<PAGE>   1
                                                                      EXHIBIT 13

================================================================================
                               THE QUEST FOR SPEED
================================================================================

THE CAR WAS A DARK BLUR trailing a mile-long plume of dust as it ripped across
the desert floor. The scene was a familiar one to the support crew and a handful
of reporters watching the ThrustSSC vehicle from the observation post. Dozens of
times in the previous three weeks, the car, carefully prepped, had rolled onto
the flats of Black Rock Desert in Nevada. The driver, RAF pilot Andy Green had
fired up its twin Rolls Royce jet engines and pushed the limits of speed
attainable in a land vehicle. Days before, the ThrustSSC had already broken the
former speed record. This time, with ideal conditions and the car performing at
its technical best, Green kept increasing fuel flow to the monstrous engines as
he made his approach to the timed area that would clock his official speed.

The ThrustSSC (Super Sonic Car) had been designed with its rear wheels, which
steer the car, set asymmetrically, giving it an unusual three-point stance. The
entire design was radical. In 1992, project leader Richard Noble had begun this
quest for speed with a dream to be the first to break the speed of sound on
land, but with absolutely no experience in designing or building cars. Noble's
final design broke tradition with much of the conventional thinking regarding
aerodynamics, power and control. With 110,000 horsepower, it was the most
powerful land vehicle ever built. Today's run would be the ultimate test of the
soundness of Noble's breakthrough concept.

NOW, WITH BOTH HANDS firmly gripping the violently shaking steering wheel, Andy
Green's eyes flicked back and forth between the blurry painted line on the dry
salt lake bed and the array of instruments in the cockpit. At these speeds, if
the terrific wind velocity shoved the nose of the car up as little as an inch
the vehicle would become airborne. The threat of disaster was measured in
centimeters and fractions of a second.

An observer would have found it difficult to know just how fast the vehicle was
traveling on this particular run, but the technical crew had remote sensors that
tracked the data Green was watching on his cockpit gauges. As the speed
continued to climb, the incredible force of wind friction and the slight
roughness of the roadway began to make the vehicle even harder to control. The
gauges flirted with the redline, but Green pushed on. Only weeks


                                                                               1
<PAGE>   2
before at this very site American Craig Breedlove, a veteran land speed record
holder, had attempted to beat Noble's team to be the first to exceed Mach One in
a land vehicle. His Spirit of America rocket car had careened out of control and
was destroyed. Amazingly, Breedlove had escaped with only minor injuries.

TENSION AND THRILL MINGLED among the members of the press and Richard Noble's
largely-British support crew as Green's speed climbed past the current land
speed record. Suddenly, just as Green accelerated past the first timing pylon, a
collective gasp went up from the watching crowd as a distant boom was both heard
and felt. In a moment, however, realization swept the observers that this noise
was cause for jubilation, rather than for concern. What they had just witnessed
was the first time man had ever broken the speed of sound on land. An exultant
roar went up as the ThrustSSC held its course and sped through the measured mile
to make it official: a new land speed record of



2
<PAGE>   3
763.035 mph (Mach 1.020). The date was October 15, 1997, exactly 50 years and
one day after pilot Chuck Yeager first penetrated the sound barrier in his
famous flight of the "Glamorous Glennis."

WHAT DOES IT TAKE TO BECOME FAST - really fast? For twenty years, Thomas Group,
Inc. has helped major corporate clients become fast companies - fast to produce
goods and services - fast to respond to customer needs - fast to develop new
products. Many of the same principles and methods that led to the success of the
ThrustSSC project are mainstays in the Thomas Group toolkit: careful planning,
unconventional thinking, and a commitment to streamlining and removing barriers
that block the way to maximum performance.

The quest for speed begins with the INSPIRATION of the ultimate goal, often
championed by a single visionary. It requires the IDENTIFICATION of the steps
required and the potential barriers to success. For those involved, the quest
for speed demands


                                                                              3
<PAGE>   4

INFORMATION, discovering the "how to" by acquiring necessary skills and
knowledge. Next comes the IMPLEMENTATION of the project, along with the
installation and careful monitoring of a set of measurement "gauges." Then, as
the quest for speed becomes reality, a process of INTERNALIZATION must occur, if
the newly acquired speed levels are to become repeatable and sustainable. These
are the steps the ThrustSSC team went through to achieve world record speed.
These are the same steps Thomas Group clients are led through to achieve their
competitive advantage through speed. Known as "the Five I's ProcessSM," and it
is only part of the methodology, and one of over 100 management tools the Thomas
Group ResultantsSM have at their disposal when "partnering" with client
companies to help them achieve their best performance levels. 

In 1978, Philip R. Thomas acted on his dream. Encouraged by his 20 years of
success in applying speed-based solutions in the electronics industry, he
founded a company dedicated to producing tangible results for corporate clients.
By focusing on cause and effect relationships, Thomas was able to design methods
that, while incredibly functional, were often not found in management textbooks.
By viewing organizations as a series of connected processes, and streamlining
each of those processes, Thomas transformed client companies into fast, agile,
competitive leaders. He developed a careful set of measurements (referred to as
a "cockpit chart") which keeps client companies on track as their overall speed
climbs higher and higher.



4
<PAGE>   5

The results have been astonishing. Over the course of a typical engagement a
Thomas Group client will...

-  ACCELERATE REVENUE GROWTH

-  CUT DELIVERY LEAD TIMES AND TIME-TO-MARKET BY
   MORE THAN 50% 

-  IMPROVE TOTAL WORKFORCE PRODUCTIVITY BY 25%

-  REDUCE INVENTORIES BY 50%

-  PRODUCE SIGNIFICANT IMPROVEMENTS IN RETURN ON ASSETS

-  INCREASE OPERATING PROFIT BY UP TO 10% OF SALES

These impressive top- and bottom-line results are the direct result of
transforming client companies into faster, more competitive organizations. The
consistency with which these results can be obtained has allowed Thomas Group to
accept incentive-based fees on many projects. This very unusual "share the risk"
approach epitomizes Thomas Group's commitment to the client-partnering
relationship. It assures potential clients that, indeed, they will achieve their
goals. Thomas Group shares the risk - and the reward - by partnering with
clients across a wide range of industries.

"ACHIEVING WORLD-CLASS SPEED." This summarizes the lofty goal of Thomas Group's
responsibility to client companies. Increasingly, however, clients have asked
Thomas Group to apply the same effective speed-based methods to their strategic
growth initiatives. Early successes indicate that 20 years of "best practices"
can be readily applied to creating fast response to growth opportunities in
virtually any industry. This allows Thomas Group to facilitate not only maximum
operational results for clients, but also help them leverage "fast-ops"
capabilities into entirely new markets.

Richard Noble's quest for speed ended with success in the Black Rock Desert when
his car broke through the sound barrier. Surely, someone else will push the
speed record even higher, and many more will likely fail trying. But none can
ever attain the goal of "first" again. For Thomas Group, however, the potential
for new success is virtually unlimited. By expanding the PRODUCTS offered for
fast operations, strategy and growth, by expanding the MARKETS served through
regional divisions around the world, and by expanding the INDUSTRIES served
through multiple business units, Thomas Group anticipates a new era of fast
growth.

FOR THOMAS GROUP, INC., THE QUEST FOR SPEED HAS JUST BEGUN.



                                                                               5
<PAGE>   6
================================================================================
                               FROM THE CHAIRMAN
================================================================================

TO OUR SHAREHOLDERS:

As Thomas Group enters its twentieth year and our fifth as a public company, we
have established ourselves as a market leader in transforming our corporate
clients into fast companies. We were the first to apply proven cycle time
reduction methods to all linked processes through a proprietary methodology we
named Total Cycle Time(R) (TCT). We proved that, not only did our clients make
tremendous financial gains, they also gained in the areas of quality, customer
responsiveness, and overall competitiveness. These factors drive enhanced
shareholder value for our clients. TCT has remained our primary product, our
core competency. As more and more companies reap the benefits of TCT, there is
an even greater urgency for their competitors to embrace a fast process culture.
If they do not, they may soon be unable to compete at all.

The commitment to speed within a company has become as fundamental as the wheels
on a car. Consider the basic elements of a car: a chassis with wheels, a
steering mechanism, a powertrain to make it go, and brakes to make it stop. Your
family sedan shares all of these same characteristics with the ThrustSSC, the
car that shattered the speed barrier in 1997. So what makes the ThrustSSC
different from your car? The ThrustSSC has been engineered to go very fast - it
has efficient systems, special designing, a dedicated and experienced support
team, and the best tools and technology. The ThrustSSC is a perfect analogy of
what Thomas Group does for our growing list of client companies - provide them
the means to move ahead very fast.

This year's annual report theme, "The Quest for Speed" is particularly relevant
to what I view as an unprecedented need for Thomas Group services. I have
observed a sharply increased recognition for the importance of speed in
business. If you read business and trade publications you have undoubtedly seen
the proliferation of recent articles linking "speed" and "competitiveness." They
are playing the Thomas Group song. And, as you will see in my comments to
follow, we have carefully and systematically laid the foundation to capitalize
on this opportunity.

Thomas Group's future growth will be partially due to our offering multiple
types of services to meet a broader range of needs for our clients. We have
invested heavily in research and development to produce the next generation of
Thomas Group products. By applying the fundamental element of speed to the
drivers of the dilemmas our clients face, we have historically produced Speed
Driven ResultsSM. Now we are using our best practices and vast store of
intellectual property to develop methods that address our clients' strategic
growth needs. We not only maximize clients' current operations, but we




6
<PAGE>   7
can now provide the systems and tools that will prepare them to take advantage
of future opportunities. We think of this new, continuing relationship with
clients as helping them by getting BETTER, BROADER, and BOLDER. This lets us
work with clients whose primary focus is on strategic growth. It also encourages
ongoing relationships with our current and former TCT clients. The common theme
to each of these engagement opportunities is enhancing shareholder value.

================================================================================
                                PHILIP R. THOMAS
                                CHAIRMAN AND CEO
================================================================================

Last year we announced the formation of our business units, designed to address
an ever-increasing number of industries and geographic markets. Our business
unit presidents and their support teams are veterans of their industries,
steeped in the Thomas Group methodology. This structural change has proven to be
a wise move. Because of their subject matter expertise, the business unit teams
can transfer our proven techniques into a customized set of solutions for the
dilemmas facing clients in their specific industries. Our Automotive unit,
headed by Lee Grubb, and our Aviation unit, led by Jim Houlditch have created
the greatest growth in new engagements, compared to their 1996 totals. The
Electronics unit, under Don McDonald, is aggressively pursuing new engagement
models. Bob Stephens has changed the title for his unit, which was formerly
called simply "Manufacturing" to Consumer and Industrial Products, to more
clearly identify with the outputs of his clients. Under the leadership of Tom
Williams, our European unit has generated impressive new sales. In Asia, the
economic crisis has created an unusual challenge for Herby Locke. Although the
monetary exchange situation makes it more difficult for them to pay us, the
Asian clients have a more pressing need for our services than ever before.
Because unusual times call for unusual solutions, Herby is developing long-range
relationships through which we can assist our Asian clients in using speed to
recover more quickly from their dilemmas during their economic crises. I am
happy to report that business-under-development of all business units points to
a strong 1998.

We have recently added a new business unit to address the needs of the utilities
industry. Faced with a new era of deregulated competition, utility companies are
having to learn a new way of doing business. With our experience in changing
processes, systems and cultures, Thomas Group is uniquely capable of making
agile competitors out of these slow-moving service providers. The utilities
industry



                                                                               7
<PAGE>   8

represents one of our greatest growth opportunities. In 1997, Alex Young, Thomas
Group president and chief operating officer accepted the challenge of
investigating the potential of this market and developing an operating plan for
launching our new Utilities business unit. He successfully built the support
team, developed the necessary materials and tools, and initiated valuable
contacts with senior utility executives. As a Thomas Group veteran and peer to
these executives, Alex has succeeded in capturing their attention at a time when
they are inundated with calls from consultants. At Alex's request to carry this
opportunity forward to its expected growth and profitability, Alex is now
devoting his full energy and attention to this important project as president of
the Thomas Group Utilities business unit.

With this shift in Alex's role, we called upon J. Thomas Williams, currently
president of our European unit, to assume the responsibilities of corporate
president and chief operating officer. Tom is a most capable,
bottom-line-oriented executive, focused on increasing shareholder value. He has
improved the European business unit performance in less than two years as unit
president. His background includes financial management, strategic planning,
resource management, and large-scale organizational change. As a captain in the
U. S. Navy, he planned and oversaw the restructuring of eight naval shipyards,
saving $2.6 billion over five years. He earned an MBA from Harvard University.

At 51 years of age, Tom represents an important part of our succession plan, as
we look forward to those who will lead Thomas Group in the years to come. In
tandem with Tom's appointment I have asked him to share responsibilities with me
by forming the Office of the Chief Executive, which will consist of Tom and me.
My focus will be on top-line revenue growth, while Tom will focus on bottom-line
profitability.

Another change that helps pave the way to expanded growth and profitability is
the decision to take a charge for certain capitalized assets in our software
unit. It is now apparent that values originally placed on capitalized software
for certain products were unrealistic. This decision eliminates a substantial
non-cash expense that has dragged down earnings of the software business since
acquisition. Bill Jackson, president of the Software business unit, has

================================================================================
                               J. THOMAS WILLIAMS
                               PRESIDENT AND COO
================================================================================



8
<PAGE>   9
completed necessary technical modifications and product repackaging, and has
added the sales resources necessary for bringing this business unit to
profitability in 1998.

We changed the name of the software units to provide improved consistency and a
sense of cohesiveness. The new name is Thomas Group Information Technologies.
This also reflects a renewed commitment to our original intent with these
acquisitions: leverage our traditional engagement relationships into the
acquisition of cutting-edge technical tools that support our essential
speed-driven methodology, plus provide access to their impressive customer
lists. Our sales- and education-related products represent advanced systems that
provide fast information and performance in the selling and learning cycles. Our
other primary software product is an advanced warehouse inventory management
system that is an essential tool for obtaining real-time information on reducing
costly inventories and raising warehouse productivity so TCT methods can be
consistently applied.

While much of our expectation for the future lies in revenue growth, we have not
overlooked our costs. We have instituted firmer cost controls in all areas of
our business. We are gaining improved utilization of our assets. For instance,
we are now making our high-tech CEO Center in Louisiana available for use by
outside corporate clients as the ultimate conference center. We have tightened
our internal rules for business under commitment to improve the accuracy and
conservative nature of our projections. We have redesigned the measurements we
use that drive our incentive compensation, thus improving the predictability of
results and providing a smoothing of our revenues.

The steps we have taken during the year have successfully laid the necessary
foundation for building the strong, rapidly growing organization we can be. By
building on the three elements of expanded products, expanded markets, and
expanded industries, our future should be dynamic and prosperous.

Every quest begins with a vision. We believe we have now designed and
implemented the structure necessary to see the Thomas Group vision become
reality.


/s/ PHILIP R. THOMAS

Philip R. Thomas
Chairman and CEO



                                                                               9
<PAGE>   10
================================================================================
                                 THOMAS GROUP'S
                                QUEST FOR SPEED
================================================================================

Thomas Group excels in developing fast, competitive companies; yet our own
growth has not met our expectations. During 1997 we implemented a number of
organizational, financial and strategic changes designed to put us on the fast
track. While the improved financial controls will continue to benefit the cost
side of our business, our future revenue growth will be driven by three
variables: an expanded line of PRODUCTS/SERVICES, delivered to an
ever-increasing number of geographic MARKET AREAS, customized to the needs of
more and more INDUSTRIES. Beginning with our initial public offering date (IPO),
the chart below illustrates how these variables have begun to affect our growth
over the last four years, and how the increase in each will drive our future
growth exponentially.

EXPANDING PRODUCTS

We developed the concept of applying fast cycle time to all processes in an
organization, a proprietary methodology we call Total Cycle Time (TCT). The
financial impact to clients has been enormous, with additional benefits in
quality improvement and increased competitiveness. Our effectiveness has been
largely due to our ability to link DRIVERS to RESULTS, using the fundamental
element of

                                           *planned
                             GROWING EXPONENTIALLY BY
                              EXPANDING INDUSTRIES,
                               MARKETS AND PRODUCTS



10
<PAGE>   11
SPEED to achieve improvement. Speed Driven Resultssm became our name for the
"deliverable," a descriptor that conveys both what we do, and how it benefits
the client. Over the years, the challenge has been to determine if Speed Driven
Results could be achieved in a variety of industries and processes. We have
discovered that our methods are fully transferable. We have successfully run
programs for clients in industries as diverse as airline food service catering,
discount retail, financial services, as well as the more traditional heavy
manufacturing and electronics industries.

There are pitfalls, however, in being essentially a one-product company. Some
viable prospective clients believe "cycle time" programs are for manufacturing
only, in spite of our many successes in non-manufacturing environments. Others
have attempted to install some form of cycle time program in the past, often
with poor results. Traditionally, by the design of our TCT programs, our
engagements have been limited to a specific length, usually 18 to 30 months.
Although we have often secured multiple engagements from a single client by
taking TCT to other divisions, subsidiaries, and even supply-chain companies,
each engagement was usually a finite, one-time intervention.

In late 1996, we created an internal Research and Development task force to
investigate opportunities


Dean Langford, President,
OSRAM Sylvania (left), and 
Bob Stephens, President, 
Thomas Group Consumer &
Industrial Products, discussing 
one of OSRAM's many unique 
lighting solutions.



                                                                              11
<PAGE>   12
for us to deliver Speed Driven Results in non-operational venues. We discovered
two areas of broad concern to our clients that could be greatly impacted by our
methods: STRATEGY and GROWTH. Upon close examination we realized that strategy
(planning and directing movements to achieve objectives) and growth (expanding
through market-share, new markets, alliances, joint ventures, etc.) are really
focused on a common goal: identifying and taking advantage of viable
OPPORTUNITIES. By using Thomas Group's speed driven methods clients can be the
first to spot opportunities and quickest to exploit them to their advantage. We
are calling this new product model Opportunity Cycle Management (OCM). It opens
the door for us with clients who have a non-operational focus, while providing a
valid means for continuous client engagement, rather than a finite, fixed-term
relationship. We refer to this expanded role with our clients as helping them
to:
      o be BETTER (operations)
      o be BROADER (growth opportunities)
      o and be BOLDER (strategic opportunities)

We will refine this exciting new product through 1998 in our initial
engagements, with the expectation that it could produce 20% to 30% of our total
revenues within the next few years.



THOMAS GROUP'S INCREASING ROLE
IN IMPROVING CLIENT COMPANIES'
MARKET VALUE



12

<PAGE>   13

Our Research and Development task force is already at work on further product
development. One clear area of interest is the implementation of Information
Technology systems, where our experience in process refinement and barrier
removal can give us a distinct competitive advantage over the typical technical
provider. Our software products (available through the Thomas Group Information
Technologies business unit) will be more aggressively cross-sold to our clients,
while we begin approaching the software client base with our TCT and OCM
products. We will also be aggressively considering other alliances, joint
ventures, and cross-selling opportunities that would give us access to new
clients and provide an expanded menu of compatible products.

We anticipate expanding alternate engagement options, such as offering shorter
term initial programs. This allows new client companies to experience Thomas
Group capabilities prior to committing to a long-term implementation contract.
By offering our assessment and improvement plan architecture as separate
products we secure a faster decision, while permitting the customer to make the
longer term engagement commitment after they have seen us perform.


                                    [PHOTO]

(Seated, left to right) David DeLaRue, Vice President,
and Barbara DiGiacomo, Vice President, both of
Willis Corroon Construction National Wrap Up
Team, with (standing) Chuck Riehm, Vice President,
Sales & Marketing, Thomas Group Information
Technologies, reviewing a customized interactive
presentation software package developed by TGIT.



                                                                              13
<PAGE>   14
EXPANDING MARKETS

In 1996, we continued our commitment to establishing regional business units to
deliver our products to clients within strategic locations around the globe.
This commitment has led to the establishment of business units based in Detroit
(for our automotive clients) and Singapore (to serve Asia and the Pacific Rim
area). Both Detroit and our existing operations in Frankfurt, Germany made great
advances in bookings in 1997. Our Asia unit has encountered the new challenge of
a broad economic crisis sweeping the area, which affects both the willingness of
clients to enter into new consulting relationships and what they can afford to
pay. We are committed to the region because of its vast potential for our
services. We expect some engagements in Asia, for the duration of the economic
downturn, and a rapidly increasing demand for Thomas Group products as the Asian
situation improves.

As we bring our three geographic business units to increased revenues and
profitability, we will be considering additional regions which may justify
establishing a new business unit. Meanwhile, the mobility of our Resultant teams
allows us to contract for programs in many countries not within a dedicated
business unit. It is likely we will establish an additional regional business
unit within the next two years.



                                    [PHOTO]


(Left to right)Herby Locke, President, Thomas Group Asia, Paul Tong,
Chief Financial Officer, and Patrick Wang, Chairman/CEO, both of
Johnson Electric Industrial Manufactury, Ltd. in Hong Kong, and Philip
Thomas, Chairman/CEO, Thomas Group, Inc., discussing the economic
crisis in Asia and the significance of achieving a competitive advantage
through Total Cycle Time.


                                    [PHOTO]


Jim Johnson, President/COO, Gulfstream Aerospace 
Corporation (left), and Jimmy Houlditch, President,
Thomas Group Aviation Business Unit, in the cockpit
of a Gulfstream V.



14
<PAGE>   15

EXPANDING INDUSTRIES

Last year we announced the formation of our industry business units. These
units, headed by veterans of the industries they serve, deliver the Thomas Group
products, customized to the unique needs of the specific industry. Our current
industry business units are: 

-  ELECTRONICS AND SEMICONDUCTORS 

-  CONSUMER AND INDUSTRIAL PRODUCTS 

-  AUTOMOTIVE 

-  AVIATION & AEROSPACE 

-  INFORMATION TECHNOLOGIES

We have "crossed over" into other industries frequently. Often the decision to
develop a new industry business unit has been driven by the success of these
cross-over programs. The general criteria we use for establishing a new business
unit are: the industry's need and potential acceptance of our methods and
products, the expectation of producing $50 million in revenues from that
industry within five to ten years, and the ability to assemble a highly
qualified leadership team with broad industry experience to lead the new
initiative.

While we continue to look for more industry-specific opportunities we have
targeted these two areas for expansion of our business units:

-  UTILITIES INDUSTRY

-  FINANCIAL SERVICES

                                    [PHOTO]

(Left to right) John Farris, 
Vice President, and Lee 
Grubb, President, Thomas 
Group Automotive 
Business Unit, with Helmut 
Fried, Vice President, 
Thomas Group Europe, at 
the Geneva Auto Show.



                                    [PHOTO]

(Left to right)Bill Wield, 
Vice President Operations, 
Alex Young, President, 
and Michael Kerrs, Vice 
President, of the newly 
formed Thomas Group 
Utilities Business Unit.

                                                                              15



<PAGE>   16

THE ROAD AHEAD

In 1997, Thomas Group achieved increased revenues, while we incurred increased
costs for establishing and developing our new business units. In addition, our
software business unit carried a capitalized expense which we corrected through
a charge in the fourth quarter. Although our planning for further business unit
and product expansion will continue through 1998, we will minimize those costs,
while we start to reap the rewards of new sales coming from the established
business units.

Although our business continued at a steady pace through 1997, we have not
achieved the growth we believe is our "entitlement." Our share price has been
disappointing, but reflects our inconsistent earnings. Many of the expenses
incurred in 1997 were one-time costs for establishing new products and markets.
This fact, combined with tighter cost controls, increased profit and loss
responsibility at the business unit level, and improved revenues driven by our
expanded products, markets and industries support our commitment to producing
more consistent earnings and significantly improved shareholder value.

The investments we have made in expanding products, markets, and industries are
just beginning to pay off. We expect to begin seeing the early effects of rapid
growth, driven by expansion within each of these areas, in 1998 and beyond
through ever-increasing revenues and improved profit margins.




16

<PAGE>   17
================================================================================
SELECTED HISTORICAL AND
PRO FORMA DATA
================================================================================

The following table sets forth selected historical and pro forma financial
information regarding the Company. This historical financial information has
been derived from the audited financial statements of the Company. This
information should be read in conjunction with, and is qualified by, the
consolidated financial statements and notes thereto included in this Annual
Report to Stockholders.

<TABLE>
<CAPTION>
                                                                        YEAR ENDED DECEMBER 31,
                                                                                                         PRO
                                                                                                         FORMA
In thousands, except per share data      1997            1996            1995            1994             1993             1993
                                      ---------------------------------------------------------------------------------------------
<S>                                   <C>             <C>             <C>             <C>              <C>              <C>        
STATEMENT OF OPERATIONS
Revenues                              $    75,124     $    72,029     $    67,220     $    52,460      $    44,586      $    44,586
Operating Expenses                         71,240          69,239          56,641          52,899           36,105           37,635
                                      -----------     -----------     -----------     -----------      -----------      -----------
Operating Income (Loss)                     3,884           2,790          10,579            (439)           8,481            6,951
Net gain on securities sale                    --              --              --             479               --               --
Interest income (expense)                     159             252             524             105              (30)             (77)
                                      -----------     -----------     -----------     -----------      -----------      -----------
Income before Income Taxes                  4,043           3,042          11,103             145            8,451            6,874
   Income Taxes                             1,617           1,217           4,348              99            3,254            2,644
                                      -----------     -----------     -----------     -----------      -----------      -----------
Net Income                            $     2,426     $     1,825     $     6,755     $        46      $     5,197      $     4,230

Earnings per share
  Basic                               $      0.40     $      0.31     $      1.13     $      0.01      $      1.07      $      0.87
  Diluted                             $      0.38     $      0.29     $      1.08     $      0.01      $      0.99      $      0.80
Weighted average shares
  Basic                                 6,097,782       5,963,394       5,998,009       5,792,333        4,841,676        4,841,676
  Diluted                               6,327,484       6,309,970       6,282,036       6,127,332        5,262,632        5,262,632

BALANCE SHEET - YEAR END
Working Capital                       $    20,738     $    15,705     $    20,001     $    15,248               --      $    18,245
Total Assets                               44,386          38,890          40,157          27,567               --           30,954
Long-term Obligations, Including
   Current Maturities                       3,286           1,661           1,101           1,131               --            1,883
Total Stockholders'
   Equity                                  34,708          31,512          31,051          22,277               --           21,662
</TABLE>

1993 PRO FORMA ADJUSTMENTS

A number of changes took place on or prior to the August 1993 closing of the
Company's initial public offering, including (i) termination of the Company's
obligation to make payments to Electronic Data Systems Corporation, whether in
the form of interest, dividends or marketing fees, (ii) termination of the
management agreement with Thomas Group Holding Company, (iii) commencement of an
employment agreement with Mr. Thomas, and (iv) termination of royalty payments
to TC Operating, Inc. Due to these changes, historical results of operations are
not comparable prior to 1994 and may not provide the most meaningful
information. Pro forma information has therefore been provided for 1993.




                                                                              17
<PAGE>   18
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
================================================================================

OVERVIEW

The Company derives the majority of its revenues from monthly fixed and
incentive fees for the implementation of Total Cycle Time and other business
improvement programs (collectively, "Business Improvement Programs"). Incentive
fees are tied to improvements in a variety of client performance measures
typically involving response time, asset utilization, productivity and
profitability. Due to the Company's use of incentive fee contracts, variations
in revenue levels may cause fluctuations in quarterly results. Factors such as a
client's commitment to a Total Cycle Time program, general economic and industry
conditions, and other issues could affect a client's business performance,
thereby affecting the Company's incentive fee revenues and quarterly earnings.

The Company also provides, on a fixed fee basis, software solutions for certain
business processes ("Information Technologies") through the sale of software
licenses, services and maintenance, and computer hardware. These services are
provided through subsidiary companies purchased in August 1995 and July 1996
which have each experienced several quarters of operating losses. The Company is
currently evaluating its options with regard to these subsidiaries. These
options include continuing to invest the funds necessary to improve the sales
process and bring the operations to profitability or evaluating opportunities to
sell or otherwise dispose of these operations. A pretax impairment charge of
$2.3 million was taken against Information Technologies' capitalized software
and goodwill in the fourth quarter of 1997, leaving $1.6 million in intangible
assets at December 31, 1997. Depending upon the option ultimately chosen, the
Company may recognize a loss on the disposition of such subsidiaries. At this
time, no decision has been made by the Company regarding these subsidiaries. If
the Company continues to own these subsidiaries, there can be no assurance that
such subsidiaries will achieve profitability. Continued losses by these
subsidiaries would have a material adverse effect on the financial condition,
results of operations or cash flows of the Company.

In 1996 the Company invested in developing its business by increasing its sales
and marketing effort, opening an office in Singapore and investing in personnel
and infrastructure for client programs that did not start until 1997. These
investments, particularly the business development expenses related to sales and
marketing, have continued into 1997 and are expected to continue in the
foreseeable future. Results from increases in the sales and marketing area are
not expected until six to twelve months after the initial expenses are incurred.

In addition to its domestic operations, the Company has operations and contracts
in Europe and the Asia/Pacific region. Contracts in these regions traditionally
have been denominated in the local currency of the client for which the service
is performed; therefore, the Company is exposed to currency fluctuation risks. A
partial natural exchange hedge exists because the Company's costs are also
denominated in the same local currency.

<TABLE>
<CAPTION>
                                               PERCENTAGE OF REVENUES
                                             FOR YEAR ENDED DECEMBER 31,
                                           1997          1996          1995
                                        -------------------------------------
<S>                                     <C>           <C>           <C>  
Revenues                                    100.0         100.0         100.0
Cost of Sales                                65.1          67.2          63.5
                                        ---------     ---------     ---------
Gross Margin                                 34.9          32.8          36.5
Selling, General and Administrative          29.7          28.9          20.8
                                        ---------     ---------     ---------
Operating Income (Loss)                       5.2           3.9          15.7
Interest Income, net                           .2            .3            .8
                                        ---------     ---------     ---------
Income before Income Taxes                    5.4           4.2          16.5

Net Income                                    3.2           2.5          10.0
                                        ---------     ---------     ---------
</TABLE>

RESULTS OF OPERATIONS

Years Ended December 31, 1997 and December 31, 1996

REVENUES

Revenues for 1997 increased by $3.1 million or 4% to $75.1 million from $72.0
million for 1996. Business Improvement Program revenues increased by $4.6
million or 7% to $69.6 million for 1997 from $65.0 million for 1996. Business
Improvement Program revenue increased due to increases in the number of
Asia/Pacific programs combined with new programs in the Automotive and Aviation
Business Units. The Information Technologies business segment revenues for 1997
decreased by $1.5 million or 21% to $5.5 million from $7.0 million in 1996.
Information Technologies revenues declined despite the inclusion of an
additional six months of revenues related to the acquisition of Bermac
Communications, Inc. ("Bermac") in July 1996, due to a decrease in the number of
software licenses sold in 1997.

Fixed fee and incentive based revenues were 73% and 27%, respectively, of
Business Improvement Program revenues for 1997 compared to 70% and 30%,
respectively, in 1996.

United States based Business Improvement Program revenues increased $4.3 million
or 10% in 1997 to $49.7 million from $45.4 million in 1996 due to additional
contracts, particularly in the Automotive and Aviation Business Units. European
revenues decreased $3.5 million or 19% to $14.9 million from $18.4 million in
1996. European revenues decreased primarily due to fewer active programs and a
weakening of the Swiss Franc and German Mark against the U.S. dollar. Since most
of the Company's European contracts are in the local currency of the programs,
the exchange rate fluctuation in 1997 reduced the converted U.S. dollar
revenues. Asia/Pacific revenues were $5.0 million in 1997, an increase of $3.8
million or



18


<PAGE>   19
311% over revenues of $1.2 million in 1996. Revenues in this region have
increased in 1997 as the Company increased its visibility and number of active
programs since entering the market in 1996. Due to deteriorated economic
conditions in the Asia/Pacific markets, 1998 revenues from this region are
expected to decline as the Company finds ways to work with its existing clients
on fees structures which are compatible with the current Asian economic
situation.

GROSS PROFIT

Gross profit for 1997 increased by $2.6 million or 11% to $26.2 million from
$23.6 million for 1996. As a percentage of sales, gross margin for 1997
increased to 35% from 33% for 1996. Gross profit for 1997 included a fourth
quarter capitalized software impairment charge of $1.6 million, reducing
Information Technologies' gross margin to a loss of $3.1 million and a negative
57% as a percentage of Information Technologies sales. (See discussion in
"Quarter ended December 31, 1997.") Had this impairment charge not been taken,
gross profit for the consolidated company would have been $27.8 million or 37%
of revenues for 1997. The increase in gross profit was the result of improved
cost control measures combined with ResultantSM work force reductions made in
late 1996. Cost control measures included, but were not limited to the closing
of the Company's Princeton, New Jersey and San Jose, California offices.
Management anticipates that the gross margin achieved in the Business
Improvement Program segment is sustainable in the short-term future.

Excluding the capitalized software impairment charge, Information Technologies'
margin declined to a negative 28% from approximately 1% in 1996. Information
Technologies' margin decline was due primarily to lower revenues in the segment.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative expenses for 1997 increased by $1.5 million
or 7% to $22.3 million from $20.8 million for 1996. As a percentage of sales,
the Company's selling, general and administrative expenses for 1997 increased
slightly to 30% from 29% for 1996. Selling, general and administrative expenses
for 1997 included a fourth quarter goodwill impairment charge of $0.7 million.
(See discussion in "Quarterly Results.") Excluding this impairment charge,
selling, general and administrative expense would have been $21.6 million or 29%
of revenues.

Absolute increases in selling, general and administrative expenses were due
primarily to business development initiatives started in the second half of 1996
and continued throughout 1997. Sales and marketing expenses increased $0.4
million due primarily to personnel increases and investments in improving market
visibility through advertisements and other initiatives. Particular emphasis was
placed on improving Information Technologies' sales and marketing efforts.

Additionally contributing to the increase in selling, general and administrative
expense was officers' incentive compensation earned in 1997 of $0.8 million. No
incentive compensation was earned in 1996.

The above-mentioned increases were partially offset by cost control measures
implemented throughout the company resulting in reduced travel and utilities
expenses.

INCOME TAXES

The company's effective tax rate in 1997 was 40%, equal to the effective tax
rate in 1996. The Company has a deferred tax asset of $2.6 million at December
31, 1997. Management believes that it is more likely than not to realize the
deferred tax asset and accordingly no valuation allowance has been provided. The
conclusion is based on the belief that current and future levels of taxable
income will be sufficient to realize the benefits of the deferred tax asset.
(See also Note 8 to the Consolidated Financial Statements.)

NET INCOME

As a result of the foregoing, net income for 1997 increased by $0.6 million or
33% to $2.4 million from $1.8 million for 1996. Earnings per share on a diluted
basis increased by $0.09 or 31% to $0.38 from $0.29 for 1996.

Years Ended December 31, 1996 and December 31, 1995

REVENUES

Revenues for 1996 increased by $4.8 million or 7% to $72.0 million from $67.2
million for 1995. Revenues from Business Improvement Programs for 1996 increased
by $1.6 million or 3% to $65.0 million from $63.4 million for 1995. Business
Improvement Program revenues for the comparable years increased despite
declining revenues in the third and fourth quarters of 1996 as several programs
ended and were not replaced with new contracts. The Information Technologies
segment revenues for 1996 increased by $3.2 million or 83% to $7.0 million from
$3.8 million for 1995 due to the inclusion of an additional seven months of
revenues related to the acquisition of Interlink Technologies ("Interlink") in
August 1995 and six months of revenues related to the acquisition of Bermac in
July 1996. Business Improvement Program and Information Technologies revenues
comprised 90% and 10% of total revenues for 1996, respectively.

Fixed fee and incentive based revenues were 70% and 30%, respectively, of 1996
Business Improvement Program revenues compared to 73% and 27%, respectively, for
1995.

United States-based Business Improvement Program revenue increased $9.1 million
or 25% in 1996 to $45.4 million from $36.3 million in 1995 due to additional
contracts and improved program performance. Revenues from European programs
decreased by $8.7 million or 32% to $18.4 million from $27.1 million in 1995.
The decline in European revenues was a result of certain large programs ending
before they were replaced with new business. As a result of the lag in program
sales and revenues, the European sales process has been refocused along the same
lines as the U.S. sales process in an effort to revive markets in Europe.
Revenues from the Asia/Pacific region were $1.2 million in 1996, the region's
first year of operations.



                                                                              19
<PAGE>   20

GROSS PROFIT

Gross profit for 1996 decreased by $1.0 million or 4% to $23.6 million from
$24.6 million for 1995. As a percentage of sales, gross margin for 1996
decreased to 33% from 37% for 1995. The decline in gross profit was the result
of the hiring of a significant number of ResultantsSM and other direct personnel
in conjunction with increases in domestic business improvement contracts and
business development initiatives. As contracts ended without adequate
replacements in the third and fourth quarter of 1996, particularly in Europe,
the Company elected to reduce its number of Resultants in the fourth quarter of
1996. Costs associated with the reduction in work force were $0.5 million in the
fourth quarter of 1996.

Margin in the Information Technologies segment was less than 1% in 1996 as cost
of sales in 1996 increased $4.2 million or 150% to $6.9 million from $2.8
million for 1995. The primary reason for this increase was the inclusion of
Interlink cost of sales for a full year in 1996 compared to only five months in
1995 coupled with the addition of Bermac's operations which yielded a lower
gross margin than Interlink had in 1995. Additionally, Interlink revenues have
declined due to fewer software license sales in the second half of 1996 which
could not offset the fixed costs of programmers.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative expenses for 1996 increased by $6.8 million
or 49% to $20.8 million from $14.0 million for 1995. As a percentage of sales,
the Company's selling, general and administrative expenses for 1996 increased to
29% from 21% for 1995. The Company's 1996 business development initiatives were
a major factor in the absolute increase in selling, general and administrative
expense. Most of the sales and marketing related cost increases occurred in the
second half of 1996 in conjunction with the decision to design an integrated
marketing strategy for the Company. As this strategy was developed, and sales
and marketing personnel increased, SG&A related personnel costs increased by
more than $2.3 million as compared to 1995. As part of this strategy, the
Company focused on increasing its visibility in the marketplace and invested an
additional $2.1 million on this initiative in 1996. Another part of the
marketing strategy included the opening of a new office in Singapore, the
acquisition of Bermac, and increasing Interlink's sales and marketing spending.
These marketing initiatives contributed $2.2 million to the increase in 1996
selling, general and administrative expense.

INCOME TAXES

The Company's effective tax rate was 40% in 1996 compared to 39% in 1995. The
company had a deferred tax asset of $1.5 million at December 31, 1996.

NET INCOME

As a result of the foregoing, net income for 1996 decreased by $5.0 million or
74% to $1.8 million from $6.8 million for 1995. Earnings per share for 1996
decreased by $0.79 or 73% to $0.29 from $1.08 for 1995.

Quarterly Results

The following table sets forth certain unaudited operating results for each of
the four quarters in the two years ended December 31, 1997. The information has
been prepared on the same basis as the audited financial statements and, in the
opinion of the company, includes all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of the information for the
periods presented.

<TABLE>
<CAPTION>
In thousands,                                    1997                                            1996
except per share data       -----------------------------------------------------------------------------------------------------
                                       For the three months ended                          For the three months ended
                            -----------------------------------------------------------------------------------------------------
                            Mar 31    June 30  Sept. 30    Dec. 31     YTD      Mar. 31   June 30   Sept. 30  Dec. 31       YTD
                            -----------------------------------------------------------------------------------------------------
<S>                         <C>       <C>       <C>       <C>         <C>       <C>       <C>       <C>       <C>         <C>    
Revenues                    $16,849   $20,662   $19,493   $ 18,120    $75,124   $19,256   $19,895   $17,327   $ 15,551    $72,029
Operating Income (Loss)       1,012     2,601     2,163     (1,892)     3,884     2,614     3,503       467     (3,794)     2,790
Income (Loss) before
   Income Taxes               1,020     2,661     2,198     (1,836)     4,043     2,690     3,561       557     (3,766)     3,042
Net Income (Loss)               612     1,597     1,301     (1,084)     2,426     1,615     2,172       345     (2,307)     1,825
Earnings (Loss) per share
   Basic                    $  0.10   $  0.26   $  0.21   $  (0.18)   $  0.40   $  0.27   $  0.37   $  0.06   $  (0.39)   $  0.31
   Diluted (1)              $  0.10   $  0.26   $  0.20         --    $  0.38   $  0.25   $  0.34   $  0.05         --    $  0.29
Weighted average shares
   Basic                      6,079     6,081     6,102      6,131      6,098     6,033     5,931     5,938      5,963      5,963
   Diluted (1)                6,220     6,247     6,435         --      6,327     6,383     6,397     6,342         --      6,310
STOCK PRICE (2)
High                        $ 11.50   $ 12.50   $ 14.00   $  13.00    $ 14.00   $ 15.75   $ 20.00   $ 18.63   $  14.63    $ 20.00
Low                         $  6.63   $  7.00   $ 10.50   $  10.00    $  6.63   $ 12.00   $ 14.13   $ 14.00   $   7.00    $  7.00
Close                       $  9.75   $ 11.75   $ 12.75   $  12.50    $ 12.50   $ 14.25   $ 18.50   $ 14.00   $   9.00    $  9.00
</TABLE>

(1)  Due to losses from operations in the fourth quarters of 1997 and 1996,
     diluted earnings per share and diluted weighted average shares are not
     presented. Exercise of options and warrants would result in antidilutive
     adjustments to basic earnings per share and basic weighted average shares.

(2)  The stock prices set forth represent the highest and lowest sales prices
     per share of the company's common stock as reported by the NASDAQ stock
     market. The prices reported by the NASDAQ stock market reflect inter-dealer
     prices without retail mark-up, mark-down or commissions, and may not
     necessarily represent actual transactions.



20
<PAGE>   21
Quarter ended December 31, 1997

As part of the Company's continuing evaluation of the prospects for the
Information Technologies segment, the company recorded a charge in the fourth
quarter of 1997 totaling $2.3 million to impair its capitalized software ($1.6
million) and related goodwill ($0.7 million). This impairment resulted from an
evaluation to determine the appropriate course or courses of action to address
continued losses and poor results from the software companies. The analysis
consisted of a comparison of projected future undiscounted cash flows, on a
product by product basis, to capitalized software costs and an appropriate
allocation of related goodwill. To the extent future cash flows were not
sufficient to recover capitalized software and allocated goodwill, impairment
was indicated. Estimates of fair market value for those products where
impairment was indicated were developed and an impairment charge was then
recorded. The charge for software impairment was recorded in cost of sales while
the goodwill impairment was charged to selling, general and administrative
costs.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary source of liquidity is cash flow from operations,
periodically supplemented by borrowings under a bank line of credit.

Operations provided cash of $9.3 million in 1997, as compared to $6.3 million in
1996. Significant items positively affecting operating activities cash flow
include: net income of $2.4 million; depreciation and amortization of $4.3
million; collection of an income tax refund of $1.8 million; increases in
accounts payable of $1.6 million; and a $2.3 million non-cash charge related to
the impairment of capitalized software and goodwill. The principal item
negatively affecting cash flow is a $2.6 million increase in trade accounts
receivable and an increase in the deferred tax asset of $1.1 million. Trade
accounts receivable increased primarily as a result of increased quarterly
revenues in the fourth quarter of 1997 versus the fourth quarter of 1996. Days
sales outstanding improved to 41 days at December 31, 1997 from 50 days at
December 31, 1996.

Capital expenditures and subsidiary acquisitions have historically been the
Company's largest investing activities. Capital expenditures related primarily
to conference center improvements in 1995, additional conference center capacity
expansion and computer hardware upgrades in 1996 and additional computer and
network upgrades and office infrastructure enhancements in 1997. In 1995 the
Company used $1.5 million of cash to acquire Interlink and in 1996 used $2.3
million of cash to acquire Bermac. The Company anticipates 1998 capital
expenditures will not exceed $2 million. Included in these expenditures will be
the replacement of the Company's accounting software to accommodate normal
growth of the Company and to enable proper processing of transactions relating
to the year 2000 and beyond.

Cash flows used in financing activities in 1996 were for the purchase of the
Company's stock for $3.3 million, the settlement of 1995 amounts due to
affiliates, including a payment of $1.0 million to an officer of the Company for
prepaid rent for its CEO Center facility, certain 1996 advances to affiliates,
and for the purchase of a suite at Texas Stadium.

In 1994, the Board of Directors approved a stock repurchase plan for up to
250,000 shares. The Company purchased 7,000 shares at an average price of $10.71
in 1994 and 226,600 shares at an average price per share of $14.74 in 1996. The
Company completed the purchase of the remaining 16,400 shares in the second
quarter of 1997, at an average price per share of $11.37. The average price per
share of treasury shares at December 31, 1997 is $14.15.

On February 19, 1998, the Company entered into a stock purchase agreement with
Mr. Philip R. Thomas, Chairman and Chief Executive Officer for an as yet
undetermined number of shares of common stock in exchange for $8.2 million in
cash and the satisfaction of a $2.3 million outstanding debt to the Company. The
ultimate number of shares purchased from Mr. Thomas shall be determined based on
a formula and at a discount to market. The Company utilized an investment
banking firm to determine the appropriate discount factor. Mr. Thomas delivered
to the Company 1.4 million shares to be held in escrow until such time as the
final reconciliation is performed on April 27, 1998. Any excess shares held in
escrow shall be returned to Mr. Thomas. If there is a deficiency at the
reconciliation, Mr. Thomas shall execute a promissory note for the difference.
In addition, Mr. Thomas has the option to pay the Company in cash at the date of
the reconciliation for the $2.3 million debt owed to the Company.

On December 4, 1996 the Company entered into a $20 million revolving credit
facility with Comerica Bank - Texas. This facility expires in December 2003 and
includes a call option in December 2001. The terms provide for a $1 million per
quarter reduction in any outstanding balances after the first two years. Loans
under this agreement bear interest at the prime rate or other options. The
Company also has a $1.0 million credit facility with Comerica Bank - Texas for
the purchase of computer equipment. The Company made draws of $0.9 million on
this facility during 1997 to purchase computer equipment.

As of February 28, 1998, the Company had $1.6 million of borrowings outstanding
on the revolving credit facility which were used for working capital purposes.
The Company anticipates it may make use of its line of credit in the first and
second quarter of 1998.

Funds anticipated to be generated from operations together with cash and cash
equivalents and borrowings under the Company's credit facility are considered
adequate to finance the Company's short- and long-term operational requirements.

INFLATION

Although the operations of the Company are influenced by general economic
conditions, the Company does not believe that inflation had a material effect on
the results of operations during the three years ended December 31, 1997.




                                                                              21
<PAGE>   22
RECENT ACCOUNTING STANDARDS

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130), which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by
owners and distributions to owners. SFAS 130 is effective for financial
statements for periods beginning after December 15, 1997 and requires
comparative information for earlier years to be restated. Because of the recent
issuance of this standard, management has been unable to fully evaluate the
impact, if any, the standard may have on future financial statement disclosures.
Results of operations and financial position, however, will be unaffected by
implementation of this standard.

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement established standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that enterprises report
selected information about operating segments in interim financial reports
issued to stockholders. This statement shall be effective for fiscal years
beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be restated. Because of the
recent issuance of this standard, the company has been unable to fully evaluate
the impact, if any, the standard may have on future financial statement
disclosures. Results of operations and financial position, however, will be
unaffected by implementation of this standard.

"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT:

With the exception of historical information, the matters discussed in this
report are "forward-looking statements" as that term is defined in Section 21E
of the Securities Exchange Act of 1934.

While the Company believes that its strategic plan is on target and the business
outlook remains strong, several important factors have been identified, which
could cause actual results to differ materially from those predicted. By way of
example: 
o    The competitive nature of the management consulting industry, in light of
     new entrants into the industry and the difficulty of differentiating the
     services offered to potential clients.
o    The time required by prospective clients to fully understand the value and
     complexity of a typical Total Cycle Time(R) (TCT) program may result in an
     extended lead time to close new business.
o    Performance-oriented fees are earned upon the achievement of improvements
     in a client's business. The client's commitment to a TCT(R) program and
     general economic/industry conditions could impact a client's business
     performance and consequently the Company's ability to forecast the timing
     and ultimate realization of performance-oriented fees.
o    The ability of the Company to productively re-deploy personnel during
     program transition periods.
o    The ability of the Company to create alliances and make acquisitions that
     are accretive to earnings.
o    The competitive nature of the software solutions industry and the speed at
     which technology changes to meet customer needs.




22
<PAGE>   23
================================================================================
                                                     CONSOLIDATED BALANCE SHEETS
================================================================================

<TABLE>
<CAPTION>
                                                                          December 31,
In thousands, except per share data                                     1997        1996
                                                                      --------------------
<S>                                                                   <C>         <C>     
Assets
Current Assets

    Cash and cash equivalents                                         $ 11,254    $  5,711
    Trade accounts receivable, net of allowances of $341 and $306       10,278       8,904
    Unbilled receivables                                                 2,083       1,363
    Accounts and notes receivable-affiliates                             2,274       1,500
    Other assets                                                         1,545       3,944
                                                                      --------    --------
Total Current Assets                                                    27,434      21,422

Net Property and Equipment                                               8,326       7,641
Capitalized Software Development Costs                                     888       3,069
Other Assets                                                             7,738       6,758
                                                                      --------    --------
Total Assets                                                          $ 44,386    $ 38,890
                                                                      --------    --------

Liabilities and Stockholders' Equity
Current Liabilities
    Accounts payable and accrued liabilities                          $  4,716    $  3,901
    Income taxes payable                                                 1,356       1,420
    Advance payments                                                       320         396
    Current maturities of long-term obligations                            304          --
                                                                      --------    --------
Total Current Liabilities                                                6,696       5,717
Long-Term Obligations                                                    2,982       1,661
                                                                      --------    --------
Total Liabilities                                                        9,678       7,378
                                                                      --------    --------

   Commitments and Contingencies

Stockholders' Equity
   Common Stock, $.01 par value; 12,500,000 shares authorized,

     6,282,391 and 6,179,117 shares issued                                  63          62
   Class B Common Stock, $.01 par value; 1,200,000 shares
     authorized, 176,594, and 185,189 shares issued and outstanding          2           2
   Additional Paid-in Capital                                           21,597      20,143
   Retained Earnings                                                    17,996      15,570
   Cumulative Translation Adjustment                                      (531)        (32)
    Treasury Stock, 312,391 and 295,991 shares, at cost                 (4,419)     (4,233)
                                                                      --------    --------
Total Stockholders' Equity                                              34,708      31,512
                                                                      --------    --------
Total Liabilities and Stockholders' Equity                            $ 44,386    $ 38,890
                                                                      --------    --------
</TABLE>

See accompanying notes to consolidated financial statements.



                                                                              23
<PAGE>   24

================================================================================
                      CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================

<TABLE>
<CAPTION>
                                                      YEAR ENDED DECEMBER 31,
In thousands, except share data                  1997           1996           1995
                                              ----------------------------------------
<S>                                           <C>            <C>            <C>       
Revenues                                      $   75,124     $   72,029     $   67,220
Cost of sales                                     48,926         48,401         42,651
                                              ----------     ----------     ----------
Gross Profit                                      26,198         23,628         24,569
Selling, general and administrative               22,314         20,838         13,990
                                              ----------     ----------     ----------
Operating Income                                   3,884          2,790         10,579
Interest income, net                                 159            252            524
                                              ----------     ----------     ----------
Income before Income Taxes                         4,043          3,042         11,103
Income taxes                                       1,617          1,217          4,348
                                              ----------     ----------     ----------

Net Income                                    $    2,426     $    1,825     $    6,755
                                              ----------     ----------     ----------

Earnings per share
Basic                                         $     0.40     $     0.31     $     1.13
Diluted                                       $     0.38     $     0.29     $     1.08

Weighted average shares
Basic                                          6,097,782      5,963,394      5,998,009
Diluted                                        6,327,484      6,309,970      6,282,036
</TABLE>

See accompanying notes to consolidated financial statements.




24
<PAGE>   25
================================================================================
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
================================================================================

<TABLE>
<CAPTION>
                                                    Class B    Additional
                                         Common     Common       Paid-in     Retained    Translation   Treasury
In thousands, except share data           Stock      Stock       Capital     Earnings     Adjustment    Stock       Total
                                          ---------------------------------------------------------------------------------
<S>                                       <C>           <C>      <C>          <C>         <C>          <C>         <C>    
January 1, 1995                           $58           $1       $16,349      $6,990      $    -       $(1,121)    $22,277
Issuance of 180,944 and 223,790 shares
  of Common Stock and of Class B            2            3         2,308           -           -             -       2,313
Tax benefit of non-qualified
  stock option exercises                    -            -           575           -           -             -         575
Redemption of 186,755 shares of Class B     -           (2)       (1,843)          -           -             -      (1,845)
Performance guarantee by Mr. Thomas         -            -           705           -           -             -         705
Purchase of 735 shares of
  Common Stock                              -            -             -           -           -           (12)        (12)
Foreign currency translation adjustment     -            -             -           -         283             -         283
Net income                                  -            -             -       6,755           -             -       6,755
                                          ---           --       -------     -------       -----       -------     -------
December 31, 1995                          60            2        18,094      13,745         283        (1,133)     31,051
Issuance of 195,949 and 180,622 shares
  of Common Stock and of Class B            2            2         3,288           -           -             -       3,292
Tax benefit of non-qualified
  stock option exercises                    -            -           619           -           -             -         619
Redemption of 146,966 shares of Class B     -           (2)       (2,181)          -           -             -      (2,183)
Purchase of 226,600 shares of
  Common Stock                              -            -             -           -           -        (3,340)     (3,340)
Reissuance of 19,742 shares of treasury
  stock through 401(k) plan, at cost        -            -            52           -           -           240         292
Discounted common stock options issued
  under employee stock option plans         -            -           271           -           -             -         271
Foreign currency translation adjustment     -            -             -           -        (315)            -        (315)
Net Income                                  -            -             -       1,825           -             -       1,825
                                          ---           --       -------     -------       -----       -------     -------
December 31, 1996                          62            2        20,143      15,570         (32)       (4,233)     31,512
Issuance of 97,632 and 1,378 shares
  of Common Stock and of Class B            1            -           998           -           -             -         999
Tax benefit of non-qualified
  stock option exercises                    -            -           247           -           -             -         247
Redemption of 9,973 shares of Class B       -            -           (82)          -           -             -         (82)
Purchase of 16,400 shares of
  Common Stock                              -            -             -           -           -          (186)       (186)
Discounted common stock options issued
  under employee stock option plans         -            -           291           -           -             -         291
Foreign currency translation adjustment     -            -             -           -        (499)            -        (499)
Net Income                                  -            -             -       2,426           -             -       2,426
                                          ---           --       -------     -------       -----       -------     -------
December 31, 1997                         $63           $2       $21,597     $17,996       $(531)      $(4,419)    $34,708
                                          ===           ==       =======     =======       =====       =======     =======
</TABLE>


See accompanying notes to consolidated financial statements.



                                                                              25
<PAGE>   26
================================================================================
                 CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================

<TABLE>
<CAPTION>
In thousands, except share data                                                 YEAR ENDED DECEMBER 31,
                                                                           1997          1996          1995
                                                                         ------------------------------------
<S>                                                                      <C>           <C>           <C>     
Cash Flows From Operating Activities
Net income                                                               $  2,426      $  1,825      $  6,755
Adjustments to reconcile net income to net cash
    provided by operating activities

    Depreciation and amortization                                           4,309         3,274         2,038
    Write-down of capitalized software and goodwill                         2,341            --            --
    Allowance for doubtful accounts                                           255           397           245
    Provision for expatriate costs                                             --          (151)         (311)
    Other                                                                     (31)           27            --
    Deferred taxes                                                         (1,060)         (327)          621
    Amortization of stock option grants                                       291           271            --
    Change in operating assets and liabilities
        (Increase)/decrease trade accounts receivable                      (1,882)        4,778        (2,143)
        (Increase)/decrease in unbilled receivables                          (720)       (1,363)           --
        (Increase)/decrease other assets                                     (297)       (2,914)         (496)
        Increase/(decrease) accounts payable and accrued liabilities        1,621           538         1,528
        Increase/(decrease) advance payments                                  (26)          106          (812)
        Increase/(decrease) income taxes payable                            2,086          (201)        3,032
                                                                         --------      --------      --------
Net Cash Provided By
    Operating Activities                                                    9,313         6,260        10,457
                                                                         --------      --------      --------
Cash Flows From Investing Activities
Acquisition of subsidiary                                                      --        (2,308)       (1,500)
Decrease (increase) in short-term receivable                                   --           598          (572)
Capital expenditures                                                       (3,148)       (3,109)       (1,714)
Capitalization of software development costs                                 (617)       (1,659)          (83)
Other                                                                        (150)         (250)         (230)
                                                                         --------      --------      --------
Net Cash Used In Investing Activities                                      (3,915)       (6,728)       (4,099)
Cash Flows From Financing Activities
Purchase of treasury stock                                                   (186)       (3,340)          (12)
Proceeds from sale of treasury stock                                           --           240            --
Proceeds from exercise of stock options                                       552           986           495
Repayment of other long-term obligations                                      (84)          (90)          (70)
Advances - computer line of credit                                            977            --            --
Repayment of obligations to affiliate                                          --        (1,027)           --
Net repayments from (advances to) affiliates                                 (803)       (1,700)          592
                                                                         --------      --------      --------
Net Cash Provided By (Used In) Financing Activities                           456        (4,931)        1,005
Effect of Exchange Rate Changes on Cash                                      (311)         (163)          (32)
                                                                         --------      --------      --------
Net Increase /(Decrease) In Cash and Cash Equivalents                       5,543        (5,562)        7,331
Cash and Cash Equivalents

    Beginning of period                                                     5,711        11,273         3,942
                                                                         --------      --------      --------
    End of period                                                        $ 11,254      $  5,711      $ 11,273
                                                                         ========      ========      ========
</TABLE>

See accompanying notes to consolidated financial statements.




26
<PAGE>   27
================================================================================
                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

NOTE 1

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) THE COMPANY - Thomas Group, Inc. (the "Company") was incorporated under the
laws of the State of Delaware in June 1978 and provides management services
designed to improve the competitiveness and profitability of the Company's
clients. The Company's specific methodology in its core product is known as
Total Cycle Time and focuses on reducing the time spent on revenue-producing,
product development and administrative processes, resulting in operational and
financial improvements. The Company also provides software solutions that focus
on reducing process cycle times for certain business processes.

(b) BASIS OF PRESENTATION - The accompanying consolidated financial statements
include the Company and its wholly owned subsidiaries. All significant
intercompany transactions and balances have been eliminated.

Earnings per share is presented in accordance with the provisions of the
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS
128), which requires the presentation of "basic" and "diluted" earnings per
share. Basic earnings per share is based on the weighted average shares
outstanding without regard for common stock equivalents such as stock options
and warrants. Diluted earnings per share includes the effect of common stock
equivalents. Earnings per share amounts for all periods presented have been
restated to reflect the provisions of SFAS 128. Diluted earnings per share, as
restated for the adoption of SFAS 128 are equivalent to previously reported
amounts and basic earnings per share are $0.02 and $0.05 higher than previously
reported in 1996 and 1995, respectively.

The following reconciles basic earnings per share to diluted earnings per share
under the provisions of SFAS 128:

<TABLE>
<CAPTION>
                                                                      YEAR ENDED DECEMBER 31, 1997
                                                                ------------------------------------------
                                                                  Income          Shares       Per Share
                                                                (Numerator)    (Denominator)     Amount
                                                                ------------------------------------------
<S>                                                                <C>             <C>            <C>  
                    Basic earnings per share
                    Income available to common shareholders        $2,426          6,098          $0.40

                    Effect of dilutive securities:
                        Options and warrants                           --            229
                                                                   ------          -----          -----

                    Diluted earnings per share
                    Income available to common shareholders        $2,426          6,327          $0.38
                                                                   ======          =====          =====
</TABLE>

<TABLE>
<CAPTION>
                                                                      YEAR ENDED DECEMBER 31, 1996
                                                                ------------------------------------------
                                                                  Income          Shares       Per Share
                                                                (Numerator)    (Denominator)     Amount
                                                                ------------------------------------------
<S>                                                              <C>             <C>            <C>  
                    Basic earnings per share
                    Income available to common shareholders        $1,825          5,963          $0.31

                    Effect of dilutive securities:
                        Options and warrants                           --            347
                                                                   ------          -----          -----

                    Diluted earnings per share
                    Income available to common shareholders        $1,825          6,310          $0.29
                                                                   ======          =====          =====
</TABLE>



                                                                              27
<PAGE>   28

<TABLE>
<CAPTION>
                                                                      YEAR ENDED DECEMBER 31, 1995
                                                                ------------------------------------------
                                                                  Income          Shares       Per Share
                                                                (Numerator)    (Denominator)     Amount
                                                                ------------------------------------------
<S>                                                             <C>                <C>            <C>
                    Basic earnings per share
                    Income available to common shareholders        $6,755          5,998          $1.13

                    Effect of dilutive securities:
                        Options and warrants                           --            284
                                                                   ------          -----          -----

                    Diluted earnings per share
                    Income available to common shareholders        $6,755          6,282          $1.08
                                                                   ======          =====          =====
</TABLE>

The presentation of financial statements in conformity with generally accepted
accounting principles 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.

(c) WARRANTS- The Company has outstanding a total of 225,000 warrants to
purchase shares of Common Stock. A portion of these warrants (175,000) expire on
August 26, 1998 and have an exercise price of $15.15. The remaining 50,000
warrants have an exercise price of $11.25 with 25,000 warrants expiring on May
29, 2002 and 25,000 expiring on May 29, 2003.

(d) RECLASSIFICATIONS - Certain consolidated financial statement amounts have
been reclassified from the previously reported financial statements in order to
conform with the current presentation.

(e) PROPERTY AND EQUIPMENT - Property and equipment are stated at cost less
accumulated depreciation. The carrying value of property and equipment is
evaluated periodically in relation to the operating performance and future
undiscounted net cash flows of the related business. Depreciation is provided by
accelerated methods over the estimated useful lives of the various assets as
follows:

<TABLE>
<S>                                                             <C>      
            Furniture and fixtures                              5-7 Years
            Equipment                                           3-7 Years
            Leasehold improvements                             5-19 Years
</TABLE>

(f) CAPITALIZED SOFTWARE DEVELOPMENT COSTS - Pursuant to Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer Software to
be Sold, Leased, or Otherwise Marketed," the Company is required to capitalize
certain software development and production costs once technological feasibility
has been achieved. The cost of purchased software is capitalized when related to
a product which has achieved technological feasibility or that has an
alternative future use. Capitalization of software development costs stops when
the product is available for sale. For the year ended December 31, 1997 the
Company capitalized software costs amounting to $0.6 million. For the years
ended December 31, 1996 and 1995, the Company capitalized $1.7 million and $0.1
million, respectively. Software development costs incurred prior to achieving
technological feasibility are charged to research and development expense.

Capitalized software development and purchased software costs are reported at
the lower of unamortized cost or net realizable value. Commencing upon initial
product release, these costs are amortized based on the greater of (a) the ratio
of current gross revenues for the product to total current and estimated future
gross revenues for the product or (b) the straight-line method over the
estimated life, generally three to five years. Fully amortized software costs
are removed from the financial records. For the years ended December 31, 1997,
1996, and 1995, the Company recorded $1.2 million, $0.6 million and $0.1 million
of amortization of capitalized software costs, respectively. See also Note 3 to
the Consolidated Financial Statements.) Amortization of capitalized software
costs is included in cost of sales in the accompanying consolidated statement of
operations.

(g) INTANGIBLES - The Company amortizes costs in excess of net assets acquired
on a straight-line basis over the estimated benefit period, generally three to
five years. Patents and licenses are generally amortized on a straight-line
basis over five years. The carrying value of goodwill and patents and licenses
is evaluated periodically in relation to the operating performance and future
undiscounted net cash flows of the related business. (See also Note 3 to the
Consolidated Financial Statements.)

(h) REVENUES - The Company derives its revenues from two primary sources: (1)
contracts for Business Improvement Programs and (2) contracts for Information
Technologies to specific business processes. Business Improvement Program
contracts specify fixed fees, or fixed fees plus incentives based on
improvements achieved. Incentive (performance-oriented) revenues are based on
agreed-upon formulas relating to improvements in customer-specific measures.
Improvements are measured at time intervals specified in each contract. Both the
Company and the client agree to the measured improvements and the corresponding
incentive fees earned by the Company, thereby completing the earnings process.
Fixed fees are recognized as revenue when earned, generally on a straight-line
basis over the life of the contract. Revenues from Information Technologies are
generally recognized on either a straight-line basis over the life of the client
agreement or upon the achievement of certain project milestones. An allowance
for doubtful accounts is provided when necessary and is determined on a
client-by-client basis.



28
<PAGE>   29

(i) UNBILLED RECEIVABLES - Fixed fees are recognized when earned, generally on a
straight-line basis over the life of the contract. Although fixed fee
recognition generally coincides with billings, as an accommodation to its
clients the Company may structure fee billings to increase in the latter stages
of a program. In such instances, straight-line recognition results in unbilled
receivables. Unbilled receivables are reduced as the program proceeds to its
latter stages and the cumulative billings more closely approximate aggregate
fees recognized.

(j) ADVANCE PAYMENTS - The Company occasionally receives advance payments of a
portion of its fees. Advance payments are deferred upon receipt and credited
against future revenue earned as specified by the contract.

(k) INCOME TAXES - Deferred income taxes are provided for temporary differences
between the financial statement and income tax basis of assets and liabilities
in accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Provisions are made for estimated United States
and foreign income taxes, less available tax credits and deductions, which may
be incurred on the remittance of the Company's share of foreign subsidiaries'
undistributed earnings.

(l) CASH AND CASH EQUIVALENTS - Cash equivalents consist of highly liquid
investments with original maturities of three months or less. At December 31,
1997, the Company had approximately $5.8 million invested in tax-exempt funds
and certificates of deposit.

(m) CONCENTRATION OF CREDIT RISK - The Company provides its services primarily
to a diverse group of large, well-established companies and does not require
collateral on receivable balances. The Company is currently expanding its
operations in Asia where severe economic turmoil has resulted in significant
fluctuations in the value of certain foreign currencies versus the U.S. dollar.
One client owes the Company $0.9 million and the Company has entered into an
extended payment agreement calling for the entire balance to be repaid by the
end of 1998. In early 1998, the client made a partial payment of $0.4 million
and the Company expects to fully collect the remaining balance in accordance
with the terms of the agreement. Until the economic situation in this area
stabilizes, the Company may experience difficulties expanding its operations or
may encounter other collection issues with its customers.

(n) FOREIGN CURRENCY TRANSLATION - Beginning in 1995, all balance sheet accounts
of foreign subsidiaries are translated at the current exchange rate as of the
end of the accounting period. The resulting translation adjustment is recorded
as a separate component of stockholders' equity. Income statement items are
translated at average currency exchange rates. Foreign currency fluctuation
risks are partially hedged because the foreign subsidiaries' costs are
denominated in local currency.

NOTE 2

ACQUISITIONS

Effective July 1, 1996 the Company acquired substantially all of the assets of
Bermac Communications, Inc. ("Bermac") a multimedia software company, for
approximately $2.3 million in cash. The acquisition was funded with cash from
operations and accounted for under the purchase method of accounting. Terms of
the acquisition provide for additional payments of $0.7 million, of which $0.2
million was for the completion of enhancements to software products and $0.5
million treated as additional goodwill. Included in these additional payments is
common stock valued at $0.3 million. The number of shares will be determined by
the stock price on July 1, 1998. In 1997 the 0.3 million was recorded as
additional goodwill and additional paid in capital. Bermac's results of
operations have been included in the Company's consolidated financial statements
beginning July 1, 1996. Bermac's operations are not material in relation to the
Company's consolidated financial statements; therefore, pro forma financial
information has not been presented.

In August 1995, the Company acquired substantially all of the assets of
Interlink Technologies, Inc. ("Interlink"), a provider of paperless warehouse
and distribution systems, for approximately $1.5 million in cash. The
acquisition was funded with cash from operations and accounted for under the
purchase method of accounting. Interlink's results of operations have been
included in the Company's consolidated financial statements beginning August 1,
1995.

The Company's unaudited pro forma consolidated results of operations for the
year ended December 31, 1995 assuming the acquisition of Interlink had occurred
as of January 1, 1995, is as follows:

<TABLE>
<CAPTION>
               In thousands                                 1995
                                                          ---------
<S>                                                       <C>      
               Revenues                                   $  71,119
               Net Income                                 $   6,422
               Earnings per share
                  Basic                                   $    1.07
                  Diluted                                 $    1.02

</TABLE>



                                                                              29
<PAGE>   30

In connection with the Interlink acquisition, the Company entered into a
software development and consulting services agreement (the "Services
Agreement") with the former principals of Interlink. The Services Agreement
provided for the completion of development projects currently in process, as
well as ongoing services by the former principals. The Company made subsequent
payments under the Services Agreement based upon (i) completion of enhancements
to Interlink's software products, (ii) the provision of consulting and other
ongoing services, and (iii) the achievement of certain financial milestones.
These subsequent payments were not material to the Company's results of
operations or financial position.

NOTE 3

CAPITALIZED SOFTWARE AND GOODWILL IMPAIRMENT (Fourth Quarter Adjustments)

As part of the Company's continuing evaluation of the prospects for the
Information Technologies segment, the Company recorded a charge in the fourth
quarter of 1997 totaling $2.3 million due to the impairment of its capitalized
software ($1.6 million) and related goodwill ($0.7 million). This impairment
resulted from an evaluation to determine the appropriate course or courses of
action to address continued losses and poor results from the software companies.
The analysis consisted of a comparison of projected future undiscounted cash
flows, on a product by product basis, to capitalized software costs and an
appropriate allocation of related goodwill. To the extent future cash flows were
not sufficient to recover capitalized software and allocated goodwill,
impairment was indicated. Estimates of fair market value for those products
where impairment was indicated were developed and an impairment charge was then
recorded. The charge for software impairment was recorded in cost of sales while
the goodwill impairment was charged to selling, general and administrative
costs.

NOTE 4

OTHER ASSETS

<TABLE>
<CAPTION>
                                                                                 DECEMBER 31,
             In thousands                                                     1997         1996
                                                                             -------------------
<S>                                                                          <C>         <C>    
             Investment in joint venture                                     $   179     $   100
             Prepaid expenses                                                  1,478       1,974
             Cash surrender value of key-man life insurance                      820         726
             Deferred compensation plan assets                                 2,124       1,360
             Deferred tax benefit                                              2,571       1,511
             Goodwill, net                                                       731       1,153
             Other intangibles, net                                               16         191
             Income tax receivable                                                25       2,252
             Investment in Texas Stadium Suite                                   489         534
             Notes receivable, affiliate                                         229         200
             Long-term receivables                                               436         506
             Other                                                               185         195
                                                                              ------     -------
                                                                               9,283      10,702
             Less current portion                                             (1,545)     (3,944)
                                                                              ------     -------

                                                                              $7,738     $ 6,758
                                                                              ======     =======
</TABLE>

On December 31, 1995, the Company purchased a leasehold interest in a Texas
Stadium suite for $0.6 million. (See also Note 12 to the Consolidated Financial
Statements.) Amortization of the purchase price is provided on a straight-line
basis over the remaining term of the lease, which expires on December 31, 2008.




30
<PAGE>   31
NOTE 5

PROPERTY AND EQUIPMENT

<TABLE>
<CAPTION>
                                                                          DECEMBER 31,
                    In thousands                                      1997         1996
                                                                    ----------------------
<S>                                                                 <C>           <C>     
                    Equipment                                       $  7,985      $  6,800
                    Furniture and fixtures                             2,943         2,786
                    Leasehold improvements                             5,547         5,280
                    Equipment under capital leases                       977           395
                    Automobiles                                          204           176
                    Construction in process                                3             6
                                                                    --------      --------
                                                                      17,659        15,443
                    Less accumulated depreciation and
                      amortization, including $94 and $384
                       respectively, relating to capital leases       (9,333)       (7,802)
                                                                    --------      --------
                                                                    $  8,326      $  7,641
                                                                    ========      ========
</TABLE>

NOTE 6

LONG-TERM OBLIGATIONS

<TABLE>
<CAPTION>
                                                                      DECEMBER 31,
                    In thousands                                  1997          1996
                                                                ----------------------
<S>                                                             <C>           <C>     
                    Capital lease obligations                   $    882      $     23
                    Deferred compensation plan (See Note 9)        2,124         1,360
                    Other                                            280           278
                                                                --------      --------
                                                                   3,286         1,661
                    Less current portion                            (304)           --
                                                                --------      --------
                                                                $  2,982      $  1,661
                                                                ========      ========
</TABLE>

Minimum lease payments required under non-cancelable lease arrangements
subsequent to December 31, 1997, are as follows:

<TABLE>
<CAPTION>
                                                               Operating     Capital
In thousands                                                    Leases       Leases
                                                               ---------------------
<S>                 <C>                                          <C>         <C>   
                    1998                                         $2,206      $  368
                    1999                                          1,022         368
                    2000                                            709         256
                    2001                                            655           -
                    2002                                            528           -
                    Thereafter                                      477           -
                                                                 ------      ------

                                                                 $5,597      $  992
                                                                 ======      ======
                    Less amount representing interest                          (110)
                                                                             ------ 
                                                                             $  882
                                                                             ======
</TABLE>

The Company leases office space, vehicles and various types of office equipment.
Rent expense related to operating leases totaled $3.3 million for 1997, $3.1
million for 1996, and $.18 million for 1995.

NOTE 7

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                     In thousands                                 1997       1996
                                                                 -----------------
<S>                                                              <C>        <C>   
                    Accounts payable and accrued liabilities     $4,003     $3,038
                    Accrued payroll and bonuses                     579        627
                    Accrued employee benefits                       134        236
                                                                 ------     ------
                                                                 $4,716     $3,901
                                                                 ======     ======
</TABLE>



                                                                              31
<PAGE>   32

NOTE 8

INCOME TAXES

Federal, state and foreign income tax net expense consists of the following:

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                     In thousands                         1997          1996          1995
                                                        ------------------------------------
<S>                                                     <C>           <C>           <C>     
                     Current tax expense                $  1,656      $    629      $  1,861
                       Federal                               280           253           219
                       State                               1,015           711         1,647
                                                        --------      --------      --------
                       Foreign                             2,951         1,593         3,727
                     Deferred tax expense (benefit)
                       Federal                            (1,194)         (336)          567
                       State                                (140)          (40)           54
                                                        --------      --------      --------
                                                          (1,334)         (376)          621
                                                        --------      --------      --------
                                                        $  1,617      $  1,217      $  4,348
                                                        ========      ========      ========
</TABLE>

The following reconciles income tax expense at the federal statutory rate to the
actual tax expense:

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                     In thousands                         1997       1996       1995
                                                         ----------------------------
<S>                                                      <C>        <C>        <C>   
                     Income taxes at statutory rate      $1,375     $1,034     $3,775
                     Effect on taxes resulting from:
                       State taxes                           80         49        273
                       Foreign taxes                         68         87        264
                       Other (primarily
                        permanent differences)               94         47         36
                                                         ------     ------     ------
                                                         $1,617     $1,217     $4,348
                                                         ======     ======     ======
</TABLE>

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

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                    In thousands                            1997         1996
                                                           -------      -------
<S>                                                        <C>          <C>    
                    Fixed assets                           $   492      $   597
                    Allowance for doubtful accounts            139          340
                    Foreign tax receivable                     612          631
                    Computer software                          570         (382)
                    Research and development                    --          (58)
                    Investment in affiliates                    --          (27)
                    Accrued expenses                           105          121
                    Goodwill                                   344           20
                    Deferred compensation                      322          254
                    Other, net                                 (13)          15
                                                           -------      -------
                                                           $ 2,571      $ 1,511
                                                           =======      =======
</TABLE>

Management believes that it is more likely than not to realize the deferred tax
asset and accordingly no valuation allowance has been provided. This conclusion
is based on the belief that current and future levels of taxable income will be
sufficient to realize the benefits of the deferred tax asset.

The domestic and foreign source components of income before taxes are as
follows:

<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31,
                     In thousands                  1997        1996        1995
                                                  ------------------------------
<S>                                               <C>         <C>         <C>   
                     Domestic sources             $2,872      $  984      $6,726
                     Foreign sources               1,171       2,058       4,377
</TABLE>



32
<PAGE>   33
NOTE 9

EMPLOYEE BENEFIT PLANS

The Company sponsors a 401(k) retirement plan. The Company, at its discretion,
matches a portion of the participants' contribution. Participants are vested in
the Company's matching contribution after five years of full-time service and
may join the plan January 1 and July 1. Matching contribution expense was $0.4
million, $0.4 million and $0.3 million for 1997, 1996 and 1995, respectively.

In 1994, the Company established a non-qualified deferred compensation plan.
Participation is limited to officers and key employees. Assets of the plan were
$2.1 million and accrued liabilities were $2.1 million at December 31, 1997 and
are recorded in the long term section of the balance sheet.

The Company has incentive compensation plans covering all full-time employees
and a separate incentive compensation program for certain key executive
officers, including Mr. Philip Thomas. Mr. Thomas' employment agreement provides
that, except for certain company-provided benefits, all of his compensation is
incentive-based. The aggregate incentive compensation paid or advanced under
these plans was $1.4 million, $1.5 million, and $3.2 million in 1997, 1996 and
1995, respectively. (See also Note 12 to the Consolidated Financial Statements.)

The Company self-insures its medical costs associated with injury and
hospitalization to its employees and their dependents up to a limit of $50,000
per person per plan year. Insurance is purchased for claims in excess of the
self-insurance limits. The current program also has contractual caps on the
total aggregate claims the Company is obligated to fund in any plan year. The
Company had an accrual for outstanding claims of approximately $0.1 million to
cover any loss incurred, including those not yet reported, through December 31,
1997.

NOTE 10

LITIGATION

The Company is party to a legal action styled Creative Dimensions in Management,
Inc. v. Thomas Group, Inc., filed September 17, 1996 in the United States
District Court for the Eastern District of Pennsylvania. This matter arises out
of disputes under two agreements between the Company and Creative Dimensions in
Management, Inc. ("CDM"), a small private company with whom the Company had an
alliance. CDMhas asserted various causes of action against the Company,
including fraud, misrepresentation, breach of contract and conversion. The
Company believes that CDM's claims lack merit and has filed counterclaims
against CDM for breach of contract, breach of implied covenant and good faith
and fair dealing, fraudulent inducement, and attorney's fees. The Company is
contesting CDM's claims and is pursuing its counterclaims vigorously. The matter
is in the early stage of discovery. The plaintiff is seeking at least $50
million in actual damages, punitive damages, and accounting, interests, costs of
suit, attorney's fees, and injunctive relief. The Company is seeking an
undetermined amount in actual damages, punitive damages, attorney's fees, and
costs of suit.

The Company has become subject to various claims and other legal matters in the
course of conducting its business. The Company believes that neither such claims
and other legal matters nor the cost of prosecuting and/or defending such claims
and other legal matters should have a material adverse effect on the Company's
consolidated results of operations, financial condition or cash flows.




                                                                              33
<PAGE>   34

NOTE 11

SEGMENT DATA AND SALES TO MAJOR CUSTOMERS

The Company conducts its business primarily in two business segments, Business
Improvement Services and Information Technologies. Information regarding these
two segments follows:

<TABLE>
<CAPTION>
                                                  Business
                                                 Improvement     Information
 In thousands                                     Services      Technologies      Corporate        Total
---------------------------------------------------------------------------------------------------------
<S>                                                 <C>           <C>         <C>                <C>    
1997
Sales to unaffiliated clients                       $69,620       $ 5,504     $         --       $75,124
Operating income (loss)                              25,192        (7,177)         (14,131)        3,884
Depreciation and amortization                         1,811         1,830              668         4,309
Capital expenditures                                  2,803            58              287         3,148
Identifiable assets                                  20,977         3,390           20,019        44,386

1996
Sales to unaffiliated clients                       $65,011       $ 7,018     $         --       $72,029
Operating income (loss)                              20,898        (2,600)         (15,508)        2,790
Depreciation and amortization                         2,221           730              323         3,274
Capital expenditures                                  2,064           725              320         3,109
Identifiable assets                                  18,918         6,590           13,382        38,890

1995
Sales to unaffiliated clients                       $63,392       $ 3,828    $          --       $67,220
Operating income (loss)                              23,013           370          (12,804)       10,579
Depreciation and amortization                         1,647           183              208         2,038
Capital expenditures                                  1,315            29              370         1,714
Identifiable assets                                  22,979         3,202           13,976        40,157
</TABLE>

The Company conducts its business primarily in three geographic areas, North
America, Europe and Asia. Information regarding these areas follows:

<TABLE>
<CAPTION>
In thousands                            North America     Europe           Asia       Corporate        Total
--------------------------------------------------------------------------------------------------------------
<S>                                        <C>            <C>              <C>      <C>               <C>    
1997
Sales to unaffiliated clients              $55,251        $14,903          $4,970   $       --        $75,124
Operating income (loss)                     15,755           (581)          2,841      (14,131)         3,884
Identifiable assets                         20,755          3,383             229       20,019         44,386

1996
Sales to unaffiliated clients              $52,463        $18,357          $1,209   $       --        $72,029
Operating income (loss)                     14,956          3,158             184      (15,508)         2,790
Identifiable assets                         21,663          3,693             152       13,382         38,890

1995
Sales to unaffiliated clients              $40,125        $27,095          $   --   $       --        $67,220
Operating income (loss)                     13,366         10,017              --      (12,804)        10,579
Identifiable assets                         20,399          5,782              --       13,976         40,157
</TABLE>



34
<PAGE>   35

The following table indicates those clients whose revenues were in excess of 10%
of consolidated revenues in any of the three years ended December 31, 1997.
These clients are all in the Business Improvement services segment.

<TABLE>
<CAPTION>
                                       North       % of        Europe       % of Total        Asia       % of Total
In thousands                          America      Total
                                      -----------------------------------------------------------------------------
<S>                                   <C>          <C>        <C>           <C>            <C>           <C>
Year Ended December 31, 1997
  Client 1                            $2,297          3%       $4,466            6%         $1,082            2%
  Client 2                             7,317         10%           --           --              --           --

Year Ended December 31, 1996
  Client 1                            $5,708          8%       $1,937            3%             --           --
  Client 2                             7,746         11%           --           --              --           --
  Client 3                             4,068          6%        5,305            7%             --           --

Year Ended December 31, 1995
  Client 1                            $5,846          9%       $6,250            9%             --           --
</TABLE>

NOTE 12

RELATED PARTY TRANSACTIONS

PHILIP R. THOMAS - Principal Stockholder - The Company has entered into 25-year
lease agreements with Mr. Thomas for land on which the CEO Center is situated
and a separate agreement to lease guest accommodations situated on Mr. Thomas'
adjacent property. The land is leased pursuant to two 25 year leases entered
into in December, 1991 and January, 1994. The annual rentals on these leases is
$6,000 each, one of which has been prepaid throughout the year 2016. These guest
accommodations leases provide for monthly payments of $12,960 through November
30, 2016. This rate was determined by evaluating average occupancy rates and
costs of comparable facilities in the area. On December 31, 1995, the Company
prepaid the guest accommodations lease in its entirety. The $0.9 million
prepayment represents a discount of $0.6 million (computed on a net present
value basis) from the lease payments to which Mr. Thomas was entitled. The
prepayment is included in Other Assets, and is being amortized on a
straight-line basis over the term of the lease.

On December 31, 1995, the Company agreed to purchase Mr. Thomas' interest in a
Texas Stadium luxury suite for $0.6 million. The purchase price was established
by an independent third party that facilitates similar transactions.

Late in 1995, Mr. Thomas executed a $0.7 million promissory note to the Company,
in connection with his guarantee of a client's account receivable. On December
31, 1995 the note and all interest was prepaid and recorded as a contribution to
paid-in capital.

The Company employed two sales executives whose focus was acquiring new business
through relationships in the investment banking community. Supporting these
executives, the Company incurred costs of approximately $0.6 million and $0.5
million in 1996 and 1995, respectively. These executives have an ownership
interest in Celerity Partners, a limited partnership (the "Partnership") which
invests in companies whose competitiveness within a particular industry may be
significantly improved. The general partner of the Partnership is a limited
liability company ("Celerity LLC") in which Mr. Thomas owns a 30% equity
interest. The Company's board of directors has precluded Mr. Thomas from
negotiating or approving contracts with any potential client in which the
Partnership holds or is negotiating an ownership interest and from negotiating
the Company's agreements with Celerity LLC. During 1997, the Company ended the
employment of the two sales executives and entered into a "finder's agreement"
with the partnership which would compensate the partnership when it delivered
potential clients who ultimately entered into a business improvement program.
The Company made advances to Celerity LLC in 1997 in the amount of $0.2 million
against future finder's fees.

In 1997, Mr. Thomas earned $0.8 million in incentive compensation and was paid
compensation advances of $1.4 million. The excess of $0.6 million will be repaid
through the tender of shares to the Company, as described in the following
paragraph. Mr. Thomas did not earn incentive compensation in 1996 and therefore
executed a $1.5 million promissory note, bearing interest at prime plus 1/4% for
advances made to him. This note was extended and will be paid by Mr. Thomas as a
result of the Company's purchase of shares from Mr. Thomas, as described in the
following paragraph.

On February 19, 1998, the Company entered into a stock purchase agreement with
Mr. Philip R. Thomas, Chairman and Chief Executive Officer, for an as yet
undetermined number of shares of common stock in exchange for $8.2 million in
cash and the satisfaction of a $2.3 million outstanding debt to the Company. The
ultimate number of shares to be purchased from Mr. Thomas shall be determined
based on a formula and at a discount to market. The Company utilized an
investment banking firm to determine the appropriate discount factor. Mr. Thomas
delivered to the Company 1.4 million shares to be held in escrow until such time
as the final reconciliation is performed on April 27, 1998. Any excess shares
held in escrow shall be returned to Mr. Thomas. If there is a deficiency at the
reconciliation, Mr. Thomas shall execute a promissory note for the difference.
In addition, Mr. Thomas has the option to pay the Company in cash at the date of
the reconciliation for the $2.3 million debt owed to the Company.




                                                                              35
<PAGE>   36
OTHER AFFILIATES - In 1996 the Company advanced Mr. Thomas Williams $0.2
million. Mr. Williams executed a promissory note due December 18, 2000.

A summary of current receivables from affiliates follows:

<TABLE>
<CAPTION>
                                                                              DECEMBER 31,
                     In thousands                                           1997       1996
                                                                           -----------------
<S>                                                                        <C>        <C>   
                    Philip R. Thomas - incentive compensation advances     $2,274     $1,500
                    Other affiliates - long term                           $  229     $  200
</TABLE>

A summary of transactions with affiliates follows:

<TABLE>
<CAPTION>
                                                                            YEAR ENDED DECEMBER 31,
                     In thousands                                        1997         1996        1995
                                                                       --------------------------------
<S>                                                                    <C>             <C>         <C> 
                     Philip R. Thomas:
                     Real estate and other rentals paid to Mr. Thomas  $     6         $262        $301
                     Payments to ISSI for security systems                  --           --          94
                     Payments to BERMAC for custom
                       computer software-- prior to acquisition             --          388         139
                     Payments to Celerity-- advance against
                       finder's agreement                                  200           --          --
                     Other Affiliates:
                     Loan to Thomas Williams                                --          200          --
</TABLE>

NOTE 13

FINANCING AGREEMENT

At December 31, 1997, the Company maintains a $20 million revolving credit
agreement with Comerica Bank - Texas. This agreement expires in December 2003
and includes a call option in December 2001. Additionally, terms of the
agreement provide for a $1 million per quarter reduction in any outstanding
balances after the first two years. Loans under this agreement bear interest at
the prime rate or other similar option. The Company utilized the credit line
during 1997 to meet working capital requirements. The average daily balance
outstanding under the credit line was $0.2 million and total interest paid, at
an annual rate of 8.25%, was less than $0.1 million. The Company paid commitment
fees for the periods for which the Company had no outstanding amounts totalling
$56,000 for 1997. The Company did not borrow funds under the revolving line of
credit agreements at any time during 1996 or 1995. During 1996 and 1995, the
Company paid no interest but paid commitment fees of $22,000 and $23,000
respectively.

In addition, the Company has a $1.0 million credit facility with Comerica Bank -
Texas for the purchase of portable computer equipment. The Company made draws of
$0.9 million on this facility to purchase notebook computers.

NOTE 14

COMMON STOCK AND STOCK OPTIONS

Shares of Common Stock and Class B Common Stock are identical, except that
holders of Class B Common Stock have no voting rights. The Company grants
incentive and non-qualified stock options and has reserved 2,425,000 shares of
Common Stock and 675,000 shares of Class B Common Stock for issuance. Options to
purchase shares of the Company's Common Stock and Class B Common Stock have been
granted to directors, officers and employees. The majority of the options
granted become exercisable at the rate of 20% per year, and generally expire ten
years after the date of grant.

Of the 1,506,818 Common Stock options outstanding at December 31, 1997, 255,577
contain a provision whereby the option can be exercised by using shares of Class
B Common Stock previously acquired through the exercise of Class B stock options
and held for more than six months to pay all or a portion of the option holder's
exercise price. The tender of Class B Common Stock to pay for all or a portion
of the exercise of Common Stock options is credited against the exercise price
at the then fair market value of Class B Common Stock. The fair market value of
Class B Stock is 70% of the then quoted closing price on the NASDAQ for the
Company's Common Stock.

The Company has elected to continue to account for stock options issued to
employees in accordance with APB opinion 25, "Accounting for Stock Issued to
Employees." In February 1996 the Company granted options to officers and
employees at an exercise price lower than the market price of the stock at the
date of grant. The total related deferred compensation expense was $0.9 million
which will be recognized as the options vest. The total 1997 compensation cost
of $0.2 million was recorded as an increase in equity.

Effective for the year ended December 31, 1996, the Company was required to
adopt the disclosure portion of Statement of Financial Accounting Standard No.
123 (SFAS No. 123), "Accounting for Stock Based Compensation." This statement
requires the Company to provide pro forma information regarding net income
applicable to common shareholders and net income per share as if compensation
cost for the Company's stock options had been determined in accordance with the
fair value assumptions used for grants in 1997, 1996 and 1995 as





36

<PAGE>   37

follows: dividend yield of 0% for all years; expected volatility of 65%; risk
free interest rates ranging from 5% to 7%; and expected lives ranging from 3.84
to 6 years. Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant date consistent with the
provisions of SFAS No. 123, the Company's net income and earnings per share
would have been reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                  YEAR ENDED DECEMBER 31,
                     In thousands             1997          1996          1995
                                            ---------     ---------     ---------
<S>                                         <C>           <C>           <C>      
                     Net Income
                     As reported            $   2,426     $   1,825     $   6,755
                     Pro forma              $   1,513     $   1,245     $   6,674

                     Earnings Per Share
                         As reported
                          Basic             $    0.40     $    0.31     $    1.13
                          Diluted           $    0.38     $    0.29     $    1.08
                        Pro forma
                          Basic             $    0.25     $    0.21     $    1.11
                          Diluted           $    0.24     $    0.20     $    1.06
</TABLE>

A summary of the status of the Company's stock options to employees as of
December 31, 1997, 1996 and 1995 and changes in the years then ended is
presented below.

<TABLE>
<CAPTION>
COMMON OPTION SHARES                           1997                           1996                          1995
                                     ----------------------------------------------------------------------------------------
                                                      Weighted                       Weighted                        Weighted
                                                      Average                        Average                         Average
                                                      Exercise                       Exercise                        Exercise
                                       Shares          Price         Shares           Price          Shares           Price
                                     ----------------------------------------------------------------------------------------
<S>                                   <C>            <C>               <C>          <C>             <C>            <C>       
Outstanding at beginning of year      1,367,625      $     9.78        949,597      $    10.16      1,004,686      $     9.88
    Granted                             370,250           10.35        656,415            9.60        180,000           11.81
    Exercised                          (104,382)           6.88       (196,120)          11.19       (170,251)          10.75
    Forfeited                          (126,675)          11.90        (42,267)           9.11        (64,838)           8.86
                                     ----------      ----------     ----------      ----------     ----------      ----------
Outstanding at end of year            1,506,818      $     9.89      1,367,625      $     9.78        949,597      $    10.16
                                     ==========      ==========     ==========      ==========     ==========      ==========

Options exercisable at year-end         739,848      $    10.39        680,761      $    10.18        676,126      $    10.67
                                     ----------      ----------     ----------      ----------     ----------      ----------
Weighted average fair value of
options granted during the year                      $    10.49                     $     7.61                     $     7.27
</TABLE>

<TABLE>
<CAPTION>
COMMON B OPTION SHARES                        1997                           1996                            1995
                                     ----------------------------------------------------------------------------------------
                                                      Weighted                       Weighted                        Weighted
                                                      Average                        Average                         Average
                                                      Exercise                       Exercise                        Exercise
                                       Shares          Price         Shares           Price          Shares           Price
                                     ----------------------------------------------------------------------------------------
<S>                                  <C>            <C>               <C>          <C>             <C>            <C>       
Outstanding at beginning of year         12,360      $     5.42        203,202      $     4.47        437,592      $     2.81

    Granted                                  --              --             --              --             --              --
    Exercised                            (3,360)           5.36       (180,622)           4.57       (223,790)           1.40
    Forfeited                                --              --        (10,220)           1.57        (10,600)           1.90
                                     ----------      ----------     ----------      ----------     ----------      ----------
Outstanding at end of year                9,000      $     5.44         12,360      $     5.42        203,202      $     4.47
                                     ==========      ==========     ==========      ==========     ==========      ==========
Options exercisable at year-end           9,000      $     5.44         12,360      $     5.42        200,662      $     4.46
                                     ==========      ==========     ==========      ==========     ==========      ==========
</TABLE>




                                                                              37
<PAGE>   38


The following table summarizes information about stock options outstanding at
December 31, 1997.

COMMON OPTIONS

<TABLE>
<CAPTION>
                                                        Options Outstanding        Options Exercisable
                                                      ---------------------------------------------------
                                                        Weighted
                                                         Average    Weighted                    Weighted
                                                        Remaining    Average                     Average
                                                       Contractual  Exercise                    Exercise
                          Exercise Price  Outstanding  Live (Years)  Price      Exercisable       Price
                       ----------------------------------------------------------------------------------
<S>                    <C>         <C>          <C>       <C>       <C>              <C>         <C>   
                       $  0.00  -  $ 5.44       10,621    6.84      $  0.15          5,160       $ 0.32
                          6.00  -    7.94      575,231    5.96         7.47        205,221         6.77
                          8.00  -    9.94      287,824    9.43         8.48        115,642         8.41
                         10.00  -   13.75      506,367    4.81        12.12        346,047        12.26
                         14.00  -   16.88      109,475    7.83        15.58         59,744        15.54
                         17.00  -   19.13       17,300    8.49        18.51          8,034        18.54
                       ------------------    ---------    ----      -------        -------       ------
                       $  0.00  -  $19.13    1,506,818    6.40      $  9.89        739,848       $10.39
                       ==================    =========    ====      =======        =======       ======
</TABLE>

COMMON B OPTIONS

<TABLE>
<CAPTION>
                                                        Options Outstanding        Options Exercisable
                                                      ---------------------------------------------------
                                                        Weighted
                                                         Average    Weighted                    Weighted
                                                        Remaining    Average                     Average
                                                       Contractual  Exercise                    Exercise
                          Exercise Price  Outstanding  Live (Years)  Price      Exercisable       Price
                       ----------------------------------------------------------------------------------
<S>                    <C>         <C>          <C>       <C>       <C>              <C>         <C>   
                       $  5.44                   9,000    1.42      $  5.44          9,000       $ 5.44
</TABLE>


NOTE 15

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                                                                   YEAR ENDED DECEMBER 31,
In thousands, except share data                                                                 1997       1996       1995
                                                                                               ----------------------------
<S>                                                                                            <C>        <C>        <C>   
Interest paid                                                                                  $   98     $    1     $    8

Income taxes paid                                                                               1,310      4,176      1,920

Receipt of Class B Common Stock in payment of exercise price of Common Stock options               82      2,181      1,843

Additional Acquisition cost payable in common stock                                               300         --         --

Acquisition of Texas Stadium Suite in exchange for note payable to Mr. Thomas                      --         --        578

Prepayment of lease for CEO Center facilities in exchange for a note payable to Mr. Thomas         --         --        876
Repayment of loan by Mr. Thomas via offset with TGI prepayment of facilities lease                 --         --        705
</TABLE>




38
<PAGE>   39
================================================================================
                                                           REPORT OF INDEPENDENT
                                                     CERTIFIED PUBLIC ACCOUNTANT
================================================================================


Thomas Group, Inc.
Irving, Texas

We have audited the accompanying consolidated balance sheets of Thomas Group,
Inc. as of December 31, 1997 and 1996 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial position of Thomas
Group, Inc. at December 31, 1997 and 1996, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 1997
in conformity with generally accepted accounting principles.


BDO Seidman, L.L.P.

Dallas, Texas
March 10, 1998



                                                                              39
<PAGE>   40
================================================================================
CORPORATE INFORMATION
================================================================================

<TABLE>
<S>                                 <C>                                         <C>
International Headquarters          DIRECTORS AND EXECUTIVE OFFICERS            CORPORATE INFORMATION              
5215 North O'Connor Boulevard       Philip R. Thomas                            TRANSFER AGENT                     
Suite 2500                          Chairman of the Board and                   Harris Trust and Savings Bank      
Irving, Texas 75039-3714            Chief Executive Officer                     5050 Renaissance Tower             
Telephone: (972) 869-3400                                                       1201 Elm Street                    
Fax: (972) 869-6501                 J. Thomas Williams                          Dallas, Texas 75270                
                                    President, Chief Operating Officer and      Telephone: (214) 658-0200          
Dallas Office                       President, European Business Unit           Fax: (214) 658-0222                
5221 North O'Connor Boulevard                                                                                      
Suite 500                           James E. Dykes                              LEGAL COUNSEL                      
Irving, Texas 75039-3714            Executive Vice President,                   Haynes & Boone, L.L.P.             
Telephone: (972) 869-4100           Corporate Development and Director          901 Main Street                    
Fax: (972) 401-4230                                                             3100 NationsBank Plaza             
                                    Leland L. Grubb, Jr.                        Dallas, Texas 75202-3789           
Detroit Office                      Vice President                                                                 
201 W. Big Beaver Road              Chief Financial Officer,                    AUDITOR                            
Suite 201                           Treasurer, and                              BDO Seidman, L.L.P.                
Troy, Michigan 48084                President, Automotive Business Unit         2323 Bryan Street                  
Telephone: (810) 528-5110                                                       Suite 1800                         
Fax: (810) 528-3271                 Herbert D. Locke                            Dallas, Texas 75201-2628           
                                    Vice President                                                                 
CEO Center                          President                                   
3104 Highway 956                    Asian/Pacific Business Unit                 
Ethel, Louisiana 70730                                                          
Telephone: (502) 683-4557           Alexander W. Young                          
Fax: (504) 683-4575                 Vice President                              
                                    President, Utilities Business Unit          
Interactive Technologies, Inc.      and Director                                
5221 North O'Connor Boulevard                                                   
Suite 500                           Roger A. Crabb                              
Irving, Texas 75039-3714            Legal Counsel and Secretary                 
Telephone: (972) 501-3600                                                       
Fax: (972) 501-3601                 John T. Chain
                                    Director
Interlink Technologies, Inc.        Retired Executive Vice President
5221 North O'Connor Bouleavard      Burlington Northern Railroad
Suite 500
Irving, Texas 75039-3714            Richard A. Freytag
Telephone: (972) 501-3650           Director,
Fax: (972) 501-3651                 Vice Chairman
                                    Citicorp Banking Corporation
Germany                             
Thomas Group GmbH                   
Aculeum                                                                         
Hahnstrasse 43                      
60528 Frankfurt am Main             
Germany                             
Telephone: + 49 (0) 69 665 38 0     
Fax: + 49 (0) 69 665 38 299                                                     
                                                                                
Singapore                                                                       
Thomas Group Asia Pte. Ltd.                                                     
Level 36, Hong Leong Building                                                   
16, Raffles Quay                                                                
Singapore 048581                                                                
Republic of Singapore                                                           
Telephone: + 65 321 8935                                                        
Fax: + 65 225 9060                                                              
</TABLE>

FORM 10-K AND OTHER FINANCIAL
INFORMATION REQUESTS

A copy of the Annual Report on Form 10-K as filed with the Securities and
Exchange Commission and other financial information is available without charge
upon written request to Investor Relations, Thomas Group, Inc. 5215 N. O'Connor
Boulevard, Suite 2500, Irving, Texas 75039-3714.

ANNUAL MEETING

The Annual Meeting of Shareholders will be held on July 9, 1998 at 9:00 a.m.
Central Time in the Company's offices, 5215 N. O'Connor Boulevard, Suite 2500,
Irving, Texas 75039-3714.

STOCK MARKET INFORMATION
AND RELATED SHAREHOLDER MATTERS

The Company's Common Stock trades on the NASDAQ National Market System under the
symbol TGIS. At December 31, 1997, the Company had approximately 117 holders of
record of its Common Stock. The Company has paid no cash dividends and the
Company intends to retain future earnings in order to provide funds for use in
the operation and expansion of the business.





40