MANAGEMENT NETWORK GROUP INC
When used in this report,  the terms  "TMNG," "we," "us," "our" or the "Company" refer to The Management Network Group, Inc. and its subsidiaries.  GENERAL  TMNG, a Delaware corporation,  founded in 1990, is a leader in consulting to the communications  industry.  We have built a fully  integrated suite of consulting offerings including strategy, management, marketing, operational, and technology consulting services (see "Services" in Item 1). Our clientele includes a variety of  businesses  whose  products,  services  and  interests  are  focused  on the evolution of the  communications  industry,  including  wireless and traditional wireline  communications  service  providers,  as well as technology  companies, media and entertainment  companies,  and financial services firms that invest in the communications  industry.  Our clients are located principally in the United States,  however,  the Company also provides services to customers in Europe and other  foreign  countries.  We believe we are unique in our ability to provide a comprehensive  business  solution  to  the  communications  industry,  including strategy  consulting  and  business  planning,  product/service  definition  and launch,  customer  acquisition  and retention,  business  model  transformation, technical  support and process  modeling for business  support systems (BSS) and operations support systems (OSS). We have consulting  experience with almost all major  aspects of managing a global  communications  company.  In  addition,  we provide marketing  consulting  services to clients outside of the communications industry, primarily in the Eastern region of the United States (Mid-Atlantic).  We  capitalize  on our industry  expertise by  developing  and enhancing new and existing proprietary  toolsets that enable us to provide strategic,  management, marketing,  operational, and technology support to our clients. Our toolsets are consulting  guidelines,  processes  and  benchmarks  created  and updated by our consultants  based on their experience over many consulting  engagements.  These toolsets assist clients to improve  productivity,  gain  competitive  advantage, reduce time to market and market entry risk, and increase  revenues and profits. Our services are provided by teams comprised of senior  professionals  recruited from prestigious  university campuses  complemented by teams of consultants from the communications industry averaging 15 years of experience.  We have provided a unique  technology  agnostic and vendor  neutral  position to make  unbiased  evaluations  and  recommendations  that are based on a  thorough knowledge of each solution and each client's situation.  Therefore,  we are able to  capitalize  on  extensive   experience   across   complex   multi-technology communications  systems  environments  to provide  what we believe  are the most sound and practical recommendations to our clients.  Over the last  six  years,  the  Company  has  transformed  from a  provider  of primarily  management  and  operational  consulting  services to a provider of a fully  integrated  suite of offerings to the  communications  marketplace.  This transformation  has been  accomplished  through  increasing  the  breadth of our employee work base, by hiring  consultants of increasingly  diverse  backgrounds with various technical competencies, and implementing an acquisition strategy to acquire  consulting  companies  whose offerings  complemented,  and expanded the offerings we historically  provided.  We believe these actions have expanded key client  relationships,  have uniquely positioned us in the market to effectively serve  today's  needs of  large  global  communication  service  providers,  and provided an expansion of our key direct distribution channel elements.  Recently, with the market dynamics changing (see "Market Overview" in Item 1) we have been focusing on the opportunity to expand our offerings  through  indirect channel  partners.  We believe  partnering  will better enable us to serve large clients in what has become a shrinking and consolidating marketplace. We provide our partners  with  contacts,  strategic  business  analysis,  business  process outsourcing  (BPO)  solutions,  and depth of knowledge and experience in serving the  industry.  The  partnerships  bring us  technology  solutions  and  systems integration  capabilities  which  enable our  partners  and us to  provide  more comprehensive  client offerings and solutions to effectively  compete with other global consultancies.                                          3   During fiscal year 2005, we made strategic  investments  designed to position us in  three  key  ways--growing  our core  management  consulting  offerings  with emphasis in Internet Protocol (IP) and wireless  solutions;  maintaining a solid base of carrier  relations  and  expanding  into the cable,  media,  and content arenas;  and launching  managed  services with partners that  facilitate  Mobile Virtual Network Operators (MVNO), IP transformation or convergence of offerings.  During fiscal year 2005, we launched our own  non-commercial  MVNO, TMNG Mobile, the first such  service  launch by a  professional  services  company.  This has positioned us to demonstrate to potential market entrants, that we can, with our partners, deliver an end-to-end solution. Through our strategy business group we are  expanding  engagements  with high profile  clients,  and  providing  market assessments and business case development services.  For those MVNOs electing to move forward, we have developed  differentiated  consulting capabilities to help the MVNO build its  back-office  facilities or to leverage,  via TMNG Global and partners, a Mobile Virtual Network Enablement (MVNE) solution.  Another  key  achievement  during  fiscal year 2005 was the  development  of our managed  services  capability to support IP  transformation.  This capability is designed to support enterprises across multiple industries as they migrate their legacy communication network architectures to IP platforms. TMNG believes it has unique expertise, in particular, in helping enterprises understand,  protect and migrate  valuable  customer data and processes to new technology  platforms.  To further the visibility of our services,  we signed in 2005 a five-year exclusive economic  relationship with S3 Matching Technologies Inc. (S3), through which we have jointly designed  solutions for IP network migration for both communication service providers and global  outsourcing  firms. These solutions marry industry know-how with proven  technology and are capable of doing so under an outsourced framework.  We  have  already  developed  and  validated  our  proprietary  data management  optimization (DMO) solution. DMO addresses one of the critical first steps in the  migration  from  legacy to IP  environments,  as it  provides  the intelligence  surrounding databases of network elements and enables accurate and efficient migration to IP.  Finally,  in 2005 we began to design a  management  and  operational  consulting offering in support of media and communications  convergence.  We are working in partnership with network service platform provider, Personeta Inc., to develop a compelling offering for small-to-mid-sized carriers. These are carriers who need to support  convergence of offerings to enterprise  clients,  utilizing existing legacy and IP, both wire line and wireless networks,  in a cost-effective manner as an alternative to massive  capital-intensive  network investment.  This is an initiative  that we and our  partner  began  implementing  in late 2005 and will continue to be a key area of focus during fiscal year 2006.  As these and other  industry  trends  develop,  TMNG expects to utilize its long history  of  engagement  experience  with  clients  to  continue  modifying  its toolsets, develop new methodologies, and expand selectively its base of employee consultants to support and extend its thought leadership and capabilities in the communications industry.  MARKET OVERVIEW  TMNG serves a global  communications  marketplace that is just now emerging from an  approximately  four-year  period  of  retrenchment  and  restructuring.  The macroeconomic  forces that drove this environment  destabilized the industry and depressed the market for outside  consulting  services,  including  ours.  These circumstances  resulted  in a continued  substantial  decline in our revenue and profits during fiscal years 2001,  2002 and 2003.  That trend leveled off during fiscal  year 2004 and  improved  during  fiscal  year  2005 (see Item 1A,  "Risk Factors" and Item 7, "Management's Discussion and Analysis").  Today, the global communications  industry is in the midst of what we believe to be  revolutionary   change.  The  complements  of  regulatory   decisions,   new technologies and industry  consolidation  have begun to stimulate new investment in the sector. What we believe the future of the global communications  industry will look like is  beginning to take shape.  A  convergence  of voice,  data and video or content based  communications  is occurring.  This is bringing both new competitors  to the market,  such as Yahoo!  and Google,  and  consolidation  of existing industry competitors.  In addition, cable communications companies that historically offered video services are now positioning  themselves as providers of voice and other data and content services.  Wireline,   wireless   and   cable   companies   alike   have   their   eye   on convergence--where   any  type  of  content  or  application  can  be  delivered seamlessly across fixed or mobile networks.  For traditional  telecom companies, convergence will ultimately come in the form of IP Multimedia  Subsystems (IMS). IMS is  expected  to have  profound  influence  on the  communications  industry through the emergence of new business  models.  IMS will allow network owners to derive value from their networks while simultaneously  opening their networks to third parties to develop and offer their own  customized  and enhanced  services and  applications.  IMS and  convergence are costly and  complicated;  while the evolution is underway it will not occur without challenges.  The convergence of content providers and wireless  distribution  channels (i.e., carriers)  has also opened new  segments  of the market  through the MVNO model. MVNOs  are  mobile  operators  that do not own their own  wireless  spectrum  or network infrastructure.  Instead, MVNOs contract with existing wireless carriers to purchase  wholesale  access to wireless  networks.  We believe the MVNO model will move the market for wireless  services from a  voice-focused  market to one focused   on   value-added   non-voice   services   extending   into  media  and entertainment.  Players like ESPN and Disney aim to transform  the way consumers view their  wireless  services.  We expect this  transformation  of the wireless market to occur  rapidly  and present  numerous  challenges  to the  traditional carriers and MVNOs, alike.  We expect these profound  changes to increase  demand for  consulting  services, with  increased  focus on  convergence  and  wireless  and IP  based  offerings, outsourced  BPO  service  opportunities,  and the need for  existing  management consultancies  to  provide  solutions  to  these  new  communications   industry challenges.  As discussed in Item 1,  "Business - General," we have  invested to enable us to provide such services.  It has been our experience that because the expertise  needed by  communications companies  to  address  the  market's  needs is  typically  outside                                          4   their core competencies,  they must ultimately either recruit and employ experts or  retain   outside   specialists.   Additionally,   the   convergence  of  the communications,   media  and  technology   industries  has  brought  forth  many non-communications  companies  who we believe do not possess the  experience  or skill sets needed to execute new business  plans. We believe due to the range of expertise  required  and the  time  associated  with  hiring  and  training  new personnel,  bringing expertise  in-house is often not a viable option.  Although demand  for  consulting  services  has been down in  recent  years,  we  believe customers will need to contract with consultative firms or outsource some of the expertise   required  to  adapt  to  new  environments  and  capitalize  on  new technologies  now  emerging.  When  retaining  outside  specialists,  we believe communications  companies need experts that fully understand the  communications industry and can provide  timely and  unbiased  advice and  recommendations.  We intend to continue responding to that anticipated need.  BUSINESS STRATEGY  Our objective is to establish  ourselves as the consulting  company of choice to the converging communications,  media and entertainment industry, which includes the service  providers and technology  companies that serve the industry,  media and entertainment  companies,  and the financial services and investment banking firms that  invest in the  sector.  The  following  are key  strategies  we have adopted to pursue this objective.  - - Develop and evolve existing offerings/solutions and thought leadership  We plan to  continue  expanding  our  end-to-end  solutions  offerings,  both by organic  expansion  and/or  through   acquisitions.   Expanding  our  consulting solutions  involves  bundling or buying the  capabilities  that  support  change elements  in  the  adoption  of  IP  and  wireless  technology  and  support  of convergence of communications with media and content, with emphasis on wireless. We plan to  continue  extending  our  product  offerings  to the  communications industry.  We believe  wireline and  wireless  providers  will be  strategically focused on the following key initiatives,  with priority  depending upon present position and state of the company:  bundling or convergence  of services  (i.e., wireline,  wireless,  high-speed data and video);  continued  consolidation  and aggressive  reduction of costs;  reassessment  of core  competencies in order to leverage strengths and exit weak areas; and migration to new  technologies--next generation  wireless and IP. Our  solutions  will assist  clients in  redefining competitive  position,  launching  new  products  and  services  and  generating revenues through  integrated  offerings.  Such offerings will also be focused on increasing clients' efficiencies in these transformations. We will also evaluate expanding our offerings to include managed services,  with partners  surrounding these initiatives.  - - Continue to build the TMNG brand  We  plan  to  continue  building  and  communicating  the  TMNG  brand,  further positioning ourselves as the consultancy of choice for the global communications industry.  In late 2005,  TMNG was  rebranded to TMNG Global,  with our strategy group rebranded to Cambridge  Strategic  Management Group (CSMG).  These changes were made to better  represent the end-to-end  capabilities we offer through our strategic consulting, management consulting and managed services practices. When acquired,  the  CSMG  name  was a  powerful  brand.  We  made  the  decision  to reintroduce  this brand to capitalize  on that value and provide the  separation between our strategy and management consulting  practices,  providing a level of independence and neutrality  desired by clients.  Direct  marketing  efforts and other marketing  initiatives are underway to continue building awareness of TMNG and  communicating  our key  strengths,  including  our  uniquely  high level of experienced  consultants,  focus  on  the  global  telecommunications  industry, integrated  end-to-end  solution and  commitment to bringing  clients a positive return on their investment.  - - Focused and effective retention and recruitment  We plan to further  enhance our business  model to accommodate  the  anticipated types of  consulting  services  as a result of  revolutionary  change  occurring within the  communications  sector.  One key  element of the  business  model we believe  will be required  is the  attraction  and  retention  of high  quality, experienced   consultants.   In  what  we  believe  is  a  rebounding   economic environment,  our two primary  challenges in the  recruitment  of new consulting personnel  are the  ability to recruit  talented  personnel  with the skill sets necessary to capitalize on an industry undergoing  revolutionary  change and the ability  to  execute  such   recruitment   with  an   appropriate   compensation arrangement.  The market for skilled  consultants has become more competitive in the current industry environment.  We reinvigorate existing skill sets of our consultants with proprietary toolsets that provide methodologies they use to augment their experience and help analyze and solve  clients'  problems.  We  utilize  a  network  of eRooms to serve as a knowledge base, enabling  consultant  collaboration on engagements and providing support  information  and updates of TMNG current  toolsets and releases of next generation  tools.  Finally,  we  continue  to manage  our  flexible  and unique employee and  independent  subject  matter  expert  model to maximize  skill set offerings, while minimizing the effect of unbillable consultant time.  - - Enhancing our global presence  We plan to  further  enhance  our  presence  globally  to deliver  services  and solution  capabilities to client companies located around the world.  Especially in Western  Europe,  we believe the  competitive  market  expertise  of our U.S. consultants can be a key factor for foreign companies facing the business issues associated with deregulation and competition.                                          5    - - Leveraging knowledge and skills through partner channels  We are also focusing on managed service  offerings and partnerships  with select global  technology,  outsourcing and system integration firms as a complement to our consultancy offerings. We believe this will be a fast growing market segment which should allow us to leverage our  intellectual  capital  while teaming with technology  partners  to bring  BPO and  managed  services  offerings  to select clients.   We  believe  we  are  uniquely  positioned  to  capitalize  on  these anticipated market opportunities,  particularly because of our vendor neutrality and proprietary productivity toolsets.  SERVICES  We provide a full  range of  strategic,  marketing,  operations  and  technology consulting services to the communications industry. Services provided include:  - - Strategy and Business Case Development  We   provide   comprehensive    strategic   analysis   to   service   providers, media/entertainment  companies,  equipment manufacturers and financial investors in the communications  industry.  Our approach combines rigorous qualitative and quantitative  analyses  with  a  detailed   understanding  of  industry  trends, technologies,  and developments.  We provide clients with specific  solutions to their key strategic  issues  relating to their existing  business as well as new product  and  service   opportunities.   Our  services   include  business  case development,  data and  content  strategies,  marketing  spending  optimization, service and brand  diversification,  enterprise and small  business  strategies, technology commercialization and operational strategies.  - - Product Development and Management  We offer global  communications  service  providers  the benefit of our hands-on experience  developing  and  launching  new  products  and  services for some of today's  industry  leaders.  Our product  development  approach  includes market assessments,   product/service  definition,  business  requirements  definition, project management,  testing and release. We also help communications clients by evaluating  the  profitability  of existing  product and  service  offerings  to identify opportunities to consolidate, de-emphasize or decommission offerings to improve clients' overall profitability.  - - Customer Acquisition and Retention  We have  developed and  implemented  acquisition  and retention  strategies  for clients in the communications industry. We have consultants skilled in the areas of target market segmentation, campaign management and sales-process management. Our strategies  take into account the needs and preferences of the target market and include a mix of marketing  communications,  partner programs,  e-marketing, direct sales, telemarketing, direct response and loyalty and retention programs.  - - Revenue and Cost Management  We are dedicated to helping clients uncover and recover missed  opportunities at every stage along the revenue  life cycle and reduce the costs  associated  with managing business functions. Our approach to revenue and cost management centers around   operational    assessment,    process    improvement,    organizational restructuring,   and  continuous  improvement.  Our  consultants  utilize  their industry  expertise and our proprietary TMNG QBC(R) (Quality Business  Controls) toolset to deliver quantifiable benefits to clients.  - - Business and Operations Process Redesign and Reengineering  We  provide  clients  with  efficient,   integrated   business  and  operational processes,  supporting technology systems and web-centric  interfaces across all OSS/BSS applications.  We take clients from the point of customer acquisition to provisioning all the way through to billing, collections and accounts receivable management  to cash and profits in the bank.  We have  modified our  traditional toolsets,  recruited consultants with relevant expertise and initiated marketing efforts  in  the   burgeoning   areas  of  the   wireless   enterprise   and  IP transformation.  We  believe  that as these two market  phenomena  evolve we are well-positioned  to bring business and technical  solutions to existing  clients and prospective clients alike.  - - Corporate Investment Services  We provide a wide range of services  to  investment  banking and private  equity firms in  connection  with  investments  and  mergers  and  acquisitions  in the communications  industry.  Services  include  evaluation of management teams and business  plans,  identification  of strengths and weakness of the company,  and analyses of the company's  financial models,  systems,  products and operational and  business  processes.  Post-investment  support  is  also  provided  to help customers  in the  optimization  of their  investment  through  our  Operational Performance   Appraisal  (OPA(TM))  tool.  OPA(TM)  features  an  assessment  of communications   companies'  revenue  assurance,   network  inventory,   network operations,  order management and  provisioning,  disaster recovery planning and e-commerce operations and products. The OPA(TM) seeks to help companies optimize asset utilization,  including network assets and inventory. In addition, OPA(TM) seeks to maximize  revenue and minimize  associated  costs and  determine if the provider's customers are being served effectively.                                          6   - - TMNG Resources  TMNG Resources, a business unit of TMNG Marketing,  focuses on providing subject matter experts  utilizing a staff  augmentation  model. As the telecom  industry starts to rebound,  we believe  service  providers may, at least  initially,  be hesitant to make  permanent  hiring  decisions  and will seek  temporary  expert staff.  We believe TMNG Resources is uniquely  positioned to fill the recruiting needs of our clients.  COMPETITION  The market for  communications  consulting  services  is highly  fragmented  and changing  rapidly.   We  face  competition  from  major  business  and  strategy consulting firms, large systems  integration and major global outsourcing firms, offshore development firms from the Asian markets,  equipment and software firms that have added service offerings, and customers' internal resources.  Recently, there has been a  significant  increase  in demand for firms that can bundle BPO with  systems  and  technical  integration.  Many of our  competitors  are large organizations  that  provide a broad  range of  services  to  companies  in many industries,  including the  communications  industry.  Many of these competitors have  significantly  greater  financial,  technical and marketing  resources and greater name recognition than we do. We believe we have a competitive  advantage due to our single focus on the  communications  industry,  and the comprehensive offerings  we  provide  to our  customers.  We also  believe  the  complementary experience  and  expertise  of  our   professionals   represents  a  competitive advantage.  With the  communications  industry  experiencing  consolidation  and convergence with media and entertainment,  we believe our principal  competitive factor is our continual focus on the converging  communications industry and the ability to develop and deliver  solutions  that enhance client revenue and asset utilization and provide return on investment. Our biggest competitor is normally the customer's internal resources. As a result, the most significant competitive advantage becomes long-lived  relationships with key client executives that have developed over time from consistency in responsiveness  to their needs,  quality and reliability of consultants and deliverables,  and an appropriate price/value formula.  We have faced, and expect to continue to face,  additional  competition from new entrants into the communications  consulting  markets.  We have also experienced increased  price  competition,  particularly  from large Asian  firms  providing technical  support and outsourcing and other large firms that have the financial resources to aggressively price engagements that they have a particular interest in obtaining.  Increased  competition  could result in further price reductions, fewer  client  projects,  underutilization  of  consultants,  reduced  operating margins, and loss of market share.  EMPLOYEES  Our  ability to recruit  and retain  experienced,  highly  qualified  and highly motivated  personnel  has  contributed  greatly to our  performance  and will be critical in the future.  We offer a flexible  recruiting model that enhances our ability  to attract  consultants  and to  effectively  manage  utilization.  Our consultants  may  work  as  full  time  employees  or as  contingent  employees. Contingent employees receive company-paid medical insurance,  vacation and other employee benefits, but instead of receiving a regular salary, they are only paid for time spent  working  on  consulting  projects  for  customers  or working on internal projects.  Generally,  we will offer contingent employment to personnel who  are  frequently  utilized  on  consulting   projects,   and  have  a  skill set/offering  that is in high  demand.  We also  have  relationships  with  many independent contracting firms to assist in delivery of consulting solutions. Our current base of independent firms has specialized expertise in discrete areas of communications,  and we  typically  deploy  these  firms only when their  unique expertise/offering is required.  During fiscal year 2005, we utilized approximately 289 consultants, representing a combination of employee  consultants  and  independent  contracting  firms. Of these,  74 were  employee  consultants  and  approximately  215 were  working on engagements  for us  primarily  through  independent  subcontracting  firms.  In addition to the consultants, we have an administrative staff of approximately 26 employees in the  accounting  and finance,  marketing,  recruiting,  information technology, human resources and administrative areas.  BUSINESS SEGMENTS  Based on an  analysis of the  criteria  in  Statement  of  Financial  Accounting Standards (SFAS) No. 131 "Disclosure about Segments of an Enterprise and Related Information,"  we have four  operating  segments,  which are  aggregated  in one reportable segment,  the Management  Consulting Services segment. The Management Consulting  Services segment includes business strategy and planning,  marketing and customer relationship management,  billing system support,  operating system support,   revenue  assurance,   corporate  investment  services,   and  network management.  MAJOR CUSTOMERS  Since our inception,  we have provided  services to more than 1,000 domestic and international  customers,  primarily  communication  service providers and large technology  and  applications  firms  serving the  communications  industry  and private  equity firms that invest in the sector.  Most recently we have added to our base of customers with media and  entertainment  clients looking to leverage communications infrastructure to deliver offerings to the market. We depend on a small number of key customers for a significant portion of revenues.  For fiscal year 2005, revenues from two significant  customers each accounted for more than 10% of our revenues, and in the aggregate accounted for 41.4% of revenues.  Also during fiscal year 2005, our top ten customers accounted for approximately 70.9% of total revenue.  We generally provide discounted pricing for large projects on fixed commitments with long-term customers. Because our clients typically engage services on a project basis,  their needs for services vary  substantially  from period to period.  We continue to  concentrate  on large  wireline  and wireless global communications  companies headquartered  principally in North America and Western Europe,  emerging MVNOs,  large  outsourcing  firms as partners and most recently media and entertainment clients. We seek to offer broad and diversified services to these customers.  We anticipate                                          7   that  operating  results  will  continue  to  depend  on  volume  services  to a relatively  small  number of  communication  service  providers  and  technology vendors. We anticipate  increased market demand for bundled business process and technical  outsourcing  which we and our partners have formalized  agreements to provide.  INTELLECTUAL PROPERTY  Our success is dependent, in part, upon proprietary processes and methodologies. We rely upon a  combination  of copyright,  trade  secret,  and trademark law to protect our intellectual property. Additionally,  employees and consultants sign non-disclosure agreements to assist us in protecting our intellectual property.  We have not applied for patent protection for the proprietary methodologies used by  our  consultants.  We  do  not  currently  anticipate  applying  for  patent protection for these toolsets and methodologies.  SEASONALITY  In the past, we have experienced seasonal  fluctuations in revenue in the fourth quarter  due  primarily  to the fewer  number of  business  days  because of the holiday  periods  occurring  in that  quarter.  We may  continue  to  experience fluctuations in revenue in the fourth quarter and may experience fluctuations in summer months and other vacation periods.  FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS  For information about foreign and domestic operations, see Item 8, "Consolidated Financial   Statements,"   Note  4  "Major   Customers  and  Significant   Group Concentrations of Credit Risk."
Our business, operating results, financial condition and stock price are subject to numerous risks,  uncertainties,  and contingencies,  many of which are beyond our control.  The following important factors,  among others, could cause actual results  to  differ  materially  from  those   contemplated  in  forward-looking statements  made in this annual  report on Form 10-K or  presented  elsewhere by management from time to time. Investors are urged to consider these risk factors when evaluating an investment in TMNG.  RISK THAT MAY IMPACT OUR FINANCIAL PERFORMANCE  Factors  outside of our control  could cause  companies to delay new product and new business  initiatives and to seek to control expenses by reducing the use of outside   consultants.   The   communications   industry   is  in  a  period  of consolidation,   which  could   reduce  our  client   base,   eliminate   future opportunities  or create  conflicts  of  interest  among  clients.  As a result, current  industry  conditions  may  continue  to harm  our  business,  financial condition, results of operations, liquidity and ability to make acquisitions and raise  investment   capital.   Future  client  financial   difficulties   and/or bankruptcies  could require us to write-off  receivables  that are in excess bad debt  reserves,  which would harm our  results of  operations  in future  fiscal periods.  OUR  BUSINESS  IS  COMPLETELY   DEPENDENT  ON   CONDITIONS  IN  THE   CONVERGING COMMUNICATIONS, MEDIA AND ENTERTAINMENT INDUSTRY  We focus almost exclusively on customers in the converging communications, media and  entertainment  industry  and  investment  banking and private  equity firms investing in that industry. We experienced  significant growth in demand for our services  throughout  the  1990s.  Between  2000 and  2004,  the  communications industry  experienced a number of adverse  conditions,  including  bankruptcies, layoffs,  consolidation  and contraction,  declining market values,  and in some cases financial scandals.  These macro economic conditions substantially reduced the demand for our  services  and caused our  revenues to decline,  resulting in operating losses, negative cash flow and a decline in our stock price. If we are not  able  to  capitalize  on  the   opportunity   created  by  the   converging communications  industry, we may continue to incur operating losses and negative cash flow, which may eventually adversely affect our liquidity.  WE ARE DEPENDENT ON A LIMITED  NUMBER OF LARGE  CUSTOMERS FOR A MAJOR PORTION OF OUR  REVENUES,  AND THE  LOSS OF A MAJOR  CUSTOMER  COULD  SUBSTANTIALLY  REDUCE REVENUES AND HARM OUR BUSINESS AND LIQUIDITY  We derive a substantial portion of our revenues from a relatively limited number of clients (see Item 1, "Business-Major Customers"). This results in part from a conscious  strategy  to market  our  services  to the  largest  and most  stable companies in the industry, but our concentration of revenues with a small number of clients does expose us to risk. Our revenues and financial condition could be impaired if a major client stopped using our services.  The services required by any one client may be  affected by industry  consolidation  or adverse  industry conditions,  technological  developments,  economic  slowdown  or  the  client's internal  strategy  or  budget  constraints.  As a  result,  the  volume of work performed for specific clients varies from period to period,  and a major client in one period may not use our services in a subsequent period.                                          8    OUR REVENUES AND OPERATING RESULTS MAY FLUCTUATE  SIGNIFICANTLY FROM QUARTER-TO- QUARTER,  AND FLUCTUATIONS IN OUR OPERATING  RESULTS COULD CAUSE OUR STOCK PRICE TO DECLINE  Our revenue and operating results may vary significantly from quarter-to-quarter due to a number of factors.  In future  quarters,  our operating  results may be below the expectations of public market analysts or investors,  and the price of our common stock may decline.  Factors that could cause  quarterly  fluctuations include:  - - the beginning and ending of significant contracts during a quarter;  - - the size and scope of assignments;  - - the potential loss of key clients;  - - the form of customer contracts changing primarily from time and materials to   fixed price or contingent fee, based on project results;  - - consultant turnover, utilization rates and billing rates;  - - the loss of key consultants, which could cause clients to end their   relationships with us;  - - the ability of clients to terminate engagements without penalty;  - - fluctuations in demand for our services resulting from budget cuts, project   delays, industry consolidations or downturns or similar events;  - - clients' decisions to divert resources to other projects, which may limit   clients' resources that would otherwise be allocated to services we could   provide;  - - reductions in the prices of services offered by our competitors;  - - developments in the communications market and economic conditions;  - - seasonality during the summer, vacation and holiday periods;  - - fluctuations in the value of foreign currencies versus the U.S. dollar; and  - - global economic and political conditions and related risks, including acts of   terrorism.  Because a  significant  portion of our  non-consultant  expenses are  relatively fixed,  a  variation  in the number of client  assignments  or the timing of the initiation  or the  completion  of  client  assignments  may  cause  significant variations  in  operating  results from  quarter-to-quarter  and could result in continuing  losses.  To the extent the addition of  consultant  employees is not followed by corresponding  increases in revenues,  additional  expenses would be incurred  that  would  not be  matched  by  corresponding  revenues.  Therefore, profitability  would decline and we could potentially  experience further losses and our stock price would likely decline.  THERE  CAN BE NO  ASSURANCE  OUR  INVESTMENT  IN NEW  OFFERINGS  WILL  YIELD THE INTENDED RESULTS  As  discussed  in  Item  1 -  "Business-General"  and  Item  7  -  "Management's Discussion  and  Analysis of  Financial  Condition  and Results of  Operations - Executive  Financial  Overview"  and  "Operating  Expenses," we have invested in proprietary toolsets designed to enable us to capitalize on industry convergence and the migration to wireless and IP platforms. We believe these investments had a positive impact on our 2005 revenues and will  positively  affect our revenues and  profitability  in 2006,  but  they  did  adversely  impact  our  short-term profitability  in 2005. There can be no assurance these  investments,  or others like them,  will continue to produce  increased  revenues or enable us to become profitable and cash flow positive in 2006 or future years.  A SIGNIFICANT  PORTION OF OUR BUSINESS IS  REPRESENTED  BY FIXED FEE  CONTRACTS, WHICH EXPOSE US TO ADDITIONAL RISKS  Fixed fee contracts  entail  subjective  judgments  and estimates  about revenue recognition  and are  subject to  uncertainties  and  contingencies.  For a more complete  discussion of our  accounting for revenue  recognition,  see "Critical Accounting  Policies" included in Item 7, "Management's  Discussion and Analysis of Financial Condition and Results of Operations." Fixed fee contracts expose us to the  risk  that  our cost of  performing  the  contract  may be  higher  than expected, reducing or eliminating our profit margin from the contract.  WE HAVE MADE SEVERAL  ACQUISITIONS AND MAY CONTINUE TO MAKE ACQUISITIONS,  WHICH ENTAIL RISKS THAT COULD HARM OUR FINANCIAL PERFORMANCE OR STOCK PRICE  As  part of our  business  strategy,  we have  made  and  may  continue  to make acquisitions.  Any future acquisition would be accompanied by the risks commonly encountered in acquisitions. These risks include:                                          9   - - the difficulty associated with assimilating the personnel and operations of   acquired companies;  - - the potential disruption of our existing business;  - - further reductions in our cash reserves;  - - adverse effects on our financial statements, including write-offs and   assumption of liabilities of acquired businesses; and  - - paying too much for an acquired company.  If  we  make  acquisitions  and  any  of  these  problems   materialize,   these acquisitions could negatively affect our operations, profitability and financial condition.  ANY FUTURE DECREASE IN REVENUES OF ACQUIRED  BUSINESSES MAY RESULT IN ADDITIONAL ASSET IMPAIRMENTS AND ADVERSELY AFFECT OUR PROFITABLITY  We have made and may continue to make  acquisitions.  As a result,  goodwill and intangible assets constitute a significant balance of the assets reported on our balance  sheet.  We have, in the past,  been required to write down goodwill and intangible assets on our financial  statements as a result of declining revenues and  earnings of the  businesses  we acquire.  We may continue to be required to take asset  impairment  charges in the future.  Our earnings  and  profitability would be adversely affected by any further asset impairments.  WE HAVE REDUCED CONSULTANT HEADCOUNT WHICH COULD ADVERSELY AFFECT OUR ABILITY TO OBTAIN AND PERFORM CONSULTING ENGAGEMENTS  Following the economic downturn of the first part of this decade, we undertook a series of  cost-cutting  measures to better align our  operating  costs with the reduced  demand  for  communications  consulting  services.  As  part  of  these cost-cutting  measures, we have reduced our employee consultant headcount.  More recently  we have  begun to expand  the  skill  sets of our  consultant  base by replacing existing  consultants with professionals  better suited to support our next  generation  offerings.  Because the  talents and skills of our  consulting resources  are  limited  in  comparison  to  much  larger  firms,  we  may  lose opportunities  to  obtain  future  consulting  engagements  or  have  difficulty performing engagements we do obtain, any of which could harm our business.  THE  MARKET  IN WHICH WE  OPERATE  IS  INTENSELY  COMPETITIVE,  AND  ACTIONS  BY COMPETITORS  COULD RENDER OUR SERVICES LESS  COMPETITIVE,  CAUSING  REVENUES AND INCOME TO DECLINE  The market for  consulting  services to  communications  companies  is intensely competitive,  highly fragmented and subject to rapid change. Competitors include strategy and management consulting firms and major global outsourcing firms like IBM,   Electronic  Data  Systems   Corporation   (EDS)  and  Computer   Sciences Corporation,  which have become more significant competitors recently due to the outsourcing  of  business  support  systems  and  operating  support  systems by communications  companies.  We  are  also  subject  to  competition  from  large technical firms from the Asian markets, like Infosys Technologies, Ltd. that can provide significant cost advantages.  Some of these competitors have also formed strategic  alliances with  communications  and technology  companies serving the industry.  We also compete  with  internal  resources  of our clients.  Although non-exhaustive, a partial list of our competitors includes:  - - Accenture;  - - Booz-Allen & Hamilton;  - - Cap Gemini;  - - DiamondCluster International, Inc.;  - - IBM;  - - EDS;  - - Computer Sciences Corporation;  - - Infosys Technologies, Ltd.; and  - - McKinsey & Company.  Many information  technology-consulting firms also maintain significant practice groups devoted to the  communications  industry.  Many of these companies have a national and international  presence and may have greater personnel,  financial, technical  and  marketing  resources  than we do. We may not be able to  compete successfully with our existing competitors or with any new competitors.                                          10   We also believe our ability to compete depends on a number of factors outside of our control, including:  - - the prices at which others offer competitive services, including aggressive   price competition and discounting on individual engagements which may become   increasingly prevalent in the current industry environment;  - - the ability and willingness of our competitors to finance customers' projects   on favorable terms;  - - the ability of our competitors to undertake more extensive marketing campaigns   than we can;  - - the extent, if any, to which our competitors develop proprietary tools that   improve their ability to compete with us;  - - the ability of our customers to perform the services themselves; and  - - the extent of our competitors' responsiveness to customer needs.  We may not be able to compete  effectively on these or other factors.  If we are unable to compete effectively,  our market position,  and therefore our revenues and profitability, would decline.  WE MUST  CONTINUALLY  ENHANCE  OUR  SERVICES TO MEET THE  CHANGING  NEEDS OF THE CONVERENCE OF COMMUNICATIONS  CUSTOMERS WITH MEDIA AND ENTERTAINMENT,  OR WE MAY LOSE FUTURE BUSINESS TO OUR COMPETITORS  Our future success will depend upon our ability to enhance existing services and to  introduce  new services to meet the  requirements  of customers in a rapidly developing  and  evolving   market,   particularly  in  the  areas  of  wireless communications and  next-generation  technologies  supporting the convergence of communications,  media and content.  Present or future  services may not satisfy the  needs of the  communications  market.  If we are  unable to  anticipate  or respond  adequately  to customer  needs,  we may lose business and our financial performance will suffer.  IF WE ARE NOT ABLE TO EFFECTIVELY  RECRUIT AND RETAIN  MANAGEMENT AND CONSULTING PERSONNEL  THAT PROVIDE US WITH NEW TALENT SETS ENABLING THE  IMPLEMENTATION  OF NEW STRATEGIC OFFERINGS IN A RAPIDLY CHANGING MARKET, OUR FINANCIAL  PERFORMANCE MAY BE NEGATIVELY IMPACTED  Our ability to adapt to changing market conditions will depend on our ability to recruit and retain talented personnel,  which cannot be assured. We may face two critical challenges in the recruitment of new management personnel. The first is the  ability  to  recruit  talented  management  personnel  with the skill  sets necessary to capitalize on an industry undergoing  revolutionary change, and the second  is  the  ability  to  execute  such   recruitment  with  an  appropriate compensation  arrangement.  If we are unable to recruit and retain the people we need to perform our consulting  engagements in a rapidly  changing  environment, our business may suffer.  We must attract new consultants to implement our strategic  plans. The number of potential  consultants  that meet our hiring criteria is relatively  small,  and there is significant  competition for these consultants from direct  competitors and others in the communications industry. Competition for these consultants may result  in  significant  increases  in our  costs  to  attract  and  retain  the consultants, which could reduce margins and profitability.  In addition, we will need to attract consultants in international  locations,  principally Europe, to support  our  international  strategic  plans.  We have  limited  experience  in recruiting  internationally,  and may not be able  to do so.  Any  inability  to recruit new consultants or retain existing  consultants could impair our ability to service existing  engagements or undertake new engagements.  If we are unable to attract and retain quality consultants,  our revenues and profitability would decline.  OUR  ENGAGEMENTS  WITH CLIENTS MAY NOT BE PROFITABLE OR MAY BE TERMINATED BY OUR CLIENTS ON SHORT NOTICE  Unexpected costs, delays or failure to achieve anticipated cost reductions could make our contracts unprofitable. We have many types of contracts, including time and materials  contracts,  fixed-price  contracts and  contingent fee contracts. When making  proposals  for  engagements,  we estimate  the costs and timing for completing the projects. These estimates reflect our best judgment regarding our costs, as well as the efficiencies of our  methodologies and professionals as we plan to deploy them on our projects.  Any increased or unexpected costs,  delays or  failures to achieve  anticipated  cost  reductions  in  connection  with the performance of these engagements, including delays caused by factors outside our control, could make these contracts less profitable or unprofitable, which would have an adverse effect on our profit margin.  Under  many  of our  contracts,  the  payment  of  some  or all of our  fees  is conditioned upon our performance. We are increasingly moving away from contracts that are priced solely on a time and materials  basis and toward  contracts that also include  incentives  related to factors such as benefits  produced.  During fiscal year 2005, we estimate that approximately 28.1% of our contracts had some fixed-price, incentive-based or other pricing terms that conditioned some or all of our fees on our ability to deliver these defined goals.  The trend to include greater incentives in our contracts may increase the variability in revenues and margins earned on such  contracts,  and may expose us to greater risk of loss on the  contracts if we do not perform  successfully.  Additionally,  the estimates required  for  revenue  recognition  on  these  contracts  expose  us to risk of misstatement of financial results if our estimates prove to be inaccurate.                                          11   A majority of our  contracts  can be terminated by our clients with short notice and  without  significant   penalty.  Our  clients  typically  retain  us  on  a non-exclusive,  engagement-by-engagement  basis,  rather  than  under  exclusive long-term contracts.  A majority of our consulting  engagements are less than 12 months in duration.  The advance notice of termination required for contracts of shorter  duration and lower revenues is typically 30 days.  Longer-term,  larger and more  complex  contracts  generally  require  a  longer  notice  period  for termination  and may  include  an  early  termination  charge  to be paid to us. Additionally,  large client projects involve multiple engagements or stages, and there is a risk that a client may choose not to retain us for additional  stages of a  project  or  that  a  client  will  cancel  or  delay  additional  planned engagements.  These  terminations,  cancellations  or delays  could  result from factors  unrelated  to our work  product or the  project,  such as  business  or financial conditions of the client,  changes in client strategies or the economy in general.  When contracts are terminated,  we lose the associated revenues and we  may  not  be  able  to  eliminate  associated  costs  in  a  timely  manner. Consequently,  our  profit  margins  in  subsequent  periods  may be lower  than expected.   OUR  PROFITABLITY  WILL  SUFFER IF WE ARE NOT ABLE TO  MAINTAIN  OUR PRICING AND UTILIZATION RATES AND CONTROL COSTS  Our  profitability  is largely a function of the rates we are able to obtain for our services and the utilization rate, or chargeability,  of our  professionals. If we do not maintain  pricing for our services and an  appropriate  utilization rate  for  our  professionals   without   corresponding  cost  reductions,   our profitability  will  suffer.  We are under  increasing  price  competition  from competitors, which could adversely affect our profitability.  IF  INTERNATIONAL  BUSINESS VOLUMES  INCREASE,  WE MAY BE EXPOSED TO A NUMBER OF BUSINESS  AND  ECONOMIC  RISKS,  WHICH COULD  RESULT IN  INCREASED  EXPENSES AND DECLINING PROFITABILITY  If our  international  business  volumes  increase,  we will  face a  number  of business and economic risks, including:  - - unfavorable foreign currency exchange rates or fluctuations;  - - difficulties in staffing and managing foreign operations;  - - seasonal reductions in business activity;  - - competition from local and foreign-based consulting companies;  - - ability to protect our intellectual property;  - - unexpected changes in trading policies and regulatory requirements;  - - legal uncertainties inherent in transnational operations such as export and   import regulations, tariffs and other trade barriers;  - - the impact of foreign laws, regulations and trade customs;  - - U.S. and foreign taxation issues;  - - operational issues such as longer customer payment cycles and greater   difficulties in collecting accounts receivable;  - - language and cultural differences;  - - changes in foreign communications markets;  - - increased cost of marketing and servicing international clients;  - - potential limits on our ability to repatriate foreign profits;  - - general political and economic trends, including the potential impact of   terrorist attack or international hostilities; and  - - expropriations of assets, including bank accounts, intellectual property and   physical assets by foreign governments.  In addition,  we may not be able to  successfully  execute our business  plan in foreign markets. If we are unable to achieve anticipated levels of revenues from international operations, our overall revenues and profitability may decline.  WE ARE  DEPENDENT ON A LIMITED  NUMBER OF KEY  PERSONNEL,  AND THE LOSS OF THESE INDIVIDUALS COULD HARM OUR COMPETITIVE POSITION AND FINANCIAL PERFORMANCE  Our business  consists  primarily of the delivery of professional  services and, accordingly,   our  success  depends  upon  the  efforts,  abilities,   business generation  capabilities and project execution of our executive officers and key consultants.  Our success is also  dependent upon the                                          12   managerial,  operational,  marketing, and administrative skills of our executive officers,  particularly  Richard Nespola,  TMNG's Chairman,  President and Chief Executive Officer.  The loss of any executive officer or key consultant or group of  consultants,  or the failure of these  individuals  to generate  business or otherwise  perform  at or above  historical  levels,  could  result in a loss of customers or revenues, which could harm our financial performance.  IF WE FAIL TO PERFORM EFFECTIVELY ON PROJECT  ENGAGEMENTS,  OUR REPUTATION,  AND THEREFORE OUR COMPETITIVE POSITION AND FINANCIAL PERFORMANCE, COULD BE HARMED  Many of our engagements come from existing clients or from referrals by existing clients.  Therefore,  our growth is  dependent on our  reputation  and on client satisfaction.  The failure to perform services that meet a client's expectations may damage our reputation and harm our ability to attract new business.  IF WE FAIL TO DEVELOP AND MAINTAIN  LONG-TERM  RELATIONSHIPS WITH OUR CUSTOMERS, OUR SUCCESS WOULD BE JEOPARDIZED  A substantial majority of our business is derived from repeat customers.  Future success  depends to a  significant  extent on our  ability to develop  long-term relationships with successful  communications providers who will give us new and repeat business. Inability to build long-term customer relations would result in declines in our revenues and  profitability.  This may  increasingly be the case with any further consolidation or contraction in the industry.  WE CLASSIFY A LARGE NUMBER OF SUBCONTRACTORS AS INDEPENDENT  CONTRACTORS FOR TAX AND EMPLOYMENT LAW PURPOSES. IF THESE FIRMS OR PERSONNEL WERE TO BE RECLASSIFIED AS EMPLOYEES,  WE COULD BE SUBJECT TO BACK TAXES, INTEREST,  PENALTIES AND OTHER LEGAL CLAIMS  We provide a significant  percentage of consulting  services through independent contractors  and,  therefore,  do not pay Federal or state  employment  taxes or withhold  income  taxes for such  persons.  We  generally  do not include  these independent  contractors in our benefit plans.  In the future,  the IRS or state authorities may challenge the status of consultants as independent  contractors. Independent  contractors may also initiate proceedings to seek  reclassification as  employees  under  state law.  In either  case,  if persons  engaged by us as independent  contractors  are determined to be employees by the IRS or any state taxation  department,  we would be required to pay applicable  federal and state employment taxes and withhold income taxes with respect to such contractors, and could become liable for amounts required to be paid or withheld in prior periods along with interest and penalties.  In addition, we could be required to include such contractors in benefit plans retroactively and going forward.  WE COULD BE SUBJECT TO CLAIMS FOR PROFESSIONAL  LIABILITY,  WHICH COULD HARM OUR FINANCIAL PERFORMANCE  As a provider of professional  services, we face the risk of liability claims. A liability  claim  brought  against  us could harm our  business.  We may also be subject to claims by clients for the actions of our  consultants  and  employees arising from damages to clients' business or otherwise,  or clients may demand a reduction in fees because of dissatisfaction with our services.  OUR INABILITY TO PROTECT OUR  INTELLECTUAL  PROPERTY COULD HARM OUR  COMPETITIVE POSITION AND FINANCIAL PERFORMANCE  Despite  our efforts to protect  proprietary  rights  from  unauthorized  use or disclosure,  parties, including former employees or consultants,  may attempt to disclose,  obtain or use our solutions or technologies.  The steps we have taken may not prevent  misappropriation of our intellectual property,  particularly in foreign  countries  where  laws or law  enforcement  practices  may not  protect proprietary rights as fully as in the United States.  Unauthorized disclosure of our proprietary information could make our solutions and methodologies available to others and harm our competitive position.  RISK THAT COULD AFFECT OUR STOCK PRICE  THE MARKET PRICE OF OUR COMMON STOCK IS VOLATILE,  AND INVESTORS MAY  EXPERIENCE INVESTMENT LOSSES  The market price of our common stock is volatile and has declined  significantly from its initial  public  offering  price.  Our stock  price  could  continue to decline or fluctuate in response to a variety of factors, including:  - - variations in quarterly operating results;  - - announcements of technological innovations that render talent outdated;  - - future trends in the communications industry;  - - acquisitions or strategic alliances by us or others in the industry;                                          13   - - failure to achieve financial analysts' or other estimates of results of   operations for any fiscal period;  - - the relatively small public float and relatively low volume at which our stock   trades;  - - changes in estimates of performance or recommendations by financial analysts;  - - any further reduction in our revenues or continued losses during 2006 and   future years; and  - - continuing adverse market conditions in the communications industry and the   economy as a whole.  In addition,  the stock market itself  experiences  significant price and volume fluctuations.  These fluctuations  particularly  affect the market prices of the securities of many technology and communications  companies.  These broad market fluctuations could continue to harm the market price of our common stock. If the market price of our common stock falls below $1.00 per share for a period of 180 consecutive  calendar  days,  we may risk being  delisted  from the NASDAQ Stock Market on which our stock  trades.  The  recent  decline in our  overall  market capitalization  may also  discourage  analysts and investors  from following us. Additionally, due to the limited public float of our common stock, investors may find their investment illiquid, and suffer losses.  PRINCIPAL  STOCKHOLDERS,  EXECUTIVE  OFFICERS  AND  DIRECTORS  HAVE  SUBSTANTIAL CONTROL OVER OUR VOTING STOCK  Executive officers,  directors and stockholders owning more than five percent of our  outstanding  common  stock (and  their  affiliates)  own a majority  of our outstanding  common stock. If all such persons acted  together,  they would have the ability to control all matters  submitted to the  stockholders  for approval (including  the election and removal of directors and any merger,  consolidation or sale of all or substantially all of our assets) and to control our management and affairs.  Concentration of ownership of our common stock may have the effect of  delaying,  deferring or  preventing a change in control,  impeding a merger, consolidation,   takeover  or  other  business   combination   involving  us  or discouraging  a  potential  acquirer  from  making a tender  offer or  otherwise attempting  to obtain  control of us, any of which  could be  beneficial  to our shareholders.  WE MAY SEEK TO RAISE ADDITIONAL FUNDS,  WHICH MAY BE DILUTIVE TO STOCKHOLDERS OR IMPOSE OPERATIONAL RESTRICTIONS  Although  we have not been  required to obtain new debt or equity  financing  to support our operations or complete acquisitions, we may decide or be required to raise new  capital for these or other  purposes  in the future.  There can be no assurances  any such capital would be available to us on acceptable  terms.  Any additional equity financing,  if available,  may be dilutive to our stockholders and debt financing, if available,  may involve restrictive covenants,  which may limit our operating  flexibility  with respect to certain business  matters.  If additional  funds are raised  through  the  issuance of equity  securities,  our stockholders  may experience  dilution in the voting power or net book value per share of our  stock,  and any  additional  equity  securities  may have  rights, preferences and privileges senior to those of the holders of our common stock.  ANTI-TAKEOVER  PROVISIONS  AND OUR RIGHT TO ISSUE  PREFERRED  STOCK COULD MAKE A THIRD PARTY ACQUISITION DIFFICULT  Our  certificate  of  incorporation,  bylaws,  and  anti-takeover  provisions of Delaware law could make it more  difficult for a third party to acquire  control of our Company.  In addition,  our bylaws provide for a classified  board,  with board members serving  staggered  three-year  terms. The Delaware  anti-takeover provisions  and  the  existence  of a  classified  board,  in  addition  to  our relatively small public float, could make it more difficult for a third party to acquire  us,  even  if  such  transaction  were  in  the  best  interest  of our shareholders.
Our principal  executive  offices are located in a 4,705 square foot facility in Overland  Park,  Kansas.  This  facility  houses our  executive,  corporate  and administrative  offices and is under a lease,  which  expires in August 2010. In addition to the executive offices, we also lease a 7,575 square foot facility in McLean,  Virginia,  which lease  expires in June 2009,  and a 10,344 square foot facility in Boston,  Massachusetts,  which lease expires in 2011. The Boston and McLean locations are primarily utilized by management and consulting personnel.  In the fourth  quarter of fiscal  year 2004,  the Company  made the  decision to consolidate office space. In connection with this decision, a sublease agreement for 11,366 square feet of unutilized  office space in Boston,  Massachusetts was entered into with a third party  through the end of the  original  lease term in 2011.
We are  involved in legal  proceedings  and  litigation  arising in the ordinary course of business.  In addition,  customer bankruptcies could result in a claim on collected balances for professional services near the bankruptcy filing date. While resolution of legal proceedings,  claims and litigation may have an impact on our financial  results for the period in which they are resolved,  we believe that the ultimate  disposition of these matters will not have a material adverse effect upon our  consolidated  results of  operations,  cash flows or  financial position.                                          14   In June 1998, the bankruptcy trustee of a former client,  Communications Network Corporation,  sued TMNG for a total of $320,000 in the U.S.  Bankruptcy Court in New York seeking recovery of $160,000 alleging an improper payment of consulting fees paid by the former  client  during the  period  from July 1, 1996,  when an involuntary  bankruptcy  proceeding  was  initiated  against the former  client, through August 6, 1996,  when the former client agreed to an order for relief in the bankruptcy  proceeding,  and $160,000 in consulting  fees paid by the former client after August 6, 1996.  The  bankruptcy  trustee also sued us for at least $1.85 million for breach of contract, breach of fiduciary duties and negligence. In March 2006, we reached a settlement  agreement  with the  bankruptcy  trustee whereby we agreed to pay the trustee  $255,000 in  exchange  for being  released from all potential liability under the suits discussed above.  Additionally,  as of  December  31, 2005 the  Company  has  outstanding  demands aggregating  approximately  $1.0 million by the  bankruptcy  trustees of several former  clients  in  connection  with  collected  balances  near the  customers' respective  bankruptcy filing dates.  Although we do not believe we received any preference  payments from these former clients and plan to vigorously defend our position,  we have  established  reserves of $727,000 as of December  31,  2005, which we believe are adequate.
No  matters  were  submitted  to a vote of  security  holders  during the fourth quarter of 2005.                                       PART II
Our Common Stock is quoted on the NASDAQ Stock Market under the symbol TMNG. The high and low closing  price per share for the Common  Stock for the fiscal years ended December 31, 2005 and January 1, 2005 by quarter were as follows:                                              High           Low First quarter, fiscal year 2005            $ 2.57        $ 2.20 Second quarter, fiscal year 2005           $ 2.52        $ 1.83 Third quarter, fiscal year 2005            $ 2.59        $ 2.06 Fourth quarter, fiscal year 2005           $ 2.78        $ 2.24                                              High           Low First quarter, fiscal year 2004            $ 5.50        $ 3.19 Second quarter, fiscal year 2004           $ 3.75        $ 1.77 Third quarter, fiscal year 2004            $ 2.45        $ 1.62 Fourth quarter, fiscal year 2004           $ 2.40        $ 1.92    The above  information  reflects  inter-dealer  prices,  without retail mark-up, markdown or commissions and may not necessarily represent actual transactions.  As of March 28, 2006 the closing  price of our Common Stock was $2.24 per share. At such date, there were approximately 84 holders of record of our Common Stock.  Holders of Common Stock are entitled to receive ratably such dividends,  if any, as may be declared by the Board of Directors out of funds legally available.  To date, we have not paid any cash  dividends on our Common Stock and do not expect to declare or pay any cash or other dividends in the foreseeable future.  EQUITY COMPENSATION PLAN INFORMATION                                                                 (a)                                                     (c)                                                      NUMBER OF                                        NUMBER OF SECURITIES                                               SECURITIES TO BE ISSUED                                 REMAINING AVAILABLE                                                  UPON EXERCISE OF                (b)                   FOR FUTURE ISSUANCE                                                OUTSTANDING OPTIONS         WEIGHTED AVERAGE         UNDER EQUITY COMPENSATION                                               OR VESTING OF RESTRICTED     EXERCISE PRICE OF        PLANS (EXCLUDING SECURITIES                                                        STOCK              OUTSTANDING OPTIONS        REFLECTED IN COLUMN (a)) APPROVED BY SECURITY HOLDERS - - 1998 Equity Incentive Plan - Stock Options         5,052,405               $    4.51                      2,589,985 - - 1998 Equity Incentive Plan - Restricted Stock        895,000                    n/a                         305,000 PLANS NOT APPROVED BY SECURITY HOLDERS - - 2000 Supplemental Stock Plan                         957,040               $    4.63                      2,831,087                                                      ---------                                              --------- TOTAL                                                6,904,445                                              5,726,072                                                      =========                                              =========    For an  additional  discussion  of our equity  compensation  plans,  see Item 8, "Consolidated  Financial  Statements," Note 9 "Stock Option Plan and Stock-Based Compensation."                                          15
The selected consolidated  financial data presented below have been derived from our consolidated  financial statements.  The data presented below should be read in conjunction with Item 7,  "Management's  Discussion and Analysis of Financial Condition  and  Results  of  Operations,"   Item  8,   "Consolidated   Financial Statements"  and  Notes  thereto  and  other  financial   information  appearing elsewhere in this annual report on Form 10-K.                                                                                                   FISCAL YEAR ENDED                                                            -------------------------------------------------------------------------                                                             December 31,   January 1,     January 3,    December 28,   December 29,                                                                2005           2005           2004           2002           2001                                                              --------       --------       --------       --------       --------                                                                            (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENTS OF OPERATIONS DATA:  Revenues ............................................         $30,378        $23,704        $23,245       $ 33,057       $ 54,236 Cost of services:   Direct cost of services (exclusive of amortization     shown below)                                               14,834         12,319         11,927         16,111         27,338   Equity related charges (benefits)..................             100            205            (57)           721          2,322                                                              --------       --------       --------       --------       --------           Total cost of services (exclusive of            amortization shown below).................          14,934         12,524         11,870         16,832         29,660                                                              --------       --------       --------       --------       --------                                                                15,444         11,180         11,375         16,225         24,576  Operating expenses:   Selling, general and administrative................          18,462         16,037         19,359         23,811         16,727   Legal settlement ..................................              95         (1,294)   Real estate restructuring .........................              75          1,545   Goodwill and intangible asset impairment ..........                                        19,484         25,165   Goodwill and intangibles amortization .............             336            992          2,343          2,887          1,996   Equity related charges ............................             618            958            142            353            843                                                              --------       --------       --------       --------       --------           Total operating expenses ..................          19,586         18,238         41,328         52,216         19,566                                                              --------       --------       --------       --------       --------                                                                (4,142)        (7,058)       (29,953)       (35,991)         5,010  Other income (expense):   Interest income ...................................           1,632            718            624            996          2,433   Other, net ........................................             126            (30)           (51)           (37)           (22)                                                              --------       --------       --------       --------       --------           Total other income (expense) ..............           1,758            688            573            959          2,411  Income (loss) from continuing operations before  income tax (provision) benefit and cumulative  effect of a change in accounting principle .........          (2,384)        (6,370)       (29,380)       (35,032)         7,421 Income tax (provision) benefit ......................             (36)           (49)       (12,978)        12,389         (2,141)                                                              --------       --------       --------       --------       -------- Income (loss) from continuing operations before  cumulative effect of a change in accounting  principle ..........................................          (2,420)        (6,419)       (42,358)       (22,643)         5,280 Cumulative effect of a change in accounting  principle, net of taxes ............................                                                       (1,140)                                                              --------       --------       --------       --------       -------- Income (loss) from continuing operations.............          (2,420)        (6,419)       (42,358)       (23,783)         5,280  Discontinued operations:   Net income (loss) from discontinued operations.....                         (2,276)            34            380            328                                                              --------       --------       --------       --------       -------- Net income (loss) ...................................         $(2,420)       $(8,695)      $(42,324)      $(23,403)      $  5,608                                                              ========       ========       ========       ========       ======== Net income (loss) from continuing operations before  cumulative effect of a change in accounting  principle per common share   Basic .............................................         $ (0.07)       $ (0.18)      $  (1.26)      $  (0.69)      $   0.18                                                              ========       ========       ========       ========       ========   Diluted ...........................................         $ (0.07)       $ (0.18)      $  (1.26)      $  (0.69)      $   0.17                                                              ========       ========       ========       ========       ======== Cumulative effect of a change in accounting  principle per common share   Basic and Diluted .................................                                                     $  (0.03)                                                              ========       ========       ========       ========       ======== Net income (loss) from discontinued operations per  common share   Basic and Diluted .................................                        $ (0.07)                     $   0.01       $   0.01                                                              ========       ========       ========       ========       ======== Net income (loss) per common share   Basic .............................................         $ (0.07)       $ (0.25)      $  (1.26)      $  (0.71)      $   0.19                                                              ========       ========       ========       ========       ========   Diluted ...........................................         $ (0.07)       $ (0.25)      $  (1.26)      $  (0.71)      $   0.18                                                              ========       ========       ========       ========       ======== Weighted average common shares outstanding   Basic .............................................          35,175         34,619         33,545         32,734         29,736                                                              ========       ========       ========       ========       ========   Diluted ...........................................          35,175         34,619         33,545         32,734         30,774                                                              ========       ========       ========       ========       ========                                            16                                                                       December 31,   January 1,     January 3,    December 28,   December 29,                                                                2005           2005           2004           2002           2001                                                              --------       --------       --------       --------       --------                                                                                         (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA:  Net working capital ...............................         $  52,497      $  55,121       $ 57,231       $ 63,478       $ 94,569 Total assets ......................................         $  73,549      $  75,353       $ 81,582       $125,459       $129,042 Total capital lease obligations ...................         $       4      $     200       $    493       $    885       $    338 Total stockholders' equity  .......................         $  66,048      $  66,747       $ 73,369       $115,726       $123,992    On September 5, 2001, we completed our acquisition of Tri-Com Computer  Services Inc.,  a Maryland  corporation.  The  acquisition,  recorded  under the purchase method  of  accounting,  included  the  purchase  of all  outstanding  shares of Tri-Com,  which resulted in a total purchase price of approximately $5.2 million for the equity and assumption of  liabilities.  Consideration  consisted of $1.8 million cash and 490,417  shares of our common stock valued at $3.0 million.  We incurred direct costs of  approximately  $180,000 related to the acquisition and recorded  this  amount as an  increase  to  purchase  price.  In addition to the above-mentioned  costs,  we  recorded  approximately  $216,000 as an increase to purchase  price in connection  with the exchange of our stock options for vested stock appreciation rights held by Tri-Com employees at the time of acquisition.  On March 6, 2002, we completed our acquisition of CSMG, a Delaware  corporation. The  acquisition  resulted  in a total  purchase  price of  approximately  $46.5 million  consisting  of $33.0  million cash and $13.5  million in common  stock. Additionally,   we  incurred  direct  costs  of  $2.3  million  related  to  the acquisition and recorded this amount as an increase to purchase price.                                           17
The following  discussion  should be read in conjunction  with our  Consolidated Financial  Statements  and Notes thereto  included in this Annual Report on Form 10-K. The  forward-looking  statements included in this discussion and elsewhere in this  Form  10-K  involve  risks  and  uncertainties,  including  anticipated financial performance,  business prospects, industry trends, shareholder returns and other  matters,  which reflect  management's  best judgment based on factors currently known.  Actual results and experience could differ materially from the anticipated  results and other  expectations  expressed  in our  forward-looking statements  and  should  be  read  in  conjunction   with  the  disclosures  and information  contained  in the  sections  of this report  entitled  "Disclosures Regarding Forward-Looking Statements" and in Item 1A, " Risk Factors."  EXECUTIVE FINANCIAL OVERVIEW  Included in Item 1, "Business" and Item 1A, "Risk  Factors",  is discussion that includes a general overview of our Business, Market Overview, Business Strategy, Competition  and Risk  Factors.  The  purpose of this  executive  overview is to complement the qualitative discussion of the Business from Item 1.  As  previously  noted,  the  communications  industry  experienced a significant economic recession from 2001 through 2004. We are a consultancy to the industry, and as a result  experienced  a  significant  reduction in  consulting  business during that period  primarily due to the recession.  We experienced  significant revenue  declines  and/or  net losses  from 2001 to 2004 (see Item 6,  "Selected Consolidated  Financial  Data").  During  this period we  maintained  relatively consistent  gross  margins  through   innovative  pricing  and  high  consultant utilization levels.  Beginning in late 2004 and  continuing  through  fiscal year 2005,  we have seen significant  changes in the industry  resulting from  consolidation,  technology transformation and the convergence of telecommunication, media and entertainment sectors.   During  2005,   our  revenues   increased  28%  compared  with  2004. Additionally,  gross margins improved to nearly 51% in 2005 compared with 47% in 2004. We believe these improved  operating results and margins are reflective of our efforts to  identify,  adapt to and  capitalize  on these  change  elements, combined with growth of wireless and IP  initiatives  within the  communications sector.  As a result  of a  combination  of  significantly  lower  operating  results  of reporting  units  during  fiscal  year 2003,  the  resignation  of  certain  key personnel and revised and reduced financial projections,  our operating expenses include  goodwill and  intangible  impairment  losses of $19.5 million in fiscal year 2003. In fiscal year 2004, we recorded a goodwill  impairment  loss of $2.2 million in connection  with the  discontinuation  of our hardware  business.  In fiscal years 2005, 2004, and 2003, we also recorded  valuation  reserves of $0.9 million,  $2.6 million,  and $24.0  million,  respectively,  in connection  with deferred  income  tax  assets,   which  were  generated  primarily  by  goodwill impairment and current operating losses.  Selling,  general and administrative costs were $18.5 million, $16.0 million and $19.4 million in fiscal years 2005,  2004 and 2003,  respectively.  The increase from fiscal year 2004 to fiscal year 2005, primarily reflects  non-capitalizable research & development  (R&D)  investments in intellectual  property,  including proprietary   toolsets  and   methodologies  to  support  new  wireless  and  IP consultative  offerings  as well as increases  in variable  selling  expenses to support the increase in revenues.  Although these  investments have impacted our short-term profitability, we believe they will better enable us to capitalize on the industry convergence and migration toward wireless and IP platforms.  We are also  focusing our marketing  efforts on growth  markets  surrounding  large and sustainable  clients to  maintain a portfolio  of  business  that is high credit quality, thus reducing bad debt risks.  Our R&D investments have been partially offset by comprehensive cost containment efforts  which  have  assisted  us in  maintaining  strong  levels  of cash  and short-term investments. Our short-term investments consist of money market funds and  investment-grade  auction  rate  securities.   Returns  on  our  short-term investments  have  increased  over  recent  periods  as a result  of  increasing interest rates.  OPERATIONAL OVERVIEW  We report our financial data on a 52/53-week  fiscal year. Fiscal years 2005 and 2004 had 52 weeks.  Fiscal  year 2003 was a 53 week  fiscal  year.  For  further discussion  of  our  fiscal  year  end  see  Item  8,  "Consolidated   Financial Statements,"  Note  1  "Organization  and  Summary  of  Significant   Accounting Policies," contained herein.  Revenues  typically  consist of consulting  fees for  professional  services and related expense reimbursements. Our consulting services are typically contracted on a time and materials basis, a time and materials basis not to exceed contract price, a fixed fee basis, or contingent fee basis.  Revenues on contracts with a not to exceed  contract  price or a fixed cost  contract are recorded  under the percentage of completion method, utilizing estimates of project completion under both of these types of  contracts.  Larger fixed price  contracts  have recently begun to represent a more  significant  component  of our revenue mix.  Contract revenues  on  contingent  fee  contracts  are  deferred  until  the  revenue  is realizable and earned.  Generally a client relationship begins with a short-term  engagement utilizing a few consultants.  Our sales strategy focuses on building long-term relationships with  both  new and  existing  clients  to gain  additional  engagements  within existing accounts and referrals for new clients.  Strategic alliances with other companies are also used to sell services. We anticipate that we will continue to pursue these  marketing  strategies  in the future.  Because we are a consulting company, we experience  fluctuations in revenues derived from clients during the course of a project  lifecycle.  As a result,  the volume of work  performed for specific clients varies from period to period and a major client from one period may                                          18   not use our  services  or the same  volume of  services  in another  period.  In addition,  clients generally may end their engagements with little or no penalty or notice. If a client engagement ends earlier than expected,  we must re-deploy professional  service  personnel  as any  resulting  unbillable  time could harm margins.  Cost of services  consists  primarily of  compensation  for  consultants who are employees  and  amortization  of equity  related  non-cash  charges  incurred in connection with  pre-initial  public  offering  grants of equity  securities and restricted  stock  awards  primarily  to  consultants,  as well as fees  paid to independent  contractor   organizations  and  related  expense   reimbursements. Employee compensation includes certain unbillable time, training, vacation time, benefits and payroll taxes. Annual gross margins have ranged from 48.9% to 50.8% during the period from 2003 to 2005. Gross margins are primarily impacted by the type of  consulting  services  provided;  the  size  of  service  contracts  and negotiated  volume  discounts;  changes  in our  pricing  policies  and those of competitors;  utilization  rates of consultants and  independent  subject matter experts; and employee and independent contractor  organization costs, which tend to be higher in a competitive labor market.  Operating expenses include selling,  general and administrative,  equity related charges,  intangible  asset  amortization,  and  goodwill and  intangible  asset impairments, litigation settlements and real estate restructuring charges. Sales and marketing  expenses consist primarily of personnel  salaries,  bonuses,  and related costs for direct client sales efforts and marketing  staff. We primarily use a  relationship  sales  model  in  which  partners,  principals  and  senior consultants generate revenues. In addition, sales and marketing expenses include costs associated with marketing collateral, product development, trade shows and advertising.  General and  administrative  expenses  consist mainly of costs for accounting,   recruiting  and  staffing,   information  technology,   personnel, insurance, rent, and outside professional services incurred in the normal course of business. The equity related charges consist of non-cash amortization charges incurred  in  connection  with  pre-initial  public  offering  grants  of equity securities  and  restricted  stock awards,  primarily to principals  and certain senior executives.  Impairment relates to the write down of goodwill  calculated in accordance with the provisions of SFAS No. 142,  "Accounting for Goodwill and Intangible Assets" and write down of other intangibles  calculated in accordance with the provisions of SFAS No. 144,  "Accounting for the Impairment on Disposal of Long Lived  Assets."  Such  impairments  occur when the carrying  amount of a long-lived  asset (asset group) is not  recoverable  and exceeds its fair value. That  assessment  is based on the carrying  amount of the asset (asset group) at the date it is tested for recoverability, whether in use or under development.  CRITICAL ACCOUNTING POLICIES  Our significant accounting policies are summarized in Note 1 to the consolidated financial statements included in Item 8 "Consolidated  Financial  Statements" of this report.  While the selection and  application of any  accounting  policy may involve some level of subjective judgments and estimates, we believe the following accounting policies  are  the  most  critical  to our  consolidated  financial  statements, potentially  involve  the  most  subjective  judgments  in their  selection  and application,  and  are  the  most  susceptible  to  uncertainties  and  changing conditions:  - - Allowance for Doubtful Accounts; - - Impairment of Goodwill and Long-lived Intangible Assets; - - Revenue Recognition; and - - Deferred Income Tax Assets.  Allowances for Doubtful Accounts - Substantially all of our receivables are owed by companies in the  communications  industry.  We typically  bill customers for services  after all or a portion of the services have been performed and require customers  to pay within 30 days.  We attempt  to control  credit  risk by being diligent  in  credit  approvals,  limiting  the  amount of  credit  extended  to customers and monitoring  customers' payment record and credit status as work is being performed for them.  We recorded  bad debt expense in the amounts of $399,000 and $575,000 for fiscal years 2004 and 2003,  respectively.  We recorded a credit to bad debt expense of $59,000  in  fiscal  year  2005  as  recoveries   offset  our  estimate  of  new uncollectible  accounts.  Our allowance for doubtful  accounts totaled $296,000, $396,000  and  $652,000  at  the  end of  fiscal  years  2005,  2004  and  2003, respectively.  The  calculation  of these amounts is based on judgment about the anticipated  default  rate  on  receivables  owed  to us as of  the  end  of the reporting period.  That judgment was based on uncollected  account experience in prior years and our ongoing evaluation of the credit status of our customers and the communications industry in general.  We have attempted to mitigate credit risk by concentrating our marketing efforts on the largest and most stable companies in the  communications  industry and by tightly  controlling  the  amount of credit  provided  to  customers.  If we are unsuccessful  in these  efforts,  or if our  customers  file for  bankruptcy  or experience  financial  difficulties,  it is  possible  that  the  allowance  for doubtful  accounts will be insufficient and we will have a greater bad debt loss than the amount reserved, which would adversely affect our financial performance and cash flow.  Impairment  of Goodwill and  Long-lived  Intangible  Assets - Goodwill and other long-lived  intangible  assets  arising from our  acquisitions  are subjected to periodic  review for impairment.  SFAS No. 142 requires an annual  evaluation at the  reporting  unit  level  of the fair  value of  goodwill  and  compares  the calculated  fair  value of the  reporting  unit to its book  value to  determine whether an impairment has been deemed to occur.  Any impairment  charge would be based  on the  most  recent  estimates  of the  recoverability  of the  recorded goodwill.  If the remaining book value assigned to goodwill in an acquisition is higher  than  the  estimated  fair  value  of the  reporting  unit,  there  is a requirement to write down these assets. The determination of fair value requires management to make  assumptions  about future cash flows and  discounted  rates. These  assumptions  require  significant  judgment and estimations  about future events and are thus  subject to  significant  uncertainty.  If actual                                          19   cash  flows  turn out to be less  than  projected,  we may be  required  to take further write-downs,  which could increase the variability and volatility of our future results.  Effective  March 4,  2004,  management  and the Board of  Directors  elected  to discontinue our hardware business. We concluded this segment of the business did not align well with our strategic focus. We incurred goodwill impairment charges of $2.2  million  in the first  quarter  of fiscal  year  2004,  related  to the discontinuation of the hardware  business,  in accordance with the provisions of SFAS No. 142.  Due to a combination of significantly lower operating results of reporting units during  fiscal year 2003,  the  resignation  of key  personnel,  and revised and reduced financial  projections,  we recorded a goodwill impairment loss of $15.8 million in 2003,  in  accordance  with the  provisions  of SFAS No. 142.  For an additional  discussion see Item 8, "Consolidated  Financial  Statements," Note 2 "Goodwill and Other Intangible Assets."  In accordance with SFAS No. 144, we use our best estimates based upon reasonable and  supportable   assumptions  and  projections,   reviews  for  impairment  of long-lived  assets  and  certain  identifiable  intangibles  to be held and used whenever events or changes in circumstances indicate that the carrying amount of our assets  might not be  recoverable.  During  fiscal  year 2003 we  identified certain events, including a significant decrease in revenue from customers whose relationships  were valued in purchase  accounting.  We performed an  impairment test, and determined that the carrying value of customer  relationships exceeded its fair market value and recorded an aggregate impairment loss of $3.7 million. Fair  value was  based on an  analysis  of  projected  future  cash  flows.  The impairment loss has been reflected as a component of Loss from Operations in the Statement of Operations and Comprehensive Loss.  Revenue  Recognition--We  recognize revenue from time and material  contracts in the  period  in which  our  services  are  performed.  In  addition  to time and materials  contracts,  our other types of contracts  include time and  materials contracts not to exceed contract price, fixed fee contracts,  and contingent fee contracts.  We recognize  revenues on time and materials  contracts  not to exceed  contract price  and fixed  fee  contracts  using the  percentage  of  completion  method. Percentage of  completion  accounting  involves  calculating  the  percentage of services  provided during the reporting period compared with the total estimated services to be provided  over the duration of the contract.  For all  contracts, estimates of total contract revenues and costs are continuously monitored during the term of the  contract,  and  recorded  revenues  and  costs are  subject  to revisions as the contract  progresses.  Such  revisions may result in a material increase or decrease in revenues and income and are  reflected in the  financial statements in the periods in which they are first identified.  We also enter into fixed fee  contracts in which  revenue is based upon delivery of services or solutions,  and  contingent  fee  contracts,  in which revenue is subject to achievement of savings or other agreed upon results, rather than time spent. Due to the nature of contingent fee contracts, we recognize costs as they are incurred on the project and defer revenue  recognition  until the revenue is realizable and earned as agreed to by our clients.  Although these contracts can be very  rewarding,  the  profitability  of these  contracts is dependent on our ability to deliver  results for our  clients  and control the cost of  providing these   services.   Both  of  these  types  of  contracts  are  typically   more results-oriented  and are  subject  to  greater  risk  associated  with  revenue recognition  and  overall  project   profitability  than  traditional  time  and materials contracts.  Deferred Income Tax Assets - We have generated  substantial  deferred income tax assets primarily from the accelerated financial statement write-off of goodwill, the charge to  compensation  expense  taken for stock  options and net operating loss carryforwards. For us to realize the income tax benefit of these assets, we must generate  sufficient  taxable income in future periods when such deductions are allowed for income tax purposes. In some cases where deferred taxes were the result of  compensation  expense  recognized  on stock  options,  our ability to realize the income tax benefit of these  assets is also  dependent  on our share price increasing to a point where these options will be exercised.  In assessing whether a valuation  allowance is needed in connection  with our deferred income tax  assets,  we have  evaluated  our  ability to carry back tax losses to prior years that  reported  taxable  income,  and our ability to  generate  sufficient taxable income in future  periods to utilize the benefit of the deferred  income tax assets.  Such  projections  of future  taxable  income  require  significant subjective  judgments and  estimates by us. As of December 31, 2005,  cumulative valuation  allowances in the amount of $27.5 million were recorded in connection with the deferred income tax assets. We continue to evaluate the  recoverability of the recorded deferred income tax asset balances. If we continue to report net operating  losses for  financial  reporting in future years,  no additional  tax benefit  would be  recognized  for those  losses,  since we would be required to increase our valuation allowance to offset such amounts.   RECENT ACCOUNTING PRONOUNCEMENT  In December  2004, the FASB issued SFAS No. 123R which replaces SFAS No. 123 and supersedes  APB No. 25. SFAS No. 123R  requires  compensation  costs  related to share-based  payment  transactions to be recognized in the financial  statements based on the fair value on the grant date of the equity or liability instruments issued.  Compensation  cost will be recognized  over the period that an employee provides  service for that award,  resulting in a decrease in net  earnings.  We will adopt the  provisions  of this  Statement,  as amended,  using the modified prospective  method  beginning in fiscal year 2006.  Compensation  costs will be recognized for awards that are issued beginning in 2006 and for awards that have been  granted  prior to  December  31, 2005 but have yet to reach the end of the requisite  service  period.  The  amount of expense  to be  recognized  over the remaining  service period as of December 31, 2005 is approximately  $3.0 million to $3.5  million.  We will begin  expensing  these costs over the shorter of the vesting  period or the  period  from the date of grant to the date the  employee becomes  eligible for retirement.  Based on currently  outstanding  options,  we expect to record a total expense of  approximately  $2.0 million to $2.4 million during fiscal year 2006.                                          20    RESULTS OF OPERATIONS  On March 4, 2004,  management and the Board of Directors  elected to discontinue our  hardware   business.   The   Consolidated   Statements  of  Operations  and Comprehensive  Loss have been  adjusted for fiscal years 2004 and 2003 to report the  income  (loss)  from  discontinued  operations,  net of tax.  For a further discussion see Item 1, "Notes to Consolidated  Condensed Financial  Statements," Note 3, "Discontinued Operations."   FISCAL 2005 COMPARED TO FISCAL 2004                                      REVENUES  Revenues  increased  28.2% to $30.4  million  for  fiscal  year 2005 from  $23.7 million for fiscal year 2004. The increase in revenue in 2005 is attributable to an  increased   penetration   of  consulting   services  to  our  top  5  client relationships,  with  emphasis in growth areas of wireless and IP. During fiscal year 2005,  we  provided  services  on 231  customer  projects,  compared to 197 projects performed in fiscal year 2004. Average revenue per project was $132,000 in fiscal year 2005  compared to $120,000 in fiscal year 2004.  The  increase in average  revenue per project was  primarily  attributable  to a small  number of large engagements in the mix in fiscal year 2005. Our international revenue base decreased to 3.9% of our  revenues  for fiscal year 2005,  from 22.3% for fiscal year 2004, due primarily to the completion of multiple large projects in Western Europe at the end of fiscal year 2004, combined with an increase in our domestic project and revenue base.  Revenues   recognized  in  connection   with  fixed  price  and  contingent  fee engagements  totaled $8.5 million and $9.6 million in fiscal year 2005 and 2004, respectively,  representing 28.1% and 40.5% of total revenue in fiscal year 2005 and 2004, respectively.  The mix of contract engagement types will vary by year, depending on the type of engagement.                                  COST OF SERVICES  Direct  costs of  services  increased  to $14.8  million  for  fiscal  year 2005 compared to $12.3 million for fiscal year 2004. As a percentage of revenues, our gross  margin  based on direct cost of  services  was 51.2% for fiscal year 2005 compared  to 48.0% for  fiscal  year  2004.  The  increase  in gross  margin was primarily  attributable  to a shift in the mix of services to more  strategy and management  consultancy  engagements  which  typically yield higher margins than staffing engagements, coupled with better utilization levels.  Non-cash  equity related charges were $100,000 and $205,000 for fiscal year 2005 and 2004,  respectively.  The charges  primarily  relate to awards of restricted stock to select  executives and key  consultants  which are being amortized on a graded vesting schedule over a period of two years from the date of grant.                                 OPERATING EXPENSES  In total,  operating expenses increased by 7.4% to $19.6 million for fiscal year 2005,  from $18.2  million  for fiscal  year 2004.  Operating  expenses  include selling,  general  and  administrative  costs,  legal  settlement,  real  estate restructuring,  equity related charges,  and intangible asset amortization.  The major  components  of the  increase are  discussed by category in the  following paragraphs.  The increase in operating  expenses  includes  $2.4 million  related to selling, general and  administrative  expense  increases in fiscal year 2005  compared to fiscal year 2004.  The  increase is primarily  related to  increased  R&D in our initiative to develop our MVNE offerings and toolsets for IP  transformations in fiscal  year 2005 and  increases  in  variable  selling  expenses to support the increase in revenues.  In fiscal year 2005 we recorded a charge of $95,000 to settle a preference claim legal dispute with the  bankruptcy  trustee of a former  client.  In fiscal year 2004  we  entered  into  a  mediated  settlement  agreement  to  settle  pending litigation  with a customer  regarding  a take or pay  contract.  As part of the settlement,  we received a $2 million  payment to settle all claims and disputes in the  litigation.  This payment was  recorded as a $1.3  million  reduction of operating expenses and $0.7 million reduction of existing  receivables.  We made the decision to  consolidate  office space  resulting in a charge to earnings of $1.5 million in 2004 and an additional expense of $75,000 in fiscal year 2005.  Non-cash  equity related  charges were $0.6 million in fiscal year 2005 compared to $1.0 million for fiscal year 2004. The charges  primarily relate to the award of restricted  stock issued to select  executives and key  employees,  which are being amortized on a grading vesting  schedule over periods of two to four years from the date of grant.  The decrease in equity related charges is the result of reversals of previously  recognized  compensation expense related to forfeitures of restricted stock.  Intangible asset amortization was $0.3 million in fiscal year 2005,  compared to $1.0 million in fiscal year 2004. The decrease in intangible asset  amortization was due to certain intangible assets becoming fully amortized during fiscal year 2004 and early fiscal year 2005.                              OTHER INCOME AND EXPENSES  Interest  income was $1.6  million and $0.7  million  for fiscal  years 2005 and 2004,  respectively,  and  represented  interest  earned on  invested  balances. Interest income  increased during fiscal year 2005 due primarily to increases in interest rates from 2004 to 2005. We primarily  invest in money market funds and investment-grade  auction  rate  securities  as part of our  overall  investment policy.                                          21                                      INCOME TAXES  For fiscal years 2005 and 2004 we have fully  reserved  our deferred  income tax benefits  generated by our pre-tax  losses from  continuing  operations  of $2.4 million and $6.4  million,  respectively.  The fiscal years 2005 and 2004 income tax  provisions  of $36,000 and  $49,000,  respectively,  relate to state income taxes.  In fiscal years 2005 and 2004, we recorded  valuation  allowances in the amount of $0.9 million and $2.6 million,  respectively,  against deferred income tax assets.  The valuation  allowance was  calculated  utilizing the guidance of SFAS No. 109  "Accounting  for Income Taxes" which requires an estimation of the recoverability of the recorded deferred income tax asset balances.   FISCAL 2004 COMPARED TO FISCAL 2003                                      REVENUES  Revenues increased 2.0% to $23.7 million for fiscal year 2004 from $23.2 million for fiscal year 2003. Included in revenues for fiscal year 2003 was $0.7 million related  to a customer  take or pay  contract,  representing  the  shortfall  in consulting  services  utilized by a customer in connection  with annual  minimum usage  requirements.  The  increase  in  revenue in 2004 is  attributable  to an increase in engagements in the wireless segment of the telecom  industry,  along with a slight increase in the average size of projects. During fiscal year 2004, we  provided  services  on 197  customer  projects,  compared  to  196  projects performed  in fiscal year 2003.  Average  revenue  per  project was  $120,000 in fiscal year 2004 compared to $119,000 in fiscal year 2003. International revenue base  increased to 22.3% of our  revenues  for fiscal year 2004,  from 10.0% for fiscal year 2003,  due primarily to a significant  increase in project  activity with select large  global  wireline  and  wireless  carriers  located in Western Europe and  Australia.  Revenues  recognized  in  connection  with  fixed  price engagements  totaled $9.6 million and $6.4 million in fiscal year 2004 and 2003, respectively,  representing 40.5% and 27.4% of total revenue in fiscal year 2004 and 2003, respectively.  Effective  March 4,  2004,  management  and the Board of  Directors  elected  to discontinue our hardware business  (previously reported as the separate business segment "All  Other").  Operating  results of the  hardware  business for fiscal years 2004 and 2003 have been included as a component of discontinued operations in the Consolidated  Statements of Operations and  Comprehensive  Loss contained herein.                                  COST OF SERVICES  Direct  costs of  services  increased  to $12.3  million  for  fiscal  year 2004 compared to $11.9 million for fiscal year 2003. As a percentage of revenues, our gross  margin  based on direct cost of  services  was 48.0% for fiscal year 2004 compared  to 48.7% for fiscal  year  2003.  Included  in fiscal  year 2003 gross margin is the $0.7 million of revenue  from the take or pay  contract  discussed above.  Gross margin percentage is attributable to the mix of services,  pricing of our projects and efficiency of delivery.  Non-cash  equity related charges were $205,000 for fiscal year 2004. The charges relate to the award of  restricted  stock  issued to select  executives  and key employees  during  the  fourth  quarter  of fiscal  year  2003,  which are being amortized on a graded vesting  schedule over a period of two years from the date of grant.  The non-cash  equity related benefit of $57,000 for fiscal year 2003, was primarily  related to the  cancellation  and  forfeiture  of unvested  stock options by employees.                                 OPERATING EXPENSES  In total, operating expenses decreased by 55.9% to $18.2 million for fiscal year 2004,  from $41.3  million  for fiscal  year 2003.  Operating  expenses  include selling,  general  and  administrative  costs,  legal  settlement,  real  estate restructuring, equity related charges, goodwill and intangible asset impairment, and  intangible  asset  amortization.  The major  components of the decrease are discussed by category in the following paragraphs.  The decrease in operating  expenses  includes  $3.3 million  related to selling, general and  administrative  expense  reductions in fiscal year 2004 compared to fiscal year 2003.  Approximately  $1.5 million of the reductions were associated with reductions in personnel levels and improvement in our utilization rates, as part of our ongoing  effort to  properly  size the  business to a lower  revenue base. In fiscal year 2004 we incurred severance charges of $0.1 million compared to $0.4 million in fiscal year 2003 related to involuntary employee turnover. We also reduced  outside  professional  service fees by $0.6 million in fiscal year 2004 from  fiscal  year 2003.  Additionally,  throughout  fiscal  year 2004,  we implemented   a  number  of  cost   reductions   within  sales  and   marketing, communications,  insurance,  and other  administrative  costs.  We  continue  to examine  cost-reduction   measures  to  enhance  our  profitability  and  manage operating expenses to better align them with the size of the business.  We recorded a goodwill and intangible asset  impairment  charge of $19.5 million in fiscal  year  2003.  The  goodwill  impairment  charge is  attributable  to a combination  of the  resignation of key executive  personnel  during fiscal year 2003 and lower than expected  operating results of reporting units during fiscal year 2003,  both of which  adversely  affected  future  projections of operating results  utilized in the  impairment  analysis.  The write down of goodwill  and customer  relationships was calculated in accordance with the provisions of SFAS No. 142 and SFAS No. 144, respectively.  In fiscal year 2004 we entered  into a mediated  settlement  agreement to settle pending  litigation with a customer regarding the take or pay contract discussed in "Revenues" above. As part of the settlement, we received a $2 million payment to settle all claims and disputes in the  litigation.  This payment was recorded as a $1.3 million reduction of operating  expenses and $0.7 million reduction of existing  receivables.  Also during  fiscal year 2004,  we made the  decision to consolidate office space resulting in a charge to earnings of $1.5 million.                                          22   Non-cash  equity related  charges were $1.0 million in fiscal year 2004 compared to $0.1 million for fiscal year 2003. The fiscal year 2004 charges relate to the award of restricted  stock issued to select  executives and key employees during the fourth  quarter of fiscal year 2003,  which are being  amortized on a graded vesting schedule over a period of two years from the date of grant.                              OTHER INCOME AND EXPENSES  Interest  income was $0.7  million and $0.6  million  for fiscal  years 2004 and 2003,  respectively,  and represented  interest earned on invested cash and cash equivalent balances and short-term investments. Interest income increased during fiscal year 2004 due to investing cash reserves at slightly higher interest rate returns in 2004 compared to 2003. We primarily  invest in money market funds and investment-grade  auction  rate  securities  as part of our  overall  investment policy.                                    INCOME TAXES  For fiscal year 2004 we have fully  reserved  our  deferred  income tax benefits generated by our pre-tax losses of $6.4 million from continuing operations.  The fiscal year 2004 income tax provision of $49,000  relates to state income taxes. In fiscal year 2003,  we recorded a valuation  allowance  in the amount of $24.0 million against  deferred  income tax assets,  offsetting the income tax benefit from current year  operating  losses and resulting in a net income tax provision of $13.0 million.  The valuation allowance was calculated utilizing the guidance of SFAS No. 109,  "Accounting  for Income Taxes" which requires an estimation of the recoverability of the recorded deferred income tax asset balances.   SUMMARY OF QUARTERLY RESULTS OF OPERATIONS -- UNAUDITED                                                                       (In thousands, except per share data)                                                                             QUARTER ENDED                                                       ----------------------------------------------------                                                       APRIL 2,       JULY 2,     OCTOBER 1,    DECEMBER 31,                                                         2005          2005          2005           2005                                                       --------      --------      --------       -------- Revenues .......................................      $  7,067      $  9,017      $  8,057       $  6,237                                                       ========      ========      ========       ======== Gross profit ...................................      $  3,638      $  4,464      $  4,199       $  3,143                                                       ========      ========      ========       ========  Net income (loss)...............................      $   (608)     $     30      $     24       $ (1,866)                                                       ========      ========      ========       ========  Basic and diluted net   income (loss) per common share ...............      $  (0.02)     $   0.00      $   0.00       $  (0.05)                                                       ========      ========      ========       ========                                                                             QUARTER ENDED                                                       ----------------------------------------------------                                                       APRIL 3,       JULY 3,     OCTOBER 2,     JANUARY 1,                                                         2004          2004          2004           2005                                                       --------      --------      --------       -------- Revenues .......................................      $  5,779      $  5,184      $  6,546       $  6,195                                                       ========      ========      ========       ======== Gross profit ...................................      $  2,812      $  2,393      $  3,054       $  2,921                                                       ========      ========      ========       ======== Net loss from discontinued operation............      $ (2,276)                                                       ========      ========      ========       ========  Net loss........................................      $ (4,251)     $ (2,117)     $ (1,119)      $ (1,208)                                                       ========      ========      ========       ========  Basic and diluted net loss from discontinued  operation per common share ....................      $  (0.07)                                                       ========      ========      ========       ========   Basic and diluted net loss per common share ....      $  (0.13)     $  (0.06)     $  (0.03)      $  (0.03)                                                       ========      ========      ========       ========    LIQUIDITY AND CAPITAL RESOURCES  Net cash used in operating  activities  was $0.8 million,  $0.7 million and $0.9 million for fiscal years 2005,  2004,  and 2003,  respectively.  We used cash in operating  activities  for fiscal  years 2005,  2004 and 2003  primarily  due to operating losses. These losses were substantially offset                                          23   by effective  management of working capital and operating assets and liabilities and a favorable legal settlement during fiscal year 2004.  Net cash  provided by (used in)  investing  activities  was $0.6  million,  $2.6 million and ($2.0 million) for fiscal year 2005,  2004, and 2003,  respectively. This  includes net proceeds  (net  purchases)  from sales and  reinvestments  of auction rate  securities  of $2.6  million,  $2.8 million and ($1.9  million) in fiscal years 2005,  2004, and 2003,  respectively.  In fiscal year 2005 net cash provided by investing  activities was reduced by a $1.5 million  investment in a five-year  exclusive marketing license with S3 Matching  Technologies.  Net cash provided by (used in) investing activities also includes  acquisitions of office equipment,  software and computer  equipment of $0.5  million,  $0.2 million and $0.1 million in fiscal years 2005, 2004, and 2003, respectively.  Net cash provided by financing activities was $482,000, $22,000, and $94,000 for fiscal years 2005, 2004, and 2003, respectively,  which related to proceeds from the exercise of employee  stock  options as well as common stock issued by us as part of our employee stock purchase  program,  partially offset by payments made on long-term obligations.  FINANCIAL COMMITMENTS  As of December 31,  2005,  we have the  following  contractual  obligations  and commercial commitments by year (amounts in millions):                                         2006    2007     2008     2009     2010       2011      Total                            ----    ----     ----     ----     ----     -------     ----- Operating leases           $1.9    $1.9     $1.9     $1.8     $1.6       $0.1      $9.2                            ----    ----     ----     ----     ----       ----      ----- Total                      $1.9    $1.9     $1.9     $1.8     $1.6       $0.1      $9.2                            ====    ====     ====     ====     ====       ====      =====     We have met our cash requirements  with a combination of operating  revenues and the use of our cash reserves.  At  December  31,  2005,  we had  approximately  $49.7  million  in  cash,  cash equivalents,  and short-term investments. We believe we have sufficient cash and short-term   investments  to  meet  anticipated  cash  requirements,   including anticipated capital expenditures,  consideration for possible acquisitions,  and any  future  operating  losses  that may be  incurred,  for at least the next 12 months.  Should our cash and short-term  investments prove insufficient we might need to  obtain  new debt or equity  financing  to  support  our  operations  or complete  acquisitions.  We have  established  a flexible  model that provides a lower fixed cost  structure  than most  consulting  firms,  enabling us to scale operating cost  structures more quickly based on market  conditions.  Our strong cash position and absence of long-term  debt have enabled us to weather  adverse conditions  in the  telecommunications  industry  and  to  make  investments  in intellectual  property we believe are enabling us to  capitalize  on the current recovery and transformation of the industry; however, if the industry and demand for our  consulting  services  do not  continue  to rebound  and we  continue to experience negative cash flow, we could experience  liquidity challenges at some future point.  TRANSACTIONS WITH RELATED PARTIES  During  fiscal year 2004, we made payments of $55,000 to a legal firm in which a member of our Board of Directors  owns an equity  interest.  Such  payments were made in connection  with matters  arising in the normal course of business.  Our Board of  Directors  has  affirmatively  determined  that such  payments  do not constitute  a material  relationship  between the  director  and the Company and concluded  the  director  is  independent  as defined  by the  NASDAQ  corporate governance rules.  As of December  31,  2005,  there is one  remaining  line of credit  between the Company and its Chief Financial Officer, Richard P. Nespola, which originated in fiscal year 2001. Aggregate borrowings outstanding against the line of credit at December  31, 2005 and  January 1, 2005  totaled  $300,000  and are due in 2011. These amounts are included in other assets in the non-current  assets section of the balance sheet.  In accordance  with the loan  provisions,  the interest rate charged on the loans is equal to the Applicable Federal Rate (AFR), as announced by the  Internal  Revenue  Service,  for  short-term  obligations  (with  annual compounding)  in effect for the month in which the advance is made,  until fully paid.  Pursuant to the  Sarbanes-Oxley  Act, no further loan agreements or draws against  the line may be made by the  Company to, or arranged by the Company for its  executive  officers.  Interest  payments  on this  loan are  current  as of December 31, 2005.
We do not invest  excess  funds in  derivative  financial  instruments  or other market  rate  sensitive  instruments  for the  purpose of  managing  our foreign currency  exchange rate risk. We invest excess funds in short-term  investments, including  auction  rate  securities,  the yield of which is exposed to interest rate market risk.  Auction rate securities are classified as  available-for-sale and reported on the balance sheet at fair value,  which equals market value,  as the rate on such securities resets generally every 28 to 35 days.  Consequently, interest rate movements do not materially  affect the balance sheet valuation of the fixed income  investments.  Changes in the overall  level of interest  rates affect our interest income generated from investments.  We do not have  material  exposure to market  related  risks.  Foreign  currency exchange rate risk may become  material  given U.S.  dollar to foreign  currency exchange rate changes and  significant  increases in  international  engagements denominated in the local currency of our clients.                                          24
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  TO THE BOARD OF DIRECTORS OF  The Management Network Group, Inc. Overland Park, Kansas  We have audited the accompanying  consolidated  balance sheets of The Management Network Group, Inc. and subsidiaries (the "Company") as of December 31, 2005 and January  1, 2005 and the  related  consolidated  statements  of  operations  and comprehensive  loss,  stockholders'  equity and cash flows for the fiscal  years ended  December  31,  2005,  January 1, 2005 and January 3, 2004 (52, 52, and 53 weeks,  respectively).  These financial statements are the responsibility of the Company's  management.  Our  responsibility  is to  express  an opinion on these financial statements based on our audits.  We conducted our audits in accordance  with the standards of the Public  Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements  are free of material  misstatement.  The Company is not  required to have,  nor were we engaged to perform,  an audit of its  internal  control  over financial reporting.  Our audits included consideration of internal control over financial  reporting  as  a  basis  for  designing  audit  procedures  that  are appropriate  in the  circumstances  but not for the  purpose  of  expressing  an opinion on the  effectiveness  of the Company's  internal control over financial reporting.  Accordingly,  we express  no such  opinion.  An audit also  includes examining,  on a test basis,  evidence supporting the amounts and disclosures in the  financial   statements,   assessing  the  accounting  principles  used  and significant  estimates  made by  management,  as well as evaluating  the overall financial  statement  presentation.   We  believe  that  our  audits  provide  a reasonable basis for our opinion.  In our opinion,  such consolidated  financial  statements present fairly, in all material respects, the financial position of the Company as of December 31, 2005 and January 1, 2005,  and the results of its  operations  and its cash flows for the fiscal years ended December 31, 2005, January 1, 2005 and January 3, 2004 in conformity with accounting principles generally accepted in the United States of America.                                 /S/ DELOITTE & TOUCHE LLP                                KANSAS CITY, MISSOURI                                    March 29, 2006                                               25                           THE MANAGEMENT NETWORK GROUP, INC.                             CONSOLIDATED BALANCE SHEETS                         (IN THOUSANDS, EXCEPT SHARE DATA)                                       ASSETS                                                                                       December 31,      January 1,                                                                                 2005             2005                                                                             ------------     ------------ CURRENT ASSETS:  Cash and cash equivalents ..........................................        $  10,951        $  10,882  Short-term investments .............................................           38,700           41,300  Receivables:     Accounts receivable .............................................            3,886            4,663     Accounts receivable -- unbilled .................................            2,559            1,911                                                                              ---------        ---------                                                                                  6,445            6,574     Less: Allowance for doubtful accounts ...........................             (296)            (396)                                                                              ---------        ---------                                                                                  6,149            6,178 Refundable income taxes .............................................              117              769 Prepaid and other assets ............................................            1,262            1,176                                                                              ---------        ---------          Total current assets .......................................           57,179           60,305                                                                              ---------        --------- Property and equipment, net .........................................              900              896 Goodwill.............................................................           13,365           13,365 Intangible assets, net...............................................            1,651              487 Other assets ........................................................              454              300                                                                               --------         -------- Total Assets ........................................................        $  73,549        $  75,353                                                                              =========        ========= CURRENT LIABILITIES:  Trade accounts payable .............................................        $   1,025        $     845  Accrued payroll, bonuses and related expenses ......................            1,136            1,040  Other accrued liabilities ..........................................            1,893            2,574  Unfavorable and capital lease obligations ..........................              628              725                                                                              ---------        ---------          Total current liabilities ..................................            4,682            5,184                                                                              ---------        --------- Unfavorable and capital lease obligations ...........................            2,819            3,422 STOCKHOLDERS' EQUITY:  Common stock:     Voting -- $.001 par value, 100,000,000 shares authorized;     35,705,520 and 34,750,562 shares issued and outstanding on     January 1, 2005, and December 31, 2005, respectively ............               36               35  Preferred stock -- $.001 par value, 10,000,000 shares     authorized; no shares issued or outstanding  Additional paid-in capital .........................................          159,586          157,857  Accumulated deficit.................................................          (93,305)         (90,885)  Accumulated other comprehensive income --   Foreign currency translation adjustment ...........................              147              352  Unearned compensation ..............................................             (416)            (612)                                                                              ---------        ---------          Total stockholders' equity .................................           66,048           66,747                                                                              ---------        --------- Total Liabilities and Stockholders' Equity ..........................        $  73,549        $  75,353                                                                              =========        =========    See notes to consolidated financial statements.                                          26                           THE MANAGEMENT NETWORK GROUP, INC.            CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS                       (IN THOUSANDS, EXCEPT PER SHARE DATA)                                                                                   FISCAL YEAR ENDED                                                              ------------------------------------------                                                              December 31    January 1,      January 3,                                                                 2005           2005            2004                                                              -----------   -----------     ----------- Revenues.................................................      $ 30,378       $ 23,704       $ 23,245 Cost of services:  Direct cost of services (exclusive of amortization   shown below)...........................................        14,834         12,319         11,927  Equity related charges (benefits).......................           100            205            (57)                                                                --------       --------       --------          Total cost of services (exclusive of           amortization shown below) .....................        14,934         12,524         11,870                                                                --------       --------       --------                                                                  15,444         11,180         11,375 Operating expenses:  Selling, general and administrative.....................        18,462         16,037         19,359  Legal settlement .......................................            95         (1,294)  Real estate restructuring ..............................            75          1,545  Goodwill and intangible asset impairment ...............                                      19,484  Intangible asset amortization ..................                   336            992          2,343  Equity related charges .................................           618            958            142                                                                --------       --------       --------          Total operating expenses .......................        19,586         18,238         41,328                                                                --------       --------       --------                                                                  (4,142)        (7,058)       (29,953) Other income (expense):  Interest income ........................................         1,632            718            624  Other, net .............................................           126            (30)           (51)                                                                --------       --------       --------          Total other income .............................         1,758            688            573                                                                --------       --------       -------- Loss from continuing operations before income tax  provision  .............................................        (2,384)        (6,370)       (29,380) Income tax provision ....................................           (36)           (49)       (12,978)                                                                --------       --------       -------- Loss from continuing operations .........................        (2,420)        (6,419)       (42,358)  Discontinued operations:  Net income (loss) from discontinued operations   (including a charge for impairment of goodwill of   $2,163 in fiscal year 2004 and income tax provision   of $53 for fiscal 2003)................................                       (2,276)            34                                                                --------       --------       -------- Net loss ................................................        (2,420)        (8,695)       (42,324)  Other comprehensive income (loss) -  Foreign currency translation adjustment.................          (205)           176             63                                                                --------       --------       -------- Comprehensive loss ......................................      $ (2,625)      $ (8,519)      $(42,261)                                                                ========       ========       ======== Loss from continuing operations per common share  Basic and diluted ......................................      $  (0.07)      $  (0.18)      $  (1.26)                                                                ========       ========       ======== Net income (loss) from discontinued operations per  common share  Basic and diluted ......................................                     $  (0.07)                                                                ========       ========       ======== Net loss per common share  Basic and diluted.......................................      $  (0.07)      $  (0.25)      $  (1.26)                                                                ========       ========       ========  Shares used in calculation of loss from continuing  operations, net income (loss) from discontinued  operations, and net loss per common share  Basic and diluted ......................................        35,175         34,619         33,545                                                                ========       ========       ========    See notes to consolidated financial statements.                                          27                          THE MANAGEMENT NETWORK GROUP, INC.                       CONSOLIDATED STATEMENTS OF CASH FLOWS                                  (IN THOUSANDS)                                                                                        FISCAL YEAR ENDED                                                                   -----------------------------------------                                                                   December 31,     January 1,    January 3,                                                                       2005           2005           2004                                                                   ------------  ------------   ------------ CASH FLOWS FROM OPERATING ACTIVITIES:   Net loss .................................................      $  (2,420)      $ (8,695)     $ (42,324)   Adjust for      (Income) loss from discontinued operations (includes        non-cash goodwill impairment charge of $2,163 in        fiscal year 2004)                                                             2,276            (34)                                                                    --------       --------       --------   Loss from continuing operations                                    (2,420)        (6,419)       (42,358)   Adjustments to reconcile net loss to net cash    provided by (used in) operating activities:     Goodwill and intangible asset impairment ...............                                       19,484     Real estate restructuring charge .......................                         1,545     Depreciation and amortization ..........................            822          1,672          3,197     Equity related charges .................................            718          1,163             85     Deferred income taxes ..................................                                       14,066     Bad debt expense ......................................             (59)           399            575     Loss on retirement of assets ...........................                            39     Income tax benefit realized upon exercise/      forfeiture of stock options ...........................                                           45     Other changes in operating assets and liabilities:       Accounts receivable ..................................            736             61           (173)       Accounts receivable -- unbilled ......................           (648)           229          2,092       Refundable income taxes ..............................            652          1,437          2,720       Prepaid and other assets .............................           (239)          (364)         1,113       Trade accounts payable ...............................            180            211           (535)       Accrued liabilities ..................................           (559)          (563)        (1,286)                                                                    --------       --------       --------          Net cash used in operating activities from          continuing operations .............................           (817)          (590)          (975)                                                                    --------       --------       --------          Net cash used in operating activities                         (817)          (703)          (941)                                                                    --------       --------       -------- CASH FLOWS FROM INVESTING ACTIVITIES:   Purchases of short-term investments.......................         (9,300)        (6,850)        (9,150)   Proceeds from maturities/sales of short-term investments .         11,900          9,600          7,300   Investment in S3 license .................................         (1,500)   Acquisition of property and equipment, net................           (491)          (188)          (127)                                                                    --------       --------       --------          Net cash provided by (used in) investing activities            609          2,562         (1,977)                                                                    --------       --------       -------- CASH FLOWS FROM FINANCING ACTIVITIES:   Issuance of common stock through employee     stock purchase plan ....................................            158            131             70   Payments made on lease obligations .......................           (726)          (710)          (392)   Exercise of stock options.................................          1,050            601            416                                                                    --------       --------       --------          Net cash provided by financing activities                      482             22             94                                                                    --------       --------       -------- Effect of exchange rate on cash and cash equivalents .......           (205)           176             63                                                                    --------       --------       -------- Net increase (decrease) in cash and cash equivalents .......             69          2,057         (2,761) Cash and cash equivalents, beginning of period .............         10,882          8,825         11,586                                                                    --------       --------       -------- Cash and cash equivalents, end of period ...................       $ 10,951       $ 10,882       $  8,825                                                                    ========       ========       ======== Supplemental disclosure of cash flow information:   Cash paid during period for interest .....................       $      3       $     30       $     51                                                                    ========       ========       ========   Cash paid during period for taxes ........................       $     36       $     49       $    493                                                                    ========       ========       ========    See notes to consolidated financial statements.                                          28                           THE MANAGEMENT NETWORK GROUP, INC.                   CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY                         (In thousands, except share data)                                                                            COMMON STOCK                                                                   $.001 PAR                                                                     VOTING            ADDITIONAL                                                              ---------------------     PAID-IN    ACCUMULATED                                                                 SHARES      AMOUNT     CAPITAL      DEFICIT                                                              ------------   ------    ----------   --------- Balance, December 28, 2002                                     33,347,228      $33      $155,509    $(39,866) Option grants                                                                                189 Exercise of options                                               245,304                    416 Cancellation of options                                                                     (294) Stock surrender                                                    (8,702)                   (12) Employee stock purchase plan                                       67,238                     70 Stock compensation Restricted stock grant                                            720,000        1         2,069 Other comprehensive income -     Foreign currency translation adjustment Reduction of tax benefit due to exercise/forfeiture  of stock options                                                                           (655) Net loss                                                                                             (42,324)                                                              ------------   ------    ----------   --------- Balance, January 3, 2004                                       34,371,068       34       157,292     (82,190) Exercise of options                                               338,165        1           601 Employee stock purchase plan                                       98,529                    131 Stock compensation Restricted stock grant                                             15,000                     30 Restricted stock cancellation                                     (77,000)                  (212) Stock bonus                                                         4,800                     15 Other comprehensive income -     Foreign currency translation adjustment Net loss                                                                                              (8,695)                                                              ------------   ------    ----------   --------- Balance, January 1, 2005                                       34,750,562       35       157,857     (90,885) Exercise of options                                               602,329        1         1,049 Employee stock purchase plan                                      115,629                    158 Stock compensation Restricted stock grant                                            300,000                    695 Restricted stock cancellation                                     (63,000)                  (173) Other comprehensive income -     Foreign currency translation adjustment Net loss                                                                                              (2,420)                                                              ------------   ------    ----------   --------- Balance, December 31, 2005                                     35,705,520   $   36    $  159,586   $ (93,305)                                                              ============   ======    ==========   =========                                            29                                                                           ACCUMULATED                                                                      OTHER                                                                  COMPREHENSIVE         UNEARNED                                                                      INCOME          COMPENSATION        TOTAL                                                                  -------------       --------------    --------- Balance, December 28, 2002                                              $113                 $(63)     $115,726 Option grants                                                                                (189) Exercise of options                                                                                         416 Cancellation of options                                                                       294 Stock surrender                                                                                             (12) Employee stock purchase plan                                                                                 70 Stock compensation                                                                             85            85 Restricted stock grant                                                                     (2,070) Other comprehensive income -     Foreign currency translation adjustment                               63                                 63 Reduction of tax benefit due to exercise/forfeiture   of stock options                                                                                         (655) Net loss                                                                                                (42,324)                                                                  -------------       --------------     --------- Balance, January 3, 2004                                                 176               (1,943)       73,369 Exercise of options                                                                                         602 Employee stock purchase plan                                                                                131 Stock compensation                                                                          1,149         1,149 Restricted stock grant                                                                        (30) Restricted stock cancellation                                                                 212 Stock bonus                                                                                                  15 Other comprehensive income -     Foreign currency translation adjustment                              176                                176 Net loss                                                                                                 (8,695)                                                                  -------------       --------------     --------- Balance, January 1, 2005                                                 352                 (612)       66,747 Exercise of options                                                                                       1,050 Employee stock purchase plan                                                                                158 Stock compensation                                                                            718           718 Restricted stock grant                                                                       (695) Restricted stock cancellation                                                                 173 Other comprehensive income -     Foreign currency translation adjustment                             (205)                              (205) Net loss                                                                                                 (2,420)                                                                  -------------       --------------     --------- Balance, December 31, 2005                                       $         147       $         (416)    $  66,048                                                                  =============       ==============     =========    See notes to consolidated financial statements.                                          30                           THE MANAGEMENT NETWORK GROUP, INC.                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  1.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  Nature of  Operations  - The  Management  Network  Group,  Inc.  ("TMNG"  or the "Company") was founded in 1990 as a management  consulting firm  specializing in providing consulting services to the converging  communications industry and the financial  services firms that support it. A majority of the Company's  revenues are from  customers in the United  States,  however,  the Company also  provides services to customers in Europe and other foreign  countries.  TMNG's  corporate offices are located in Overland Park, Kansas.  Principles of Consolidation - The consolidated  statements  include the accounts of TMNG and its wholly-owned  subsidiaries,  The Management Network Group Europe Ltd.  (TMNG-Europe),  formed on March 19, 1997, based in the United Kingdom; The Management  Network  Group  Canada Ltd.  (TMNG-Canada),  formed on May 14, 1998, based in Toronto,  Canada;  TMNG.com, Inc., formed in June 1999; TMNG Marketing, Inc.,  acquired on  September  5, 2000;  TMNG  Technologies,  Inc.,  acquired on September  5, 2001;  and TMNG  Strategy,  Inc.,  acquired on March 6, 2002.  All significant  intercompany  accounts and  transactions  have been  eliminated  in consolidation.  Fiscal Year - The Company reports its operating  results on a 52/53-week  fiscal year basis.  The fiscal year end is  determined as the Saturday  ending  nearest December  31. The fiscal  years  ended  December  31,  2005 and  January 1, 2005 reported 52 weeks of  operating  results  and  consisted  of four equal  13-week quarters.  The fiscal year ended  January 3, 2004 reported 53 weeks of operating results and consisted of three  13-week  quarters and one 14-week  quarter.  The fiscal years ended  December  31, 2005,  January 1, 2005 and January 3, 2004 are referred to herein as fiscal year 2005, 2004 and 2003, respectively. TMNG Europe and TMNG Canada maintain year-end dates of December 31.  Revenue  Recognition - The Company  accounts for revenue and costs in connection with  client  service  engagements  under a time and  materials  contract in the period in which the service is performed.  The Company generally records revenue in  connection  with fixed price  contracts  under a  percentage  of  completion method.  This method of accounting results in the ratable recognition of revenue in proportion to the related costs over the client service engagement. Estimates are prepared to monitor and assess the Company's progress on the engagement from the initial phase of the project to completion, and these estimates are utilized in recognizing  revenue in the Company's  financial  statements.  If the current estimates of total  contract  revenues and contract  costs  indicate a loss, the Company records a provision for the entire loss on the contract. The Company has no such loss contracts as of the end of fiscal years 2005 and 2004. Revenues and related costs of smaller fixed price  contracts  are generally  recognized  upon contract  completion under the completed  contract method, and generally involve immaterial amounts and are of a short duration.  On a more limited  basis,  the Company also enters into gain sharing  contracts, where the  Company's  revenue is determined on a  success-based  revenue  model. Revenues generated on such contracts result from financial success recognized by the client  utilizing agreed upon contract  measures and milestones  between the two parties.  Due to the contingent nature of these gain-sharing  projects,  the Company  recognizes  costs as they are  incurred  on the  project and defers the revenue recognition until the revenue is realizable and earned.  Cash and Cash Equivalents - Cash and cash  equivalents  include cash on hand and short-term  investments  with  original  maturities of three months or less when purchased.  Short-Term   Investments   -   Short-term   investments,    which   consist   of investment-grade auction rate securities, are classified as "available for sale" under the provisions of Statement of Financial  Accounting  Standards (SFAS) No. 115,  "Accounting  for  Certain  Investments  in Debt  and  Equity  Securities." Accordingly,  the short-term  investments  are reported at fair value,  with any related  unrealized  gains  and  losses  included  as a  separate  component  of stockholders'  equity, net of applicable taxes, when applicable.  Realized gains and losses and interest and dividends are included in interest income within the Consolidated  Statements  of Operations  and  Comprehensive  Loss.  Auction rate securities  generally  reset every 28 to 35 days;  consequently,  interest  rate movements  do not  materially  affect  the fair value of these  investments.  At December 31, 2005 and January 1, 2005 there were no  unrealized  gains or losses on short-term investments.  Fair  Value of  Financial  Instruments  - The fair  value of  current  financial instruments  approximates  the carrying  value because of the short  maturity of these instruments.  Property  and  Equipment  -  Property  and  equipment  are  stated  at cost less accumulated  depreciation and amortization.  Maintenance and repairs are charged to expense as incurred.  Depreciation is based on the estimated  useful lives of the assets and is computed using the  straight-line  method,  and capital leases are amortized on a straight-line  basis over the life of the lease.  Asset lives range  from  three  to  seven  years  for  computers  and  equipment.  Leasehold improvements  are capitalized and amortized over the life of the lease or useful life of the asset, whichever is shorter.  Research and  Development  Costs -  Expenditures  relating to development of new offerings and services are expensed as incurred.  Research and development costs (exclusive of associated sales and marketing related costs) were $1.0 million in fiscal year 2005,  no research  and  development  costs were  incurred in fiscal years 2004 and 2003.  Goodwill - The Company  accounts for goodwill in accordance  with the provisions of SFAS No. 142,  "Accounting  for Goodwill  and  Intangible  Assets."  Goodwill represents  the  excess of  purchase  price  over the fair  value of net  assets acquired  in  business  combinations  accounted  for as                                          31   purchases.  The Company evaluates  goodwill for impairment on an annual basis on the last day of the first fiscal month of the fourth quarter and whenever events or  circumstances  indicate  that these  assets  may be  impaired.  The  Company determines  impairment by comparing the net assets of each reporting unit to its respective  fair value.  In the event a reporting  unit's carrying value exceeds its fair value,  an indication  exists that the  reporting  unit goodwill may be impaired.  In this situation,  the Company must determine the implied fair value of  goodwill  by  assigning  the  reporting  unit's fair value to each asset and liability of the reporting  unit.  The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill.  An impairment loss is measured by the difference between the goodwill carrying value and the implied fair value.  Intangible  Assets -  Intangible  assets  are  stated at cost  less  accumulated amortization,  and represent  customer  relationships and employment  agreements acquired in the acquisition of Cambridge  Strategic  Management Group (CSMG) and Tri-Com Computer  Services,  Inc.  (Tri-Com),  and an investment in an exclusive marketing  license  with S3  Matching  Technologies.  Amortization  is  based on estimated  useful  lives  of 3 to 62  months,  depending  on the  nature  of the intangible asset, and is recognized on a straight-line basis.  In connection  with SFAS No. 144  "Accounting  for the Impairment or Disposal of Long-lived  Assets" the Company uses its best estimate,  based on reasonable and supportable assumptions and projections, to review certain long-lived assets and identifiable   intangibles   for  impairment   whenever  events  or  changes  in circumstances  indicate  that the  carrying  amount of these assets might not be recoverable.  Income Taxes - The Company  recognizes a liability or asset for the deferred tax consequences  of  temporary  differences  between  the tax  basis of  assets  or liabilities and their reported amounts in the financial statements.  A valuation allowance is provided when, in the opinion of management, it is more likely than not that some portion or all of a deferred tax asset will not be realized.  Use of Estimates - The  preparation of financial  statements in conformity  with accounting  principles  generally  accepted  in the  United  States  of  America requires  management to make estimates and assumptions  that affect the reported amounts  of assets and  liabilities  and  disclosure  of  contingent  assets and liabilities at the date of the financial  statements and the reported amounts of revenues and expenses during the reporting  period.  Actual results could differ from those estimates.  Foreign Currency Transactions and Translation - TMNG-Europe and TMNG-Canada both conduct  business  primarily  denominated in their  respective  local  currency. Assets and liabilities  have been  translated to U.S.  dollars at the period-end exchange rate. Revenue and expenses have been translated at exchange rates which approximate the average of the rates prevailing during each period.  Translation adjustments are reported as a separate component of other  comprehensive  income in the consolidated  statements of stockholders' equity. Realized and unrealized exchange gains and losses included in results of operations  were  insignificant for all periods presented.  Stock-Based  Compensation - The Company utilizes an intrinsic value  methodology in  accounting   for  stock  based   compensation   for  employees  and  certain non-employee   directors  in  accordance   with  the  provisions  of  Accounting Principles  Board  (APB)  Opinion  No.  25,  "Accounting  for  Stock  Issued  to Employees"   and  related   Interpretations,   and  accounts   for   stock-based compensation for non-employees  utilizing a fair value methodology in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based  Compensation - Transition and Disclosure." For an additional discussion of the Company's stock-based  compensation see Note 9 "Stock Option Plan and Stock Based Compensation." If compensation cost for the Company's APB No. 25 grants,  restricted  stock grants,  and the employee  stock purchase plan had been determined  under SFAS No. 123, based upon the fair value at the grant date,  consistent with the Black-Scholes  pricing methodology,  the Company's net loss for fiscal years 2005,  2004 and 2003 would have increased by $1.7 million, $2.8 million and $1.1 million,  respectively.  For purposes of pro forma  disclosures  required under the provisions of SFAS No. 123, as amended by SFAS No.  148,  the  estimated  fair value of options and  restricted  stock are amortized to pro forma  expense over the vesting  period.  The  following  table contains  pro  forma  information  for  fiscal  years  2005,  2004  and 2003 (in thousands, except per share amounts):                                                             FISCAL        FISCAL        FISCAL                                                      YEAR          YEAR          YEAR                                                      2005          2004          2003                                                    --------      --------      -------- Net loss, as reported:                             $ (2,420)     $ (8,695)     $(42,324)   Add: Stock-based employee compensation    expense included in reported net loss,    net of related tax effects                           718         1,163            85    Deduct:  Total stock-based compensation    expense determined under fair value    based method for all awards, net of related       (2,415)       (3,988)       (1,213)    tax effects                                                    --------      --------      -------- Pro forma net loss                                 $ (4,117)     $(11,520)     $(43,452)                                                    ========      ========      ======== Loss per share   Basic and diluted, as reported                   $  (0.07)     $  (0.25)     $  (1.26)                                                    ========      ========      ========   Basic and diluted, pro forma                     $  (0.12)     $  (0.33)     $  (1.30)                                                    ========      ========      ========                                            32    Earnings (Loss) Per Share - The Company  calculates and presents earnings (loss) per share using a dual  presentation  of basic and diluted  earnings  (loss) per share. Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted  average  number of common  shares  outstanding  for the period. Diluted  earnings per share  reflects the  potential  dilution of  securities by adding  common  stock  options and  unvested  restricted  stock in the  weighted average  number of common  shares  outstanding  for a period,  if  dilutive.  In accordance  with the  provisions  of SFAS No. 128,  "Earnings  Per  Share",  the Company  has not  included  the  effect of common  stock  options  and  unvested restricted  stock for fiscal years 2005, 2004 and 2003 as the Company reported a loss from  continuing  operations  for those periods.  Had the Company  reported income from  continuing  operations  in fiscal  years 2005,  2004 and 2003,  the treasury  stock  method of  calculating  common  stock  equivalents  would  have resulted in  approximately  426,000,  822,000 and  772,000  additional  dilutive shares, respectively.   Recent  Accounting  Pronouncements  - In December 2004, the FASB issued SFAS No. 123R which  replaces  SFAS No. 123 and  supersedes  APB No.  25.  SFAS No.  123R requires  compensation costs related to share-based  payment  transactions to be recognized in the financial statements based on the fair value on the grant date of the  equity  or  liability  instruments  issued.  Compensation  cost  will be recognized  over the period  that an employee  provides  service for that award, resulting in a decrease in net earnings.  The Company will adopt the  provisions of this Statement,  as amended,  using the modified prospective method beginning in fiscal year 2006.  Compensation  costs will be recognized for awards that are issued beginning in 2006 and for awards that have been granted prior to December 31,  2005 but have yet to reach the end of the  requisite  service  period.  The amount of expense  to be  recognized  over the  remaining  service  period as of December 31, 2005 is  approximately  $3.0 million to $3.5  million.  The Company will begin  expensing  these costs over the shorter of the vesting period or the period  from the date of grant to the date the  employee  becomes  eligible  for retirement.  Based on  currently  outstanding  options,  the Company  expects to record a total  expense of  approximately  $2.0 million to $2.4  million  during fiscal year 2006.   2.   GOODWILL AND OTHER INTANGIBLE ASSETS  During the second quarter of fiscal year 2003, the Company  performed an interim goodwill  impairment  test due to  significantly  lower than expected  operating results of the CSMG reporting unit and the  resignation of a key CSMG executive. Based on an analysis of projected future cash flows and utilizing the assistance of an outside valuation firm, the Company  determined that the carrying value of goodwill  acquired in the CSMG  acquisition  exceeded  the fair market value and recorded an  impairment  loss related to the  Management  Consulting  Segment of approximately  $15.8  million in the second  quarter  of fiscal  year 2003.  The Company  subsequently  performed its annual impairment test in October 2003, and each year thereafter,  and concluded there was no additional goodwill impairment as the  calculated  fair  values of its  reporting  units were higher than their respective  carrying values. The goodwill impairment loss related to fiscal year 2003 has been reflected as a component of Loss from  Operations in the Statement of Operations and Comprehensive Loss for that year.  In the first  quarter of fiscal  year 2004 the Company  recorded a $2.2  million goodwill  impairment loss related to the discontinuation of the hardware segment and has reflected this amount in the Statement of Operations  and  Comprehensive Loss as a component of discontinued operations.  The changes in the  carrying  amount of  goodwill  as of  December  31, 2005 and January 1, 2005 are as follows (amounts in thousands):                                                     Management Consulting    All Other                                                    Segment            Segment       Total                                             ---------------------    ---------     -------- Balance as of January 3, 2004                     $ 13,365            $  2,163     $ 15,528  2004 impairment loss on   discontinued operations                                               (2,163)      (2,163)                                                   --------           ---------     -------- Balance as of January 1, 2005 and   December 31, 2005                               $ 13,365                         $ 13,365                                                   ========           =========     ========    Included in intangible assets, net are the following (amounts in thousands):                                December 31, 2005         January 1, 2005                             -------------------     ---------------------                                    Accumulated                Accumulated                             Cost   Amortization      Cost    Amortization                             ----   ------------      ----    ------------ Customer relationships     $1,908    $(1,709)        $1,908     $(1,538) Employment agreements       3,200     (3,200)         3,200      (3,083) S3 license agreement        1,500        (48)                           -------    -------        -------     ------- Total                      $6,608    $(4,957)        $5,108     $(4,621)                           =======    =======        =======     =======                                          33   During fiscal year 2003, in accordance  with the provisions of SFAS No. 144, the Company  determined that the carrying value of customer  relationships  exceeded its fair market value and recorded an impairment  loss related to the Management Consulting  Segment and All Other Segment of approximately $3.4 million and $0.3 million,  respectively. The impairment losses have been reflected as a component of Loss from  Operations in the Statement of Operations and  Comprehensive  Loss for fiscal year 2003.  During  fiscal  year  2005,  the  Company  entered  into a  five-year  exclusive marketing  license with S3 Matching  Technologies  Inc. to resell their products and solutions.  The $1.5 million cost of this license has been capitalized as an intangible  asset and is being amortized over the 62 month life of the agreement on a straight-line basis.  Intangible assets amortization  expense for fiscal years 2005, 2004 and 2003 was $0.3  million,   $1.0  million  and  $2.3  million,   respectively.   Intangible amortization  expense is  estimated to be  approximately  $0.5 million in fiscal year 2006 and $0.3 million in fiscal years 2007 through 2010.  3.   DISCONTINUED OPERATIONS  On March 4, 2004,  management and the Board of Directors  elected to discontinue the hardware segment of the Company.  The Company concluded that this segment of the business did not align well with the strategic focus of the Company. Charges related to the  discontinuation  of the hardware  business  were $2.2 million in fiscal year 2004 and relate  primarily  to  goodwill  impairment  and  severance charges.  These charges are reported as a component of discontinued  operations. The  hardware   segment's   results  of  operations   have  been  classified  as discontinued operations and prior periods have been restated.  Revenue and income (loss) from  discontinued  operations are as follows (amounts in thousands):                                           Fiscal        Fiscal                                           Year          Year                                           2004          2003                                         --------      --------         Revenue                         $     13      $    231          Goodwill impairment          and severance charge           $ (2,213)         Operating income (loss)         $    (63)     $     87         Income tax provision                          $     53                                         --------      --------         Income (loss) from           discontinued operations       $ (2,276)     $     34                                         ========      ========  4.   MAJOR CUSTOMERS AND SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK  The Company  identifies its segments  based on the way management  organizes the Company  to  assess  performance  and make  operating  decisions  regarding  the allocation  of  resources.  In  accordance  with the  criteria  in SFAS No.  131 "Disclosure  about  Segments  of an  Enterprise  and Related  Information,"  the Company has  concluded it has four  operating  segments:  Operations,  Strategy, Marketing and International, which are aggregated in one reportable segment, the Management Consulting Services segment.  Management Consulting Services includes business strategy and planning,  marketing and customer relationship management, billing system support,  operating system support, revenue assurance,  corporate investment services, and network management.  The Company intends to continue to measure and report its activities using our current segment structure.  However, as the services  provided by the Company  evolve,  management  will  continue to evaluate its segment reporting structure.  Major  customers in terms of  significance to TMNG's revenues (i.e. in excess of 10% of revenues) for fiscal years 2005,  2004 and 2003, and accounts  receivable as of  December  31,  2005 and  January  1, 2005  were as  follows  (amounts  in thousands):                                                   REVENUES                       ACCOUNTS RECEIVABLE                           ------------------------------------     ---------------------------                            FISCAL        FISCAL        FISCAL                             YEAR          YEAR          YEAR       December 31,    January 1,                             2005          2004          2003          2005            2005                           --------       ------        ------      ------------   ------------ Customer A .........      $ 6,098                                      $  709 Customer B .........                     $2,894        $3,238                         $  438 Customer C .........      $ 6,469        $3,305        $2,692          $1,149         $  906    Revenues  from  the  Company's  ten most  significant  customers  accounted  for approximately 71%, 67% and 67% of revenues for fiscal years 2005, 2004 and 2003, respectively.  Substantially  all of TMNG's  receivables  are  obligations  of companies in the communications,  media and entertainment industries.  The                                          34   Company generally does not require  collateral or other security on its accounts receivable.  The credit risk on these  accounts  is  controlled  through  credit approvals,  limits and  monitoring  procedures.  The  Company  records  bad debt expense based on judgment about the anticipated default rate on receivables owed to TMNG at the end of the  reporting  period.  That  judgment  is  based  on the Company's  uncollected  account  experience  in  prior  years  and  the  ongoing evaluation  of the  credit  status of TMNG's  customers  and the  communications industry  in  general.  The  changes in the  Company's  allowance  for  doubtful accounts are as follows (amounts in thousands):                                       FISCAL       FISCAL        FISCAL                                     YEAR         YEAR          YEAR                                     2005         2004          2003                                   -------      --------      --------         Beginning balance         $   396           652           471         Bad debt expense (benefit)    (59)          399           575         Account write-offs            (41)         (655)         (394)                                   -------      --------      --------         Ending balance            $   296      $    396      $    652                                   =======      ========      ========  Revenues earned in the United States and  internationally  based on the location where the services are performed are as follows (amounts in thousands):                                                                                       LOSS FROM CONTINUING OPERATIONS BEFORE                                              REVENUE                          INCOME TAX (PROVISIONS) BENEFIT                                ------------------------------------        --------------------------------------                                   FY            FY            FY              FY            FY            FY                                  2005          2004          2003            2005          2004          2003                                 --------      --------      --------        --------      --------      --------     United States ........      $ 29,179      $ 18,427      $ 20,915        $ (2,290)     $ (4,952)     $(26,473)     International:       The Netherlands ....            40           891           964              (3)         (239)       (1,203)       Canada .............                         245            95                           (66)         (119)       Belize .............                         173           704                           (46)         (879)       Portugal  ..........                       1,124           451                          (302)         (562)       Great Britain ......         1,153         2,296                           (90)         (617)       Australia ..........                         386                                        (104)       Other ..............             6           162           116              (1)          (44)         (144)                                 --------      --------      --------        --------      --------      --------             Total ......        $ 30,378      $ 23,704      $ 23,245        $ (2,384)     $ (6,370)     $(29,380)                                 ========      ========      ========        ========      ========      ========    No significant long-lived assets are deployed outside the United States.  5.   PROPERTY AND EQUIPMENT                                                       December 31,   January 1,                                                          2005          2005                                                      ------------  ------------                                                                (000'S) Furniture and fixtures.............................     $  660        $  823 Software and computer equipment....................      2,140         2,777 Leasehold improvements.............................        774           479                                                         ------        ------                                                          3,574         4,079 Less: Accumulated depreciation and amortization....      2,674         3,183                                                         ------        ------                                                         $  900        $  896                                                         ======        ======  Depreciation   and   amortization   expense  on  property  and   equipment   was approximately  $486,000,  $680,000 and $854,000 for fiscal years 2005,  2004 and 2003, respectively.                                           35    6.   INCOME TAXES  For fiscal  years  2005,  2004 and 2003,  the income  tax  provision  (benefit), exclusive of the tax associated with the discontinued operations consists of the following (amounts in thousands):                                              FISCAL         FISCAL         FISCAL                                            YEAR           YEAR           YEAR                                            2005           2004           2003                                          --------       --------       -------- Federal   Current ............................                                 $   (992)   Deferred tax benefit ...............   $   (714)       $(1,992)        (8,698)   Change in valuation allowance.......        714          1,992         20,999                                          --------       --------       --------                                                 0              0         11,309 State   Current ............................         36             49   Deferred tax benefit ...............       (213)          (700)        (1,244)   Change in valuation allowance ......        213            700          3,000                                          --------       --------       --------                                                36             49          1,756 Foreign   Current ............................                                      (87)   Deferred tax expense ...............         14             99   Change in valuation allowance ......        (14)           (99)                                          --------       --------       --------                                                 0              0            (87)                                          --------       --------       -------- Total ................................   $     36       $     49       $ 12,978                                          ========       ========       ========  The  Company  has fully  reserved  its  deferred  tax  assets  with a  valuation allowance as of December 31, 2005 and January 1, 2005,  in  accordance  with the provisions of SFAS No. 109  "Accounting  for Income  Taxes."  Realization of the deferred  tax  asset is  dependent  on  generating  sufficient  income in future periods.  In  evaluating  the ability to recover its  deferred  tax assets,  the Company  considers  all positive and negative  evidence  including the Company's past operating  results,  the existence of cumulative  losses in the most recent fiscal year and the Company's  forecast of future income. In determining  future income, the Company is responsible for assumptions utilized including the amount of state, federal and international  operating income, the reversal of temporary differences  and  the  implementation  of  feasible  and  prudent  tax  planning strategies.  These assumptions require significant  judgment about the forecasts of future income and are consistent  with the plans and estimates the Company is using to manage the underlying business.  In  the  fourth  quarter  of  fiscal  year  2003,  the  Company  reassessed  all significant  estimates  and judgments  made in connection  with its SFAS No. 109 analysis.  In  performing  the  updated  analysis  of the  realizability  of its deferred tax assets, the Company considered  continuing market uncertainties and concluded  that an increase to the  valuation  allowance for deferred tax assets was required.  Accordingly,  based upon the Company's best estimate, the Company recorded a non-cash  charge in the fourth  quarter of fiscal  year 2003 of $18.0 million to increase the  valuation  allowance and fully reserve for all deferred tax assets.  The following is a reconciliation between the provision for income taxes and the amounts  computed  based on loss from  continuing  operations  at the  statutory federal income tax rate (amounts in thousands):                                                              FISCAL YEAR          FISCAL YEAR            FISCAL YEAR                                                     2005                 2004                   2003                                              -----------------     -----------------     -----------------                                               AMOUNT       %        AMOUNT       %        AMOUNT       %                                              --------     ----     --------     ----     --------     ---- Computed expected federal income  tax benefit ..........................      $   (835)   (35.0)    $ (2,229)   (35.0)    $(10,282)   (35.0) State income tax expense, net of  federal benefit ......................          (115)    (4.8)        (298)    (4.7)      (1,252)    (4.3) Goodwill impairment....................                                                       217      0.7 Other .................................            73      3.0          (17)    (0.2)         316      1.1 Valuation allowance ...................           913     38.3        2,593     40.7       23,979     82.0                                              --------     ----     --------     ----     --------     ----           Total .......................      $     36      1.5     $     49      0.8     $ 12,978     44.5                                              ========     ====     ========     ====     ========     ====                                            36   Items giving rise to the  provision for deferred  income taxes  (benefit) are as follows (amounts in thousands):                                                                 FISCAL         FISCAL         FISCAL                                                         YEAR           YEAR           YEAR                                                         2005           2004           2003                                                       --------       --------       -------- Goodwill .......................................      $  1,349       $  1,402       $ (4,961) Bad debt reserve ...............................            22            100            (97) Stock compensation expense .....................           497           (196)            45 Intangible assets ..............................           113           (156)        (1,831) Valuation allowance ............................           913          2,593         23,999 Net operating loss carryforward ................        (2,993)        (3,318)        (3,212) Unfavorable lease liability                                206           (359)           166 Other ..........................................          (107)           (66)             2                                                       --------       --------       --------           Total ................................      $      0       $      0       $ 14,111                                                       ========       ========       ========    The significant components of deferred income tax assets and the related balance sheet  classifications,  as of December 31, 2005, January 1, 2005 and January 3, 2004 are as follows (amounts in thousands):                                                          DECEMBER 31,   JANUARY 1,    JANUARY 3,                                                      2005          2005         2004                                                  ------------  -----------  ----------- Current deferred tax assets:   Accounts receivable .......................    $      118           140    $     240   Accrued expenses ..........................           118           147          296   Unfavorable lease liability ...............           239           212   Valuation allowance........................          (475)         (499)        (536)                                                  ----------     ---------    ---------           Current deferred tax asset ........    $        0     $       0    $       0                                                  ==========     =========    =========   Non-current deferred tax assets:   Goodwill ..................................    $   10,530        11,879    $  13,281   Stock compensation expense ................         1,838         2,335        2,193   Unfavorable lease liability........... ....         1,096         1,329        1,017   Net operating loss carryforward ...........        10,301         7,308        3,944   Intangible assets..........................         2,584         2,696        2,540   Reserves ..................................           395           365          415   Other .....................................           271           173           73   Valuation allowance .......................       (27,015)      (26,085)     (23,463)                                                  ----------     ---------    ---------           Non-current deferred tax asset ....    $        0     $       0    $       0                                                  ==========     =========    =========    The net  operating  loss  carryforward  as of December  31, 2005 is scheduled to expire as follows (amounts in thousands):                            Amount            Year                         $ 1,831            2016                           5,602            2023                          10,970            2024                           7,206            2025                         -------         Total           $25,609                         =======                                          37   7.   REAL ESTATE RESTRUCTURING  In the fourth  quarter of fiscal  year 2004,  the Company  made the  decision to consolidate office space. In connection with this decision, a sublease agreement for  unutilized  space was entered into with a third party for the  remainder of the original  lease term.  Due to current  market  conditions,  the terms of the sublease  require payments by the sublessee which are less than the payments the Company  must make to the  original  lessor.  In  accordance  with SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal  Activities," the Company recognized a charge of $1.3 million for the present value of the total remaining lease payments less amounts to be received  under the sublease.  The decision to consolidate space also resulted in charges of $163,000 relating to impairment of fixed  assets/leasehold  improvements and $122,000 for brokerage  commissions in connection with the sublease.  The restructuring charge of $1.5 million has been reflected as a component of Loss from  Operations in the Statement of Operations and Comprehensive  Loss in the year ended January 1, 2005.  Additional  expenses totaling $75,000  associated with the space  consolidation  were incurred in the year ended December 31, 2005.  8.   LEASE COMMITMENTS  The Company leases office facilities,  computer equipment, office furniture, and an automobile  under various  operating leases expiring at various dates through May 2011.  Following is a summary of future minimum  payments under  operating  leases that have  initial or remaining  noncancellable  lease terms in excess of one year at December 31, 2005 (amounts in thousands):                                                       OPERATING           FISCAL YEAR                                 LEASES           ---------------------------------------   -----------            2006                                       $   1,887           2007                                           1,886           2008                                           1,891           2009                                           1,793           2010                                           1,640           Thereafter                                       131                                                      ---------           Total minimum lease payments                   9,219           Future minimum rentals to be received            under noncancellable subleases               (1,444)                                                      ---------           Minimum lease payments net of amounts            to be received under subleases            $   7,775                                                      =========  Operating  lease  minimum  payments  include  the  off-market  portion  of lease payments  recorded through purchase  accounting in connection with the Company's acquisition  of CSMG  and  continuing  lease  commitments  associated  with  the consolidation  of office space. As of December 31, 2005 and January 1, 2005, the unamortized  balance of these unfavorable lease liabilities was $3.3 million and $3.9 million, respectively.  At  December  31,  2005 and  January  1, 2005,  future  minimum  payments  under capitalized leases were $4,000 and $16,000,  respectively.  All existing capital leases expire during fiscal year 2006.  Assets recorded under capital leases are included in property and equipment as follows (amounts in thousands):                                                December 31,    January 1,                                                   2005           2005                                               -----------    -----------      Furniture and fixtures                   $                      156      Software and computer equipment                  476    $       505                                               -----------    -----------                                                       476            661      Less: Accumulated depreciation                  (472)          (534)                                               -----------    -----------                                               $         4    $       127                                               ===========    ===========   Total rental expense was approximately  $946,000,  $1,852,000 and $1,911,000 for fiscal years 2005, 2004 and 2003, respectively.  9.   STOCK OPTION PLAN AND STOCK BASED COMPENSATION  The  Company's  1998  Equity  Incentive  Plan (the 1998  Plan) is a  shareholder approved plan,  which  provides for the granting of incentive  stock options and nonqualified  stock options to  employees,  and  nonqualified  stock options and restricted  shares to  employees,  directors  and                                          38   consultants.  The Company has  7,642,390  shares of the  Company's  common stock authorized  for issuance as stock options under the 1998 Plan.  Incentive  stock options are  granted at an exercise  price of not less than fair value per share of the  common  stock  on the  date of  grant  as  determined  by the  Board  of Directors.  Vesting  and  exercise  provisions  are  determined  by the Board of Directors. As of December 31, 2005, all options granted under the 1998 Plan were non-qualified  stock  options.  Options  granted  under the 1998 Plan  generally become  exercisable  over a three to four year period  beginning  on the date of grant. Options granted under the 1998 Plan have a maximum term of ten years.  A summary of the status of the  Company's  1998 Plan as of  December  31,  2005, January 1, 2005 and January 3, 2004 and changes during the years ending on those dates is presented below:  EXERCISE PRICE EQUALS FAIR MARKET VALUE AT GRANT DATE:                                                         DECEMBER 31,                     JANUARY 1,                       JANUARY 3,                                                 2005                            2005                             2004                                    -------------------------------  ----------------------------    ------------------------------                                                   WEIGHTED AVERAGE              WEIGHTED AVERAGE                  WEIGHTED AVERAGE                                      SHARES        EXERCISE PRICE     SHARES     EXERCISE PRICE       SHARES       EXERCISE PRICE  Outstanding at beginning of year    3,902,196          $ 5.54       4,233,696          $5.57        3,143,459          $ 8.72 Granted                             1,761,000          $ 2.45         405,500          $2.38        1,967,500          $ 2.07 Exercised                            (540,205)         $ 1.73        (258,831)         $1.57         (116,221)         $ 1.43 Forfeited/cancelled                  (560,711)         $ 6.21        (478,169)         $5.27         (761,042)         $10.17                                     ---------                       ---------                       --------- Outstanding at end of year          4,562,280          $ 4.72       3,902,196          $5.54        4,233,696          $ 5.57                                     =========                       =========                       =========  Options exercisable at year-end     2,322,761          $ 6.97       2,331,710          $7.66        1,661,916          $ 9.15                                     =========                       =========                       ========= Weighted average fair value of  options granted during the year                       $ 1.58                          $1.76                           $ 1.60     The  following  table  summarizes  information  about market value stock options outstanding as of December 31, 2005:                                                                         WEIGHTED AVERAGE                                               WEIGHTED            REMAINING                               WEIGHTED     RANGE OF              NUMBER              AVERAGE            CONTRACTUAL             NUMBER            AVERAGE EXERCISE PRICES         OUTSTANDING        EXERCISE PRICE           LIFE              EXERCISABLE      EXERCISE PRICE - ----------------     -----------------     --------------     ----------------      -----------------   -------------- $ 0.00 to $ 2.00           655,268             $ 1.63               7.12                478,426           $ 1.58 $ 2.01 to $ 3.00         2,618,333             $ 2.40               9.05                568,656           $ 2.30 $ 3.01 to $ 4.00           250,279             $ 3.89               5.59                237,279           $ 3.91 $ 4.01 to $ 5.00           375,000             $ 4.82               5.52                375,000           $ 4.82 $ 5.01 to $10.00           204,000             $ 6.75               5.39                204,000           $ 6.75 $10.01 to $20.00           129,500             $15.12               4.62                129,500           $15.12 $20.01 to $35.00           329,900             $24.41               4.23                329,900           $24.41                          ---------                                                    ---------    TOTAL                 4,562,280             $ 4.72                                 2,322,761           $ 6.97                          =========                                                    =========    EXERCISE PRICE LESS THAN FAIR MARKET VALUE AT GRANT DATE:                                                        DECEMBER 31,                        JANUARY 1,                     JANUARY 3,                                                 2005                               2005                           2004                                     -----------------------------    ------------------------------    --------------------------                                                  WEIGHTED AVERAGE                  WEIGHTED AVERAGE              WEIGHTED AVERAGE                                       SHARES      EXERCISE PRICE       SHARES      EXERCISE PRICE      SHARES     EXERCISE PRICE Outstanding at beginning of year      553,189        $  2.44           629,919        $  2.51          768,336       $  2.38 Granted                                                                                                 50,000       $  2.31 Exercised                             (52,209)       $  1.88           (34,167)       $  1.94          (84,667)      $  1.90 Forfeited/cancelled                   (10,855)       $  1.84           (42,563)       $  3.90         (103,750)      $  2.00                                      ---------                       ---------                         ------- Outstanding at end of year            490,125        $  2.51           553,189        $  2.44          629,919       $  2.51                                      =========                       =========                         =======  Options exercisable at year-end       473,458        $  2.52           519,855        $  2.45          579,919       $  2.52                                      =========                       =========                         ======= Weighted average fair value of  options granted during the year                                                                                     $  2.69    The  following  table  summarizes  information  about below  market  value stock options outstanding at December 31, 2005:                                                    WEIGHTED         REMAINING                              WEIGHTED     RANGE OF            NUMBER           AVERAGE         CONTRACTUAL            NUMBER            AVERAGE  EXERCISE PRICES      OUTSTANDING     EXERCISE PRICE         LIFE             EXERCISABLE      EXERCISE PRICE  ---------------   ----------------   --------------   ----------------    -----------------   -------------- $ 0.00 to $ 2.00          360,125              $1.88             3.42                 360,125            $1.88 $ 2.01 to $ 3.00           50,000              $2.31             7.96                  33,333            $2.31 $ 3.01 to $ 4.00           50,000              $4.00             3.87                  50,000            $4.00 $ 4.01 to $ 5.00 $ 5.01 to $10.00           30,000              $8.00             3.81                  30,000            $8.00 $10.01 to $20.00 $20.01 to $35.00                          ---------                                                   ---------    TOTAL                  490,125              $2.51                                  473,458            $2.52                          =========                                                   =========                                            39   The Company has 305,000  shares of the  Company's  common stock  authorized  for issuance as restricted shares under the 1998 Plan for key management  personnel. The shares are subject to  restriction  based upon a two year  vesting  schedule where 30% of the shares vest on the first  anniversary of the grant date and the remaining 70% of the shares vest on the second anniversary.  A summary of the status of the restricted  shares granted under the 1998 Plan as of December 31, 2005, January 1, 2005 and January 3, 2004 and changes during the years ending on those dates is presented below:  RESTRICTED STOCK:                                                       DECEMBER 31,                     JANUARY 1,                       JANUARY 3,                                                   2005                           2005                              2004                                    -------------------------------  ----------------------------    ------------------------------                                                   SHARES                          SHARES                           SHARES Outstanding at beginning of year                 658,000                        720,000 Granted                                          300,000                         15,000                           720,000 Forfeited/cancelled                              (63,000)                       (77,000)                                                 --------                       --------                          -------- Outstanding at end of year                       895,000                        658,000                           720,000                                                 ========                       ========                          ========  Weighted average fair value of  Shares granted during the year                  $  2.32                        $  2.01                            $2.87    The Company has 3,788,127  shares of the Company's  common stock  authorized for issuance  under the 2000  Supplemental  Stock  Plan (the  2000  Plan).  The plan provides  the  Company's  common stock for the  granting of  nonqualified  stock options to employees  and is not subject to  shareholder  approval.  Vesting and exercise  provisions are determined by the Board of Directors.  Options  granted under the plan become exercisable over a period of up to four years beginning on the date of grant and have a maximum term of ten years.  A summary of the status of the  Company's  2000 Plan as of  December  31,  2005, January 1, 2005 and  January 3, 2004,  and  changes  during the years  ending on those dates is presented below:  EXERCISE PRICE EQUALS FAIR MARKET VALUE AT GRANT DATE:                                                          DECEMBER 31,                    JANUARY 1,                     JANUARY 3,                                                   2005                           2005                           2004                                      ----------------------------   ----------------------------   -----------------------------                                                  WEIGHTED AVERAGE               WEIGHTED AVERAGE                WEIGHTED AVERAGE                                        SHARES     EXERCISE PRICE      SHARES     EXERCISE PRICE      SHARES      EXERCISE PRICE Outstanding at beginning of year     1,053,564         $4.71        1,175,160        $4.78          2,212,226         $4.62 Granted                                182,500         $2.45          117,500        $2.54             10,000         $1.77 Exercised                               (9,915)        $2.11          (45,167)       $3.04            (44,416)        $1.85 Forfeited/cancelled                   (269,109)        $3.55         (193,929)       $4.23         (1,002,650)        $4.53                                      ---------                      ---------                      ---------- Outstanding at end of year             957,040         $4.63        1,053,564        $4.71          1,175,160         $4.78                                      =========                      =========                      ==========  Options exercisable at year-end        672,225         $5.44          635,630        $5.60            527,545         $5.62                                      =========                      =========                      ========== Weighted average fair value of  options granted during the year                       $1.62                         $2.38                            $1.37                                            40    The following table summarizes  information  about stock options  outstanding at December 31, 2005:                                                                          WEIGHTED AVERAGE                                                WEIGHTED           REMAINING                                  WEIGHTED     RANGE OF                NUMBER             AVERAGE           CONTRACTUAL               NUMBER             AVERAGE  EXERCISE PRICES          OUTSTANDING       EXERCISE PRICE          LIFE                 EXERCISABLE      EXERCISE PRICE - ----------------       -----------------    --------------     ----------------       -----------------   -------------- $ 0.00 to $ 2.00           71,000              $ 1.88               7.40                    40,166            $ 1.86 $ 2.01 to $ 3.00          204,834              $ 2.45               9.62 $ 3.01 to $ 4.00          456,706              $ 3.72               5.60                   415,893            $ 3.78 $ 4.01 to $ 5.00           11,000              $ 4.96               6.73                     7,666            $ 4.98 $ 5.01 to $10.00          160,000              $ 5.88               5.81                   155,000            $ 5.86 $10.01 to $20.00            3,500              $13.68               4.83                     3,500            $13.68 $20.01 to $35.00           50,000              $21.00               4.68                    50,000            $21.00                          ---------                                                        ---------    TOTAL                  957,040              $ 4.63                                      672,225            $ 5.44                          =========                                                        =========    EXERCISE PRICE LESS THAN FAIR MARKET VALUE AT GRANT DATE:                                                              JANUARY 1,                     JANUARY 3,                                                      2005                           2004                                           --------------------------      --------------------------                                                     WEIGHTED AVERAGE                WEIGHTED AVERAGE                                            SHARES     EXERCISE PRICE       SHARES     EXERCISE PRICE Outstanding at beginning of year            8,125          $5.50           23,537          $5.50 Forfeited/cancelled                        (8,125)         $5.50          (15,412)         $5.50                                            ------                          ------ Outstanding at end of year                      0                           8,125          $5.50                                            ======                          ======  Options exercisable at year-end                 0                           8,125          $5.50                                            ======                          ======    At December 31, 2005, the Company had a total of 6,009,445  outstanding  options to acquire shares with a weighted average exercise price of $4.52 and a weighted average  remaining  contractual  life of 7.18 years. Of these options  3,468,444 were  exercisable at December 31, 2005 with a weighted average exercise price of $6.08.  The  Company  follows  APB  Opinion  No. 25 to account  for the  employee  stock purchase  plan  and for  employee  and  certain  non-employee  directors'  stock options.  In connection  with stock option grants made in fiscal year 2003,  the Company recorded unearned  compensation of approximately  $58,000,  representing the difference between the exercise price and the fair value of the common stock on the dates such stock options were granted.  Such amounts are being  amortized by charges to  operations  on a graded  vesting  method  over the  corresponding vesting period of each respective  option,  generally  three to four years.  All option grants in 2005 and 2004 were issued with the exercise price of the option equal to the market price of the Company's stock as of the grant date.  The Company  also  follows APB  Opinion No. 25 to account for  restricted  stock grants made to key management  personnel.  In connection with  restricted  stock granted during fiscal years 2005,  2004 and 2003 the Company  recorded  unearned compensation of approximately $695,000,  $30,000, and $2,070,000,  respectively, representing  the fair  value of the  common  stock on the date such  restricted stock grants were made. The  compensation  cost associated with restricted stock is being amortized by charges to operations on a graded vesting  schedule over a period of two years from the date of grant for the fiscal  year 2003  grants and four years from the date of grant for the fiscal year 2005 grants.  The Company recognizes compensation cost over the vesting periods. These options and restricted  shares have resulted in equity related  charges to operations of approximately  $0.7  million,  $1.2  million,  and $0.1 million for fiscal years 2005,  2004 and 2003,  respectively.  These expenses have been  allocated  among various expense categories.  During fiscal year 2000,  the Company  initiated an employee stock purchase plan for all eligible employees. Under the plan, shares of the Company's common stock may be purchased  at six-month  intervals at 85% of the lower of the fair market value  on the  first  day of the  enrollment  period  or on the last day of each six-month  period.  Employees may purchase  shares  through a payroll  deduction program having a value not exceeding 15% of their gross  compensation  during an offering period.  During fiscal years 2005, 2004 and 2003, 116,000,  99,000, and 67,000 shares were purchased under the plan, respectively. At December 31, 2005, 739,000  shares were reserved for future  issuance.  The employee stock purchase plan is classified as a non-compensatory plan under APB No. 25.  The  Company  follows APB  Opinion  No. 25 to account  for its stock  plans.  In accordance with SFAS No. 123 the Company also calculates the pro forma impact of applying the fair value provisions of that standard. Those pro forma disclosures have been  included in Note 1. The fair value of each option grant was estimated using the following assumptions:                                          41                                            FISCAL YEAR 2005    FISCAL YEAR 2004    FISCAL YEAR 2003                                    ----------------    -----------------   ---------------- Expected volatility factor.....           83%                 91%                104% Risk-free interest rate........      3.58% - 4.55%       3.00% - 4.10%       1.04% - 3.44% Expected life of options.......        5 years              5 years             5 years Expected life of stock issued  under employee stock purchase  plan..........................    0.5 - 2.0 years      0.5 - 2.0 years     0.5 - 2.0 years Expected dividend rate.........           0%                  0%                  0%    10.  LOANS TO OFFICERS  As of December 31, 2005,  there is one  outstanding  line of credit  between the Company and its Chief Executive Officer, Richard P. Nespola, which originated in fiscal year 2001. Aggregate borrowings outstanding against the line of credit at December  31, 2005 and  January 1, 2005  totaled  $300,000  and are due in 2011. These amounts are included in other assets in the non-current  assets section of the balance sheet.  In accordance  with the loan  provisions,  the interest rate charged on the loans is equal to the Applicable Federal Rate (AFR), as announced by the  Internal  Revenue  Service,  for  short-term  obligations  (with  annual compounding)  in effect for the month in which the advance is made,  until fully paid.  Pursuant to the  Sarbanes-Oxley  Act, no further loan agreements or draws against  the line may be made by the  Company to, or arranged by the Company for its  executive  officers.  Interest  payments  on this  loan are  current  as of December 31, 2005.  11.  LETTER OF CREDIT  In March 2002, the Company  entered into a $1.0 million standby letter of credit (LOC)  facility  with a  financial  institution  in  connection  with  the  CSMG acquisition. The LOC was required as part of the assignment of the leased office space from the seller to the Company. The Company originally  collateralized the LOC with a $1.0 million cash  deposit  with  reductions  in this amount based on passage of time.  As of December  31, 2005 and for the  remainder of the term of the LOC, the collateral  amount is $273,000.  The collateral  deposited for this LOC is included in "Cash and Cash  Equivalents"  on the  Company's  consolidated condensed balance sheet as of December 31, 2005 and January 1, 2005. The Company would be required to perform  under the agreement in the event it was to default on balances due and owing the landlord on the leased office space. An obligation has not been recorded in connection  with the LOC on the Company's  consolidated condensed balance sheet as of December 31, 2005 and January 1, 2005.  12.  RELATED PARTY TRANSACTIONS  During fiscal year 2004, the Company made payments of $55,000 to a legal firm in which a member of the Board of Directors owns an equity interest.  Such payments were made in  connection  with matters  arising in the normal course of business and were within the limitations set forth by NASDAQ rules.  13.  SIGNIFICANT CUSTOMER CONTRACT SETTLEMENT  On December 10, 1999, the Company entered into a consulting  services  agreement with a significant customer under which the customer committed to $22 million of consulting  fees over a three-year  period  commencing  January 1, 2000.  During fiscal year 2002 the agreement was extended for two additional  years beyond the original term of the agreement, in exchange for an expanded preferred contractor relationship and immediate commitment to a significant  consulting  arrangement. The agreement  provided for minimum annual usage requirements in connection with consulting  services performed under the agreement,  and as of January 3, 2004 a shortfall in minimum annual usage requirements of consulting  services under the agreement  was deemed to have  occurred.  The  shortfall was not remedied by the customer during the first quarter of 2004,  resulting in the customer's  default on the contract.  On March 4, 2004,  the Company filed suit against the customer for breach of the consulting agreement,  seeking damages of approximately $5.7 million against the customer.  The customer  responded to the suit on March 26, 2004 with its answer and two  counterclaims,  neither of which  sought  money  damages.  The customer requested a declaration  that the Company first  breached the agreement and that the customer was therefore not liable for any damages. Additionally,  during the first  quarter of fiscal  year 2004 the  customer  informed  the  Company of its decision to cancel the consulting agreement.  On August 25, 2004 the Company entered into a mediated  settlement  agreement to settle the pending  litigation  with the customer.  Pursuant to the terms of the settlement agreement, each party was dismissed from any liability for the claims made  against it and the  customer  agreed to make a  settlement  payment to the Company in the amount of $2  million to settle all claims and  disputes  arising under the consulting services agreement. The Company has no obligation to render further services to the customer.  At October 11, 2004, the Company received the $2 million  settlement  from the customer and the parties  dismissed one another from  liability.  This payment was recorded in the fourth quarter of fiscal year 2004 as a $1.3  million  reduction of operating  expenses,  in the  Consolidated Statement of Operations  and  Comprehensive  Loss and $0.7 million  reduction of existing receivables.                                          42    14.  CONTINGENCIES  In June 1998, the bankruptcy trustee of a former client,  Communications Network Corporation,  sued TMNG for a total of $320,000 in the U.S.  Bankruptcy Court in New York seeking recovery of $160,000 alleging an improper payment of consulting fees paid by the former  client  during the  period  from July 1, 1996,  when an involuntary  bankruptcy  proceeding  was  initiated  against the former  client, through August 6, 1996,  when the former client agreed to an order for relief in the bankruptcy  proceeding,  and $160,000 in consulting  fees paid by the former client after August 6, 1996. The bankruptcy  trustee also sued TMNG for at least $1.85 million for breach of contract, breach of fiduciary duties and negligence. In March 2006,  the Company  reached a settlement  agreement with the bankruptcy trustee  whereby the Company agreed to pay the trustee  $255,000 in exchange for being released from all potential liability under the suits discussed above. The Company has  recognized  a charge of $95,000 in fiscal year 2005 to fully accrue for this liability.  Additionally,  as of  December  31, 2005 the  Company  had  outstanding  demands aggregating  approximately  $1.0 million by the  bankruptcy  trustees of several former  clients  in  connection  with  collected  balances  near the  customers' respective  bankruptcy  filing  dates.  Although the Company does not believe it received  any  preference  payments  from  these  former  clients  and  plans to vigorously defend its position, the Company has established reserves of $727,000 as of December  31, 2005 and January 1, 2005,  which it believes are adequate in the event of loss or settlement on remaining outstanding claims.  The Company  may become  involved in various  legal and  administrative  actions arising in the normal course of business. These could include actions brought by taxing authorities  challenging the employment status of consultants utilized by the  Company.  In  addition,   future  customer  bankruptcies  could  result  in additional  claims on collected  balances  for  professional  services  near the bankruptcy filing date. While the resolution of any of such actions,  claims, or the matters  described above may have an impact on the financial results for the period in which they occur, the Company  believes that the ultimate  disposition of these matters will not have a material  adverse effect upon its  consolidated results of operations, cash flows or financial position.  The Company establishes reserves for potential tax liabilities when, despite the belief that tax return  positions  are fully  supported,  certain  positions are likely  to be  challenged  and not be fully  sustained.  Such tax  reserves  are analyzed  on a  quarterly  basis and  adjusted  based upon  changes in facts and circumstances,  such as the progress of federal and state  audits,  case law and emerging  legislation.  The Company's  effective tax rate includes the impact of such tax reserves and changes to these  reserves as  considered  appropriate  by management.  The Company  establishes  the reserves based upon its assessment of exposure  associated with possible future  assessments  that may result from the examination of federal,  state, or international tax returns. These tax reserves were  $649,000 at December 31, 2005 and December 31, 2005.  Management  believes that it has established  adequate reserves in the event of loss or settlement of any potential tax liabilities.                                             43    15.  QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)  In  management's   opinion,   the  interim  financial  data  below  reflect  all adjustments  necessary  to  fairly  state the  results  of the  interim  periods presented.  Adjustments are of a normal  recurring  nature  necessary for a fair presentation of the information for the periods presented. Results of any one or more quarters are not  necessarily  indicative  of annual  results or continuing trends.                                                                          (AMOUNTS IN THOUSANDS)                                                                  2005 QUARTERS ENDED                                                   --------------------------------------------------------                                                   April 2,       July 2,      October 1,     December 31,                                                   -------       --------     ----------       ---------- Revenues ...................................      $  7,067       $  9,017     $    8,057      $    6,237 Cost of Services:   Direct cost of services (exclusive of    amortization shown below)........... ....         3,394          4,519          3,846           3,075   Equity related charges....................            35             34             12              19                                                   --------       --------       --------        --------           Total cost of services (exclusive            of amortization shown below......         3,429          4,553          3,858           3,094                                                   --------       --------       --------        --------                                                      3,638          4,464          4,199           3,143 Operating Expenses:   Selling, general and administrative.......         4,147          4,662          4,484           5,169   Legal settlement .........................                                                          95   Real estate restructuring.................            75   Intangible asset amortization ............           160             43             42              91   Equity related charges....................           188            200             60             170                                                   --------       --------       --------        --------           Total operating expenses..........         4,570          4,905          4,586           5,525                                                   --------       --------       --------        --------                                                        (932)          (441)          (387)         (2,382) Other Income:    Interest income...........................           324            379            424             505   Other, net................................            15             95                             16                                                   --------       --------       --------        --------           Total other income................           339            474            424             521                                                   --------       --------       --------        -------- Income (loss) from continuing operations   before income tax provision ..............          (593)            33             37          (1,861)  Income tax provision .......................           (15)            (3)           (13)             (5)                                                   --------       --------       --------        -------- Net income (loss) ..........................          (608)            30             24          (1,866)  Other comprehensive item -   Foreign currency translation adjustment...           (70)          (121)            26             (40)                                                   --------       --------       --------        -------- Comprehensive income (loss) ................      $   (678)      $    (91)      $     50        $ (1,906)                                                   ========       ========       ========        ======== Net income (loss) per common share  Basic and diluted                                $  (0.02)      $   0.00       $   0.00        $  (0.05)                                                   ========       ========       ========        ======== Shares used in calculation of net income  (loss) per common share   Basic ....................................        34,977         35,104         35,156          35,476                                                   ========       ========       ========        ========   Diluted  ..................................        34,977         35,461         35,525          35,476                                                   ========       ========       ========        ========                                            44                                                                         (AMOUNTS IN THOUSANDS)                                                                  2004 QUARTERS ENDED                                                   --------------------------------------------------------                                                   April 3,        July 3,     October 2,      January 1,                                                   -------        --------     ----------      ---------- Revenues ...................................      $  5,779       $  5,184     $    6,546      $    6,195 Cost of Services:   Direct cost of services (exclusive of    amortiztion shown below).................         2,913          2,739          3,441           3,226   Equity related charges....................            54             52             51              48                                                   --------       --------       --------        --------           Total cost of services (exclusive            of amortization shown below).....         2,967          2,791          3,492           3,274                                                   --------       --------       --------        --------                                                      2,812          2,393          3,054           2,921 Operating Expenses:   Selling, general and administrative.......         4,278          4,179          3,860           3,720   Legal settlement..........................                                                      (1,294)   Real estate restructuring.................                                                       1,545   Intangible asset amortization ............           339            218            218             217   Equity related charges....................           283            232            261             182                                                   --------       --------       --------        --------           Total operating expenses..........         4,900          4,629          4,339           4,370                                                   --------       --------       --------        --------                                                      (2,088)        (2,236)        (1,285)         (1,449) Other Income:    Interest income...........................           136            145            189             248   Other, net................................            (9)            (6)           (10)             (5)                                                   --------       --------       --------        --------           Total other income................           127            139            179             243                                                   --------       --------       --------        -------- Loss from continuing operations before   income tax (provision) benefit ...........        (1,961)        (2,097)        (1,106)         (1,206)  Income tax (provision) benefit .............           (14)           (20)           (13)             (2)                                                   --------       --------       --------        -------- Loss from continuing operations  ...........        (1,975)        (2,117)        (1,119)         (1,208)  Discontinued operations:  Net income (loss) from discontinued operations     (including charge for impairment of goodwill     of $2,163 for the first quarter ended April 3,     2004)                                           (2,276)                                                   --------       --------       --------        -------- Net loss ..................................         (4,251)        (2,117)        (1,119)         (1,208)  Other comprehensive item -   Foreign currency translation adjustment...           (15)            11             (1)            181                                                   --------       --------       --------        -------- Comprehensive Loss ................               $ (4,266)      $ (2,106)      $ (1,120)       $ (1,027)                                                   ========       ========       ========        ======== Loss from continuing operations  per common share  Basic and Diluted ........................       $  (0.06)      $  (0.06)      $  (0.03)       $  (0.03)                                                   ========       ========       ========        ========  Loss from discontinued operations  per common share  Basic and Diluted.........................       $  (0.07)                                                   ========       ========       ========        ======== Loss per common share  Basic and diluted                                $  (0.13)      $  (0.06)      $  (0.03)       $  (0.03)                                                   ========       ========       ========        ======== Basic and diluted weighted average shares   outstanding............................           34,503         34,625         34,631          34,716                                                   ========       ========       ========        ========      See Note 13  "Significant  Customer  Contract" for  discussion of fourth quarter 2004 legal settlement.  See  Note  7  "Real  Estate   Restructuring"   for  discussion  of  real  estate restructuring charges.                                          45    ITEM  9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND FINANCIAL DISCLOSURE  None.
A review and evaluation was performed by the Company's management, including the Company's Chief Executive  Officer (the "CEO") and Chief Financial  Officer (the "CFO"),  of the  effectiveness  of the design  and  operation  of the  Company's disclosure  controls and  procedures as of the end of the period covered by this annual  report.  Based  upon that  review and  evaluation,  the CEO and CFO have concluded that the Company's disclosure controls and procedures, as designed and implemented,  were  effective.  There  have been no  significant  changes in the Company's internal controls or in other factors that could significantly  affect the Company's  internal  controls  subsequent  to the date of their  evaluation. There were no significant  material weaknesses  identified in the course of such review and evaluation,  and accordingly,  the Company  implemented no corrective measures.
None                                     PART III
The Company's  definitive Proxy Statement for its Annual Meeting of Shareholders to be held on or about June 22, 2006 (the "Proxy Statement") contains, under the captions  "Election of  Directors,"  "Officers"  and "Section  16(a)  Beneficial Ownership Reporting Compliance" the information required by Item 10 of this Form 10-K, which information is incorporated herein by this reference.
The Proxy  Statement  contains  under the captions  "Election of Directors"  and "Executive Compensation," the information required by Item 11 of this Form 10-K, which information is incorporated herein by this reference.
The Proxy Statement  contains under the caption  "Security  Ownership of Certain Beneficial  Owners and Management and Related  Stockholder  Matters" and "Equity Compensation Plan Information" the information  required by Item 12 of this Form 10-K, which information is incorporated herein by this reference.
The Proxy  Statement  contains  under the  caption  "Certain  Relationships  and Transactions  with Related Persons" the information  required by Item 13 of this Form 10-K, which information is incorporated herein by this reference.
The Proxy Statement  contains under the caption  "Ratification of Appointment of Independent  Registered Public Accounting Firm" the information required by Item 14 of  this  Form  10-K,  which  information  is  incorporated  herein  by  this reference.                                       PART IV
(a) The  following  documents  are filed as part of this  Annual  Report on Form 10-K:  (1) The  response  to this  portion of Item 15 is set forth in Item 8 of Part II hereof.  (2)  Schedules  for  which  provision  is  made  in  the  applicable  accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.  (3) Exhibits  See accompanying Index to Exhibits. The Company will furnish to any stockholder, upon written request,  any exhibit listed in the accompanying  Index to Exhibits upon  payment  by such  stockholder  of the  Company's  reasonable  expenses  in furnishing any such exhibit.                                          46                                      SIGNATURES  Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange Act of 1934,  the  Registrant  has duly  caused  this  Report on Form 10-K to be signed on its behalf by the undersigned,  thereunto duly authorized, in the City of Overland Park, State of Kansas, on the 30th day of March 2006.                         THE MANAGEMENT NETWORK GROUP, INC.                              BY: /S/ RICHARD P. NESPOLA                       ------------------------------------                                RICHARD P. NESPOLA                              CHAIRMAN OF THE BOARD,                                PRESIDENT AND CHIEF                                 EXECUTIVE OFFICER                                  POWER OF ATTORNEY  KNOW ALL PERSONS BY THESE  PRESENTS,  that each person whose  signature  appears below   hereby   constitutes   and   appoints   Richard   P.   Nespola   as  his attorney-in-fact, with full power of substitution, for him or her in any and all capacities,  to sign any and all  amendments to this Report on Form 10-K, and to file  the  same,  with  exhibits  thereto  and  other  documents  in  connection therewith,  with the Securities and Exchange  Commission,  hereby  ratifying and confirming  our signatures as they may be signed by our said attorney to any and all amendments to said Report.  Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed by the following  persons in the  capacities and on the dates indicated:               SIGNATURE                        TITLE                   DATE             ---------                        -----                   ----     /s/ RICHARD P. NESPOLA          Chairman of the Board,      March 30, 2006 - -------------------------------      President and Chief         Richard P. Nespola            Executive Officer                                     (Principal executive                                             officer)      /s/ DONALD E. KLUMB          Chief Financial Officer and    March 30, 2006 - -------------------------------       Treasurer (Principal         Donald E. Klumb               financial officer and                                       principal accounting                                             officer)      /s/ MICKY K. WOO                       Director             March 30, 2006 - -------------------------------         Micky K. Woo      /s/ GRANT G. BEHRMAN                   Director             March 30, 2006 - -------------------------------         Grant G. Behrman      /s/ WILLIAM M. MATTHES                 Director             March 30, 2006 - -------------------------------         William M. Matthes     /s/  Robert J. Currey                    Director            March 30, 2006 - -------------------------------         Robert J. Currey      /s/ ANDREW LIPMAN                      Director             March 30, 2006 - -------------------------------         Andrew Lipman      /s/ ROY A. WILKENS                     Director             March 30, 2006 - -------------------------------         Roy A. Wilkens                                          47       /s/ FRANK SISKOWSKI                    Director             March 30, 2006 - -------------------------------         Frank Siskowski                                  INDEX TO EXHIBITS  The following is a list of exhibits filed as part of this report.             EXHIBIT            NUMBER                DESCRIPTION OF DOCUMENT            -------               -----------------------               3.1*   Certificate of Incorporation of the registrant               3.2*   By-laws of the Registrant               4.1*   Specimen Common Stock Certificate              10.1*   Registration  Rights  Agreement  dated January 7, 1998 among                     the registrant and certain investors              10.2*   Form of Indemnification Agreement between the registrant and                     each of its Directors and Officers              10.3*   1998 Equity Incentive Plan and form of agreements thereunder              10.4*   1999  Employee  Stock  Purchase  Plan and form of agreements                     thereunder              10.5*   Consulting  Services  Agreement  between the  registrant and                     Williams Communications Group, Inc. dated November 5, 1997              10.6*   Credit Agreement,  including revolving credit notes and term                     notes,  dated  February  12, 1998 among the  registrant  and                     certain guarantors, lenders and agents              10.7*   Lease between Lighton Plaza L.L.C.  and the registrant dated                     April 23, 1998              10.8*   Noncompetition  Agreement between the registrant and certain                     parties dated February 12, 1998.              10.9*   Employment  Agreement  between  the  registrant  and Richard                     Nespola dated February 12, 1998.              10.10*  Employment  Agreement  between the  registrant and Micky Woo                     dated February 12, 1998.              10.12*  Employment Agreement between the registrant and Donald Klumb                     dated September 9, 1999              10.13*  Amended Lease Agreement between Lighton Plaza L.L.C. and the                     registrant dated December 21, 2000              10.16*  2000   Supplemental   Stock  Plan  and  form  of  agreements                     thereunder              10.19*  Employment  Agreement  between  the  registrant  and Richard                     Nespola dated January 5, 2004              10.20*  Employment Agreement between the registrant and Donald Klumb                     dated December 19, 2003                                          48               10.21*  Sublease  between  Best  Doctors  and the  registrant  dated                     December 30, 2004              21.1    List of subsidiaries of TMNG, Inc.              23.1    Consent of Independent Registered Public Accounting Firm.              24.1    Power of attorney (see signature page)              31.1    Certification of Chief Executive Officer pursuant to Section                     302 of the Sarbanes - Oxley Act              31.2    Certification of Chief Financial Officer pursuant to Section                     302 of the Sarbanes - Oxley Act               32.1    Certifications  furnished  pursuant  to  Section  906 of the                     Sarbanes - Oxley Act  * Previously filed                                           49       EX-23 2 form10k_033006ex231.txt EXH. 23.1 CONSENT OF DELOITTE & TOUCHE LLP                                      EXHIBIT 23.1  CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  We consent to the  incorporation  by reference in  Registration  Statements Nos. 333-37304,  333-74940, 333-114979 and 333-123948 on Form S-8 of our report dated March 29, 2006,  appearing in this annual report on Form 10-K of The  Management Network Group, Inc. for the fiscal year ended December 31, 2005.                                 /S/ DELOITTE & TOUCHE LLP                                KANSAS CITY, MISSOURI                                  MARCH 29, 2006         EX-31 3 form10k_033006ex311.txt EXH. 31.1 CERT. OF CEO RE SECTION 302                                      EXHIBIT 31.1  Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes - - Oxley Act  I, Richard P.  Nespola,  Chairman of the Board,  President  and Chief  Executive Officer of The Management Network Group, Inc., certify that:  1. I have  reviewed this Annual  Report on Form 10-K of The  Management  Network Group, Inc.;  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact  necessary to make the statements made, in light of the  circumstances  under which such statements were made, not misleading with respect to the period covered by this Annual Report;  3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial information included in this report, fairly present in all material respects the financial  condition,  results of operations and cash flows of the registrant as of, and for, the periods presented in this Annual Report;  4.  The  registrant's  other  certifying  officer  and  I  are  responsible  for establishing and maintaining  disclosure  controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:  a) designed such disclosure  controls and procedures,  or caused such disclosure controls and  procedures to be designed  under our  supervision,  to ensure that material  information  relating to the  registrant,  including its  consolidated subsidiaries, is made known to us by others within those entities,  particularly during the period in which this report is being prepared;  b) evaluated  the  effectiveness  of the  registrant's  disclosure  controls and procedures and presented in this report our conclusions  about the effectiveness of the disclosure  controls and procedures,  as of the end of the period covered by this report based on such evaluation; and  c) disclosed in this report any change in the registrant's internal control over financial  reporting that occurred during the registrant's fourth fiscal quarter that has materially affected,  or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and  5. The registrant's other certifying officer and I have disclosed,  based on our most recent  evaluation of internal  control over  financial  reporting,  to the registrant's  auditors  and the audit  committee  of the  registrant's  Board of Directors (or persons performing the equivalent functions):  a) all  significant  deficiencies  and  material  weaknesses  in the  design  or operation of internal  control over  financial  reporting  which are  reasonably likely  to  adversely  affect  the  registrant's  ability  to  record,  process, summarize and report financial information; and  b) any  fraud,  whether  or not  material,  that  involves  management  or other employees who have a significant role in the registrant's  internal control over financial reporting.  Date: March 30, 2006                                 BY: /S/ RICHARD P. NESPOLA                       CHAIRMAN OF THE BOARD, PRESIDENT AND                              CHIEF EXECUTIVE OFFICER       EX-31 4 form10k_033006ex312.txt EXH. 31.2 CERT. OF CFO RE SECTION 302                                      EXHIBIT 31.2  Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes - - Oxley Act  I, Donald E. Klumb,  Chief  Financial  Officer and  Treasurer of The  Management Network Group, Inc., certify that:  1. I have  reviewed this Annual  Report on Form 10-K of The  Management  Network Group, Inc.;  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact  necessary to make the statements made, in light of the  circumstances  under which such statements were made, not misleading with respect to the period covered by this Annual Report;  3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial information included in this report, fairly present in all material respects the financial  condition,  results of operations and cash flows of the registrant as of, and for, the periods presented in this Annual Report;  4.  The  registrant's  other  certifying  officer  and  I  are  responsible  for establishing and maintaining  disclosure  controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:  a) designed such disclosure  controls and procedures,  or caused such disclosure controls and  procedures to be designed  under our  supervision,  to ensure that material  information  relating to the  registrant,  including its  consolidated subsidiaries, is made known to us by others within those entities,  particularly during the period in which this report is being prepared;  b) evaluated  the  effectiveness  of the  registrant's  disclosure  controls and procedures and presented in this report our conclusions  about the effectiveness of the disclosure  controls and procedures,  as of the end of the period covered by this report based on such evaluation; and  c) disclosed in this report any change in the registrant's internal control over financial  reporting that occurred during the registrant's fourth fiscal quarter that has materially affected,  or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and  5. The registrant's other certifying officer and I have disclosed,  based on our most recent  evaluation of internal  control over  financial  reporting,  to the registrant's  auditors  and the audit  committee  of the  registrant's  Board of Directors (or persons performing the equivalent functions):  a) all  significant  deficiencies  and  material  weaknesses  in the  design  or operation of internal  control over  financial  reporting  which are  reasonably likely  to  adversely  affect  the  registrant's  ability  to  record,  process, summarize and report financial information; and  b) any  fraud,  whether  or not  material,  that  involves  management  or other employees who have a significant role in the registrant's  internal control over financial reporting.  Date: March 30, 2006                                   BY: /S/ DONALD E. KLUMB                      CHIEF FINANCIAL OFFICER AND TREASURER        EX-32 5 form10k_033006ex321.txt EXH. 32.1 CERTIFICATIONS RE SECTION 906                                      EXHIBIT 32.1  Certification furnished pursuant to Section 906 of the Sarbanes - Oxley Act  In  connection  with this Annual Report on Form 10-K of The  Management  Network Group, Inc., I, Richard P. Nespola,  Chairman of the Board,  President and Chief Executive Officer of the registrant, certify that:  1. this Annual Report fully complies with the  requirements  of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and  2. the  information  contained in this Annual  Report  fairly  presents,  in all material  respects,  the  financial  condition  and results of operations of the registrant for, and as of, the end of such year.  Date: March 30, 2006                                 BY: /S/ RICHARD P. NESPOLA                         CHAIRMAN OF THE BOARD, PRESIDENT                            AND CHIEF EXECUTIVE OFFICER    In  connection  with this Annual Report on Form 10-K of The  Management  Network Group,  Inc., I, Donald E. Klumb,  Chief Financial  Officer and Treasurer of the registrant, certify that:  1. this Annual Report fully complies with the  requirements  of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and  2. the  information  contained in this Annual  Report  fairly  presents,  in all material  respects,  the  financial  condition  and results of operations of the registrant for, and as of, the end of such year.  Date: March 30, 2006                                   BY: /S/ DONALD E. KLUMB                      CHIEF FINANCIAL OFFICER AND TREASURER          -----END PRIVACY-ENHANCED MESSAGE-----