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Article by DailyStocks_admin    (03-16-08 12:42 PM)

The Daily Magic Formula Stock for 03/16/2008 is Thomas Group Inc. According to the Magic Formula Investing Web Site, the ebit yield is 22% and the EBIT ROIC is >100 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


Dailystocks.com makes NO RECOMMENDATIONS whatsoever, and provides this for informational purpose only.

BUSINESS OVERVIEW

Overview

We are an operations and process improvement services firm headquartered in Irving, Texas providing process improvement solutions to enhance business efficiency, competitiveness and financial performance. We develop and employ methodologies to transform the processes, procedures and people within our clients’ organizations to enable more efficient and seamless operations. Our methodologies address business processes throughout the ‘‘Extended Enterprise.’’ Extended Enterprise is a term we use to describe the full spectrum of a client’s value chain from its suppliers, through its internal operations, and to its customers. Historically, we have successfully applied our methodologies in engagements for both government entities and Global and Fortune 1000 companies in a number of industries. During the past three years, however, we have been engaged primarily by various government entities to implement our operations management solutions.

As specialists in operations and process improvement , we create and implement operations management solutions to remove barriers, increase productivity, improve cultures and enable our clients to improve and sustain performance as measured by the following:

• total cycle time;

• cost savings;

• time-to-market;

• product yields;

• delivery lead times;

• inventory turns;

• operational and administrative productivity; and

• return on assets.

To deliver these solutions, we utilize our staff of professionals, whom we refer to as ‘‘Resultants™,’’ and who average over 25 years of business experience. To manage our client engagements, our Resultants typically leverage our Process Value Management, or PVM, approach, which often incorporates our proprietary Total Cycle Time ® , or TCT ® , methodology along with other industry-accepted process improvement methodologies such as Kaizan, Lean, Six Sigma and Theory of Constraints. PVM is used to manage client engagements, identify process inefficiencies and implement change within our clients in order to achieve a total transformation to what we refer to as the ‘‘Process Managed Enterprise.’’ A Process Managed Enterprise is one in which management focus and systems are centered on customers and managed around processes.

The following principles guide us when we assess, architect, implement and deliver continuous improvements to transform our clients into Process Managed Enterprises:

• All businesses are made up of a series of linked processes, from the initial business concept through all its applied resources and its end customer.

• All processes, left unmanaged, naturally deteriorate over time.

• People working in cross-functional teams and focusing on customer needs are what make processes effective.

• Operational change is achieved by employing a combination of our proprietary methodologies and industry best practices, and is implemented using a metrics-driven approach without additional capital expenditure by the client.

• The client is the final arbiter of the value of the process.

• The transformation to the Process Managed Enterprise must deliver short-term operating results as well as continuous, long-term, systemic business enhancements.

Industry Background

Businesses operate in increasingly complex environments. Markets are becoming progressively larger and more global, offering companies the opportunity to expand their presence but also exposing them to increased competition and operational uncertainties. As a result, many companies will frequently evaluate their business processes in order to manage change and risk, reduce costs, increase productivity, improve quality and drive higher profitability in order to be more competitive within their respective industries and the global marketplace. In order to best accomplish these goals, we believe both management and business systems must be focused on customers’ needs and the processes that strengthen the customers’ perception of value. These goals are typically achieved by increasing resource utilization, reducing cycle time, reducing procurement inefficiencies and reducing costs.

Similar to commercial enterprises, government entities compete for scarce budget resources and are seeking methods by which to decrease inefficiencies, thereby saving taxpayer dollars and reducing burdens on under-staffed agencies. As a result, many government entities are choosing to bring private industry best practices to federal programs in an effort to improve efficiency.

Commercial enterprises and government entities frequently lack the internal strategic expertise or the dedicated staff necessary to address operational challenges and implement corrective solutions. In an effort to streamline operations and achieve higher returns on investment, companies and government entities are turning to consultants with specialized operational expertise and experience. We believe firms employing senior professionals with executive management experience are well-positioned to help large organizations and government entities solve complex business challenges and improve and sustain operational performance.

Competitive Strengths

We believe the following factors are strengths of our company and provide us with key competitive advantages:

Experienced Professional Staff

We believe our most important asset is the knowledge base and experience of our Resultants. It is our policy to be highly selective in our hiring practices and to employ seasoned executives with extensive management experience. Our Resultants average 25 years of business experience and approximately 70% have held senior management positions with previous employers, with almost half being former CEOs or CFOs. Our Resultants’ backgrounds in executive management roles allow them to better relate to the business challenges faced by our clients’ senior management. Our Resultants are critical to developing long-term client relationships, which can span multiple engagements. We believe that their expertise and experience significantly improve our ability to effectively market our capabilities, implement operational improvements and deliver return on investment to our clients.

Emphasis on Results

The success of each client engagement is defined by our ability to deliver measurable results. Our results can be measured by our clients’ productivity improvements, which are derived directly from the operational changes we implement, and by our clients’ cost savings and return on investment that ultimately result from these productivity improvements. In appropriate client situations, we are willing to base a portion of our fees on achieving desired results. These incentive fees are based on predetermined client-specific measures, such as the achievement of specified process improvements, cost reductions or designated goals. We believe this demonstrates confidence in our ability to deliver positive results to our clients.

Focus on Implementation and Continuous Improvement

We stress a hands-on implementation of process improvements and focus on the institutionalization of changes that improve the efficiency of our clients’ businesses and processes. We apply our process improvement methodologies throughout our clients’ Extended Enterprises in close cooperation with our clients’ management to effectively eliminate process barriers, thereby improving cycle time, quality or ‘‘first pass yield’’ (that is, doing it right the first time) and overall operational performance. As part of each client engagement, we conduct knowledge management sessions, which provide our clients with essential information, training and skills necessary to sustain continuous improvement. In contrast, we believe many of our competitors often leave their clients with a written assessment or report, but generally do not work with company management to actually implement the changes. Our Resultants not only identify and analyze a client’s critical business processes, but also implement and institutionalize process improvements into a client’s day-to-day business practices in an effort to provide lasting, transformational results.

Reputation

We have built a reputation as a leader in providing operational process improvement solutions that solve complex business problems. Through our client successes, we have established a strong reputation for our expertise in delivering collaborative, cross-functional results across the Extended Enterprise. We believe our industry reputation along with a high level of client referrals helps us source new engagements and is evidence of the value we offer to our clients.

Operations and Process Improvement Solutions

We specialize in implementing solutions that achieve measurable and sustainable results including reductions in cost and improved financial performance. We manage our client engagements by applying our PVM approach, a holistic approach that defines the steps necessary to improve strategic business processes, assesses their linkages and efficiencies, and prescribes short- and long-term enhancement programs.

Our Resultants specialize in operational process improvement solutions that can be applied to clients in a variety of industries. Our process improvement solutions address product development, resource utilization, procurement, cycle time, customer service, operations logistics, inventory turns and other business challenges. Specific examples of our solutions to these business challenges include:

• Product Development / Cycle Time Reductions. In a competitive environment, the time required to get a product to market can significantly affect a company’s market position. We deliver operations management solutions that identify barriers in the product development process and implement efficiencies that reduce cycle time and speed product development. Reducing the time required to get a product to market can increase customer satisfaction, lower costs and enhance our clients’ ability to respond timely to evolving market conditions.

• Procurement and Sourcing. Inefficiencies in procurement and sourcing tend to increase costs. We work with our clients to achieve measurable savings by addressing the entire procurement process including contract negotiations, vendor selection, contract compliance, consumption patterns, total cost of ownership, performance measurement, knowledge transfer and make-versus-buy decisions. Implementation of our solutions has enabled many of our clients to achieve substantial savings in a wide variety of spend categories including office supplies, telecommunications, technology hardware, software and services, insurance, printing services, travel and other industry-specific categories. Operations Logistics. Inefficiencies within enterprises, particularly those with complex business processes, often result from a lack of coordination among business units or other functional groups. Our solutions address these inefficiencies by improving operations logistics across the Extended Enterprise, and include business process reengineering, identification of facility inefficiencies with respect to people, parts and layout, as well as operational testing, evaluation, implementation and training. Our operations logistics engagements often lead to significant productivity improvement and cost savings.

Growth Strategy

Our strategy to grow our business includes the following:

Attract, Hire, Develop, Train and Retain Highly Qualified Senior Resultants

We are in the consulting services industry and rely heavily on the quality of our professionals to drive our success. We believe attracting, hiring, developing, training and retaining experienced professionals significantly improves our ability to achieve desired client results, and the quality of our Resultants is critical to both our industry reputation and our success in obtaining new business. We believe our culture and the opportunity to work collaboratively on interesting assignments attracts high-quality Resultants and leads to low attrition rates. We invest in our Resultants’ career progression by providing training and development programs designed to match their skill sets with the needs of our clients.

Leverage Our Track Record of Success

We have built a track record of client satisfaction through the efficient and successful completion of complex projects for our government and large commercial clients. As a result, we have established a solid reputation and many of our clients continue to serve as excellent references for us. As a key element of our future growth, we intend to leverage our reputation with existing and past clients to win new business and seek repeat business opportunities with existing and former clients, many of which have multiple operating divisions. We will continue to expand efforts to promote our successes and to utilize our Resultants’ unique experience and skill sets to secure new client engagements.

Expand Sales and Marketing

We believe the proliferation of global markets and complex business environments will continue to drive demand for process improvement expertise, significantly enhancing the market opportunity for our solutions. To adequately address client opportunities on a wider scale, we intend to invest in our sales and marketing as a means of accelerating our market presence, increasing our reputation as a knowledge leader and securing new client engagements. We intend to continue building upon the strength of our brand and further promote awareness through a variety of traditional sales and marketing activities such as knowledge sessions, white papers, press interviews and conference speaking engagements. We continually update the content and functionality of our website. Collectively, we believe these programs will help clarify and differentiate our capabilities from our competition.

As an example, we currently have alliances with established academic programs, including The Wharton School of the University of Pennsylvania. Through these programs, we publish white papers and host knowledge sessions and events with senior-level executive attendees, which reinforce our subject-matter expertise in the field of operations and process improvement services. The content of these events is typically focused on addressing key business and operational challenges faced by large companies and generally produce a number of quality sales leads. We believe the synergy of our operational expertise combined with the strategic and technical skills of these partners will reinforce our position as knowledge leaders in the minds of potential clients and greatly improve our ability to market our services.

Target Repeat Client Engagements

We intend to leverage our prior engagement successes with existing and former clients to identify additional opportunities to apply our solutions and experiences. We believe clients for whom we have helped realize cost savings or return on investment are likely to realize the economic benefit potential from our solutions and will be more likely to engage us in follow-on programs.

Focus on Additional Business Opportunities in the Commercial Sector

Historically, we have served both government and commercial clients. Recently, we have successfully provided our operations management solutions primarily to the government sector. However, we are dedicated to growing our commercial client base and expect to deploy additional sales personnel, marketing resources and Resultants in the future.

Clients

We have delivered operations and process improvement solutions to approximately 375 clients since our inception in 1978. Historically, most of our clients have been large, diversified commercial or government enterprises in North America, Europe, and Asia. During the last three years, however, our engagements have involved primarily various government entities. We have also served international clients in previous years from our former offices in Switzerland, Sweden, Germany, Singapore, China and Hong Kong. Currently, we are focused on delivering our solutions in North America. In some instances, we provide solutions to the same organization under separate contract agreements. While we believe our methodologies are applicable to any industry, we have developed a significant amount of subject-matter expertise relevant to specific industries, including automotive, aviation, distribution, government, healthcare, manufacturing, semiconductor, textiles and transportation. Consequently, we can leverage our Resultants’ prior executive experiences to obtain business and determine appropriate client project teams.

Contractual Arrangements

We perform services and provide solutions for clients pursuant to contracts that generally have terms of three months to one year. We are compensated for our professional services and solutions in one or more of three ways: fixed fees, task-based fees or incentive fees. The majority of our revenue is derived from fixed fee and task-based fee contracts. Our fee type and structure for each client engagement is dependant on a number of variables, including size of the client, the complexity and geographic dispersion of its business, the level of the opportunity for us to improve the client’s processes and other factors. Our contracts are generally cancellable by the client upon 30 days’ notice.

We are working in several divisions of the Navy, each governed by a separate contractual agreement. However, contracts related to these engagements are executed within the United States government’s budget cycle and are fully funded for up to one year at a time and may be renewed annually for successive one-year periods over the remaining life of the engagement. Since we began working with the Navy in 1997, we have never had a premature termination. For our engagements with the Navy, we contract either directly with the government through our listing with the General Services Administration, or GSA, or we use an intermediary that acts as a prime contractor providing contracting and administrative services. Currently, we utilize CACI, Inc.-Federal, a wholly owned subsidiary of CACI International, Inc., or CACI, as an intermediary. In these instances, CACI plays a limited role in contract execution, and does not provide any client consulting services. We are in the third year of a three year contract with CACI. We anticipate entering into a similar contract with substantially similar terms upon expiration of the current contract. If we are unable to reach agreement with CACI as a future intermediary, we will seek other intermediaries or utilize our existing GSA agreement to contract with the Navy.

Fixed fee revenue is recognized on a percentage of completion method, based on direct labor hours expended. In order to calculate the completion ratio on a given project, time and effort to date are divided by the total estimated time and effort for the entire project. This ratio is then multiplied by the total fixed fee to be earned on the project, resulting in the amount of revenue earned to date. Revenues attributable to fixed fees were 8%, 4% and 10% of consolidated revenue for the years ended December 31, 2006, 2005, and 2004, respectively.

Task-based fees are recognized as revenue when the task is completed or the deliverable is received by the client. Typically, task-based revenue recognition involves the delivery of a report, minutes or some other evidence of completion. Revenues attributable to task-based fees were 91%, 96% and 89% of consolidated revenue for the years ended December 31, 2006, 2005, and 2004, respectively.

Incentive fees are tied to improvements in a variety of client performance measures typically involving cycle time, asset utilization and productivity. Incentive fee revenue is recognized in the period in which the related client improvements are achieved. Our incentive fee agreements with our clients define in advance performance improvement standards that form the basis of our incentive fees earned. Incentive fees are affected by our clients’ business performance and prevailing economic conditions. Revenues attributable to incentive fees were 0%, 0% and 1%, for the years ended December 31, 2006, 2005, and 2004, respectively. As of April 3, 2007, we had no contractual agreements for incentive fees.

Reimbursement revenue represents the client’s repayment of our mutually agreed upon travel expenses as incurred. All billable travel expenses are submitted to and approved by the client. Revenues attributable to reimbursement were 1%, 0% and 1%, for the years ended December 31, 2006, 2005, and 2004, respectively.

In our business under commitment, also known as backlog, we include signed client contracts and funded government contract commitments with terms generally ranging from three months to one year. In 2006 and 2005, a portion of our backlog included projects that were funded as a specific line item in the United States government’s budget, as opposed to inclusion in a general category. Budgeting in this manner was considered equivalent to full funding; therefore, these commitments are included in backlog. Backlog at December 31, 2006, was $16.1 million. Backlog at December 31, 2005 and 2004 was $14.5 million and $22.5 million, respectively.

Financial Information About Segments and Geographic Areas

Financial information about our segments and information related to the geographic areas in which we operate appears in Note 12 to our Consolidated Financial Statements included in this report.

Competition

The consulting services industry in which we operate is highly competitive and significantly fragmented. We compete with a large number of diverse service providers, including business operations consulting firms, such as Huron Consulting Group, financial consulting firms, such as FTI Consulting, Inc., management consulting firms, such as McKinsey & Company, accounting firms, technical and economic advisory firms, regional and specialty consulting firms and internal professional resources of existing and potential clients. In addition, since there are relatively low barriers to entry into the consulting services market, we expect new entrants into our operations management consulting field to result in continued and additional future competition. Some of our competitors have significantly greater financial resources, professional staffs, industry expertise, and name recognition than we do. Competitive pressures could reduce our market share or require us to reduce the price of our services and solutions, either of which could harm our business and results of operations. Furthermore, there can be no assurance we will be able to compete successfully with our existing or new competitors. Our PVM approach and proprietary methodologies are trade secrets not capable of being patented, and there can be no assurance our competitors will not acquire or develop substantially similar methodologies or our clients will not adopt our methodologies without our assistance. Therefore, there can be no assurance we will not be subject to competition from others using substantially similar methodologies. However, we believe our competitive strengths differentiate us from competitors.

Employees

At December 31, 2006, we had a total of 155 employees, consisting of 107 full-time Resultants, 11 part-time Resultants, 13 sales and marketing employees and 24 administrative employees. Our employees are not represented by a labor union and are not subject to any collective bargaining agreement. We consider our employee relations to be good.

We are highly selective in our hiring of Resultants. We recruit primarily experienced professionals with operational expertise. We believe these highly sought after professionals choose to work for us because of the credentials, experience and reputation of our Resultants, the opportunity to work on a diverse range of matters and our strong reputation. We also develop and support our Resultants in their career progression through training and development programs designed to match the skill sets of our Resultants with the needs of our clients. We believe our attractiveness as an employer is reflected in our low turnover rate among Resultants.

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

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

CEO BACKGROUND

James “Jim” T. Taylor has been our Chief Executive Officer and President since January 2004 and a member of our Board of Directors since February 2004. From January 2004 to June 2005, Mr. Taylor served as our Interim Chief Financial Officer. Mr. Taylor served as our Vice President and Chief Financial Officer from January 2001 to January 2004. From 1997 to 2001, Mr. Taylor served as Vice President of the Chancellor Group, a Dallas, Texas management consulting firm, where he assisted companies in restructuring, raising funds and completing initial public offerings. From 1995 to 1997, Mr. Taylor served as Vice President for Overhill Farms Corporation and led in the creation of its Food Group division. From 1986 to 1993, Mr. Taylor served as President, Chief Executive Officer and Chief Financial Officer for Elcon Industries, a privately held manufacturer/distributor of after market automotive accessories. Mr. Taylor also was a partner with Coopers & Lybrand (currently PriceWaterhouseCoopers) in both the Los Angeles and Dallas offices. Mr. Taylor is a licensed CPA in the state of Texas and a member of Financial Executive Institute and Financial Executive Network Group. Mr. Taylor holds a B.S. in Accounting from California State Polytechnic University. Mr. Taylor is a member of the Dallas Citizens Council and serves on the board of Bigthought, a Dallas-based arts partnership.

David English has been our Chief Financial Officer, Vice President, Treasurer and Assistant Secretary since June 2005. Mr. English was appointed as our Secretary in January 2007. Mr. English is a licensed CPA and serves as our Principal Financial and Accounting Officer. Mr. English was our Controller from June 2004 until June 2005 and our Assistant Controller from August 2000 to June 2004. From 1997 to 2000, Mr. English served as Chief Financial Officer of The Nichols Companies, a distributor/retailer for construction equipment. From 1996 to 1997, Mr. English served as Controller of Cross Continent Auto Retailers, Inc., an automotive retailer, including during its initial public offering. From 1990 to 1996, Mr. English served as Chief Financial Officer of Southwest X-Ray Company, a medical products and equipment distributor. From 1986 to 1990, Mr. English was in public accounting with the firm of Gerhardt & Puckett, P.C.

Jimmy C. Houlditch has been our Vice President and President, North America, Government since 2001. From 1996 to 2001, Mr. Houlditch served as President of our Aviation division. Mr. Houlditch was a member of our Board of Directors from April 2004 to June 2006. Mr. Houlditch served as Corporate Vice President of Manufacturing and Productivity for Allied Signal Corporation, and as Chief Operating Officer for Allied Signal’s Gas Turbine Company from 1991 to 1996. He was previously with Texas Instruments Semiconductor as Senior Vice President of Operations for Texas Instruments’ Defense Systems Electronics Company from 1987 to 1990, and as Senior Vice President of Automation, Quality and Worldwide Product Rationalization from to 1984 to 1987.

Terry D. Stinson has been our President, North America, Commercial since February 2006. Mr. Stinson has been Chief Executive Officer of his own consulting practice, Stinson Consulting, LLC, which engages in strategic alliances and marketing for the aerospace industry, since 2001. In addition, Mr. Stinson was associated with Xelus, Inc., a collaborative enterprise service management solution company, and served as its Chairman, President and Chief Executive Officer from 2002 to 2005. From 1997 to 2002, Mr. Stinson served as Chief Executive Officer and Chairman of the board of directors of Bell Helicopter Textron Inc., the world’s leading manufacturer of vertical lift aircraft, and was its President from 1996 to 1998. Prior to joining Textron, Mr. Stinson had been President and Chief Executive Officer of Hamilton Standard Division of United Technologies Corporation since 1986. Mr. Stinson has served as a member of the boards of directors of Lennox International Inc., a leading global provider of climate control solutions, since 1998, of Triumph Group Inc., a global leader in supplying and overhauling aerospace and industrial gas turbine systems and components, since 2004, of Enigma Inc., a software company delivering an aftermarket platform for service, parts and diagnostic information of complex equipment, since 2002, and of First Equity Group, an aviation investment and aftermarket company, since 2006. Mr. Stinson is a trustee of the United States Air and Trade Show and the National Security Industry Association, and a member of the Aerospace Industries Association Board of Governors.

General (Retired) John T. Chain, Jr. has served as a member of our Board of Directors since May 1995 and has been the Chairman of our Board of Directors since May 1998. He served as the President of Quarterdeck Equity Partners, Inc., an investor in the aerospace industry, from June 1996 to June 2001. He served as Special Assistant to the Chairman of Burlington Northern Santa Fe Corporation, a major U.S. freight railroad, from November 1995 to March 1996, and as an Executive Vice President of Burlington Northern from 1991 to November 1995. From 1986 to 1991, he served as a General (Commander-in-Chief, the Strategic Air Command) in the United States Air Force. General Chain is a member of the boards of directors of ConAgra Foods, Inc., a packaged food company, and Kemper Insurance, a property and casualty insurance company. General Chain is also lead independent director of Northrop Grumman Corporation, a provider of products, services and solutions in information and services, aerospace, electronics, and shipbuilding; and is lead independent director of Reynolds American, a manufacturer of cigarettes. He was a member of the board of directors of RJR Nabisco, Inc. (which became R.J. Reynolds Tobacco Holdings, Inc., or RJR) from 1994 until June 1999, a member of the board of directors of Nabisco Group Holdings Corp., the former parent of RJR, from 1994 to December 2000, and a member of the RJR board of directors from June 1999 through July 2004. In May 2007, General Chain intends to retire from the boards of directors of Kemper Insurance and Northrop Grumman Corporation, both of which he has served since 1991.

Edward P. Evans has served as a member of our Board of Directors since February 2005. Mr. Evans received his B.A. from Yale and received his MBA in business from Harvard. In addition to personal business investments, Mr. Evans has been Chairman and CEO of MacMillian, Inc., Missouri Portland Cement Company, Fansteel, Inc. and H.K. Porter, Inc. Mr. Evans serves as a member of the board of directors of HBD Industries, Inc., a manufacturer and supplier of a diverse line of general-purpose and application-engineered industrial products.

Dorsey R. Gardner has served as a member of our Board of Directors since June 2005. Mr. Gardner has been the President at Kelso Management Company, Inc., an investment management company, since July 1980. Mr. Gardner has also been a General Partner at Hollybank Investments, LP, Thistle Investments, LP and Gattonside Investments, LLC (each a private investment fund) from 1994, 1999 and 2000, respectively, until 2002. Prior to 1994, Mr. Gardner spent 15 years at Fidelity Management & Research, including as a Vice-President from 1972 to 1980. Mr. Gardner serves as a member of the board of directors of Otologics, LLC, Crane Company and Huttig Building Products Inc.

David B. Mathis has served as a member of our Board of Directors since June 1998. Mr. Mathis has served as Chairman of the Board and Chief Executive Officer of Kemper Insurance Companies, which has operations in commercial and personal insurance, risk management, and reinsurance, from 1990 to 2003, and remains as Chairman. Mr. Mathis has had a long career with Kemper since 1960 that has included executive assignments with both Kemper Insurance Companies and as Chief Executive Officer and Chairman of Kemper Corporation, its former publicly-owned affiliate. Mr. Mathis also serves on the board of directors of The Mosaic Company, a producer and distributor of crop nutrients and feed ingredients for the animal nutrition industry, and is also Chairman of the James S. Kemper Foundation.

SHARE OWNERSHIP

(1) Except as otherwise indicated, the persons named in the table possess sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. Beneficial ownership as reported in the above table has been determined according to Rule 13d-3 of the Securities Exchange Act of 1934, as amended. The percentages shown are calculated based on 10,939,242 shares of common stock outstanding on April 15, 2007. The numbers and percentages shown include the shares actually owned as of April 15, 2007, and the shares that the identified person or group has the right to acquire within 60 days after that date. In calculating the percentage ownership, all shares that the identified person or group has the right to acquire within 60 days after April 15, 2007 upon exercise of options are deemed to be outstanding for the purpose of computing the percentage of shares owned by that person or group, but are not deemed to be outstanding for the purpose of computing the percentage of shares owned by any other person or group. Except as otherwise noted, the address of the named individuals is 5221 N. O’Connor Boulevard, Suite 500, Irving, Texas 75039-3714.

(2) Includes 10,600 shares of common stock issuable upon exercise of outstanding options exercisable within 60 days of April 15, 2007.

(3) Consists of 3,405,307 shares held directly by Mr. Evans; 129,750 shares held by the Edward P. Evans Foundation; 128,250 shares held by Fiduciary Trust Co. International, custodian for the Edward P. Evans IRA and 240,000 shares held by Mr. Evans, custodian for Merrick Gillies UGMA MA. Power to vote or dispose of shares held by the Edward P. Evans Foundation, Fiduciary Trust Co. International, custodian for the Edward P. Evans IRA, and Mr. Evans, custodian for Merrick Gillies UGMA MA is held by Mr. Evans.

(4) Includes 10,902 shares of common stock issuable upon exercise of outstanding options exercisable within 60 days of April 15, 2007.

(5) Includes 100,000 shares of restricted stock granted under the 2005 Omnibus Stock and Incentive Plan for Thomas Group, Inc. that have become available on or before April 15, 2007.

(6) Includes 200 shares of common stock issuable upon exercise of outstanding options exercisable within 60 days of April 15, 2007. Also includes 16,667 shares of restricted stock granted under the 2005 Omnibus Stock and Incentive Plan for Thomas Group, Inc. and vested on or before April 15, 2007.

(7) Includes 16,667 shares of restricted stock granted under the 2005 Omnibus Stock and Incentive Plan for Thomas Group, Inc. and vested on or before April 15, 2007.

(8) Includes 21,702 shares of common stock issuable upon exercise of outstanding options exercisable within 60 days of April 15, 2007. Also includes 133,334 shares of restricted stock granted under the 2005 Omnibus Stock and Incentive Plan for Thomas Group, Inc. and vested on or before April 15, 2007.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

We are an operations and process improvement services firm headquartered in Irving, Texas that provides process improvement solutions that enhance business efficiency, competitiveness and financial performance. We develop and employ methodologies to transform the processes, procedures and people within our clients’ organizations to enable more efficient and seamless operations. Our methodologies address business processes throughout the “Extended Enterprise.” Extended Enterprise is a term we use to describe the full spectrum of a client’s value chain from its suppliers, through its internal operations, and to its customers.

As specialists in operations and process improvement, we create and implement process improvement solutions that remove barriers, increase productivity, improve cultures and enable our clients to improve and sustain operational performance as measured by the following:

• total cycle time;

• time-to-market;

• delivering lead times;

• operational and administrative productivity;

• cost savings;

• product yields;

• inventory turns; and

• return on assets.

To deliver these solutions, we utilize our staff of professionals, whom we refer to as “Resultants™,” who average over 25 years of business experience. To manage our client engagements, our Resultants typically leverage our Process Value Management, or PVM, approach, which incorporates our proprietary Total Cycle Time ® , or TCT ® , methodology along with other industry-accepted process improvement methodologies. PVM is used to manage client engagements, identify process inefficiencies and implement change within our clients in order to achieve a total transformation to what we refer to as the “Process Managed Enterprise.” A Process Managed Enterprise is one in which management focus and systems are centered on customers and managed around processes.

We have delivered operations and process improvement solutions to approximately 375 clients since our inception in 1978. Historically, most of our clients have been large, diversified commercial or government enterprises in North America, Europe, and Asia. During the last three years, however, our engagements have involved primarily various government entities. We have also served international clients in previous years from our former offices in Switzerland, Sweden, Germany, Singapore, China and Hong Kong. Currently, we are focused on delivering our solutions in North America. In some instances, we provide solutions to the same organization under separate contract agreements. While we believe our methodologies are applicable to any industry, we have developed a significant amount of subject-matter expertise relevant to specific industries, including automotive, aviation, distribution, government, healthcare, manufacturing, semiconductor, textiles and transportation.

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

Fixed fee revenue is recognized on a percentage of completion method, based on direct labor hours expended. In order to calculate the completion ratio on a given project, time and effort to date are divided by the total estimated time and effort for the entire project. This ratio is then multiplied by the total fixed fee to be earned on the project, resulting in the amount of revenue earned to date. Revenues attributable to fixed fees were 8%, 4% and 10% of consolidated revenue for the years ended December 31, 2006, 2005, and 2004, respectively.

Task-based fees are recognized as revenue when the task is completed or the deliverable is received by the client. Typically, task-based revenue recognition involves the delivery of a report, minutes or some other evidence of completion. Revenues attributable to task-based fees were 91%, 96% and 89% of consolidated revenue for the years ended December 31, 2006, 2005, and 2004, respectively.

Incentive fees are tied to improvements in a variety of client performance measures typically involving cycle time, asset utilization and productivity. Incentive fee revenue is recognized in the period in which the related client improvements are achieved. Our incentive fee agreements with our clients predefine performance improvement standards that form the basis of our incentive fees earned. Incentive fees are affected by our clients’ business performance and prevailing economic conditions, both of which are out of our control, and may cause variability in revenue and profit margins earned on such engagements. We do not recognize revenue until the client has agreed that performance improvements have in fact been achieved. Revenues attributable to incentive fees were 0%, 0% and 1%, for the years ended December 31, 2006, 2005, and 2004, respectively. As of April 3, 2007, we had no contractual agreements for incentive fees.

Reimbursement revenue represents the client’s repayment of our mutually agreed upon travel expenses as incurred. All billable travel expenses are submitted to and approved by the client. Revenues attributable to reimbursement were 1%, 0% and 1%, for the years ended December 31, 2006, 2005, and 2004, respectively.

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

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

In addition, during the last three years, we have used cash generated from operating activities to eliminate debt incurred in 2001 and 2002. We repurchased all of our outstanding warrants in September 2005, and, in December 2005, we instituted our first annual dividend policy, which was subsequently increased to $0.30 per share annually in June 2006 and $0.40 per share annually in December 2006.

Sublease losses and income arise from the sublease contracts we maintain with subtenants in our Reston, VA and Troy, MI offices. Losses are generally the result of a subtenant defaulting on a lease or at the termination of a lease in which we anticipate that the future subtenant income will not be sufficient to recoup our costs associated with the subleased office space. Sublease income is recognized generally upon the termination of a sublease in which we, as a result of the termination, are able to avoid future anticipated costs previously recognized as sublease losses.

In addition to our United States operations, we have operations in the Asia/Pacific region. Some of our revenue related transactions are denominated in the local currency where the client is located. The majority of our operating expenses for our subsidiaries are denominated in the local currency of the subsidiary. Therefore, we are exposed to currency fluctuation risks. See Item 7A, “Quantitative and Qualitative Disclosure About Market Risk.”

Critical Accounting Policies and Estimates

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

Revenue Recognition

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

Unbilled Receivables

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

Deferred 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. A valuation allowance is recognized if, based on the weight of available evidence, it is more likely than not that some portion or all of a deferred tax asset will not be realized. All available evidence, both positive and negative, is considered when determining the need for a valuation allowance. Judgment is used in considering the relative impact of negative and positive evidence. The weight given to the potential effect of negative and positive evidence is commensurate with the extent to which it can be objectively verified. In accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, evidence, such as operating results during the most recent three-year period, is given more weight than our expectations of future profitability, which are inherently uncertain.

In addition to timing differences arising from operating assets and liabilities, we also record deferred tax assets for the tax benefits of net operating losses and foreign tax credits. For United States federal tax purposes, at December 31, 2002, we 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 net operating loss was generated, resulting in a balance of $11.4 million at December 31, 2004. In 2005, we used $8.1 million of the net operating loss to offset United States taxable income and used $0.2 million of the net operating loss carryforward limited under Section 382, resulting in a net operating loss carryforward balance of $3.1 million at December 31, 2005. In 2006, we used $0.2 million of the net operating loss carryforward balance of $2.9 million at December 31, 2006. We had unused foreign tax credit 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, we used our remaining $0.7 million of net operating loss carryovers to offset taxable income in 2004.

In assessing the realizability of deferred tax assets, we considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Due to the uncertainty of our ability to utilize our net deferred tax assets, primarily due to the Section 382 limitation discussed above, we provided a valuation allowance of $1.4 million against net deferred tax assets of $1.4 million, leaving a net deferred tax asset of approximately $33,000 at September 30, 2006. At December 31, 2006, after further evaluation of operating results of the most recent three-year period and comparison of all positive and negative evidence, we determined that a valuation allowance was only appropriate on approximately $117,000 of the NOL carryforward, due to annual limitations under Section 382. Therefore, we removed $1.5 million of the valuation allowance, which decreased income tax expense and increased assets.

If future analyses of the positive and negative evidence indicates that it is more likely than not that some portion or all of the net deferred tax asset will not be realized, a partial or full valuation allowance may be required, which could have a negative on net income in the period that it becomes more likely than not that deferred tax assets will not be realized.

Accumulated Other Comprehensive Loss

Translation of the financial statements of our 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, we liquidated our 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 our subsidiary in Hong Kong which is currently under liquidation. Upon substantially complete liquidation of our investment in our Hong Kong subsidiary, $31,000 will be reclassified as a non-cash gain included in operations for the year then ended. Review of Stock Option Grant Practices

As previously announced on February 2, 2007, our Board of Directors, with concurrence and oversight by our Audit Committee, which is comprised solely of independent directors, initiated a review of our historical stock option practices and related accounting during the period 1988 to 2006. This voluntary review was initiated in connection with our assessment of our historical capitalization documentation and not in response to any specific concerns from within Thomas Group about option practices or any inquiry from the Securities and Exchange Commission or any other regulatory agency. The review was conducted with the assistance of our outside legal counsel and specially-retained forensic accountants. Based on the preliminary findings of this review, on March 15, 2007, our Board of Directors, Audit Committee and management concluded that we would need to restate our financial statements and related footnote disclosures for fiscal years ending December 31, 2002 through 2005 and the first three quarters of the 2006 fiscal year. The Audit Committee and the Board of Directors further concluded on March 15, 2007 that our previously issued financial statements and related auditors’ reports for the years 2002 through 2005, and previously issued financial statements for the first three quarters of 2006, should no longer be relied upon.

The investigation has now been completed and our Board of Directors received a report on the results of that investigation on March 30, 2007, from our outside counsel and specially-retained forensic accountants. At that time, such counsel and accountants also submitted recommendations for proposed remedial measures to the Board, which are outlined below. Those proposals did not include any remedial measures pertaining to our directors or senior management team. Except as noted below, those recommendations are now being reviewed by the Board for possible implementation. After consideration of the report, the Board affirmed its confidence in our senior management team and their continued ability to sign certifications with respect to our periodic SEC reports and our financial statements. We have self reported the internal investigation and the restatement to the Securities and Exchange Commission and intend to cooperate with any informational or other requests from the SEC.

During the course of the investigation, the investigation team reviewed available electronic and hard copy documentation and conducted interviews of selected current and former officers, directors and employees.

The following background pertaining to our historical stock option grant practices was confirmed through the investigation.

From our initial public offering in August 1993 to January 2003, our historical stock option granting process has generally reflected a lack of either Board or Compensation Committee authorization for specific option grants, although a few instances exist where our Board or Compensation Committee took appropriate granting action under Delaware law and our option plans. Instead, from August 1993 to January 2003, we ran a CEO-centric option granting process with additional participation by the President from time to time and with minimal oversight by either our Board or Compensation Committee—particularly with respect to grants to rank and file employees. Our current and former Board members who were interviewed generally recalled periodic discussions concerning option grants to senior executives and directors, but, except for the instances noted above, there is a general lack of confirmatory written evidence in our records that would evidence these discussions. We last issued stock options in January 2003.

Our CEOs and/or Presidents through January 2003 thought they had the apparent authority to grant options. Although the investigation discovered 1992 Board resolutions purporting to delegate authority to the CEO and President to grant stock options, it does not appear from the investigation that the CEOs and/or Presidents acted pursuant to such delegation but instead acted based on their perceived apparent authority resulting from their positions as senior officers of Thomas Group.

During the review period, we granted options under the following circumstances: (i) grants to new employees at or near start dates; (ii) grants as part of an annual review process; (iii) grants to employees on their fifth and tenth year anniversaries; (iv) grants that were awarded to a key group of officers and employees; (v) grants made in connection with business developed through the Company’s CEO center; (vi) periodic grants to directors for Board service; and (vii) grants made periodically to employees for other reasons. Documents identified pursuant to which CEOs prior to 2003 made option grants include notices of grant awards, stock option agreements, memos, notes and emails directing employees to document the granting of stock options.

Based on our historical process deficiencies noted above, we have concluded that we will be required to adjust the accounting measurement dates for certain of our stock option grants as more fully discussed below. In addition to the process deficiencies noted above that allowed grants to be made without proper stock option plan or Delaware statutory approval, our investigation also identified some evidence that could be construed as manipulative for certain option grants and option exercises, including the following:(i) evidence of possible rearward selection of certain grant dates and exercise prices, including due to administrative delays in initiation and/or finalization of stock option terms; (ii) the use of an incorrect calculation to determine exercise prices under two of our stock option plans; (iii) evidence of the extension of expiration dates of certain stock option grants not properly accounted for; (iv) evidence that a limited number of rank and file employees were allowed to exercise options after expiration dates and (v) evidence of the possible rearward selection of an exercise date in one case. Notwithstanding the foregoing, the investigation team concluded that the totality of the information obtained and reviewed does not indicate that (i) stock option grants were intentionally back-dated on a widespread basis in order to obtain more favorable pricing for directors, officers or employees or (ii) option exercises were intentionally manipulated on a widespread basis. The investigation team also concluded that our internal control over financial reporting and our legal processes in connection with stock option grants and exercises have been ineffective.

In connection with the investigation, the investigation team has made the following recommendations with respect to proposed remedial measures: (i) establish modified accounting measurement dates for option grants not properly authorized by either Board or Compensation Committee resolutions, which we did in connection with the restatement; (ii) in order to correct the lack of complete legal documentation, adopt resolutions ratifying all prior option grants that may not have been previously authorized by specific Board or Compensation Committee resolutions, which resolutions were adopted by the Board on March 30, 2007; (iii) adopt and document an effective system of internal control over financial reporting that govern our stock option granting and/or other equity award processes; and (iv) adopt written equity granting practices and procedures that provide for option grants or other equity awards only by our Compensation Committee, consisting of outside independent directors, and that equity awards be made only on a quarterly basis during a meeting of the Compensation Committee.

Based upon the results of the investigation, we have determined that we will establish an accounting measurement date for each grant in accordance with the earliest evidence that the recipient of the grant as well as the number of shares subject to such award were set with finality as described in more detail below. We have also concluded that, on balance, our process deficiencies and lack of historical documentation of certain stock option grants should not preclude us from concluding, from an accounting perspective, that such options had been properly granted or that such stock options should be accounted for on a date other than the purported date of grant reflected in our stock option administration software. For stock option grants that were not otherwise evidenced by specific Board or Compensation Committee action, we have determined that it is appropriate to rely upon ancillary documentation that was found in our files and records, when such documentation confirms stock options had been granted.This conclusion is supported by Hein & Associates, our independent public accounting firm. This conclusion is also supported by the SEC’s published September 2006 guidance, which generally indicates that the accounting for stock options may depend on the facts and circumstances surrounding a company’s stock option grant practices when definitive documentation is not available.

In conducting the review of our stock option practices, the investigation team reviewed all available documentation, including but not limited to corporate minute books, Board of Directors’ packages, employment offer letters, employment agreements, notices of stock option grants, stock option agreements and personnel files. We have focused on the identified documentation and other evidence that may support a determination that a stock option grant was awarded with finality, even if such documentation is not sufficient to otherwise support a conclusion that all necessary legal steps have been taken to authorize such an award. In particular, we have focused on correspondence or agreements with employees that indicate the employees knew stock option awards were outstanding. We have also relied upon internal documents that indicate we recognized the awards were outstanding. Where ancillary documentation exists for a stock option grant and is dated, we have determined to use the date of earliest supporting documentation in establishing a revised measurement date. We have used the following documents in establishing revised measurement dates:

• Offer letters

• Notices of grant awards

• Section 16 filings

• Stock option grant lists

• Company worksheets prepared to support earnings per share calculations

• Other correspondence to employees recognizing existence of outstanding stock option grants

• Director and officer questionnaires listing outstanding stock option grants

In connection with the investigation, our Board of Directors, with the approval of our Audit Committee, has determined that the cumulative non-cash stock-based compensation expense adjustment was material and that our consolidated financial statements for each of the first three quarters of fiscal year ended December 31, 2006, each of the quarters in the fiscal year ended December 31, 2005 and the fiscal years ended December 31, 2005 and 2004 as well as the selected consolidated financial data for the fiscal years ended December 31, 2003 and 2002 should be restated to record additional stock-based compensation expense resulting from stock options granted during 1993 to 2003 that were incorrectly accounted for under GAAP, and related income tax effects.

We also analyzed the impact of our investigation related to Internal Revenue Code Section 162(m), which provides for a $1 million tax deduction cap on compensation awarded to certain top executives that is not considered performance-based. After completing our analysis, we determined that Section 162(m) may apply to option exercises in 2006 for 180,649 shares held by James T. Taylor, our CEO, which, when combined with other applicable employee remuneration, will be limited to a tax deduction of $1 million in 2006. We estimate the non-deductible amount for 2006 to be approximately $654,000, which will result in increased taxes of approximately $241,000.

We have determined that the cumulative, pre-tax, non-cash stock-based compensation expense resulting from revised measurement dates was approximately $2.1 million during the period from our initial public offering in August 1993 through December 31, 2006. The adjustments relate to options covering approximately 1.9 million shares. We recorded additional stock-based compensation expense of $5,532, $48,567 and $53,722 for the fiscal years ended December 31, 2006, 2005 and 2004, respectively, and $2.0 million for fiscal years ending prior to fiscal 2002. Previously reported total revenues were not impacted by our restatement. The table below reflects the cumulative effect on our stockholders’ equity In connection with the restatement of our consolidated financial statements discussed above, we assessed the impact of the findings of our internal investigation into our historical stock option grant practices and other tax matters on our reported income tax benefits and deductions, including income tax deductions previously taken for cash and stock-based executive compensation under the provisions of Section 162(m). In connection with that assessment, we determined that no adjustments were required to our (i) income tax expense previously reported in our Consolidated Statements of Income; (ii) tax benefits on stock option exercises previously reported in our Consolidated Statements of Cash Flows and Consolidated Statement of Changes in Stockholders’ Equity or (iii) deferred tax assets previously reported in our Consolidated Balance Sheets.

We have recorded $101,230 of income tax benefit in our Consolidated Statements of Income for the year ended December 31, 2006 and in our Consolidated Balance Sheets at December 31, 2006 to recognize deferred income tax assets on stock-based compensation relating to unexercised stock options. This amount is not included in the tables above because it is a fourth quarter 2006 estimate, and not part of the restatement.

Section 409A of the Internal Revenue Code (“Section 409A”) provides that option holders with options granted with a below-market exercise price, to the extent the options were not vested as of December 31, 2004, may be subject to adverse Federal income tax consequences. Holders of these options will likely be required to recognize taxable income at the date of vesting for those options vesting after December 31, 2004, rather than upon exercise, on the difference between the amount of the fair market value of our common stock on the date of vesting and the exercise price, plus an additional 20 percent penalty tax and interest on any income tax to be paid. To the extent this process is available to affected employees, we have decided to follow the IRS Settlement Offer issued in February 2007 to pay penalty and interest to the IRS on behalf of the employees and potentially gross-up employees for tax costs. The IRS offer only applies to option exercises by rank and file employees in 2006.

Certain grants of stock options made during the period under investigation were priced below fair market value, rather than at fair market value. Consequently, certain grants intended to be classified as ISOs, requiring pricing at no less than fair market value on the date of grant, should have been classified as nonqualified stock options, or NQs. Given the significant differences in the tax treatment between ISOs and NQs, we underreported or underwithheld certain payroll taxes for those options which were exercised during the period through 2006. We have recorded certain tax liabilities related to these issues in the period of exercise with related penalties and interest charged in subsequent periods, except for periods closed by the statute of limitations where no liability is recorded. We intend to pursue a negotiated settlement with the IRS as soon as practicable; however, there can be no assurance that we will settle these issues for amounts consistent with the estimated liabilities we have recorded. In the aggregate, the financial impact of these tax errors was approximately $0.1 million and are included in the adjustment.

Results of Operations

Years Ended December 31, 2006 and 2005

Revenue

Total revenue increased $16.4 million, or 38%, to $59.5 million in 2006, from $43.1 million in 2005. The increase in revenue is primarily attributable to our efforts in securing additional contracts for services with current and previous customers. Typically, our initial customer engagement consists of a paid assessment followed by a longer, more extensive program. During 2005, we completed 4 assessments leading to longer term programs in 2006, benefiting both revenue and gross margins in 2006. Additionally, we completed 4 assessments in 2006 that led to additional assessments or programs starting within 2006. During 2006, we recorded revenues on 36 assessments and programs from 17 different customers compared to 22 assessments and programs with 12 different customers during 2005. There were 5 assessments completed or started in 2006 that, as of December 31, 2006, had not yet led to a subsequent assessment or program.

Fixed fee revenues increased $3.0 million, or 176%, to $4.6 million, or 8% of revenue, in 2005 from to $1.6 million, or 4% of revenue, in 2005. The increase in fixed fee revenues is attributable to the rise in the number of active commercial contracts. During 2006, we derived fixed fee revenues from 19 assessments and programs from 12 different customers, versus 9 programs and assessments from 8 different customers in 2005. In 2006, we recorded fixed fee revenues from 3 customers with multiple engagements, versus 1 customer with multiple engagements in 2005.

Task based revenues increased $13.0 million, or 31%, to $54.3 million, or 91% of revenue, in 2006, from $41.3 million, or 96% of revenue, in 2005. The increase in task based revenues relates primarily to the number of active programs with the United States government. During 2006, we derived task based revenues on 17 assessments and programs from 5 customers, versus 13 assessments and programs from 3 customers in 2005. In 2006 and 2005, we had multiple engagements with each of our task based customers.

Incentive fee revenue was $0, or 0%, of revenue in 2006, compared to $0.1 million, or 0% of revenue, in 2005. Although we continue to offer a portion of our fees contingent on performance based metrics, our more recent customers have preferred fixed fee arrangements.

Reimbursement revenues increased $0.5 million, 400%, to $0.6 million, or 1% of revenues, from $0.1 million, or 0%, in 2005. The increase in the number of commercial contracts is also solely responsible for the increase in reimbursement revenues.

North America region revenue increased $16.3 million, or 38%, to $59.4 million in 2006, from $43.0 million in 2005. Revenues from United States government contracts increased $13.0 million, or 31%, to $54.3 million from $41.3 million in 2005. Revenues from contracts with commercial clients in the United States increased $3.4 million, or 200%, to $5.1 million from $1.7 million in 2005.

Our Europe region generated no revenue in 2006 or 2005. We have no significant continuing involvement in our former Europe operations and all prior activity is included in discontinued operations.

Our Asia/Pacific region revenue increased to $71,000 in 2006 from $29,000 in 2005. The increase is due to training programs initiated in the first quarter of 2006 and an assessment with one customer completed over the second and third quarters of 2006, compared to no revenue from training classes and incentive fees finalized from one customer in 2005. We currently retain limited sales and marketing operations in Asia.

Gross Profit

Gross profit for 2006 increased $9.1 million to $31.5 million, or 53% of revenue, from $22.4 million, or 52% of revenue, in 2005. Costs of sales consists of direct labor, travel, and other direct costs incurred by our Resultants to provide services to our clients and to complete client related projects, including training. The improvement in gross profit margin is primarily attributable to a higher ratio of fixed fee and task based programs to assessments completed, the consolidation of several large task based programs resulting in higher utilization of our Resultants assigned to these programs, and our ability to match our hiring pace with the resource needs of our assessments and programs. At December 31, 2006, we had 118 full and part time Resultants and 3 active contractors serving on active assessments and programs for our clients compared to 114 full and part time Resultants and 3 contractors at December 31, 2005.

Selling, General and Administrative

Selling, general and administrative expense for 2006 increased $3.1 million, or 23%, to $16.6 million from $13.5 million in 2005. The increase is comprised primarily of $1.2 million in stock based compensation costs, $0.4 million in sales commissions and incentive compensation, $0.5 million related to staffing levels in support functions necessary to accommodate our growth, $0.2 million in advertising and marketing related activities, $0.2 million in office and equipment rental, and $0.6 in legal costs.

Sublease Losses

During June 2006, we terminated a portion of our Troy, Michigan office lease and our related sublease agreement resulting in a gain of $16,000. As of December 31, 2006, the remaining sublease loss liability was approximately $96,000 and consisted entirely of amounts related to our Reston, Virginia sublease.

During the first quarter of 2005, we recorded a $0.6 million charge relating to subleasing excess office capacity in Reston, Virginia, at market rates. The charge is based on the shortfall between future sublease income and costs expected to be incurred under our leases with our landlords. This action accounted for $0.6 million, or $0.06 per diluted share for the year ended December 31, 2005 (See the accompanying Note 11 of the Consolidated Financial Statements included herein).

Discontinued Operations

In 2005, we disposed of our operations in Switzerland. Although we 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, we determined the liquidation of our investment in our Swiss 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, which were required to be reported as a separate component of stockholders’ equity titled “Accumulated other comprehensive loss”. This reclassification had no effect on equity for 2005 as the amount was previously recorded as a direct reduction of equity. The presentation of all periods 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).

Income Taxes

During 2006, we recorded income tax expense of $3.9 million compared to $0.3 million during 2005. Our effective tax rate for 2006 was 25%, compared to 4% in 2005. The increase in tax expense and resulting effective rate is due primarily to the utilization of significant NOLs outstanding during 2005 no longer available in 2006, offset by certain reductions in our deferred tax asset valuation allowance.

At December 31, 2001, we determined, based primarily on our recent history of operating losses in the United States, that we could no longer consider the recovery of our net deferred tax assets as more likely than not. Accordingly, our net deferred tax assets were reduced by a valuation allowance adjustment. While a valuation allowance was required for our net deferred tax assets, as discussed below, the assets remained 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.

Beginning in 2001, we had provided a valuation allowance for the full amount of the net deferred tax assets. During the three months ended March 31, 2006, we determined that future sources of taxable income, the reversing of temporary differences and other tax planning strategies will be sufficient to realize certain components of our deferred tax asset. Therefore, approximately $0.3 million of the deferred tax asset valuation allowance was removed during the three months ended March 31, 2006. There were no reductions in the deferred tax asset valuation allowance for the three months periods ended June 30, 2006, September 30, 2006. At December 31, 2006, after further evaluation of operating results of the most recent three-year period and comparison of all positive and negative evidence, we determined that a valuation allowance was only appropriate on approximately $117,000 of the NOL carryforward, due to annual limitations under Section 382. Therefore, we removed $1.5 million of the valuation allowance during the three months ended December 31, 2006.

Although our statutory tax rate is approximately 38%, our removal of this portion of our deferred tax asset valuation allowance reduced income tax expense in the first and fourth quarters of 2006 resulting in an effective tax rate of 28% for the quarter ended March 31, 2006, 0% for the quarter ended December 31, 2006 and 26% for the year ended December 31, 2006.

We continue to provide a valuation allowance of approximately $117,000 against our net deferred tax assets against net operating loss carryforwards subject to annual limitation under Section 382 of the Internal Revenue Code of 1986, as amended. While the factors listed above were considered in assessing the sufficiency of a valuation allowance, there is no assurance an adjustment to the valuation allowance would not need to be made in the future if information about future years change. Any change in the valuation allowance would impact our income tax provision and net income in the period in which such a determination is made.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Three Month Period Ended September 30, 2007 Compared to the Three Month Period Ended September 30, 2006

Revenue —In the third quarter of 2007, total revenues decreased $2.4 million, or 15%, to $13.5 million from $15.9 million in the third quarter of 2006. Fixed fee revenue was $1.1 million, or 7% of revenue, in the third quarter of 2007, compared to $1.2 million, or 8% of revenue, in the third quarter of 2006. Task based revenue was $12.3 million, or 92% of revenue, in the third quarter of 2007, compared to $14.5 million, or 91% or revenue in the third quarter of 2006. Reimbursement revenues were $0.1 million, or 1% of revenue in the third quarter of 2007 compared to $0.2 million, or 1% of revenue, in the third quarter of 2006. As of October 19, 2007, we had no active incentive based contracts.

North America region revenue decreased $2.4 million, or 15%, to $13.4 million in the third quarter of 2007, compared to $15.8 million in the third quarter of 2006. Revenue from commercial clients decreased $0.2 million, or 14%, to $1.2 million in the third quarter of 2007, compared to $1.4 million in the third quarter of 2006. Revenue from United States government contracts decreased $2.2 million, or 15%, to $12.3 million in the third quarter of 2007, compared to $14.5 million in the third quarter of 2006.

Our Asia/Pacific region revenues decreased to $24,000 in the third quarter of 2007 compared to $41,000 in the third quarter of 2006. We currently retain limited sales and marketing operations in Asia.

During the third quarter of 2007, we recorded $12,000 in revenue from a client located in Europe, compared to $0 in the third quarter of 2006. Although we discontinued our Europe operations in 2006, we maintain a strategic relationship in Europe through whom we may periodically obtain business.

Gross Profit —Gross profit margins were 53% of revenue, or $7.1 million, in the third quarter of 2007, compared to 55%, or $8.7 million, in the third quarter of 2006. Costs of sales consists of direct labor, travel, and other direct costs incurred by our Resultants to provide services to our clients and to complete client related projects, including training. The decrease in gross profit margin, as a percentage of revenue, is attributable to lower utilization rates of our Resultants in 2007.

Selling, General and Administrative Expenses —Selling, general and administrative expenses decreased $0.2 million to $4.2 million in the third quarter of 2007, compared to $4.4 million in the third quarter of 2006. The decrease is primarily due to decreases in incentive and stock-based compensation as compared to the prior year.

Sublease Losses —During June 2006, we terminated a portion of our Detroit, Michigan office lease and its related sublease agreement resulting in a gain of $16,000. As of September 30, 2007, the remaining rent reserve balance of approximately $23,000 related to our Reston, Virginia office, is being amortized ratably against rent expense until the expiration of the lease on October 31, 2007.

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