

Shares

Weighted
Average
Exercise
Price

Intrinsic value

Shares

Weighted
Average
Exercise
Price

Intrinsic
valueOutstanding grants at beginning of year


780,000

$
0.00

$
374,400


530,000

$
0.00

$
4,155,200


700,000

$
0.00

$
9,688,000Awards Granted




$


$



880,000

$
0.00

$
2,906,200


30,000

$
0.00

$
334,400Vested


(50,000
)
$
0.00

$
(28,500
)

(200,000
)
$
0.00

$
576,000


(133,334
)
$
0.00

$
1,168,006Forfeited


(608,666
)
$
0.00

$
(369,773
)

(430,000
)
$
0.00

$
1,012,601


(66,666
)
$
0.00

$
703,993Outstanding grants at year end


121,334

$
0.00

$
75,227


780,000

$
0.00

$
397,800


530,000

$
0.00


4,928,573Restricted stock exercisable at year end




$








$








$
Weighted average grant-date fair value of restricted stock granted




$
0.63







$
1.34







$
10.54Weighted average life of outstanding awards (years)





8.17








8.80








5.23


Of the 200,000 shares of restricted stock awards that vested during 2008, 26,450 shares were withheld in satisfaction of tax requirements.

At
December 31, 2009 there was approximately $0.08 million of stock based compensation costs related to nonvested restricted stock awards to be recognized over an average
vesting period of 2 years.

Tax
benefit for options and stock awards exercised was $45,000, $279,000 and $151,000 for the years ended December 31, 2009, 2008 and 2007.

Stock Appreciation Rights

There were no Stock Appreciation Rights activities during 2009, 2008 and 2007.

Registered Status of Award Shares

Shares issued pursuant to stock based awards granted under the 2008 Omnibus Plan, the 2005 Omnibus Plan, the 1997 Stock Option Plan of
Thomas Group, Inc., the
Amended and Restated 1992 Stock Option Plan of Thomas Group, Inc. and the Amended and Restated 1988 Stock Option Plan for Thomas Group, Inc. are registered pursuant to Registration
Statements on Form S-8 that have been filed with the SEC.

F-24

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Table of Contents

THOMAS GROUP, INC.

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

Note 15Supplemental Disclosure of Cash Flow Information

Years Ended December 31,2009

2008

2007In thousands of dollarsInterest paid

$
3

$
14

$
15Income taxes paid

$
40

$
1,131

$
4,501Other non-cash financing activities:Dividends declared

$
0

$
0

$
4,445


Note 16Subsequent Events

Management has evaluated subsequent events through March 30, 2010 which is the date that the
Company's financial statements were issued. No material subsequent events have occurred since December 31, 2009 that required recognition or disclosure in these financial statements.

Note 17Valuation and Qualifying Accounts

The following table summarizes the activity of the allowance for doubtful accounts and the deferred tax asset valuation allowance:

Year Ended December 31,2009

2008

2007In thousands of dollarsAllowance for doubtful accounts:Beginning balance

$
11

$
45

$
45Additions to expense





345


Reductions of allowance


(6
)

(379
)Ending balance

$
5

$
11

$
45Deferred tax asset valuation allowance:Beginning balance

$
58

$
117

$
117Additions to valuation allowance








Reductions of valuation allowance





(59
)

Ending balance

$
58

$
58

$
117


F-25

---



Table of Contents

THOMAS GROUP, INC.

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

Note 18Selected Quarterly Financial Data (Unaudited)

2009For the Three Months EndedMar. 31

June 30

Sept. 30

Dec. 31In thousands, except per share dataRevenue

$
3,288

$
2,619

$
2,098

$
1,547Gross profit


1,442


886


712


355Operating income (loss)


(1,920
)

(2,264
)

(1,883
)

(1,254
)Net income (loss)

$
(1,225
)
$
(1,354
)
$
(1,581
)
$
(1,163
)Earnings (loss) per shareBasic

$
(0.11
)
$
(0.13
)
$
(0.10
)
$
(0.06
)Diluted

$
(0.11
)
$
(0.13
)
$
(0.10
)
$
(0.06
)Weighted average sharesBasic


10,678


10,667


10,614


10,511Diluted


10,678


10,667


10,614


10,511




2008For the Three Months EndedMar. 31

June 30

Sept. 30

Dec. 31In thousands, except per share dataRevenue

$
12,438

$
5,378

$
3,832

$
3,474Gross profit


5,993


1,980


1,094


995Operating income (loss)


463


(3,016
)

(3,271
)

(2,736
)Net income (loss)

$
366

$
(1,893
)
$
(2,285
)
$
(2,003
)Earnings (loss) per shareBasic

$
0.03

$
(0.17
)
$
(0.21
)
$
(0.19
)Diluted

$
0.03

$
(0.17
)
$
(0.21
)
$
(0.19
)Weighted average sharesBasic


11,073


11,076


10,973


10,787Diluted


11,320


11,076


10,973


10,787


F-26

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