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UNITED STATES
SECURITIES AND
EXCHANGE COMMISSIONWashington, 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 1934FOR THE YEAR ENDED DECEMBER 31, 2005.
|--------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------
|OR                                                                                           
|o                                                                                             | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934                                 
|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(State or other jurisdiction of incorporation or organization)                          |  | 72-0843540(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 |  | None                                     

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

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

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.

Large
Accelerated filer o            Accelerated Filer o
            Non-accelerated filer ý

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

As of June 30, 2005, the last day of the registrant's most recently completed second fiscal quarter, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $8,923,226 based on the Over The Counter ("OTC") Bulletin Board closing price of $3.03. Effective December 23, 2005, the Company began trading
on the Nasdaq Capital Market under the symbol "TGIS."

As
of March 23, 2006, there were 10,671,506 shares of the registrant's common stock outstanding.

|Documents incorporated by reference                                                                                                                                     |  | Part |  | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- |  | 
|The registrant's definitive proxy statement pertaining to the 2006 Annual Meeting of Stockholders to be filed not later than 120 days after the end of the fiscal year. |  | III  |  | 



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TABLE OF CONTENTS



|                                           |  |                                                                                      
|------------------------------------------ |  | -------------------------------------------------------------------------------------
|PART I                                     |  |                                                                                      
|Item 1.                                    |  | Business                                                                             
|Item 1A.                                   |  | Risk Factors                                                                         
|Item 1B.                                   |  | Unresolved Staff Comments                                                            
|Item 2.                                    |  | Properties                                                                           
|Item 3.                                    |  | Legal Proceedings                                                                    
|Item 4.                                    |  | Submission of Matters to a Vote of Security Holders                                  
|PART II                                    |  |                                                                                      
|Item 5.                                    |  | Market for Registrant's Common Equity and Related Stockholder Matters                
|Item 6.                                    |  | Selected Financial Data                                                              
|Item 7.                                    |  | Management's Discussion and Analysis of Financial Condition and Results of Operations
|Item 7A.                                   |  | Quantitative and Qualitative Disclosure About Market Risk                            
|Item 8.                                    |  | Financial Statements and Supplementary Data                                          
|Item 9.                                    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|Item 9A.                                   |  | Controls and Procedures                                                              
|Item 9B.                                   |  | Other Information                                                                    
|PART III                                   |  |                                                                                      
|Item 10.                                   |  | Directors and Executive Officers of the Registrant                                   
|Item 11.                                   |  | Executive Compensation                                                               
|Item 12.                                   |  | Security Ownership of Certain Beneficial Owners and Management                       
|Item 13.                                   |  | Certain Relationships and Related Transactions                                       
|Item 14.                                   |  | Principal Accounting Fees and Services                                               
|PART IV                                    |  |                                                                                      
|Item 15.                                   |  | Exhibits and Financial Statement Schedules                                           
|                                           |  | Signatures                                                                           
|Index to Consolidated Financial Statements

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PART I

ITEM 1.Business.

General

Thomas Group, Inc. (the "Company"), a Delaware corporation, established in 1978, is an international, professional services firm focusing on
improving operations, competitiveness and financial performance of 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, and units of governmental agencies.

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 and supplements TCT with numerous process improvement tools the Company has developed over the last 27 years. PVM continues to contribute to the measurable
operational 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 client'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 focus on quickly satisfying customer needs. This has been the primary focus of the
Company since its beginning in 1978.

Process Value Management

The Company's PVM approach is based on its 27 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 hindering performance. A long-term relationship might involve an
implementation team of Resultants working with the client over a number of years to achieve a total transformation to the "Process Managed Enterprise."

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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), thereby 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.

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.

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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 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.

Summary

Over the years, the Company has become a leader in implementing process improvement strategies that make clients 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 clients 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
alliances with other knowledge 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 entities 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.

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Clients

The Company's clients are typically large, diversified enterprises or distinct units of such enterprises in North America, Europe, and Asia. Many of the Company's
clients are Fortune or Global 1000 companies, or governmental agencies. The Company has worked for over 350 clients, including the following:

|Aerospace                    |  | Distribution             |  | Mechanical Engineering         
|---------------------------- |  | ------------------------ |  | -------------------------------
|Aerostructures               |  | ProSource                |  | ABB                            
|Bombardier                   |  | W.W. Grainger            |  | Alstom Power                   
|Delta Air Lines              |  |                          |  | Dresser Waukesha               
|Gulfstream                   |  | Electronics              |  | Dresser-Rand                   
|ITT Cannon                   |  | ABB                      |  | GEA                            
|LSG Sky Chefs                |  | Berg                     |  | Hilti                          
|Lufthansa Cargo              |  | EDS                      |  | Schindler                      
|Lufthansa Technik            |  | Euclid-Hitachi           |  |                                
|McDonnell Douglass           |  | Flat Panel Display       |  | Medical Equipment Supplies     
|TRW                          |  | GTE Control Devices      |  | Boston Scientific              
|Vought Aircraft              |  | Gemplus                  |  | Siemens Medical                
|                             |  | Johnson Electric         |  | GE Medical                     
|Automotive                   |  | Motorola                 |  |                                
|Adam Opel                    |  | Osram                    |  |                                
|Audi                         |  | Philips                  |  | Specialty Retail               
|Delco                        |  | Texas Instruments        |  | Tuesday Morning                
|Delphi                       |  | Western Digital          |  |                                
|Detroit Diesel               |  | Yuasa Exide Batteries    |  | Semiconductor                  
|GM                           |  |                          |  | Alcatel Mietec                 
|GM DELCO                     |  | Healthcare               |  | AMI Microsystems               
|GM/Warranty                  |  | Centura                  |  | ASM Lithography                
|Meritor                      |  | Mallinckrodt             |  | AT&T Semiconductor             
|Osram                        |  |                          |  | Cypress Semiconductor          
|Pep Boys                     |  | Government               |  | Fairchild Semiconductor        
|Robert Bosch                 |  | FAA                      |  | Ford Microelectronics          
|Saab                         |  | CACI                     |  | Hewlett Packard                
|Siemens                      |  | City of Garland, Texas   |  | Hyundai                        
|                             |  | United States Army       |  | IBM                            
|Apparel Manufacturer         |  | United States Navy       |  | LG Semiconductor               
|Brandix                      |  |                          |  | NCR                            
|Esquel Group                 |  | Manufacturing/Industrial |  | National Semiconductor         
|Lanka Equities               |  | Breguet                  |  | Matra MHS                      
|Tristate Holdings            |  | Dover                    |  | Motorola                       
|                             |  | Emerson                  |  | Philips Semiconductor          
|Banking, Financial Services, |  | Kimberly Clark           |  | Rockwell                       
|Insurance                    |  | VIAD                     |  | Signetics                      
|DG Bank                      |  | Leeds & Northrup         |  | ST Microelectronics            
|Forethought Insurance        |  | Moore                    |  | Taiwan Semiconductor           
|Olivetti                     |  | Pawnee Industries        |  | Trilogy                        
|Sun Life Financial           |  | Pinnacle-lvey            |  |                                
|                             |  | Radium                   |  | Telecommunications             
|Chemical                     |  | Robert Bosch             |  | Allen Telecom                  
|Heraeus                      |  | Siemens                  |  |                                
|Shipley                      |  | Stewart and Stevenson    |  | Transportation                 
|                             |  | Teledyne                 |  | Alstom                         
|Consumer Products            |  | Thrall                   |  | Amtrak                         
|Fossil                       |  | Xerox                    |  | Bombardier                     
|Givaudan                     |  |                          |  | Burlington Northern Santa Fe   
|HengAn                       |  |                          |  |                                
|Hillenbrand                  |  |                          |  | Utilities                      
|Kodak                        |  |                          |  | PECO                           
|Polaroid                     |  |                          |  | Siemens                        
|Rand McNally                 |  |                          |  | Southern Indiana Gas & Electric
|Robert Bosch                 |  |                          |  |                                
|Rubbermaid                   |  |                          |  |                                

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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: North America, Europe and Asia/Pacific. Information regarding these areas
follows:

|                                                      |  | North America |         | Europe |   | Asia/Pacific |   | Total
|----------------------------------------------------- |  | ------------- | ------- | ------ | - | ------------ | - | -----
|
|Year ended December 31, 2005:                         |  |               |         |        |   |              |   |      
|Revenue                                               |  | $             | 43,033  |        |   |             |   | $    
|Income from continuing operations before income taxes |  | $             | 8,527   |        |   |             |   | $    
|Long-lived assets                                     |  | $             | 580     |        |   |             |   |      
|Year ended December 31, 2004:                         |  |               |         |        |   |              |   |      
|Revenue                                               |  | $             | 28,930  |        |   |             |   | $    
|Income from continuing operations before income taxes |  | $             | (11,425 | )      |   |             |   | $    
|Long-lived assets                                     |  | $             | 804     |        |   |             |   | $    
|Year ended December 31, 2003:                         |  |               |         |        |   |              |   |      
|Revenue                                               |  | $             | 27,110  |        |   |             |   | $    
|Income from continuing operations before income taxes |  | $             | 4,559   |        | $ | (453         | ) | $    
|Long-lived assets                                     |  | $             | 1,208   |        |   |             |   | $    

In
2005, revenues from one client, CACI, INC.FEDERAL ("CACI", formerly known as CACI AB, Inc. and previously Action Burnell, Inc.), a
wholly-owned subsidiary of CACI International Inc. (www.caci.com), totaled $27.9 million or 65% of consolidated revenues. Revenues from another client, the United States Navy
(the "Navy"), totaled $13.0 million or 30% of consolidated revenues.

In
2004, revenues from one client, CACI, totaled $14.5 million or 48% of consolidated revenues. Revenues from another client, the Navy, totaled $9.8 million or 33% of
consolidated revenues.

In
2003, revenues from one client, CACI, totaled $11.8 million or 39% of revenues. Revenues from another client, the Navy, totaled $9.7 million or 32% of consolidated
revenues.

Contractual Arrangements

The Company performs PVM services for clients pursuant to contracts, generally with terms of three months to one year, or targeted process improvement programs
typically lasting from three to six months. Clients compensate the Company for its services in one or more of three forms: fixed fees, task-based or specific deliverable-based fees, or
incentive fees based on client improvements achieved. The Company's fee structure depends on a client's size, the complexity and geographic deployment of a client's business, the level of improvement
opportunity available to a client, the number of barriers to be removed, and other factors.

Fixed
fee revenue is recognized on a percentage of completion basis using direct labor efforts as the measurement. Time and effort to date on a project are compared to the total
estimated time and effort for the entire project; deriving the percentage completion ratio. This ratio is multiplied by the total fixed fee to be earned on the project, resulting in the amount of
revenue earned to date on the project.

Task-based
fee revenue (also known as specific deliverable-based) is recognized as revenue when the task/deliverable has been completed. Typically, this involves a report,
chart, minutes or some other form of proof of completion. This work product is delivered to the client, and the client acknowledges receipt prior to recognition of revenue by the Company.

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Incentive
(performance-oriented) fee revenue is calculated by our clients and Resultants, using the client's own data and are based on agreed-upon formulas relating to
improvements in customer-specific measures. Incentive fee revenue is recognized by the Company in the period in which the related improvements are achieved. 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 incentive-based revenue. Factors
such as a client's commitment to PVM, 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 2005, 2004, and 2003, approximately 0%, 1% and 1%, respectively, of the Company's revenue was attributable to incentive fees.

The
Company includes in its business under commitment (backlog) signed client contracts and budgeted United States government commitments with terms generally ranging from three
months to one year. Budgeted United States government commitments consist of funds that are designated for the Company in the Department of Defense's operating budget as a line item, as opposed
to inclusion in a general category. Typically, government agencies agree to sign one-year contracts even though the program may be a budgeted expenditure for several years. The Company
considers the budgeted United States government commitments to be equivalent to a signed commercial contract. Therefore, these commitments are included in backlog. Backlog at
December 31, 2005, was $14.5 million, and is expected to be realized within fiscal 2006. Backlog was $22.5 million at December 31, 2004.

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 a larger number of personnel, greater financial, technical and marketing resources than the Company. There can be no assurance the Company will be able to compete successfully with
its existing or 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, using the Company's methodologies, 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 and experienced resultants provide it with a competitive advantage.

Intellectual Property

The Company has secured federal registration for the service marks Total Cycle Time® and TCT®. These registrations expire from
August 2012 to May 2015. The Company has secured federal service mark registration for several other marks important to its business. The Company has also made

6

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appropriate
filings in several European countries securing 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 27 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 noncompetition 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 23, 2006, the Company had a total of 147 employees, consisting of 102 full-time Resultants,
12 part-time Resultants and 16 sales and 17 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.

Securities and Exchange Commission

The Company is required to file reports with the Securities and Exchange Commission ("SEC") pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. The Company routinely files certain reports to the SEC. These forms, among others, include:

Form 10-K

Annual ReportForm 10-Q

Quarterly ReportForm 8-K

Current ReportsSchedule 14A

Definitive Proxy Statement


The
public may read and copy any materials filed to the SEC by the Company at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Company's filings to the SEC are submitted electronically and
can be accessed via the SEC's website at (http://www.sec.gov).

Company Website

Information about the Company can be obtained by accessing the Company's website at (http://www.thomasgroup.com).
The Company's website contains an investor information section which provides links to the Company's SEC reports and filings. Such reports and filings are available free of charge as soon as
reasonably practical after such material is electronically filed with or furnished to the SEC.

ITEM 1A.Risk Factors.

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

7

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



The market in which the Company operates is 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,
could 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 could suffer.

8

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

International
operations create special risks, including:



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 former and 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

9

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

The
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
credit facility also contains covenants concerning the maintenance of minimum levels of debt service coverage, minimum levels of EBITDA, adhere to minimum ratios of funded debt to
EBITDA, and restrictions on annual capital expenditures. The Company's 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 credit facility and, potentially, an acceleration of the obligation to repay amounts owed, if any.

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

Certain information contained in this report constitutes "forward-looking statements." Forward-looking statements are those that use the words such as "believe,"
"expect," "anticipate," "intend," "plan," "may," "will," "likely," "should," "estimate," "continue," "future" or the negative thereof, other variations thereon or other comparable expressions. These
words indicate future events and trends. Forward-looking statements are the Company's current views with respect to future events and financial performance. These forward-looking statements are
subject to many assumptions, risks and uncertainties that could cause actual results to differ significantly from historical results or from those anticipated by the Company. It is advisable not to
place undue reliance on the Company's forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new
information, future events, or otherwise. The most significant risks are detailed from time to time in the Company's filings and reports with the Securities and Exchange Commission including this
Annual Report on Form 10-K and the following:



10

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ITEM 1B.Unresolved Staff Comments.

None.

ITEM 2.Properties.

The Company leases approximately 17,000 square feet of office space at its principal executive office in Irving, Texas, under a lease that expires
in March 2012.

The
Company leases approximately 6,000 square feet of office space in Troy, Michigan under a lease that expires in December 2006. Under the same lease, the Company
subleases another 3,000 square feet to a third party.

The
Company subleases approximately 12,000 square feet of office space in Reston, Virginia to a third party under a sublease that expires in October 2007.

The
Company leases space for its office in Hong Kong under a month-to-month lease. During 2005, leases for office space in Switzerland were allowed to expire and
were not renewed. The Company believes its facilities are adequate for its current needs.

ITEM 3.Legal Proceedings.

In 2002, the Company filed for insolvency of its wholly-owned subsidiary headquartered in Frankfurt, Germany and in 2005, the Company filed for insolvency of its
wholly-owned subsidiary in Switzerland. During 2005, a suit was filed against the Company's subsidiary in Switzerland by the German insolvency administrator to recover approximately
$0.3 million related to an intercompany receivable between the two entities. Due to the insolvency of the Swiss entity, the suit was dismissed during the fourth quarter in 2005. The Company
believes any future legal action related to the closure of its German and Swiss subsidiaries would not have a material impact on the Company's financial position, results of operations or cash flows
in future years.

During
the third quarter of 2003, the Company became aware of past circumstances involving a former employee that management believed would result in future litigation or settlement
costs. As such, the Company recorded a $150,000 contingent liability related to the matter. On December 17, 2003, the Company entered into a settlement agreement with this former employee
resulting in $121,160 payable to the former employee in two installments, due December 17, 2003 in the amount of $21,160 and January 5, 2004 in the amount of $100,000. The Company made
both installment payments. In addition to the settlement payments, as part of the settlement agreement, the Company and the former employee entered into a consulting agreement whereby the Company paid
its former employee $84,640, in five equal monthly installments of $16,928 beginning January 2004 with the final payment being made in May 2004. The Company's former employee provided
reports related to the financial strength and other conditions of the Asian marketplace as performance under the consulting agreement, and no obligation to this former employee remained after the
final payment was made in 2004.

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

11

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

On December 20, 2005, stockholders holding 7,144,906 shares, or approximately 67%, of the Company's common stock approved by written consent the 2005 Omnibus
Stock and Incentive Plan for Thomas Group, Inc. ("2005 Plan") and awards made under the 2005 Plan to James T. Taylor, the Company's President and Chief Executive Officer, and David
English, the Company's Chief Financial Officer. In addition, on December 23, 2005, stockholders holding 7,144,906 shares, or approximately 67%, of the Company's common stock approved, by
written consent, an amendment to the 2005 Plan, increasing the number of shares available under the 2005 Plan from 750,000 to 1,000,000 and granting a share price restricted share award under the 2005
Plan to Mr. Taylor.

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 was quoted on the OTC Bulletin Board (OTCBB) under the symbol "TGIS.OB" during 2004 and through December 22, 2005. Beginning
December 23, 2005 the Company's common stock was listed in the Nasdaq Capital Market 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 OTC Bulletin Board through December 22, 2005. Stock prices set forth beginning December 23, 2005 represent the highest and lowest
sales prices per share as reported on the Nasdaq Capital Market.:

Quarter Ended

High

LowDecember 31, 2005

$
9.25

$
5.32September 30, 2005

$
6.97

$
2.55June 30, 2005

$
3.23

$
1.77March 31, 2005

$
2.00

$
1.25December 31, 2004

$
1.45

$
1.15September 30, 2004

$
1.55

$
0.75June 30, 2004

$
1.75

$
1.26March 31, 2004

$
1.90

$
1.20


Holders of Record

As of March 23, 2006 there were approximately 1,173 holders of record of the Company's common stock.

Dividends

Prior to 2005, the Company had paid no dividends to stockholders. On December 20, 2005, the Company adopted a policy under which it intends to pay an
aggregate annual cash dividend of $0.20 on each outstanding share of common stock, payable quarterly at a rate of $0.05 per share. On December 20, 2005, Thomas Group's Board of Directors
declared the first quarterly cash dividend under this annual dividend policy. The record date was December 30, 2005 and the payment date was January 13, 2006. Payments of future
dividends under the policy will be at the discretion of the Company's board of directors after taking into account various factors, including the Company's financial condition, operating results, and
current and anticipated cash needs.

12

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Sale of Unregistered Securities

During 2005, the Company issued a total of 869,798 shares of unregistered common stock to General John T. Chain and Edward P. Evans in exchange for
$260,939 in cash as a result of the exercise of warrants (See the accompanying Note 1(f) and Note 14 of the Consolidated Financial Statements included herein).

The
transactions did not involve any underwriters, underwriting discount or commissions, or any public offering, and the Company believes that the transactions were exempt from the
registration by virtue of Section 4(2) of the Securities Act of 1933, as amended.

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. 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.

The
selected financial data below as of and for each of the years in the five-year period ended December 31, 2005 are derived from our audited financial statements.

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

|                                                                                                                                                                                                |  | Year Ended December 31, |       
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------
|
|
|Revenue                                                                                                                                                                                         |  | $                       | 43,062
|Operating expenses                                                                                                                                                                              |  |                         | 34,746
|                                                                                                                                                                                                |  |                         |       
|Operating income (loss)                                                                                                                                                                         |  |                         | 8,316 
|Other expense, net                                                                                                                                                                              |  |                         | (13   
|                                                                                                                                                                                                |  |                         |       
|Income (loss) from continuing operations before income taxes                                                                                                                                    |  |                         | 8,303 
|Income taxes (benefit)                                                                                                                                                                          |  |                         | 329   
|                                                                                                                                                                                                |  |                         |       
|Income (loss) from continuing operations before the cumulative effect of a change in accounting principle                                                                                       |  |                         | 7,974 
|(Gain) loss on discontinued operations, net of related income tax expense (benefit) effect of $58, $(44), $(184), $263 and $(3,386) for the years 2005, 2004, 2003, 2002 and 2001, respectively |  |                         | 1,212 
|                                                                                                                                                                                                |  |                         |       
|Income (loss) before the cumulative effect of a change in accounting principle                                                                                                                  |  | $                       | 6,762 
|Cumulative effect of a change in accounting principle, net of related income tax benefit of $0.5                                                                                                |  |                         | (10   
|                                                                                                                                                                                                |  |                         |       
|Net income (loss)                                                                                                                                                                               |  | $                       | 6,752 
|                                                                                                                                                                                                |  |                         |       
|                                                                                                                                                                                                |  |                         |       

13

---



|Per share of common stock:  |                                                                            |   |      |            |   |   |            |   |   |            |   |    |           |   |    |          
|--------------------------- | -------------------------------------------------------------------------- | - | ---- | ---------- | - | - | ---------- | - | - | ---------- | - | -- | --------- | - | -- | ---------
|Basic earnings per share:   |                                                                            |   |      |            |   |   |            |   |   |            |   |    |           |   |    |          
|                            | Income (loss) from continuing operations                                   |   | $    | 0.76       |   | $ | 0.25       |   | $ | 0.29       |   | ($ | 1.93      | ) | ($ | 4.45     
|                            | (Gain) loss on discontinued operations, net of tax                         |   |      | (0.12      | ) |   | (0.10      | ) |   | (0.22      | ) |    | 0.54      |   |    | 0.58     
|                            | Cumulative effect of a change in accounting principles, net of tax benefit |   |      |           |   |   |           |   |   |           |   |    |          |   |    |         
|                            |                                                                            |   |      |            |   |   |            |   |   |            |  
|                            | Net income (loss)                                                          |   | $    | 0.64       |   | $ | 0.15       |   | $ | 0.07       |   | ($ | 1.39      | ) | ($ | 3.87     
|Diluted earnings per share: |                                                                            |   |      |            |   |   |            |   |   |            |   |    |           |   |    |          
|                            | Income (loss) from continuing operations                                   |   | $    | 0.75       |   | $ | 0.22       |   | $ | 0.28       |   | ($ | 1.93      | ) | ($ | 4.45     
|                            | (Gain) loss on discontinued operations, net of tax                         |   |      | (0.12      | ) |   | (0.08      | ) |   | (0.21      | ) |    | 0.54      |   |    | 0.58     
|                            | Cumulative effect of a change in accounting principles, net of tax benefit |   |      |           |   |   |           |   |   |           |   |    |          |   |    |         
|                            |                                                                            |   |      |            |   |   |            |   |   |            |  
|                            | Net Income (loss)                                                          |   | $    | 0.63       |   | $ | 0.14       |   | $ | 0.07       |   | ($ | 1.39      | ) | ($ | 3.87     
|                            |                                                                            |   |      |            |   |   |            |   |   |            |  
|Dividends per share:        |                                                                            | $ | ..05 |            | $ |  |            | $ |  |            | $ |   |           | $ |   |          
|Weighted average shares:    |                                                                            |   |      |            |   |   |            |   |   |            |   |    |           |   |    |          
|                            | Basic                                                                      |   |      | 10,512,703 |   |   | 9,658,131  |   |   | 9,555,662  |   |    | 5,538,520 |   |    | 4,164,517
|                            | Diluted                                                                    |   |      | 10,702,375 |   |   | 10,548,922 |   |   | 10,169,575 |   |    | 5,538,520 |   |    | 4,164,517

---

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

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 15(a)(1) and (2) of this Annual Report on Form 10-K.

Overview

The Company derives the majority of its revenue from monthly fixed, task-based and incentive fees for the implementation of PVM and other business
improvement programs. Task-based fees are based on specific deliverables completed at varying points in time. 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 task-based and 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

14

---



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 United States operations, the Company has operations in the Asia/Pacific region. Some of the Company's revenue related transactions are denominated in the local
currency where the client is located. The majority of the Company's operating expenses for its subsidiaries are denominated in the local currency of the subsidiary. Therefore, the Company is exposed
to currency fluctuation risks. See Item 7A, "Quantitative and Qualitative Disclosure About Market Risk."

Critical Accounting Policies

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

Revenue Recognition

Revenue is recognized when realizable and earned generally as services are provided over the life of the contract. Fixed fee revenue is recognized on a percentage
completion method, based on direct
labor hours expended. Task-based, or deliverable-based, fees are recognized when the task/deliverable is completed and delivered to the client. Incentive fee revenue is recognized in the
period in which the related improvements are achieved. 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

Income taxes are calculated using the asset and liability method required by FASB Statement No. 109, "Accounting for Income Taxes." Deferred
income taxes are recognized for the tax consequences resulting from timing differences by applying enacted statutory tax rates applicable to future years. These timing differences are associated with
differences between the financial and the tax basis of existing assets and liabilities. Under FAS No. 109, a statutory change in tax rates will be recognized immediately in deferred
taxes and income. Net deferred taxes are recorded both as a current deferred income tax asset and as other long-term liabilities based upon the classification of the related timing
difference.

In
addition to timing differences arising from operating assets and liabilities, the Company also records deferred tax assets for the tax benefits of net operating losses
("NOL") and foreign tax credits. For United States federal tax purposes, at December 31, 2002, the Company had NOL carryovers of approximately $4.2 million. Under
the Section 382 limitation, discussed below, $0.7 million was used to offset United States taxable income in 2003. In 2004, $0.2 million expired under Section 382,
but an $8.1 million in United States NOL was generated, resulting in a balance of $11.4 million at December 31, 2004. In 2005, the Company used $8.1 million of the
NOL to offset United States taxable income and used $0.2 million of the NOL limited under Section 382, resulting in an NOL balance of $3.1 million at December 31,
2005 (See the accompanying Note 9 of the Consolidated Financial Statements included herein). The Company had unused foreign tax credit ("FTC") carryovers of $0.8 million, on
December 31, 2002. These credits were converted to deductions and amended returns were filed for the appropriate years, leaving approximately $3,000 in foreign tax credits which were utilized
in 2005. In Asia, the Company used its remaining $0.7 million of NOL carryovers to

15

---



offset
taxable income in 2004. In Europe, the Company has $2.5 million of NOL carryovers which will expire unused due to the liquidation of the Company's subsidiaries located in Europe.

In
assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Due to the uncertainty of the Company's ability to utilize its net deferred tax assets, primarily due to the Section 382 limitation discussed above, the Company has provided a valuation
allowance for the full amount of the net deferred tax assets. However, if the Company generates United States and foreign taxable income in future periods, reversal of the valuation allowance
could have a positive impact on net income in the period that it becomes more likely than not that deferred tax assets will be realized.

Accumulated Other Comprehensive Loss

Translation of the financial statements of the Company's operations in Europe and Asia resulted in accumulated translation adjustments of approximately $682,000
at December 31, 2004 that was required to be carried on the balance sheet as a separate component of stockholders' equity. During 2005, the Company liquidated its subsidiaries in Switzerland
resulting in a reclassification of a $713,000 accumulated other comprehensive loss to the income statement. The remaining gain of $31,000 relates to the Company's subsidiary in Hong Kong which is
currently under liquidation. Upon substantially complete liquidation of the Company's investment in its Hong Kong subsidiary, $31,000 will be reclassified as a non-cash gain included in
operations for the year then ended.

Results of Operations

|                                                                                                   |  | Percentage of Revenue For Year Ended December 31, |  
|-------------------------------------------------------------------------------------------------- |  | ------------------------------------------------- | -
|
|Revenue                                                                                            |  | 100.0                                             | %
|Cost of sales                                                                                      |  | 47.9                                              | %
|                                                                                                   |  |                                                   |  
|Gross profit                                                                                       |  | 52.1                                              | %
|Selling, general and administrative                                                                |  | 32.8                                              | %
|                                                                                                   |  |                                                   |  
|Operating income                                                                                   |  | 19.3                                              | %
|Interest income (expense), net                                                                     |  | (0.2)                                             | %
|Other income, net                                                                                  |  | 0.2                                               | %
|                                                                                                   |  |                                                   |  
|Income from continuing operations before income taxes                                              |  | 19.3                                              | %
|Income taxes (benefit)                                                                             |  | 0.8                                               | %
|                                                                                                   |  |                                                   |  
|Income from continuing operations before the cumulative effect of a change in accounting principle |  | 18.5                                              | %
|Loss on discontinued operations, net of tax                                                        |  | 2.8                                               | %
|                                                                                                   |  |                                                   |  
|Income before cumulative effect of a change in accounting principle, net of tax                    |  | 15.7                                              | %
|Cumulative effect of a change in accounting principle, net of tax                                  |  | 0.0                                               | %
|                                                                                                   |  |                                                   |  
|Net income                                                                                         |  | 15.7                                              | %
|                                                                                                   |  |                                                   |  

2005 Compared to 2004

Revenue

During the first quarter of 2002, the Company adopted EITF 00-14 "Income Statement Characterization of Reimbursements
Received for 'Out-of-pocket' Expenses Incurred" requiring certain reimbursements received for out-of-pocket expense incurred be
classified in the income statement as

16

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revenue.
The Company has presented revenue in two components: consulting revenue before reimbursements and reimbursements. Reimbursements reclassified to revenue for the years ended
December 31, 2005, 2004, and 2003 were $0.1 million, $0.1 million and $0.6 million, respectively. In addition, cost of sales has been presented in two components: cost of
sales before reimbursable expenses and reimbursable expenses.

Revenue
increased $13.1 million, or 44%, to $43.1 million in 2005, from $30.0 million in 2004. Fixed fee revenue was $42.9 million, or 99% of revenue in 2005,
compared to $29.6 million, or 99% in 2004. The increase in fixed fee revenue primarily relates to contracts signed with the United States government. Incentive fee revenue was
$0.1 million, or 0.5% of revenue in 2005, compared to $0.3 million, or 1% of revenue in 2004. Reimbursements were $0.1 million, or 0.5% of revenue in 2005, compared to
$0.1 million, or 0.5% of revenue in 2004.

North
America region revenue increased $14.1 million, or 48%, to $43.0 million in 2005, from $28.9 million in 2004. United States government contracts
increased $14.5 million, or 54%, to $41.3 million from $26.8 million in 2004. Contracts from commercial clients in the United States and Canada decreased $0.4 million, or
19%, to $1.7 million from $2.1 million in 2004.

Europe
region revenue is included in discontinued operations and decreased $10,000 or 100%, to $0 from $10,000 in 2004. The Company has no significant continuing involvement in its
former operations in Europe.

Asia/Pacific
region revenue decreased $1.1 million, or 99%, to $29,000 million in 2005, from $1.1 million in 2004. The decrease is attributable to the 2004
completion of programs that were not replaced in 2005.

Gross Profit

Gross profit for 2005 increased to $22.4 million and 52% of revenue, from $15.0 million and 50% of revenue in 2004. The improvement in gross profit
is primarily attributable to increased revenue, maintaining full utilization of the Company's direct labor and strict control over costs.

Selling, General and Administrative

Selling, general and administrative expense for 2005 increased $1.1 million, or 9%, to $13.5 million from $12.4 million in 2004. The increase
is composed primarily of a $0.5 million increase in selling costs and a $0.6 million increase in stock-based compensation expense attributable to the increase in the value of the
Company's stock during the year.

Sublease Losses

During the first quarter of 2005, the Company recorded a $0.6 million charge relating to subleasing excess office capacity, at market rates. The charge is
based on the shortfall between future sublease income and costs expected to be incurred under the Company's leases with its landlords. This action had no impact on the fourth quarter, but for the
year, accounted for $0.6 million, or $0.06 per diluted share (See the accompanying Note 11 of the Consolidated Financial Statements included herein).

Discontinued Operations

In 2005, the Company disposed of its operations in Switzerland. Although the Company maintained only minimal S,G&A costs in Switzerland, the operations had not
produced significant revenue for two years. It was determined the cost of maintaining an office was no longer prudent, and the operations were disposed of by filing for insolvency with the Swiss
insolvency court. During the fourth quarter of 2005, the Company determined that the liquidation of its investment in its Swiss

17

---



entity
was substantially complete, triggering the non-cash reclassification of $713,000 in accumulated translation loss adjustments to the income statement. These adjustments represent
foreign currency losses incurred prior to 2001 that were required to be reported as a separate component of stockholders' equity titled "Accumulated other comprehensive loss". This reclassification
has no effect on equity for the quarter or for the year as the amount was previously recorded as a direct reduction of equity. The presentation of all prior periods is revised to reflect the Swiss
operations as discontinued operations. For the year 2005, the effect of the discontinued Swiss operation was $1.2 million, net of tax, or $0.12 per diluted share, compared to
$0.9 million, net of tax, or $0.08 per diluted share, for the year 2004 (See the accompanying Note 2 of the Consolidated Financial Statements included herein).

Cumulative effect of a change in accounting principle

The company adopted FASB Statement No. 123(R), "Share-based Payments" on October 1, 2005. FAS No. 123(R) which eliminates the
ability to account for stock-based compensation using the intrinsic value provisions of Accounting Principles Board Opinion No. 25, and instead requires such compensation to be valued using a
fair-value-based method. The Company applied FAS No. 123(R) using the Modified Prospective Application method. Under this method, compensation cost is recognized on or after
the adoption date for the portion of the outstanding equity and liability awards for which the requisite service has not yet been rendered. The fair value of certain liability awards are required to
be adjusted to fair value at the date of adoption, and such adjustment is to be recognized in the income statement, net of any related tax effect, as a cumulative effect of a change in accounting
principle. The adjustment to the liability awards was recorded in the fourth quarter as a cumulative effect of a change in accounting principle and totaled $10,000, net of tax(See the
accompanying Note 1(c) of the Consolidated Financial Statements).

Income Taxes

The Company's effective tax rate for 2005 was 4%, compared to 3% in 2004. The change in the Company's effective tax rate is primarily related to tax refunds
received in 2004 that did not recur in
2005. The refunds are the result of converting foreign tax credits to deductions prior to their expiration, and filing amended tax returns to obtain the refunds.

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 were reduced by a valuation allowance adjustment. While a valuation allowance is currently
required for the Company's net deferred tax assets, as discussed above, the assets remain available for use in the future, subject to the limitations described above, to offset future income tax
liabilities should sufficient amounts of United States and foreign income be generated in the carryforward period.

Consistent
with the Company's position since December 31, 2001, the Company recorded no income tax expense for income offset by NOL carryforwards previously subject to valuation
reserve.

2004 Compared to 2003

Revenue

Revenue decreased $0.3 million, or 1%, to $30.0 million in 2004, from $30.3 million in 2003. Fixed fee revenue was $29.6 million, or
99% of revenue in 2004, compared to $29.3 million, or 97% of revenue in 2003. Incentive fee revenue was $0.3 million, or 1% of revenue in 2004, compared to $0.4 million, or 1% of
revenue in 2003. The decrease in incentive fee revenue relates to the substantial completion of an incentive based contract during 2004. Reimbursements were $0.1 million, or 0% of revenue in
2004, compared to $0.6 million, or 2% of revenue in 2003.

18

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North
America region revenue increased $1.8 million, or 7%, to $28.9 million in 2004, from $27.1 million in 2003. Revenue from United States government
contracts increased $3.4 million, or 15%, to $26.8 million from $23.4 million in 2003. Revenue from commercial clients in the United States and Canada decreased
$1.6 million, or 43%, in 2004 to $2.1 million, from $3.7 million in 2003.

Asia/Pacific
region revenue decreased $2.1 million, or 66%, to $1.1 million in 2004, from $3.2 million in 2003. The decrease is attributable to the completion of
several programs during 2003 that contributed $1.0 million to revenue in 2003, and a $1.1 million reduction in revenue due to substantial completion of another program.

Europe
region revenue is included in discontinued operations and decreased $122,000, or 92%, to $10,000 in 2004, from $132,000 in 2003. The decrease is primarily attributable to the
significant decline in the European economy, which adversely affected the Company's ability to secure contracts.

Gross Profit

Gross profit for 2004 increased to $15.0 million and 50% of revenue, from $14.9 million and 49% of revenue in 2003. The improvement in gross profit
is primarily attributable to a higher concentration of pure process improvement programs. In 2003, the Company was involved in two contracts with clients requiring software assistance from
third-parties, at significant cost to the Company. These programs ended in 2003, and it was decided not to pursue software-related ventures in 2004 due to their lower margins.

Selling, General and Administrative

Selling, general and administrative expense for 2004 increased $0.6 million, or 5%, to $12.4 million from $11.8 million in 2003. The increase
is comprised of increases of $0.2 million in expenses such as travel and telecommunications, $0.2 million of reductions in outside professional services such as legal and accounting,
$0.4 million of reductions in leases of office equipment and office space, and $1.0 million increase in selling costs, such as salaries and advertising.

Income Taxes

The Company's effective tax rate for 2004 was 3%, compared to an effective tax benefit rate of 23% in 2003. The change in the Company's effective tax rate is
primarily related to the reversal of prior year foreign tax estimates in 2003, which did not recur in 2004.

At
December 31, 2001, the Company determined, based primarily on its recent history of operating losses in the United States ("US"), 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 were reduced by a
valuation allowance adjustment. While a valuation allowance is currently required for the Company's net deferred tax assets, the assets remain available for use in the future, subject to the
limitation described below, to offset future income tax liabilities should sufficient amounts of United States and foreign income be generated in the carryforward period.

Net Operating Losses and Section 382 Limitation

During 2002, the Company reached agreements with its current Chairman of the Board, General John T. Chain, Jr., and with Edward P. Evans, a stockholder of the
Company, to infuse $1.0 million each into the Company, in the form of Subordinated Convertible Notes bearing interest at 6% annually. Upon stockholder approval at the Company's Annual Meeting
of Stockholders held November 11, 2002, the principal and unpaid interest of $11,500 on the notes were converted to 5,364,002 shares of common stock of the Company at a conversion price
of $0.375 per share. After conversion of the notes and related interest, General Chain and Mr. Evans held approximately 29%

19

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and
33% of the Company's outstanding common stock, respectively. The issuance of these shares, when combined with various other changes in certain stockholders' stock ownership during the three year
period preceding November 11, 2002, resulted in a change in control as provided in Section 382 of the Internal Revenue Code of 1986, as amended. Under Section 382, such a change
in control limits the annual deductible amount of NOL carryforwards that existed on the date of the change in control. The annual limitation is based on a formula involving the value of the Company
immediately prior to the change in control, and the result for the Company is an annual limitation of approximately $0.2 million. At December 31, 2002, the Company had approximately
$4.2 million of NOL carryforwards available. On the 2003 tax return, the Company deducted $0.5 million of NOL carryforwards to offset income earned after the change in control, and
offset income earned prior to the change in control by the $0.2 million limitation amount, resulting in a $3.5 million NOL carryforward at December 31, 2003. In 2004, the Company
generated a net operating loss for US tax purposes of $8.1 million due to the intercompany bad debt deduction from the Company's subsidiaries in Asia (See the accompanying Note 9
of the Consolidated Financial Statements included herein and "Intercompany Bad Debt" below). Under Section 382, $0.2 million of the Company's pre-2003 NOLs expired, resulting
in a NOL carryforward balance of $11.4 million at December 31, 2004.

Foreign Tax Credits

At December 31, 2003, the Company had approximately $2.3 million in FTC carryovers, of which $1.5 million expired in 2003 with the remaining
$0.8 million expiring in 2005. Due to the lack of foreign source taxable income in 2003, the Company was unable to utilize its FTC carryovers. To avoid losing the FTC carryovers, the Company
converted all but $3,000 of the FTC carryovers to tax deductions and carried them back to prior year returns, generating a tax benefit of approximately $34,000, which was recorded during the first
quarter of 2004.

Intercompany Bad Debt

The Company has wholly-owned subsidiaries in Europe and Asia. The subsidiaries in Asia consist of entities in Singapore, China and Hong Kong. The Singapore entity
maintained revenue through 2001 and employees through 2003. Similarly, the China entity maintained employees and revenue into 2003. Revenue in these entities was generated by US employees who traveled
overseas to perform the work. The Asia subsidiaries were charged, via intercompany accounts, a daily rate for services performed by US employees, plus actual travel costs at no markup. In addition,
royalties were accrued to the US parent Company, via intercompany accounts, for use of intellectual property in the performance of such services. Due to a lack of revenue sufficient to support
operations in Singapore and China, the intercompany balances owed to the US parent company were $2.3 million from the Singapore entity and $1.2 million from the China entity. During
2003, the Company determined the entities were no longer efficient and substantially liquidated both entities in 2003, resulting in a $3.5 million bad debt deduction on the Company's 2003 US
tax return.

The
Company's Hong Kong entity substantially completed its only program during 2004 and had no contracts for future revenue; therefore, management decided in 2004 to close the Hong Kong
entity. Intercompany accounts had been used to transact business with the US parent Company, as described above, and upon substantial liquidation of the Hong Kong entity at December 31, 2004,
the intercompany account balance of $10.1 million was deemed uncollectible. Therefore, in 2004 the US parent company recorded bad debt expense of $10.1 million and conversely, the Hong
Kong entity recorded debt forgiveness income in the same amount.

Due
to the NOL created by the bad debt deduction described above, the Company recorded no US federal income tax expense in 2004. NOL carryforwards in Hong Kong were available to offset
the debt forgiveness income; therefore, no income tax was accrued for Hong Kong. However, the company did provide for $68,000 for US state income taxes due to franchise fees and other minimum taxes
and fees levied by certain states in spite of net operating losses for the year.

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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, 2005. 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. The first quarter of 2004 was restated to reflect an adjustment to a tax refund created by the carryback of net operating losses to prior
years.

|                           |         | 2005 |       | 2004  
|-------------------------- | ------- | ---- | ----- | ------
|
|
|
|Revenue                    |         | $    | 7,908 |       
|Gross profit               |         |      | 3,670 |       
|Operating income           |         |      | 18    |       
|Net income (loss)          |         |      | (127) | (c)   
|Earnings (loss) per share: |         |      |       |       
|                           | Basic   |      | $     | (0.01 
|                           | Diluted |      | $     | (0.01 
|Weighted average shares:   |         |      |       |       
|                           | Basic   |      |       | 10,077
|                           | Diluted |      |       | 10,077
|Stock Price(a):            |         |      |       |       
|                           | High    |      | $     | 2.00  
|                           | Low     |      | $     | 1.25  
|                           | Close   |      | $     | 1.93  

---

Liquidity and Capital Resources

Cash provided by operating activities increased $5.7 million, to $6.3 million in 2005, compared to $0.6 million in 2004. The increase in 2005
is primarily attributable to an increase in net profits.

Net
cash used in investing activities increased $124,000 to $166,000 in 2005, from $42,000 in 2004. The increase is a result of increased capital expenditures in 2005. Capital
expenditures in 2005 and 2004 consisted of computer hardware and software upgrades.

Net
cash used in financing activities increased $0.5 million to $2.8 million in 2005, from $2.3 million in 2004. In 2004, the Company paid off its
$2.8 million bank term debt, leaving only $1.4 million in subordinated term debt and an outstanding balance of $0.4 million on its $5.5 million line of credit. In 2005, the
Company eliminated its subordinated and bank debt totaling $1.8 million, repurchased all outstanding warrants for $1.3 million, and received $0.3 million upon the exercise of
stock warrants and options.

In
January and October of 1999, the Company announced two stock repurchase plans for up to 250,000 and 500,000 shares, respectively, to be purchased on the open market. In
August 2000, the

21

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Company
announced an additional stock repurchase plan of up to 750,000 shares to be purchased on the open market. 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. The Company has not repurchased stock since October 23, 2001 and 505,450 shares remain available to be repurchased under the plans.

Former Credit Facility with Comerica Bank

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. Beginning in 2001, the Company experienced a significant decline in revenue related to the downturn in
the economy. The economic downturn and subsequent revenue decline caused the Company not to be in compliance with certain covenants related to its then existing $15.0 million revolving credit
facility, with its then senior lender,
Comerica Bank. As a result, Comerica Bank, in January 2002, reduced the maximum allowable borrowings to $10.0 million, secured by the Company's assets. On March 29, 2002, Comerica
Bank restructured the Company's credit facility to maximum allowable borrowings of $7.5 million, consisting of a $2.5 million revolving line of credit and a $5.0 million term
note. On November 29, 2002, the credit facility was increased to $8.0 million, consisting of a $3.0 million revolving line of credit and a $5.0 million term note. The terms
of the November 29, 2002 amended credit facility extended the maturity date on both the term and revolving notes to September 1, 2003. Term note installment payments and a $150,000
amendment fee, related to the March 29, 2002 amendment, were deferred until the September 1, 2003 maturity date. Pursuant to the amended credit facility, Comerica Bank received, as an
amendment fee, a warrant to purchase 397,443 shares of the Company's common stock at an exercise price of $0.30 per share. On April 15, 2003, the credit facility was amended to extend
the maturity date on both the term and revolving notes and payment of the $150,000 amendment fee to February 2, 2004. In addition, the April 15, 2003 amended credit facility waived all
financial covenants through March 31, 2003, certain of which covenants had been breached as of and prior to that date. The Company was required to make a $1.0 million term note payment
prior to April 15, 2003. Additional term note payments of $1.2 million were made during the remainder of 2003. At December 31, 2003, the Company was in violation of certain debt
covenants under the credit facility, which were waived by the senior lender. On February 2, 2004, the credit facility was revised to extend the maturity date to February 28, 2005. With
this revision, a $200,000 term note payment was made on February 28, 2004, and monthly payments of $100,000 were required beginning March 31, 2004.

Five
payments of $100,000 each were made through July 2004, bringing the outstanding balance on the term note to $2.1 million. On August 16, 2004, the Company agreed
to a credit facility with Bank of America, N.A, at which point the Company's debt with Comerica Bank was paid in full, the related credit agreement between the Company and Comerica Bank was
terminated, and Comerica Bank released all liens related to the credit agreement. The $150,000 amendment fee due to Comerica Bank was forgiven; however, the Company reimbursed Comerica Bank for
$128,000 in legal fees incurred preparing amendments since 2001. On September 27, 2005, the Company repurchased the warrant held by Comerica Bank for 397,443 shares for
$1.25 million, or $3.145 per share, which represented a 37% discount from the market price on that date.

$5.5 Million Revolving Line of Credit with Bank of America, N.A.

On August 16, 2004, the Company signed a $5.5 million revolving line of credit with Bank of America, N.A., replacing Comerica bank as the Company's
senior lender. The Company paid $55,000 as a commitment fee to obtain the financing. All inventory, chattel paper, accounts, equipment and general intangibles of the Company secure the credit
facility. The line of credit is subject to a

22

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borrowing
base calculated as a percentage of the Company's eligible United States trade accounts receivable less than 90 days old. The credit facility matures August 21, 2006, and
bears interest at the prime rate, or LIBOR plus 2.5%, if elected, to be paid monthly. The unused portion of the line of credit bears interest at an annual rate of 0.375%, paid quarterly. The credit
agreement contains financial and non-financial covenants, which if breached, could result in acceleration of amounts owed under the credit facility and the senior lender would be able to
foreclose on the Company's assets. On February 7, 2005, the Company signed an amendment to the credit facility with Bank of America, N.A. allowing, but not requiring, the Company to make
regularly scheduled payments of principal of $0.1 million each month against General Chain's subordinated debt so long as the Company is not in default on any agreement with Bank of America,
N.A. On May 27, 2005, the Company signed an amendment to its loan agreement eliminating an overadvance provision from the original agreement that the Company had never used, removing all
restrictions on repayment of subordinated debt and changing the financials covenants. The amended financial covenants are tested quarterly and require the Company to:



At
December 31, 2005, the outstanding balance on the line of credit was zero, and had not been drawn on since it was paid in full on June 2, 2005. At December 31,
2005, the Company was in compliance with all of its debt covenants.

Subordinated Financing

The Company issued two promissory notes to its current Chairman of the Board, General John T. Chain, Jr. The notes were subordinated to the Company's senior
lender, and their terms were as follows:

|Name                       |  | Issue Date |  | Date Funded |  | Date Retired |  | Principal & Interest Maturity Date |  | Semi-Annual Interest Payment Dates |  | Interest Rate |  | Original Principal Amount
|-------------------------- |  | ---------- |  | ----------- |  | ------------ |  | ---------------------------------- |  | ---------------------------------- |  | ------------- |  | -------------------------
|General John T. Chain, Jr. |  | 3/29/02    |  | 4/4/02      |  | 4/26/05      |  | 4/1/06                             |  | Oct 1/Apr 1                        |  | Prime + 6%    |  | $                        
|General John T. Chain, Jr. |  | 5/31/02    |  | 5/28/02     |  | 6/9/05       |  | 6/1/06                             |  | Dec 1/Jun 1                        |  | Prime + 6%    |  | $                        

On February 7, 2005, the Company signed an amendment to the credit facility with Bank of America, N.A. allowing, but not requiring, the
Company to make regularly scheduled payments of principal of $0.1 million each month against General Chain's subordinated debt so long as the Company is not in default on any agreement with
Bank of America, N.A. The Company made four payments of $0.1 million each to General Chain against the subordinated note dated May 31, 2002, retiring this note on April 26, 2005.
The Company made one payment of $0.1 million to General Chain against the subordinated note dated March 29, 2002. On May 27, 2005, the Company signed an amendment to its credit
agreement, removing any restrictions on the repayment of subordinated debt. On June 9, 2005, the Company repaid the remaining balance of $0.9 million.

The Company's Liquidity Plan

As a result of net cash provided by operations, the Company reduced its debt by $4.5 million in 2003, $2.4 million in 2004 and $1.8 million
in 2005, resulting in the Company having no senior or subordinated debt since June 9, 2005. The Company's ability to reduce debt and generate cash from

23

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operations
is due primarily to revenue increases, cost saving measures such as downsizing and subleasing facilities, and more aggressive collection policies. The Company's ability to maintain gross
margins, control costs and generate cash flow from operations in the future will determine its ability to make payments on debts as they become due and to remain in future compliance with debt
covenants. The Company regularly evaluates its business to enhance its liquidity position.

The
Company's performance will also be affected by prevailing economic conditions. Many of these factors are beyond the Company's control. Recent conflicts throughout the world involving
the United States military could potentially have an adverse affect on the Company's liquidity due to the high concentration of United States government contracts, which could result in
delays in program operations. If future cash flows and capital resources are insufficient to meet the Company's debt obligations and commitments, the Company may be forced to reduce or delay
activities and capital expenditures, obtain additional equity capital or restructure or refinance its debt.

The
Company believes that the bank debt facility described above provides adequate liquidity based on the Company's current growth strategies and cost control measures. The Company also
believes that cash flows provided by operating activities will be sufficient to service debt payments as they become due. In the event that revenue growth exceeds anticipated levels, the Company may
be required to seek additional financing.

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 years ended December 31, 2005, 2004 or 2003. However, there can be no assurance the Company's business will not be affected by inflation in the future.

Off-Balance Sheet Arrangements

At December 31, 2005 and 2004, the Company had no obligations that would qualify to be disclosed as off-balance sheet arrangements.

Contractual Obligations

The Company has contractual obligations with various creditors for the purpose of providing working capital and financing specific assets. The amounts of the
Company's contractual obligations at December 31, 2005, as well as the maturity of these commitments are as follows:(amounts in thousands)

|                            |  |   |       | Payment due in
|--------------------------- |  | - | ----- | --------------
|
|Long-term debt obligations  |  | $ |      |               
|Capital lease obligations   |  |   |      |               
|Operating lease obligations |  |   | 4,329 |               
|Purchase obligations        |  |   |      |               
|                            |  |   |       |               
|Total                       |  | $ | 4,329 |               
|                            |  |   |       |               

Long-term debt obligations:At December 31, 2005, the Company had no long-term debt
obligations. The Company continues to have availability under its $5.5 million line of credit with Bank of America, N.A.

Capital lease obligations:At December 31, 2005, the Company has no capital lease obligations.

24

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Operating lease obligations:Operating lease obligations consist of office rental commitments for the Company's offices in
Irving, Texas; Troy, Michigan, and Reston, Virginia net of rental income to be received under subleases in Troy, Michigan and Reston, Virginia. Various equipment leases for copiers, postage meters and
laptop computers are maintained under operating leases.

Purchase obligations:At December 31, 2005, the Company has no legally binding purchase obligations for goods or
services.

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 at the prime rate, or LIBOR plus 2.5%, if elected. Since January 1, 1994, the prime rate has fluctuated between 9.5%
and 4% and the 1-year LIBOR rate has fluctuated between 7.5% and 1.2%. Based on the volatility of the prime rate in recent years, a five-percentage point increase in interest
rates would have resulted in $25,000 of additional interest expense in 2005. The Company had borrowings on its revolving line of credit from time to time during 2005, with zero outstanding at
December 31, 2005. Through March 23, 2006, the Company had no in borrowings or repayments on its revolving line of credit. The outstanding balance at March 23, 2006 was $0.

Due
to the Company's foreign operations in Europe and Asia, the Company is exposed to transaction adjustments with respect to foreign currency. The Company's functional currency is 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. The Company incurred foreign exchange gains of $9,000 and losses of $8,000 for the years ended December 31, 2005 and 2004, respectively. At December 31, 2005, the
effect of a 10% increase in foreign exchange rates would have resulted in a $3,000 foreign currency exchange loss on the Company's non-United States denominated assets and a $8,000
foreign 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, 2005, would have been a $5,000 foreign currency exchange loss. The Company believes that operating under United States dollar functional currency, 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.

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ITEM 9A.Controls and Procedures.

Based
on the evaluation of the Company's disclosure controls and procedures as of the end of the period covered by this annual report, James T. Taylor, the Chief Executive Officer,
President, Secretary and David English, the Chief Financial Officer, Vice-President, Treasurer and Assistant Secretary have concluded that, in their judgment, the Company's disclosure
controls and procedures are effective to ensure that information required to be disclosed by the Company, including the Company's subsidiaries, in the reports it files, or submits under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Management necessarily
applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management's control objectives. The
design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions, regardless of how remote.

Extension of Compliance Date for Management's Report on Internal Control Over Financial Reporting

The Company is a non-accelerated filer as defined in Rule 12b-2 of the Act. On September 21, 2005, the Securities and
Exchange Commission extended the compliance dates for non-accelerated filers concerning the provisions of Exchange Act Rule 13a-15(d) or 15d-15(d),
whichever applies, requiring an evaluation of changes to internal control over financial reporting requirements with respect to the company's first periodic report due after the first annual report
that must include management's report on internal control over financial reporting. A company that is a non-accelerated filer must begin to comply with these requirements for its first
fiscal year ending on or after July 15, 2007. On March 2, 2005, the compliance period was extended to the amended portion of the introductory language in paragraph 4 of the
certification required by Exchange Act Rules 13a-14(a) and 15d-14(a) that refers to the certifying officers' responsibility for establishing and maintaining
internal control over financial reporting for the company, as well as paragraph 4(b). The amended language must be provided in the first annual report required to contain management's internal
control report and in all periodic reports filed thereafter. The extended compliance dates also apply to the amendments of Exchange Act Rules 13a-15(a)
and 15d-15(a) relating to the maintenance of internal control over financial reporting.

Under
the internal control reporting provisions of the Act, Management will be responsible for establishing and maintaining adequate internal control over financial reporting as defined
in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

The
Company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations
of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's
assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject

26

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to
the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Prior
to the extended deadline in 2007, management will conduct an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management will determine whether the Company's
internal control over financial reporting is effective. Management's assessment of the effectiveness of the Company's internal control over financial reporting will be audited by an independent
registered public accounting firm and stated in their report which will be included in the Company's Annual Report of Form 10-K filing.

There
were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant deficiencies and material weaknesses.

ITEM 9B.Other Information.

There
was no information required to be disclosed in a report on Form 8-K in the fourth quarter of 2005 which was not reported.

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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 for its 2006 Annual Meeting of Stockholders, which will be filed within 120 days of December 31, 2005.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires certain officers and directors, and any persons who own more than ten-percent of
the common stock outstanding to file forms reporting their initial beneficial ownership of shares and subsequent changes in that ownership with the Securities and Exchange. Based solely on a review of
the copies of the forms furnished to the Company, or written representations from certain reporting persons that no Forms 5 were required, the Company believes that during the 2005 fiscal year
the reporting persons complied with all section 16(a) filing requirements.

Additional
information required by Item 10, including information regarding the Company's audit committee financial expert, is incorporated herein by reference to such information
as set forth in the Company's definitive Proxy Statement for our 2006 Annual Meeting of Stockholders to be held on June 20, 2006. The Company has made available free of charge on its Internet
Web Site (http://www.thomasgroup.com) the Code of Business Conduct and Ethics applicable to all employees of the Company including the chief executive
officer and chief financial officer. The Company will make immediate disclosure by a current report on Form 8-K and on its web site of any change to, or waiver from, the Code
of Business Conduct and Ethics for principal executive and senior financial officers of the Company. The Company will also provide to any person without charge, upon
request, a copy of such code of ethics. Please send your written request to: Thomas Group, Attn: CFO, 5221 N. O'Connor Blvd, Suite 500, Irving, TX 75039.

ITEM 11. Executive Compensation.

The discussion under "Executive Compensation" in the Company's Proxy Statement for its 2006 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 2006 Annual Meeting is incorporated
herein by reference.

The
following table provides information related to the number of shares to be issued upon exercise of all outstanding options, warrants and rights and the number of shares available for
future issuance under the Company's equity compensation plans at December 31, 2005.

28

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EQUITY COMPENSATION PLAN INFORMATION

|                                                           |  | (a)       |        | (b) |      | (c)
|---------------------------------------------------------- |  | --------- | ------ | --- | ---- | ---
|
|Equity compensation plans approved by security holders     |  | 1,074,703 | (1)(2) | $   | 3.92 |    
|Equity compensation plans not approved by security holders |  | N/A       |        |     | N/A  |    
|                                                           |  |           |        |     |      |    
|Total                                                      |  | 1,074,703 |        | $   | 3.92 |    

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2005 Omnibus Stock and Incentive Plan for Thomas Group, Inc.

Board of Directors (the "Board") of Thomas Group, Inc. (the "Company"), General John T. Chain abstaining, approved the 2005 Omnibus Stock and
Incentive Plan for Thomas Group, Inc. (the "2005 Plan") and approved restricted stock awards to be granted under the 2005 Plan (the "Initial Awards") to each of James T. Taylor,
President and Chief Executive Officer of the Company ("Taylor"), and David English, Chief Financial Officer of the Company ("English"), and submitted a recommendation to the Board that the 2005 Plan
and Initial Awards be approved. On December 20, 2005, the Board approved and adopted the 2005 Plan and granted the Initial Awards. The 2005 Plan, as approved by the Board on December 20,
2005, made 750,000 shares of the Company's common stock available for issuance under the plan. The Board submitted the 2005 Plan and the Initial Awards to the holders of a majority of the
Company's common stock for action by written consent. On December 20, 2005, stockholders owning a majority of the outstanding shares of common stock approved the 2005 Plan and the grant of the
Initial Awards by action taken by written consent without a meeting in accordance with the Delaware General Corporation Law. Taylor and English each entered into agreements reflecting their respective
Initial Awards on December 27, 2005, to be effective as of December 20, 2005.

On
December 23, 2005, the Committee, General John T. Chain abstaining, approved an additional award under the 2005 Plan for Taylor (the "Additional Award," together with
the Initial Awards, collectively, the "Awards") and approved an increase in the number of shares available under the 2005 Plan from 750,000 shares of the Company's common stock to
1,000,000 shares (the "Plan Increase"). On December 23, 2005, upon recommendation from the Committee, the Board approved the Additional Award and the Plan Increase and submitted
the Additional Award and the Plan Increase to the holders of a majority of the Company's common stock for action by written consent. On December 23, 2005, stockholders owning a majority of the
outstanding shares of common stock approved the Additional Award and the Plan Increase by action taken by written consent without a meeting in accordance with the Delaware General Corporation Law.
Taylor entered into an agreement reflecting the Additional Award on December 27, 2005, to be effective as of December 23, 2005.

The
2005 Plan is effective as of December 20, 2005, the date of its adoption by the Board, subject to approval by a majority of the Company's stockholders and compliance with
Regulation 14C under the Securities Exchange Act of 1934, as amended. Approval of a majority of the Company's

29

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stockholders
has been obtained, and such approval will be effective twenty (20) calendar days after the information statement is mailed to the stockholders. Pursuant to Regulation 14C,
the Company will mail an information statement to its stockholders informing them of, among other things, the actions taken by the Committee, the Board and a majority of the stockholders and of the
terms and conditions of the 2005 Plan and the Awards. Failure to comply with Regulation 14C by December 20, 2006 will result in the 2005 Plan and the Awards being terminated and null and
void. No restricted shares granted pursuant to the Awards will vest prior to stockholder approval and compliance with Regulation 14C.

The 2005 Plan

A total of 1,000,000 shares of the Company's common stock are available for issuance under the 2005 Plan. Awards under the 2005 Plan may consist of a stock
option, a stock appreciation right ("SAR"), a restricted share award or a performance award (payable in cash or shares, or both.) Stock options may take the form of an incentive stock option or a
non-qualified stock option. Incentive stock options may be granted under the 2005 Plan only to employees of the Company or any of the Company's subsidiaries. Non-qualified
options, SARs, restricted share awards or performance awards may be granted to any employee or consultant of the Company. Selection of the recipients of, and the nature and size of, awards granted
under the 2005 Plan will be solely within the discretion of the Committee. No person whose compensation may be subject to limitations on deductibility under Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code"), will be eligible for a grant of more than 700,000 shares, or a cash performance award of more than $1,000,000, during a single calendar
year. The 2005 Plan will terminate on December 20, 2015.

The Initial Awards

The Initial Awards consist of a grant of 300,000 shares of restricted stock to Taylor and 50,000 shares of restricted stock to English.
One-third of the restricted shares granted to each of Taylor and English (each a "Holder," and collectively, the "Holders") will vest on the last day of each fiscal year in which the
Company achieves at least a fifteen percent (15%) increase in the Company's annual profit, as determined pursuant to the definition set forth in the applicable Award agreement, when compared to the
annual profit for 2005 or the year preceding the then-current year, whichever annual profit is larger.

At
each time restricted shares become vested, the Company will deliver to the appropriate Holder forty percent (40%) of such vested shares, and will continue to hold the remaining sixty
percent (60%) of vested shares until the respective Holder's full-time employment is terminated for any reason (the "Retention Period"), and will, as soon as reasonably possible
after such termination, deliver all retained vested shares to the appropriate Holder. The shares held by the Company during the Retention Period, and the Initial Awards, are not transferable by the
Holders.

In
addition to the grant of restricted stock, the Initial Award includes a cash bonus of $100,000 to Taylor and $16,666 to English following any fiscal year in which one third of the
restricted shares vest.

The
Initial Awards automatically terminate and expire on the earlier of (i) the date on which all restricted shares have become vested shares (except the Retention Period will
continue), or (ii) the date the Holder's full-time employment with the Company is terminated for any reason ("Separation"), and upon the date of such Separation all restricted
shares which have not previously vested will be permanently forfeited. Notwithstanding the foregoing, as to Taylor only, one third of the restricted shares will vest, and $100,000 of the cash bonus
will be paid, upon Taylor's Separation if such Separation is by reason of Taylor's Involuntary Termination without Cause or Taylor's resignation for Good Reason within 12 months following a
Change-in-Control, as such capitalized terms are defined in the 2005 Plan and the Initial Award. In the event that such acceleration of vesting occurs as a result of

30

---



Taylor's
Separation following a Change-in-Control, the distribution of shares and/or cash to Taylor as a result of such acceleration will be limited so as not to cause Taylor
to become subject to the excise tax imposed by section 4999 of the Code.

The Additional Award

The Additional Award consists of 300,000 shares of restricted stock (the "Award Shares") granted to Taylor. The lowest closing price per share of
the Company's stock during any given calendar quarter, beginning with the quarter ending December 31, 2005, shall constitute the "Quarterly Price" for that quarter. The Award Shares become
available ("Available Shares") in such amounts as set forth in the Additional Award based upon the highest Quarterly Price during the term of the Additional Award. The number of Available Shares
increases in 20,000 share increments starting with 20,000 based upon a highest Quarterly Price of $6.00 per share, to 300,000 based upon a highest Quarterly Price of $20.00 per
share. As of December 23, 2005, the lowest closing price for the quarter ending December 31, 2005 was $5.40 and thus, no restricted shares will become Available Shares during that
quarter. On the fifth anniversary of the date of grant, if the Additional Award has not previously terminated, the Available Shares will become vested. The Additional Award automatically will
terminate and expire on the earlier of (i) the fifth anniversary of the date of grant, or (ii) the date of Taylor's Separation, and if the Additional Award terminates as a result of
Taylor's Separation, all shares, including Available Shares, will be permanently forfeited. Notwithstanding the foregoing, upon Taylor's Involuntary Termination without Cause or resignation for Good
Reason following a Change-in-Control, as such capitalized terms are defined in the 2005 Plan and Additional Award, all of the then Available Shares will vest immediately. In
the event that such acceleration of vesting occurs as a result of the Holder's Separation following a Change-in-Control, then the distribution of shares to the Holder as a
result of such acceleration will be limited so as not to cause the Holder to become subject to the excise tax imposed by section 4999 of the Code.

General Terms Applicable to the Awards

The restricted shares granted by the Awards do not constitute issued and outstanding common stock for any corporate purposes and the Holders have no rights,
powers or privileges of a holder of unrestricted shares until (i) in the case of the Initial Awards, the restricted shares become vested, and (ii) in the case of the Additional Award, at
the time they become Available Shares, after each such time the Holders shall have all rights, powers and privileges of a holder of unrestricted shares. Without limiting the generality of the
preceding sentence, the Holders are not entitled to receive dividends and other distributions to shareholders which are made prior to the date on which their restricted shares become vested shares or
Available Shares, as applicable.

ITEM 13. Certain Relationships and Related Transactions.

The discussion under "Certain Transactions" in the Company's Proxy Statement for its 2006 Annual Meeting is incorporated herein by reference.

ITEM 14. Principal Accounting Fees and Services.

The discussion under "Principal Accounting Fees and Services" in the Company's Proxy Statement for its 2006 Annual Meeting is incorporated herein by reference.

31

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PART IV

ITEM 15. Exhibits and Financial Statement Schedules.



|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 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            |  | 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).                                                                                                                                           
|4.3            |  | 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).                                                                                            
|4.4            |  | 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 dated June 30, 1999 and incorporated herein by
reference).                                                                                        
|4.5            |  | Warrant to Purchase Common Stock, dated September 20, 2002, issued to John T. Chain, Jr. (filed as Exhibit 99.3 to the Company's Form 8-K dated October 3, 2002 and incorporated herein by reference).                                                                                           
|4.6            |  | Registration Rights Agreement, dated September 20, 2002, by and between the Company and John T. Chain, Jr. (filed as Exhibit 99.4 to the Company's Form 8-K dated October 3, 2002 and incorporated herein by
reference).                                                                         
|4.7            |  | First Amendment to Rights Agreement, dated September 13, 2002, between the Company and Computershare Trust Company, as rights agent (filed as Exhibit 99.7 to the Company's Form 8-K dated October 3, 2002 and incorporated
herein by reference).                                                
|4.8            |  | Warrant to Purchase Common Stock, dated October 17, 2002, issued to Edward P. Evans (filed as Exhibit 99.3 to the Company's Form 8-K/A dated October 22, 2002 and incorporated herein by reference).                                                                                             
|4.9            |  | Registration Rights Agreement, dated October 17, 2002, by and between the Company and Edward P. Evans (filed as Exhibit 99.4 to the Company's Form 8-K/A dated October 22, 2002 and incorporated herein by
reference).                                                                           
|               |  |                                                                                                                                                                                                                                                                                                  

32

---



|4.10  |  | Second Amendment to Rights Agreement, dated October 17, 2002, between the Company and Computershare Trust Company, as rights agent (filed as Exhibit 99.7 to the Company's Form 8-K/A dated October 22, 2002 and incorporated
herein by reference).                  
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.11  |  | Amended and Restated Warrant, dated October 17, 2002, issued to John T. Chain, Jr. (filed as Exhibit 99.9 to the Company's Form 8-K/A dated October 22, 2002 and incorporated herein by reference).                                                                  
|10.1  |  | Amended and Restated 1988 Stock Option Plan 9 (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  |  | Thomas Group, Inc. 401(k) Savings 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  |  | 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).                                                                              
|10.6  |  | Promissory Note between John T. Chain, Jr. and the Company dated March 29, 2002, (filed as Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by
reference).                                      
|10.7  |  | Promissory Note between John R. Hamann and the Company dated March 29, 2002, (filed as Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by
reference).                                         
|10.8  |  | Promissory Note between John T. Chain. Jr. and the Company dated May 31, 2002, (filed as Exhibit 10.12 to the Company's Annual Report on Form 10-K for the year ended December 31, 2002 and incorporated herein by
reference).                                       
|10.9  |  | Note and Warrant Purchase Agreement, dated September 20, 2002, by and between the Company and General Chain (filed as Exhibit 99.1 to the Company's Form 8-K dated October 3, 2002 and incorporated herein by
reference).                                            
|10.10 |  | 6% Subordinated Convertible Promissory Note, dated September 20, 2002, issued to John T. Chain, Jr. in the principal amount of $1,000,000 (filed as Exhibit 99.2 to the Company's Form 8-K dated October 3, 2002 and incorporated
herein by reference).              
|10.11 |  | Subordination Agreement, dated September 20, 2002, by and among the Company, John T. Chain, Jr. and Comerica Bank-Texas (filed as Exhibit 99.5 to the Company's Form 8-K dated October 3, 2002 and incorporated herein by
reference).                                
|10.12 |  | Amended and Restated Note and Warrant Purchase Agreement, dated October 17, 2002, by and between the Company, Edward P. Evans and John T. Chain, Jr. (filed as Exhibit 99.1 to the Company's Form 8-K/A dated October 22, 2002
and incorporated herein by reference).
|      |  |                                                                                                                                                                                                                                                                      

33

---



|10.13 |  | 6% Subordinated Convertible Promissory Note, dated October 17, 2002, issued to Edward P. Evans in the principal amount of $1,000,000 (filed as Exhibit 99.2 to the Company's Form 8-K/A dated October 22, 2002 and incorporated
herein by reference).                       
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.14 |  | Waiver and Consent Agreement, dated October 17, 2002, by and among Edward P. Evans, John T. Chain, Jr. and the Company (filed as Exhibit 99.8 to the Company's Form 8-K/A dated October 22, 2002 and incorporated herein by
reference).                                     
|10.15 |  | Employment Agreement between the Company and John R. Hamann dated December 21, 2002, (filed as Exhibit 10.21 to the Company's Annual Report on Form 10-K for the year ended December 31, 2002 and incorporated herein by
reference).                                        
|10.16 |  | Consulting Agreement between the Company and John R. Hamann dated December 31, 2003 (filed as Exhibit 10.24 to the Company's Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated herein by
reference).                                         
|10.17 |  | Consulting Agreement by and between the Company, Asian Consulting Resources, Ltd. and G. Toby Marion dated February 19, 2004 (filed as Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year ended
December 31, 2003 and incorporated herein by reference).
|10.18 |  | Severance Agreement between the Company and G. Toby Marion dated February 19, 2004 (filed as Exhibit 10.26 to the Company's Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated herein by
reference).                                          
|10.19 |  | Appreciation Rights Agreement between the Company and James T. Taylor dated December 13, 2003 (filed as Exhibit 10.27 to the Company's Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated
herein by reference).                               
|10.20 |  | Appreciation Rights Agreement between the Company and John R. Hamann dated December 12, 2003 (filed as Exhibit 10.28 to the Company's Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated
herein by reference).                                
|10.21 |  | Consulting Agreement between the Company and John T. Chain, Jr. dated February 5, 2004 (filed as Exhibit 10.29 to the Company's Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated herein by
reference).                                      
|10.22 |  | Employment Agreement between the Company and Jimmy C. Houlditch dated August 12, 2003 (filed as Exhibit 10.30 to the Company's Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated herein by
reference).                                       
|10.23 |  | Loan Agreement dated July 21, 2004 between Bank of America, N.A. and the Company (filed as Exhibit 99.1 to the Company's Form 8-K dated August 20, 2004 and incorporated herein by reference).                                                                              
|10.24 |  | Amendment No. 1 dated February 7, 2005 between Bank of America, N.A. and the Company (filed as Exhibit 10.33 to the Company's Form 10-K dated March 30, 2005 and incorporated herein by reference).                                                                         
|10.25 |  | Second Amended Employment Agreement between the Company and James T. Taylor dated February 14, 2005 (filed as Exhibit 10.34 to the Company's Form 10-K dated March 30, 2005 and incorporated herein by reference).                                                          
|10.26 |  | Amended Employment Agreement between the Company and Jimmy C. Houlditch dated March 28, 2005 (filed as Exhibit 10.35 to the Company's Form 10-K dated March 30, 2005 and incorporated herein by reference).                                                                 
|      |  |                                                                                                                                                                                                                                                                             

34

---



|*10.27 |  | Amendment No. 2 dated May 27, 2005 between Bank of America, N.A. and the Company.                                                                                                                       
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.28  |  | Employment Agreement between the Company and David English, dated November 7, 2005 (filed as Exhibit 10.1 to the Company's Form 10-Q dated November 10, 2005 and incorporated herein by reference).     
|10.29  |  | 2005 Omnibus Stock and Incentive Plan for Thomas Group, Inc. dated December 19, 2005 (filed as Exhibit 10.1 to the Company's Form 8-K dated December 27, 2005 and incorporated herein by reference).    
|10.30  |  | Net Profit Restricted Share Award agreement for James T. Taylor dated December 20, 2005 (filed as Exhibit 10.2 to the Company's Form 8-K dated December 27, 2005 and incorporated herein by reference). 
|10.31  |  | Net Profit Restricted Share Award agreement for David English dated December 20, 2005 (filed as Exhibit 10.3 to the Company's Form 8-K dated December 27, 2005 and incorporated herein by reference).   
|10.32  |  | Share Price Restricted Share Award agreement for James T. Taylor dated December 23, 2005 (filed as Exhibit 10.4 to the Company's Form 8-K dated December 27, 2005 and incorporated herein by reference).
|*21    |  | Subsidiaries of the Company.                                                                                                                                                                            
|*23    |  | Consent of Hein & Associates LLP.                                                                                                                                                                       
|24     |  | Power of Attorney (set forth on page 33 of this Annual Report on Form 10-K).                                                                                                                            
|*31.1  |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                 
|*31.2  |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                
|*32.1  |  | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                
|*32.2  |  | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                

---

35

---





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 March 30, 2006.

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

POWER OF ATTORNEY

Each individual whose signature appears below constitutes and appoints James T. Taylor 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/JAMES T. TAYLORJames T. Taylor       |  | Chief Executive Officer, President,
Secretary and Director
(Principal Executive Officer)                  |  | March 30, 2006
|/s/DAVID ENGLISHDavid English           |  | Vice President, Chief Financial Officer, Treasurer, and Assistant Secretary
(Principal Financial Officer) |  | March 30, 2006
|/s/JIMMY C. HOULDITCHJimmy C. Houlditch |  | Vice President, Director, President of North America Operations and Director                              |  | March 30, 2006
|/s/JOHN T. CHAIN, JR.John T. Chain, Jr. |  | Chairman of the Board                                                                                     |  | March 30, 2006
|/s/EDWARD P. EVANSEdward P. Evans       |  | Director                                                                                                  |  | March 30, 2006
|/s/DORSEY R. GARDNERDorsey R. Gardner   |  | Director                                                                                                  |  | March 30, 2006
|/s/CHARLES M. HARPERCharles M. Harper   |  | Director                                                                                                  |  | March 30, 2006
|/s/DAVID B. MATHISDavid B. Mathis       |  | Director                                                                                                  |  | March 30, 2006

36

---





ANNUAL REPORT ON FORM 10-K
ITEM 8, and 15(a)(1) and (c)
LIST OF FINANCIAL STATEMENTS
CERTAIN EXHIBITS
FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2005
THOMAS GROUP, INC.
IRVING, TEXAS

FORM 10-KITEM 15(a)(1)
Thomas Group, Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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



|Report of Independent Registered Public Accounting Firm                                                              
|---------------------------------------------------------------------------------------------------------------------
|Consolidated Balance Sheets as of December 31, 2005 and 2004                                                         
|Consolidated Statements of Operations for the fiscal years ended December 31, 2005, 2004 and 2003                    
|Consolidated Statements of Stockholders' Equity (Deficit) for the fiscal years ended December 31, 2005, 2004 and 2003
|Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2005, 2004 and 2003                    
|Notes to Consolidated Financial Statements                                                                           

F-1

---





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We
have audited the accompanying consolidated balance sheets of Thomas Group, Inc. as of December 31, 2005 and 2004, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 2005. 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 audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Thomas Group, Inc. at
December 31, 2005 and 2004 and the consolidated results of operations and cash flows of Thomas Group, Inc. for each of the three years in the period ended December 31, 2005, in
conformity with U.S. generally accepted accounting principles.

/s/ HEIN & ASSOCIATES LLP

Dallas,
Texas
February 2, 2006

F-2

---





THOMAS GROUP, INC. CONSOLIDATED BALANCE SHEETS

|                                                                                                                         |                                                                                                                                                                                                 | December 31,               |       
|------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------
|
|
|ASSETS                                                                                                                   |                                                                                                                                                                                                
|Current Assets                                                                                                           |                                                                                                                                                                                                 |                            |       
|                                                                                                                         | Cash and cash equivalents                                                                                                                                                                       |                            | $     
|                                                                                                                         | Trade accounts receivable, net of allowances of $137 and $45 at December 31, 2005 and 2004, respectively                                                                                        |                            |       
|                                                                                                                         | Unbilled receivables                                                                                                                                                                            |                            |       
|                                                                                                                         | Other current assets                                                                                                                                                                            |                            |       
|                                                                                                                         | Current assets to be disposed                                                                                                                                                                   |                            |       
|                                                                                                                         |                                                                                                                                                                                                 |                            |       
|                                                                                                                         |                                                                                                                                                                                                 | Total Current Assets       |       
|                                                                                                                         |                                                                                                                                                                                                 |                            |       
|Property and equipment, net of accumulated depreciation of $1,800 and $7,483 at December 31, 2005 and 2004, respectively |                                                                                                                                                                                                 |                            | 493   
|Other assets                                                                                                             |                                                                                                                                                                                                 |                            | 87    
|                                                                                                                         |                                                                                                                                                                                                 |                            |       
|                                                                                                                         |                                                                                                                                                                                                 | $                          | 13,031
|                                                                                                                         |                                                                                                                                                                                                 |                            |       
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                     |                                                                                                                                                                                                
|Current Liabilities                                                                                                      |                                                                                                                                                                                                 |                            |       
|                                                                                                                         | Accounts payable and accrued liabilities                                                                                                                                                        |                            | $     
|                                                                                                                         | Accrued wages and benefits                                                                                                                                                                      |                            |       
|                                                                                                                         | Income taxes payable                                                                                                                                                                            |                            |       
|                                                                                                                         | Dividends payable                                                                                                                                                                               |                            |       
|                                                                                                                         | Revolving line of credit                                                                                                                                                                        |                            |       
|                                                                                                                         | Current maturities of other long-term obligations                                                                                                                                               |                            |       
|                                                                                                                         | Current liabilities to be disposed                                                                                                                                                              |                            |       
|                                                                                                                         |                                                                                                                                                                                                 |                            |       
|                                                                                                                         |                                                                                                                                                                                                 | Total Current Liabilities  |       
|                                                                                                                         |                                                                                                                                                                                                 |                            |       
|Indebtedness to related parties                                                                                          |                                                                                                                                                                                                 |                            |      
|Other long-term obligations                                                                                              |                                                                                                                                                                                                 |                            | 274   
|                                                                                                                         |                                                                                                                                                                                                 |                            |       
|                                                                                                                         |                                                                                                                                                                                                 | Total Liabilities          |       
|                                                                                                                         |                                                                                                                                                                                                 |                            |       
|Commitments and Contingencies (Notes 11 and 13)                                                                          |                                                                                                                                                                                                 |                            |       
|Stockholders' Equity                                                                                                     |                                                                                                                                                                                                 |                            |       
|                                                                                                                         | Common stock, $.01 par value; 25,000,000 shares authorized; 13,209,119 and 12,241,822 shares issued and 10,655,243 and 9,687,946 shares outstanding at December 31, 2005 and 2004, respectively |                            | $     
|                                                                                                                         | Additional paid-in capital                                                                                                                                                                      |                            |       
|                                                                                                                         | Retained earnings (accumulated deficit)                                                                                                                                                         |                            |       
|                                                                                                                         | Accumulated other comprehensive gain (loss)                                                                                                                                                     |                            |       
|                                                                                                                         | Treasury stock, 2,553,876 at December 31, 2005 and 2004, respectively, at cost                                                                                                                  |                            |       
|                                                                                                                         |                                                                                                                                                                                                 |                            |       
|                                                                                                                         |                                                                                                                                                                                                 | Total Stockholders' Equity |       
|                                                                                                                         |                                                                                                                                                                                                 |                            |       
|                                                                                                                         |                                                                                                                                                                                                 | $                          | 13,031
|                                                                                                                         |                                                                                                                                                                                                 |                            |       

See
accompanying notes to consolidated financial statements.

F-3

---



THOMAS GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                                                                                                                   |  | Year Ended December 31, |           
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------------- | ----------
|
|
|Consulting revenue before reimbursements                                                                                                                           |  | $                       | 42,966    
|Reimbursements                                                                                                                                                     |  |                         | 96        
|                                                                                                                                                                   |  |                         |           
|Total revenue                                                                                                                                                      |  |                         | 43,062    
|                                                                                                                                                                   |  |                         |           
|Cost of sales before reimbursable expenses                                                                                                                         |  |                         | 20,540    
|Reimbursable expenses                                                                                                                                              |  |                         | 96        
|                                                                                                                                                                   |  |                         |           
|Total cost of sales                                                                                                                                                |  |                         | 20,636    
|                                                                                                                                                                   |  |                         |           
|Gross profit                                                                                                                                                       |  |                         | 22,426    
|Selling, general and administrative                                                                                                                                |  |                         | 13,500    
|Sublease losses                                                                                                                                                    |  |                         | 610       
|                                                                                                                                                                   |  |                         |           
|Operating income                                                                                                                                                   |  |                         | 8,316     
|Interest income (expense), net                                                                                                                                     |  |                         | (13       
|Other income (expense), net                                                                                                                                        |  |                         |          
|                                                                                                                                                                   |  |                         |           
|Income from continuing operations before income taxes                                                                                                              |  |                         | 8,303     
|Income taxes (benefit)                                                                                                                                             |  |                         | 329       
|                                                                                                                                                                   |  |                         |           
|Income from continuing operations before the cumulative effect of a change in accounting principle                                                                 |  |                         | 7,974     
|Loss on discontinued operations, net of related tax expense effect of $58 in 2005 and tax benefit effect of $44 and $184 for the years 2004 and 2003, respectively |  |                         | 1,212     
|                                                                                                                                                                   |  |                         |           
|Income before the cumulative effect of a change in accounting principle                                                                                            |  |                         | 6,762     
|Cumulative effect of a change in accounting principle, net of related income tax benefit of $0.5                                                                   |  |                         | (10       
|                                                                                                                                                                   |  |                         |           
|Net income                                                                                                                                                         |  | $                       | 6,752     
|                                                                                                                                                                   |  |                         |           
|Earnings per share:                                                                                                                                                |  |                         |           
|Basic:                                                                                                                                                             |  |                         |           
|Income from continuing operations                                                                                                                                  |  | $                       | 0.76      
|Loss on discontinued operations, net of tax effect                                                                                                                 |  |                         | (0.12     
|Cumulative effect of a change in accounting principle, net of tax effect                                                                                           |  |                         |          
|                                                                                                                                                                   |  |                         |           
|Net income                                                                                                                                                         |  | $                       | 0.64      
|Diluted:                                                                                                                                                           |  |                         |           
|Income from continuing operations                                                                                                                                  |  | $                       | 0.75      
|Loss on discontinued operations, net of tax effect                                                                                                                 |  |                         | (0.12     
|Cumulative effect of a change in accounting principle, net of tax effect                                                                                           |  |                         |          
|                                                                                                                                                                   |  |                         |           
|Net Income                                                                                                                                                         |  | $                       | 0.63      
|Weighted average shares:                                                                                                                                           |  |                         |           
|Basic                                                                                                                                                              |  |                         | 10,512,703
|Diluted                                                                                                                                                            |  |                         | 10,702,375

See accompanying notes to consolidated financial statements.

F-4

---





THOMAS GROUP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY  (DEFICIT)

|                                                                                         |                                                                                          | Common Stock |  |   |     |  |   |        |   | Treasury Stock |        |       |  
|---------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | ------------ |  | - | --- |  | - | ------ | - | -------------- | ------ | ----- | -
|
|
|
|Balance as of January 1, 2003                                                            |                                                                                          | 12,109,538   |  | $ | 121 |  | $ | 26,638 |   | $              | (3,509 | )     | $
|Discounted common stock options under employee stock option plans                        |                                                                                          |              |  |   |     |  |   | (42    | ) |                |        |       |  
|Reclass compensation expense for stock options canceled in prior years                   |                                                                                          |              |  |   |     |  |   | (534   | ) |                | 534    |       |  
|Comprehensive income:                                                                    |                                                                                          |              |  |   |     |  |   |        |   |                |        |       |  
|                                                                                         | Foreign currency translation adjustment reclassified to net loss, net of tax (Note 1(q)) |              |  |   |     |  |   |        |   |                |        |       |  
|                                                                                         | Net Income                                                                               |              |  |   |     |  |   |        |   |                |        | 712   |  
|                                                                                         |                                                                                          |              |  |   |     |  |   |        |   |                |        |       |  
|Total Comprehensive Income                                                               |                                                                                          |              |  |   |     |  |   |        |   |                |        |       |  
|Balance as of December 31, 2003                                                          |                                                                                          | 12,109,538   |  |   | 121 |  |   | 26,062 |   |                | (2,263 | )     |  
|                                                                                         |                                                                                          |              |  |   |     |  |   |        |   |                |        |       |  
|Exercise of stock options for 132,284 shares of common stock                             |                                                                                          | 132,284      |  |   | 1   |  |   | 51     |   |                |        |       |  
|Amortization of non-employee stock compensation                                          |                                                                                          |              |  |   |     |  |   | 131    |   |                |        |       |  
|Discounted common stock options under employee stock option plans                        |                                                                                          |              |  |   |     |  |   | (6     | ) |                |        |       |  
|Comprehensive income:                                                                    |                                                                                          |              |  |   |     |  |   |        |   |                |        |       |  
|                                                                                         | Foreign currency translation adjustment reclassified to net loss, net of tax (Note 1(q)) |              |  |   |     |  |   |        |   |                |        |       |  
|                                                                                         | Net Income                                                                               |              |  |   |     |  |   |        |   |                |        | 1,475 |  
|                                                                                         |                                                                                          |              |  |   |     |  |   |        |   |                |        |       |  
|Total Comprehensive Income                                                               |                                                                                          |              |  |   |     |  |   |        |   |                |        |       |  
|Balance as of December 31, 2004                                                          |                                                                                          | 12,241,822   |  |   | 122 |  |   | 26,238 |   |                | (788   | )     |  
|                                                                                         |                                                                                          |              |  |   |     |  |   |        |   |                |        |       |  
|Exercise of stock options for 97,499 shares of common stock                              |                                                                                          | 97,499       |  |   | 1   |  |   | 35     |   |                |        |       |  
|Exercise of stock warrants for 869,798 shares of common stock                            |                                                                                          | 869,798      |  |   | 9   |  |   | 252    |   |                |        |       |  
|Repurchase of stock warrants                                                             |                                                                                          |              |  |   |     |  |   | (113   | ) |                | (1,137 | )     |  
|Deferred compensation from restricted stock grants                                       |                                                                                          |              |  |   |     |  |   | 18     |   |                |        |       |  
|Discounted common stock options under employee stock option plans                        |                                                                                          |              |  |   |     |  |   | (11    | ) |                |        |       |  
|Dividends                                                                                |                                                                                          |              |  |   |     |  |   |        |   |                | (533   | )     |  
|Comprehensive income:                                                                    |                                                                                          |              |  |   |     |  |   |        |   |                |        |       |  
|Foreign currency translation adjustment reclassified to net loss, net of tax (Note 1(q)) |                                                                                          |              |  |   |     |  |   |        |   |                |        |       |  
|Net Income                                                                               |                                                                                          |              |  |   |     |  |   |        |   |                | 6,752  |       |  
|                                                                                         |                                                                                          |              |  |   |     |  |   |        |   |                |        |       |  
|Total Comprehensive Income                                                               |                                                                                          |              |  |   |     |  |   |        |   |                |        |       |  
|Balance as of December 31, 2005                                                          |                                                                                          | 13,209,119   |  | $ | 132 |  | $ | 26,419 |   | $              | 4,294  |       | $
|                                                                                         |                                                                                          |              |  |   |     |  |   |        |   |                |        |       |  

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:              |                                                                                   |                                                       |                                                                
|Net income                                         |                                                                                   | $                                                     | 6,752                                                          
|                                                   | Adjustments to reconcile net income to net cash provided by operating activities: |                                                       |                                                                
|                                                   |                                                                                   | Depreciation                                          |                                                                
|                                                   |                                                                                   | Amortization                                          |                                                                
|                                                   |                                                                                   | Amortization of debt discount                         |                                                                
|                                                   |                                                                                   | Loss on disposal of assets                            |                                                                
|                                                   |                                                                                   | Bad debt                                              |                                                                
|                                                   |                                                                                   | Loss on subleases                                     |                                                                
|                                                   |                                                                                   | Cumulative translation adjustment                     |                                                                
|                                                   |                                                                                   | Cumulative effect of a change in accounting principle |                                                                
|                                                   |                                                                                   | Stock based compensation expense                      |                                                                
|                                                   |                                                                                   | Cancellation of stock option grants                   |                                                                
|                                                   |                                                                                   | Other                                                 |                                                                
|                                                   |                                                                                   | Change in operating assets and liabilities:           |                                                                
|                                                   |                                                                                   |                                                       | (Increase) decrease in trade accounts receivable               
|                                                   |                                                                                   |                                                       | (Increase) decrease in unbilled receivables                    
|                                                   |                                                                                   |                                                       | (Increase) decrease in other assets                            
|                                                   |                                                                                   |                                                       | Increase (decrease) in accounts payable and accrued liabilities
|                                                   |                                                                                   |                                                       | Increase (decrease) in income taxes payable                    
|                                                   |                                                                                   |                                                       |                                                                
|Net cash provided by operating activities          |                                                                                   |                                                       | 6,292                                                          
|Cash Flows From Investing Activities:              |                                                                                   |                                                       |                                                                
|Proceeds from sale of assets                       |                                                                                   |                                                       | 1                                                              
|Capital expenditures                               |                                                                                   |                                                       | (167                                                           
|                                                   |                                                                                   |                                                       |                                                                
|Net cash used in investing activities              |                                                                                   |                                                       | (166                                                           
|Cash Flows From Financing Activities:              |                                                                                   |                                                       |                                                                
|Issuance of common stock                           |                                                                                   |                                                       | 10                                                             
|Proceeds from exercise of stock options            |                                                                                   |                                                       | 35                                                             
|Proceeds from exercise of stock warrants           |                                                                                   |                                                       | 252                                                            
|Repurchase of stock warrants                       |                                                                                   |                                                       | (1,250                                                         
|Repayment of related party indebtedness            |                                                                                   |                                                       | (1,400                                                         
|Repayments of debt and other long-term obligations |                                                                                   |                                                       | (11                                                            
|Net advances (repayments)line of credit           |                                                                                   |                                                       | (430                                                           
|                                                   |                                                                                   |                                                       |                                                                
|Net cash used in financing activities              |                                                                                   |                                                       | (2,794                                                         
|Effect of exchange rate changes on cash            |                                                                                   |                                                       | 6                                                              
|                                                   |                                                                                   |                                                       |                                                                
|Net change in cash                                 |                                                                                   |                                                       | 3,338                                                          
|Cash and cash equivalents                          |                                                                                   |                                                       |                                                                
|                                                   | Beginning of period                                                               |                                                       |                                                                
|                                                   |                                                                                   |                                                       |                                                                
|                                                   | End of period                                                                     |                                                       | $                                                              
|                                                   |                                                                                   |                                                       |                                                                

See
accompanying notes to consolidated financial statements.

F-6

---



THOMAS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005

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 2005
presentation.

(c)Accounting ChangesThe Company adopted the provisions of FASB Statement No. 123(R), "Share-Based
Payments" on October 1, 2005. The Company applied the provisions of FAS 123(R) using the modified prospective application method. Under this method, the difference between the
accumulated deferred compensation costs of liability awards using fair value as defined in FASB Statement No. 123, "Accounting for Stock-Based Compensation," and the accumulated deferred
compensation costs using the intrinsic method under APB Opinion No. 25, "Accounting for Stock Issued to Employees" is recorded as a cumulative effect of a change in accounting principle
in the period of the change. The Company recorded $10,000, net of tax, on October 1, 2005 related to this change in accounting principle. Financial statements for periods prior to 2005 are
presented as previously reported, and adoption of FAS 123(R) had no effect on beginning retained earnings.

(d)Earnings Per ShareEarnings per common share is presented in accordance with the provisions of the FASB
Statement No. 128, "Earnings Per Share", 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 (loss) per share includes the effect of dilutive securities such as stock options and warrants.

F-7

---



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

Income (Numerator)

Shares (Denominator)

Per Share AmountIn thousands, except per share dataYear Ended December 31, 2005Basic earnings per share

$
6,752

10,513

$
0.64Effect of dilutive securities:Options




189


(0.01
)Diluted earnings per share

$
6,752

10,702

$
0.63Year Ended December 31, 2004Basic earnings per share

$
1,475

9,658

$
0.15Effect of dilutive securities:Options and warrants




891


(0.01
)Diluted earnings per share

$
1,475

10,549

$
0.14Year Ended December 31, 2003Basic earnings per share

$
712

9,556

$
0.07Effect of dilutive securities:Options and warrants




614


Diluted earnings per share

$
712

10,170

$
0.07


Total
stock options and warrants outstanding in 2005, 2004 and 2003 that are not included in the diluted earnings per share computation due to their antidilutive effects are
approximately 205,000, 1,313,000, and 1,931,000, respectively. Such options and warrants are excluded due to exercise prices exceeding the average market value of the Company's common stock in 2005,
2004 and 2003.

(e)Management's Estimates and AssumptionsThe presentation of financial statements in conformity with
U.S. generally accepted accounting principles require 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. The Company considers revenue
recognition, the valuation allowance for deferred taxes, and accumulated other comprehensive loss to be the most significant estimates.

(f)WarrantsDuring 2002, the Company executed a Warrant Purchase Agreement exercisable for 434,899 shares
of common stock to General John T. Chain, Jr., Chairman of its Board of Directors, in consideration for a note in the amount of $1.0 million. The warrants were issued with an exercise price of
$0.30 per share and an expiration date of September 20, 2007. These warrants were valued at $0.30 based on the Black-Scholes model. On February 16, 2005 General Chain exercised his
outstanding warrants in full. The Company received the purchase price from General Chain, and on February 23, 2005, the Company issued 434,899 shares of unregistered common stock to
General Chain. A Warrant Purchase Agreement exercisable for 434,899 shares of common stock was also granted during 2002 to Mr. Edward P. Evans, a stockholder, in consideration for a note
in the amount of $1.0 million. The

F-8

---



warrants
were issued with an exercise price of $0.30 per share and an expiration date of October 17, 2007. These warrants were valued at $0.30 based on the Black-Scholes model. On
February 14, 2005, Mr. Edward P. Evans exercised his outstanding warrants in full. The Company received the purchase price from Mr. Evans, and on February 23, 2005 the
Company issued 434,899 shares of unregistered common stock to Mr. Evans.

On
November 26, 2002, a Warrant Purchase Agreement exercisable for 397,443 shares of common stock was granted to Comerica Bank, the Company's former senior lender, in consideration for
amending its credit facility. The warrants were issued with an exercise price of $0.30 and an expiration date of November 26, 2007. These warrants were valued at $0.37 based on the Black
Scholes model. The total fair value of the warrants issued in 2002 was allocated between the warrants and the related debt based on the relative fair value of each. The portion attributable to the
warrants was $284,000 and initially recorded as a reduction, or "discount," of the related debt and a corresponding increase in additional paid in capital. The discount was accreted to interest
expense over the life of the debt. Interest expense of $99,000 and $185,000 was recorded related to these warrants in 2003 and 2002, respectively. As of December 31, 2003, the discount had been
fully accreted. On September 27, 2005, the Company repurchased the warrants for $1.25 million cash, or $3.145 per share, which represented a 37% discount from the market price on that
date.

During
1997, the Company issued 225,000 warrants to purchase common stock to a financial advisor of the Company. During 1998, 175,000 warrants expired. The remaining
50,000 warrants were re-priced at the exercise price of $9.125 per share, the market price on the date of re-pricing. On October 28, 2003, the remaining
50,000 warrants expired.

(g)AdvertisingThe Company expenses the costs of advertising as incurred. Advertising expense was
$0.1 million, $0.1 million, and $0.2 million for the years ended December 31, 2005, 2004, and 2003, respectively.

(h)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 YearsComputer software

3 Years


(i)Capitalized Software Development CostsThe Company capitalized $0.3 million during 2002 and $0.3
during 2001 of certain software development costs, once technological feasibility was achieved. Capitalization of software development costs ceased when the product was available for sale. Software
development costs incurred prior to achieving technological feasibility were charged to selling, general and administrative expense. Amortization of previously capitalized software development costs
were $20,000 in 2005 and $0.2 million in 2004 and 2003, respectively. Unamortized software development costs were $0, $37,000 and $0.2 million at December 31, 2005, 2004 and 2003,
respectively. During 2005, the company recorded a $17,000 loss on the disposal of those assets.

F-9

---



(j)RevenueRevenue contracts specify fixed fees, task-based or deliverable-based fees, or incentives
based fees tied to improvements achieved. Revenue is recognized when realizable and earned generally as services are provided over the life of the contract. Fixed fee revenue is recognized on a
percentage completion method, based on direct labor hours expended. Task-based, or deliverable based, fees are recognized when the task/deliverable is completed and delivered to the
client. Incentive fee revenue is recognized in the period in which the related improvements are achieved. 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.

(k)Unbilled ReceivablesAlthough fixed fee revenue recognition generally coincides with billings the Company may
structure fee billings to increase in the latter stages of a program. In such instances, revenues recognized for services provided are represented in unbilled receivables.

(l)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.

(m)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.

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

(o)Accounts Receivable and Allowance for Doubtful AccountsThe Company records trade receivables related to
billings to its clients for consulting services. Trade receivables normally have terms of 30 to 60 days. The Company has no interest provision for trade accounts receivable that are past due.
Trade accounts receivable are considered past due when the amount due is still uncollected at the time the terms per the trade receivable have expired. An allowance for doubtful accounts is provided
when necessary and is evaluated periodically on a client-by-client basis. For the years ended December 31, 2005 and 2004 there were no receivables written off against
the allowance.

(p)Concentration of Credit RiskFinancial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of trade receivables. The Company encounters a certain amount of credit risk as a result of a concentration of unsecured receivables among a few significant clients.
Accounts receivable from the company's largest client, CACI, INC.FEDERAL (formerly known as CACI AB, Inc. and previously Acton Burnell, Inc.), a wholly-owned
subsidiary of CACI International Inc. (www.caci.com), totaled $5.0 million and $3.2 million, or 59% and 61% of accounts receivable at
December 31, 2005 and 2004, respectively. Accounts receivable from another client, the United States Navy, totaled $2.8 million and $1.2 million, or 33% and 23%, of
accounts receivable at December 31, 2005 and 2004, respectively. Both clients typically pay within 30 days and as of the filing of this report all amounts outstanding at
December 31, 2005 had been collected from these clients.

The
Company is currently operating in Asia where potential economic turmoil may result in significant fluctuations in the value of certain foreign currencies versus the
United States dollar. The Company may experience difficulties expanding its operations or may encounter other collection issues if economic conditions should change. There were no significant
concentrations of credit risk in these foreign operations as of December 31, 2005.

F-10

---



(q)Foreign Currency TranslationThe Company's reporting and functional currency is 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. Monetary
assets such as cash, accounts receivable and most liabilities are remeasured at the period end exchange rate. All other assets, liabilities and stockholders' equity are remeasured based on the
historical rates that existed at the time of the transaction. The resulting remeasurement adjustment is recorded as foreign exchange gain or loss in the statement of operations. Revenue and expense
transactions are remeasured at the average exchange rate for the period. The resulting remeasurement adjustment is recorded as foreign exchange gain or loss in the statement of operations.
Remeasurement gains were $7,000 for the year ended December 31, 2005. Remeasurement losses were $8,000 and $3,000 for the years ending December 31, 2004, and 2003, respectively. There is
no translation adjustment to the separate component of stockholders' equity or adjustment to comprehensive income.

Prior
to the change of the Company's reporting and functional currency to the United States dollar, all adjustments resulting from the translation of foreign currency financial statements were
recorded and reported as a separate component of stockholders' equity titled "Accumulated other comprehensive loss." Generally accepted accounting principles require that such amounts be reclassified
to the income statement and recorded as a non-cash charge to operations upon discontinuance of the operation that generated such currency adjustments. At the beginning of 2005, the
accumulation of prior years' translation adjustments of approximately $682,000 included in accumulated other comprehensive loss related primarily to the Company's Swiss operations in Europe of
$713,000. During 2005 the Company liquidated its subsidiaries in Switzerland, and as a result, reclassified $713,000 from other accumulated comprehensive loss to the income statement. The resulting
reclassification was recorded as a non-cash charge to operations for the year then ended. The Company reclassified approximately $713,000, $104,000 and $7,000 to selling, general and
administrative expense
during the years 2005, 2004, and 2003, respectively, as a result of the substantial liquidation of certain foreign subsidiaries.

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

(s)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. Periodically, the Stockholder
Rights Plan is amended to exempt certain transactions from triggering the rights. During 2002, the Stockholder Rights Plan was amended, on two separate occasions, regarding the conversion of two
$1.0 million subordinated notes to common stock.

(t)Stock Appreciation RightsEffective April 8, 2003 the Company entered into two Stock Appreciation
Right ("SAR") agreements with John R. Hamann, former CEO of the Company, and James T. Taylor current CEO of the Company. Mr. Hamann's agreement granted him 170,317 SARs at a price of
$0.42 per SAR. The SARs were exercisable in full or in part immediately upon grant and entitled Mr. Hamann to a cash payment equal to the fair market value, as defined in the agreement, of a
share of common stock of the Company over $0.42 per share. In the third quarter of 2004, Mr. Hamann exercised 42,400 SARs, which the Company paid. On December 31, 2004,
Mr. Hamann exercised his remaining 127,917 SARs, which the Company paid on January 4, 2005 in accordance with the SARs agreement.

Mr. Taylor's
agreement granted him 99,351 SARs at a price of $0.42 per SAR. The SARs are exercisable in full or in part immediately upon grant and entitle Mr. Taylor to a cash
payment equal to the fair market value, as defined in the agreement, of a share of common stock of the Company over

F-11

---



$0.42
per share. Mr. Taylor's SARs expire the earlier of (a) three months following the date Mr. Taylor ceases to be an employee of the Company other than by reason of death,
retirement or disability as each term is defined in the Company's 1997 Stock Option Plan or (b) if Mr. Taylor ceases to be an employee due to death, retirement or disability, the dates
set forth in Article 9 of the 1997 Stock Option Plan. The total amount expense related to the aforementioned SAR agreements was $684,000, inclusive of a cumulative change in accounting
principle of $11,000, and $238,000 for the years ended December 31, 2005 and 2004, respectively. Amounts due to SAR holders are classified as a current liability based upon the immediate
exercisability of the SAR, and the total amount due was $782,000 and $243,000 at December 31, 2005 and 2004, respectively.

Under
the terms of the Mr. Taylor's SAR agreement, fair market value is defined as the last reported sale price of Common Stock on the Nasdaq Capital Market on the last business
day of the previous calendar quarter. Prior to October 1, 2005, the Company accounted for the SARs under the intrinsic
value method specified in APB Opinion No. 25 "Accounting for Stock Issued to Employees" and related Interpretations, and the amount classified as a current liability based upon immediate
exercisability of the SAR was $243,000 as of December 31, 2005. Effective October 1, 2005, the company adopted the fair value recognition provisions of FASB Statement No. 123(R),
"Share-Based Payment,", as discussed in Note 1(u) below, requiring the Company to value the liability attributable to the SAR using a fair value pricing model. Using the Black-Scholes option
pricing model, the Company recorded the fair value of the SAR liability of $782,000 at December 31, 2005. However, under the terms of SAR agreement, Mr. Taylor would receive $773,000 in
cash upon exercise calculated on the difference between $0.42 and the closing price on the last business day of the previous quarter of $8.20. Under FAS 123(R), any difference between the
amount carried as a liability and the actual settlement amount is recorded in the period the SAR is settled.

(u)Stock Based Compensation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.

On
December 20, the Company adopted the 2005 Omnibus Stock and Incentive Plan which allowed an additional 1,000,000 shares to become available for awards as options, SARs,
restricted shares or performance awards. Under this plan, 650,000 restricted stock awards were been granted to employees in 2005. These awards vest between three and five years and expire
90 days after termination.

Prior
to October 1, 2005, the Company accounted for these plans under the recognition and measurement provisions of APB Opinion No. 25, "Accounting for Stock Issued
to Employees," and related Interpretations. No stock-based employee compensation cost was reflected in the nine month period ending September 30, 2005 or in the years ended December 31,
2004 or 2003 net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective October 1, 2005,
the company adopted the fair value recognition provisions of FASB Statement No. 123(R), "Share-Based Payment," which revises FASB Statement No. 123, "Accounting for Stock-Based
Compensation" using the modified prospective application method. Under the modified prospective method of adoption selected by the company under the provisions of FASB Statement No. 148,
"Accounting for Stock-Based CompensationTransition and Disclosure," compensation cost recognized in the fourth quarter 2005 is the same as that which would have been recognized had
the recognition provisions of FAS 123 been applied from its original effective date. Results for prior years have not been restated. The fair value of these options

F-12

---



was
estimated at the date of grant using a Black-Scholes option pricing model and the risk-free interest rate was based on the U.S. 10-year Treasury Bond yield.
Beginning in October 2005, with the adoption of FAS 123(R), the expected life of stock options and grants are estimated using the term of the awards granted and historical experience.
This information is summarized as follows:

2005

2004

2003Dividend yield

3%

0%

0%Expected volatility

65%

85%

85%Risk free interest rate

4%

3%

3%Expected life (years)

5

5

5


The
following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period.

Year Ended December 31,2005

2004

2003In thousands of dollarsNet income, as reported

$
6,752

$
1,475

$
712Add: Stock-based employee compensation expense


17





Deduct: Total stock-based compensation adjusted for stock option cancellations


(12
)

(6
)

(52
)Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards


(73
)

(128
)

(295
)Pro forma net income

$
6,684

$
1,341

$
365Earnings (loss) per shareAs reported:Basic

$
0.64

$
0.15

$
0.07Diluted

$
0.63

$
0.14

$
0.07Pro forma:Basic

$
0.64

$
0.14

$
0.04Diluted

$
0.62

$
0.12

$
0.03


Upon
the adoption of the FAS 123(R) the Company recorded $10,000, net of tax effects, for the effect of a change in accounting policy. The charge was directly related to the
difference in the accumulated compensation costs of its Stock Appreciation Rights liability awards under the intrinsic method and the fair value at October 1, 2005 and treated as an accounting
change under APB Opinion No. 20,
"Accounting Changes," and FASB Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements."

The
Company already accounts for stock-based compensation for non-employees under the fair value method prescribed by FASB Statement No. 123, "Accounting
for Stock-Based Compensation." On January 12, 2004, the Company's then CEO, John R. Hamann resigned. As part of the separation agreement between the Company and Mr. Hamann, the
expiration date of his 329,683 outstanding options was extended to January 12, 2005. Under generally accepted accounting principles, a modification to terms of an option cancels the
existing option, and the option is considered a new

F-13

---



issuance;
in this case to a non-employee to be accounted for under the fair value method as required under EITF 00-18. The Company recorded approximately $358 and
$131,311 for the years ending December 31, 2005 and 2004, respectively, related to this transaction. There were no other stock-based compensation grants to non-employees during
2005, 2004 or 2003, respectively.

(v)Recent Accounting PronouncementsIn May 2005, FASB Statement No. 154, "Accounting Changes and
Error Corrections" was issued. This new standard replaces APB Opinion No. 20, "Accounting Changes" and FASB Statement No. 3, "Reporting Accounting Changes in Interim Financial
Statements." Under FAS 154, voluntary changes in accounting principles are applied retrospectively with all prior period financial statements presented based on the new accounting principle.
FAS 154 also requires that changes in depreciation or amortization methods for long-lived assets be accounted for prospectively as a change in estimate and that correction of errors
in previously issued financial statements should be treated as a restatement. The adoption of the provisions of the FAS 154 on January 1, 2006 will not have a material impact on our
financial position or results of operations.

Note 2Discontinued Operations

In the second quarter of 2005, management of the Company committed to an exit plan related to its wholly owned subsidiary in Switzerland. This action was taken in
response to declining revenue and cash flows from the operations of this subsidiary during 2004 and 2005. All existing revenue contracts of this subsidiary were completed in the second quarter of
2004, and the subsidiary had no significant assets or operations. Selling efforts during 2004 and the first quarter of 2005 were unsuccessful, and as a result, management decided to liquidate the
Swiss subsidiary. Approximately $178,000 was accrued for costs expected to be incurred during the last half of 2005 and was classified as a current liability at June 30, 2005, based on the
expected completion date of the liquidation, and included in selling, general and administrative expenses for the second quarter of 2005. The accrual was comprised of $108,000 in compensation and
benefits, $9,000 in losses on disposal of assets, $34,000 in legal and accounting costs and $27,000 in other administrative costs. For the six months ended December 31, 2005, approximately
$143,000 in cash was paid related to exit activities.

In
December 2005, the Company liquidated the remaining investment in its Swiss subsidiaries and will have no significant continuing involvement in Switzerland. The Company
eliminated the operations and cash flows of the Swiss subsidiaries from ongoing operations, and has presented the results of the Swiss subsidiaries as discontinued operations for all periods. The
Company has accrued approximately $165,000 for existing remaining obligations as of December 31, 2005. The accrual was comprised of $95,000 in compensation and benefits, $27,000 in legal and
accounting costs and $43,000 in other administrative costs.

Discontinued Operations
for the Year Ended2005

2004

2003(in thousands)Revenues

$


$
10

$
132Loss before income tax

$
1,270

$
849

$
1,922Net loss

$
1,212

$
893

$
2,106


F-14

---



Note 3Financing Agreement and Liquidity

On August 16, 2004, the Company signed a $5.5 million revolving line of credit with Bank of America, N.A., replacing Comerica Bank as the Company's
senior lender. The Company paid $55,000 as a commitment fee to obtain the financing. All inventory, chattel paper, accounts, equipment and general intangibles of the Company secure the credit
facility. The line of credit is subject to a borrowing base calculated as a percentage of the Company's eligible United States trade accounts receivable less than 90 days old. The credit
facility matures August 21, 2006, and bears interest at the prime rate, or LIBOR plus 2.5%, if elected, to be paid monthly. The unused portion of the line of credit bears interest at an annual
rate of 0.375%, paid quarterly. The credit agreement contains financial and non-financial covenants, which if breached, could result in acceleration of amounts owed under the credit
facility and the senior lender would be able to foreclose on the Company's assets. On February 7, 2005, the Company signed an amendment to the credit facility with Bank of America, N.A.
allowing, but not requiring, the Company to make regularly scheduled payments of principal of $0.1 million each month against General Chain's subordinated debt so long as the Company is not in
default on any agreement with Bank of America, N.A. On May 27, 2005, the Company signed an amendment to its loan agreement eliminating an overadvance provision from the original agreement that
the Company had never used, removing all restrictions on repayment of subordinated debt and changing the financials covenants. The amended financial covenants are tested quarterly and require the
Company to:



At
December 31, 2005, the outstanding balance on the line of credit was zero, and had not been drawn on since it was paid in full on June 2, 2005. The Company was in
compliance with all of its debt covenants.

The
Company utilized the credit line with Bank of America, N.A. to meet working capital requirements during 2005 and 2004. During 2003, the Company utilized a credit facility with its
former senior lender, Comerica Bank. Total interest expense under bank credit facilities was $4,000, $135,000, and $384,000 for 2005, 2004, and 2003 respectively. The Company incurred commitment fees
on the unused portion of the credit facility in 2005 and 2004, totaling $21,000 and $9,000, respectively, at an interest rate of 0.375%. The credit facility contained no provision for unused
commitment fees in 2003.

Total
interest expense for 2005 was $92,000, comprised of $25,000 related to bank debt and $60,000 for related party debt, and $7,000 to other parties.

Total
interest expense for 2004 was $289,000, comprised of $143,000 related to bank debt and $145,000 for related party debt, and $1,000 to other parties.

Total
interest expense for 2003 was $632,000, comprised of $384,000 related to bank debt, $144,000 for related party debt, $99,000 related to warrants and $5,000 to other parties.

At
December 31, 2005, the Company had no outstanding amounts on its credit facility.

At
December 31, 2004, the outstanding balance on the line of credit was $0.4 million, classified as a current liability, and the Company was in compliance with all of its
debt covenants.

F-15

---



Note 4Other Assets

December 31,2005

2004In thousands of dollarsAccounts receivable, employees

$


$
51Prepaid expenses


246


202Current receivables


16


100Income tax receivable


50


109Investment in Texas Stadium Suite, net of accumulated amortization expense


57


76369


538Less current portion


(282
)

(402
)$
87

$
136


Note 5Property and Equipment

December 31,2005

2004In thousands of dollarsEquipment

$
875

$
3,982Furniture and fixtures


561


1,471Leasehold improvements


747


2,007Computer software


110


669Equipment under capital leases





292,293


8,158Less accumulated depreciation and amortization


(1,800
)

(7,483
)$
493

$
675


During
the year ended December 31, 2005, the Company identified approximately $6.0 million in fixed assets with related accumulated depreciation of approximately
$6.0 million that were no longer utilized. The Company recorded a loss of $73,706 upon disposal of these assets. Also during the year, the Company purchased all its equipment being leased under
capital leases resulting in a gain of $800.

Depreciation
from equipment under capital leases totaled $7,000 in 2005 and $6,000 in 2004.

F-16

---



Note 6Accounts Payable and Accrued Liabilities

December 31,2005

2004In thousands of dollarsAccounts payable trade

$
358

$
225Other accrued liabilities


911


687$
1,269

$
912


Note 7Accrued Wages and Benefits

December 31,2005

2004In thousands of dollarsAccrued salaries and benefits

$
336

$
350Stock appreciation rights


782


243Accrued bonuses and sales commissions


1,208


629$
2,326

$
1,222


Note 8Other Long-Term Obligations

December 31,2005

2004In thousands of dollarsCapital lease

$


$
12Sublease obligations


413


413


12Less current portion


(139
)

(6
)$
274

$
6


Note 9Income Taxes

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

Year Ended December 31,2005

2004

2003In thousands of dollarsDomestic sources

$
8,527

$
(11,425
)
$
4,106Foreign sources


(224
)

13,793


(1,604
)$
8,303

$
2,368

$
2,502


F-17

---



In
2004, $13.7 million of intercompany bad debt from foreign subsidiaries of the Company was recorded on the books of the United States parent Company. Conversely,
$13.7 million of debt forgiveness income was recorded by the respective subsidiaries in Asia. No taxes are owed as a result of the debt forgiveness income due to net operating loss
carryforwards in the Asia subsidiaries which offset the income in 2004.

The
reconciliation of income tax from continuing operations computed at the United States federal statutory tax rate to the Company's effective income tax rate is as follow:

Year Ended December 31,2005

2004

2003In thousands of dollarsIncome taxes at statutory rate

$
2,819

$
805

$
851Effect on taxes resulting from:State taxes


87


68


70Utilization of federal and foreign net operating losses, less benefit received


(2,811
)

(734
)

(1,472
)Unbenefitted losses of foreign subsidiary


76





Effect of United States and foreign minimum taxes


(119
)

(11
)

134United States federal tax refund





(34
)

Other (primarily permanent differences)


277


(94
)

101Income tax (benefit)

$
329

$


$
(316
)


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

Year Ended December 31,2005

2004

2003In thousands of dollarsCurrent tax expense (benefit):Federal

$
239

$
(68
)
$
(308
)State


87


68


70Foreign


3





(78
)329





(316
)Deferred tax expense:Federal








State














$
329




$
(316
)


F-18

---



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

December 31,2005

2004In thousands of dollarsDeferred tax assets:Net operating loss carryforward

$
1,234

$
4,270Foreign tax credit carryforward





3Allowance for doubtful accounts


47


15Accrued expenses


388


111Deferred compensation


106


Fixed assets





37Minimum tax credit carryforward


105


197Charitable contribution carryforward





521,880


4,685Valuation allowance


(1,880
)

(4,685
)Total deferred tax assets





Deferred tax liabilities:Fixed assets





Total deferred tax liabilities





Net deferred tax asset

$


$



At
December 31, 2005, the Company had $3.1 million of United States Federal net operating loss carry-forwards. These carry forwards are subject to a
$0.2 million Section 382 annual limitation expiring 2022. At December 31, 2005, the Company had approximately $1.1 million of state net operating loss carryovers, expiring
at various times. Due to liquidation proceedings in the Company's Asia and Europe subsidiaries, foreign net operating losses of $0.7 million and $2.5 million, respectively, were
forfeited.

At
December 31, 2004 the Company had $11.4 million of United States federal net operating loss carryforwards, of which $3.3 million is subject to a
$0.2 million Section 382 annual limitation. At December 31, 2004, the Company had approximately $9.2 million of state net operating loss carryovers, expiring at various
times. The Company also had approximately $3.2 million in foreign net operating loss carryovers at December 31, 2004 of which $0.7 million were in Asian subsidiaries and
$2.5 million were in European subsidiaries. Due to liquidation proceedings and operating losses in these subsidiaries, the foreign net operating losses will be forfeited, and therefore no
deferred tax asset was established for the foreign NOLs.

While
a valuation allowance is currently required for the Company's net deferred tax assets, the United States deferred tax 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.

Note 10Employee Benefit Plans

The Company sponsors a 401(k) retirement plan. The Company, at its discretion, may match a portion of the participants' contribution or make a profit-sharing
contribution. Participants vested in the Company's contributions ratably over five years and may join immediately. Matching contributions were

F-19

---



$739,000
and $535,000 for the years ending December 31, 2005 and 2004, respectively. A profit-sharing contribution of $50,000 was made for the year ending December 31, 2003.

Note 11Commitments and Contingencies

Operating lease commitments

The Company leases office space, vehicles and various types of office equipment under non-cancelable operating leases. Rent expense related to
operating leases totaled $1.5 million in 2005, $1.0 million for 2004 and $1.4 million for 2003.

In
November 2005, the Company entered into a new lease agreement for its current office space in Irving, Texas. The new lease agreement becomes effective April 1, 2006 and
expires on March 31, 2012. Minimum lease payments required under non-cancelable operating lease arrangements subsequent to December 31, 2005, net of rental income of $347,515
in 2006 and $259,282 in 2007, are as follows:

Operating LeasesIn thousands of dollars2006

$
1,2632007


1,0642008


6952009


4822010


362Thereafter


466Total minimum lease payments

$
4,332


Sublease losses

In January 2005, the Company evicted its Troy sublessee. The Company subsequently entered into an agreement with another sublessee and recognized an
additional liability of approximately $63,000 in the first quarter of 2005. On February 1, 2005, the Company received notice from its sublessee in its Reston facilities of their intent to
vacate the premises effective immediately and that it would not fulfill its remaining commitment under the sublease agreement. Subsequent to the notice by the sublessee, the Company entered into an
agreement with another sublease and recognized the deferred rental expense of $454,000 in the first quarter of 2005. The Company charged an additional $93,000 to sublease losses for the write off of
other sublease-related receivables.

Contingencies

In 2002, the Company filed for insolvency of its wholly-owned subsidiary headquartered in Frankfurt, Germany and in 2005, the Company filed for insolvency of its
wholly-owned subsidiary in Switzerland. During 2005, a suit was filed against the company's subsidiary in Switzerland by the German insolvency administrator to recover approximately
$0.3 million related to an intercompany receivable between the
two entities. Due to the insolvency of the Swiss entity, the suit was dismissed. The Company believes any future legal action related to the closure of its German and Swiss subsidiaries would not have
a material impact on the Company's financial position, results of operations or cash flows in future years.

The
Company has become subject to other various claims and 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

F-20

---



and
other legal matters will have a material adverse effect on the Company's consolidated results of operations, financial condition or cash flows.

Note 12Geographic and Major Customer Information

Geographical Information

The Company provides services within one industry segment. During 2005, 2004, and 2003, the Company conducted business in three geographic areas: North America,
Europe, and Asia/Pacific. In the fourth quarter 2005, the Company liquidated its remaining interest in its operations located in Switzerland and revised the presentation of its financial results to
reflect the discontinued operations. The geographical revenue and long-lived asset information below has been restated to reflect this change:

North America

Europe

Asia/Pacific

TotalIn thousandsYear ended December 31, 2005:Revenue

$
43,033




$
29

$
43,062Income from continuing operations before income taxes

$
8,527




$
(224
)
$
8,303Long-lived assets

$
580







$
580Year ended December 31, 2004:Revenue

$
28,930




$
1,090

$
30,020Income from continuing operations before income taxes

$
(11,425
)



$
13,793

$
2,368Long-lived assets

$
804




$
7

$
811Year ended December 31, 2003:Revenue

$
27,110




$
3,165

$
30,275Income from continuing operations before income taxes

$
4,559

$
(453
)
$
(1,604
)
$
2,502Long-lived assets

$
1,208




$
14

$
1,222


Major Customer Information

During 2005, one client accounted for approximately $27.9 million or 65% of North America revenues and another client accounted for approximately
$13.0 million or 30% of North America revenues. One client accounted for approximately $29,000 or 100% of Asia/Pacific 2005 revenues.

During
2004, one client accounted for approximately $14.5 million or 50% of North America revenues and another client accounted for approximately $9.8 million or 34% of
North America revenues. One client accounted for approximately $698,000 or 64% of Asia/Pacific 2004 revenues and another client accounted for approximately $371,000 or 34% of Asia/Pacific 2004
revenues.

During
2003, one client accounted for approximately $11.8 million or 44% of North America revenues and another client accounted for approximately $9.7 million or 36% of
North America revenues. One client accounted for approximately $1.9 million or 60% of Asia/Pacific 2003 revenues and another client accounted for approximately $698,000 or 22% of Asia/Pacific
2003 venues.

There
were no other clients from whom revenue exceeded 10% of any one geographical region's revenues in the years ended December 31, 2005, 2004, and 2003.

F-21

---



Note 13Related Party Transactions

In 2002, the Company issued two promissory notes totaling $1.4 million to its current Chairman of the Board, General John T. Chain, Jr. The notes were
subordinated to the Company's senior lender and matured in 2006. On February 7, 2005, the Company signed an amendment to its credit facility with Bank of America, N.A. allowing, but not
requiring, the Company to make regularly scheduled principal payments of $0.1 million each month against General Chain's subordinated debt provided that the Company was not in default on any
agreement with Bank of America, N.A. The Company made five payments of $0.1 million each, reducing the subordinated debt balance to $0.9 million. On May 7, 2005, the Company
signed an amendment to the credit facility releasing the prohibition against repayment of subordinated debt. On June 9, 2005, the Company repaid the remaining $0.9 million balance,
including unpaid interest, of its then outstanding subordinated debt to its current Chairman of the Board, General John T. Chain, Jr. Interest payments related to the subordinated debt were $112,508,
$141,520 and $202,200 in 2005, 2004 and 2003, respectively.

A
family member of James T. Taylor, the Company's Chief Executive Officer and president, performed advertising and marketing services during 2005 and 2004 for the Company. Fees and
expenses paid for these services were approximately $32,300 in 2005 and $4,600 in 2004.

On
February 14, 2005, Mr. Edward P. Evans, a director of the Company, exercised his outstanding warrants in full. The Company received the purchase price of $130,470 and on
February 23, 2005 the Company issued 434,899 shares of unregistered common stock to Mr. Evans.

On
February 16, 2005, General John T. Chain, Jr., Chairman of the Company, exercised his outstanding warrants in full. The Company received the purchase price of $130,470 and on
February 23, 2005, the Company issued 434,899 shares of unregistered common stock to General Chain.

On
December 31, 2004, John R. Hamann, former CEO of the Company, exercised stock options for 97,399 shares of common stock. The Company received the purchase price of
$36,038 and on January 4, 2005, the Company issued 97,399 shares of registered common stock to Mr. Hamann.

On
February 19, 2004, the Company entered into a consulting agreement with its former Asia region president, Mr. G. Toby Marion. Effective May 1, 2004, the Company
agreed to pay $408,750, payable in nine installments of $43,750 per month beginning May 31, 2004 and one installment of $15,000 payable in January 2005. Mr. Marion agreed to
consult and advise the Company on doing business in Asia. This agreement expired January 31, 2005. Non-compete and other covenants were re-affirmed and carried into the
consulting agreement. Under the terms of the agreement, the Company paid $47,813 during 2005 and $393,750 during 2004.

On
July 1, 2003, the Company entered into a consulting agreement with its Chairman, General John T. Chain, Jr. Under the terms of the contract, General Chain received $100,000
annually, in quarterly installments, in return for his services with regards to sales, marketing and financial strategies. The agreement expired June 30, 2005. The Company made payments under
this agreement totaling $50,000, $150,000 and $50,000 during 2005, 2004 and 2003, respectively.

On
December 17, 2003, the Company entered into settlement and consulting agreements with a former employee to provide services with regards to the Asian marketplace. The Company
paid a total of $0, $184,640 and $21,160 during 2005, 2004 and 2003, respectively.

Effective
April 8, 2003, the Company entered into a SAR agreement with John R. Hamann, former CEO of the Company. Mr. Hamann's agreement granted him 170,317 SARs at
a price of $0.42 per SAR. The SARs were exercisable in full or in part immediately upon grant and entitled Mr. Hamann to a cash payment equal to the fair market value, as defined in the
agreement, of a share of common stock of the Company over $0.42 per share. The Company received payments of

F-22

---



approximately
$12,000 for these shares during 2004. In the third quarter of 2004, Mr. Hamann exercised 42,400 SARs, which the Company paid approximately $46,000. On December 31,
2004, Mr. Hamann exercised his remaining 127,917 SARs, which the Company paid approximately $144,000 on January 4, 2005 in accordance with the SARs agreement.

On
January 12, 2004, the Company entered into a separation agreement with John R. Hamann, former CEO of the Company. As part of the separation agreement between the Company and
Mr. Hamann, the expiration date of his 329,683 outstanding options was extended to January 12, 2005, which created a new stock option issuance under generally accepted accounting
principles. Under the new issuance, Mr. Hamann exercised 129,683 options during 2004. The Company issued 32,284 shares of common stock during 2004 related to these exercises. The
remaining 97,399 shares were issued on January 4, 2005, based on an exercise date of December 31, 2004. The remaining 200,000 options expired on January 12, 2005 due
to their exercise price exceeding market value.

On
December 31, 2003, the Company entered into a consulting agreement with its former Chief Executive Officer, John R. Hamann. Effective January 13, 2004, the Company
agreed to pay a total of $450,000 to Mr. Hamann in return for his services as an advisor to the Chairman of the Board and seeking out new business for the Company. Monthly payments of $37,500
were made until expiration of this agreement on January 12, 2005. In addition, the Company agreed to pay Mr. Hamann a commission of five percent of the value on any new
U.S. commercial business for the Company for clients identified by Mr. Hamann prior to January 13, 2005 and which leads to business under contract prior to July 13, 2005.
Non-compete and other covenants were re-affirmed and carried into the consulting agreement. Under the terms of the agreement, the Company paid $13,846 and $436,154 for
consulting services and $0 for commissions during 2005 and 2004, respectively. No amounts were earned or paid as commissions to Mr. Hamann during 2005 or 2004.

A
family member of John R. Hamann, the Company's former Chief Executive Officer, performed, on a contract basis, marketing services during 2003. Fees and expenses related to these
services were $30,000 in 2003.

On
March 29, 2002, the Company issued a promissory note in the original amount of $92,000 to its then Chief Executive Officer, John R. Hamann. Although this note was subordinated
to the Company's senior lender, it was repaid to Mr. Hamann in full on April 17, 2003, including unpaid interest, with the permission of the senior lender. Total interest payments
related to this note were $9,000 in 2003.

F-23

---



Note 14Stock Based Awards

Options

A summary of the status of the Company's stock options to employees as of December 31, 2005, 2004, and 2003 and changes in the years then ended is
presented below.

|                                                          |           | 2005    |          | 2004 |      | 2003 
|--------------------------------------------------------- | --------- | ------- | -------- | ---- | ---- | -----
|
|Outstanding at beginning of year                          |           | 936,516 |          | $    | 6.24 |      
|                                                          | Granted   |         | 200      |      |      | 6.47 
|                                                          | Exercised |         | (100     | )    |      | (0.94
|                                                          | Expired   |         |         |      |      |     
|                                                          | Forfeited |         | (511,913 | )    |      | (7.49
|                                                          |           |         |          |      |      |      
|Outstanding at end of year                                |           | 424,703 |          |      | 4.74 |      
|                                                          |           |         |          |      |      |      
|Options exercisable at year-end                           |           | 424,703 |          | $    | 4.74 |      
|Weighted average grant-date fair value of options granted |           |         |          | $    | 6.47 |      

The following table summarizes information about stock options outstanding at December 31, 2005.

Options Outstanding and ExercisableCommon Options

Weighted Average Remaining Contractual Life (Years)Exercise Price

Outstanding and Exercisable

Weighted Average Exercise Price$    0.37-7.94

314,149

5.53

$
2.838.00-9.75

74,104

2.07


8.8510.09-13.00

23,850

3.17


11.0114.38-16.88

12,600

0.62


16.38$  0.37-16.88

424,703

4.65

$
4.74


The
total intrinsic value (the excess of market price over the exercise price) was approximately $1.7 million for stock options outstanding and exercisable as of
December 31, 2005. The total intrinsic value for stock options exercised in 2005 was approximately $406.

The
amount of cash received from the exercise of stock options during 2005 was approximately $94.

F-24

---



Changes
in the Company's outstanding options during 2005 were as follows:

2005Shares

Weighted Average Exercise PriceNonvested options at the January 1, 2005

131,587

$
6.94Granted

200


6.47Vested

(26,787
)

(1.59
)Forfeited

(105,000
)

(8.29
)Non vested options at December 31, 2005



$



Restricted Stock

Under the 2005 Omnibus Stock and Incentive Plan, the Company is able to grant restricted stock. In 2005, the Company granted approximately
350,000 performance awards and 300,000 market awards to employees under this plan. The restricted stock awards performance awards vest over 3 years and the restricted stock market
awards become available and vest over 5 years. The fair value of the performance awards is the excess of market price at grant date over the exercise price, which is zero. The fair value of the
market awards were determined using a binomial lattice method. The awards are summarized below:

2005Restricted Stock

Shares

Weighted Average Exercise PriceOutstanding at beginning of year



$
Granted

650,000


0.00Outstanding at end of year

650,000

$
0.00Restricted stock exercisable at year-end

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



$
1.28


There
was no restricted stock outstanding and exercisable as of December 31, 2005. There was no restricted stock redeemed in 2005.

Warrants

During 2002, the Company issued stock warrants to two shareholders and to its then senior lender. All warrants held by the Company's shareholders were exercised
in February 2005. The warrant held by the Company's former senior lender was cancelled in September 2005 upon repurchase by the

F-25

---



Company(See Note 1(f)).
The warrants were exercisable upon issuance and expired five years after date of issuance. Changes in the Company's outstanding warrants were as follows:

|                                                           |           | 2005      |          | 2004 |      | 2003  |          
|---------------------------------------------------------- | --------- | --------- | -------- | ---- | ---- | ----- | ---------
|
|Outstanding at beginning of year                           |           | 1,267,241 |          | $    | 0.30 |       | 1,267,241
|                                                           | Exercised |           | (869,798 | )    |      | (0.30 | )        
|                                                           | Cancelled |           | (397,443 | )    |      | (0.30 | )        
|                                                           | Expired   |           |          |      |      |       |          
|                                                           |           |           |          |      |      |       |          
|Outstanding at end of year                                 |           |          |          |      |     |       | 1,267,241
|                                                           |           |           |          |      |      |       |          
|Warrants exercisable at year-end                           |           |          |          | $    |     |       | 1,267,241
|Weighted average grant-date fair value of warrants granted |           |           |          | $    |     |       |          

There were no outstanding warrants at December 31, 2005.

The
total cash received from the exercise of warrants during 2005 was approximately $261,000.

Stock Appreciation Rights

Effective April 8, 2003, the Company entered into two Stock Appreciation Rights ("SARs") agreements with John R. Haman, former CEO of the Company, and
James T. Taylor, current CEO of the Company (See Note 1(t)). Changes in the Company's outstanding SARs were as follows:

|                                                       |           | 2005   |   | 2004 |      | 2003
|------------------------------------------------------ | --------- | ------ | - | ---- | ---- | ----
|
|Outstanding at beginning of year                       |           | 99,351 |   | $    | 0.42 |     
|                                                       | Granted   |        |  |      |      |    
|                                                       | Exercised |        |  |      |      |    
|                                                       |           |        |   |      |      |     
|Outstanding at end of year                             |           | 99,351 |   | $    | 0.42 |     
|                                                       |           |        |   |      |      |     
|SARs exercisable at year-end                           |           | 99,351 |   | $    |     |     
|Weighted average grant-date fair value of SARs granted |           |        |   | $    |     |     

The total intrinsic value (the excess of market price over the exercise price) was approximately $772,951 for SARs outstanding and
exercisable as of December 31, 2005. There were no SARs exercised in 2005.

F-26

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Note 15Supplemental Disclosure of Cash Flow Information

Year Ended December 31,2005

2004

2003In thousands of dollarsInterest paid

$
145

$
301

$
625Income taxes paid

$
202

$
171

$
291Other non-cash financing activities:Dividends declared

$
533

$


$



Note 16Subsequent Events

On March 17, 2006, the Company's board of directors declared a $0.05 per share dividend, with a record date of March 31, 2006 to be paid
April 14, 2006.

Note 17Valuation and Qualifying Accounts

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

|                                        |                                     | Year Ended December 31, |  
|--------------------------------------- | ----------------------------------- | ----------------------- | -
|
|
|Allowance for doubtful accounts:        |                                     |                         |  
|                                        | Beginning balance                   |                         | $
|                                        | Additions to expense                |                         |  
|                                        | Reductions from allowance           |                         |  
|                                        |                                     |                         |  
|                                        | Ending balance                      |                         | $
|                                        |                                     |                         |  
|Deferred tax asset valuation allowance: |                                     |                         |  
|                                        | Beginning balance                   |                         | $
|                                        | Additions to valuation allowance    |                         |  
|                                        | Reductions from valuation allowance |                         |  
|                                        |                                     |                         |  
|                                        | Ending balance                      |                         | $
|                                        |                                     |                         |  

F-27

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Note 18Selected Quarterly Financial Data (Unaudited)

|                                            |         | 2005
|------------------------------------------- | ------- | ----
|
|
|
|Revenue                                     |         | $   
|Gross profit                                |         |     
|Operating income from continuing operations |         |     
|Net income (loss)                           |         |     
|Earnings (loss) per share                   |         |     
|                                            | Basic   |     
|                                            | Diluted |     
|Weighted average shares                     |         |     
|                                            | Basic   |     
|                                            | Diluted |     

|                                            |         | 2004
|------------------------------------------- | ------- | ----
|
|
|
|Revenue                                     |         | $   
|Gross profit                                |         |     
|Operating income from continuing operations |         |     
|Net income (loss)                           |         |     
|Earnings (loss) per share                   |         |     
|                                            | Basic   |     
|                                            | Diluted |     
|Weighted average shares                     |         |     
|                                            | Basic   |     
|                                            | Diluted |     

F-28

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