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



FORM 10-K

ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE FISCAL YEAR ENDED DECEMBER 31, 2010.ORo

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


Commission file number: 0-22010



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

Delaware

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

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




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

75039-3714(Address of principal executive offices)

(Zip Code)




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


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

Title of Each Class

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

The NASDAQ Capital Market LLC




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

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

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. ý

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

Large accelerated filer o

Accelerated filer o

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

Smaller reporting company ý


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

As of June 30, 2010, the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of the voting stock
held by non-affiliates of the registrant was $1,807,571 based on the NASDAQ Capital Market Closing Price of $3.20 per share.

As
of March 24, 2011, there were 2,211,553 shares of the registrant's common stock outstanding.

Documents incorporated by referencePortions of the registrant's definitive proxy statement pertaining to the 2011 Annual Meeting of Stockholders to be filed on or before April 30, 2011 are incorporated by reference into Part III of
this Annual Report on Form 10-K.




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TABLE OF CONTENTS



PagePART ISpecial Note Regarding Forward-Looking Statements

1Item 1.

Business

2Item 1A.

Risk Factors

10Item 1B.

Unresolved Staff Comments

21Item 2.

Properties

22Item 3.

Legal Proceedings

22Item 4.

Removed and Reserved

22PART IIItem 5.

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

22Item 6.

Selected Financial Data

24Item 7.

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

25Item 8.

Financial Statements and Supplementary Data

35Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

35Item 9A(T).

Controls and Procedures

35Item 9B.

Other Information

36PART IIIItem 10.

Directors and Executive Officers of the Registrant

37Item 11.

Executive Compensation

37Item 12.

Security Ownership of Certain Beneficial Owners and Management

37Item 13.

Certain Relationships and Related Transactions

38Item 14.

Principal Accounting Fees and Services

38PART IVItem 15.

Exhibits and Financial Statement Schedules

38Signatures

40Index to Consolidated Financial Statements

F-1


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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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



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

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PART I

ITEM 1.Business.

Overview

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

Through
our proprietary Process Value Management, or PVM, methodology, our consultants refine processes throughout an organization to give our clients a
competitive advantage that increases revenues, lowers costs, and generates cash. With our more than 30 years of change management experience, innovation, and knowledge leadership, we have
demonstrated our ability to apply this methodology in hundreds of clients in both the private and the public sectors. We strive to provide measurable results for clients during our engagements, not
just reports for actions to be implemented by the client following our departure from the client.

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

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

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

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

In
the future we may create additional practices as we see potential market opportunities, or we may combine or eliminate practices in response to market conditions.

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



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



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



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

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



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

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

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



We provide services that enable our clients' finance and administration functions to improve performance, deliver
enterprise-wide profit improvement, and increase shareholder value. We assist

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companies
to redefine the role of finance and administration and transform it from a backward-looking, number-crunching organization to one that is future-oriented and focused on providing value
through deeper analysis and insight.

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



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

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

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



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



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



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



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

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

Contractual Arrangements and Revenue Recognition

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



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

In
the last few years, the majority of our revenue is derived from fixed fee and task-based fee contracts.

Fixed
fee revenue is recognized on the proportional performance model (which approximates the percentage completion method), based on direct labor hours expended and, when applicable,
the completed performance model. In order to calculate the completion ratio on a given project, time and effort to date are divided by the total estimated time and effort for the entire project. This
ratio is then multiplied by the total fixed fee to be earned on the project, resulting in the amount of revenue earned to date. A few of our fixed fee contracts, primarily assessments, are recognized
using the completed contract performance model as these contracts are generally one to six weeks in duration and conclude with a presentation or agreed upon deliverable to the clients' management.
Revenues attributable to fixed fees were 77%, 69% and 42% of consolidated revenue for the years ended December 31, 2010, 2009, and 2008, respectively.

Task-based
fees are recognized as revenue when the relevant task is completed, usually on a monthly basis. Revenues attributable to task-based fees were 12%, 11%
and 49% of consolidated revenue for the years ended December 31, 2010, 2009, and 2008, respectively.

In
the last few years, we have had relatively few engagements involving incentive fees. Incentive fees are tied to improvements in a variety of client performance measures typically
involving cycle time, asset utilization and productivity. Incentive fee revenue is recognized in the period in which the related client improvements are achieved and we obtain the client's acceptance.
Our incentive fee agreements with our clients define in advance the performance improvement standards that will form the basis for the payment of incentive fees. In order to mitigate the risk of
disputes arising over the achievement of performance improvements, which drive incentive fees, we obtain customer agreement to these achievements prior to recognizing revenue. Typically these
contracts are for commercial customers and they provide for a base fee and an additional incentive fee earned according to a formula in the contract. Incentive fees are affected by our clients'
business performance and prevailing economic conditions. Revenues attributable to incentive fees were 0%, 7% and 2% of consolidated revenue for the years ended December 31, 2010, 2009, and
2008, respectively. As of March 24, 2011, we had no contractual agreements that included incentive fees. While incentive fees are not currently a significant portion of our revenue, earlier in
our history they were more significant.

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Reimbursement
revenue represents our clients' repayment of our mutually agreed upon travel expenses as incurred. All billable travel expenses are submitted to and approved by the client.
Revenues attributable to reimbursement were 11%, 13% and 7%, for the years ended December 31, 2010, 2009, and 2008, respectively. For some clients, the fixed fee or task-based fee
is inclusive of travel. In these cases, the travel expense is included in cost of sales.

Consulting
contracts typically are awarded by both government entities and private organizations on the basis of sole-source negotiations, that is, direct negotiation between
the client and a single vendor such as Thomas Group, or on the basis of competitive bidding, generally in response to a Request for Proposal, or RFP. Whenever possible, we prefer to work under sole
source contract arrangements. Competitive bids can require extensive time, effort and cost to submit a qualified bid, and the outcome is unpredictable. In many competitive bid situations, we compete
against far larger companies with far greater resources to devote to the proposal process. In some cases, we team with another company that has capabilities complementary to ours in order to increase
the competitiveness of our bid. In some other cases, we use an intermediary who has the capability to respond more effectively in this process.

Contracts
related to these U.S. government engagements often are executed within the United States government's budget cycle and may be fully funded for up to one year at a time. They
may be renewed
annually for successive one-year periods if the life of the engagement extends beyond one fiscal year. For our engagements with the U.S. government, we contract either directly with the
government through our listing with the General Services Administration or we use an intermediary that acts as a prime contractor providing contracting and administrative services for the majority of
our government programs. Last year and again in this current fiscal year, the U.S. government has failed to pass a budget bill to fund their operations on an annual basis or have not done so until
later in the year than is normal. Instead it has relied on a series of shorter-term "continuing resolutions" to fund day to day operations. This has made it much more difficult for us as
well as other government contractors to obtain contracts for new work with the U.S. government, due both to the rules related to such continuing resolutions as well as to the reluctance of contracting
officers to commit to longer term projects that may not be funded by the next continuing resolution.

Financial Information about Segments and Geographic Areas

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

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

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

From
time to time, we also do business in other areas of the world in addition to the U.S. and Europe. For example, during 2009 and 2008 we also performed services in South America. In
these cases, we may perform this work directly.

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Clients

Historically, most of our clients have been large, diversified commercial or government enterprises in North America, Europe, South
America and Asia. For several years prior to May 2008, however, the majority of our revenue was derived from engagements with the U.S. Navy, both directly and through an intermediary.

In
2010, we have focused on diversifying our client base by delivering our solutions in North America, both to the U.S. government and to commercial entities. Beginning November 2010, we
concentrated our sales focus on government related organizations, although we will continue to pursue commercial business on an opportunistic basis for the short term. We also expect to engage in some
business in Europe, and perhaps elsewhere, on an opportunistic basis.

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

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

Competition

The consulting services industry in which we operate is highly competitive and significantly fragmented. We compete with a large number
of diverse service providers, including business operations consulting firms, such as Huron Consulting Group; financial consulting firms, such as FTI Consulting, Inc.; management consulting
firms, such as McKinsey & Company, Booz & Company and Booz Allen Hamilton; accounting firms; technical and economic advisory firms; regional and specialty consulting firms and internal
professional resources of existing and potential clients. In
addition, since there are relatively low barriers to entry into the consulting services market, we expect new entrants into the operations management consulting field to result in continued and
additional future competition.

We
seek to compete by differentiating ourselves on the basis of our results-driven culture, the experience of our consultants and a hands-on approach to problem solving. Most
of our competitors have significantly greater financial resources, professional staffs, industry expertise, and name recognition than we have. Competitive pressures could reduce our market share or
require us to reduce the price of our services and solutions, either of which could harm our business and results of operations. Furthermore, there can be no assurance that we will be able to compete
successfully with our existing or new competitors.

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

Employees

At December 31, 2010, we had a total of 28 employees, consisting of six full-time consultants, five sales and
marketing employees, eight administrative employees and nine consultants on furlough. When on furlough, consultants continue to receive company benefits, but are not paid any salary unless they are
called back to work. They can be called back based on their individual qualifications to work on either short term sales efforts and marketing projects or client engagements.

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

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

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

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

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

Intellectual Property

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

We
have secured federal registration for the service marks Total Cycle Time® and TCT®. These registrations expire from August 2012 to May 2015. We also have
secured
federal service mark registration for several other marks important to our business. We also have made filings in several European countries in an effort to secure protection of our marks in those
countries. We consider each of these service marks to be significant to our business.

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

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to
our proprietary tools, we often use the following non-proprietary tools when providing services to our clients:



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

Through
our proprietary Process Value Management methodology, our consultants seek to utilize the appropriate process improvement tools to predict the financial benefits that will be
obtained through deployment of those tools in our client's organization. For each client, we seek to measure the status of the organization when we begin an engagement, develop appropriate metrics to
measure key drivers of the performance of the organization, manage the change process and measure our improved results at the end of our engagement, while leaving the organization with a metrics based
process for continuous improvement following our departure.

Available Information

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

Company Website

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

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ITEM 1A.Risk Factors.

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

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

During March and April of 2008, two of our multi-year contracts with the U.S. Navy expired. These contracts accounted for
approximately 85% of our revenue in 2007 and 44% of our revenue in 2008. Our revenue for 2010 and 2009 decreased significantly as compared to 2008 and 2007, due in large part to these contract
expirations. In response to the loss of these contracts, we have implemented cost-containment initiatives, reorganized our management structures, enhanced our product and service offerings
and implemented enhanced business development processes. To date, however, we have not been able to replace a significant portion of the revenue lost due to these contract expirations.

As
a result of the loss of these contracts, our inability to develop new client relationships in sufficient volume, and our inability to reduce Cost of Sales and Selling, General and
Administrative Costs sufficiently to offset the decline in revenue, we were unprofitable in 2010. Although we continue to reduce or contain costs, if we are unable to develop significant new client
relationships and generate increased revenue from new consulting engagements to allow us to return to profitability in 2011, our ability ultimately to recover will be adversely affected. There can be
no assurance that we will ultimately be successful in increasing revenues and reducing or containing costs sufficiently to return to profitability.

Our current cash resources might not be sufficient to meet our cash needs over time. We continue to believe that our cash balances, together with cash generated from
operating activities, will be sufficient to provide funds that are adequate for our operating needs through March 31, 2012. However, if we are unable to generate positive cash flows sufficient
to fund our needs, our business, financial condition and results of operations could be materially and adversely affected.

During 2010 and 2009, we experienced net losses. Our ability to generate additional cash from operations is determined primarily by our
ability to generate substantial new revenue. We have developed a business plan for 2011 including an internal forecast of cash needs. Based on this plan, we believe that existing cash resources and
cash generated from current operations will be sufficient to satisfy our operating cash needs at least through March 31, 2012.

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

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If we are unable to return to profitability during 2011, we may receive a "going concern" opinion from our independent auditors at the end of 2011. This could materially and
adversely affect our potential to sign contracts with new clients, further limiting our opportunity to return to profitability.

Management believes that, as of December 31, 2010, we met the requirements of U.S. generally accepted accounting principles, or
GAAP, for a "going concern," which contemplates the realization of assets and discharge of liabilities in the ordinary course of business. Management has prepared the financial statements included in
this Form 10-K on that basis. Accordingly, the financial statements do not include any adjustments to reflect the possible future effects that may result from the outcome of various
uncertainties described in these risk factors and elsewhere in this Form 10-K. If we are unable to develop sufficient new business from existing and new clients to allow us to
return to profitability, we may no longer meet this requirement as of the end of 2011. In that event, the report of our independent registered accounting firm with respect to our financial statements
for the year ended December 31, 2011 may contain an explanatory paragraph with respect to our ability to continue as a going concern. Such a statement may make it more difficult for us to sign
new contracts with clients and to obtain necessary capital or credit, and may have other effects that further adversely impact our ability to return to profitability.

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

Beginning in the third quarter of 2008, the U.S. economy has experienced a significant downturn. Our results of operations generally
are affected by the level of business activity of our clients, which in turn is affected by the level of economic activity in the industries and markets they serve. Budgets for consulting services
typically decrease during times of adverse economic conditions. Although we believe our consulting services are a cost effective way for companies to reduce costs and improve operational efficiency,
in periods of economic uncertainty prospective clients may not be willing to commit to projects that are typically three to 12 months or longer in duration.

A
decline in the level of business activity of our clients has negatively affected our ability to secure new client engagements, increased the likelihood of existing client engagement
contract cancellations, and reduced our utilization rates, all of which has had a material adverse impact on our ability to generate revenue and on our operating results. In addition, the current
economic downturn has caused some clients to reduce or defer their expenditures for consulting services, making our recovery more difficult. We have implemented and will continue to implement
cost-savings initiatives to closely manage our expenses; however, current and future savings initiatives will not permit us to return to profitability without significant revenues from new
contracts or new clients. Although the downturn appears to have stabilized and a slow recovery may have begun, this has not yet resulted in substantial new business for us. The prolonged weak economy
has impacted almost all government entities, which has made obtaining new business in this target market more challenging.

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

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

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Unless
credit becomes more readily available, the current uncertainty may make it more difficult for us to sign new consulting contracts with new or former clients and may negatively
impact our ability to return to profitability.

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

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

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

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

We are a small company with a thinly traded stock, and two of our stockholders control more than 66% of our stock. Between early 2008 and mid-January 2010, we
repurchased stock in the open market, which has further reduced the "public float" of shares available for trading on a daily basis. Our reverse stock split reduced the number of shares outstanding by
80%. Additionally, one of our two major stockholders died on December 31, 2010. Ultimately his stock may be sold by the administrator of his estate. As a result, a stockholder's liquidity may
be seriously limited and our stock price may volatile.

In
January 2010, we completed a Rule 10b5-1 plan under which we repurchased shares of our common stock in market transactions between April 2008 and
mid-January 2010. These repurchases

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may
have provided additional liquidity for our stockholders during that time period. Currently, we have no plans to resume stock repurchases under this plan or otherwise, so Company repurchases will
no longer be a potential source of additional liquidity for our stockholders.

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

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

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

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

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

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

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

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

Historically we have derived a significant portion of our revenue from a limited number of engagements. From year to year, revenue from
one or more individual clients may exceed 10% of our revenue for such period. For the year ended December 31, 2010, four clients each represented more than 10% of our revenue. If contracts with
major clients are not renewed upon termination or if any of our significant engagements is reduced in scope or cancelled, we would lose a significant amount of revenue. In general, the volume of work
we perform for any particular client varies from year to year due to the specific engagement nature of our business. A client accounting for a significant portion of our revenue in one year may not
comprise a significant portion of our revenue in the following year

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due
to completion of the project, early termination of the project or a reduction of the scope of our engagement in the following year. Thus, in order to maintain revenue or grow revenue, we generally
have to sell new engagements to new clients. During 2010 we had difficulty doing so, and there can be no assurance that we will be able to do so more productively in 2011.

Over half of our revenue is derived from government client engagements, and we are currently focusing our sales efforts on government engagements. This exposes us to various
risks inherent in government contracts and the government contracting process.

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



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

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

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

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

We charge for our professional services and solutions based on fixed fee arrangements, task-based fees or incentive fees.
Fixed fee contracts require us to price our contracts by estimating our

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

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

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



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

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

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



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



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

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



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

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

Our business consists primarily of the delivery of professional services and solutions and our success depends upon the efforts,
abilities and project execution of our business consultants. Our consultants have highly specialized skills. If key consultants leave and we are unable to replace them with suitable candidates, we
could experience difficulty in managing the affected client engagements. Professionals with requisite credentials and experience qualified to be our consultants are in demand and we face significant
competition for these professionals from our competitors, academic institutions, government entities, research firms and other organizations, including our clients.

In
addition, we rely on our sales professionals to develop business opportunities and client relationships. We face significant competition for these sales professionals from our
competitors. Competing employers for both consultants and sales professionals may be able to offer greater compensation and benefits or more attractive lifestyle choices, career paths or geographic
locations than we do.

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

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

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

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

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

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Maintaining our reputation is critical to our future success.

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

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

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

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

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

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

We have only a limited ability to protect our intellectual property rights, which are important to our success. Our PVM approach and
proprietary methodologies are trade secrets not capable of being patented, and there can be no assurance our competitors will not acquire or develop substantially similar methodologies or that our
clients will not adopt our methodologies without our assistance. Despite our efforts to protect our proprietary trade secrets from unauthorized use or disclosure, such as use of nondisclosure and
non-competition agreements with our current and former employees, our current or former employees or others may attempt to disclose, obtain or use our trade secrets. The steps we have
taken to protect our proprietary trade secrets may not prevent misappropriation,

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particularly
in foreign countries where laws or law enforcement practices may not protect intellectual property rights as fully as in the United States. The unauthorized use of our trade secrets or
use of substantially similar methodologies and solutions by our competitors or others could harm our competitive position and financial performance.

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

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

While
we intend to try to maintain effective internal controls, if we fail, we may experience a loss of investor confidence in the reliability of our financial statements. This could
harm our ability to sign new
contracts with clients and to obtain financing for the business. It may also negatively impact the trading price of our common stock.

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

We currently operate primarily in the United States and have limited operations through a non-owned affiliate in Europe. If
our revenue from international operations does not exceed the expense associated with establishing and maintaining our international operations, our results of operations could suffer.

International
operations create special risks, including the following:



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We may not pay dividends in the future.

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

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

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



Any
additional capital raised through the sale of equity may dilute our existing stockholders' ownership percentage.

Based
on our current forecast, we believe that existing cash resources and cash generated from current operations will be sufficient to satisfy our operating cash needs at least through
March 31, 2012.

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

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

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

ITEM 1B.Unresolved Staff Comments.

None.

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ITEM 2.Properties.

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

ITEM 3.Legal Proceedings.

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

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

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

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

ITEM 4.Removed and Reserved

PART II

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

Market for Registrant's Common Equity

Our common stock is listed on the Nasdaq Capital Market under the symbol "TGIS." On December 11, 2009 we transferred our listing
to the Nasdaq Capital Market from the Nasdaq Global Market because we no longer complied with (i) the minimum bid price requirements as set forth in Listing Rule 5450(a)(1) of the Nasdaq
Stock Market, which requires that listed securities maintain a minimum closing bid price of $1.00 per share, and (ii) the minimum market value of publicly held shares as set forth in Listing
Rule 5450(b)(1)(C), which requires that the market value of publicly held shares be at least $5,000,000. At that time we met the requirements for listing on the Nasdaq Capital Market, which has
a lower requirement for the minimum market value of publicly held shares of $1,000,000, with the exception of maintaining a minimum closing bid price of $1 per share.

On
March 16, 2010, we received notification from the Nasdaq Stock Market that we had not regained compliance with the Nasdaq Listing Rules requiring that we maintain a minimum
closing bid price of $1.00 per share. In order to provide an additional opportunity to regain compliance, at our 2010 annual meeting of stockholders in June 2010, we received stockholder approval for
a reverse stock

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

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

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

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

Quarter Ended

Dividends
Declared

High

LowDecember 31, 2010

$
0

$
3.23

$
1.41September 30, 2010

$
0

$
2.80

$
1.70June 30, 2010

$
0

$
3.90

$
2.90March 31, 2010

$
0

$
4.20

$
3.05December 31, 2009

$
0

$
5.80

$
2.60September 30, 2009

$
0

$
6.50

$
2.75June 30, 2009

$
0

$
4.65

$
3.65March 31, 2009

$
0

$
4.90

$
2.41


Holders of Record

As of December 31, 2010, there were approximately 71 holders of record of our common stock, not including holders who own stock
in "street name".

Dividends

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

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

Equity Compensation Plan Information

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

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Issuer Repurchases of Shares

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

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

ITEM 6.Selected Financial Data.

The following table presents selected consolidated financial information that has been prepared based on our audited consolidated
financial statements for each of the fiscal years in the five-year period ended December 31, 2010. The financial statements for each of the fiscal years ended December 31,
2010, 2009, 2008, 2007 and 2006 have been audited by Hein & Associates LLP, an independent registered public accounting firm.

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

Year Ended December 31,2010

2009

2008

2007

2006In thousands, except per share and share dataRevenue

$
3,514

$
9,553

$
25,121

$
55,869

$
59,478Operating expenses


9,280


16,873


33,682


45,341


44,571Operating income (loss)


(5,766
)

(7,320
)

(8,561
)

10,528


14,907Other income, net


182


425


296


530


362Income (loss) from continuing operations before income taxes


(5,584
)

(6,895
)

(8,265
)

11,058


15,269Income taxes expense (benefit)


1,617


(2,619
)

(2,450
)

4,012


3,764Income (loss) from continuing operations before the cumulative effect of a change in accounting principle


(7,201
)

(4,276
)

(5,815
)

7,046


11,505Gain on discontinued operations, net of related income tax expense (benefit) effect of $0 for each of the years 2010, 2009, 2008, 2007 and 2006,
respectively














1Net income (loss)

$
(7,201
)
$
(4,276
)
$
(5,815
)
$
7,046

$
11,506Per share of common stock:Basic earnings (loss) per share:

$
(3.37
)
$
(2.01
)
$
(2.64
)
$
3.20

$
5.32Diluted earnings (loss) per share:

$
(3.37
)
$
(2.01
)
$
(2.64
)
$
3.14

$
5.19Dividends per share:

$


$


$


$
2.00

$
1.50Weighted average shares:Basic


2,136,796


2,123,524


2,195,460


2,198,045


2,162,423Diluted


2,136,796


2,123,524


2,194,460


2,238,254


2,213,018


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Year ended December 31,2010

2009

2008

2007

2006Balance Sheet DataWorking capital

$
2,952

$
8,092

$
13,211

$
19,323

$
16,787Total assets

$
4,111

$
11,578

$
17,154

$
25,939

$
24,043Long-term obligations, including current maturities

$
25

$
126

$
202

$
238

$
103Total stockholders' equity

$
3,317

$
10,086

$
15,251

$
21,544

$
18,663


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

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

Overview

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

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

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

For
marketing purposes, we are organized into two business units, the Government Business Unit and the Commercial Business Unit.

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

The
Government Business Unit is focused on sales to U.S. government agencies, to all branches of the military, and to state and local government entities. This is the current focus for
most of our efforts to develop new business.

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

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



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

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

Fixed
fee revenue is recognized on the proportional performance model (which approximates the percentage completion method), based on direct labor hours expended and, when applicable,
the completed performance model. In order to calculate the completion ratio on a given project, time and effort to date are divided by the total estimated time and effort for the entire project. This
ratio is then multiplied by the total fixed fee to be earned on the project, resulting in the amount of revenue earned to date. A few of our fixed fee contracts, primarily assessments, are recognized
using the completed contract performance model as these contracts are generally one to six weeks in duration and conclude with a presentation or agreed upon deliverable to the clients' management.
Revenues attributable to fixed fees were 77%, 69% and 42% of consolidated revenue for the years ended December 31, 2010, 2009, and 2008, respectively.

Task-based
fees are recognized as revenue when the relevant task, as defined in the contract, is completed, usually on a monthly basis. Revenues attributable to
task-based fees were 12%, 11% and 49% of consolidated revenue for the years ended December 31, 2010, 2009, and 2008, respectively.

Incentive
fees, in some cases, may be earned based on improvements in a variety of client performance measures typically involving cycle time, asset utilization and productivity.
Incentive fee revenue is recognized in the period in which the related client improvements are achieved and we obtain the client's acceptance. Our incentive fee agreements with our clients define in
advance the performance improvement standards that will form the basis for the payment of incentive fees. In order to mitigate the risk of disputes arising over the achievement of performance
improvements, which drive incentive fees, we obtain customer agreement to these achievements prior to recognizing revenue. Typically these contracts are for commercial customers and they provide for a
base fee and an additional incentive fee earned according to a formula in the contract. Incentive fees are affected by our clients' business performance and prevailing economic conditions. Revenues
attributable to incentive fees were 0%, 7% and 2% of consolidated revenue for the years ended December 31, 2010, 2009, and 2008, respectively. As of December 31, 2010, we had no
contractual agreements that provided for incentive fees in addition to fixed fees. While incentive fees are not currently a significant portion of our revenue, earlier in our history they have been
more significant.

Reimbursement
revenue represents our clients' repayment of our mutually agreed upon travel expenses as incurred. All billable travel expenses are submitted to and approved by the client.
Revenues attributable to reimbursement were 11%, 13% and 7%, for the years ended December 31, 2010, 2009, and 2008, respectively. For some clients, the fixed fee or task-based fee
is inclusive of travel. In these cases, the travel expense is included in cost of sales.

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

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telecommunications
and computer costs, travel costs and other costs incurred in providing services and solutions to our clients.

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

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

We
paid dividends of $0.10 per share on January 12, 2007, April 13, 2007, July 13, 2007 and October 12, 2007. On December 6, 2007, our Board of
Directors declared a dividend of $0.10 payable to shareholders of record as of December 31, 2007. This dividend was paid on January 12, 2008. We currently have no plans to pay dividends
in the future.

Critical Accounting Policies and Estimates

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

Revenue Recognition

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

Unbilled Receivables

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

Deferred Revenue

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

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Deferred Taxes

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

In
addition to timing differences arising from operating assets and liabilities, we also record deferred tax assets for the tax benefits of net operating losses and foreign tax credits.
For United States federal tax purposes, at December 31, 2006, we had net operating loss carryovers of approximately $2.9 million, and a $2.8 million balance at December 31,
2007, December 31, 2008 and December 31, 2009. As of December 31, 2010, we had a net operating loss carryovers of approximately $8.2 million, of which $2.8 million
is subject to the limitations of Section 382 of the Internal Revenue Code.

In
assessing the realizability of deferred tax assets, we considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. In the
first quarter of 2010, our cumulative losses began to exceed our cumulative earnings. Additionally, we are not currently profitable, and in accordance with GAAP we determined as of the end of March
2010 that it was no longer probable that we will recover our deferred tax asset. The combined tax effect was to cause an income tax expense of $1.6 million for the year ended
December 31, 2010. As of December 31, 2010, the valuation allowance is $3.6 million of which $58,000 is subject to the limitations of Section 382 of the Internal Revenue
Code.

Our
assessment of our deferred tax asset in March 2010 included a review of the critical assumptions affecting the ultimate realizability of this deferred tax asset. For 2009 we were
able to claim a refund of Federal income taxes paid in prior years. Generally, in order for us to be able to utilize the tax deductions that give rise to the balance of this deferred tax asset, it
must be probable that we will be able to generate adequate profits in the future. As a result, and particularly in light of our net losses in recent periods, it is management's view that the most
critical assumption affecting the realizability of this deferred tax asset is the assumption that we will be able to return to sustained profitability. Despite successes in reducing costs, generating
additional revenue to return to profitability has proved difficult. Thus, in accordance with GAAP we determined that it was no longer probable that we will recover our deferred tax asset.

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

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benefits
for uncertain tax positions. An income tax penalty is recognized as expense when the tax position does not meet the minimum statutory threshold to avoid the imposition of a penalty. As of
December 31, 2010, we did not have any liabilities or associated interest under ASC 740-10-25.

We
recognize deductible interest accrued related to tax penalties as interest expense in our Consolidated Statements of Operations and we recognize non-deductible accrued
interest and penalties as income tax expense in our Consolidated Statements of Operations. Non-deductible penalties and interest were $100, $100 and $14,000 for the years 2010, 2009 and
2008, respectively.

We
are currently subject to the statutes of limitations for federal and state income taxes in the states in which we perform our services. The last year that is now closed for audit for
Federal income taxes is 2008. Our Federal income tax return for the year ended December 31, 2007 was audited by the Internal Revenue Service in 2009. There were no changes to the taxes due as a
result of this audit.

Performance Share Awards

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

Government Contracts

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

Results of Operations

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

Percentage of Revenue
For Year Ended December 31,2010

2009

2008Revenue


100.0
%

100.0
%

100.0
%Cost of sales


76.6
%

64.5
%

59.9
%Gross profit


23.4
%

35.5
%

40.1
%Selling, general and administrative


187.5
%

112.2
%

74.2
%Operating loss


(164.1
%)

(76.7
%)

(34.1
%)Interest income (expense), net


(0.1
%)

0.1
%

1.2
%Other income


5.2
%

4.4
%

Loss from continuing operations before income taxes


(159.0
%)

(72.2
%)

(32.9
%)Income taxes expense (benefit)


46.0
%

(27.4
%)

(9.8
%)Net loss


(205.0
%)

(44.8
%)

(23.1
%)


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Years Ended December 31, 2010 and 2009

Revenue

Total revenue decreased $6.0 million, or 63%, to $3.5 million in 2010, from $9.6 million in 2009. The overall
decrease in revenues is due primarily to a decrease in our government business due to the ending of some of our U.S. Navy programs following the government's decision to consolidate these programs
into a single contracting vehicle for which we were not named as a provider. The decrease is also due to having a lower volume of commercial contracts, along with the contracts having a lower contract
value for the year ended December 31, 2010. Typically, our initial customer engagement consists of a paid assessment followed by a longer, more extensive program. During 2010, we recorded
revenues on 21 assessments and programs from 16 different customers compared to 38 assessments and programs with 27 different customers during 2009.

Fixed
fee revenues decreased $3.9 million, or 59%, to $2.7 million, or 77% of revenue, in 2010 from $6.6 million, or 69% of revenue, in 2009. The decrease in fixed
fee revenues is attributable to the lower number of active commercial contracts, along with the contracts having a lower contract value for the year ended December 31, 2010. During 2010, we
derived fixed fee revenues from 19 assessments and programs from 14 different customers, versus 33 programs and assessments from 25 different customers in 2009. In 2010, we recorded fixed fee revenues
from four customers with multiple engagements, versus eight customers with multiple engagements in 2009.

Task-based
revenues decreased $0.6 million, or 57%, to $0.4 million, or 12% of revenue, in 2010, from $1.0 million, or 10% of revenue, in 2009. The
decrease in task-based revenues relates to the decrease in the number of active programs with the United States government. During 2010, we derived task-based revenues on four
assessments and programs from three customers, versus five assessments and programs from two customers in 2009. In 2010, we recorded task-based revenues from one customer with multiple
engagements versus two customers with multiple engagements in 2009.

Incentive
fee revenues decreased $0.7 million, or 100%, to $0 million, or 0% of revenue, in 2010, from $0.7 million, or 7% of revenue, in 2009. Although we continue
to offer a portion of our fees contingent on performance based metrics, our more recent customers have preferred fixed fee or task-based arrangements.

Reimbursement
revenues decreased $0.9 million, or 70%, to $0.4 million, or 11% of revenues, in 2010, from $1.3 million, or 13%, in 2009. The decrease in the number
of commercial contracts is primarily responsible for the decrease in reimbursement revenues.

North
America region revenue decreased $3.4 million, or 52%, to $3.1 million in 2010, from $6.6 million in 2009. Revenues from United States government contracts
decreased $0.7 million, or 28%, to $1.8 million from $2.5 million in 2009. Revenues from contracts with commercial clients in the United States decreased $2.7 million, or
65%, to $1.4 million from $4.1 million in 2009.

We
had no revenue in our South America region in 2010 compared to $0.02 million in 2009.

Our
Europe region revenue decreased $2.6 million, or 87%, to $0.4 million in 2010, from $3.0 million in 2009.

Gross Profit

Gross profit for 2010 decreased $2.6 million to $0.8 million, or 23% of revenue, from $3.4 million, or 36% of
revenue, in 2009. Costs of sales, which is a component of gross profit, consists of direct labor, travel, and other direct costs incurred by our consultants to provide services to our clients and to
complete client related projects, including training. The drop in the quarterly and year-to-date gross margins is related to the significant slowdown of our government and
commercial programs during 2010, and to lower pricing on some engagements in this period.

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Selling, General and Administrative

SG&A costs for the year ended December 31, 2010 were $6.6 million compared to $10.7 million in the year ended
December 31, 2009. The $4.1 million decrease is primarily related to a $3.0 million decrease in payroll costs due to the decline in the number of employees, a $0.3 million
decrease in sales commissions and executive bonus, a $0.6 million decrease in travel related expenses, a $0.4 million decrease in legal expenses, a $0.3 million decrease in
outside consultants and contract labor used related to the decrease in activity, a $0.1 million decrease in audit, tax and accounting service costs, a $0.1 million decrease in
maintenance and license agreements, a $0.1 million decrease in depreciation and amortization costs, and a $0.2 million decline in other costs due to a decrease in activity and the lower
number of employees as compared to prior year, offset by a $1.0 million increase in stock-based compensation for the year ended 2010.

Income Taxes

During 2010, we recorded income tax expense of $1.6 million compared to an income tax benefit of $2.6 million during
2009. Our effective tax rate for 2010 was 34%, compared to 38% in 2009. In the first quarter of 2010, our cumulative losses began to exceed our cumulative earnings. Additionally, we are not currently
profitable, and we determined that as of the end of March 2010 it was no longer probable that we will recover our deferred tax asset. The combined tax effect was to cause an income tax expense of
$1.6 million for the year ended December 31, 2010. The effect is to increase the net loss as well as the loss per share compared to prior quarters. If we are able to return
to sustained profitability and when we can comply with all of the requirements of ASC 740-10-25, we should be able to recover all or part of our deferred tax asset.

From
2001 to 2005, we had provided a valuation allowance for the full amount of our net deferred tax assets. During 2006, however, we determined that a valuation allowance was
appropriate on only approximately $117,000 of the net operating loss carryforward, due to annual limitations under Section 382 of the Internal Revenue Code of 1986, as amended, and therefore we
removed $1.8 million of the valuation allowance. At December 31, 2008, we further reduced the valuation allowance by $59,000 to $58,000 as a result of another revaluation of this
account. We are not currently profitable, and we determined that as of the end of March 2010 it was no longer probable that we will recover our deferred tax asset. This resulted in an increase in our
valuation allowance of $3.5 million. As of December 31, 2010, the valuation allowance is $3.6 million of which $58,000 is subject to annual limitations under Section 382 of
the Internal Revenue Code.

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

Years Ended December 31, 2009 and 2008

Revenue

Total revenue decreased $15.6 million, or 62%, to $9.6 million in 2009, from $25.1 million in 2008. The overall
decrease in revenues is due primarily to a decrease in our government business due to the ending of some of our U.S. Navy programs following the government's decision to consolidate these programs
into a single contracting vehicle for which we were not named as a provider. The decrease is also due to having a lower volume of commercial contracts, along with the contracts having a lower contract
value for the year ended December 31, 2009. Typically, our initial customer engagement consists of a paid assessment followed by a longer, more extensive program. During 2009, we recorded
revenues on 38 assessments and programs from 27 different customers compared to 48 assessments and programs with 32 different customers during 2008.

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

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

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

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

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

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

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

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

Gross Profit

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

Selling, General and Administrative

Selling, general and administrative expense for 2009 decreased $7.9 million to $10.7 million, or 112% of revenue, from
$18.6 million, or 74% of revenue, in 2008. The $7.9 million decrease is related primarily to a $1.7 million decrease in stock-based compensation, a $2.5 million decrease in
payroll costs related to reduction in the support staff, $0.5 million decrease in severance and recruiting costs related to the reduction in our labor force during the second quarter of 2008, a
$1.3 million decrease in sales commission and executive bonus, a $0.3 million decrease in bad debt allowance, a $0.3 million decrease in travel expenses, a $0.2 million
decrease in outside consultants, a $0.2 million decrease in equipment rent, a $0.2 million decrease in depreciation expense, a $0.2 million decrease in legal expenses and
insurance costs, and a $0.5 million decrease in other costs due to a decline in activity.

Income Taxes

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

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Table of Contents

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

Quarterly Results

The following table sets forth certain unaudited operating results for each of the four quarters in the two years ended
December 31, 2010. This information has been prepared on the same basis as the audited financial statements and, in our opinion, includes all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of the information for the periods presented.

2010

2009For the Three Months Ended

For the Three Months EndedMar. 31

June 30

Sept. 30

Dec. 31

Mar. 31

June 30

Sept. 30

Dec. 31In thousands, except per share dataRevenue

$
1,651

$
994

$
519

$
350

$
3,288

$
2,619

$
2,098

$
1,547Gross profit (loss)


504


169


167


(17
)

1,442


886


712


355Operating income (loss)


(1,472
)

(1,446
)

(1,499
)

(1,348
)

(1,920
)

(2,264
)

(1,883
)

(1,254
)Net income (loss)

$
(2,905
)
$
(1,446
)
$
(1,502
)
$
(1,348
)
$
(1,225
)
$
(1,354
)
$
(1,024
)
$
(673
)Earnings (loss) per share:Basic

$
(1.38
)
$
(0.68
)
$
(0.70
)
$
(0.62
)
$
(0.57
)
$
(0.63
)
$
(0.48
)
$
(0.32
)Diluted

$
(1.38
)
$
(0.68
)
$
(0.70
)
$
(0.62
)
$
(0.57
)
$
(0.63
)
$
(0.48
)
$
(0.32
)Weighted average shares:Basic


2,093


2,122


2,152


2,182


2,136


2,133


2,123


2,102Diluted


2,093


2,122


2,152


2,182


2,136


2,133


2,123


2,102Stock Price(a):High

$
4.20

$
3.90

$
2.80

$
3.23

$
4.90

$
4.65

$
6.50

$
5.80Low

$
3.00

$
2.90

$
1.70

$
1.41

$
2.40

$
3.65

$
2.75

$
2.60Close

$
3.25

$
3.20

$
1.70

$
1.84

$
4.10

$
4.40

$
6.50

$
3.10


(a)These
stock prices represent the highest and lowest sales prices per share of our common stock as reported on the NASDAQ Global Market prior to
December 11, 2009 or on the NASDAQ Capital Market beginning December 11, 2009. All stock prices have been adjusted to reflect the five-for-one reverse stock split
on August 13, 2010, for all periods presented. Our common stock is listed on the NASDAQ Capital Market under the symbol "TGIS."


Liquidity and Capital Resources

For the year ended December 31, 2010, net cash decreased $2.0 million, compared to a net decrease of $3.3 million
for the year ended December 31, 2009. For the year 2010, net cash used by operating activities was $1.9 million, compared to net cash used of $3.0 million for the year 2009. This
decrease in net cash used by operating activities is due primarily to the income tax refund received during the year 2010 of $2.7 million and offset by a non-cash decrease in
deferred tax assets of $1.6 million, offset by a decrease in our accrued liabilities, increased collection of our accounts receivable and by the net loss for the year 2010.

There
were no investing activities during the year 2010, compared to $0.1 million during 2009, consisting of computer and software purchases.

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Table of Contents

Cash
used for financing activities for the year 2010 was $0.02, compared to $0.3 million during the year 2009, each related to the purchase of stock under our stock repurchase
plan.

Pursuant
to a resolution of the Board of Directors to repurchase up to 101,090 shares, on March 6, 2008 we entered into a Rule 10b5-1 repurchase plan to
establish a systematic program authorizing a stockbroker to execute repurchases in accordance with the terms of the Rule 10b5-1 plan. After a waiting period, repurchases commenced
on April 7, 2008. In October 2008, our Board of Directors approved an expansion of our stock repurchase program, authorizing us to repurchase up to an additional 60,000 shares from time to
time, subject to market conditions.

During
the year ended December 31, 2010, we repurchased 5,349 shares for a total of $17,737, or an average of $3.31 per share including commissions and fees.

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

Our Liquidity Plan

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

Our
ability to achieve positive gross margins, control costs and generate cash flow from operations in the future will determine our ability to arrange debt facilities in the future. We
regularly evaluate our business to enhance our liquidity position. Our cash balance at December 31, 2010 was $3.0 million, or $1.41 per diluted share. We are currently generating a net
operating loss. We have no line of credit or other borrowing facility. Our available liquidity is limited to our existing working capital, and cash flow that we will be able to generate from
operations in 2011. Our ability to generate additional cash from operations is determined primarily by our ability to generate substantial new revenue. We currently believe we have sufficient
liquidity to sustain our operations at least through March 31, 2012.

If
circumstances change or we fail to meet our revenue expectations in our forecast for 2011 or we are unable to control our expenses as planned, we could be required to seek other
sources of liquidity during 2011 or seek or implement alternative strategies. There can be no assurance that existing cash will be sufficient, that we will have access to the capital or credit makets
if needed or that any of our
strategies can be implemented on satisfactory terms, on a timely basis or at all to provide additional liquidity.

Inflation

Although our operations are influenced by general economic conditions, we do not believe inflation had a material effect on the results
of operations during the years ended December 31, 2010, 2009 or 2008. However, there can be no assurance our business will not be affected by inflation in the future.

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Table of Contents

Off-Balance Sheet Arrangements

At December 31, 2010, and 2009, we had no obligations that would qualify to be disclosed as off-balance sheet
arrangements.

Contractual Obligations

The amounts of our contractual obligations at December 31, 2010, as well as the maturity of these commitments, are as follows:

Payment due inContractual Obligations

Total

2011

2012

2013

Later Yearsin thousandsLong-term debt obligations

$


$


$


$


$
Capital lease obligations














Insurance note payable


39


39








Operating lease obligations


729


591


138





Purchase obligations


166


156


10





Deferred rent obligations


126


101


25





Total

$
1,060

$
887

$
173

$


$



Long-term debt obligations:At December 31, 2010, we had no long-term debt obligations.

Capital lease obligations:At December 31, 2010, we had no capital lease obligations.

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

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

ITEM 8.Financial Statements and Supplementary Data.

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

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

Not applicable.

ITEM 9A(T).Controls and Procedures.

Based on the evaluation of our disclosure controls and procedures as of the end of the period covered by this annual report, our Chief
Executive Officer and our Chief Financial Officer have concluded that, in their judgment, our disclosure controls and procedures are effective to ensure that information required to be disclosed by
us, including our subsidiaries, in the reports we file, or submit under the Securities Exchange Act of 1934, is recorded, processed, summarized, and reported within the time periods specified in the
SEC's rules and forms. The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. Management necessarily applied its judgment
in assessing the costs and benefits of such controls and

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Table of Contents

procedures,
which, by their nature, can provide only reasonable assurance regarding management's control objectives.

Management's Report on Internal Control over Financial Reporting

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

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

Management
has assessed the effectiveness of our internal control over financial reporting as of December 31, 2010. To make this assessment, management used the criteria for
effective internal control over financial reporting described in Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this
assessment, management believes that, as of December 31, 2010, our internal control over financial reporting is effective based on those criteria.

This
Annual Report on Form 10-K does not include an attestation report from our independent registered public accounting firm regarding internal control over financial
reporting pursuant to the Dodd-Frank Act signed into law on July 21, 2010. The Dodd-Frank Act, among other things, amends Section 404 of the Sarbanes-Oxley Act of
2002 to provide that non-accelerated filers, including smaller reporting companies, are permanently exempt from the requirement to obtain an attestation of management's assessment of
internal controls over financial reporting from the reporting company's independent registered public accounting firm. As a smaller reporting company, our management must still complete an internal
assessment of our internal controls, but we are not required to seek attestation of our assessment from our independent registered public accounting firm.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting during our fourth quarter of 2010 that has materially affected, or
is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B.Other Information.

There was no information required to be disclosed in a report on Form 8-K in the fourth quarter of 2010 which was
not reported.

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Table of Contents

PART III

ITEM 10.Directors and Executive Officers of the Registrant.

The information required by this Item 10 is incorporated herein by reference to our Proxy Statement for our 2011 Annual Meeting
of Stockholders, which will be filed on or before April 30, 2011.

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

ITEM 11.Executive Compensation.

The discussion under "Executive Compensation" in our Proxy Statement for our 2011 Annual Meeting is incorporated herein by reference.

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

The discussion under "Security Ownership of Certain Beneficial Owners and Management" in our Proxy Statement for our 2011 Annual
Meeting of Stockholders is incorporated herein by reference.

The
following table provides information related to the number of shares to be issued upon exercise of all outstanding options, warrants and rights and the number of shares available for
future issuance under our equity compensation plans at December 31, 2010.

EQUITY COMPENSATION PLAN INFORMATION

(a)

(b)

(c)Plan Category

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

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

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


110
(1)(2)
$
14.19


183,333Equity compensation plans not approved by security holders








Total


110

$
14.19


183,333


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


37

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Table of Contents




ITEM 13.Certain Relationships and Related Transactions.

The discussion under "Certain Relationships and Related Transactions" in our Proxy Statement for our 2011 Annual Meeting is
incorporated herein by reference.

ITEM 14.Principal Accounting Fees and Services.

The discussion under "Principal Accounting Fees and Services" in our Proxy Statement for our 2011 Annual Meeting is incorporated herein
by reference.

PART IV

ITEM 15.Exhibits and Financial Statement Schedules.

(a)(1)

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

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

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

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




Exhibit Number

Description3.1

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

Certificate of Amendment to Amended and Restated Certificate of Incorporation of Thomas Group effective August 13, 2010 (filed as Exhibit 3.1 to our Current Report on Form 8-K filed August 16, 2010 and
incorporated herein by reference).3.3

Amended and Restated By-Laws dated May 30, 2001 (filed as Exhibit 3.2 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001 and incorporated herein by
reference).3.4

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

Specimen Certificate evidencing Common Stock.10.1

Amended and Restated 1992 Stock Option Plan (filed as Exhibit 3.9 to our Registration Statement on Form S-8, File No. 333-75811, filed April 7, 1999 and incorporated herein by reference).10.2

2005 Omnibus Stock and Incentive Plan for Thomas Group, Inc. dated December 19, 2005, as amended December 23, 2005 (filed as Exhibit 10.1 to our Current Report on Form 8-K filed December 27,
2005 and incorporated herein by reference).10.3

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


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Table of Contents

Exhibit Number

Description10.4

Share Price Restricted Share Award agreement for James T. Taylor dated December 23, 2005 (filed as Exhibit 10.4 to our Current Report on Form 8-K filed December 27, 2005 and incorporated herein by
reference).10.5

Employment Agreement, dated February 19, 2008, by and between Thomas Group, Inc. and Michael E. McGrath (filed as Exhibit 10.2 to our Current Report on Form 8-K filed February 25, 2008 and
incorporated herein by reference).10.6

2008 Omnibus Stock and Incentive Plan of Thomas Group, Inc (filed as Exhibit 10.1 to our Current Report on Form 8-K filed March 6, 2008 and incorporated herein by reference).10.7

Employment Agreement, dated March 4, 2008, by and between Thomas Group, Inc. and Earle Steinberg (filed as Exhibit 10.2 to our Current Report on Form 8-K filed March 6, 2008 and incorporated
herein by reference).10.8

Restricted Share Award dated March 1, 2008 granted to Michael E. McGrath (filed as Exhibit 10.3 to our Current Report on Form 8-K filed March 6, 2008 and incorporated herein by reference).10.9

Restricted Share Award dated March 10, 2008 granted to Earle Steinberg (filed as Exhibit 10.1 to our Current Report on Form 8-K filed March 11, 2008 and incorporated herein by reference).10.10

Performance Share Award dated March 10, 2008 granted to Earle Steinberg (filed as Exhibit 10.1 to our Current Report on Form 8-K filed March 11, 2008 and incorporated herein by reference).10.11

Amendment to the Employment Agreement, dated March 3, 2009, by and between Thomas Group, Inc. and Michael E. McGrath (filed as Exhibit 10.1 to our Current Report on Form 8-K filed March 5, 2009
and incorporated herein by reference).10.12

Second Amendment to Employment Agreement, dated March 2, 2010, by and between Thomas Group, Inc. and Michael E. McGrath (filed as Exhibit 10.1 to our Current Report on Form 8-K filed March 11,
2010 and incorporated herein by reference).10.13

Restricted Share Award dated March 9, 2010 granted to Michael E. McGrath (filed as Exhibit 10.2 to our Current Report on Form 8-K filed March 11, 2010 and incorporated herein by reference).*
10.14

Third Amendment to the Employment Agreement, dated March 24, 2011, by and between Thomas Group, Inc. and Michael E. McGrath.*
10.15

Restricted Share Award dated March 15, 2011 granted to Michael E. McGrath*
10.16

Retention Pay Agreement , dated March 24, 2011, by and between Thomas Group, Inc. and Frank W. Tilley*
21

Subsidiaries of the Company.*
23

Consent of Hein & Associates LLP.*
31.1

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

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

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

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


*Filed
herewith


39

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Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, we have duly caused this
Form 10-K to be signed on our behalf by the undersigned, thereunto duly authorized, in the City of Irving, State of Texas, on March 24, 2011.

THOMAS GROUP, INC.By:

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


POWER OF ATTORNEY

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

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

Signature

Capacity

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

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

March 24, 2011/s/ FRANK TILLEY Frank Tilley

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

March 24, 2011/s/ JOHN T. CHAIN, JR. John T. Chain, Jr.

Director

March 24, 2011/s/ DORSEY R. GARDNER Dorsey R. Gardner

Director

March 24, 2011/s/ DAVID B. MATHIS David B. Mathis

Director

March 24, 2011


40

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Table of Contents

ANNUAL REPORT ON FORM 10-K
ITEM 8, and 15(a)(1) and (c)
LIST OF FINANCIAL STATEMENTS
CERTAIN EXHIBITS
FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2010
THOMAS GROUP, INC.
IRVING, TEXAS
FORM 10-KITEM 15(a)(1)
Thomas Group, Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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



Report of Independent Registered Public Accounting Firm

F-2Consolidated Balance Sheets as of December 31, 2010, and 2009

F-3Consolidated Statements of Operations for the fiscal years ended December 31, 2010, 2009 and
2008

F-4Consolidated Statements of Stockholders' Equity for the fiscal years ended December 31, 2010, 2009 and
2008

F-5Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2010, 2009 and
2008

F-6Notes to Consolidated Financial Statements

F-7


F-1

---





Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We
have audited the accompanying consolidated balance sheets of Thomas Group, Inc. as of December 31, 2010 and 2009, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period ended December 31, 2010. These financial statements are the responsibility of Thomas Group, Inc.'s
management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Thomas Group, Inc. at
December 31, 2010 and 2009 and the consolidated results of operations and cash flows of Thomas Group, Inc. for each of the three years in the period ended December 31, 2010, in
conformity with U.S. generally accepted accounting principles.

We
were not engaged to examine management's assertion about the effectiveness of Thomas Group, Inc.'s internal control over financial reporting as of December 31, 2010
included inManagement's Report on Internal Control over Financial Reportingand, accordingly, we do not express an opinion thereon.

/s/ HEIN & ASSOCIATES LLP Dallas, Texas
March 24, 2011

F-2

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Table of Contents

THOMAS GROUP, INC. CONSOLIDATED BALANCE SHEETS

December 31,2010

2009In thousands, except share dataASSETSCurrent AssetsCash and cash equivalents

$
3,032

$
5,004Trade accounts receivable, net of allowance of $42 and $5 at December 31, 2010, and 2009, respectively


237


849Unbilled receivables


57


378Deferred tax asset, net of allowance of $199 and $4 at December 31, 2010 and 2009, respectively





111Income tax receivable


108


2,835Other current assets


287


281Total Current Assets


3,721


9,458Property and equipment, net of accumulated depreciation of $2,369 and $2,110 at December 31, 2010, and 2009, respectively


359


618Deferred tax asset, net of allowance of $3,410 and $42 at December 31, 2010 and 2009, respectively





1,471Other assets


31


31$
4,111

$
11,578LIABILITIES AND STOCKHOLDERS' EQUITYCurrent LiabilitiesAccounts payable and accrued liabilities

$
272

$
725Accrued wages and benefits


439


478Income taxes payable


19


14Note payable


39


149Total Current Liabilities


769


1,366Other long-term obligations


25


126Total Liabilities


794


1,492Commitments and Contingencies (Note 7)Stockholders' EquityCommon stock, $.01 par value; 25,000,000 shares authorized; 2,768,708 and 2,768,708 shares issued and 2,211,553 and 2,096,902 shares outstanding at
December 31, 2010, and 2009, respectively

$
27

$
138Additional paid-in capital


27,109


30,761Retained earnings


(4,252
)

2,949Treasury stock, 557,155 and 671,806 shares at December 31, 2010 and 2009, respectively, at cost


(19,567
)

(23,762
)Total Stockholders' Equity


3,317


10,086$
4,111

$
11,578


See
accompanying notes to consolidated financial statements.

F-3

---





Table of Contents

THOMAS GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31,2010

2009

2008In thousands, except per share and share dataConsulting revenue before reimbursements

$
3,135

$
8,293

$
23,339Reimbursements


379


1,260


1,782Total revenue


3,514


9,553


25,121Cost of sales before reimbursable expenses


2,313


4,897


13,277Reimbursable expenses


379


1,260


1,782Total cost of sales


2,692


6,157


15,059Gross profit


822


3,396


10,062Selling, general and administrative


6,588


10,716


18,623Operating loss


(5,766
)

(7,320
)

(8,561
)Other income


184


420


Interest income (expense)


(2
)

5


296Loss before income taxes


(5,584
)

(6,895
)

(8,265
)Income tax expense (benefit)


1,617


(2,619
)

(2,450
)Net loss

$
(7,201
)
$
(4,276
)
$
(5,815
)Loss per share:Basic

$
(3.37
)
$
(2.01
)
$
(2.64
)Diluted

$
(3.37
)
$
(2.01
)
$
(2.64
)Weighted average shares:Basic


2,136,796


2,123,524


2,195,460Diluted


2,136,796


2,123,524


2,195,460


See
accompanying notes to consolidated financial statements.

F-4

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Table of Contents

THOMAS GROUP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Common Stock





Accumulated
Other
Comprehensive
Income (Loss)

Treasury StockAdditional
Paid-In
Capital

Retained
EarningsShares

Amount

Shares

Amount

TotalIn thousands, except share dataBalance as of January 1, 2008


2,718,708

$
136

$
30,826

$
13,040

$



510,775

$
(22,459
)
$
21,543Exercise of stock options


20,000


1


(236
)













(235
)Issuance of restricted stock grants for common stock


20,000


1


1,081














1,082Tax benefit of options
exercised








(279
)













(279
)Share repurchase

















99,382


(984
)

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

















5,290


(61
)

(61
)Net Loss











(5,815
)










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


2,758,708

$
138

$
31,392

$
7,225

$



615,447

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


10,000Issuance of restricted stock grants for common stock








(586
)













(586
)Tax benefit of optionspelexercised








(45
)













(45
)Share repurchase

















56,359


(258
)

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











(4,276
)










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


2,768,708

$
138

$
30,761

$
2,949

$



671,806

$
(23,762
)
$
10,086Exercise of stock options








(4,213
)







(120,000
)

4,213Issuance of restricted stock grants for common stock








450














450Adjustment for reverse stock split





(111
)

111Tax benefit of options
exercisedShare repurchase

















5,349


(18
)

(18
)Acquisition of treasury stock for taxes on exercise of stock optionsNet Loss











(7,201
)










(7,201
)Balance as of December 31, 2010


2,768,708

$
27

$
27,109

$
(4,252
)
$



557,155

$
(19,567
)
$
3,317


See accompanying notes to consolidated financial statements.

F-5

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Table of Contents

THOMAS GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31,2010

2009

2008In thousands of dollarsCash Flows from Operating Activities:Net loss

$
(7,201
)
$
(4,276
)
$
(5,815
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation


260


357


500Amortization








19(Gain)/loss on disposal of assets





(3
)

Bad debt expense


37


16


338Deferred taxes


1,582


214


76Foreign currency translation (gain) loss


11


(63
)

115Stock based compensation expense (reversal)


450


(586
)

846Other


17


(19
)

(58
)Change in operating assets and liabilities:Decrease in trade accounts receivable


566


623


7,614(Increase) decrease in unbilled receivables


321


77


(185
)(Increase) decrease in other assets


(7
)

279


(411
)Decrease in accounts payable and accrued liabilities


(509
)

(461
)

(1,409
)Decrease in other liabilities


(85
)

(37
)

(3
)Increase (decrease) in short-term note payable


(110
)

149


(Increase) decrease in income tax receivable


2,726


815


(2,784
)Increase (decrease) in income taxes payable


5


(55
)

70Net cash used in operating activities


(1,937
)

(2,970
)

(1,087
)Cash Flows From Investing Activities:Proceeds from sale of assets





5


Capital expenditures





(97
)

(126
)Net cash used in investing activities





(92
)

(126
)Cash Flows From Financing Activities:Repurchase of common stock


(18
)

(258
)

(1,044
)Proceeds from exercise of stock options





1


Dividends








(1,163
)Tax effect of option exercises





(45
)

(279
)Net cash used in financing activities


(18
)

(302
)

(2,486
)Effect of exchange rate changes on cash


(17
)

19


58Net change in cash


(1,972
)

(3,345
)

(3,641
)Cash and cash equivalentsBeginning of year


5,004


8,349


11,990End of year

$
3,032

$
5,004

$
8,349


See
accompanying notes to consolidated financial statements.

F-6

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Table of Contents

THOMAS GROUP, INC.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010

Note 1Summary of Significant Accounting Policies

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

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

(b)Basis of PresentationThe accompanying consolidated financial statements include the accounts of the Company
and our wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated. Certain amounts from prior years have been reclassified to conform to the 2010
presentation.

(c)Reverse Stock SplitOur Board of Directors and stockholders approved a 1-for-5
reverse split of our outstanding common stock that became effective at 6:01 pm ET, August 13, 2010. The new shares began trading on the Nasdaq Capital Market on August 16, 2010. As a
result of the reverse stock split, every five shares of our issued and outstanding common stock, treasury shares, and unawarded or unvested shares under our approved stock plans were combined into one
share. The reverse stock split did not change the number of authorized shares or par value of our common stock. All share and per share amounts have been adjusted to reflect the stock split for all
periods presented.

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

F-7

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Table of Contents

THOMAS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (Continued)

Note 1Summary of Significant Accounting Policies (Continued)

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

Income
(Numerator)

Shares
(Denominator)

Per Share
AmountIn thousands, except per share dataYear Ended December 31, 2010Basic earnings (loss) per share

$
(7,201
)

2,137

$
(3.37
)Effect of dilutive securities:Options








Diluted earnings (loss) per share

$
(7,201
)

2,137

$
(3.37
)Year Ended December 31, 2009Basic earnings (loss) per share

$
(4,276
)

2,124

$
(2.01
)Effect of dilutive securities:Options








Diluted earnings (loss) per share

$
(4,276
)

2,124

$
(2.01
)Year Ended December 31, 2008Basic earnings (loss) per share

$
(5,815
)

2,195

$
(2.64
)Effect of dilutive securities:Options








Diluted earnings (loss) per share

$
(5,815
)

2,195

$
(2.64
)


Total
stock options and unvested restricted stock awards outstanding in 2010, 2009 and 2008 not included in the diluted earnings per share computation due to their antidilutive effects
are approximately 110, 27,067 and 165,365, respectively. Such options and warrants are excluded due to exercise prices exceeding the average market value of our common stock in 2010, 2009 and 2008.

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

(f)AdvertisingWe expense the costs of advertising as incurred. Advertising expense was $0.02 million for
the year ended December 31, 2010, $0.01 million for the year ended December 31, 2009 and $0.05 million for the year ended December 31, 2008.

(g)Property and EquipmentProperty and equipment are stated at cost less accumulated depreciation. We record
impairment losses on long-lived assets used in operations when events and

F-8

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Table of Contents

THOMAS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (Continued)

Note 1Summary of Significant Accounting Policies (Continued)

circumstances
indicate the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets.

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

Furniture and fixtures

5-7 YearsEquipment

3-7 YearsLeasehold improvements

2-10 YearsComputer software

3 Years


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

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

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

Royalty
revenue is recognized when received.

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

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

(k)Income TaxesIncome taxes are calculated using the asset and liability method required by ASC
740-10-25,Income Taxes. Deferred income taxes are recognized for the tax consequences resulting

F-9

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Table of Contents

THOMAS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (Continued)

Note 1Summary of Significant Accounting Policies (Continued)

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

In
assessing the realizability of deferred tax assets, we considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. In the
first quarter of 2010, our cumulative losses began to exceed our cumulative earnings. Our analyses of the positive and negative evidence indicate that it is more likely than not that all of the net
deferred tax asset will not be realized, and a full valuation allowance is required. Additionally, we are not currently profitable and we determined that, as of March 31, 2010, it was no longer
probable that we will recover our deferred tax asset. The combined tax effect was to cause an income tax expense for the year ended December 31, 2010 of $1.6 million. This had the effect
of increasing the net loss as well as the loss per share compared to prior quarters. If we are able to return to sustained profitability and we can comply with all of the requirements of ASC
740-10-25, we should be able to recover all or part of our deferred tax asset.

As
of December 31, 2010, we had a net operating loss carryovers of approximately $8.2 million, of which $2.8 million is subject to the limitations of
Section 382 of the Internal Revenue Code. As of December 31, 2010, we had a valuation allowance of $3.6 million of which $58,000 is subject to the limitations of
Section 382 of the Internal Revenue Code.

Our
assessment of our deferred tax asset in March 2010 included a review of the critical assumptions affecting the ultimate realizability of this deferred tax asset. Generally, in order
for us to be able to utilize the tax deductions that give rise to the balance of this deferred tax asset, it must be probable that we will be able to generate adequate profits in the future. As a
result, and particularly in light of our net losses in recent periods, it is management's view that the most critical assumption affecting the realizability of this deferred tax asset is the
assumption that we will be able to return to sustained profitability. Despite successes in reducing costs, generating additional revenue to return to profitability has proved difficult. Thus, in
accordance with GAAP we determined that it was no longer probable that we will recover our deferred tax asset.

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

F-10

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Table of Contents

THOMAS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (Continued)

Note 1Summary of Significant Accounting Policies (Continued)

subsequently
measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and
all relevant facts. ASC 740-10-25 also requires additional disclosures about unrecognized tax benefits associated with uncertain income tax positions and a reconciliation of
the change in the unrecognized benefit. In addition, ASC 740-10-25 requires interest to be recognized on the full amount of deferred benefits for uncertain tax positions. An
income tax penalty is recognized as expense when the tax position does not meet the minimum statutory threshold to avoid the imposition of a penalty. As of December 31, 2010, we did not have
any liabilities or associated interest under ASC 740-10-25.

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

(m)Accounts Receivable and Allowance for Doubtful AccountsWe record trade receivables related to billings to
our clients for operations and process improvement services. Trade receivables normally have terms of 30 to 60 days. We have no interest provision for past due trade accounts receivable. Trade
accounts receivable are considered past due when the amount due is still uncollected at the time the terms per the trade receivable have expired. An allowance for doubtful accounts is provided when
considered necessary based on periodic evaluation of estimated collectability, nature of dispute (if any), and credit history of the client. Amounts more than 120 days past due are charged to
bad debt expense. For the year ended December 31, 2010, we wrote off $37,000 in receivables which were charged to bad debt expense. In the year ended December 31, 2009, we wrote off
$16,000 in receivables.

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

December 31, 2010

December 31, 2009$ thousands

% of AR

$ thousands

% of ARClient A

$



0
%
$
267


31
%Client B

$
130


47
%
$



0
%Client C

$
141


51
%
$
95


11
%Client D

$



0
%
$



0
%


As
of December 31, 2010, allowances assessed against trade receivables were $42,000, compared to $5,000 at December 31, 2009.

As
of December 31, 2010, we had cash balances in demand deposit accounts with one large U.S. bank and one European bank in excess of the insured amounts. In total, the amount on
deposit in our accounts with these banks was $0.3 million, of which $57,000 was in excess of the amounts insured under FDIC insurance or the temporary Transaction Account Guarantee Program.
Short term working capital in excess of operating needs is invested in a short term money market fund which invests in U.S. government securities sponsored by one of the U.S. banks referenced above.
The amounts

F-11

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Table of Contents

THOMAS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (Continued)

Note 1Summary of Significant Accounting Policies (Continued)

invested
in this money market fund totaled $2.7 million at December 31, 2010. The funds in the money market fund are not guaranteed or insured.

(o)Foreign Currency TranslationOur reporting and functional currency is the United States dollar. Monetary
assets such as cash in other currencies are remeasured at the period end exchange rate. Accounts receivable and accounts payable are translated based on the rate at the time the transaction is
recorded. Revenue and expense transactions are measured at the average exchange rate for the period. The resulting remeasurement adjustment is recorded as foreign exchange gain or loss in the
statement of operations. We recorded a $17,000 remeasurement loss, a $19,000 remeasurement gain, and a $58,000 remeasurement gain for the years ending December 31, 2010, 2009, and 2008,
respectively. There is no translation adjustment to the separate component of stockholders' equity or adjustment to comprehensive income.

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

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

(q)Stock Based CompensationWe grant performance share awards, restricted stock and incentive and
non-qualified stock options to certain of our directors, officers, and employees. We have reserved 400,000 shares of common stock for issuance under our stock and incentive plans, of which
183,333 remain authorized and available for grant.

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

The
2008 Omnibus Plan provides a means for us to grant awards to officers, employees or consultants in the form of options, restricted shares, performance awards, and stock appreciation
rights. A total of 200,000 shares of our common stock was reserved for issuance pursuant to awards to be made under the 2008 Omnibus Plan. The 2008 Omnibus Plan received stockholder approval at our
2008 Annual Meeting of Stockholders held on June 26, 2008.

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

F-12

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Table of Contents

THOMAS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (Continued)

Note 1Summary of Significant Accounting Policies (Continued)

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

In
February 2010, the FASB issued ASU No. 2010-09, which updates the guidance in ASC 855,Subsequent Events.This
amendment eliminated the requirement for companies that file with the United States Securities and Exchange Commission to indicate the date through which they have analyzed subsequent events. This
amendment was effective upon the issuance date of February 24, 2010. The adoption of ASU No. 2010-09 had no impact on our financial statements.

Note 2Liquidity and Financing Agreements

Our cash balance was $3,032,000 at December 31, 2010 and we are currently generating a net operating loss. We have no line of credit or other borrowing facility. Our available
liquidity is limited to our existing working capital and cash flow that we will be able to generate from operations. Our ability to generate increased cash from operations is determined primarily by
our ability to generate substantial new revenue.

We
continue our efforts to reduce fixed costs wherever possible. Effective November 1, 2010, we implemented temporary partial furloughs and salary reductions for members of our
management team in order to reduce SG&A costs. Members of our management team are subject to a flexible work schedule and adjusted compensation based on job requirements, including utilization on
client engagements. The work schedule of all members of our management team will be re-evaluated periodically. Work schedules and salaries may be adjusted as needed to ensure that
necessary functions are performed during this period and to accommodate further changes in business conditions and changes in individual utilization on client engagements. Effective Janaury 1, 2010 we
implemented a new incentive based compensation plan for our key practice leaders which provides each of them a substantial incentive opportunity based on performance while reducing our fixed costs.
Also, we have implemented a variable cost model for consulants to better match cost of salaries to revenue.

Based
on our financial forecast for 2011, we currently believe we have sufficient liquidity to sustain our operations at least through end of the first quarter of 2012. If circumstances
change, we could be required to seek other sources of liquidity during 2011. There can be no assurance that existing cash will be sufficient, that we will have access to the capital or credit markets
if needed or that any of our strategies can be implemented on satisfactory terms, on a timely basis or at all to provide additional liquidity.

F-13

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Table of Contents

THOMAS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (Continued)

Note 2Liquidity and Financing Agreements (Continued)

We
have no long-term debt. As of December 31, 2010, we had a short-term note payable of $39,000 for insurance premiums for 2011.

Total
interest expense for 2010 was $4,000, for finance charges on our note payable. Total interest expense for 2009 was $3,000, for fees related to our credit facility, which has since
expired and was not renewed. Total interest expense for 2008 was $8,000, comprised of $14,000 for fees related to our credit facility, a negative $13,000 for the write off of excess interest on tax
penalties related to the review of our historical stock option granting procedures and $7,000 for interest on Federal and state tax.

Note 3Property and Equipment

December 31,2010

2009In thousands of dollarsEquipment

$
864

$
864Furniture and fixtures


541


541Leasehold improvements


990


990Computer software


333


3332,728


2,728Less accumulated depreciation and amortization


(2,369
)

(2,110
)$
359

$
618


We
had no disposals of assets during the year ended December 31, 2010.

Note 4Accounts Payable and Accrued Liabilities

December 31,2010

2009In thousands of dollarsAccounts payable trade

$
142

$
462Accrued travel





61Other accrued liabilities


130


202$
272

$
725


Note 5Income Taxes

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

Years Ended December 31,2010

2009

2008In thousands of dollarsDomestic sources

$
(5,348
)
$
(7,697
)
$
(8,670
)Foreign sources


(236
)

802


405$
(5,584
)
$
(6,895
)
$
(8,265
)


F-14

---



Table of Contents

THOMAS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (Continued)

Note 5Income Taxes (Continued)

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

Years Ended December 31,2010

2009

2008In thousands of dollarsIncome taxes at statutory rate

$
(1,899
)
$
(2,344
)
$
(2,808
)Effect on taxes resulting from:State taxes


(90
)

(219
)

81Utilization of federal and foreign net operating losses, less benefit received








AMT credit adjustment





(30
)

30Change in valuation allowance


3,550





(59
)Non-deductible compensation and other


56


(26
)

306Income tax expense (benefit)

$
1,617

$
(2,619
)
$
(2,450
)


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

Years Ended December 31,2010

2009

2008In thousands of dollarsCurrent tax expense (benefit):Federal

$
38

$
(2,469
)
$
(2,719
)State


(3
)

(364
)

193$
35

$
(2,833
)
$
(2,526
)Deferred tax expense (benefit):Federal


1,247


178


146State


335


36


(70
)$
1,582

$
214

$
76$
1,617

$
(2,619
)
$
(2,450
)


F-15

---



Table of Contents

THOMAS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (Continued)

Note 5Income Taxes (Continued)

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

December 31,2010

2009In thousands of dollarsDeferred tax assets:Current:Accrued expenses

$
185

$
106Allowance for doubtful accounts


14


2Net operating loss carryforward





7Valuation allowance


(199
)

(4
)Net current deferred tax asset





111Non-current:Depreciation


(21
)

(20
)Deferred rent


9


43Minimum tax credit carryforward


197


197Net operating loss carryforward


3,225


1,300Deferred compensation





5Valuation allowance


(3,410
)

(54
)Net non-current deferred tax asset


0


1,471Total deferred tax assets


0


1,582Net deferred tax asset

$
0

$
1,582


At
December 31, 2010, we had $8.2 million of United States federal net operating loss carryforwards. Out of these carryforwards, $2.8 million are subject to a
$0.2 million Section 382 annual limitation expiring 2022. At December 31, 2010, we had approximately $7.5 million of state net operating loss carryforwards, expiring at
various times.

As
of December 31, 2009, we had approximately $58,000 in a valuation allowance for net deferred tax assets. These carryforwards are subject to a $0.2 million
Section 382 annual limitation expiring 2022. We continue to provide a valuation allowance of approximately $58,000 against our net deferred tax assets against net operating loss carryforwards
subject to annual limitation under Section 382. In the first quarter of 2010, our cumulative losses began to exceed our cumulative earnings. Our analyses of the positive and negative evidence
indicate that it is more likely than not that all of the net deferred tax asset will not be realized, and a full valuation allowance is required. As of December 31, 2010, we have
$3.6 million in valuation allowance. While the factors listed above were considered in assessing the sufficiency of a valuation allowance, there is no assurance an adjustment to the valuation
allowance would not need to be made in the future if information about future years change. Any change in the
valuation allowance would impact our income tax provision and net income in the period in which such a determination is made.

We
recognize deductible interest accrued related to tax penalties as interest expense in our Consolidated Statements of Operations and we recognize non-deductible accrued
interest and penalties

F-16

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Table of Contents

THOMAS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (Continued)

Note 5Income Taxes (Continued)

as
income tax expense in our Consolidated Statements of Operations. During 2010, we did not have any non-deductible penalties and interest.

We
are subject to the statutes of limitations for federal and state income taxes in the states in which we perform our services and generally, we are no longer subject to income tax
examinations for years before 2007.

Note 6Employee Benefit Plans

We sponsor a 401(k) retirement plan. We may match a portion of the participants' contributions or make profit-sharing contributions. Participants vest in our contributions ratably over
five years and may join when hired. Effective June 2010, the company does not match 401(k) contributions. Matching contributions were $14,000, $49,000 and $587,000 for the years ending
December 31, 2010, 2009, and 2008, respectively. We made no profit sharing contributions in any of these years.

Note 7Commitments and Contingencies

Operating lease commitments

We lease office space and various types of office equipment under non-cancelable operating leases. Rent expense related to
these operating leases totaled $0.6 million in 2010, $0.7 million in 2009, and $1.0 million for 2008.

In
June 2006, we entered into a lease agreement for our current office space in Irving, Texas. The lease agreement became effective September 1, 2006, and expires on
March 31, 2012. Minimum lease payments required under non-cancelable operating lease arrangements, including office leases, subsequent to December 31, 2010, are as follows:

Operating
LeasesIn thousands
of dollars2011

$
5512012


138Total minimum lease payments

$
689


Contingencies

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

We
have notified our employment liability insurance carrier of this claim, and we expect that much of our legal costs for this lawsuit will be covered by insurance, subject to a $50,000
deductible. We have

F-17

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Table of Contents

THOMAS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (Continued)

Note 7Commitments and Contingencies (Continued)

expensed
our legal costs to date in the period incurred. Through December 31, 2010, our legal costs in this matter have been $36,000.

We
are currently in negotiations to settle Mr. Steinberg's claims for a sum less than his asserted total claim, but that settlement has not been finalized as of March 24,
2010. There can be no assurance that such a settlement will be reached at this time.

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

Note 8Segment, Geographical and Major Customer Information

Segment and Geographical Information

We provide services within one industry segment and conduct our business primarily in North America and Europe with only occasional
activities elsewhere. During 2010, we conducted business primarily in North America and Europe. During 2009 and 2008, we conducted business primarily in North America and Europe and had one client in
South America. The geographical revenue and long-lived asset information is shown below:

North
America

South
America

Europe

Asia/Pacific

TotalIn thousandsYear ended December 31, 2010:Revenue

$
3,140




$
374




$
3,514Income/(loss) from continuing operations before income taxes

$
(5,348
)



$
(236
)



$
(5,584
)Long-lived assets

$
359










$
359Year ended December 31, 2009:Revenue

$
6,578

$
17

$
2,958




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

$
(7,697
)
$
17

$
785




$
(6,895
)Long-lived assets

$
618










$
681Year ended December 31, 2008:Revenue

$
20,860

$
573

$
3,688




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

$
(6,220
)
$
115

$
290




$
(5,815
)Long-lived assets

$
881










$
881


Major Customer Information

During 2010, one client accounted for approximately $0.7 million, or 19%, of North America revenues and another client accounted
for approximately $0.5 million, or 15%, of North America revenues. A third client accounted for approximately $0.5 million, or 13%, of North America revenues. A fourth client accounted
for approximately $0.4 million, or 11%, of North America revenues.

F-18

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Table of Contents

THOMAS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (Continued)

Note 8Segment, Geographical and Major Customer Information (Continued)

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

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

There
were no other clients from whom revenue exceeded 10% of any one geographical region's revenues in the years ended December 31, 2010, 2009, and 2008.

Note 9Related Party Transactions



Note 10Stock Based Awards

Options and Restricted Stock Awards

All share amounts subject to outstanding awards under the 2005 Omnibus Stock and Incentive Plan for Thomas Group, Inc, ("2005 Omnibus
Plan") and the 2008 Omnibus Stock
and Incentive Plan for Thomas Group, Inc, ("2008 Omnibus Plan") have been restated for the reverse stock split of 1 new share for each 5 old shares of our common stock. Effective August 13,
2010, we amended the 2005 Omnibus Plan and the 2008 Omnibus Plan to reflect the reverse stock split by adjusting the number of shares of common stock reserved for issuance under the plans. Options to
purchase shares of our common stock have been granted to directors, officers and employees. At September 30, 2010, options to purchase 20,110 shares of our common stock were outstanding and 110
were exercisable.

On
March 1, 2008, the Compensation Committee granted Michael McGrath, our newly appointed Executive Chairman, an initial award of 20,000 restricted shares of our common stock
which vested upon the date of grant, and a performance share award entitling Mr. McGrath to receive up to 70,000 shares of our common stock if certain conditions related to our profitability
were satisfied. The initial restricted share award was granted pursuant to the 2005 Omnibus Plan. The performance share award was granted pursuant to the 2008 Omnibus Plan.

In
December 2009, we determined that we would not achieve the annual profit goal for 2009 that was required for Mr. McGrath's performance share award to vest with respect to 2009.
It was also determined to be highly unlikely that we would meet the minimum profitability target required in 2010 for the "catch up" provision of Mr. McGrath's performance share award to be
effective. Since we determined that the "catch up" performance targets were unlikely to be achieved in 2010, the previously recognized compensation cost for Mr. McGrath for 2008 and 2009 was
reversed in December 2009. On March 9, 2010, with the consent of Mr. McGrath, the Compensation and

F-19

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Table of Contents

THOMAS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (Continued)

Note 10Stock Based Awards (Continued)

Corporate
Governance Committee of our Board of Directors cancelled Mr. McGrath's entire performance share award granted in 2008.

On
March 9, 2010, an award entitling Mr. McGrath to receive up to an aggregate of 120,000 shares of restricted stock was granted to Mr. McGrath with vesting of
30,000 shares at the end of each calendar quarter, contingent upon his being employed by us at the end of such calendar quarter. On March 31, 2010, the first 30,000 shares vested and were
issued to Mr. McGrath. On June 30, 2010, the second 30,000 shares vested and were issued to Mr. McGrath. On September 30, 2010, the third 30,000 shares were issued to
Mr. McGrath. On December 31, 2010, the fourth 30,000 shares were vested and issued to Mr. McGrath.

On
March 10, 2008, the Compensation Committee granted Earle Steinberg, our former President and Chief Executive Officer, an initial award of 10,000 restricted shares of our common
stock which vested on March 10, 2009, the one year anniversary of their grant, and a performance share award entitling Mr. Steinberg to receive up to 76,000 shares of our common stock if
certain conditions related to our profitability were satisfied. The initial restricted share award was granted pursuant to the 2005 Omnibus Plan. The performance share award was granted pursuant to
the 2008 Omnibus Plan.

Effective
December 21, 2009, Earle Steinberg was removed by the Board of Directors from his role as CEO and President. His employment agreement provided for payment of his salary
for six months following separation, under certain circumstances. This amount of potential liability was accrued at December 31, 2009 and September 30, 2010. We ceased payments to
Mr. Steinberg as of February 1, 2010 and have disputed our continuing liability for future payments under the employment agreement. He was no longer eligible for any outstanding
performance stock awards as of December 21, 2009. Thus, all accrued but unvested stock-based compensation cost for 2008 and 2009 was reversed in December 2009.

The
restricted share awards were valued on the date of grant using the closing price of our common stock on the Nasdaq Capital Market on that date. Compensation expense is recognized
over the applicable period of service.

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

2010

2009

2008Dividend yield


0
%

0
%

0
%Expected volatility


111
%

114
%

74
%Risk free interest rate


3.2
%

2.5
%

3.4
%Expected life (years)


5


5


5


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

F-20

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Table of Contents

THOMAS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (Continued)

Note 10Stock Based Awards (Continued)

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

A
summary of the status of our stock options to employees as of December 31, 2010, 2009, and 2008 and changes in the years then ended is presented below.

2010

2009

2008Common Option Shares

Shares

Weighted
Average
Exercise
Price

Shares

Weighted
Average
Exercise
Price

Shares

Weighted
Average
Exercise
PriceOutstanding at beginning of year


2,800

$
48.59


9,365

$
33.50


53,430

$
39.25Granted


20,000


14.00








Adjustments

















Exercised

















Forfeited


(22,690
)

14.00


(6,565
)

27.00


(44,065
)

40.50Outstanding at end of year


110


14.19


2,800


48.59


9,365


33.50Options exercisable at year-end


110

$
14.19


2,800

$
48.59


9,365

$
33.50Weighted average grant-date fair value of options granted




$





$





$



The
following table summarizes information about stock options outstanding at December 31, 2010.

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

Outstanding and
Exercisable

Weighted Average
Exercise Price$5.50-5.70


50


0.13


5.505.80-29.00


20


0.23


5.7929.00-29.25


40


0.35


29.25$5.50-29.25


110


0.23

$
14.19


Due
to the decline in stock price during 2010, the intrinsic value was approximately $0 for stock options outstanding and exercisable as of December 31, 2010 that had an exercise
price exceeding the
closing stock price on December 31, 2010, compared to $150 for stock options outstanding and exercisable as of December 31, 2009. There were no stock options exercised during 2010 and
2009.

We
had no outstanding non-vested options during 2010, 2009 or 2008.

F-21

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Table of Contents

THOMAS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (Continued)

Note 10Stock Based Awards (Continued)

Stock
based compensation expense for the years ended December 31, 2010, 2009 and 2008 was $0.5 million, $(0.6) million, and $1.1 million respectively. The restricted
stock awards are summarized below:

2010

2009

2008Restricted Stock Awards

Shares

Weighted
Average
Exercise
Price

Intrinsic
value

Shares

Weighted
Average
Exercise
Price

Intrinsic
value

Shares

Weighted
Average
Exercise
Price

Intrinsic
valueOutstanding grants at beginning of year


24,267

$
0.00

$
75,227


156,000

$
0.00

$
374,000


106,000

$
0.00

$
4,155,200Awards Granted


120,000

$


$





$
0.00

$



176,000

$
0.00

$
2,906,200Vested


(120,000
)
$
0.00

$
150,300


(10,000
)
$
0.00

$
28,500


(40,000
)
$
0.00

$
576,000Forfeited


(24,267
)
$
0.00

$



(121,773
)
$
0.00

$
377,373


(86,000
)
$
0.00

$
1,012,601Outstanding grants at year end


0

$
0.00

$
0.00


24,267

$
0.00

$
75,227


156,000

$
0.00


397,800Restricted stock exercisable at year end




$








$








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




$
0.63







$
1.34







$
10.54Weighted average life of outstanding awards (years)














8.17








8.80


Of
the 40,000 shares of restricted stock awards that vested during 2008, 5,290 shares were withheld in satisfaction of tax requirements.

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

Tax
benefit for options and stock awards exercised was $0, $45,000 and $279,000 for the years ended December 31, 2010, 2009 and 2008.

Stock Appreciation Rights

There were no Stock Appreciation Rights activities during 2010, 2009 and 2008.

Registered Status of Award Shares

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

F-22

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Table of Contents

THOMAS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (Continued)

Note 11Supplemental Disclosure of Cash Flow Information

Years Ended December 31,2010

2009

2008In thousands of dollarsInterest paid

$
4

$
3

$
14Income taxes paid

$
11

$
40

$
1,131


Note 12Valuation and Qualifying Accounts

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

Year Ended December 31,2010

2009

2008In thousands of dollarsAllowance for doubtful accounts:Beginning balance

$
5

$
11

$
45Additions to expense


43





345Reductions of allowance


(6
)

(6
)

(379
)Ending balance

$
42

$
5

$
11Deferred tax asset valuation allowance:Beginning balance

$
58

$
58

$
117Additions to valuation allowance


3,551


Reductions of valuation allowance








(59
)Ending balance

$
3,609

$
58

$
58


Note 13Selected Quarterly Financial Data (Unaudited)

2010For the Three Months EndedMar. 31

June 30

Sept. 30

Dec. 31In thousands, except per share dataRevenue

$
1,651

$
994

$
519

$
351Gross profit (loss)


504


169


167


(16
)Operating loss


(1,472
)

(1,446
)

(1,499
)

(1,347
)Net loss

$
(2,905
)
$
(1,446
)
$
(1,502
)
$
(1,348
)Loss per shareBasic

$
(1.38
)
$
(0.68
)
$
(0.70
)
$
(0.62
)Diluted

$
(1.38
)
$
(0.68
)
$
(0.70
)
$
(0.62
)Weighted average sharesBasic


2,093


2,122


2,152


2,182Diluted


2,093


2,122


2,152


2,182


F-23

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Table of Contents

THOMAS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (Continued)

Note 13Selected Quarterly Financial Data (Unaudited) (Continued)



2009For the Three Months EndedMar. 31

June 30

Sept. 30

Dec. 31In thousands, except per share dataRevenue

$
3,288

$
2,619

$
2,098

$
1,547Gross profit


1,442


886


712


355Operating loss


(1,920
)

(2,264
)

(1,883
)

(1,254
)Net loss

$
(1,225
)
$
(1,354
)
$
(1,581
)
$
(1,163
)Loss per shareBasic

$
(0.57
)
$
(0.63
)
$
(0.48
)
$
(0.32
)Diluted

$
(0.57
)
$
(0.63
)
$
(0.48
)
$
(0.32
)Weighted average sharesBasic


2,136


2,133


2,123


2,102Diluted


2,136


2,133


2,123


2,102


F-24

---