Use these links to rapidly review the documentTABLE OF CONTENTS FORM 10-K.ITEM 14(a)(1) Thomas Group, Inc.

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-K

|ý  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required] FOR THE YEAR ENDED DECEMBER 31, 2001.      
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------
|OR
|o  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] FOR THE TRANSITION PERIOD FROM
 TO .

Commission file number 0-22010

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THOMAS GROUP, INC.

(Exact name of registrant as specified in its 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(Address of principal executive offices) |  | 75039-3714(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 registered
|Common stock, par value $.01 per share                                                          |  | NASDAQ-NMS                               

Securities registered pursuant to Section 12(g) of the Act: Rights to purchase common stock

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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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. ý Yes / No o

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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. o

As
of April 8, 2002, the aggregate market value of the voting stock held by non-affiliates of the registrant was $4,218,038, based on the NASDAQ-NMS
closing price of $1.50.

As
of April 8, 2002, the following number of shares of the registrant's stock were outstanding:

Common stock

4,169,376Class B common stock

3,970Total

4,173,346


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TABLE OF CONTENTS



|                                           |         |           
|------------------------------------------ | ------- | ----------
|PART I                                     |         |           
|                                           | Item 1. |           
|                                           | Item 2. |           
|                                           | Item 3. |           
|                                           | Item 4. |           
|PART II                                    |         |           
|                                           | Item 5  |           
|                                           | Item 6  |           
|                                           | Item 7  |           
|                                           | Item 7a |           
|                                           | Item 8  |           
|                                           | Item 9  |           
|PART III                                   |         |           
|                                           | Item 10 |           
|                                           | Item 11 |           
|                                           | Item 12 |           
|                                           | Item 13 |           
|PART IV                                    |         |           
|                                           | Item 14 |           
|                                           |         | Signatures
|Index to Consolidated Financial Statements

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PART I

ITEM 1.Business.

General

Thomas Group, Inc. (the "Company"), established in 1978, is an international, professional services firm focusing on improving operations, competitiveness
and financial performance of major corporate clients through process improvement and strategically aligning operations with technology. Recognized as a leading specialist in operations consulting, the
Company creates and implements custom improvement strategies for sustained performance improvement. The Company's clients are typically large companies, many of whom are included in the Fortune or
Global 1000.

The
Company's products are based on three fundamental principles: a metrics-driven process, attaining and sustaining significant results for clients and program implementation by
consultants with senior management experience in industry.

Since
1978, the Company has been developing and improving its Process Value Management ("PVM") methodology for achieving operational excellence. PVM is based on the Company's Total Cycle
Time ("TCT") methods, first introduced in 1978, and supplements TCT with numerous process improvement tools the Company has developed over the last 24 years. PVM continues to contribute to the
measurable improvement of hundreds of companies.

During
the Company's first ten years, it originated many of the fast-process methods that transform the processes, procedures and people within clients' organizations to
create smooth, efficient and seamless operations. These methods quickly became standard operations for the electronics and semiconductor
industries. Soon afterwards, they were being applied to general manufacturing, heavy industry and product inventory. In the late 1980s, in response to numerous client requests, the Company applied the
fast-process tools and methods to non-manufacturing processes such as product development, sales, marketing and the strategic alignment of resources. The application of
fast-process tools across the entire enterprise led to major process and productivity gains in "white collar" areas that had been ignored for years in the manufacturing plant, again
delivering substantial gains for its clients. Today, the Company is involved with new tools, both proprietary and non-proprietary, to drive higher results. The Company is working to help
link all of a corporation's strategic processes, not only across its internal functions, but also across entities and geographies.

Statement of Business

The Company's business is helping its clients improve their bottom-line results using the Company's senior executives who work
side-by-side with clients to remove barriers, increase productivity, change culture, and focuseveryoneon quickly satisfying
customer needs. This has been the sole focus of the Company since our beginning in 1978.

Process Value Management

The Company's PVM approach is based on its 24 years of experience with process improvement tools and methodologies that drive financial
bottom-line results. The Company uses PVM to help an enterprise determine strategic business processes, assess their linkages and efficiencies, and prescribe short-and
long-term enhancement programs that optimize customer satisfaction and shareholder value. The Company's staff of business professionals who apply PVM methodology are referred to by the
Company as "Resultants." An initial client assignment might typically address one or more of these key processes that are dragging down performance. A long-term relationship might involve
an implementation team of Resultants working with the corporation over a number of years to achieve a total transformation to the "Process Managed Enterprise".

1

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Experience
has taught us that:



Total Cycle Time

The Company's initial offering, TCT, centers on reducing cycle times and increasing first pass yield (quality), therefore improving overall productivity. Using
the Company's methods, business process cycle timesthe time from the beginning to the end of any business activitycan normally be reduced by up to 50% whether the process is
engineering, manufacturing or sales.

For
example, in a manufacturing setting, it might take 30 days from the time an order is received until the order is shipped. The Company first determines the baseline time of
that processthe time currently expended doing the work. Based on the Company's best practices, a multiplier is used to move from baseline to "entitlement"how fast the process
should run with current resources. The Company's Resultants then work with client management to reduce the current rate to the entitlement by mapping the process, eliminating unnecessary steps, and
removing process and cultural barriers.

The
key to TCT's success is the Resultants' ability to identify the right metrics to drive the business and the critical processes of the business. Many companies only look at results measures, such as
return on net assets. The problem with results measures is that by the time their value is known, it is too late in the
process to employ corrective measures. However, when predictivedriver measuressuch as cycle time and first pass yield are used, clients can determine
the trajectory of their business and make adjustments as needed.

The
Company uses a "cockpit chart" approach to capture the key measurements for a business and to ensure that the focus is on the appropriate processes that will drive results. Cockpit
charts contain a balanced combination of results and driver measurements. In addition, these top-level measurements are hierarchical and represent the roll-up of the key
processes.

TCT
remains a core of the Company's PVM methodology.

TTMOPTTMIZE

New product development is a particularly complex challenge for most enterprises. It requires not only coordinated participation from resources across the
organization but also the successful blending of the creative and operational aspects of the development process. Additionally, there is a constant juggling act as multiple new product programs of
differing length, cost, risk, complexity and resource requirements begin and end. Finally, there is the critical element of time: being second to market with a breakthrough innovation is too late, and
in any event there can be no return on investment of any development activity until that new product enters the marketplace.

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As
is in all activities of the Process Managed Enterprise, time is of the essence. In the case of new product development, the management challenge is two dimensional: one dimension is
managing the new product development process in terms of time, quality and cost, what the Company calls time to market ("TTM"); the other is assessing these programs in a portfolio context to maximize
resource utilization and portfolio returns.

The
Company's solution to the TTM issue is to couple the Company's existing PVM process approach and measurements with a new, proprietary database tool that can be applied across new
product development activities. This combination, called OPTTMIZE, improves new product project tracking, shortens new product introduction times, and quantifies new product portfolio performance.

OPTTMIZE
brings a new level of visibility, particularly in the area of time to market and constrained resources, with both data and tools that link process improvement to improved
resource utilization, higher returns on investment, and reduced time to market.

Supply Chain Process Value

Supply chain management ("SCM") has matured over the last decade. A milestone in the maturity of SCM, driven by the need for value control in today's competitive
global environment, is the leading-edge concept that the demand side management within a supply chain has as much impact on value and cash management as does supply side management.

This
is an excellent example of recognizing the interconnectivity of processes and supports the need to shift from a functional to a process view of SCM. Thomas Group's own Supply Chain
Process Value ("SCPV") offering within its overarching PVM approach, balances demand side management and supply side management while optimizing responsiveness, quality and value.

The
Company has helped hundreds of clients make a successful transition from functional organizations to efficient SCPV cross-functional teams. Using this PVM architecture, the Company
analyzes the client's operations and supply chain network, then applies tools such as TCT and OPUS (described below) to drive down inventory levels, reduce delivery time and improve order accuracy.
Ideally, this process links back into the client's suppliers and customers and drives additional benefits.

Inventory Optimization ("OPUS")

Many enterprises are learning that reducing high inventory is as much a process challenge as a technological one. Specifically, long cycle time processes require
high inventories, so reducing inventories without cycle time reductions necessarily creates stock outs and unpredictable service levels. Furthermore, unpredictable customer demand and supplier
performance introduces supply chain risk that is similarly managed through higher inventory levels.

To
comprehensively optimize inventory (maximize availability, remove waste, increase controls and improve customer satisfaction while minimizing investment) requires an understanding of
how these key factors interact in both time and risk to impact inventory at the part number level.

The
Company's approach to inventory optimization simultaneously addresses these risk and time variables through process management activities that are guided by a software tool called
OPUS. OPUS optimizes inventory across six independent risk and time variables, allowing inventory parameters to be set by part number.

This
process approach, supported by the OPUS decision support tool, delivers inventory optimization in a relatively short amount of time.

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Summary

Over the years, the Company has become a leader in implementing process improvement strategies that make companies faster and improve their competitiveness and
financial performance. This ability to link and align a client organization's strategy, technology, people and processes offers a powerful and unique benefit to client companies faced with integrating
their operations, internally and externally, throughout the value chain. The Company's strategic plan is to continually add value to its core PVM product offering and to expand its marketing reach
through partnerships with industry leaders.

Competitive Strategy

The Company's strategy is to maintain and enhance its position in the development and implementation of its PVM methodology. The Company's strategy includes the
following key elements, many of which differentiate it from traditional providers of consulting services.

Emphasize Results.The Company may enter into incentive fee contracts, which make a portion of its revenue from a particular
program contingent upon certain measurable results. The Company offers incentive fee contracts in cases where the client prefers that the Company share the risks to achieve entitled results or for
clients who prefer to work on a gain-sharing basis. The Company's competitors generally charge fees based on time expended regardless of results. Thus. the Company's willingness to enter
into incentive fee contracts demonstrates the Company's confidence that its programs will positively enhance the businesses of its clients and furthermore provides significant competitive
differentiation and advantage.

Target Large Clients and Multiple Program Opportunities.The Company has focused its marketing efforts on companies with
annual revenues greater than $400 million, preferably where sequential program opportunities exist. The Company believes larger clients provide greater revenue opportunities because such
clients are likely to realize greater economic benefit from the Company's services and will be more likely to engage the Company in follow-on programs.

Focus on Results Implementation and Continuous Improvement.By applying PVM throughout the client's complete business or
business unit and by working in close cooperation with the client's management, the Company believes it can more effectively drive operational performance improvements and their associated financial
benefits. The Company stresses hands-on implementation of process improvements and focuses on implementation of prioritized changes that improve the client's business culture and
processes. In addition to implementing change through its PVM plan, an essential element of a PVM program is "leaving behind" with the client the knowledge and skills needed for the client to continue
to sustain continuous improvement. In contrast, traditional consulting firms often provide subject expertise in the form of written assessments or reports that focus on discrete functions or an
isolated segment of a business.

Experienced Professional Staff.The Company employs professionals with extensive business management experience, often
20 years or more. Traditional consulting firms often hire recent business school graduates with expertise in a particular subject matter, rather than expertise in business management. The use
of seasoned professionals significantly improves the ability of the Company to effectively implement its PVM methodologies and creates a significant competitive difference and advantage for the
Company.

Program Focus.The Company focuses primarily on cultural and business process barriers rather than on subject matter barriers
and functional units. The Company believes reductions in cultural and business process barriers have a greater impact on improving a client's performance.

4

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Clients

The Company's clients are typically large, well-established manufacturing, project and service companies, or distinct business units of such
companies, in the United States, Europe, and the Asia/Pacific region. Many of the Company's clients are Fortune or Global 1000 companies. The Company has worked for over 250 clients, including the
following:

|AerospaceAerostructures
Delta Air Lines
Gulfstream
ITT Cannon
LSG Sky Chefs
Lufthansa Cargo
Lufthansa Technik
McDonnell Douglass
TRW AutomotiveAdam Opel
Audi
Robert Bosch
Delco
Delphi
Detroit Diesel
GM
GM DELCO
GM/Warranty
Meritor
Osram
Saab
Siemens Apparel ManufacturerEsquel Group
Tristate Holdings Banking, Financial Services,
InsuranceDG Bank
Forethought Insurance
Olivetti ChemicalHeraeus
Shipley Consumer ProductsGivaudan
HengAn
Hillenbrand
Kodak
Polaroid
Rand McNally
Robert Bosch
Rubbermaid |  | DistributionProSource
W.W. Grainger ElectronicsABB
Berg
EDS
Euclid-Hitachi
Flat Panel Display
GTE Control Devices
Gemplus
Johnson Electric
Motorola
Osram
Philips
Texas Instruments
Western Digital
Yuasa Exide Batteries HealthcareMallinckrodt GovernmentFAA
Acton Burnell Manufacturing/IndustrialBreguet
Dover
Emerson
Kimberly Clark
Leeds & Northrup
Moore
Pawnee Industries
Pinnacle-lvey
Radium
Robert Bosch
Siemens
Stewart and Stevenson
Teledyne
Thrall
Xerox Mechancial EngineeringABB
Alstom Power
Dresser Waukesha
Dresser-Rand
GEA
Hilti
Schindler |  | Medical Equipment SuppliesBoston Scientific
Siemens Medical
GE Medical Specialty RetailTuesday Morning SemiconductorAlcatel Mietec
AMI Microsystems
ASM Lithography
AT&T Semiconductor
Cypress Semiconductor
Fairchild Semiconductor
Ford Microelectronics
Hewlett Packard
Hyundai
IBM
LG Semiconductor
NCR
National Semiconductor
Matra MHS
Motorola
Philips Semiconductor
Rockwell
Signetics
ST Microelectronics
Taiwan Semiconductor
Trilogy TelecommunicationsAllen Telecom UtilitiesPECO
Siemens
Southern Indiana Gas & Electric
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

5

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There can be no assurance that the Company will perform services for any of its previous clients in the future. In order to maintain and increase
its revenues, the Company will need to add new clients or expand existing client relationships to include additional divisions or business units of such clients.

The
Company operates in one industry segment, but conducts its business primarily in three geographic areas: the United States, Europe and Asia/Pacific. Information regarding these areas
follows:

|                              |  | United States |        | Europe |   | Asia/Pacific |  | Corporate |        | Total
|----------------------------- |  | ------------- | ------ | ------ | - | ------------ |  | --------- | ------ | -----
|
|Year ended December 31, 2001: |  |               |        |        |   |              |  |           |        |      
|Revenue                       |  | $             | 12,314 |        | $ | 28,680       |  | $         | 10,676 |      
|Gross profit (loss)           |  | $             | 9,871  |        | $ | 9,968        |  | $         | (1,387 | )    
|Long-lived assets             |  | $             | 2,627  |        | $ | 857          |  | $         | 266    |      
|Year ended December 31, 2000: |  |               |        |        |   |              |  |           |        |      
|Revenue                       |  | $             | 30,171 |        | $ | 29,040       |  | $         | 8,487  |      
|Gross Profit                  |  | $             | 17,381 |        | $ | 13,366       |  | $         | 496    |      
|Long-lived assets             |  | $             | 2,909  |        | $ | 1,071        |  | $         | 17     |      
|Year ended December 31, 1999: |  |               |        |        |   |              |  |           |        |      
|Revenue                       |  | $             | 39,933 |        | $ | 18,352       |  | $         | 5,521  |      
|Gross profit                  |  | $             | 16,168 |        | $ | 10,688       |  | $         | 1,352  |      
|Long-lived assets             |  | $             | 2,011  |        | $ | 680          |  | $         | 51     |      

In
2001, three clients, Robert Bosch, Adam Opel and Acton Burnell, accounted for 37%, 11% and 11% of the Company's total revenue, respectively.

In
2000, three clients, Robert Bosch, General Motors and Boston Scientific, accounted for 29%, 16% and 14% of the Company's total revenue, respectively.

In
1999, three clients, General Motors, Robert Bosch and Delphi Delco, accounted for 21%, 15% and 12% of the Company's total revenue, respectively.

Contractual Arrangements

The Company performs PVM services for clients pursuant to contracts, generally with terms of one to three years, or targeted process improvement programs that
could last from three to six months. Clients compensate the Company for its services in the form of fixed fees or a combination of fixed and incentive fees (based on client improvements achieved). The
Company's fee structure is based on a client's size, the complexity and geographic deployment of a client's business, the level of improvement opportunity available to a client and certain other
factors.

Fixed
fees are recognized proportionately as revenue over the term of the contract as performance measures are achieved. Incentive (performance-oriented) revenue is recognized in the
period for which performance improvement is being measured and is based on agreed-upon formulas relating to improvements in customer-specific measures. Factors such as a client's
commitment to TCT, general business and economic cycles and a client's product position in the marketplace will affect the performance of the Company's clients, thus affecting the Company's revenue
from incentive fee compensation. In 2001, 2000, and 1999, approximately 29%, 8% and 10%, respectively, of the Company's revenue was attributable to incentive fees.

The
Company includes in its business under commitment (backlog) signed client contracts with terms generally ranging from 12 to 18 months. Business under commitment was
$32.6 million at December 31, 2001, of which approximately $19.6 million is expected to be realized within fiscal 2002.

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Competition

Traditional consulting firms provide services similar in some respects to the services provided by the Company. Providers of such services include A.T.
Kearney, Inc., Boston Consulting Group, McKinsey & Co., as well as several small firms that primarily focus on time-based management services. Many of the Company's
competitors have greater personnel, financial, technical and marketing resources than the Company, and there can be no assurance the Company will be able to compete successfully with its existing
competitors or with any new competitors.

The
Company believes the competitive factors most important to its business are the unique quality of its PVM methodology, the quality and character of its professional staff, its
willingness to be compensated on an incentive basis, its reputation for achieving targeted results and its dedication to implementation of programs that deliver results. The Company believes that no
significant competitors offer their clients the opportunity to base fees on the results achieved or emphasize hands-on implementation to the same extent as the Company.

The
Company believes its most significant "competitor" is the propensity for potential clients to "self-medicate" by attempting to implement changes in their businesses
themselves in the belief they will achieve results comparable to those resulting from the Company's services without the assistance of outside professionals. The Company believes these attempts to
self-medicate result in limited success. However, such attempts may substantially lengthen the Company's sales cycle and may, therefore, limit its business opportunities.

Because
the PVM methodology or related shorter term products are not capable of being patented, there can be no assurance the Company will not be subject to competition from others using
substantially similar methodologies. However, the Company believes its base of knowledge, experience and clients provides it with a competitive advantage.

Intellectual Property

The Company has secured federal registration for the service marks "Total Cycle Time®," "TCT®," "5 I's Process®" and "Cycles
of Learning®." These registrations expire from August 2002 to January 2003. The Company has filed an application for federal service mark registration for several other marks
important to its business. The Company has also made appropriate filings in several European countries to secure protection of its marks in those countries. The Company considers each of these service
marks to be significant to its business.

The
Company's proprietary methodologies have been developed over 20 years at great expense, have required considerable effort on the part of skilled professionals, are not
generally known and are considered trade secrets. In some circumstances, the Company grants clients a limited license to make internal use of certain of the Company's proprietary methodologies
following completion of a program. The Company maintains its trade secrets in strict confidence and as part of its standard engagement.

The
Company has entered into nondisclosure and noncompete agreements with its current and former employees. There can be no assurance that such agreements will deter any employee of the
Company from disclosing confidential information to third parties or from using such information to compete with the Company in the future.

Employees

At March 31, 2002, the Company had a total of 211 employees, consisting of 104 full-time Resultants, 53 part-time Resultants and 54
sales and administrative employees. The Company's employees are not represented by a labor union and are not subject to any collective bargaining agreement. The Company considers its employee
relations to be good.

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ITEM 2.Properties.

The Company leases approximately 17,000 square feet of office space at its principal executive office in Irving, Texas, under leases that expire in
July 2006. The Company also leases space for its offices in Troy, Michigan; Frankfurt, Germany; Singapore and Hong Kong. The Company believes these facilities are adequate for its current
needs.

ITEM 3.Legal Proceedings.

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

ITEM 4.Submission of Matters to a Vote of Security Holders.

No matters were submitted to a vote of stockholders, through the solicitation of proxies or otherwise, during the quarter ended December 31, 2001.

PART II

ITEM 5.Market for Registrant's Common Equity and Related Stockholder Matters.

Market for Registrant's Common Equity

The Company's common stock is traded on the NASDAQ National Market System under the symbol TGIS. The stock prices set forth below represent the highest and lowest
sales prices per share of the Company's common stock as reported by the NASDAQ National Market System. The prices reported in the following table by the NASDAQ National Market System reflect
inter-dealer prices without retail mark-up, mark-down or commissions.

Quarter Ended

High

LowMarch 31, 2000

$
12.25

$
8.25June 30, 2000

$
11.69

$
6.25September 30, 2000

$
9.00

$
6.25December 31, 2000

$
8.44

$
3.50March 31, 2001

$
7.75

$
4.00June 30, 2001

$
5.98

$
4.90September 30, 2001

$
5.25

$
3.00December 31, 2001

$
3.90

$
1.53


There
is no established public market for the Company's Class B common stock.

Holders of Record

As of March 8, 2002 there were approximately 141 holders of record of the Company's common stock.

As
of March 8, 2002 there were 8 holders of the Company's Class B common stock.

Dividends

The Company has not paid cash dividends on its common stock. The Company intends to retain future earnings to provide funds for use in the operation and expansion
of the business, and accordingly, does not anticipate paying regular cash dividends on its common stock in the foreseeable future.

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ITEM 6.Selected Financial Data.

The following table sets forth selected historical financial information of the Company. This historical financial information has been derived from the audited
financial statements of the Company and, with respect to data for 1997 is adjusted for the reclassification of discontinued operations. This information should be read in conjunction with, and is
qualified by, the consolidated financial statements and notes thereto included in this and previous Annual Reports on Form 10-K.

|                                                             |                                                  | Year ended December 31, |        
|------------------------------------------------------------ | ------------------------------------------------ | ----------------------- | -------
|
|Statement of Operations Data:                                |                                                  |                         |        
|Revenue from continuing operations                           |                                                  | $                       | 51,670 
|Operating expenses                                           |                                                  |                         | 61,371 
|                                                             |                                                  |                         |        
|Operating income (loss)                                      |                                                  |                         | (9,701 
|Other income (expense), net                                  |                                                  |                         | 28     
|                                                             |                                                  |                         |        
|Income (loss) from continuing operations before income taxes |                                                  |                         | (9,673 
|Income tax expense                                           |                                                  |                         | 5,959  
|                                                             |                                                  |                         |        
|Income (loss) from continuing operations                     |                                                  |                         | (15,632
|Discontinued operations:                                     |                                                  |                         |        
|                                                             | Income (loss) from operations, net of income tax |                         |        
|                                                             | Loss on disposal, net of income tax              |                         |        
|                                                             |                                                  |                         |        
|Net income (loss)                                            |                                                  | $                       | (15,632
|                                                             |                                                  |                         |        
|Earnings (loss) per share:                                   |                                                  |                         |        
|Basic                                                        |                                                  |                         |        
|                                                             | Income (loss) from continuing operations         |                         | $      
|                                                             | Income (loss) from discontinued operations       |                         |        
|                                                             |                                                  |                         |        
|                                                             | Net income (loss)                                |                         | $      
|                                                             |                                                  |                         |        
|Diluted                                                      |                                                  |                         |        
|                                                             | Income (loss) from continuing operations         |                         | $      
|                                                             | Income (loss) from discontinued operations       |                         |        
|                                                             |                                                  |                         |        
|                                                             | Net income (loss)                                |                         | $      
|                                                             |                                                  |                         |        
|Weighted Average Shares                                      |                                                  |                         |        
|                                                             | Basic                                            |                         |        
|                                                             | Diluted                                          |                         |        

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|                                                    |  | Year ended December 31
|--------------------------------------------------- |  | ----------------------
|
|Balance Sheet Data                                  |  |                       
|Working capital                                     |  | $                     
|Total assets                                        |  | $                     
|Long-term obligations, including current maturities |  | $                     
|Total stockholders' equity                          |  | $                     

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

The following discussion should be read in conjunction with the Company's Consolidated Financial Statements and the notes thereto and the other information
included in Item 14(a)(1) and (2) of this Annual Report on Form 10-K.

Overview

The Company derives the majority of its revenue from monthly fixed and incentive fees for the implementation of PVM and other business improvement programs.
Incentive fees are tied to improvements in a variety of client performance measures typically involving response time, asset utilization and productivity. Due to the Company's use of incentive fee
contracts, variations in revenue levels may cause fluctuations in quarterly results. Factors such as a client's commitment to a PVM program, general economic and industry conditions and other issues
could affect a client's business performance, thereby affecting the Company's incentive fee revenue and quarterly earnings. Quarterly revenue and earnings of the Company may also be impacted by the
size of individual contracts relative to the annual revenues of the Company.

In
addition to its domestic operations, the Company has operations and contracts in its Europe and Asia/Pacific regions. The majority of contracts in these regions have been denominated
using the United States dollar. However, some of the Company's contracts are in the local currency of the client; therefore, the Company is exposed to currency fluctuation risks.

Discontinued Operations

In 1998, the Company announced its plans to dispose of its Information Technologies business segment. The sale of the Company's Information Technologies assets
closed on August 31, 1998. No proceeds were received at the time of the transaction, but the agreement included earn-outs that could have been earned over the next five years. In
exchange, the Company was relieved of the liabilities related to extended service contracts. On September 30, 2001, the buyer of the Information Technologies segment sold those assets acquired,
which contractually voided the Company's ability to earn amounts from the agreement's earn-out provisions. As such, the Company received no earn-outs from the agreement.

During
the third quarter of 1999, the Company recorded a $2.0 million after tax charge to discontinued operations as a result of the settlement of a lawsuit related to the
Company's Information Technologies business segment. In December 1999, the Company recognized a $0.3 million after tax charge to discontinued operations due to additional legal costs.

During
the second quarter of 2000, the Company recognized an after tax gain of $0.1 million from discontinued operations as a result of reimbursement of legal fees in connection
with prior litigation.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and
assumptions that affect the amounts reported

10

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in the accompanying financial statements and related footnotes. 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. The Company believes the following critical accounting policies require management's most
difficult, subjective and complex judgments.

Revenue Recognition

Revenue is recognized when realizable and earned generally as services are provided over the life of the contract. Incentive fee revenue is recognized in the
period in which the related improvements are achieved. Fixed fees are recognized as they become billable per the terms of the contracts, which generally represent effort expended to date on a contract
on a percentage of completion basis. In order to mitigate the risk of disputes arising over the achievement of performance improvements, which drive incentive fees, the Company obtains customer
agreement to these achievements prior to recognizing revenue.

Deferred Taxes

For United States federal tax purposes, at December 31, 2001, the Company had net operating loss carryovers of approximately $4.4 million, which
begin to expire in 2021 and unused foreign tax credit carryovers of $3.4 million, which begin to expire in 2003. In Asia, the Company has approximately $6.6 million of net operating loss
carryovers, which currently do not have any statutory expiration date. Due to the uncertainty of the Company's ability to utilize its net deferred tax assets, the Company has provided a valuation
allowance of $7.9 million. If the Company generates United States taxable income in future periods, reversal of the valuation allowance could have a significant positive impact on net income in
the period that it becomes more likely than not that the net operating loss carryover will be recognized. Utilization of net operating loss carryforwards in the future may be limited if changes in the
Company's stock ownership create a change of control as provided in Section 382 of the Internal Revenue Code of 1986, as amended.

Unless
otherwise stated, the discussion that follows pertains to continuing operations only.

|                                                             |  | Percentage Of Revenue
For Year Ended December 31, |   
|------------------------------------------------------------ |  | ------------------------------------------------- | --
|
|Revenue from continuing operations                           |  | 100.0                                             | % 
|Cost of sales                                                |  | 64.3                                              | % 
|                                                             |  |                                                   |   
|Gross profit                                                 |  | 35.7                                              | % 
|Selling, general and administrative                          |  | 48.8                                              | % 
|Litigation settlements                                       |  | 5.7                                               | % 
|                                                             |  |                                                   |   
|Operating income (loss)                                      |  | (18.8                                             | )%
|Other income, net                                            |  | 0.1                                               | % 
|                                                             |  |                                                   |   
|Income (loss) from continuing operations before income taxes |  | (18.7                                             | )%
|Income taxes                                                 |  | 11.5                                              | % 
|                                                             |  |                                                   |   
|Income (loss) from continuing operations                     |  | (30.2                                             | )%
|                                                             |  |                                                   |   

11

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Results of Operations

2001 Compared to 2000

Revenue

Revenue decreased $16.0 million, or 24%, to $51.7 million in 2001, from $67.7 million in 2000. Fixed fee revenue was $36.8 million, or
71% of revenue in 2001, compared to $62.0 million, or 92% in 2000. Incentive fee revenue was $14.9 million, or 29% of revenue in 2001, compared to $5.7 million, or 8% in 2000.

United
States region revenue decreased $17.9 million, or 59%, to $12.3 million in 2001, from $30.2 million in 2000. The decrease relates to three major contracts,
operating primarily in 2000, which accounted for net revenue of $16.3 million. Due to the general economic downturn, the Company was unable to replace this revenue with contracts of a similar
magnitude during 2001.

Asia/Pacific
region revenue increased $2.2 million, or 26%, to $10.7 million in 2001, from $8.5 million in 2000. The increase reflects revenue on new contracts in
2001 exceeding revenue on completed contracts during 2000 by $0.8 million. The growth in the Asia/Pacific region also reflects a $1.4 million revenue increase when comparing existing
contracts from 2001 to 2000.

Europe
region revenue decreased $0.3 million, or 1%, to $28.7 million in 2001, from $29.0 million in 2000. The decrease is attributable to revenue from a significant
client, which produced revenue of $19.2 million in 2001 compared to $19.6 million in 2000.

Gross Profit

Gross profit for 2001 decreased to $18.5 million and 36% of revenue from $31.2 million and 46% of revenue in 2000. The primary reason for the
decrease in gross profit margin was decreased revenue of $16.0 million related to the adverse economic climate the Company's potential and existing clients faced
during 2001. This economic downturn forced potential and existing clients to delay and/or cancel programs. The impact of this revenue decrease on gross profit offset the efficiencies gained related to
a $3.2 million decrease in cost of sales. The decrease in cost of sales relates primarily to lower personnel cost due to staff reductions. The decrease in cost of sales was negatively impacted
by increased severance cost of $1.0 million as a result of these staff reductions.

Selling, General and Administrative

Selling, general and administrative expense decreased 4% to $25.2 million in 2001, from $26.2 million 2000. The decrease in selling, general and
administrative relates to a $1.2 million reduction in personnel expense resulting from staff reductions during 2001, lower bad debt expense of $0.5 million and a decrease in depreciation
expense of $0.4 million. These cost decreases were offset by increased incentive compensation expense of $1.1 million related to the Company's incentive plan, which was paid in the first
two quarters of 2001.

Litigation Settlements

On March 16, 2001, the Company received notice of a claim from Balanced Scorecard Collaborative, Inc. ("BSCol"), to mediate/arbitrate a dispute
regarding BSCol's claim for unpaid fees under the parties' March 2000 agreement. The matter was not settled during an April 26 mediation, and consequently was resolved by a proceeding
before a neutral arbitration panel in Dallas, Texas, during the week of September 17, 2001, pursuant to an arbitration provision in the parties' agreement. On October 5, 2001, the
Company received an adverse ruling from the arbitration panel. The decision of the arbitration panel awarded BSCol $2.4 million. The total cost of the litigation of $2.9 million,

12

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including legal fees of $0.5 million, is presented separately as litigation settlement in the Company's Consolidated Statements of Operations.

During
2000, the Company was party to an arbitration proceeding with Overhead Door Corporation, a former client, to collect unpaid fees. The Company received an adverse ruling from the
arbitration panel. The total cost to the Company, including legal fees, was $0.7 million and is presented separately as litigation settlement in the Company's Consolidated Statements of
Operations.

Income Taxes

The Company's effective tax rate for 2001 was (62)% compared to 40% in 2000. The significant change in the Company's effective tax rate reflects adjustments to
the valuation allowance on the Company's net deferred tax assets. At December 31, 2001, the Company determined, based primarily on its recent
history of operating losses in the United States, that it could no longer consider the recovery of its net deferred tax assets as more likely than not. Accordingly, the Company's net deferred tax
assets at the beginning of 2001 were reduced by a valuation allowance adjustment of $3.3 million. In addition, net operating loss and tax credit carryforwards generated in 2001 were also
reduced by a valuation allowance such that no benefit for those carryforwards was recognized in 2001. While a valuation allowance is currently required for the Company's net deferred tax assets, the
assets remain available for use in the future to offset future income tax liabilities should sufficient amounts of United States and foreign income be generated in the carryforward periods.

Discontinued Operations

During the second quarter of 2000, the Company recorded a $0.1 million after tax gain from discontinued operations for reimbursement of legal fees in
connection with prior litigation.

2000 Compared to 1999

Revenue

Revenue increased $3.9 million, or 6%, to $67.7 million in 2000, from $63.8 million in 1999. Fixed fees were $62.0 million, or 92% of
revenue in 2000, compared to $57.6 million, or 90% in 1999. Incentive fees were $5.7 million, or 8% revenue in 2000, compared to $6.2 million, or 10% of revenue in 1999.

United
States region revenue decreased $9.7 million, or 24%, to $30.2 million in 2000 from $39.9 million in 1999. The decrease relates to the completion of two major
contracts without replacing the revenue with contracts of a similar magnitude. These contracts provided revenue of $19.9 million in 1999 compared with $8.7 million in 2000.

Asia/Pacific
region revenue increased 54% to $8.5 million in 2000 from $5.5 million in 1999. This marks the second consecutive year in which Asia/Pacific revenues have
grown at more than 50%. The improvement in revenue is attributable to a full year of revenue on new contracts attained during 1999. In addition, the Company replaced completed contracts with new
business during 2000.

Europe
region revenue increased 58% to $29.0 million in 2000 from $18.4 million in 1999. The increase relates to a major contract, which produced revenue of
$19.6 million in 2000 compared to $9.3 million in 1999.

Gross Profit

Gross profit for 2000 increased to $31.2 million and 46% as a percentage of revenue from $28.2 million and 44% in 1999. The improvement in gross
profit can be attributed to improved productivity on increased sales. The Company was able to improve margins by increasing revenue $3.9 million while incurring only a $0.9 million
increase in cost of sales.

13

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Selling, General and Administrative

Selling, general and administrative expenses increased 42% to $26.2 million in 2000, from $18.5 million in 1999. The increase relates primarily to
approximately $4.2 million for personnel, travel, advertising and other professional fees associated with the start-up of the Company's new product offerings and formation of
strategic alliances. The Company incurred expenses of $1.3 million related to the CEO change during the fourth quarter of 2000. The remaining increase in selling, general and administrative
expense relates primarily to increased lease expense to replace the Company's laptop computers and administrative costs related to the Company's United States employees working overseas.

Litigation Settlement

During 2000, the Company was party to an arbitration proceeding with Overhead Door Corporation, a former client, to collect unpaid fees. The Company received an
adverse ruling from the arbitration panel. The total cost to the Company, including legal fees, was $0.7 million and is presented separately as litigation settlement in the Company's
Consolidated Statements of Operations.

Income Taxes

The Company's effective tax rate in 2000 was 40% compared to 38% in 1999. The increase in the Company's effective tax rate relates to adjustments made to properly
reflect certain aspects of foreign taxable income and depreciation expense.

Discontinued Operations

During the second quarter of 2000, the Company recorded a $0.1 million after tax gain from discontinued operations for reimbursement of legal fees in
connection with prior litigation.

14

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Quarterly Results

The following table sets forth certain unaudited operating results for each of the four quarters in the two years ended December 31, 2001. This information
has been prepared on the same basis as the audited financial statements and, in the opinion of the Company, includes all adjustments (consisting of normal recurring adjustments) necessary for a fair
presentation of the information for the periods presented.

|                                                     |         | 2001
For the Three Months Ended |        | 2000
For the Three Months Ended |  
|---------------------------------------------------- | ------- | ------------------------------- | ------ | ------------------------------- | -
|
|
|Revenue                                              |         | $                               | 16,360 |                                 | $
|Gross profit                                         |         |                                 | 6,711  |                                 |  
|Operating income (loss)                              |         |                                 | 708(b  | )                               |  
|Income (loss) from continuing operations             |         |                                 | 410    |                                 |  
|Earnings (loss) per share from continuing operations |         |                                 |        |                                 |  
|                                                     | Basic   |                                 | $      | 0.10                            |  
|                                                     | Diluted |                                 | $      | 0.10                            |  
|Weighted average shares                              |         |                                 |        |                                 |  
|                                                     | Basic   |                                 |        | 4,184                           |  
|                                                     | Diluted |                                 |        | 4,198                           |  
|Stock Price(a)                                       |         |                                 |        |                                 |  
|                                                     | High    |                                 | $      | 7.75                            |  
|                                                     | Low     |                                 | $      | 4.00                            |  
|                                                     | Close   |                                 | $      | 5.06                            |  

---

Liquidity and Capital Resources

Operations used cash of $7.8 million in 2001, compared to cash provided by operations of $4.7 million in 2000. The primary reason for the use of
cash in 2001 relates to $9.7 million of operating losses experienced from the decline in revenue in 2001.

Net
cash used in investing activities decreased to $1.1 million in 2001 from $3.2 million in 2000. The decrease is a result of lower capital expenditures in 2001. Capital
expenditures in 2001 consisted of leasehold improvements, automobiles to facilitate program support in the Europe region and computer software, computer equipment and cost related to website design.

Net
cash provided by financing activities was $5.8 million in 2001 compared to cash used in financing activities of $4.4 million in 2000. The primary reason for the
increase in cash from financing

15

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activities is due to a net $5.3 million increase in advances on the line of credit facility. In addition, during 2001 the Company decreased the purchase of treasury stock by a net
$4.2 million.

In
January and October of 1999, the Company announced two stock repurchase plans for up to 250,000 and 500,000 shares, respectively. In August of 2000, the Company announced an
additional stock repurchase plan of up to 750,000 shares. During 1999, the Company purchased 289,150 shares at an average price of $8.41 per share. During 2000, the Company purchased 596,300 shares at
an average price of $7.96 per share. During 2001, the Company purchased 109,100 shares at an average price of $5.11 per share. Through March 8, 2002, the Company had purchased no additional
shares of treasury stock.

The
Company has traditionally used cash flow from operations, periodically supplemented by borrowings under a bank line of credit, as its primary source of liquidity, when transferring
funds among the Company's foreign subsidiaries was not efficient. During 2001, the Company experienced a significant decline in revenue related to the downturn in the economy, combined with the events
of September 11, which resulted in prospective and existing clients delaying and/or canceling potential programs. The economic downturn and subsequent revenue decline caused the Company not to
be in compliance with certain covenants related to its then existing $15 million revolving credit facility. As a result, the Company's lender, in January of 2002, reduced the maximum allowable
borrowings to $10 million, secured by the Company's accounts receivable and inventories. On March 29, 2002, the lender restructured the Company's revolving credit facility to maximum
allowable borrowings of $7.5 million. In connection with the restructuring of the credit facility, the lender waived past covenant violations through March 31, 2002. The restructured
facility consists of a $2.5 million revolving line of credit and a $5 million term loan.

$7.5 Million Credit Facility

All United States assets of the Company and 65% of the outstanding capital voting stock of each foreign subsidiary secure the $7.5 million credit facility.
The $2.5 million revolving portion of this facility is a borrowing based loan related to a percentage of the Company's United States trade accounts receivable. This revolving credit portion
bears interest at prime plus 2%. The $5 million term loan portion is due in monthly installments of $200,000 plus accrued interest, beginning July 15, 2002, with the remaining balance
due on December 3, 2003. Required principal payments on the term loan total $1.2 million in 2002 and $3.8 million in 2003. This term loan bears interest at prime plus 4%. In
addition, the Company is required to pay the lender a $150,000 amendment fee payable in two equal installments due September 15, 2002 and December 15, 2002. Both the term and revolving
portions of the facility are callable on demand by the lender on April 30, 2003, if the lender provides written notice of its intent to call 90 days prior to April 30, 2003.

The
terms of the facility contain several financial covenants which, if breached, could result in acceleration of amounts owed. The covenants require the Company to maintain certain
levels of tangible net worth, current ratio, cash flow coverage ratio, avoid two consecutive fiscal quarters that generate operating losses and restrict annual capital expenditures in excess of
$300,000. In addition, the covenants require the Company to secure $1.0 million in new equity or subordinated debt by each of April 5, May 15 and June 30 of 2002, for a
total of $3.0 million.

The Company's Liquidity Plan

Recent operating results and the restructuring of the Company's credit facility give rise to concerns about the Company's ability to generate cash flow from
operations sufficient to make scheduled debt payments as they become due. As of March 29, 2002 the Company had secured $1.1 million in subordinated debt from members of the Company's
board of directors. These subordinated notes have a two year term and the entire principal of these notes, plus any accrued interest, is due in full in

16

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April 2004. These subordinated notes are in aggregate principal amounts of $1.0 million and $0.1 million, respectively, and bear interest at prime plus 6%. Interest on these
subordinated notes accrues semi-annually on October 1 and April 1 of each year. The Company is currently seeking to raise the additional debt or equity necessary to remain in
compliance with the covenants of the $7.5 million credit facility and to provide additional liquidity for operations. Although management is confident that the required debt or equity can be
raised, the Company can give no assurances that any debt or equity raised will be sufficient to prevent the Company from being in default on its current credit facility or be sufficient to meet
operating cash requirements.

In
addition to the Company's need to raise additional equity or debt financing, the Company's ability to generate cash flow from operations sufficient to make scheduled payments on its
debts as they become due will depend on its future performance and its ability to successfully implement business and growth strategies. Since the first quarter of 2001, the Company has implemented
cost saving
measures including staff reductions, downsizing and subleasing of facilities and greater control over alliances with strategic business partners. The Company will take additional cost saving measures
such as those taken recently, if necessary, to maintain sufficient liquidity. The Company's performance will also be affected by prevailing economic conditions. Many of these factors are beyond the
Company's control. If future cash flows and capital resources are insufficient to meet the Company's debt obligations and commitments, it may be forced to reduce or delay activities and capital
expenditures, obtain additional equity capital beyond what is required under its current credit facility or restructure or refinance its debt. In the event that the Company is unable to do so, it may
be left without sufficient liquidity and it may not be able to meet its debt service requirements. In such a case, an event of default would occur under our credit facility and could result in all of
the Company's indebtedness becoming immediately due and payable. As a result, the Company's lender would be able to foreclose on the Company's assets.

Inflation

Although the operations of the Company are influenced by general economic conditions, the Company does not believe inflation had a material effect on the results
of operations during the year ended December 31, 2001. However, there can be no assurance the Company's business will not be affected by inflation in the future.

Risk Factors

The Company's revenue and operating results may fluctuate significantly from quarter to quarter, and fluctuations in operating results could cause its
stock price to decline.

The Company's 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 public market analysis or investors, and the price of its common stock may decline. Factors that could cause quarterly fluctuations include:



17

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The market in which the Company competes is intensely competitive and actions by competitors could render its services less competitive, causing revenue
and income to decline.

The ability to compete depends on a number of factors outside of the Company's control, including:



The
Company may not be able to compete effectively on these or other factors. If the Company is unable to compete effectively, market position, and therefore revenue and profitability,
would decline.

The Company must continually enhance its services to meet the changing needs of its customers or face the possibility of losing future business to
competitors.

Future success will depend upon the Company's ability to enhance existing services and to introduce new services to meet the requirements of customers in a
rapidly developing and evolving market. Present or future services may not satisfy the needs of the market. If the Company is unable to anticipate or respond adequately to its customers' needs, lost
business may result and financial performance will suffer.

International business exposes the Company to various foreign statutory requirements, which could interfere with our business or operations and could
result in increased expenses and declining profitability.

International operations create special risks, including:



18

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The Company is dependent on a limited number of key personnel, and the loss of these individuals could harm its competitive position and financial
performance.

The Company's business consists primarily of the delivery of professional services and, accordingly, its success depends upon the efforts, abilities, business
generation capabilities and project execution of its executive officers and Resultants. The Company's success is also dependent upon the managerial, operational and administrative skills of its
executive officers. The loss of any executive officer or key Resultant or group of Resultants, or the failure of these individuals to generate business or otherwise perform at or above historical
levels could result in a loss of customers or revenue, and could therefore harm the Company's financial performance.

If the Company fails to perform effectively on project engagements, its reputation, and therefore its competitive position and financial performance,
could be harmed.

Many of the Company's engagements come from existing clients or from referrals by existing clients. Therefore, growth is dependent on the Company's reputation and
on client satisfaction. The failure to
perform services that meet a client's expectations may damage the Company's reputation and harm its ability to attract new business. Damage to the Company's reputation arising from client
dissatisfaction could therefore harm financial performance.

Inability to protect intellectual property could harm the Company's competitive position and financial performance.

Despite efforts to protect proprietary rights from unauthorized use or disclosure, parties, including former employees or consultants, may attempt to disclose,
obtain or use the Company's solutions or technologies. The steps the Company has taken may not prevent misappropriation of solutions or technologies, particularly in foreign countries where laws or
law enforcement practices may not protect proprietary rights as fully as in the United States. Unauthorized disclosure of proprietary information could make the Company's solutions and methodologies
available to others and harm its competitive position.

The Company's restructured credit facility could have an adverse effect on the Company's financial health.

For example the restructured credit facility may force the Company to:



19

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The
ability to make payments on and to refinance the Company's debt will depend on financial and operating performance, which may fluctuate significantly from quarter to quarter and is
subject to prevailing economic conditions and to financial, business and other factors beyond the Company's control.

The
Company cannot assure that our business will generate sufficient cash flow from operations or that future borrowings will be available to it under the restructured credit facility in
an amount sufficient to enable it to pay debt or to fund other liquidity needs. The Company may need to refinance all or a portion of its debt on or before maturity. The Company can give no assurance
that it will be able to refinance any of its debt on commercially reasonable terms or at all.

The terms of the Company's debt contain a number of restrictive covenants, which restrict its flexibility and which, if breached, could result in
acceleration of amounts owed.

The restructured credit facility contains covenants that limit the Company's flexibility. These covenants could materially and adversely affect the ability to
finance future operations or capital needs or to engage in other business activities that may be in the best interest of the Company. The covenants limit the ability to, among other things:



The
restructured credit facility also contains covenants concerning the maintenance of certain levels of tangible net worth, current ratio, cash flow coverage ratio, avoid two
consecutive fiscal quarters that generate operating losses and restrict annual capital expenditures in excess of $300,000. In addition the covenants require the Company to secure $1.0 million
in new equity or subordinated debt by each
April 5, May 15 and June 30 of 2002, for a total of $3.0 million. The ability to comply with these covenants may be affected by events beyond the Company's control, and it
cannot be sure that it will be able to comply. A breach of any of these covenants could result in a default under the restructured credit facility and, potentially, an acceleration of the obligation
to repay the amounts owed.

"Safe Harbor" Statement Under The Private Securities Litigation Reform Act:

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

While
the Company believes its strategic plan is on target and the business outlook remains strong, several important factors have been identified, including the risk factors set forth
herein, which could cause actual results to differ materially from those predicted. By way of example:



20

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ITEM 7A.Quantitative and Qualitative Disclosure About Market Risk

The Company invests cash balances in excess of operating requirements in short-term securities, generally with maturities of 90 days or less.
The Company's credit agreement provides for borrowings which bear interest of prime plus 2%, on the $2.5 million revolving portion and prime plus 4% on the $5 million term portion. Since
January 1, 1992 the prime rate has fluctuated between 9.5% and 4.75%. Based on the volatility of the prime rate in recent years, a five percentage point increase in interest rates would have
resulted in an additional $223,000 of additional interest expense in 2002 and would result in additional interest expense of $192,000 in 2003. The Company had borrowings on its credit facility from
time to time during 2001, with an outstanding balance of $7.1 million at December 31, 2001. Through April 8, 2002, the Company had additional borrowings of $9.2 million and
repayments of $9.9 million. As of April 8, 2002, the Company had $6.4 million of outstanding borrowings on this credit facility.

Due
to the Company's foreign operations in Europe and Asia, the Company is exposed to transaction adjustments with respect to foreign currency. On January 1, 2001, the Company
elected to change the functional currency of its foreign subsidiaries to the United States dollar. Under United States dollar functional currency, the financial statements of foreign subsidiaries are
remeasured from the recording currency to the United States dollar. The resulting remeasurement adjustment is recorded as foreign exchange gain or loss in the statement of operations. There is no
translation adjustment to the separate component of stockholders' equity or adjustment to comprehensive income. At December 31, 2001, the effect of a 10% increase in foreign exchange rates
would have resulted in a $310,000 foreign currency exchange loss on the Company's non United States denominated assets and a $327,000 foreign currency exchange gain on the Company's non United States
denominated liabilities. As such, the net effect of a 10% increase in the Company's foreign exchange rates, at December 31, 2001, would have been a $27,000 foreign currency gain. The Company
believes that changing the functional currency of its foreign subsidiaries to the United States dollar combined with transacting business in countries with traditionally stable currencies mitigates
the effect of any near-term foreign currency transaction adjustments on the Company's financial position, results of operations and cash flows.

The
Company has not engaged in foreign currency hedging transactions nor does the Company have any derivative financial instruments. However, going forward, the Company will assess the
need to enter into hedging transactions to limit its risk due to fluctuations in exchange rates.

ITEM 8.Financial Statements and Supplementary Data

See Index to Consolidated Financial Statements on page F-1. Supplementary quarterly financial information for the Company 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.

21

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PART III

ITEM 10.Directors and Executive Officers of the Registrant.

The information relating to the Company's directors and nominees for election as directors, and the information relating to executive officers of the Company, is
incorporated herein by reference from the Company's Proxy Statement (herein so called) for its 2002 Annual Meeting of Stockholders, which will be filed within 120 days of December 31,
2001.

ITEM 11.Executive Compensation.

The discussion under "Executive Compensation" in the Company's Proxy Statement for its 2002 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 the Company's Proxy Statement for its 2002 Annual Meeting is incorporated
herein by reference.

ITEM 13.Certain Relationships and Related Transactions.

The discussion under "Certain Transactions" in the Company's Proxy Statement for its 2002 Annual Meeting is incorporated herein by reference.

PART IV

ITEM 14.Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

|Exhibit
Number |  | Description                                                                                                                                                                                                                                                                                       |  | 
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|3.1            |  | Amended and Restated Certificate of Incorporation of the Company filed August 13, 1993, with the State of Delaware Office of the Secretary of State (filed as Exhibit 3.1 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). |  | 
|3.2            |  | Amended and Restated By-Laws (filed as Exhibit 3.5 to the Company's 1993 Form S-1 (File No. 33-64492) and incorporated herein by reference).                                                                                                                                                      |  | 
|3.3            |  | Amended and Restated By-Laws dated May 30, 2001 (filed as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 and incorporated herein by
reference).                                                                                                   |  | 
|4.1            |  | Specimen Certificate evidencing Common Stock (filed as Exhibit 4.1 to the Company's 1993 Form S-1 (file No. 33-64492) and incorporated herein by reference).                                                                                                                                      |  | 
|4.2            |  | Form of Warrant Certificate for the Purchase of Shares (SRG & Associates, Ltd.) (filed as Exhibit 4.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated
herein by reference).                                                                     |  | 

22

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|4.3    |  | Form of Warrant Certificate for the Purchase of Shares (Lyon Securities, Inc.) (filed as Exhibit 4.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated herein
by reference).                                                 |  | 
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|4.4    |  | Rights Agreement dated July 9, 1998 (filed as Exhibit 4 to the Company's Report on Form 8-K dated July 16, 1998 and incorporated herein by reference).                                                                                                                       |  | 
|4.5    |  | Amendment No. 1 to Rights Agreement dated March 1, 1999 (filed as Exhibit 4.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated herein by
reference).                                                                        |  | 
|4.6    |  | Amendment No. 2 to Rights Agreement dated August 12, 1999 (filed as Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 and incorporated herein by
reference).                                                                    |  | 
|10.1   |  | Amended and Restated 1988 Stock Option Plan (filed as Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference).                                                                                   |  | 
|10.2   |  | Amended and Restated 1992 Stock Option Plan (filed as Exhibit 10.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference).                                                                                   |  | 
|10.3   |  | Amended and Restated 1997 Stock Option Plan (filed as Exhibit 10.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference).                                                                                   |  | 
|10.4   |  | 401(k) Plan (filed as Exhibit 10.5 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference).                                                                                                                   |  | 
|10.5   |  | First Amended and Restated Revolving Credit Loan Agreement dated December 4, 1996 between Comerica Bank-Texas and the Company (filed as Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1998 and incorporated herein by reference). |  | 
|10.6   |  | Amendment No. 1 to Revolving Loan Agreement dated April 1, 1999 (filed as Exhibit 10.14 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 and incorporated herein by
reference).                                                            |  | 
|10.7   |  | Non-Employee Director Retainer Fee Plan (filed as Exhibit 10.12 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference).                                                                                      |  | 
|*10.9  |  | Promissory Note between John T. Chain, Jr. and the Company dated March 29, 2002.                                                                                                                                                                                             |  | 
|*10.10 |  | Promissory Note between John R. Hamann and the Company dated March 29, 2002.                                                                                                                                                                                                 |  | 
|10.11  |  | Employment Agreement between the Company and John R. Hamann dated January 12, 2001 (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001
and incorporated herein by reference).                                         |  | 
|*21    |  | Subsidiaries of the Company                                                                                                                                                                                                                                                  |  | 
|*23.1  |  | Consent of Ernst & Young LLP                                                                                                                                                                                                                                                 |  | 
|24     |  | Power of Attorney (set forth on the signature page of this Form 10-K).                                                                                                                                                                                                       |  | 

---

23

---

|Date of Filing   |  | Subject                                  
|---------------- |  | -----------------------------------------
|October 19, 2001 |  | Arbitrators' Award dated October 5, 2001.

24

---



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Form 10-K
to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Irving, State of Texas, on April 16, 2002.

| |  | THOMAS GROUP, INC.
| |  | ------------------
| |  | By:               

POWER OF ATTORNEY

Each individual whose signature appears below constitutes and appoints John R. Hamann such person's true and lawful attorneys-in-fact and
agents with full power of substitution and resubstitution, 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
attorneys-in-fact and agents, and each of them, 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 attorneys-in-fact and agents or any of
them, or their 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/JOHN R. HAMANNJohn R. Hamann         |  | Chief Executive Officer, President, and Director |  | April 16, 2002
|/s/JAMES T. TAYLORJames T. Taylor       |  | Vice President and Chief Financial Officer       |  | April 16, 2002
|/s/JOHN T. CHAIN, JR.John T. Chain, Jr. |  | Chairman of the Board                            |  | April 16, 2002
|/s/JAMES E. DYKESJames E. Dykes         |  | Director                                         |  | April 16, 2002
|/s/RICHARD A. FREYTAGRichard A. Freytag |  | Director                                         |  | April 16, 2002
|/s/DAVID B. MATHISDavid B. Mathis       |  | Director                                         |  | April 16, 2002
|/s/TIMOTHY G. CAFFREYTimothy G. Caffrey |  | Director                                         |  | April 16, 2002

25

---

ANNUAL REPORT ON FORM 10-K
ITEM 8, and 14(a)(1) and (c)
LIST OF FINANCIAL STATEMENTS
CERTAIN EXHIBITS
FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2001
THOMAS GROUP, INC.
DALLAS, TEXAS

---

FORM 10-K.ITEM 14(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:



|Reports of Independent Auditors                                                                            
|-----------------------------------------------------------------------------------------------------------
|Consolidated Balance Sheets as of December 31, 2001 and 2000                                               
|Consolidated Statements of Operations for the fiscal years ended December 31, 2001, 2000 and 1999          
|Consolidated Statements of Stockholders' Equity for the fiscal years ended December 31, 2001, 2000 and 1999
|Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2001, 2000 and 1999          
|Notes to Consolidated Financial Statements                                                                 

F-1

---



REPORT OF INDEPENDENT AUDITORS

Board
of Directors and Stockholders
Thomas Group, Inc.

We
have audited the accompanying consolidated balance sheets of Thomas Group, Inc. as of December 31, 2001 and 2000, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Thomas Group, Inc. at
December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States.

|                                                                                          |  | ERNST & YOUNG LLP
|----------------------------------------------------------------------------------------- |  | -----------------
|Dallas, Texas
February 18, 2002, except for Note 2 as to which the date is March 29, 2002 |  |                  

F-2

---



THOMAS GROUP, INC.        CONSOLIDATED BALANCE SHEETS

ASSETS

|                                     |                                                                                                                                                                                              | December 31,              |       
|------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | ------
|
|
|Current Assets                       |                                                                                                                                                                                              |                           |       
|                                     | Cash and cash equivalents                                                                                                                                                                    |                           | $     
|                                     | Trade accounts receivable, net of allowances of $640 and $269 at December 31, 2001 and 2000, respectively                                                                                    |                           |       
|                                     | Unbilled receivables                                                                                                                                                                         |                           |       
|                                     | Deferred tax asset                                                                                                                                                                           |                           |       
|                                     | Other assets                                                                                                                                                                                 |                           |       
|                                     |                                                                                                                                                                                              |                           |       
|                                     |                                                                                                                                                                                              | Total Current Assets      |       
|                                     |                                                                                                                                                                                              |                           |       
|Property and equipment, net          |                                                                                                                                                                                              |                           | 3,502 
|Deferred tax asset                   |                                                                                                                                                                                              |                           |      
|Other assets                         |                                                                                                                                                                                              |                           | 3,381 
|                                     |                                                                                                                                                                                              |                           |       
|                                     |                                                                                                                                                                                              | $                         | 21,755
|                                     |                                                                                                                                                                                              |                           |       
|LIABILITIES AND STOCKHOLDERS' EQUITY |                                                                                                                                                                                             
|Current Liabilities                  |                                                                                                                                                                                              |                           |       
|                                     | Accounts payable and accrued liabilities                                                                                                                                                     |                           | $     
|                                     | Revolving line of credit                                                                                                                                                                     |                           |       
|                                     | Current portion of long-term debt                                                                                                                                                            |                           |       
|                                     | Income taxes payable                                                                                                                                                                         |                           |       
|                                     | Current maturities of other long-term obligations                                                                                                                                            |                           |       
|                                     |                                                                                                                                                                                              |                           |       
|                                     |                                                                                                                                                                                              | Total Current Liabilities |       
|Long-term debt                       |                                                                                                                                                                                              |                           | 3,800 
|Other long-term obligations          |                                                                                                                                                                                              |                           | 3,084 
|                                     |                                                                                                                                                                                              |                           |       
|                                     |                                                                                                                                                                                              | Total Liabilities         |       
|                                     |                                                                                                                                                                                              |                           |       
|Commitments and Contingencies        |                                                                                                                                                                                              |                           |       
|Stockholders' Equity                 |                                                                                                                                                                                              |                           |       
|                                     | Common stock, $.01 par value; 25,000,000 shares authorized; 6,705,333 and 6,659,267 shares issued and 4,151,934 and 4,214,968 shares outstanding at December 31, 2001 and 2000, respectively |                           |       
|                                     | Class B Common stock, $.01 par value; 1,200,000 shares authorized; 3,970 shares issued and outstanding                                                                                       |                           |       
|                                     | Additional paid-in capital                                                                                                                                                                   |                           |       
|                                     | Retained earnings                                                                                                                                                                            |                           |       
|                                     | Accumulated other comprehensive loss                                                                                                                                                         |                           |       
|                                     | Treasury stock, 2,553,399 and 2,444,299 shares at December 31, 2001 and 2000, respectively, at cost                                                                                          |                           |       
|                                     |                                                                                                                                                                                              |                           |       
|                                     | Total Stockholders' Equity                                                                                                                                                                   |                           |       
|                                     |                                                                                                                                                                                              |                           |       
|                                     |                                                                                                                                                                                              | $                         | 21,755
|                                     |                                                                                                                                                                                              |                           |       

See accompanying notes to consolidated financial statements.

F-3

---

THOMAS GROUP, INC.        CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                             |  | Year Ended December 31, |          
|------------------------------------------------------------ |  | ----------------------- | ---------
|
|
|Revenue                                                      |  | $                       | 51,670   
|Cost of sales                                                |  |                         | 33,218   
|                                                             |  |                         |          
|Gross profit                                                 |  |                         | 18,452   
|Selling, general and administrative                          |  |                         | 25,220   
|Litigation settlements                                       |  |                         | 2,933    
|                                                             |  |                         |          
|Operating income (loss)                                      |  |                         | (9,701   
|Other income, net                                            |  |                         | 28       
|                                                             |  |                         |          
|Income (loss) from continuing operations before income taxes |  |                         | (9,673   
|Income taxes                                                 |  |                         | 5,959    
|                                                             |  |                         |          
|Income (loss) from continuing operations                     |  |                         | (15,632  
|Discontinued Operations:                                     |  |                         |          
|Gain from operations, net of income tax of $100              |  |                         |         
|Loss on disposal, net of income tax benefit of $1,428        |  |                         |         
|                                                             |  |                         |          
|Net Income (loss)                                            |  | $                       | (15,632  
|                                                             |  |                         |          
|Earnings (loss) per common share:                            |  |                         |          
|Basic:                                                       |  |                         |          
|Income (loss) from continuing operations                     |  | $                       | (3.75    
|Gain (loss) from discontinued operations                     |  |                         |         
|                                                             |  |                         |          
|Net Income (loss)                                            |  | $                       | (3.75    
|                                                             |  |                         |          
|Diluted:                                                     |  |                         |          
|Income (loss) from continuing operations                     |  | $                       | (3.75    
|Gain (loss) from discontinued operations                     |  |                         |         
|                                                             |  |                         |          
|Net Income (loss)                                            |  | $                       | (3.75    
|                                                             |  |                         |          
|Weighted average shares:                                     |  |                         |          
|Basic                                                        |  |                         | 4,164,517
|Diluted                                                      |  |                         | 4,164,517

See
accompanying notes to consolidated financial statements.

F-4

---



THOMAS GROUP, INC.        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

|                                                                         |                                         | Common
Stock               |    | Additional
Paid-In-
Capital |   | Retained
Earnings |   | Accumulated
Other Comprehensive
Income (Loss) |        | Treasury Stock |   | Total  |     
|------------------------------------------------------------------------ | --------------------------------------- | -------------------------- | -- | --------------------------- | - | ----------------- | - | --------------------------------------------- | ------ | -------------- | - | ------ | ----
|
|Balance as of January 1, 1999                                            |                                         | $                          | 65 |                             | $ | 22,699            |   | $                                             | 13,654 |                | $ | (482   | )   
|Issuance of 66,618 shares of common stock                                |                                         |                            | 1  |                             |   | 582               |   |                                               |       |                |   |       |     
|Purchase of 289,150 shares of common stock                               |                                         |                            |   |                             |   |                  |   |                                               |       |                |   |       |     
|Tax benefit of non-qualified stock option exercises                      |                                         |                            |   |                             |   | 85                |   |                                               |       |                |   |       |     
|Discounted common stock options issued under employee stock option plans |                                         |                            |   |                             |   | 292               |   |                                               |       |                |   |       |     
|Comprehensive income:                                                    |                                         |                            |    |                             |   |                   |   |                                               |        |                |   |        |     
|                                                                         | Foreign currency translation adjustment |                            |    |                            |   |                   |  |                                               |        |               |   |        | (700
|                                                                         | Net income                              |                            |    |                            |   |                   |  |                                               |        | 3,814          |   |        |    
|                                                                         |                                         |                            |    |                             |   |                   |   |                                               |        |                |   |        |     
|                                                                         |                                         | Total comprehensive income |    |                             |   |                   |   |                                               |        |                |   |        |     
|Balance as of December 31, 1999                                          |                                         |                            | 66 |                             |   | 23,658            |   |                                               | 17,468 |                |   | (1,182 | )   
|                                                                         |                                         |                            |    |                             |   |                   |   |                                               |        |                |   |        |     
|Issuance of 56,203 shares of common stock                                |                                         |                            | 1  |                             |   | 549               |   |                                               |       |                |   |       |     
|Purchase of 569,300 shares of common stock                               |                                         |                            |   |                             |   |                  |   |                                               |       |                |   |       |     
|Discounted common stock options under employee stock option plans        |                                         |                            |   |                             |   | 58                |   |                                               |       |                |   |       |     
|Comprehensive Income:                                                    |                                         |                            |    |                             |   |                   |   |                                               |        |                |   |        |     
|                                                                         | Foreign currency translation adjustment |                            |    |                            |   |                   |  |                                               |        |               |   |        | (180
|                                                                         | Net income                              |                            |    |                            |   |                   |  |                                               |        | 2,876          |   |        |    
|                                                                         |                                         |                            |    |                             |   |                   |   |                                               |        |                |   |        |     
|                                                                         |                                         | Total comprehensive income |    |                             |   |                   |   |                                               |        |                |   |        |     
|Balance as of December 31, 2000                                          |                                         |                            | 67 |                             |   | 24,265            |   |                                               | 20,344 |                |   | (1,362 | )   
|                                                                         |                                         |                            |    |                             |   |                   |   |                                               |        |                |   |        |     
|Issuance of 46,066 shares of common stock                                |                                         |                            |   |                             |   | 172               |   |                                               |       |                |   |       |     
|Purchase of 109,100 shares of common stock                               |                                         |                            |   |                             |   |                  |   |                                               |       |                |   |       |     
|Discounted common stock options under employee stock option plans        |                                         |                            |   |                             |   | (4                | ) |                                               |       |                |   |       |     
|                                                                         | Net and comprehensive loss              |                            |    |                            |   |                   |  |                                               |        | (15,632        | ) |        |    
|                                                                         |                                         |                            |    |                             |   |                   |   |                                               |        |                |   |        |     
|Balance as of December 31, 2001                                          |                                         | $                          | 67 |                             | $ | 24,433            |   | $                                             | 4,712  |                | $ | (1,362 | )   
|                                                                         |                                         |                            |    |                             |   |                   |   |                                               |        |                |   |        |     

See accompanying notes to consolidated financial statements.

F-5

---

THOMAS GROUP, INC.        CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                     |                                                                                                                           | Year Ended December 31,                     |                                                             
|---------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------- | ------------------------------------------------------------
|
|Cash Flows from Operating Activities:                |                                                                                                                           |                                             |                                                             
|Income (loss) from continuing operations             |                                                                                                                           | $                                           | (15,632                                                     
|                                                     | Adjustments to reconcile income (loss) from continuing operations to net cash provided by (used in) operating activities: |                                             |                                                             
|                                                     |                                                                                                                           | Depreciation                                |                                                             
|                                                     |                                                                                                                           | Amortization                                |                                                             
|                                                     |                                                                                                                           | Loss on sale of assets                      |                                                             
|                                                     |                                                                                                                           | Bad debt                                    |                                                             
|                                                     |                                                                                                                           | Other                                       |                                                             
|                                                     |                                                                                                                           | Deferred taxes                              |                                                             
|                                                     |                                                                                                                           | Amortization of stock option grants         |                                                             
|                                                     |                                                                                                                           | Change in operating assets and liabilities: |                                                             
|                                                     |                                                                                                                           |                                             | (Increase) decrease trade accounts receivable               
|                                                     |                                                                                                                           |                                             | (Increase) decrease unbilled receivables                    
|                                                     |                                                                                                                           |                                             | (Increase) decrease other assets                            
|                                                     |                                                                                                                           |                                             | Increase (decrease) accounts payable and accrued liabilities
|                                                     |                                                                                                                           |                                             | Increase (decrease) advance payments                        
|                                                     |                                                                                                                           |                                             | Increase (decrease) income taxes payable                    
|                                                     |                                                                                                                           |                                             |                                                             
|Net Cash Provided by (Used in) Operating Activities  |                                                                                                                           |                                             | (7,750                                                      
|                                                     |                                                                                                                           |                                             |                                                             
|Cash Flows From Investing Activity:                  |                                                                                                                           |                                             |                                                             
|Capital expenditures                                 |                                                                                                                           |                                             | (1,073                                                      
|                                                     |                                                                                                                           |                                             |                                                             
|Cash Flows From Financing Activities:                |                                                                                                                           |                                             |                                                             
|Purchase of treasury stock                           |                                                                                                                           |                                             | (557                                                        
|Proceeds from exercise of stock options              |                                                                                                                           |                                             | 172                                                         
|Repayment of other long-term obligations             |                                                                                                                           |                                             |                                                            
|Net advancesline of credit                          |                                                                                                                           |                                             | 6,140                                                       
|                                                     |                                                                                                                           |                                             |                                                             
|Net Cash Provided by (Used in) Financing Activities  |                                                                                                                           |                                             | 5,755                                                       
|Effect of exchange rate changes on cash              |                                                                                                                           |                                             | 258                                                         
|                                                     |                                                                                                                           |                                             |                                                             
|Net Cash Provided by (Used in) Continuing Operations |                                                                                                                           |                                             | (2,810                                                      
|                                                     |                                                                                                                           |                                             |                                                             
|Discontinued Operations:                             |                                                                                                                           |                                             |                                                             
|                                                     | Net Cash Provided by (Used in) Operating Activities                                                                       |                                             |                                                             
|Cash and Cash Equivalents                            |                                                                                                                           |                                             |                                                             
|                                                     | Beginning of year                                                                                                         |                                             |                                                             
|                                                     |                                                                                                                           |                                             |                                                             
|                                                     | End of year                                                                                                               |                                             | $                                                           
|                                                     |                                                                                                                           |                                             |                                                             

See
accompanying notes to consolidated financial statements.

F-6

---



THOMAS GROUP, INC.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2001

Note 1Summary Of Significant Accounting Policies

(a)The CompanyThomas Group, Inc. (the "Company") was incorporated under the laws of the State of
Delaware in June 1978 and provides management services designed to improve the competitiveness and profitability of its clients. The Company's specific methodology in its core product is known
as PVM and focuses on reducing the time spent on revenue-producing, product development and administrative processes, resulting in operational and financial improvements.

(b)Basis Of PresentationThe accompanying consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated. Certain amounts from prior years have been reclassified to conform to the 2001
presentation.

(c)Earnings Per ShareEarnings (loss) per common share is presented in accordance with the provisions of the
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128), which requires the presentation of "basic" and "diluted" earnings per share. Basic earnings (loss)
per share is based on the weighted average shares outstanding. Diluted earnings per share includes the effect of dilutive securities such as stock options and warrants.

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

|                                |                      | Income (Loss)
(Numerator) |         | Shares
(Denominator) |       | Per Share
Amount |  
|------------------------------- | -------------------- | ------------------------- | ------- | -------------------- | ----- | ---------------- | -
|
|Year Ended December 31, 2001    |                      |                           |         |                      |       |                  |  
|Basic earnings (loss) per share |                      | $                         | (15,632 | )                    | 4,165 |                  | $
|Effect of dilutive securities:  |                      |                           |         |                      |       |                  |  
|                                | Options and warrants |                           |         |                     |       |                 |  
|                                |                      |                           |         |                      |       |                  |  
|Diluted earnings per share      |                      | $                         | (15,632 | )                    | 4,165 |                  | $
|                                |                      |                           |         |                      |       |                  |  
|Year Ended December 31, 2000    |                      |                           |         |                      |       |                  |  
|Basic earnings per share        |                      | $                         | 2,876   |                      | 4,602 |                  | $
|Effect of dilutive securities:  |                      |                           |         |                      |       |                  |  
|                                | Options and warrants |                           |         |                     |       | 32               |  
|                                |                      |                           |         |                      |       |                  |  
|Diluted earnings per share      |                      | $                         | 2,876   |                      | 4,634 |                  | $
|                                |                      |                           |         |                      |       |                  |  
|Year Ended December 31, 1999    |                      |                           |         |                      |       |                  |  
|Basic earnings per share        |                      | $                         | 3,814   |                      | 4,863 |                  | $
|Effect of dilutive securities:  |                      |                           |         |                      |       |                  |  
|                                | Options and warrants |                           |         |                     |       | 54               |  
|                                |                      |                           |         |                      |       |                  |  
|Diluted earnings per share      |                      | $                         | 3,814   |                      | 4,917 |                  | $
|                                |                      |                           |         |                      |       |                  |  

Total
stock options outstanding in 2001, 2000 and 1999 that are not included in the diluted earnings per share computation due to the antidilutive effects are approximately 913,000, 836,000 and
1,285,000, respectively. Such options are excluded due to the Company incurring a net loss per share in that year or due to exercise prices exceeding the average market value of the Company's common
stock in the applicable period.

F-7

---

(d)Management's Estimates And AssumptionsThe presentation of financial statements in conformity with accounting
principles generally accepted in the United States 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. The Company
reviews all significant estimates affecting the financial statements on a recurring basis and records the effect of any necessary adjustments prior to their issuance.

(e)WarrantsAt December 31, 1997 the Company had 225,000 warrants outstanding to purchase the Company's
common stock. During 1998, 175,000 warrants expired. The remaining 50,000 warrants were repriced at an exercise price of $9.125 per share, the market price on the date of repricing, and extended to
expire on October 28, 2003. The warrants were granted to a financial advisor to the Company.

(f)AdvertisingThe Company expenses the costs of advertising as incurred. Advertising expense was
$0.8 million, $1.9 million and $1.3 million for the years ended December 31, 2001, 2000, and 1999, respectively.

(g)Property And EquipmentProperty and equipment are stated at cost less accumulated depreciation. The Company
records impairment losses on long-lived assets used in operations when events and circumstances indicate that 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 Years


(h)Capitalized Software Development CostsIn 2001, the Company capitalized $0.3 million of certain
software development costs once technological feasibility was achieved. Capitalization of software development costs will cease when the product is available for sale. Software development costs
incurred prior to achieving technological feasibility were charged to selling, general and administrative expense.

(i)RevenueBusiness Improvement Program contracts specify fixed fees, or fixed fees plus incentives based on
improvements achieved. Incentive (performance-oriented) revenue is recognized in the period for which performance improvement is being measured and is based on agreed-upon formulas
relating to improvements in customer-specific measures. Improvements are measured at time intervals specified in each contract. Fixed fees are recognized as they become billable per the terms of
contracts, which generally represent effort expended to date on a contract on a percentage of completion basis.

(j)Unbilled ReceivablesFixed fees are recognized when earned, generally as services are provided over the life
of the contract. Although fixed fee recognition generally coincides with billings, as an accommodation to its clients the Company may structure fee billings to increase in the latter stages of a
program. In such instances, revenue recognition as services are provided results in unbilled receivables.

F-8

---

(k)Advance PaymentsThe Company occasionally receives advance payments of a portion of its fees. Advance
payments are deferred upon receipt and recorded as revenue when earned.

(l)Income TaxesDeferred income taxes are provided for temporary differences between the financial statement and
income tax basis of assets and liabilities. Provisions are made for estimated domestic and foreign income taxes, less available tax credits and deductions, which may be incurred on the remittance of
the Company's share of foreign subsidiaries' undistributed earnings.

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

(n)Concentration Of Credit RiskThe Company provides its services primarily to a diverse group of large,
well-established companies and does not require collateral on receivable balances. At December 31, 2001, three clients, Acton Burnell, Adam Opel and HengAn, accounted for
$6.5 million, or 76% of the Company's total trade accounts receivable of $8.6 million. An allowance for doubtful accounts is provided when necessary and is evaluated periodically on a
client-by-client basis. Receivables written off against the allowance totaled $0, $1.1 million and $0 for the years ended December 31, 2001, 2000, and 1999,
respectively.

The
Company is currently expanding its operations in Europe and Asia where potential economic turmoil may result in significant fluctuations in the value of certain foreign currencies versus the U.S.
dollar. The Company may experience difficulties expanding its operations or may encounter other collection issues if economic conditions should change.

(o)Foreign Currency TranslationOn January 1, 2001, the Company elected to change the functional currency
of its foreign subsidiaries to the United States dollar. This change resulted from the Company's increased presence in the Europe and Asia/Pacific regions as well as increased United States dollar
denominated contracts in these regions. Due to this growth, the Company's contracts are serviced primarily by United States employees. Under United States dollar functional currency, the financial
statements of foreign subsidiaries are remeasured from the recording currency to the United States dollar. The resulting remeasurement adjustment is recorded as foreign exchange gain or loss in the
statement of operations. There is no translation adjustment to the separate component of stockholders' equity or adjustment to comprehensive income. The effect of the change in functional currency had
no material impact on results of operations. The accumulation of prior years' translation adjustments remains on the balance sheet as a separate component of stockholders' equity until part, or all,
of the respective entities are disposed. During 2000 and 1999, the financial statements were prepared using the local currency as the functional currency. All balance sheet accounts of foreign
subsidiaries were translated at the current exchange rate as of the end of the accounting period. The resulting translation adjustment was recorded as a separate component of stockholders' equity.
Income statement items were translated at average currency exchange rates.

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

(q)Stockholder Rights PlanOn July 9, 1998, the Company announced the adoption of a Stockholder Rights
Plan, intended to protect the Company from unfair or coercive takeover attempts. The grant of the rights was made to stockholders of record as of July 20, 1998.

F-9

---

(r)Stock Options And WarrantsThe Company accounts for its stock-based compensation plans in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations. The Company accounts for stock-based compensation for
non-employees under the fair value method prescribed by Statement of Financial Accounting Standards No. 123, "Accounting for Stock- Based Compensation." Through December 31,
2001, there have been no significant grants to non-employees.

Effective
July 1, 2000, the Company adopted Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation" ("FIN 44"), an interpretation of APB 25, which
requires changes to previous practice regarding the accounting for certain stock compensation arrangements. FIN 44 does not change APB 25's intrinsic value method, under which compensation expense is
generally not recognized for stock option grants to employees if the exercise price of the Company's stock option grants equals or exceeds the fair market value of the underlying stock on the date of
grant, but it has narrowed its application. Adoption of FIN 44 did not have a significant effect on the Company's results of operations for the year ended December 31, 2001.

(s)Fair Market Value Of Financial InstrumentsThe Company's financial instruments include notes payable. The
carrying value of these notes approximates market value because the borrowing rate is similar to other financial instruments with similar terms.

(t)Recent Accounting StandardsThe Company adopted the provisions of Statement of Financial Accounting Standard
No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") effective January 1, 2001. This statement standardized the accounting for derivative
instruments, including certain derivative instruments embedded in other contracts, requiring that an entity recognize those items as assets or liabilities in the statement of financial position and
measure them at fair value. The statement generally provides for matching the timing of gain or loss recognition on the hedging instrument with the recognition of (a) the changes in fair value
of hedged assets or liabilities that are attributable to the hedged risk or, (b) the earnings effect of the hedged transaction. Derivatives that are not hedges must be adjusted to fair value
through income. Adoption of SFAS 133 had no effect on the Company's financial statements, as the Company has not entered into any derivative instruments.

Note 2Financing Agreement and Liquidity

The Company has traditionally used cash flow from operations, periodically supplemented by borrowings under a bank line of credit, as its primary source of
liquidity, when transferring funds among the Company's foreign subsidiaries was not efficient. During 2001, the Company experienced a significant decline in revenue related to the downturn in the
economy, combined with the events of September 11, which resulted in prospective and existing clients delaying and/or canceling potential programs. The economic downturn and subsequent revenue
decline caused the Company not to be in compliance with certain covenants related to its then existing $15 million revolving credit facility. As a result, the Company's lender, in January of
2002, reduced the maximum allowable borrowings to
$10 million, secured by the Company's accounts receivable and inventories. On March 29, 2002, the lender restructured the Company's credit facility to maximum allowable borrowings of
$7.5 million. In connection with the restructuring of the credit facility, the lender waived past covenant violations through March 31, 2002. The restructured facility consists of a
$2.5 million revolving line of credit and a $5 million term loan.

F-10

---

$7.5 Million Credit Facility

All United States assets of the Company and 65% of the outstanding capital voting stock of each foreign subsidiary secure the $7.5 million credit facility.
The $2.5 million revolving portion of this facility is a borrowing based loan related to a percentage of the Company's United States trade accounts receivable. This revolving credit portion
bears interest at prime plus 2%. The $5 million term loan portion is due in monthly installments of $200,000 plus accrued interest beginning July 15, 2002, with the remaining balance due
on December 3, 2003. Required principal payments on the term loan total $1.2 million in 2002 and $3.8 million in 2003. This term loan bears interest at prime plus 4%. In addition,
the Company is required to pay the lender a $150,000 amendment fee payable in two equal installments due September 15, 2002 and December 15, 2002. Both the term and revolving portions of
the facility are callable on demand by the lender on April 30, 2003 if the lender provides written notice of its intent to call 90 days prior to April 30, 2003.

The
$2.1 million outstanding under the revolving line of credit at December 31, 2001, is classified as a current liability as the Company anticipates to satisfy this debt within
twelve months of the balance sheet date. The $5 million term loan has been classified on the balance sheet in two components based on its restructured payment terms: $1.2 million as a
current portion of long-term debt and $3.8 million as long-term debt.

The
terms of the facility contain several financial covenants which, if breached, could result in acceleration of amounts owed. The covenants require the Company to maintain certain
levels of tangible net worth, current ratio, cash flow coverage ratio, avoid two consecutive fiscal quarters that generate operating losses and restrict annual capital expenditures in excess of
$300,000. In addition, the covenants require the Company to secure $1.0 million in new equity or subordinated debt by each of April 5, May 15 and June 30 of 2002, for a
total of $3.0 million.

The Company's Liquidity Plan

Recent operating results and the restructuring of the Company's credit facility give rise to concerns about the Company's ability to generate cash flow from
operations sufficient to make scheduled debt payments as they become due. As of March 29, 2002 the Company had secured $1.1 million in
subordinated debt from members of the Company's board of directors. These subordinated notes have a two-year term and the entire principal of these notes, plus any accrued interest, is due
in full in April 2004. These subordinated notes are in aggregate principal amounts of $1.0 million and $0.1 million, respectively, and bear interest at prime plus 6%. Interest on
these subordinated notes accrues semi-annually on October 1 and April 1 of each year. The Company is currently seeking to raise the additional debt or equity necessary to
remain in compliance with the covenants of the $7.5 million credit facility and to provide additional liquidity for operations. Although, management is confident that the required debt or
equity can be raised, the Company can give no assurances that any debt or equity raised will be sufficient to prevent the Company from being in default on its current credit facility or be sufficient
to meet operating cash requirements.

In
addition to the Company's need to raise additional equity or debt financing, the Company's ability to generate cash flow from operations sufficient to make scheduled payments on its
debts as they become due will depend on its future performance and its ability to successfully implement business and growth strategies. Since the first quarter of 2001, the Company has implemented
cost saving measures including staff reductions, downsizing and subleasing of facilities and greater control

F-11

---

over alliances with strategic business partners. The Company will take additional cost saving measures such as those taken recently, if necessary, to maintain sufficient liquidity. The Company's
performance will also be affected by prevailing economic conditions. Many of these factors are beyond the Company's control. If future cash flows and capital resources are insufficient to meet the
Company's debt obligations and commitments, it may be forced to reduce or delay activities and capital expenditures, obtain additional equity capital beyond what is required under its current credit
facility or restructure or refinance its debt. In the event that the Company is unable to do so, it may be left without sufficient liquidity and it may not be able to meet its debt service
requirements. In such a case, an event of default would occur under our credit facility and could result in all of the Company's indebtedness becoming immediately due and payable. As a result, the
Company's lender would be able to foreclose on the Company's assets.

At
December 31, 2001 the Company had $7.1 million outstanding on its previously existing $15 million revolving credit agreement. The Company utilized the credit line
during 2001 to meet working capital requirements. Total interest paid was $106,000, $133,000 and $4,500 at an annual rate of 5.69%, 9.25% and 8.25% for 2001, 2000 and 1999 respectively. The Company
paid commitment fees on the unused portion of the credit facility, totaling $51,000, $66,000 and $57,000 for 2001, 2000 and 1999 respectively, at an interest rate of 0.375%.

Note 3Discontinued Operations

In 1998, the Company announced its plans to dispose of its Information Technologies business segment. The sale of the Company's Information Technologies assets
closed on August 31, 1998. No proceeds were received at the time of the transaction, but the agreement included earn-outs that could have been earned over the next five years. In
exchange, the Company was relieved of the liabilities related to extended service contracts. On September 30, 2001, the buyer of the Information Technologies segment
sold those assets acquired, which contractually voided the Company's ability to earn amounts from the agreement's earn-out provisions. As such, the Company received no
earn-outs from this agreement.

During
the third quarter of 1999, the Company recorded a $2.0 million after tax charge to discontinued operations as a result of the settlement of a lawsuit related to the
Company's Information Technologies business segment. In December 1999, the Company recognized a $0.3 million after tax charge to discontinued operations due to additional legal costs.

During
the second quarter of 2000, the Company recognized an after tax gain of $0.1 million from discontinued operations as a result of reimbursement of legal fees in connection
with prior litigation.

F-12

---

Note 4Other Assets

December 31,2001

2000In thousands of dollarsDeferred compensation plan assets

$
3,001

$
2,773Prepaid expenses


656


1,075Current receivables


1,436


1,483Income tax receivable


254


640Investment in Texas Stadium Suite


132


151Accounts receivable, employee


307


52Other


6


205,792


6,194Less current portion


(2,411
)

(3,102
)$
3,381

$
3,092


Note 5Property And Equipment

December 31,2001

2000In thousands of dollarsEquipment

$
4,439

$
7,525Furniture and fixtures


3,378


3,239Leasehold improvements


2,645


2,485Equipment under capital leases


29


Construction in process


237


Automobiles


200


11610,928


13,365Less accumulated depreciation and amortization


(7,426
)

(9,536
)$
3,502

$
3,829


During
2000, the Company retired fully depreciated computer equipment under capital lease obligations totaling approximately $1.0 million.

F-13

---

Note 6Other Long-Term Obligations

December 31,2001

2000In thousands of dollarsDeferred compensation plan

$
3,001

$
2,773Estimated loss on disposal of segment





575Other


88


93,089


3,357Less current portion


(5
)

(575
)$
3,084

$
2,782


Note 7Accounts Payable And Accrued Liabilities

December 31,2001

2000In thousands of dollarsAccounts payable trade

$
1,164

$
674Accrued CEO transition cost





1,119Accrued payroll and bonuses


1,129


543Accrued severance


960


Accrued restructuring


203


222Accrued employee benefits


133


100Other accrued liabilities


1,499


2,075$
5,088

$
4,733


Accrued
severance relates to four staff reduction actions taken during 2001 affecting 65 employees (primarily resultants) which resulted in severance charges of $2.3 million of
which $1.0 million remains accrued at December 31, 2001 and is expected to be paid in the first and second quarters of 2002.

Accrued
restructuring relates to remaining liabilities associated with the Company's 1998 restructuring actions to realign its corporate structure. The remaining liabilities relate to
accrued costs relating to future lease obligations for leased space that was vacated in connection with the restructuring plan. There were no material changes to the 1998 accrued restructuring
reserves, other than cash payments of liabilities, in any of three years in the period ended December 31, 2001.

F-14

---

Note 8Income Taxes

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

Year Ended December 31,2001

2000

1999In thousands of dollarsDomestic sources

$
(9,345
)
$
(2,404
)
$
3,207Foreign sources


(328
)

6,949


6,702(9,673
)

4,545


9,909Discontinued operations





249


(3,758
)$
(9,673
)
$
4,794

$
6,151


The
reconciliation of income tax from continuing operations computed at the U.S. federal statutory tax rate to the Company's effective income tax rate is as follows:

Year Ended December 31,2001

2000

1999In thousands of dollarsIncome taxes (benefit) at statutory rate

$
(3,289
)
$
1,545

$
3,369Effect on taxes resulting from:State taxes


366


255


322Increase (decrease) in valuation allowance


3,339


174


(1,043
)Operating losses and tax credits generated but not benefited


3,929





Foreign income subject to current U.S. taxation


1,458


622


772Other (primarily permanent differences)


156


(778
)

345$
5,959

$
1,818

$
3,765


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

Year Ended December 31,2001

2000

1999In thousands of dollarsCurrent tax expense:Federal

$
328

$
36

$
334State


243


34


661Foreign


2,049


533


1,1472,620


603


2,142Deferred tax expense (benefit):Federal


3,066


958


826State


273


357


(631
)3,339


1,315


195$
5,959

$
1,918

$
2,337


F-15

---

Income
tax expense (benefit) is included in the consolidated financial statements as follows:

Year Ended December 31,2001

2000

1999In thousands of dollarsContinuing operations

$
5,959

$
1,818

$
3,765Discontinued operations





100


(1,428
)$
5,959

$
1,918

$
2,337


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

December 31,2001

2000In thousands of dollarsDeferred tax assets:Foreign tax credit carryforward

$
3,383

$
2,519Allowance for doubtful accounts


166


102Restructuring expenses


17


85Discontinued operations





218Accrued expenses


409


259Deferred compensation


956


834Net operating loss carryforward


2,964


558Minimum tax credit carryforward


169


176Charitable contribution carryforward


51


8,115


4,751Valuation allowance


(7,938
)

(646
)Total deferred tax assets


177


4,105Deferred tax liabilities:Unremitted earnings of foreign subsidiaries


(146
)

(471
)Fixed assets


(31
)

(6
)Other, net





(289
)Total deferred tax liabilities


(177
)

(766
)Net deferred tax asset




$
3,339Net deferred tax assetcurrent




$
1,339Net deferred tax assetnon-current





2,000

$
3,339


At
December 31, 2001, the Company has approximately $4.4 million of federal net operating loss carryovers, which begin to expire in 2021 and approximately
$6.3 million of state net operating loss carryovers, which expire at various times. The Company also has approximately $6.6 million of Asian net operating loss carryovers which currently
do not have any statutory expiration date. In addition, the

F-16

---

Company has approximately $3.4 million of U.S. foreign tax credit carryovers that begin to expire in 2003 and approximately $169,000 of U.S. minimum tax credits, which may be carried forward
indefinitely.

At
December 31, 2001, the Company determined, based primarily on its recent history of operating losses in the U.S., that it could no longer consider the recovery of its net
deferred tax assets as more likely than not. Accordingly, the Company's net deferred tax assets at the beginning of 2001 were reduced by a valuation allowance adjustment of $3.3 million. In
addition, net operating loss and tax credits carryforwards generated in 2001 were also reduced by a valuation allowance such that no benefit for the carryforwards was recognized in 2001. While a
valuation allowance is currently required for the Company's net deferred tax assets, the assets remain available for use in the future to offset future income tax liabilities, should sufficient
amounts of U.S. and foreign income be generated in the carryforward periods.

Note 9Employee Benefit Plans

The Company sponsors a 401(k) retirement plan. The Company, at its discretion, matches a portion of the participants' contribution. Participants are vested in the
Company's matching contribution after five years of full-time service and may join the plan January 1 and July 1. Matching contribution expense was $0.5 million for
2001, and $0.4 million for 2000 and 1999, respectively.

In
1994, the Company established a non-qualified deferred compensation plan. Participation is limited to officers and key employees. Assets and accrued liabilities of the
plan were $3.0, $2.8 and $2.6 million at December 31, 2001, 2000 and 1999, respectively and are recorded in the long term asset and long-term liabilities section of the
balance sheet. Amounts deferred under the plan are deposited in a trust that qualifies as a grantor trust under the Internal Revenue Code of 1986, as amended. The Company's obligations under the
deferred compensation plan are unsecured general obligations of the Company and rank equally with other unsecured general creditors of the Company. Assets of the deferred compensation plan are
invested in various mutual funds as directed by the plan participants. Adjustments to the fair value of the mutual fund investments, which are classified as trading, are recorded in operating
expenses.

Note 10Commitments and Contingencies

On March 16, 2001, the Company received notice of a claim from Balanced Scorecard Collaborative, Inc. ("BSCol"), to mediate/arbitrate a dispute
regarding BSCol's claim for unpaid fees under the parties' March 2000 agreement. The matter was not settled during an April 26 mediation, and consequently was resolved by a proceeding
before a neutral arbitration panel in Dallas, Texas, during the week of September 17, 2001, pursuant to an arbitration provision in the parties' agreement. On October 5, 2001, the
Company received an adverse ruling from the arbitration panel. The decision of the arbitration panel awarded BSCol $2.4 million. The total cost of the litigation of $2.9 million,
including legal fees of $0.5 million, is presented separately as litigation settlements in the Company's Consolidated Statements of Operations.

During
2000, the Company was party to an arbitration proceeding with Overhead Door Corporation, a former client, to collect unpaid fees. The Company received an adverse ruling from the
arbitration panel. The total cost to the Company, including legal fees, was $0.7 million and is presented separately as litigation settlements in the Company's Consolidated Statements of
Operations.

F-17

---

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

The
Company leases office space, vehicles and various types of office equipment under non-cancelable operating leases. Rent expense related to operating leases totaled
$2.6 million for 2001, $1.8 million for 2000, and $1.5 million for 1999.

Minimum
lease payments required under non-cancelable operating lease arrangements subsequent to December 31, 2001, are as follows:

Operating
Leases In
thousands of dollars2002

$
2,3432003


1,7482004


1,1722005


9582006


784Thereafter


217Total minimum lease payments


7,222Sublease arrangements


(2,494
)Net minimum lease payments

$
4,728


F-18

---

Note 11Segment Data And Sales To Major Customers

The
Company operates in one industry segment, but conducts its business primarily in three geographic areas: the United States, Europe and Asia. Information regarding these areas
follows:

|                              |  | United States |        | Europe |   | Asia   |  | Corporate |        | Total
|----------------------------- |  | ------------- | ------ | ------ | - | ------ |  | --------- | ------ | -----
|
|Year ended December 31, 2001: |  |               |        |        |   |        |  |           |        |      
|Revenue                       |  | $             | 12,314 |        | $ | 28,680 |  | $         | 10,676 |      
|Gross profit (loss)           |  | $             | 9,871  |        | $ | 9,968  |  | $         | (1,387 | )    
|Long-lived assets             |  | $             | 2,627  |        | $ | 857    |  | $         | 266    |      
|Year ended December 31, 2000: |  |               |        |        |   |        |  |           |        |      
|Revenue                       |  | $             | 30,171 |        | $ | 29,040 |  | $         | 8,487  |      
|Gross profit                  |  | $             | 17,381 |        | $ | 13,366 |  | $         | 496    |      
|Long-lived assets             |  | $             | 2,909  |        | $ | 1,071  |  | $         | 17     |      
|Year ended December 31, 1999: |  |               |        |        |   |        |  |           |        |      
|Revenue                       |  | $             | 39,933 |        | $ | 18,352 |  | $         | 5,521  |      
|Gross profit                  |  | $             | 16,168 |        | $ | 10,688 |  | $         | 1,352  |      
|Long-lived assets             |  | $             | 2,011  |        | $ | 680    |  | $         | 51     |      

The
following table indicates those clients whose revenues were in excess of 10% of consolidated revenues in any of the three years ended December 31, 2001.

|                              |                   | United
States |   | % of
Total |  | Europe |   | % of
Total |       
|----------------------------- | ----------------- | ------------- | - | ---------- |  | ------ | - | ---------- | ------
|
|Year Ended December 31, 2001: |                   |               |   |            |  |        |   |            |       
|                              | Robert Bosch      |               |   |           |  |       |   | $          | 19,244
|                              | Adam Opel         |               |   |           |  |       |   | $          | 5,779 
|                              | Acton Burnell     |               | $ | 5,586      |  | 11     | % |            |      
|Year Ended December 31, 2000: |                   |               |   |            |  |        |   |            |       
|                              | Robert Bosch      |               |   |           |  |       |   | $          | 19,602
|                              | General Motors    |               | $ | 5,248      |  | 8      | % | $          | 5,346 
|                              | Boston Scientific |               | $ | 9,750      |  | 14     | % |            |      
|Year Ended December 31, 1999: |                   |               |   |            |  |        |   |            |       
|                              | General Motors    |               | $ | 11,954     |  | 19     | % | $          | 1,412 
|                              | Robert Bosch      |               | $ | 486        |  | 1      | % | $          | 9,252 
|                              | Delphi Delco      |               | $ | 7,977      |  | 12     | % |            |      

The
majority of foreign revenue was earned in Germany and Switzerland for all of the years presented.

Note 12Related Party Transactions

In March of 2002, the Company issued promissory notes to two members of the Company's board of directors. These notes are in aggregate principal amounts of
$1.0 million and $0.1 million. These

F-19

---

promissory notes have a two-year term and the entire principal of these notes, plus any accrued interest is due in full in April 2004.

In
2001, the Company advanced a key employee $0.5 million. The employee executed a promissory note due November 2, 2001. At December 31, 2001, there were no amounts
due on this promissory note.

In
1996, the Company advanced a key employee $0.2 million. The employee executed a promissory note due December 18, 2000. At December 31, 2000, there were no amounts
due on this promissory note.

Note 13Common Stock And Stock Options

The Company grants incentive and non-qualified stock options and has reserved 3,550,000 shares of common stock for issuance under its stock option
plans. Options to purchase shares of the Company's common stock have been granted to directors, officers and employees. The majority of the options granted become exercisable at the rate of 20% per
year, and generally expire ten years after the date of grant.

The
Company adopted the disclosure provisions of Statement of Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for Stock Based Compensation." This
statement requires the Company to provide pro forma information regarding net income and net income per share as if compensation cost for the Company's stock options had been determined in accordance
with the fair value method. The fair value of these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 2001,
2000, and 1999: dividend yield of 0%; expected volatility of 65%; risk free interest rate of 6%; and expected life of five years. Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant date consistent with the provisions of SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma
amounts indicated below:

Year Ended December 31,2001

2000

1999In thousands of dollarsNet Income (Loss)As reported

$
(15,632
)
$
2,876

$
3,814Pro forma

$
(15,960
)
$
2,383

$
3,165Earnings (Loss) Per ShareAs reportedBasic

$
(3.75
)
$
0.62

$
0.78Diluted

$
(3.75
)
$
0.62

$
0.78Pro formaBasic

$
(3.83
)
$
0.52

$
0.65Diluted

$
(3.83
)
$
0.51

$
0.64


F-20

---

A
summary of the status of the Company's stock options to employees as of December 31, 2001, 2000 and 1999 and changes in the years then ended is presented below.

|                                                          |           | 2001    |         | 2000 |      | 1999
|--------------------------------------------------------- | --------- | ------- | ------- | ---- | ---- | ----
|
|Outstanding at beginning of year                          |           | 868,316 |         | $    | 9.29 |     
|                                                          | Granted   |         | 147,900 |      |      | 6.58
|                                                          | Exercised |         | (13,238 | )    |      | 0.02
|                                                          | Forfeited |         | (89,554 | )    |      | 8.28
|                                                          |           |         |         |      |      |     
|Outstanding at end of year                                |           | 913,424 |         | $    | 9.09 |     
|                                                          |           |         |         |      |      |     
|Options exercisable at year-end                           |           | 566,073 |         | $    | 9.88 |     
|Weighted average grant-date fair value of options granted |           |         |         | $    | 6.70 |     

The
following table summarizes information about stock options outstanding at December 31, 2001.

|                |  |         |  | Options Outstanding |      |  |   |      
|--------------- |  | ------- |  | ------------------- | ---- |  | - | -----
|
|
|
|$  0.73 -  7.94 |  | 397,693 |  | $                   | 6.88 |  | $ | 7.40 
|8.00 -  9.94    |  | 364,433 |  |                     | 6.18 |  |   | 9.10 
|10.09 - 13.75   |  | 83,120  |  |                     | 5.78 |  |   | 11.73
|14.25 - 16.88   |  | 67,378  |  |                     | 4.11 |  |   | 15.64
|18.44 - 19.13   |  | 800     |  |                     | 4.43 |  |   | 18.96
|                |  |         |  |                     |      |  |   |      
|$  0.73 - 19.13 |  | 913,424 |  | $                   | 6.30 |  | $ | 9.09 

Note 14Supplemental Disclosure Of Cash Flow Information

Year Ended December 31,2001

2000

1999In thousands of dollarsInterest paid

$
198

$
215

$
107Income taxes paid

$
1,676

$
1,602

$
928


F-21

---