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TABLE OF CONTENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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

FORM 10-K

Commission file number 0-22010

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

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

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

        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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

        As of March 23, 2005, the aggregate market value of the voting stock held by non-affiliates of the registrant was $6,795,709, based on the OTC Bulletin Board closing price of $1.95.

        As of March 23, 2005, there were 10,655,143 shares of the registrant's common stock outstanding.

TABLE OF CONTENTS

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 major corporate clients through process improvement and strategically aligning operations with technology. Recognized as a leading specialist in operations consulting, the Company creates and implements custom improvement strategies for sustained performance improvement. The Company's clients are typically large companies, many of whom are included in the Fortune or Global 1000.

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

        Since 1978, the Company has been developing and improving its Process Value Management ("PVM") methodology for achieving operational excellence. PVM is based on the Company's Total Cycle Time® ("TCT") methods and supplements TCT with numerous process improvement tools the Company has developed over the last 26 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 corporation's strategic processes, not only across its internal functions, but also across entities and geographies.

Statement of Business

        The Company's business is helping its clients improve their bottom-line results using the Company's senior executives who work side-by-side with clients to remove barriers, increase productivity, change culture, and 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 26 years of experience with process improvement tools and methodologies that drive financial bottom-line results. The Company uses PVM to help an enterprise determine strategic business processes, assess their linkages and efficiencies, and prescribe short and long-term enhancement programs that optimize customer satisfaction and shareholder value. The Company's staff of business professionals who apply PVM methodology are referred to by the Company as "Resultants." An initial client assignment might typically address one or more of these key processes that are dragging down performance. A long-term relationship might involve an implementation team of Resultants working with the 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:

•

The Process Managed Enterprise is one in which its management focus and systems are centered on customers and managed around processes;



•

All businesses are made up of a series of linked processes, from the initial business concept through all its applied resources to its end customer. All processes, left unmanaged, naturally deteriorate over time;



•

People, working in cross-functional teams, focusing on customer needs, are what make processes effective;



•

The customer is the final arbiter of the value of the process; and,



•

The transformation process itself must deliver short-term operating results as well as long-term systemic business enhancements.

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 predictive driver measures such 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 companies faster and improve their competitiveness and financial performance. This ability to link and align a client organization's strategy, technology, people and processes offers a powerful and unique benefit to client companies faced with integrating their operations, internally and externally, throughout the value chain. The Company's strategic plan is to continually add value to its core PVM product offering and to expand its marketing reach through partnerships with industry leaders.

Competitive Strategy

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

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

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

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

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

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

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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. The Company has worked for over 250 clients, including the following:

4

        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:

        In 2004, two clients accounted for 48% and 33% of the Company's revenue, respectively.

        In 2003, two clients accounted for 39% and 32% of the Company's revenue, respectively.

        In 2002, two clients accounted for 39% and 28% of the Company's revenue, respectively.

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 that could last 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, or incentive fees (based on client improvements achieved). The Company's fee structure is based on a client's size, the complexity and geographic deployment of a client's business, the level of improvement opportunity available to a client, the number of barriers to be removed, and certain other factors.

        Fixed fees are 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 fees (also known as specific deliverables) are 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.

        Incentive (performance-oriented) fees are calculated by our 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

5

improvements, which drive incentive fees, the Company obtains customer agreement to these achievements prior to recognizing 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 2004, 2003, and 2002, approximately 1%, 1% and 22%, 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, 2004, was $22.5 million, of which approximately $18.1 million is expected to be realized within fiscal 2005, and the remaining $4.4 million is expected to be realized in 2006. Backlog was $28.4 million at December 31, 2003.

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, and 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 in the belief they will achieve results comparable to those resulting from the Company's services without the assistance of outside professionals. The Company believes these attempts to self-medicate result in limited success. However, such attempts may substantially lengthen the Company's sales cycle and may, therefore, limit its business opportunities.

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

Intellectual Property

        The Company has secured federal registration for the service marks Total Cycle Time® and TCT®. These registrations expire from May 2005 to August 2012. The Company has filed an application for federal service mark registration for several other marks important to its business. The Company has also made appropriate filings in several European countries to secure protection of its marks in those countries. The Company considers each of these service marks to be significant to its business.

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        The Company's proprietary methodologies have been developed over 26 years at great expense, have required considerable effort on the part of skilled professionals, are not generally known and are considered trade secrets. In some circumstances, the Company grants clients a limited license to make internal use of certain of the Company's proprietary methodologies following completion of a program. The Company maintains its trade secrets in strict confidence and as part of its standard engagement.

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

Employees

        At March 23, 2005, the Company had a total of 108 employees, consisting of 66 full-time Resultants, 12 part-time Resultants and 10 sales and 20 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 include:

        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).

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 July 2006.

        The Company also 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 leases another 3,000 square feet in Troy, Michigan that was subleased during 2004. However, the subtenant became delinquent in rent payments to the Company and an event of default occurred. Subsequent to year-end, the subtenant was evicted. The Company has engaged a broker to find a replacement subtenant.

        The Company also leases approximately 12,000 square feet of office space in Reston, Virginia under a lease that expires in October 2007. This space was subleased under an agreement expiring October 2007. Subsequent to year-end, the subtenant became delinquent in rent payments and an event of default occurred. The subtenant abandoned the space, and the Company intends to use this facility

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as office space due to the amount of time spent in Reston as a result of several US Military projects currently under contract

        The Company also leases space for its offices in Zug, Switzerland, and Hong Kong. During 2004, leases for office space in Singapore and Shanghai, China 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. 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. The Company and its legal counsel believe that the loss, if any, resulting from the suit will 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 its 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 and continuing through 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.

        The Company has 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.

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

        No matters were submitted to a vote of stockholders, through the solicitation of proxies or otherwise, during the quarter ended December 31, 2004.

PART II

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

Market for Registrant's Common Equity

        The Company's common stock is quoted on the OTC Bulletin Board under the symbol TGIS.OB. The stock prices set forth below represent the highest and lowest bid prices per share of the Company's common stock as reported by the OTC Bulletin Board. The prices reported in the following table

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reflect inter-dealer prices without retail mark-up, mark-down or commissions, and may not necessarily represent actual transactions.

Holders of Record

        As of March 23, 2005 there were approximately 123 holders of record of the Company's common stock.

Dividends

        The Company has never paid dividends on its common stock. Payments of future dividends, if any, 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.

Sale of Unregistered Securities

        During 2004, the company issued 32,284 shares of unregistered common stock. The shares were issued to John Hamann, former CEO of the Company, under the Company's stock option plans (See the accompanying Note 1(t), Note 11 and Note 15 of the Consolidated Financial Statements, included herein). This transaction did not involve any underwriters, underwriting discount or commissions, or any public offering, and the Company believes that the transaction was exempt from the registration by virtue of Section 4(2) of the Securities Act of 1933, as amended.

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ITEM 6. Selected Financial Data.

        The following table sets forth selected historical financial information of the Company. This historical financial information has been derived from the audited financial statements of the Company. 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.

(a)

Includes the reversal of $0.2 million of foreign income taxes payable.

(b)

Includes $1.3 million of restructuring charges for insolvency proceedings related to the Company's German subsidiary.

(c)

Includes $0.9 million of federal income tax refunds.

(d)

Includes $2.9 million of litigation settlement expense, $2.3 million of severance cost related to staff reductions during 2001 and $0.5 million of leasehold improvement write downs related to a loss on a contract for subleased office space.

(e)

Includes $3.3 million valuation allowance adjustment to the Company's net deferred tax assets.

(f)

Includes $1.3 million of CEO transition costs and $0.7 million of litigation settlement expense.

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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 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 and contracts in the Europe and Asia/Pacific regions. The majority of revenue related transactions in these regions are denominated using the United States dollar. However, 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 accounting principles generally accepted in the United States 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

        For United States federal tax purposes, at December 31, 2002, the Company had net operating loss ("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. The Company had unused foreign tax credit ("FTC") carryovers

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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 at December 31, 2004. In Asia, the Company has approximately $0.7 million of net operating loss carryovers, which currently do not have any statutory expiration date. In Europe, the Company has $2.5 million of net operating loss carryovers. Due to the uncertainty of the Company's ability to utilize its net deferred tax assets, the Company has provided a valuation allowance of $4.7 million. If the Company generates United States and foreign taxable income in future periods, reversal of the valuation allowance could have a significant positive impact on net income in the period that it becomes more likely than not that the foreign tax credit carryover will be realized.

Accumulated Other Comprehensive Loss

        At December 31, 2004 the accumulation of prior years' translation adjustments of approximately $682,000 included in accumulated other comprehensive loss relates primarily to the Company's operations in Europe. The Company intends to liquidate its subsidiaries in Europe, and as a result, will reclassify the appropriate amount to the income statement. The Company believes the transaction will be completed by December 31, 2005 and the resulting reclassification will be recorded as a non-cash charge to operations for the year then ended.

Results of Operations