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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

Commission File Number 0-22010

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

NONE
(Former name, former address and former fiscal year, if changed since last report)

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

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

        As of August 13, 2004 there were 9,655,662 shares of the registrant's common stock outstanding.

THOMAS GROUP, INC.

PART I—FINANCIAL INFORMATION

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ITEM 1—FINANCIAL STATEMENTS

THOMAS GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

See accompanying notes to consolidated financial statements.

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THOMAS GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share data)

(Unaudited)

See accompanying notes to consolidated financial statements.

4

THOMAS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

See accompanying notes to consolidated financial statements.

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THOMAS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

        1.     (a) Basis of Presentation—The unaudited consolidated financial statements of Thomas Group, Inc. (the "Company") include all adjustments, which include only normal recurring adjustments, which are, in the opinion of management, necessary to present fairly the results of operations of the Company for the interim periods presented. The unaudited financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Company's Form 10-K for the 2003 fiscal year, filed with the Securities and Exchange Commission. The results of operations for the three and six month periods ended June 30, 2004 are not necessarily indicative of the results of operations for the entire year ending December 31, 2004. Certain amounts from prior periods have been reclassified to conform with the 2004 presentation.

        (b)   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.

        The Company adopted the disclosure provisions of Statement of Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for Stock Based Compensation." This statement requires the Company to provide pro forma information regarding net income and net income per share as if compensation cost for the Company's stock options had been determined in accordance with the fair value method. The fair value of these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 2004 and 2003.

        Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date consistent with the provisions of SFAS No. 123, the Company's net income

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(loss) and income (loss) per share would have been adjusted to the pro forma amounts indicated below:

        (c)   Prior Period Adjustment—During the first quarter of 2004 the Company discovered a calculation error related to an income tax benefit that had been recorded in the first quarter of 2004. The benefit resulted from an election to convert expiring foreign tax credits to ordinary deductions and carry back the resulting net operating losses to prior years, creating income tax refunds.

        Restatement of the three month period ended March 31, 2004 resulted in a $224,000 decrease in other current assets, a $40,000 decrease in accounts payable and accrued liabilities and a $184,000 increase in accumulated deficit with a corresponding decrease in income tax benefit. Basic income per share for the three months ended March 31, 2004 decreased $0.01 per share to $0.01 from $0.02 per share. Diluted income per share for the same period decreased $0.02 per share to $0.00 from $0.02 per share.

        During 2001, the Company recognized a loss on a contract related to subleased office space. This office space included leasehold improvements, the carrying value of which exceeded its fair value, and was not recoverable at the time the contract was signed. The sublease loss recorded in 2001 failed to include the impairment of these improvements.

        To correct this situation, the Company has restated the financial statements related to the fiscal years ended 2002 and 2001, and for each of the three quarters ended September 30, 2003.

        Restatement of the June 30, 2003 statement of operations resulted in a decrease to selling, general and administrative expense for the three and six month periods then ended of $21,000 and $43,000 respectively, and a corresponding decrease to net loss due to the reversal of depreciation expense related to these leasehold improvements. Restatement of the June 30, 2003 balance sheet resulted in a

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$376,000 increase to accumulated deficit and a corresponding decrease to property and equipment. The effect of this prior period adjustment is outlined in the table below.

        2.     Financing Agreement—On February 2, 2004, the Company revised its credit agreement with its senior lender, extending the maturity date to February 28, 2005. An initial principal payment of $200,000 was made against the term note on February 28, 2004 and monthly term note payments of $100,000 were required beginning March 31, 2004 and continuing until maturity. These required payments will result in a minimum term note reduction in 2004 of $1.4 million. In addition, term note payments equal to 25% of cash flows provided by operating activities on a year-to-date, cumulative basis are payable quarterly. As part of the revision, an amendment fee of $100,000 was added. This fee is to be accrued in five monthly installments of $20,000 each beginning August 1, 2004 and is payable in full on December 31, 2004 unless the Company replaces the senior lender. If the senior lender is replaced prior to December 31, 2004, a pro-rata portion of the amendment fee will be due.

        At June 30, 2004 the Company had $0.4 million outstanding under the revolving line of credit and $2.2 million outstanding on the term note classified as current liabilities, due to the maturity date of February 28, 2005. At June 30, 2004, the Company was in compliance with all of its debt covenants.

        3.     Liquidity Plan—As a result of cash generated from operations, the Company reduced its senior debt by $4.5 million in 2003 and another $0.7 million through August 13, 2004. The Company's ability to reduce debt and generate cash from operations is due primarily to cost saving measures including staff reductions, downsizing and subleasing facilities and more aggressive collection policies. However, recent operating results and the uncertainty of future business development and growth strategies give rise to concerns about the Company's ability to generate cash flow from operations sufficient to make scheduled debt payments as they become due and to remain in compliance with its restrictive loan covenants.

        The Company's need to raise additional equity or debt financing and its ability to generate cash flow from operations sufficient to make scheduled payments on its debts as they become due will depend on its future performance and in particular, its ability to successfully implement business and growth strategies. In addition, the Company is seeking financing alternatives to replace its current senior lender, as well as continuing the evaluation of the business on a daily basis to enhance its liquidity position. Such evaluation includes appropriate furlough of its unassigned workforce, staff reductions and the downsizing or subleasing of facilities when necessary.

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        The Company's performance will also be affected by prevailing economic conditions. Many of these factors are beyond the Company's control. The Company currently seeks business opportunities in the European, Asia/Pacific and North American regions and is affected by prevailing economic conditions in these regions. In addition, 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. In the event the Company is unable to do so, the Company may be left without sufficient liquidity and it may not be able to meet its debt service requirements. In such case, an event of default would occur under the credit facility and could result in all of the Company's indebtedness becoming immediately due and payable. As a result, the Company's senior lender would be able to foreclose on the Company's assets.

        4.     Earnings Per Share—Basic earnings per share is based on the number of weighted average shares outstanding. Diluted earnings per share includes the effect of dilutive securities such as stock options and warrants. The following table reconciles basic earnings per share to diluted earnings per share under the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share."

        Stock options and warrants outstanding at June 30, 2004 and 2003 that are not included in the diluted earnings per share computation due to the antidilutive effects are approximately 1,406,000 and 2,612,000 respectively. Such options and warrants are excluded due to the Company incurring a net loss for the three and six months ended June 30, 2003 and due to exercise prices exceeding the average market value of the Company's common stock in 2004.

        5.     Significant Clients—The Company recorded revenue from CACI International of $3.8 million and $6.8 million or 50% and 46% of revenue for the three and six month periods ended June 30, 2004. Revenue from the same client totaled $2.6 million and $5.2 million, or 37% and 35% of revenue for the three and six month periods ended June 30, 2003.

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        The Company recorded revenue from the United States Navy of $2.1 million and $4.7 million or 27% and 32% of revenue for the three and six month periods ended June 30, 2004. Revenue from the same client totaled $2.2 million and $4.9 million or 32% and 33% of revenue for the three and six month periods ended June 30, 2003.

        There were no other clients from whom revenue exceeded 10% of total revenue in the three and six month periods ended June 30, 2004 and 2003, respectively.

        6.     Comprehensive Income or Loss—Comprehensive income or loss includes all changes in equity (foreign currency translation), except those resulting from investments by owners and distributions to owners. For the three and six month periods ended June 30, 2004 and 2003, net income (loss) is the only component of comprehensive income.

        7.     Legal Proceedings—The Company has become subject to various claims and other legal matters, such as collection matters initiated by the Company, in the course of conducting its business. The Company believes that neither such claims and 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.

        8.     Supplemental Disclosure of Cash Flow Information

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        9.     Segment Data—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 follosws: