UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

(Mark One)

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number 0-28000

PRG-Schultz International, Inc.

(Exact name of registrant as specified in its charter)

Georgia (State or other jurisdiction of incorporation or organization)		58-2213805 (I.R.S. Employer Identification No.)
600 Galleria Parkway Suite 100 Atlanta, Georgia (Address of principal executive offices)		30339-5986 (Zip Code)

Registrant’s telephone number, including area code: (770) 779-3900

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

Title of each class		Name of each exchange on which registered
Common Stock, No Par Value		The NASDAQ Stock Market LLC (The Nasdaq Global Market)
Preferred Stock Purchase Rights		The NASDAQ Stock Market LLC (The Nasdaq Global Market)

Securities registered pursuant to Section 12(g) of the Act: None

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

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

     Note—Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

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

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

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):

o Large accelerated filer                    oAccelerated filer                     þ Non-accelerated filer

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

     The aggregate market value, as of June 30, 2006, of common shares of the registrant held by non-affiliates of the registrant was approximately $23.1 million, based upon the last sales price reported that date on The Nasdaq Global Market of $4.50 per share. (Aggregate market value is estimated solely for the purposes of this report and shall not be construed as an admission for the purposes of determining affiliate status.)

     Common shares of the registrant outstanding as of February 28, 2007 were 8,446,640 including shares held by affiliates.

Documents Incorporated by Reference

     Part III: Portions of Registrant’s Proxy Statement relating to the Company’s 2007 Annual Meeting of Shareholders.

 

 

PRG-SCHULTZ INTERNATIONAL, INC.

FORM 10-K
December 31, 2006

				Page
Part I
Item 1.		Business			1
Item 1A.		Risk Factors			10
Item 1B.		Unresolved Staff Comments			17
Item 2.		Properties			17
Item 3.		Legal Proceedings			17
Item 4.		Submission of Matters to a Vote of Security Holders			18
Part II
Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			19
Item 6.		Selected Financial Data			21
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
Item 7A.		Quantitative and Qualitative Disclosures About Market Risk			43
Item 8.		Financial Statements and Supplementary Data			44
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			82
Item 9A.		Controls and Procedures			82
Item 9B.		Other Information			84
Part III
Item 10.		Directors, Executive Officers and Corporate Governance			85
Item 11.		Executive Compensation			85
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			85
Item 13.		Certain Relationships and Related Transactions, and Director Independence			86
Item 14.		Principal Accounting Fees and Services			86
Part IV
Item 15.		Exhibits, Financial Statement Schedules			87
Signatures					92
EX-10.15 SUMMARY OF COMPENSATION ARRANGEMENTS WITH NON-EMPLOYEE DIRECTORS
EX-10.16 SUMMARY OF COMPENSATION ARRANGEMENTS WITH NAMED EXECUTIVE OFFICERS
EX-10.24 RELEASE AGREEMENT AND COVENANT NOT TO SUE/ JAMES E. MOYLAN, JR.
EX-21.1 SUBSIDIARIES OF THE REGISTRANT
EX-23.1 CONSENT OF BDO SEIDMAN, LLP
EX-23.2 CONSENT OF KPMG LLP
EX-31.1 SECTION 302 CERTIFICATION OF CEO
EX-31.2 SECTION 302 CERTIFICATION OF CFO
EX-32.1 SECTION 906 CERTIFICATION OF CEO AND CFO

PART I

ITEM 1. Business

     The following discussion includes “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are at times identified by words such as “plans,” “intends,” “expects,” or “anticipates” and words of similar effect and include statements regarding the Company’s financial and operating plans and goals. These forward-looking statements include any statements that cannot be assessed until the occurrence of a future event or events. Actual results may differ materially from those expressed in any forward-looking statements due to a variety of factors, including but not limited to those discussed herein and below under Item 1A. Risk Factors.

     PRG-Schultz International, Inc. and its subsidiaries (collectively, the “Company”), a United States of America based company, incorporated in the State of Georgia in 1996, is the leading worldwide provider of recovery audit services principally to large businesses, mid-size businesses, and government agencies having numerous payment transactions. These businesses and agencies include, but are not limited to:

	•		retailers such as discount, department, specialty, grocery and drug stores;
	•		manufacturers of high-tech components, pharmaceuticals, consumer electronics, chemicals and aerospace and medical products;
	•		government agencies such as the Centers for Medicare and Medicaid Services (“CMS”)
	•		wholesale distributors of computer components, food products and pharmaceuticals; and

•

service providers such as communications providers, transportation providers and financial institutions.

     In businesses and agencies with large transaction volumes and continuously fluctuating prices or complex rate structures, some small percentage of erroneous overpayments to vendors or providers is inevitable. Although the vast majority of these payment transactions are processed correctly, a small number of errors occur. In the aggregate, these transaction errors can represent significant amounts of cash flow for the Company’s clients. The Company’s trained, experienced industry specialists use sophisticated proprietary technology and advanced recovery techniques and methodologies to identify overpayments on behalf of clients.

     Under virtually all of its client contracts, the Company receives a contractual percentage of overpayments and other savings it identifies and its clients recover or realize. In other instances, the Company receives a fee for specific services provided.

     The Company currently provides services to clients in over 30 countries. For financial reporting purposes, in 2006, the Company had two reportable operating segments, the Accounts Payable Services segment and the Meridian VAT Reclaim (“Meridian”) segment. See Note 5 of “Notes to Consolidated Financial Statements” included in Item 8. of this Form 10-K for worldwide operating segment disclosures.

Operational Restructuring

     On August 19, 2005, the Company announced that it had taken the initial step in implementing an expense restructuring plan, necessitated by the Company’s declining revenue trend over the previous two and one-half years. On September 30, 2005, the Company’s Board of Directors approved the restructuring plan and authorized implementation of the plan. At the time the operational restructuring plan was approved, annualized savings from the restructuring plan were expected to be approximately $42.2 million. Management believes that as of December 31, 2006, cost savings in excess of the original estimate have been achieved. The expense restructuring plan encompassed exit activities, including reducing the number of clients served, reducing the number of countries in which the Company operates, reducing headcount, and terminating operating leases. Almost all of the savings were

realized in the area of selling, general and administrative expenses and only a small percentage of the Company’s auditor staff was directly impacted by the reductions. The Company initially expected that the implementation of the operational restructuring plan would result in severance related and other charges of approximately $14.6 million, most or all of which would be recognized prior to the end of 2006. Actual operational restructuring charges recognized in 2005 and 2006 totaled $15.7 million. As of December 31, 2005, the Company had recorded an $11.6 million charge related to the restructuring, $10.0 million of which was for severance pay and benefits costs and $1.6 million of which related to early termination of operating leases. As of December 31, 2005 the Company had paid out approximately $2.8 million of severance and as of December 31, 2006 a total of $11.2 million of severance had been paid. As of December 31, 2005, the Company had accrued $1.2 million of early lease termination costs and leasehold improvement impairment charges of $0.4 million related to these leases. In 2006, the Company recorded additional restructuring charges for early termination costs of $1.4 million and leasehold improvement impairment charges of $0.5 million. The 2006 operational restructuring charges also included $2.2 million related to severance pay and related benefits costs.

     As of December 31, 2006, the operational restructuring plan as originally contemplated and approved in 2005 had essentially been completed. Management plans to continue to diligently manage costs on an ongoing basis. For example, in the fourth quarter of 2006, the Company implemented additional headcount reductions which the Company believes will result in estimated annualized savings of approximately $6.5 million. As a result of this action, the Company recorded approximately $4 million of severance charges not classified as operational restructuring charges in the fourth quarter of 2006.

Financial Restructuring

     On October 19, 2005 the Board of Directors of the Company formed a Special Restructuring Committee to oversee the efforts of the Company, with the assistance of its financial advisor, Rothschild, Inc., to restructure the Company’s financial obligations, including its obligations under its then existing convertible subordinated notes, and to improve the Company’s liquidity. On March 17, 2006, the Company successfully completed the financial restructuring.

     Pursuant to the restructuring the Company exchanged for $124.1 million of its existing convertible subordinated notes due November 2006 (and $1.8 million of accrued interest thereon) the following new securities: $51.5 million in aggregate principal amount of new senior notes, $59.6 million in aggregate principal amount of new senior convertible notes that may be converted into shares of common stock, and new Series A convertible preferred stock having an initial aggregate liquidation preference of $14.9 million. As of December 31, 2006, the outstanding Series A convertible preferred stock had a liquidation preference of $11.2 million. Concurrently with closing the exchange offer, the Company also refinanced its senior indebtedness. For details with respect to the terms of the securities issued in the exchange offer and the Company’s new senior indebtedness, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financial Restructuring.”

Other Developments

     During the fourth quarter of 2005, the Company classified its Channel Revenue and Airline businesses, and the Accounts Payable Services business units in South Africa and Japan, as discontinued operations. The South Africa and Japan Accounts Payable Services business units were closed during 2005. On January 11, 2006, the Company consummated the sale of its Channel Revenue business for $0.4 million in cash to Outsource Recovery, Inc. Outsource Recovery also undertook to pay the Company an amount equal to 12% of gross revenues received by Outsource Recovery during each of the calendar years 2006 through 2009 with respect to the Channel Revenue business. The Company recognized a 2006 gain on sale of $0.3 million related to the sale of the Channel Revenue business. On July 17, 2006, the Company completed the sale of its Airline business to a former employee, and as a consequence, during the year ended December 31, 2006, the Company recognized a loss of $0.3 million relating to the sale..

     Unless specifically stated, all financial and statistical information contained herein is presented with respect to continuing operations only.

The Recovery Audit Industry

     Businesses and government agencies with substantial volumes of payment transactions involving multiple vendors, numerous discounts and allowances, fluctuating prices and complex pricing arrangements or rate structures find it difficult to process every payment correctly. Although the vast majority of payment transactions are processed correctly, a small number of errors occur. These errors include, but are not limited to, missed or inaccurate discounts, allowances and rebates, vendor pricing errors and duplicate payments. In the aggregate, these transaction errors can represent significant amounts of cash flow for the Company’s clients. The errors are caused by factors such as communication failures between the purchasing and accounts payable departments, complex pricing arrangements or rate structures, personnel turnover and changes in information and accounting systems.

     Although some organizations (including most large retailers) maintain internal recovery audit departments to recover selected types of payment errors and identify opportunities to reduce costs, independent recovery audit firms, like the Company, are often retained as well due to their specialized knowledge and focused technologies.

     In the U.S., Canada, and much of the European Union, large retailers routinely engage independent recovery audit firms as standard business practice. In other countries, the Company believes that large retailers and many other types of businesses are also engaging independent recovery audit firms.

     The domestic and international recovery audit industry for accounts payable services is comprised of the Company and numerous smaller competitors. Most smaller recovery audit firms do not possess multi-country service capabilities and lack the centralized resources or broad client base to support the technology investments required to provide comprehensive recovery audit services for large, complex accounts payable systems. These firms are less equipped to audit large, data intensive purchasing and accounts payable systems. In addition, many of these firms have limited resources, and may lack experience and the knowledge of national promotions, seasonal allowances and current recovery audit practices. As a result, the Company believes that it has competitive advantages based on its national and international presence, well-trained and experienced professionals, and advanced technology.

     As businesses have evolved, the Company and the recovery audit industry have evolved with them, innovating processes, error identification tools, and claim types to maximize recoveries. The following are a number of the changes that have been driving the recovery audit industry in the recent past:

Data Capture and Availability. Businesses are increasingly using technology to manage complex procurement and accounts payable systems and realize greater operating efficiencies. Many businesses worldwide communicate with vendors electronically – whether by Electronic Data Interchange (“EDI”) or the Internet – to exchange inventory and sales data, transmit purchase orders, submit invoices, forward shipping and receiving information and remit payments. These systems capture more detailed data and enable the cost effective review of more transactions by recovery auditors.

Increasing Number of Auditable Claim Categories. Traditionally, the recovery audit industry identified simple, or “disbursement,” claim types such as the duplicate payment of invoices. Enhancements to accounts payable software, particularly large enterprise software solutions, used by many large companies have reduced the extent to which these companies make simple disbursement errors. However, the introduction of creative vendor discount programs, complex pricing arrangements and activity-based incentives has led to an increase in auditable transactions and potential sources of error. These transactions are complicated to audit as the underlying transaction data is difficult to access and recognizing mistakes is complex. Recovery audit firms with significant industry-specific expertise and sophisticated technology are best equipped to audit these complicated, or “contract compliance,” claim categories.

Globalization. As the operations of major retailers become increasingly global, they often seek service providers with a global reach.

Consolidation in the Retail Industry. Retailer consolidation in both, the U.S. and internationally, continues. As retailers grow larger, vendors become more reliant on a smaller number of customers and, as a result, the balance of power favors retailers rather than vendors. This dynamic creates an environment that allows retailers to assert valid claims more easily.

Significant Promotional Activity. Trade promotion spending is substantial within the retail trade and significant sums are being spent in categories with numerous transactions and a high potential for errors, such as scan downs, or discounts at the point of sale. Because of the high volume of trade promotion within retail, there are significant opportunities for mistakes and, therefore, auditable claims.

Move Toward Standard Auditing Practices. Increasingly, vendors are insisting on the satisfaction of certain conditions, such as clearer post-audit procedures, better documentation and electronic communication of claims, before accepting the validity of a claim.

     The evolution of the recovery audit industry is expected to continue. In particular, the Company expects that the industry will continue to move towards the electronic capture and presentation of data, more automated, centralized processing and faster approvals and deductions of claims.

The PRG-Schultz Solution

     The Company provides its domestic and international clients with comprehensive recovery audit services by using sophisticated proprietary technology and advanced auditing techniques and methodologies, and by employing highly trained, experienced industry specialists. As a result, the Company believes it is able to identify significantly more payment errors than its clients are able to identify through their internal audit capabilities or than many of its competitors are able to identify.

     The Company is a leader in developing and utilizing sophisticated software audit tools and techniques that enhance the identification and recovery of payment errors. By leveraging its technology investment across a large client base, the Company is able to continue developing proprietary software tools and expanding its technology leadership in the recovery audit industry. The Company is also a leader in establishing new recovery audit practices to reflect evolving industry trends.

     The Company’s auditors are highly trained. Many have joined the Company from finance-related management positions in the industries the Company serves. To support its clients, the Company provides its auditors and audit teams with data processing services, software and software support, sales and marketing assistance, and training and administrative services.

The PRG-Schultz Strategy

     The Company’s objective is to build on its position as the leading worldwide provider of recovery audit services. The Company’s strategic plan to achieve these objectives focuses on a series of initiatives designed to maintain its dedicated focus on its clients. The Company has implemented a number of strategic business initiatives to significantly reduce costs, stabilize revenue at existing clients and offer new services to existing and new clients. Some of these key initiatives include:

	•		Centralize Claim Processing and Field Audit Work. The processing of certain claim types and certain client audits has been shifted to the Company’s Shared Service Centers and its Regional Audit Centers, resulting in cost savings and improved audit productivity.
	•		Flatten Management Structure and Focus on Existing Clients. The Company has reduced its number of management layers and has focused a greater portion of its resources on its existing client base, especially larger clients.
	•		Improve Audit Software and Processes. The Company has developed proprietary software tools and algorithms that enable its auditors to identify trends, exceptions and claims quickly and efficiently and use the best auditing practices to increase recoveries.
	•		Expand Opportunities with Existing Clients. The Company intends to maximize the revenue opportunities with its existing clients by identifying and auditing new categories of potential errors. The Company also intends to increase its emphasis on using its technology and professional experience to assist its clients in achieving objectives that do not directly involve recovery of past overpayments. These objectives are related

			to such things as transaction accuracy and compliance, purchasing effectiveness, M&A due diligence analysis, and processing efficiency in the procure-to-pay value chain.
	•		Focus on Select International Opportunities. The Company believes that its best opportunities for international growth are related to major multi-national clients and that it is the only recovery audit firm with the capability to serve these clients in multiple geographies. Some of the Company’s international operations have proved to be unprofitable. To improve profitability of its international business, the Company plans to exit some international markets in 2007 and redirect the Company’s resources to the profitable international markets and clients.
	•		Develop Medicare Audit. In 2005, the Centers for Medicare & Medicaid Services (“CMS”), the federal agency that administers the Medicare program, awarded the Company a contract to provide recovery audit services for the State of California’s Medicare spending. The three-year contract, effective March 28, 2005, was awarded as part of a demonstration program by CMS to recover overpayments on behalf of taxpayers through the use of recovery auditing. The Company began generating revenue from the California Medicare audit in 2006 and believes that Medicare audit has significant revenue and profit potential in future years. In late 2006, legislation was passed that mandated that recovery audit of Medicare be extended beyond March 27, 2008, the end of the three-year recovery audit demonstration project under the original authorizing legislation, and that CMS enter into additional contracts with recovery audit contractors to expand recovery auditing of Medicare out to all fifty states by January 1, 2010. While it is difficult to assess the impact of this legislation, management believes it will provide additional opportunities to expand the Company’s Medicare audit recovery business.

PRG-Schultz Services

   Accounts Payable Services

     Through the use of proprietary technology, audit techniques and methodologies, the Company’s trained and experienced auditors examine procurement records on a post-payment basis to identify overpayments, including those resulting from situations such as missed or inaccurate discounts, allowances and rebates, vendor pricing errors, duplicate payments and erroneous application of sales tax laws and regulations.

     The Company’s Accounts Payable Services target three main client types, retail/wholesale, commercial, and government agencies; with each type typically served under a different service delivery model, as more particularly described below. Commercial clients are business entities other than retailers and wholesalers, and include companies in industries such as manufacturing and financial services.

     Contract compliance audit services provided to retail/wholesale clients currently account for the substantial majority of the Company’s revenues. These audit services typically recur annually, but after the Company’s relationship with a given client matures, the dollar volume of client overpayments recovered begins to decline from year to year. Contract compliance audit services for retailers are the most comprehensive of the Company’s Accounts Payable Services, focusing on numerous recovery categories related to both procurement and payment activities. These audits typically entail comprehensive and customized data acquisition from the client with the aim of capturing individual line-item transaction detail. Contract compliance audits for larger clients often require year-round on-site work by multi-auditor teams.

     Many large retailers have internal recovery audit departments that audit payment data for errors before the data is released for audit by external recovery audit firms. Process and software improvements made by these internal recovery audit departments over time have increased their recoveries, thus reducing the number of compliance errors to be discovered by the external recovery audit firms. This trend is expected to continue, and the Company’s revenues from its core retail/wholesale accounts payable business are expected to continue to decline.

     The service model for commercial clients is generally different from that for retailers. The substantial majority of the Company’s domestic commercial Accounts Payable Services clients are served using a disbursement audit service model which entails obtaining limited data from the client and an audit focus on a select few recovery categories. Services to these types of clients to date have tended to be either periodic (typically, every two to three years) or rotational in nature with different divisions of a given client often audited in pre-arranged annual

sequences. Accordingly, revenues derived from a given commercial client may change markedly from year to year. Additionally, the duration of a disbursement audit is often measured in weeks or months, as opposed to years, and the number of auditors assigned per client is usually between one and five. Because accounts payable software increasingly used by many large companies significantly reduces the number of disbursement errors, the Company’s revenues from commercial audits have rapidly declined in recent years and are expected to continue to do so. As a result, the Company has recently placed more focus on services to its retail/wholesale clients.

     The majority of the Company’s government agency services are presently related to the CMS audit of the State of California Medicare spending. The principal activities involve the identification of overpayments made to healthcare providers under the Medicare program. The Company identifies such overpayments by using various methods, including proprietary methods which are comparable to the Company’s proprietary techniques developed through many years of performing other types of recovery audits involving massive volumes of transaction data.

   Meridian

     Meridian is based in Ireland and specializes in the recovery of value-added taxes (“VAT”) paid on business expenses for corporate clients located throughout the world. Acting as an agent on behalf of its clients, Meridian submits claims for refunds of VAT paid on expenses incurred primarily in European Union countries. Meridian provides a fully outsourced service dealing with all aspects of the VAT reclaim process, from the provision of audit and invoice retrieval services to the preparation and submission of VAT claims and the subsequent collection of refunds from the relevant VAT authorities. For this service, Meridian receives a contractual percentage of VAT recovered on behalf of its clients. These services provided to clients by Meridian are typically recurring in nature. Meridian also has certain “fee-for-service” offerings, including accounts payable and employee expense reimbursement processing for third parties.

Client Contracts

     The Company typically provides services to its clients under terms of a contract. The Company’s compensation under these contracts is in most all cases set as a stipulated percentage of overpayments or other savings recovered for or realized by clients. Clients generally recover claims by either (a) taking credits against outstanding payables or future purchases from the involved vendors, or (b) receiving refund checks directly from those vendors. The manner in which a claim is recovered by a client is often dictated by industry practice. In addition, many clients establish client-specific procedural guidelines that the Company must satisfy prior to submitting claims for client approval. For some services provided by the Company, client contracts provide for compensation to the Company in the form of a flat fee, or fee rate per hour, or per unit of usage for the rendering of that service.

Technology

     The Company uses advanced, proprietary information systems and processes and a large-scale technology infrastructure to conduct its audits of its clients’ accounts payable transactions. Because of the ever increasing volume and complexity of the transactions of its clients, the Company believes that its proprietary technology and processes serve as important competitive advantages over both its principal competitors and its clients’ in-house internal recovery audit functions. To sustain these competitive advantages, the Company continually invests in technology initiatives for the purpose of sustaining and improving its advantages in delivering innovative solutions that improve both the effectiveness and efficiency of the Company’s services.

   Accounts Payable Services Audit Technology

     The Company’s data acquisition, data processing and data management methodologies are aimed at maximizing efficiencies and productivity and maintaining the highest standards of transaction auditing accuracy.

     At the beginning of a typical recovery audit engagement, the Company utilizes a dedicated staff of data acquisition specialists and proprietary tools to acquire a wide array of transaction data from its client for the time period under review. The Company typically receives this data by secured electronic transmissions, magnetic media or paper. For paper-based data the Company uses a custom, proprietary imaging technology to scan the paper into

electronic format. Upon receipt, the data is secured, catalogued, backed up and converted into standard, readable formats using third party and proprietary tools.

     Massive volumes of client data are cleansed and mapped by the Company’s technology professionals, primarily using high performance database and storage technologies, into standardized layouts at one of the Company’s data processing facilities. Statistical reports are also generated to verify the completeness and accuracy of the data.

     The data is then processed using algorithms (business rules) leveraging over thirty years’ experience to help uncover patterns or potential problems in clients’ various transactional streams. The Company delivers this data with a high probability of transaction errors to its auditors who, using the Company’s proprietary audit software, sort, filter and search the data to validate and identify actual transaction errors. The Company also maintains a secure database of audit information with the ability to query on multiple variables, including claim categories, industry codes, vendors and audit years, to facilitate the identification of additional recovery opportunities and provide recommendations for process improvements to clients.

     Once errors are validated,the information is presented to clients for approval and submission to vendors as a “claim.” The Company offers an Internet-based claim presentation and collaboration tool, which leverages its proprietary imaging technology to help the client view, approve and submit claims to vendors.

     The Company has implemented and manages several distinct technical and procedural controls to ensure the confidentiality of client data and other information. The data security program encompasses compliance with applicable regulatory requirements within a framework based on International Standards Organization publications and industry best practices.

   Meridian VAT Reclaim Technology

     Meridian utilizes proprietary software that allows it to assist business clients in reclaiming VAT. The functionality of the software includes paper flow monitoring, financial and managerial reporting and EDI. The paper flow monitoring captures all stages of the reclaim business process, from logging claims received to printing checks due to clients. The reporting system produces reports that measure the financial and managerial information for each stage of the business process.

Auditor Hiring, Training and Compensation

     Many of the Company’s auditors and specialists formerly held finance-related management positions in the industries the Company serves. Training provided in the field by the Company’s experienced auditors enables newly hired auditors to develop and refine their auditing skills and improve productivity. Additionally, the Company provides training for auditors utilizing both classroom training and training via self-paced media such as specialized computer-based training modules. Training programs are periodically upgraded based on feedback from auditors and changing industry protocols. Many of the Company’s auditors and specialists participate in some form of incentive compensation plan that link compensation to audit performance.

Clients

     The Company provides its services principally to large businesses, mid-sized businesses, and government agencies, having numerous payment transactions. Retailers/wholesalers continue to constitute the largest part of the Company’s client and revenue base. The Company’s five largest clients contributed approximately 23.2%, 22.3% and 22.6% of its revenues from continuing operations for the years ended December 31, 2006, 2005 and 2004, respectively. The Company did not have any clients who individually provided revenues in excess of 10.0% of total revenues from continuing operations during the years ended December 31, 2006, 2005 and 2004.

Sales and Marketing

     Due to the highly confidential and proprietary nature of an organization’s purchasing patterns, procurement practices and payment data, as well as the typical desire to maximize the amount of funds recovered, most prospective clients conduct an extensive investigation prior to selecting a specific recovery audit firm. The Company

has found that its service offerings that are the most annuity-like in nature, such as a contract compliance audit, typically require a relatively long sales cycle and a relatively high level of direct person-to-person contact.

Proprietary Rights

     From time to time the Company develops new recovery audit software and methodologies that enhance existing proprietary software and methodologies. The Company relies primarily on trade secret and copyright protection for its proprietary software and other proprietary information. While the Company’s competitive position may be affected by its ability to protect its software and other proprietary information, the Company believes that the protection afforded by trade secret and copyright laws is generally less significant to the Company’s overall success than the continued pursuit and implementation of its operating strategies and other factors such as the knowledge, ability and experience of its personnel.

     The Company owns or has rights to various copyrights, trademarks and trade names used in the Company’s business, including but not limited to PRGSchultz®, ImDex®, AuditPro™, SureF!nd™ , Direct F!nd™ and claimDex™.

Competition

     The Company has numerous existing accounts payable audit competitors that are believed to be substantially smaller than the Company. Barriers to effective entry and longevity as a viable accounts payable auditor are believed to vary depending upon whether the service provided involves contract compliance auditing or whether it is limited to auditing of disbursements for duplicate payments and statement errors. For contract compliance auditing, the Company believes that barriers to entry are high as a result of numerous factors including, but not limited to, significant technology infrastructure requirements, the need to gather, summarize and examine volumes of client data at the line-item level of detail, the need to establish effective audit techniques and methodologies, and the need to hire and train audit professionals to work in a very specialized manner that requires technical proficiency with numerous recovery categories.

     The Company believes that the market for simpler duplicate and statement disbursement audit services is also highly competitive, but that barriers to entry for these types of services are relatively low. The Company believes that the low barriers to entry result from limited technology infrastructure requirements, the need for relatively minimal high-level data, and an audit focus on a select few recovery categories.

     While the Company believes that it has the greatest depth and breadth of audit expertise, data and technology capabilities, scale and global presence in the industry, the Company faces competition from the following:

Client Internal Recovery Audit Departments. A number of larger retailers (particularly those in the discount, grocery and drug sectors) have developed an internal recovery audit process to review transactions prior to turning them over to external post-audit providers. Regardless of the level of recoveries made by internal recovery audit departments, the Company has observed that virtually all large retail clients retain at least one (primary), and sometimes two (primary and secondary), external recovery audit firms to capture errors missed by their internal recovery audit departments.

Other Recovery Audit Firms. The competitive landscape in the recovery audit industry is comprised of:

	•		Full-service accounts payable recovery audit firms. The Company believes that only one other company also offers a full suite of U.S. and international recovery audit services;
	•		A large number of smaller accounts payable recovery firms which have a limited client base and which use less sophisticated tools to mine disbursement claim categories at low contingency rates. These firms are most common in the U.S. market and the largest of these firms typically have approximately $10 – $15 million in annual revenue. Competition in most international markets, if any, typically comes from small niche providers;

	•		Firms that offer a hybrid of audit software tools and training for use by internal audit departments, and/or general accounts payable process improvement enablers; and
	•		Firms with specialized skills focused on recovery audit services for discrete sectors such as sales and use tax or real estate.

Other Providers of Recovery Services. The major international accounting firms provide recovery audit services; however, the Company believes their practices tend to be focused on tax-related services.

Regulation

     Various aspects of the Company’s business, including, without limitation, its data acquisition, processing and reporting protocols are subject to extensive and frequently changing governmental regulation in both the United States and internationally. These regulations include extensive data privacy and security requirements such as, in the U.S., the Health Insurance Portability and Accountability Act of 1996, with respect to the Company’s Medicare,audit recovery work, and, internationally, the European Data Protection Directive, as such Directive has been implemented by various members of the European Union in which the Company operates. Failure to comply with such regulations may, depending on the nature of the noncompliance, result in the termination or loss of contracts, the imposition of contractual damages, civil sanctions, or in certain circumstances, criminal penalties.

Employees

     At February 28, 2007, the Company had approximately 1,935 employees, of whom approximately 891 were located in the U.S. The majority of the Company’s employees are involved in the audit function. None of the Company’s employees are covered by a collective bargaining agreement and the Company believes its employee relations are satisfactory.

Website

     The Company makes available free of charge on its website, www.prgx.com, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports. The Company makes all filings with the Securities and Exchange Commission available on its website no later than the close of business on the date the filing was made. In addition, investors can access the Company’s filings with the Securities and Exchange Commission at www.sec.gov/edgar.shtml.

ITEM 1A. Risk Factors

We have a history of losses and may not be able to improve our performance to achieve profitability.

     We reported net losses of $21.1 million, $207.7 million, $71.5 million, and $160.8 million for the years ended December 31, 2006, 2005, 2004 and 2003, respectively. There is no guarantee that our ongoing cost reduction efforts or attempts to increase our revenues will be successful. If we are not able to successfully reduce costs and/or increase revenues, we may not be able to operate profitability in the future or generate sufficient cash to fund our operations and pay our indebtedness.

We believe that our core accounts payable recovery audit business will continue to decline. Therefore, we must continue to diligently manage our costs and successfully grow other business lines in order to stabilize and increase our revenues and improve our profitability.

     As our clients improve their systems and processes, fewer transactional errors occur. In addition, many of our clients have internal staffs that audit the same transactions before we do. As the skills, experience and resources of our clients’ internal recovery audit staffs improve, they will identify more overpayments themselves and reduce our audit recovery opportunities. Based on these and other factors, we currently believe that our core accounts payable recovery audit business will continue to experience revenue declines over the long-term. In order to stabilize and increase our revenues and return to profitability, we must continue our cost reduction efforts (which includes emphasizing larger accounts that provide a greater return on the resources required for the account) and grow our other lines of business, such as our Medicare audit work. These other lines of business are still in the early stages of development, and there can be no guarantee that they will ultimately succeed.

We depend on our largest clients for significant revenues, so losing a major client could adversely affect our revenues.

     We generate a significant portion of our revenues from our largest clients. For the years ended December 31, 2006, 2005, and 2004, our two largest clients accounted for approximately 13.3%, 13.8% and 13.8% of our revenues from continuing operations, respectively. If we lose any of our major clients, our results of operations could be materially and adversely affected by the loss of revenue unless we acquire new business to replace such clients.

Client and vendor bankruptcies and financial difficulties could reduce our earnings.

     Our clients generally operate in intensely competitive environments and, accordingly, bankruptcy filings by our clients are not uncommon. Bankruptcy filings by our large clients or the significant vendors who supply them or unexpectedly large vendor claim chargebacks lodged against one or more of our larger clients, could have a materially adverse effect on our financial condition and results of operations. Similarly, our inability to collect our accounts receivable due to the financial difficulties of one or more of our large clients could adversely affect our financial condition and results of operations.

     If a client files for bankruptcy, we could be subject to an action to recover certain payments received in the 90 days prior to the bankruptcy filing as “preference payments.” If we are unsuccessful in defending against such claims, we would be required to make unbudgeted cash payments which could strain our financial liquidity and our earnings would be reduced.

     For example, on April 1, 2003, Fleming Companies, one of the Company’s larger U.S. Accounts Payable Services clients at the time filed for Chapter 11 bankruptcy reorganization. During the quarter ended March 31, 2003, the Company received approximately $5.6 million in payments on account from Fleming. On January 24, 2005, the Company received a demand from the Fleming Post Confirmation Trust (“PCT”), a trust which was created pursuant to Fleming’s Chapter 11 reorganization plan to represent the client, for preference payments received by the Company. The demand stated that the PCT’s calculation of the preferential payments was approximately $2.9 million. The Company disputed the claim. Later in 2005, the PCT filed suit against the Company seeking to recover approximately $5.6 million in payments that were made to the Company by Fleming during the 90 days preceding Fleming’s bankruptcy filing, and that are alleged to be avoidable either as preferences or fraudulent transfers under the Bankruptcy Code. The Company believes that it has valid defenses to certain of the PCT’s claims in the proceeding. In December 2005, the PCT offered to settle the case for $2 million. The Company

countered with an offer to waive its bankruptcy claim and to pay the PCT $250,000. The PCT rejected the Company’s settlement offer, and although the parties have agreed to settlement mediation, the litigation is ongoing.

Our strategic business initiatives may not be successful.

     Our objective is to build on our position as the leading worldwide provider of recovery audit services. Our strategic plan to achieve these objectives focuses on a series of initiatives designed to maintain our dedicated focus on clients and rekindle our growth. Recently, we have implemented a number of strategic business initiatives that are designed to reduce costs and stabilize revenues.

     These initiatives are ongoing and the results of the strategy and implementation will not be known until some time in the future. Each of the initiatives requires sustained management focus, organization and coordination over time, as well as success in building relationships with third parties. If we are unable to implement the strategy successfully, our results of operations and cash flows could be adversely affected. In addition, successful implementation of the strategy may require material increases in costs and expenses.

We have incurred significant costs in establishing the necessary resources to provide services for Medicare audit recovery work, and to date, have not generated material revenues from this business.

     As part of a pilot program to use recovery auditing to recover overpayments on behalf of taxpayers, the Centers for Medicare & Medicaid Services, CMS, the federal agency that administers the Medicare program, awarded us a three-year contract, effective March 28, 2005, to provide recovery audit services in connection with the State of California’s Medicare spending. We have expended substantial resources in connection with preparing for and performing the CMS audit services. While we believe this contract is a significant opportunity for us, to date the work has not generated material revenues and there is no guarantee that actual revenues will justify the required expenditures. In addition, as a result of the complex regulations governing Medicare payments, and the complexity of Medicare data, systems and processes, generally, it may be more difficult and may take longer to achieve recoveries than in other areas of our business.

We may be unable to protect and maintain the competitive advantage of our proprietary technology and intellectual property rights.

     Our operations could be materially and adversely affected if we are not able to protect our proprietary software, audit techniques and methodologies, and other proprietary intellectual property rights. We rely on a combination of trade secret and copyright laws, nondisclosure and other contractual arrangements and technical measures to protect our proprietary rights. Although we presently hold U.S. and foreign registered trademarks and U.S. registered copyrights on certain of our proprietary technology, we may be unable to obtain similar protection on our other intellectual property. In addition, our foreign registered trademarks may not receive the same enforcement protection as our U.S. registered trademarks.

     Additionally, we generally enter into nondisclosure agreements with our employees, consultants, clients and potential clients. We also limit access to, and distribution of, our proprietary information. Nevertheless, we may be unable to deter misappropriation or unauthorized dissemination of our proprietary information, detect unauthorized use and take appropriate steps to enforce our intellectual property rights. Even though we take care to protect our own intellectual property, there is no guarantee that our competitors will not independently develop technologies that are substantially equivalent or superior to our technology. Moreover, although we believe that our services and products do not infringe on the intellectual property rights of others, we are also subject to the risk that someone else will assert a claim against us in the future for violating their intellectual property rights.

Our failure to retain the services of key members of management and highly skilled personnel could adversely impact our continued success.

     Our continued success depends largely on the efforts and skills of our executive officers and key employees. As such, we have entered into employment agreements with key members of management. While these employment agreements limit the ability of key employees to directly compete with us in the future, nothing prevents them from leaving our company.

     In addition, our current financial and operational condition, including, but not limited to our liquidity

concerns, makes it especially challenging to attract and retain highly qualified skilled auditors in an industry where competition for skilled personnel is intense. Accordingly, our future performance also depends, in part, on the ability of our management team to work together effectively, manage our workforce, and retain highly qualified personnel.

We rely on international operations for a significant portion of our revenues.

     Approximately 47.2% of our revenues from continuing operations were generated from international operations in 2006. International operations are subject to numerous risks, including:

	•		political and economic instability in the international markets we serve;
	•		difficulties in staffing and managing foreign operations and in collecting accounts receivable;
	•		fluctuations in currency exchange rates, particularly weaknesses in the British pound, the euro, the Canadian dollar, the Mexican peso, and the Brazilian real and other currencies of countries in which we transact business, which could result in currency translations that materially reduce our revenues and earnings;
	•		costs associated with adapting our services to our foreign clients’ needs;
	•		unexpected changes in regulatory requirements and laws;
	•		expenses and legal restrictions associated with transferring earnings from our foreign subsidiaries to us;
	•		burdens of complying with a wide variety of foreign laws and labor practices;
	•		business interruptions due to widespread disease, potential terrorist activities, or other catastrophes;
	•		reduced or limited protection of our intellectual property rights; and
	•		longer accounts receivable cycles.

     Because we expect a significant portion of our revenues to continue to come from international operations, the occurrence of any of these events could materially and adversely affect our business, financial condition and results of operations.

The market for providing disbursement audit services to commercial clients in the U.S. is rapidly declining.

     We currently serve the substantial majority of our U.S. commercial accounts payable services clients using a disbursement audit service model that typically entails acquisition from the client of limited purchase data and an audit focus on a select few recovery categories. We believe that the market for providing disbursement audit services to commercial entities in the United States is rapidly declining. Similar to the decline in our core accounts payable recovery audit business, we will need to continue to successfully implement our cost savings efforts and grow our other lines of business in order to stabilize and increase our revenues to replace declining revenues from this business.

Our U.S. commercial accounts payable services business is subject to price pressure.

     The substantial majority of our domestic commercial accounts payable services clients are currently served using a disbursement audit service model which typically entails obtaining limited purchase data from the client and an audit focus on a select few recovery categories. The disbursement audit business is highly competitive and barriers to entry are relatively low. We believe that the low barriers to entry result from limited technology infrastructure requirements, the minimal need for audit data that is difficult to extract from the client’s systems, and an audit focus on a select few recovery categories. As a result of the low barriers to entry, our domestic commercial accounts payable services business is subject to intense price pressure from our competition. Such price pressure could cause our profit margins to decline and have a materially adverse effect on our business, financial condition, and results of operations.

Generally our client contracts contain provisions under which the client may terminate the agreement prior to the completion of the agreement.

     Many of our client contracts contain provisions that would permit the client to terminate the contract without cause prior to the completion of the term of the agreement by providing us with relatively short prior written notice of the termination. As a result, the existence of contractual relationships with our clients is not an assurance that we will continue to provide services for our clients through the entire terms of their respective agreements. If

clients representing a significant portion of our revenues terminated their agreements unexpectedly, we may not, in the short-term, be able to replace the revenues and earnings from such contracts which would have a material adverse effect on our operations and financial results. In addition, client contract terminations could also harm our reputation within the industry which could negatively impact our ability to obtain new clients.

Our failure to comply with applicable governmental privacy laws and regulations could substantially impact our business, operations and financial condition.

     We are subject to extensive and evolving federal, state and foreign privacy laws and regulations. Changes in privacy laws or regulations or new interpretations of existing laws or regulations could have a substantial effect on our operating methods and costs. Failure to comply with such regulations could result in the termination or loss of contracts, the imposition of contractual damages, civil sanctions, or in certain circumstances, criminal penalties, any of which could have a material adverse effect on our results of operations, financial condition, business and prospects. Determining compliance with such regulations is complicated by the fact that many of these laws and regulations have not been fully interpreted by governing regulatory authorities or the courts and many of the provisions of such laws and regulations are open to a wide range of interpretations. There can be no assurance that we are or have been in compliance with all applicable existing laws and regulations or that we will be able to comply with new laws or regulations.

Proposed legislation by the European Union, if enacted as currently drafted, will have a materially adverse impact on Meridian’s operations.

     The European Union has currently proposed legislation that would remove the need for suppliers to charge value-added taxes on the supply of services to clients within the European Union. It is difficult to estimate whether and/or when the proposed legislation would be enacted and implemented. Management believes that the proposed legislation, if enacted as currently drafted, when implemented would have a materially adverse impact on the results of operations of our Meridian segment and would also negatively affect our consolidated results of operations.

Meridian may be required to repay grants received from the Industrial Development Authority.

     During the period of May 1993 through September 1999, Meridian received grants from the Industrial Development Authority of Ireland, IDA, in the sum of 1.4 million Euro ($1.8 million at December 31, 2006 exchange rates). The grants were paid primarily to stimulate the creation of 145 permanent jobs in Ireland. As a condition of the grants, if the number of permanently employed Meridian staff in Ireland falls below 145, then the grants are repayable in full. This contingency expires on September 23, 2007. As of December 31, 2006, Meridian employed 213 permanent employees in Dublin, Ireland. As discussed above, proposed EU legislation could eventually have a materially adverse impact on Meridian’s results of operations. If Meridian’s results of operations were to decline as a result of the enactment of that legislation, it is possible that the number of permanent employees that Meridian employs in Ireland could fall below 145 prior to September 2007. Should such an event occur, Meridian will have to repay the full amount of the grants it previously received from IDA. Because of the lengthy approval process required for the legislative proposal to become law and the requirements for numerous systems changes before implementation, management currently estimates that any impact on employment levels related to a possible change in the EU legislation will not be realized until after September 2007.

     As any potential liability related to these grants is not currently determinable, we have not included any expenses related to this matter in our financial statements. Management is monitoring this situation and if it appears probable that Meridian’s permanent staff in Ireland will fall below 145 and that grants will need to be repaid to IDA, Meridian will be required to recognize an expense at that time. Such expense could be material to Meridian’s results of operations.

Our revenues from certain clients and VAT authorities may change markedly from year to year.

     We examine merchandise procurements and other payments made by business entities such as manufacturers, distributors and service firms. To date, services to these types of clients have tended to be either periodic (typically, every two or three years) or rotational in nature with different divisions of a given client often audited in pre-arranged annual sequences. Accordingly, revenues derived from a given client may change markedly from year to year depending on factors such as the size and nature of the client division under audit.

     Meridian’s revenue recognition policy causes its revenues to vary markedly from period to period as well. Meridian defers recognition of revenues to the accounting period in which cash is both received from the foreign governmental agencies reimbursing VAT claims and transferred to Meridian’s clients. The timing of reimbursement of VAT claims by the various European tax authorities with which Meridian files claims can differ significantly by country.

The ownership change that occurred as a result of the exchange offer limits our ability to use our net operating losses.

     We have substantial tax loss and credit carryforwards for U.S. federal income tax purposes. On March 17, 2006, as a result of its financial restructuring, the Company experienced an ownership change as defined under Section 382 of the Internal Revenue Code (“IRC”). This ownership change resulted in an annual IRC Section 382 limitation that mathematically limits the use of certain tax attribute carryforwards. Of the $34.1 million of U.S. federal net loss carryforwards available to the Company, $27.1 million of the loss carryforwards are subject to an annual usage limitation of $1.4 million. The ownership change resulted in the write-off of approximately $72.6 million in previously incurred and unexpired federal net operating loss carryforward amounts and the write-off of approximately $7.4 million in future tax deductions related to certain built-in losses associated with intangible and fixed assets. In addition, the following write-offs also took place in 2006 as a result of the ownership change: $34.1 million in unexpired capital loss carryforwards, $14.3 million in unexpired foreign tax credit carryforwards, and $0.2 million in unexpired R&D credit carryforward amounts. Approximately $191.9 million of previously incurred and unexpired state net operating losses were also written off as a result of this ownership change.

     We believe such limitations and loss of these carryforwards will significantly increase our projected future tax liability.

We may not be allowed to deduct interest with respect to our senior convertible notes issued in the exchange offer.

     For U.S. federal income tax purposes, no deduction is allowed for interest paid or accrued with respect to convertible debt if it is substantially certain that the holders will voluntarily convert the debt into equity. The proper application of this provision in the case of our senior convertible notes is subject to varying interpretations, depending in part on facts and circumstances existing on the exchange date. We currently intend to take the position that we are entitled to interest deductions in respect of our senior convertible notes. Nevertheless, there is no assurance that the Internal Revenue Service, IRS, would not take a contrary position, or that any change in facts and circumstances would not result in us changing our position.

     In addition, even if not disallowed, any interest deductions with the respect to our senior convertible notes would cease upon an actual conversion of our senior convertible notes into stock.

Future impairment of goodwill, other intangible assets and long-lived assets would reduce our future earnings.

     During the fourth quarter of 2005, we recorded a goodwill impairment charge of $166.0 million and an impairment charge of $4.4 million relating to our intangible trade name value. Adverse future changes in the business environment or in our ability to perform audits successfully and compete effectively in our market could result in additional impairment of goodwill, other intangible assets or long-lived assets, which could materially adversely impact future earnings. As of December 31, 2006, the Company’s goodwill and other intangible assets totaled $27.7 million. We must perform annual assessments to determine whether some portion, or all, of our goodwill, intangible assets and other long-term assets are impaired. Annual impairment testing under SFAS No. 142 could result in a determination that our goodwill or other intangible assets have been further impaired, and annual impairment testing under SFAS No. 144 could result in a determination that our other long-lived assets have been impaired. Any future impairment of goodwill, other intangible assets or long-lived assets would reduce future earnings.

We may not be able to continue to compete successfully with other businesses offering recovery audit services, including client internal recovery audit departments.

     The recovery audit industry is highly competitive. Our principal competitors for accounts payable recovery audit services include numerous smaller firms. Because these firms tend to be privately owned, we do not have

access to their financial statements, so we cannot be certain as to whether we can continue to compete successfully with our competitors. In recent years, revenues from our core accounts payable recovery audit business have declined, and are expected to continue to decline, due in part to our clients’ continuing development of their own internal recovery audit capabilities. In addition, the trend toward more effective internal recovery audit departments diminishes claims available for us to identify in our recovery audits and is likely to continue to negatively impact our future revenues.

We have previously reported material weaknesses in our internal control over financial reporting, and any unidentified material weaknesses could cause us to fail to meet our SEC and other reporting requirements.

     In connection with an evaluation of the effectiveness of our internal control over financial reporting for the year ended December 31, 2005, management determined that material weaknesses existed with respect to our internal controls over revenue recognition and company level controls, including the expertise of the accounting and finance staff. Management believes that during 2006 significant progress was made in remediating these material weaknesses. However, we can provide no assurances that these material weaknesses have been fully corrected or that additional material weaknesses or significant deficiencies in our internal control over financial reporting will not be discovered in the future. If we fail to remediate any such material weaknesses, our operating results or client relationships could be adversely affected or we may fail to meet our SEC reporting requirements or our financial statements may contain a material misstatement.

     Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives or of preventing fraud due to its inherent limitations, regardless of how well designed or implemented. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Because of these limitations, there is a risk that material misstatements or instances of fraud may not be prevented or detected on a timely basis by our internal control over financial reporting.

Our articles of incorporation, bylaws, shareholder rights plan and Georgia law may inhibit a change of control that shareholders may favor.

     Our articles of incorporation and bylaws and Georgia law contain provisions that may delay, deter or inhibit a future acquisition not approved by our Board of Directors. This could occur even if our shareholders receive attractive offers for their shares or if a substantial number, or even a majority, of our shareholders believe the takeover is in their best interest. These provisions are intended to encourage any person interested in acquiring us to negotiate with and obtain the approval of our Board of Directors in connection with the transaction. Provisions that could delay, deter or inhibit a future acquisition include the following:

	•		a classified Board of Directors;
	•		the requirement that our shareholders may only remove directors for cause;
	•		specified requirements for calling special meetings of shareholders; and
	•		the ability of the Board of Directors to consider the interests of various constituencies, including our employees, clients and creditors and the local community, in making decisions.

     Our articles of incorporation also permit the Board of Directors to issue shares of preferred stock with such designations, powers, preferences and rights as it determines, without any further vote or action by our shareholders. In addition, we have in place a “poison pill” shareholders’ rights plan that could trigger a dilutive issuance of common stock upon substantial purchases of our common stock by a third party that are not approved by the Board of Directors. These provisions also could discourage bids for our shares of common stock at a premium and have a materially adverse effect on the market price of our common stock.

The terms of our senior credit facility place restrictions on us, which create risks of default and reduce our flexibility.

     Our current senior credit facility contains a number of affirmative, negative, and financial covenants, which limit our ability to take certain actions and require us to comply with specified financial ratios and other performance covenants. No assurance can be provided that we will not violate the covenants of our senior credit facility in the future. If we are unable to comply with our financial covenants in the future, our lenders could pursue their contractual remedies under the credit facility, including requiring the immediate repayment in full of all

amounts outstanding, if any. Additionally, we cannot be certain that, if the lenders demanded immediate repayment of any amounts outstanding, we would be able to secure adequate or timely replacement financing on acceptable terms or at all. Additionally, if the lenders accelerated repayment demand is subsequently made and we are unable to honor it, cross-default language contained in the indentures underlying our separately-outstanding senior notes and senior convertible notes due March 2011, could also be triggered, potentially accelerating the required repayment of those notes as well. In such an instance, there can likewise be no assurance that we will be able to secure additional financing that would be required to make such a rapid repayment.

Our substantial leverage could materially adversely impact our financial health.

     We are highly leveraged. As of December 31, 2006, our total outstanding debt and redeemable preferred stock was approximately $151 million and we reported a shareholders’ deficit of approximately $104 million. In addition, as of December 31, 2006, we had a maximum of $17 million of additional available borrowings under our senior credit facility. The instruments governing the notes and preferred stock issued in our recent financial restructuring and our senior credit facility also allow the issuance of additional indebtedness under certain circumstances.

     Our substantial indebtedness could adversely affect our financial health by, among other things:

	•		increasing our vulnerability to adverse economic conditions or increases in prevailing interest rates, particularly with respect to any of our borrowings at variable interest rates;
	•		limiting our ability to obtain any additional financing we may need to operate, develop and expand our business;
	•		requiring us to dedicate a substantial portion of any cash flow from operations to service our debt, which reduces the funds available for operations and future business opportunities; and
	•		potentially making us more highly leveraged than our competitors, which could potentially decrease our ability to compete in our industry.

     We will have significant interest, dividend, principal and redemption payments under the notes and preferred stock issued in the exchange offer coming due in the next four years. Our ability to make payments due on the notes and preferred stock and on our debt will depend upon our future operating performance, which is subject to general economic and competitive conditions and to financial, business and other factors, many of which we cannot control. If the cash flow from our operating activities is insufficient, we may take actions such as delaying or reducing capital expenditures, attempting to restructure or refinance our debt, selling assets or operations or seeking additional equity capital. Some or all of these actions may not be sufficient to allow us to service our debt obligations and we could be required to file for bankruptcy. Further, we may be unable to take any of these actions on satisfactory terms, in a timely manner or at all. In addition, our credit agreements and indentures may limit our ability to take several of these actions. Our failure to generate sufficient funds to pay our debts or to undertake any of these actions successfully could materially adversely affect our business, results of operations and financial condition.

Our stock price has been and may continue to be volatile.

     Our common stock is currently traded on The Nasdaq Global Market System. The trading price of our common stock has been and may continue to be subject to large fluctuations. Our stock price may increase or decrease in response to a number of events and factors, including:

	•		issuance of additional common stock on exercise of conversion rights of our senior convertible notes or our convertible preferred stock;
	•		future announcements concerning us, key clients or competitors;
	•		quarterly variations in operating results and liquidity;
	•		changes in financial estimates and recommendations by securities analysts;
	•		developments with respect to technology or litigation;
	•		the operating and stock price performance of other companies that investors may deem comparable to our company;
	•		acquisitions and financings; and
	•		sales and purchases of blocks of stock by insiders.

     Fluctuations in the stock market, generally, also impact the volatility of our stock price. General stock market movements may adversely affect the price of our common stock, regardless of our operating performance.

Issuance of shares of our common stock upon conversion of our preferred stock and senior convertible notes and pursuant to our new management incentive plan will dilute our common stock.

     Our convertible notes and preferred stock, upon full conversion, would represent in excess of a majority of our outstanding common stock, based on the current number of shares of common stock outstanding. In addition, in order to retain key executive employees, in 2006, we adopted a new management incentive plan, pursuant to which certain senior management employees have received phantom shares of stock that are partially payable in common stock. We have reserved 10% of our outstanding common stock on a fully-diluted basis, as measured on the dates of distribution, to settle phantom shares under the management incentive plan. In addition, we may need to issue additional equity securities in the future in order to execute our business plan or for other reasons, which could lead to further dilution to holders of our common stock. This dilution of our common stock could depress the price of our common stock.

ITEM 1B. Unresolved Staff Comments

     None

ITEM 2. Properties

     The Company’s principal executive offices are located in approximately 132,000 square feet of office space in Atlanta, Georgia. The Company leases this space under an agreement expiring on December 31, 2014. The Company has subleased approximately 33,000 square feet of its principal executive office space to independent third parties and is attempting to sublease approximately 25,000 additional square feet of space at this location. The Company’s various operating units lease numerous other parcels of operating space in the various countries in which the Company currently conducts its business.

     Excluding the lease for the Company’s principal executive offices, the majority of the Company’s real property leases are individually less than five years in duration. See Note 9 of “Notes to Consolidated Financial Statements” included in Item 8. of this Form 10-K.

ITEM 3. Legal Proceedings

     On April 1, 2003, Fleming Companies, one of the Company’s larger U.S. Accounts Payable Services clients at the time filed for Chapter 11 bankruptcy reorganization. During the quarter ended March 31, 2003, the Company received approximately $5.6 million in payments on account from Fleming. On January 24, 2005, the Company received a demand from the Fleming Post Confirmation Trust (“PCT”), a trust which was created pursuant to Fleming’s Chapter 11 reorganization plan to represent the client, for preference payments received by the Company. The demand stated that the PCT’s calculation of the preferential payments was approximately $2.9 million. The Company disputed the claim. Later in 2005, the PCT filed suit against the Company seeking to recover approximately $5.6 million in payments that were made to the Company by Fleming during the 90 days preceding Fleming’s bankruptcy filing, and that are alleged to be avoidable either as preferences or fraudulent transfers under the Bankruptcy Code. The Company believes that it has valid defenses to certain of the PCT’s claims in the proceeding. In December 2005, the PCT offered to settle the case for $2 million. The Company countered with an offer to waive its bankruptcy claim and to pay the PCT $250,000. The PCT rejected the Company’s settlement offer, and although the parties have agreed to settlement mediation, the litigation is ongoing.

     In the normal course of business, the Company is involved in and subject to other claims, contractual disputes and other uncertainties. Management, after reviewing with legal counsel all of these actions and proceedings, believes that the aggregate losses, if any, will not have a material adverse effect on the Company’s financial position or results of operations.

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

     During the fourth quarter covered by this report, no matter was submitted to a vote of security holders of the Company.

PART II

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     The Company’s common stock is traded under the symbol “PRGX” on The Nasdaq Global Market (Nasdaq). All common share and per share data in this Form 10-K has been restated to give effect to the one-for-ten reverse stock split which became effective August 14, 2006. The Company has not paid cash dividends since its March 26, 1996 initial public offering and does not intend to pay cash dividends in the foreseeable future. Moreover, restrictive covenants included in the Company’s senior credit facility specifically prohibit payment of cash dividends. As of February 28, 2007, there were 153 holders of record of the Company’s common stock and management believes there were in excess of 5,000 beneficial holders. The following table sets forth, for the quarters indicated, the range of high and low sales prices for the Company’s common stock as reported by Nasdaq during 2006 and 2005.

2006 Calendar Quarter		High				Low
1st Quarter		$	7.60			$	3.90
2nd Quarter			7.20				2.70
3rd Quarter			6.38				2.03
4th Quarter			8.36				4.67

2005 Calendar Quarter		High				Low
1st Quarter		$	57.90			$	42.00
2nd Quarter			51.50				27.50
3rd Quarter			34.90				25.80
4th Quarter			33.00				2.40

     The Company did not repurchase any of its outstanding common stock during 2006.

Performance Graph

Set forth below is a line graph presentation comparing the cumulative shareholder return on the Company’s common stock (Nasdaq: PRGX), on an indexed basis, against cumulative total returns of The Nasdaq Composite Index and the RDG Technology Composite Index. The graph assumes that the value of the investment in the common stock in each index was $100 on December 31, 2001 and shows total return on investment for the period beginning December 31, 2001 through December 31, 2006, assuming reinvestment of any dividends. Notwithstanding anything to the contrary set forth in any of the Company’s filings under the Securities Act of 1933, or the Securities Exchange Act of 1934 that might incorporate future filings, including this Annual Report on Form 10-K, in whole or in part, the Performance Graph presented below shall not be incorporated by reference into any such filings.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among PRG-Schultz International, Inc., The NASDAQ Composite Index
And The RDG Technology Composite Index

* $100 invested on 12/31/01 in stock or index-including reinvestment of dividends.
Fiscal year ending December 31.

VALUE OF $100 INVESTED ON DECEMBER 31, 2001 AT:

														Cumulative Total Return
				12/01					12/02					12/03					12/04					12/05					12/06
	PRG-Schultz International, Inc.				100.00					109.20					60.12					61.72					7.48					9.82
	NASDAQ Composite Index				100.00					71.97					107.18					117.07					120.50					137.02
	RDG Technology Composite Index				100.00					62.44					92.49					95.27					97.49					106.14

ITEM 6. Selected Financial Data

     The following table sets forth selected consolidated financial data for the Company as of and for the five years ended December 31, 2006. Such historical consolidated financial data have been derived from the Company’s Consolidated Financial Statements and Notes thereto, which have been audited by the Company’s Independent Registered Public Accounting Firms. The Consolidated Balance Sheets as of December 31, 2006 and 2005, and the related Consolidated Statements of Operations, Shareholders’ Equity (Deficit) and Cash Flows for each of the years in the three-year period ended December 31, 2006 and the report of the Independent Registered Public Accounting Firms thereon are included in Item 8. of this Form 10-K.

     In January 2004, the Company consummated the sale of its Communications Services operations. During the fourth quarter of 2005, the Company classified its Channel Revenue, Airline, and the Accounts Payable Services business units in South Africa and Japan as discontinued operations. The Company’s Consolidated Financial Statements have been reclassified to reflect Communications Services, Channel Revenue, Airline, and the Accounts Payable Services business units in Japan and South Africa business units as discontinued operations for all periods presented. All per share data has been restated to give effect to the one-for-ten reverse stock split which became effective August 14, 2006.

     The data presented below should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere in this Form 10-K and other financial information appearing elsewhere in this Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

		Years Ended December 31,
		2006 (6)				2005 (1)				2004				2003 (1)				2002 (3) (4)
		(In thousands, except per share data)
Statements of Operations Data:
Revenues		$	266,095			$	292,152			$	350,602			$	367,380			$	439,686
Cost of revenues			193,747				195,091				217,059				225,938				248,722
Gross margin			72,348				97,061				133,543				141,442				190,964
Selling, general and administrative expenses			60,199				111,439				124,365				123,424				141,151
Impairment charges			¾				170,375				¾				206,923				¾
Operational restructuring expense			4,130				11,550				¾				¾				¾
Operating income (loss)			8,019				(196,303	)			9,178				(188,905	)			49,813
Interest expense, net			(16,219	)			(8,391	)			(8,549	)			(8,948	)			(9,339	)
Loss on financial restructuring			(10,047	)			¾				¾				¾				¾
Earnings (loss) from continuing operations before income taxes, discontinued operations and cumulative effect of accounting changes			(18,247	)			(204,694	)			629				(197,853	)			40,474
Income taxes (2)			2,019				821				76,197				(35,362	)			14,883
Earnings (loss) from continuing operations before discontinued operations and cumulative effect of accounting changes			(20,266	)			(205,515	)			(75,568	)			(162,491	)			25,591
Discontinued operations:
Earnings (loss) from discontinued operations, net of income taxes			(833	)			(2,225	)			4,085				1,673				(4,307	)
Earnings (loss) before cumulative effect of accounting changes			(21,099	)			(207,740	)			(71,483	)			(160,818	)			21,284
Cumulative effect of accounting changes, net of income taxes			¾				¾				¾				¾				(8,216	)
Net earnings (loss)		$	(21,099	)		$	(207,740	)		$	(71,483	)		$	(160,818	)		$	13,068

		Years Ended December 31,
		2006 (6)				2005 (1)				2004				2003 (1)				2002 (3) (4)
		(In thousands, except per share data)
Basic earnings (loss) per share:
Earnings (loss) from continuing operations before discontinued operations and cumulative effect of accounting changes		$	(3.20	)		$	(33.14	)		$	(12.23	)		$	(26.31	)		$	4.08
Discontinued operations			(0.12	)			(0.36	)			0.66				0.27				(0.69	)
Cumulative effect of accounting changes			¾				¾				¾				¾				(1.31	)
Net earnings (loss)		$	(3.32	)		$	(33.50	)		$	(11.57	)		$	(26.04	)		$	2.08
Diluted earnings (loss) per share:
Earnings (loss) from continuing operations before discontinued operations and cumulative effect of accounting changes		$	(3.20	)		$	(33.14	)		$	(12.23	)		$	(26.31	)		$	3.20
Discontinued operations			(0.12	)			(0.36	)			0.66				0.27				(0.54	)
Cumulative effect of accounting changes			¾				¾				¾				¾				(1.03	)
Net earnings (loss)		$	(3.32	)		$	(33.50	)		$	(11.57	)		$	(26.04	)		$	1.63

		December 31,
		2006				2005 (1)				2004				2003 (1)				2002 (3)(4)(5)
		(In thousands)
Balance Sheet Data:
Cash and cash equivalents		$	35,013			$	11,848			$	12,596			$	26,658			$	14,860
Working capital			5,218				(9,123	)			5,882				1,715				35,562
Total assets			178,667				162,062				358,593				429,257				590,270
Long-term debt, excluding current installments			136,922				140,401				123,286				122,395				147,854
Redeemable preferred stock			11,199				¾				¾				¾				¾
Total shareholders’ equity (deficit)		$	(104,483	)		$	(102,365	)		$	103,584			$	173,130			$	337,885

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

     The Company’s revenues are based on specific contracts with its clients. Such contracts generally specify: (a) time periods covered by the audit; (b) nature and extent of audit services to be provided by the Company; (c) the client’s duties in assisting and cooperating with the Company; and (d) fees payable to the Company, generally expressed as a specified percentage of the amounts recovered by the client resulting from overpayment claims identified. Clients generally recover claims by either taking credits against outstanding payables or future purchases from the involved vendors, or receiving refund checks directly from those vendors. The manner in which a claim is recovered by a client is often dictated by industry practice. In addition, many clients establish client-specific procedural guidelines that the Company must satisfy prior to submitting claims for client approval. For some services provided by the Company, client contracts provide for compensation to the Company in the form of a flat fee, or fee rate per hour, or per unit of usage for the rendering of that service.

     The Company generally recognizes revenue on the accrual basis except with respect to its Meridian VAT reclaim business and certain international Accounts Payable Services units where revenue is recognized on the cash basis in accordance with guidance issued by the Securities and Exchange Commission in Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition.” Revenue is generally recognized for a contractually specified percentage of amounts recovered when it has been determined that the client has received economic value (generally through credits taken against existing accounts payable due to the involved vendors or refund checks received from those vendors), and when the following criteria are met: (a) persuasive evidence of an existing contractual arrangement between the Company and the client exists; (b) services have been rendered; (c) the fee billed to the client is fixed or determinable; and (d) collectability is reasonably assured. In certain limited circumstances, the Company will invoice a client prior to meeting all four of these criteria. In those instances, revenue is deferred until all of the criteria are met. Historically, there has been a certain amount of revenue that, even though meeting the requirements of the Company’s revenue recognition policy, relates to underlying claims ultimately rejected by the Company’s clients’ vendors. In that case, the Company’s clients may request a refund of such amount. The Company records such refunds as a reduction of revenue (See “Critical Accounting Policies – Unbilled Revenue and Refund Liability” as fully described in Note 1 of Notes of the Consolidated Financial Statements included in Item 8. of this Form 10-K).

     The contingent fee based VAT reclaim division of the Company’s Meridian business, along with certain other international Accounts Payable Services units, recognize revenue on the cash basis in accordance with guidance issued by the Securities and Exchange Commission in Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition.” Based on the guidance in SAB No. 104, Meridian defers recognition of contingent fee revenues to the accounting period in which cash is both received from the foreign governmental agencies reimbursing the VAT claims and transferred to Meridian’s clients.

     The Company derives a relatively small amount of revenues on a “fee-for-service” basis where revenue is based upon a flat fee, or fee per hour, or fee per unit of usage. The Company recognizes revenue for these types of services as they are provided and invoiced and when the revenue recognition criteria described above in clauses (a) through (d) have been satisfied.

     On March 29, 2005, the Company announced that CMS, the federal agency that administers the Medicare program, awarded the Company a contract to provide recovery audit services for the State of California’s Medicare spending. The three-year contract was effective on March 28, 2005. To fully address the range of payment recovery opportunities, the Company has sub-contracted with Concentra Preferred Systems, the nation’s largest provider of specialized cost containment services for the healthcare industry, which will add its clinical experience to the Company’s expertise in recovery audit services.

     The contract was awarded as part of a demonstration program by CMS to recover overpayments through the use of recovery auditing. The Company began to incur capital expenditures and employee compensation costs related to this contract in 2005. Such capital expenditures and employee compensation costs will continue to be incurred during 2007 as the Company continues to build this business. Management remains optimistic that the audit of Medicare payments in California will make an important contribution to future earnings; however, the Company has only limited ability to influence the timing of the processing of identified claims by third party claims processors, and the Company’s revenues from its Medicare audit efforts may vary significantly from period to period.

     In late 2006, legislation was passed that mandated that recovery audit of Medicare be extended beyond March 27, 2008, the end of the three-year recovery audit demonstration project under the original authorizing legislation, and that CMS enter into additional contracts with recovery audit contractors to expand recovery auditing of Medicare out to all fifty states by January 1, 2010. While it is difficult to assess the impact of this legislation, management believes it will provide additional opportunities to expand the Company’s Medicare audit recovery business.

   Operational Restructuring

     On August 19, 2005, the Company announced that it had taken the initial step in implementing an expense restructuring plan, necessitated by the Company’s declining revenue trend over the previous two and one-half years. On September 30, 2005, the Company’s Board of Directors approved the restructuring plan and authorized implementation of the plan. At the time the operational restructuring plan was approved, annualized savings from the restructuring plan were expected to be approximately $42.2 million. Management believes that as of December 31, 2006, cost savings in excess of the original estimate have been achieved. The expense restructuring plan encompassed exit activities, including reducing the number of clients served, reducing the number of countries in which the Company operates, reducing headcount, and terminating operating leases. Almost all of the savings were realized in the area of selling, general and administrative expenses and only a small percentage of the Company’s auditor staff was directly impacted by the reductions. See “- Operational Restructuring Expense” for more details regarding the operational restructuring.

   Financial Restructuring

     On October 19, 2005 the Board of Directors of the Company formed a Special Restructuring Committee to oversee the efforts of the Company, with the assistance of its financial advisor, Rothschild, Inc., to restructure the Company’s financial obligations, including its obligations under its then existing convertible subordinated notes, and to improve the Company’s liquidity. The restructuring was successfully completed on March 17, 2006.

     Pursuant to the restructuring, the Company exchanged for $124.1 million of its existing convertible subordinated notes due November 2006 (and $1.8 million of accrued interest thereon) the following new securities: $51.5 million of new senior notes, $59.6 million of new senior convertible notes that may be converted into shares of common stock, and new Series A convertible preferred stock having an initial liquidation preference of $14.9 million. As of December 31, 2006, the outstanding Series A convertible preferred stock had a liquidation preference of $11.2 million. Concurrently with closing the exchange offer, the Company also refinanced its senior indebtedness. See “- Liquidity and Capital Resources – Financial Restructuring” for more details regarding the financial restructuting.

Critical Accounting Policies

     “Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes a discussion of the Company’s consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the 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.

     The Company’s significant accounting policies are more fully described in Note 1 of “Notes to Consolidated Financial Statements” included in Item 8. of this Form 10-K. However, certain of the Company’s accounting policies are particularly important to the portrayal of its financial position and results of operations and require the application of significant judgment by management. As a result, they are subject to an inherent degree of uncertainty. Accounting policies that involve the use of estimates that meet both of the following criteria are considered by management to be “critical” accounting policies. First, the accounting estimate requires the Company to make assumptions about matters that are highly uncertain at the time that the accounting estimate is made. Second, alternate estimates in the current period, or changes in the estimate that are reasonably likely in future periods, would have a material impact on the presentation of the Company’s financial condition, changes in financial condition or results of operations.

     In addition to estimates that meet the “critical” estimate criteria, the Company also makes many other accounting estimates in preparing its consolidated financial statements and related disclosures. All estimates, whether or not deemed critical, affect reported amounts of assets, liabilities, revenues and expenses, as well as disclosures of contingent assets and liabilities. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, refund liabilities, accounts receivable allowance for doubtful accounts, goodwill and other intangible assets and income taxes. Management bases its estimates and judgments on historical experience, information available prior to the issuance of the consolidated financial statements and on various other factors that are believed to be reasonable under the circumstances. This information forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Materially different results can occur as circumstances change and additional information becomes known, including changes in those estimates not deemed “critical”.

     Management believes the following critical accounting policies, among others, involve its more significant estimates and judgments used in the preparation of its consolidated financial statements. The development and selection of accounting estimates, including those deemed “critical,” and the associated disclosures in this Form 10-K have been discussed with the audit committee of the Board of Directors.

	•		Revenue Recognition. The Company recognizes revenue on the accrual basis except with respect to its Meridian VAT reclaim business, and certain international Accounts Payable Services units where revenue is recognized on the cash basis in accordance with guidance issued by the Securities and Exchange Commission in Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition. Revenue is generally recognized for a contractually specified percentage of amounts recovered when it has been determined that our clients have received economic value (generally through credits taken against existing accounts payable due to the involved vendors or refund checks received from those vendors), and when the following criteria are met: (a) persuasive evidence of an arrangement exists; (b) services have been rendered; (c) the fee billed to the client is fixed or determinable; and (d) collectibility is reasonably assured. The determination that each of the aforementioned criteria has been met, particularly the determination of the timing of economic benefit received by the client and the determination that collectibility is reasonably assured, requires the application of significant judgment by management and a misapplication of this judgment could result in inappropriate recognition of revenue.
	•		Unbilled Receivables & Refund Liabilities. Unbilled receivables are usually contractual and relate to claims for which our client has received economic value. Unbilled receivables arise when a portion of the Company’s fee is deferred at the time of the initial invoice. At a later date (which can be up to a year after original invoice, or a year after completion of the audit period), the unbilled receivable amount is invoiced. Notwithstanding the deferred due date, the Company and the client acknowledge that this unbilled receivable has been earned at the time of the original invoice, it just has a deferred due date.
	•		Refund liabilities result from reductions in the economic value previously received by the Company’s clients with respect to vendor claims identified by the Company and for which the Company has previously recognized revenue. Such refund liabilities are recognized by either offsets to amounts otherwise due from clients or by cash refunds to clients. The Company computes the estimate of its refund liabilities at any given time based on actual historical refund data. A hypothetical 1% change in refund liabilities would have an impact on operating income of approximately $0.1 million.

Periodic changes in unbilled receivables and refund liabilities are recorded as adjustments to revenue.

•

Accounts Receivable Allowance for Doubtful Accounts. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability or unwillingness of its clients to make required payments. The Company evaluates the adequacy of these allowances on a periodic basis. This evaluation includes, but is not limited to, historical loss experience, the aging of current accounts receivable balances and provisions for adverse situations that may affect a client’s ability to pay. If the evaluation of allowance requirements differs from the actual aggregate allowance, adjustments are made to the allowance. This evaluation is inherently subjective, as it requires estimates that are susceptible to revision as more information becomes available. If the financial condition of any of the Company’s clients were to deteriorate, or their operating climates were to change, resulting in an impairment of either their ability or

			willingness to make payments, additional allowances may be required. If the Company’s estimate of required allowances for doubtful accounts is determined to be insufficient, it could result in decreased operating income in the period such determination is made. Conversely, if a client subsequently remits cash for an accounts receivable balance which has previously been written off, it could result in increased operating income in the period in which the payment is received. A hypothetical 1% change in the allowance for doubtful accounts would have an impact on operating income of less than $0.1 million.
	•		Goodwill and Other Intangible Assets. During the fourth quarter of 2006, the Company, working with its independent valuation advisors, Adams Capital, LLC, completed the required annual impairment testing of goodwill and other intangible assets in accordance with SFAS No. 142. As a result of this testing, the Company concluded that there was no impairment of goodwill and other intangible assets.
			During the fourth quarter of 2005, as part of its annual intangible asset impairment testing, the Company, together with its independent valuation advisors, Deloitte Financial Advisory Services LLP, performed valuation analyses of its goodwill balances as well as other intangible assets. As a result of this process, the Company determined that non-cash, pre-tax intangible asset impairment charges totaling $170.4 million were required during the quarter and year-ended December 31, 2005, in accordance with U.S. generally accepted accounting principles. The Company’s Accounts Payable Services segment had experienced its third consecutive year of significant declines in revenues and gross profit. The continuing downward trend in this segment was the single most important factor leading to the necessity of the impairment charge. This trend is also what necessitated the initiation of the implementation of the Company’s operational restructuring plan in the third quarter of 2005.
	•		Income Taxes. The Company’s reported effective tax rates on earnings (loss) from continuing operations before income taxes and discontinued operations approximated (11.1)%, (0.4)%, and 12,114% for the years ended December 31, 2006, 2005 and 2004, respectively. The unusual 2005 rate is primarily attributable to the nondeductible portions of the impairment charges discussed above and the change in the deferred tax asset valuation allowance. The unusual 2006 and 2004 rates are primarily attributable to the changes in the deferred tax asset valuation allowance.
			The Company’s effective tax rate is based on historical and anticipated future taxable income, statutory tax rates and tax planning opportunities available to the Company in the various jurisdictions in which it operates. Significant judgment is required in determining the effective tax rate and in evaluating the Company’s tax positions. Tax regulations require items to be included in the tax returns at different times than the items are reflected in the financial statements. As a result, the Company’s effective tax rate reflected in its Consolidated Financial Statements included in Item 8. of this Form 10-K is different than that reported in its tax returns. Some of these differences are permanent, such as expenses that are not deductible on the Company’s tax returns, and some are temporary differences, such as depreciation expense. Temporary differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in the Company’s tax returns in future years for which it has already recorded the tax benefit in the statement of operations. The Company establishes valuation allowances to reduce deferred tax assets to the amounts that it believes are more likely than not to be realized. These valuation allowances are adjusted in light of changing facts and circumstances. Deferred tax liabilities generally represent tax expense recognized in the Company’s consolidated financial statements for which payment has been deferred, or expense for which a deduction has already been taken on the Company’s tax returns but has not yet been recognized as an expense in its consolidated financial statements.
			SFAS No. 109, “Accounting for Income Taxes”, requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are deductible. In making this determination, management considers all available positive and negative evidence affecting specific deferred tax assets, including the Company’s past and anticipated future performance, the reversal of deferred tax liabilities, the length of carry-back and carry-forward periods, and the implementation of tax planning strategies.
			Objective positive evidence is necessary to support a conclusion that a valuation allowance is not needed for all or a portion of deferred tax assets when significant negative evidence exists. Cumulative losses in

			recent years are the most compelling form of negative evidence considered by management in this determination. In 2004, the Company recognized an increase in the valuation allowance against its remaining net deferred tax assets of $76.6 million. This increase was offset by the use of approximately $4.3 million of capital loss carry-forwards resulting in a net change in the valuation allowance of approximately $72.3 million. During 2005 the Company recorded an additional valuation allowance adjustment of $48.5 million, bringing the total valuation allowance balance to $139.6 million.
			For the year ended December 31, 2006, management has determined that based on all available evidence, a valuation allowance of $79.5 million is appropriate, as compared to a valuation allowance in the amount of $139.6 million as of the year ended December 31, 2005. The reduction in the valuation allowance is primarily attributable to the write-off of a number of deferred tax assets as a result of an ownership change as defined in IRC Section 382, and the corresponding limitations imposed on certain tax attributes as a result of this ownership change. The impact of IRC Section 382 on the deferred tax assets of the Company is discussed in more detail in Note 10 of “Notes to Consolidated Financial Statements” included in Item 8. of this Form 10-K.
	•		Stock-Based Compensation. The Company adopted the provisions of SFAS 123(R) in 2006. See “New Accounting Standards” below.

Results of Operations

     The following table sets forth the percentage of revenues represented by certain items in the Company’s Consolidated Statements of Operations for the periods indicated:

		Years Ended December 31,
		2006				2005				2004
Statements of Operations Data:
Revenues			100.0	%			100.0	%			100.0	%
Cost of revenues			72.8				66.8				61.9
Gross margin			27.2				33.2				38.1
Selling, general and administrative expenses			22.6				38.1				35.5
Impairment charges			—				58.3				—
Operational restructuring expenses			1.6				4.0				—
Operating income (loss)			3.0				(67.2	)			2.6
Interest expense, net			(6.1	)			(2.9	)			(2.4	)
Loss on financial restructuring			(3.8	)			—				—
Earnings (loss) from continuing operations before income taxes and discontinued operations			(6.9	)			(70.1	)			0.2
Income taxes			0.7				0.3				21.7
Earnings (loss) from continuing operations before discontinued operations			(7.6	)			(70.4	)			(21.5	)
Discontinued operations:
Earnings (loss) from discontinued operations and disposals, net of income taxes			(0.3	)			(0.7	)			1.1
Net earnings (loss)			(7.9	)%			(71.1	)%			(20.4	)%

     The Company has two reportable operating segments, the Accounts Payable Services segment and Meridian. See Note 5 of “Notes to Consolidated Financial Statements” included in Item 8. of this Form 10-K.

Accounts Payable Services

     Revenues. Accounts Payable Services revenues for the years ended December 31, 2006, 2005 and 2004 were as follows (in millions):

		2006				2005				2004
Domestic Accounts Payable Services revenue:
Retail		$	126.9			$	137.3			$	167.8
Commercial			13.5				17.1				33.5
			140.4				154.4				201.3
International Accounts Payable Services revenue			85.5				97.2				107.9
Total Accounts Payable Services revenue		$	225.9			$	251.6			$	309.2

     For the years ended December 31, 2006 and 2005, the Company continued to experience a decline in revenues for domestic retail/wholesale Accounts Payable Services. The decline in revenues is consistent with the revenue decline that the Company has been experiencing over the past several years and was primarily attributable to fewer claims being processed as a result of improved client processes. Revenues from both domestic and international operations decreased as the Company’s clients developed and strengthened their own internal audit capabilities as a substitute for the Company’s services. Further, the Company’s clients made fewer transaction errors as a result of the training and methodologies provided by the Company as part of the Company’s accounts payable recovery process. These trends are expected to continue, and as a result, revenues from the Accounts Payable Services segment are expected to continue to decline for the foreseeable future.

     Revenues from the Company’s domestic commercial Accounts Payable Services clients declined during 2006 and 2005, as well. The Company believes the market for providing disbursement audit services (which typically entail acquisition from the client of limited purchase data and an audit focus on a select few recovery categories) to commercial entities in the United States is declining with fewer audit starts and lower fee rates due to increasing pricing pressures. In response to the decline in performance for the commercial business, the Company continues to intentionally reduce the number of commercial clients serviced based on profitability, and this trend is expected to continue. As a result of the foregoing, revenues from domestic commercial Accounts Payable Services are expected to continue to decline for the foreseeable future.

     The declines in domestic retail, domestic commercial and international Accounts Payable Services revenues in 2005 versus 2004 are likewise attributable to the same factors as discussed above.

     The Company intends to maximize the revenue opportunities with each of its existing clients by identifying and auditing new categories of potential errors. The Company also intends to increase its emphasis on using its technology and professional experience to assist its clients in achieving objectives that do not directly involve recovery of past overpayments. These objectives are related to such things as transaction accuracy and compliance, purchasing effectiveness, M&A due diligence analysis, and processing efficiency in the procure-to-pay value chain.

     In addition the Company will continue to focus on its business within the Health Care industry and in particular with the Medicare audit. In 2005, CMS, the federal agency that administers the Medicare program, awarded the Company a contract to provide recovery audit services for the State of California’s Medicare spending. The three-year contract, effective March 28, 2005, was awarded as part of a demonstration program by CMS to recover overpayments on behalf of taxpayers through the use of recovery auditing. The Company began generating revenue from the California Medicare audit in 2006 and believes that Medicare audit has significant revenue and profit potential in future years. In late 2006, legislation was passed that mandated that recovery audit of Medicare be extended beyond March 27, 2008, the end of the three-year recovery audit demonstration project under the original authorizing legislation, and that CMS enter into additional contracts with recovery audit contractors to expand recovery auditing of Medicare out to all fifty states by January 1, 2010. While it is difficult to assess the impact of this legislation, management believes it will provide additional opportunities to expand the Company’s Medicare audit recovery business.

     Cost of Revenues (“COR”). COR consists principally of commissions paid or payable to the Company’s auditors based primarily upon the level of overpayment recoveries, and compensation paid to various types of hourly workers and salaried operational managers. Also included in COR are other direct costs incurred by these personnel,

including rental of non-headquarters offices, travel and entertainment, telephone, utilities, maintenance and supplies and clerical assistance. A significant portion of the components comprising COR for the Company’s domestic Accounts Payable Services operations are variable compensation-related costs that will increase or decrease with increases and decreases in revenues. The COR support base for domestic retail and domestic commercial operations are not separately distinguishable and are not evaluated by management individually. The Company’s international Accounts Payable Services also have a portion of their COR, although less than domestic Accounts Payable Services, that will vary with revenues. The lower variability is due to the predominant use of salaried auditor compensation plans in most emerging-market countries.

     Accounts Payable Services COR for the years ended December 31, 2006, 2005 and 2004 was as follows (in millions):

		2006				2005				2004
Domestic Accounts Payable Services COR		$	95.3			$	99.8			$	120.2
International Accounts Payable Services COR			66.6				68.1				72.7
Total Accounts Payable Services COR		$	161.9			$	167.9			$	192.9

     The dollar decrease in COR for 2006 compared to 2005 and for 2005 compared to 2004 was primarily due to lower revenues during each fiscal year. COR for domestic Accounts Payable services was $95.3 million or 67.9% of revenue for the year ended December 31, 2006. This amount includes $2.9 million of severance charges and $3.0 million of bonuses earned during the year. This compares to $99.8 million or 64.6% of revenue in 2005 and $120.2 million or 59.7% of revenue in 2004. In addition while the Company’s revenues continued to decrease in 2006 and 2005, the Company continued to incur certain fixed costs that are also a component of COR.

     On a dollar basis, COR for the Company’s international Accounts Payable Services decreased in 2006 and 2005 primarily due to lower revenues. COR for international Accounts Payable Services was $66.6 million or 77.9% of revenue for the year ended December 31, 2006. This amount includes $1.0 million of severance charges and $1.1 million of bonuses earned during the year. This compares to $68.1 million or 70.1% of revenue in 2005 and $72.7 million or 67.4% of revenue in 2004. Again, there is a portion of international Accounts Payable Services COR that is fixed expenses.

     Selling, General, and Administrative Expenses (“SG&A”). SG&A expenses include the expenses of sales and marketing activities, information technology services and the corporate data center, human resources, legal, accounting, administration, currency translation, headquarters-related depreciation of property and equipment and amortization of intangibles with finite lives. The SG&A support base for domestic retail and domestic commercial operations are not separately distinguishable and are not evaluated by management individually.

     Accounts Payable Services SG&A for the years ended December 31, 2006, 2005 and 2004 were as follows (in millions):

		2006				2005				2004
Domestic Accounts Payable Services SG&A		$	20.7			$	30.9			$	39.3
International Accounts Payable Services SG&A			10.2				28.5				29.4
Total Accounts Payable Services SG&A		$	30.9			$	59.4			$	68.7

Accounts Payable Services SG&A expenses for the year ended December 31, 2006 decreased by $28.5 million (or 48%) from the same period in 2005. Such expenses had already decreased in 2005 by $9.3 million (or 13.5%) from 2004. The reduction in both the domestic and international Accounts Payable Services’ SG&A is primarily the result of reducing the number of clients served, reducing the number of countries in which the Company operates, reducing headcount, terminating operating leases, and diligently managing the operating expenses of the business.

Meridian

     Meridian’s operating income for the years ended December 31, 2006, 2005 and 2004 was as follows (in millions):

		2006				2005				2004
Revenues		$	40.2			$	40.6			$	41.4
Cost of revenues			31.8				27.2				24.2
Gross margin			8.4				13.4				17.2
Selling, general and administrative expenses			3.7				6.6				8.2
Operational restructuring expense			—				0.4				—
Operating income		$	4.7			$	6.4			$	9.0

     Revenues. Meridian recognizes revenue in its contingent fee based VAT reclaim operations on the cash basis in accordance with SAB No. 104. Based on the guidance in SAB No. 104, Meridian defers recognition of revenues to the accounting period in which cash is both received from the foreign governmental agencies reimbursing VAT claims and transferred to Meridian’s clients. Since Meridian has minimal influence over when the foreign governmental agencies make their respective VAT reimbursement payments, Meridian’s revenues can vary markedly from period to period.

     Revenue generated by Meridian decreased by $0.4 million in 2006 when compared to the same period in 2005. Fee income on VAT refunds decreased by $1.7 million in 2006 when compared to 2005 due to the timing of refunds from local VAT authorities. For the year ended December 31, 2006, the exchange rate impact of the strengthening of the Euro, Meridian’s functional currency, relative to the U.S. dollar, resulted in the increase in revenue of $0.8 million when compared to the similar period of 2005. Meridian has developed a number of new business services offered on a fee for service basis, including accounts payable and employee expense processing for third parties, tax return processing for governmental departments, and Local Agent Services Division (“LASD”) opportunities. The revenues from these services totaled $4.7 million for the year ended December 31, 2006 as compared to $3.6 million for the year ended December 31, 2005.

     Revenues generated by Meridian decreased by $0.8 million in 2005 when compared to the same period in 2004. Fee income on VAT refunds decreased by $0.6 million in 2005 when compared to 2004 due to the timing of refunds from local VAT authorities. For the year ended December 31, 2005, the exchange rate impact of the strengthening of the Euro, Meridian’s functional currency, relative to the U.S. dollar, resulted in the increase in revenue of $0.2 million when compared to the similar period of 2004.

     Cost of Revenue (“COR”). COR for Meridian consists principally of compensation paid to various types of hourly workers and salaried operational managers. Also included in COR are other direct costs incurred by these personnel, including rental of offices, travel and entertainment, telephone, utilities, maintenance and supplies and clerical assistance. COR for the Company’s Meridian operations is largely fixed within a period and, for the most part, will not vary significantly with changes in revenue. In addition, revenue for Meridian is recognized on a cash rather than accrual basis. As a result, COR from period to period on a percentage basis, can vary in relation to revenue recognized during the period.

     For the year ended December 31, 2006 compared to the prior year, on a dollar basis, COR increased primarily due to increased payroll costs as a result of higher headcount and annual merit increases and increases in commissions paid to joint venture partners. The exchange rate impact of the strengthening of the Euro relative to the U.S. dollar was an increase in COR of $0.8 million when compared to the similar period of 2005. Without the exchange rate impact, COR increased by 2.6% for the year.

     For the year ended December 31, 2005 compared to the same period of the prior year, on a dollar basis, COR for the Company’s Meridian operations increased primarily due to increased payroll costs as a result of higher headcount related to new service offerings and an annual merit increase.

     Selling, General & Administrative Expenses (“SG&A”). Meridian’s SG&A expenses include the expenses of marketing activities, administration, professional services, property rentals and currency translation. Due to the relatively fixed nature of the Company’s SG&A expenses, these expenses as a percentage of revenues can vary markedly from period to period based on fluctuations in revenues.

     On a dollar basis, Meridian’s SG&A for the year ended December 31, 2006 compared to 2005, increased by $0.1 million primarily due the exchange rate impact of the strengthening of the Euro relative to the U.S. dollar.

     Meridian’s SG&A for the year ended December 31, 2005 compared to 2004, decreased primarily due to non-recurring professional services fees incurred in 2004 related to the Company’s Sarbanes-Oxley Act of 2002 compliance initiative.

Corporate Support

     SG&A. Corporate Support SG&A expenses include the expenses of sales and marketing activities, information technology services, the corporate data center, human resources, legal, accounting, treasury, administration, foreign currency translation, and stock-based compensation charges. Corporate support represents the unallocated portion of corporate SG&A expenses not specifically attributable to Accounts Payable Services or Meridian and totaled the following for the years ended December 31, 2006, 2005 and 2004 (in millions):

		2006				2005				2004
Selling, general and administrative expenses		$	25.6			$	45.4			$	47.5

     The decrease in SG&A for corporate support for the year ended December 31, 2006 compared to the same period in the prior year, was primarily the result of the Company’s 2005 operational restructuring plan. In addition, during fiscal year 2005 the Company recorded a $3.9 million severance charge for the departure of Messrs. Cook and Toma. This compares to a charge of $1.4 million recorded in 2004 for Messrs. Cook and Toma’s retirement benefits.

     In addition, during 2006 the Company was able to successfully sub-lease approximately 20% of the space located in its corporate headquarters. The Company estimates that the subleases will have a positive cash flow impact of approximately $4 million over the next eight years.

     Corporate support SG&A expenses in 2006 include $6.4 million of stock-based compensation charges compared to $0.4 million in 2005 and less than $0.1 million in 2004. The 2006 charges include $2.6 million related to performance based options that were voluntarily surrendered for cancellation by the Company’s chief executive officer and $3.4 million related to the Company’s 2006 Management Incentive Plan.

Operational Restructuring Expense

     On August 19, 2005, the Company announced that it had taken the initial step in implementing an expense restructuring plan, necessitated by the Company’s declining revenue trend over the previous three years. Revenues for the years 2002, 2003, 2004 and 2005 were $439.7 million, $367.4 million, $350.6 million and $292.2 million, respectively. With revenues decreasing in 2003, 2004 and 2005, the Company’s selling, general and administrative expenses had increased as a percentage of revenue in each period (33.6%, 35.5% and 38.1%, respectively). The expense restructuring plan encompassed exit activities, including reducing the number of clients served, reducing the number of countries in which the Company operates, reducing headcount, and terminating operating leases.

     The operational restructuring expense for the years ended December 31, 2006, 2005 and 2004 was as follows (in millions):

		2006				2005				2004
Operational restructuring expense		$	4.1			$	11.6				¾

     The Company initially expected that the implementation of the operational restructuring plan would result in severance related and other charges of approximately $14.6 million, most or all of which would be recognized prior to the end of 2006. Actual operational restructuring charges recognized in 2005 and 2006 totaled $15.7 million. As of December 31, 2005, the Company had recorded an $11.6 million charge related to the restructuring, $10.0 million

of which was for severance pay and benefits costs and $1.6 million of which related to early termination of operating leases. As of December 31, 2005 the Company had paid out approximately $2.8 million of severance and as of December 31, 2006 a total of $11.2 million of severance had been paid. As of December 31, 2005, the Company had accrued $1.2 million of early lease termination costs and leasehold improvement impairment charges of $0.4 million related to these leases. In 2006, the Company recorded additional restructuring charges for early termination costs of $1.4 million and leasehold improvement impairment charges of $0.5 million. The 2006 operational restructuring charges also included $2.2 million related to severance pay and related benefits costs.

     As of December 31, 2006, the operational restructuring plan as originally contemplated and approved in 2005 had essentially been completed. Management plans to continue to diligently manage costs on an ongoing basis. For example, in the fourth quarter of 2006, the Company implemented additional headcount reductions resulting in estimated annualized savings of approximately $6.5 million. As a result of this action, the Company recorded approximately $4 million of severance charges not classified as operational restructuring charges in the fourth quarter of 2006.

Discontinued Operations

     On October 30, 2001, the Company consummated the sale of its Logistics Management Services business to Platinum Equity, a firm specializing in acquiring and operating technology organizations and technology-enabled service companies worldwide. The transaction yielded initial gross sale proceeds, as adjusted, of approximately $9.5 million with up to an additional $3.0 million payable in the form of a revenue-based royalty over four years. The Company recognized a gain on the sale of discontinued operations during the year ended December 31, 2004 of $0.3 million, net of tax expense of $0.2 million, representing the receipt of a portion of the revenue-based royalty. During 2006 and 2005, the Company recognized additional gains on the sale of discontinued operations of $0.3 million and $0.5 million, respectively, related to the receipt of the final portions of the revenue-based royalty from the sale.

     During the fourth quarter of 2005, the Company classified its Channel Revenue and Airline businesses, and the Accounts Payable Service business units in South Africa and Japan, as discontinued operations. The South Africa and Japan Accounts Payable Services business units were closed during 2005. On January 11, 2006, the Company consummated the sale of its Channel Revenue business. The Channel Revenue business was sold for $0.4 million in cash to Outsource Recovery, Inc. Outsource Recovery also undertook to pay the Company an amount equal to 12% of gross revenues received by Outsource Recovery during each of the calendar years 2006 through 2009 with respect to the Channel Revenue business. The Company recognized a 2006 gain on sale of $0.3 million related to the sale of the Channel Revenue business. On July 17, 2006, the Company completed the sale of its Airline business to a former employee. During the year ended December 31, 2006, the Company recognized a loss of $0.3 million relating to the sale of the Airline business unit.

     During the fourth quarter of 2003, the Company declared its remaining Communications Services operations, formerly part of the Company’s then-existing Other Ancillary Services segment, as a discontinued operation. On January 16, 2004, the Company consummated the sale of the remaining Communications Services operations to TSL (DE) Corp., a newly formed company whose principal investor was One Equity Partners, the private equity division of Bank One. The operations were sold for approximately $19.1 million in cash paid at closing, plus the assumption of certain liabilities of Communications Services. In 2004, the Company recognized a gain from the sale of approximately $8.3 million, net of tax expense of approximately $5.5 million.

     On December 14, 2001, the Company consummated the sale of its French Taxation Services business (“ALMA”), as well as certain notes payable due to the Company, to Chequers Capital, a Paris-based private equity firm. In conjunction with this sale, the Company provided the buyer with certain warranties. Effective December 30, 2004, the Company, Meridian and ALMA (the “Parties”) entered into a Settlement Agreement pursuant to which the Company paid a total of $4.7 million on January 3, 2005 to resolve the buyer’s warranty claims and a commission dispute with Meridian. During 2004, the Company recognized loss of $3.1 million for amounts not previously accrued to provide for these claims. No tax benefit was recognized in relation to the expense. The Settlement Agreement terminated all contractual relationships between the Parties and specified that the Parties renounce all complaints, grievances and other actions.

     Operating losses of the discontinued operations up until their sale or closure for the three years ended December 31, 2006, 2005 and 2004 amounted to $1.1 million, $2.7 million and $2.5 million, respectively. Operating losses exclude general corporate overhead previously allocated to Communications Services and rent expense allocated to

the Airline unit. An income tax benefit of $1.1 million was allocated to earnings (loss) from discontinued operations in 2004. The net tax effects on earnings (loss) of discontinued operations were not significant in 2006 and 2005.

Other Items

     Depreciation and Amortization. Net purchases of property and equipment for the years ended December 31, 2006, 2005 and 2004 amounted to $1.7 million, $5.4 million and $11.5 million, respectively. The significant decline in the amount of new purchases that has occurred over recent years has resulted in significant declines in depreciation and amortization expense as older purchased items become fully depreciated. A decline in depreciation and amortization expense is expected to continue for the foreseeable future.

     Net Interest Expense. Net interest expense was $16.2 million, $8.4 million and $8.5 million for the years ended December 31, 2006, 2005 and 2004, respectively (net of interest income of $0.9 million, $0.5 million and $0.6 million, respectively). The Company’s interest expense for the years ended December 31, 2005 and 2004 was comprised of interest expense and amortization of the discount related to the convertible subordinated notes and interest on borrowings outstanding under the Company’s prior senior credit facility. The interest expense for 2005 as compared to 2004 was favorable by $0.1 million due to lower interest on borrowings outstanding under Company’s prior senior credit facility.

     Net interest expense in 2006 increased significantly as a result of the Company’s financial restructuring completed on March 17, 2006. The exchange of the convertible subordinated notes due November 2006 for the new senior convertible notes and new senior notes resulted in additional annual interest expense of approximately $7.7 million. Such amount may change in future periods. The Company has the option to pay interest on the new senior convertible notes in cash or in kind. Interest expense for 2006 also includes $0.9 million related to the excess of fair value over face value of the senior convertible notes which were issued on September 15, 2006 as “paid-in-kind” interest payments on the existing senior convertible notes. The Company has also incurred additional interest expense under its senior secured credit facility. See Note 8 of Notes to the Consolidated Financial Statements included in Item 8. to this Form 10-K.

     Income Tax Expense (Benefit). The Company’s reported effective tax rates on earnings (loss) from continuing operations before income taxes and discontinued operations approximated (11.1)%, (0.4)%, and 12,114% for the years ended December 31, 2006, 2005 and 2004, respectively. The unusual 2005 rate is primarily attributable to the nondeductible portions of the impairment charges discussed above and the change in the deferred tax asset valuation allowance. The unusual 2006 and 2004 rates are primarily attributable to the changes in the deferred tax asset valuation allowance.

     As of December 31, 2006, the Company had approximately $34.1 million of U.S. federal loss carryforwards available to reduce future taxable income. The loss carryforwards expire through 2026.

     On March 17, 2006, the company experienced an ownership change as defined under Section 382 of the Internal Revenue Code (“IRC”). This ownership change resulted in an annual IRC Section 382 limitation that mathematically limits the use of certain tax attribute carryforwards. Of the $34.1 million of U.S. federal loss carryforwards available to the Company, $27.1 million of the loss carryforwards are subject to an annual usage limitation of $1.4 million. The ownership change that took place in March 2006, resulted in the write-off of approximately $72.6 million in previously incurred and unexpired federal net operating loss carryforward amounts and the write-off of approximately $7.4 million in future tax deductions related to certain built-in losses associated with intangible and fixed assets. The following write-offs also took place in 2006 as a result of the ownership change: $34.1 million in unexpired capital loss carryforwards, $14.3 million in unexpired foreign tax credit carryforwards, and $0.2 million in unexpired R&D credit carryforward amounts. Approximately $191.9 million of previously incurred and unexpired state net operating losses were also written off as a result of this ownership change. The write-off of the tax attributes noted above resulted in a $62.8 reduction in the Company’s deferred tax assets which was offset by a corresponding reduction in the previously established valuation allowance against these assets.

     As a result of the enactment of The American Jobs Creation Act of 2004, in 2004, the Company repatriated approximately $1.8 million of earnings that were previously indefinitely reinvested. As a result of this repatriation, the Company recorded additional current income tax expense of approximately $0.7 million during 2004.

Quarterly Results

     The following tables set forth certain unaudited quarterly financial data for each of the last eight quarters during the Company’s fiscal years ended December 31, 2006 and 2005. The information has been derived from unaudited Condensed Consolidated Financial Statements that, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such quarterly information. The operating results for any quarter are not necessarily indicative of the results to be expected for any future period. Certain reclassifications have been made to the first three quarters of 2006 to conform to the presentation adopted in the fourth quarter of 2006.

		2006 Quarter Ended																2005 Quarter Ended
		Mar. 31				June 30				Sept. 30				Dec. 31				Mar. 31				June 30				Sept. 30				Dec. 31
		(In thousands, except per share data)
Revenues		$	65,538			$	65,308			$	64,733			$	70,516			$	75,147			$	78,162			$	66,415			$	72,428
Cost of revenues			47,257				48,246				45,172				53,072				48,595				50,997				48,057				47,442
Gross margin			18,281				17,062				19,561				17,444				26,552				27,165				18,358				24,986
Selling, general and administrative expenses			14,894				13,734				17,557				14,014				28,578				31,259				27,374				24,228
Impairment charges			—				—				—				—				—				—				—				170,375
Operational restructuring expense			408				1,580				153				1,989				—				—				7,922				3,628
Operating income (loss)			2,979				1,748				1,851				1,441				(2,026	)			(4,094	)			(16,938	)			(173,245	)
Interest expense, net			(2,543	)			(4,269	)			(5,260	)			(4,147	)			(1,810	)			(2,061	)			(2,089	)			(2,431	)
Gain (loss) on financial restructuring			(10,129	)			—				82				—				—				—				—				—
Earnings (loss) from continuing operations before income taxes and discontinued operations			(9,693				(2,521	)			(3,327	)			(2,706	)			(3,836	)			(6,155	)			(19,027	)			(175,676	)
Income tax expense (benefit)			650				338				726				305				687				412				715				(993	)
Earnings (loss) from continuing operations before discontinued operations			(10,343	)			(2,859	)			(4,053	)			(3,011	)			(4,523	)			(6,567	)			(19,742	)			(174,683	)
Discontinued operations:
Earnings (loss) from discontinued operations and disposals, net			49				(786	)			(181	)			85				(373	)			275				(1,056	)			(1,071	)
Net earnings (loss)		$	(10,294	)		$	(3,645	)		$	(4,234	)		$	(2,926	)		$	(4,896	)		$	(6,292	)		$	(20,798	)		$	(175,754	)
Basic and diluted earnings (loss) per share:
Earnings (loss) from continuing operations before discontinued operations		$	(1.67	)		$	(0.50	)		$	(0.66	)		$	(0.44	)		$	(0.73	)		$	(1.06	)		$	(3.18	)		$	(28.15	)
Discontinued operations			0.01				(0.12	)			(0.03	)			0.01				(0.06	)			0.04				(0.17	)			(0.17	)
Net earnings (loss)		$	(1.66	)		$	(0.62	)		$	(0.69	)		$	(0.43	)		$	(0.79	)		$	(1.02	)		$	(3.35	)		$	(28.32	)

Liquidity and Capital Resources

     Net cash provided by (used in) operating activities was $25.4 million, $(8.0) million and $10.8 million during the years ended December 31, 2006, 2005 and 2004, respectively. Cash provided by operating activities for the year ended December 31, 2006 was the result of the Company’s focus on improving working capital and reducing overall expenses. As of December 31, 2006 the Company’s days sales outstanding (“DSO”) had improved by 18% compared to the prior year, providing in excess of $7.2 million of additional cash. Renegotiating and paying vendors according to terms provided an additional $5.2 million. Cash used by operations for the year ended December 31, 2005 was primarily the result of a $205.5 million loss from continuing operations largely offset by noncash impairment, depreciation and amortization charges of $186.8 million and a $17.7 million reduction in receivable balances. Cash provided by operating activities during the year ended December 31, 2004 was principally influenced by the offset of a loss from continuing operations by a non-cash charge to provide a valuation allowance against the Company’s remaining deferred tax assets as of December 31, 2004, in addition to a release of restricted cash as a result of the Company’s prior senior credit facility.

     Net cash used in investing activities was $1.7 million, $5.4 million and $11.5 million during the years ended December 31, 2006, 2005 and 2004, respectively. Cash used in investing activities for all three years was attributable to capital expenditures net of proceeds from sales.

     Net cash provided by (used in) in financing activities was $(0.2) million, $14.9 million and $(31.3) million for the years ended December 31, 2006, 2005 and 2004, respectively. The net cash used by financing activities during the year ended December 31, 2006 primarily related to a new borrowing of $25 million used to pay off $16.8 million of existing debt and the payment of $7.5 million to professionals during the refinancing. Net cash provided from financing activities for the year ended December 31, 2005 related primarily to net borrowings on the Company’s revolving credit facility and $10 million bridge loan. Net cash used in financing activities during the year ended December 31, 2004 related primarily to repayment of amounts outstanding under the Company’s previous senior credit facility.

     Net cash provided by (used in) discontinued operations was $(0.8) million, $(1.9) million and $17.1 million during the years ended December 31, 2006, 2005 and 2004, respectively. Cash used in discontinued operations during the year ended December 31, 2006 was primarily related to the wind down and professional expenses associated with selling of the Airlines business. Cash used in discontinued operations during the year ended December 31, 2005 was primarily the result of net operating losses on the four business units classified as held for sale during the fourth quarter of 2005 offset by the receipt of a portion of the revenue-based royalty from the former Logistics Management Services segment that was sold in October 2001. Cash provided by discontinued operations during 2004 was the result of losses generated by the Communications Services operations prior to its sale on January 16, 2004 and net operating losses on the four business units classified as held for sale during the fourth quarter of 2005 offset by proceeds of $19.1 million from the sale of the remaining Communications Services business in January 2004.

     As of December 31, 2006, the Company had cash and cash equivalents of $35.0 million, and no borrowings under the revolver portion of its senior credit facility (see “Financial Restructuring” below). The revolver had approximately $17.0 million of calculated availability for borrowings. The Company had borrowings of $25.0 million outstanding under the term loan portion of its senior credit facility.

     Management believes that the Company will have sufficient borrowing capacity and cash generated from operations to fund its capital and operational needs for at least the next twelve months; however, current projections reflect that the Company’s core accounts payable business will continue to decline. Therefore, the Company must continue to successfully manage its expenses and grow its other business lines in order to stabilize and increase revenues and improve profitability.

     Contractual Obligations and Other Commitments

     As discussed in “Notes to Consolidated Financial Statements” included in Item 8. of this Form 10-K, the Company has certain contractual obligations and other commitments. A summary of those commitments as of December 31, 2006 is as follows:

		Payments Due by Period
		(in thousands)
						Less												More
						Than								3-5				Than
Contractual obligations		Total				1 Year				1-3 Years				Years				5 Years
Operating lease obligations		$	48,672			$	9,051			$	13,257			$	9,576			$	16,788
Capital lease obligations			1,089				61				726				302				—
Senior notes (1)			51,455				—				—				51,455				—
Interest on senior notes (1)			25,470				5,660				11,320				8,490				—
Senior convertible notes (2)			62,511				—				—				62,511				—
Interest on senior convertible notes (2)			28,130				6,251				12,502				9,377				—
Term Loan (3)			25,000				750				3,750				20,500				—
Series A convertible preferred stock (4)			16,225				—				—				16,225				—
Payments to Messrs. Cook and Toma (5)			6,826				1,530				3,064				1,217				1,015
Severance and deferred compensation			6,076				6,076				—				—				—
Total		$	271,454			$	29,379			$	44,619			$	179,653			$	17,803

   Financial Restructuring

     On October 19, 2005 the Board of Directors of the Company formed a Special Restructuring Committee to oversee the efforts of the Company, with the assistance of its financial advisor, Rothschild Inc., to restructure the Company’s financial obligations, including its obligations under its convertible subordinated notes due November 2006, and to improve the Company’s liquidity. The Company successfully completed the financial restructuring on March 17, 2006.

     Pursuant to the financial restructuring, the Company exchanged:

	•		$400 principal amount of its 11.0% Senior Notes Due 2011, plus an additional amount of principal equal to accrued and unpaid interest due on the existing notes held by the tendering holders;
	•		$480 principal amount of its 10.0% Senior Convertible Notes Due 2011 convertible into common stock; and
	•		one share, $120 liquidation preference, of its 9.0% Senior Series A Convertible Participating Preferred Stock convertible into common stock;

for each $1,000 principal amount of outstanding 4.75% Convertible Subordinated Notes due November 2006.

Approximately 99.3% of the aggregate $125 million outstanding convertible subordinated notes were tendered for exchange and accepted by the Company.

The material terms of these new securities include:

•

The new senior notes bear interest at 11%, payable semiannually in cash, and are callable at 104% of face in year 1, 102% in year 2, and at par in years 3 through 5.

	•		The new senior convertible notes bear interest at 10%, payable semiannually in cash or in kind, at the option of the Company. The new senior convertible notes are convertible into common stock at a rate of approximately 153.8 shares per $1,000 principal amount. On September 15, 2006, the Company issued $2.9 million of additional senior convertible notes in lieu of the semiannual cash interest payment.
	•		The new Series A convertible preferred stock has a 9% dividend, payable in cash or in kind, at the option of the Company. The new Series A convertible preferred stock is convertible at the option of the holders into shares of common stock at the rate of $2.8405 of liquidation preference per share of common stock. As of December 31, 2006, 37,030 shares of Series A convertible preferred stock had been converted into 1,618,995 shares of common stock.
	•		The Series A convertible preferred stock has the right to vote with the Company’s common stock on most matters requiring shareholder votes. The Company has the right to redeem the new senior convertible notes at par at any time after repayment of the new senior notes. The Company also has the right to redeem the new Series A convertible preferred stock at the stated liquidation preference at any time after repayment of the new senior notes and the new senior convertible notes.
	•		Both the new senior notes and the new senior convertible notes mature on the fifth anniversary of issuance. The new Series A convertible preferred stock must be redeemed on the fifth anniversary of issuance.

     As a part of its financial restructuring, the Company also entered into a new senior secured credit facility with Ableco LLC (“Ableco”) and The CIT/Group/Business Credit, Inc., a portion of which was syndicated to the Company’s prior bridge financing lenders, Petrus Securities L.P. and Parkcentral Global Hub Limited (collectively, the “Petrus Entities”) and Blum Strategic Partners II GmbH & Co. K.G. and Blum Strategic Partners II, L.P. (collectively, the “Blum Entities”). An affiliate of the Blum Entities was a member of the Ad Hoc Committee of noteholders of the Company’s convertible subordinated notes due November 2006, with the right to designate one member of the Company’s Board of Directors, and together with its affiliates, the Company’s largest shareholder. The new credit facility includes (1) a $25.0 million term loan, and (2) a revolving credit facility that provides for revolving loan borrowings of up to $20 million. No borrowings are currently outstanding under the revolving credit facility.

     PRG-Schultz USA, Inc., the Company’s direct wholly-owned subsidiary (the “borrower”), is the primary borrower under the senior secured credit facility, and the Company and each of its other existing and subsequent acquired or organized direct and indirect domestic wholly-owned subsidiaries have guaranteed the facility. The borrower’s and all of the Company’s other subsidiaries’ obligations under the senior secured credit facility are secured by liens on substantially all of the Company’s assets (including the stock of our domestic subsidiaries and two-thirds of the stock of certain of our foreign subsidiaries).

     The senior secured credit facility will expire on March 17, 2010, the fourth anniversary of the closing of the exchange offering. The term loan under the senior secured credit facility will amortize with quarterly payments beginning on the first anniversary of the closing date of $250,000 per quarter for the second year of the facility, and $500,000 per quarter for the third and fourth years of the facility, with the balance due at maturity on the fourth anniversary of closing.

     The term loan under the senior secured credit facility may be repaid at the Company’s option at any time; provided, that any such pre-payment in the first year shall be subject to a prepayment penalty of 3.0% of the principal amount pre-paid, and pre-payments in the second year shall be subject to a pre-payment penalty of 2.0% of the principal amount pre-paid. The term loan may be pre-paid at any time following the 2nd anniversary of the closing date without penalty. The senior secured credit facility also provides for certain mandatory repayments, including a portion of our consolidated excess cash flow (which will be based on an adjusted EBITDA calculation), sales of assets and sales of certain debt and equity securities, in each case subject to certain exceptions and reinvestment rights.

     The Company’s ability to borrow revolving loans under the senior secured credit facility is limited to a borrowing base of a percentage of our eligible domestic receivables, subject to adjustments. Based on this borrowing base calculation, the Company had approximately $15.0 million of availability under the revolving credit facility at the closing of the exchange offer.

     The interest on the term loan is based on a floating rate equal to the reserve adjusted London inter-bank offered rate, or LIBOR, plus 8.5% (or, at our option, a published prime lending rate plus 5.5%). The interest rate on outstanding revolving credit loans is based on LIBOR plus 3.75% (or, at our option, a published prime lending rate plus 1.0%). The Company will also pay an unused commitment fee on our revolving credit facility of 0.5%. The senior secured credit facility also required the payment of commitment fees, closing fees and additional expense reimbursements of approximately $1.1 million at closing.

     The senior secured credit facility contains customary representations and warranties, covenants and conditions to borrowing. The senior secured credit facility also contains a number of financial maintenance and restrictive covenants that are customary for a facility of this type, including without limitation (and subject to certain exceptions and qualifications): maximum capital expenditures (to be measured annually); maximum total debt to EBITDA (to be measured quarterly); minimum EBITDA (to be measured quarterly); minimum fixed charge coverage ratio (to be measured quarterly); provision of financial statements and other customary reporting; notices of litigation, defaults and un-matured defaults with respect to material agreements; compliance with laws, permits and licenses; inspection of properties, books and records; maintenance of insurance; limitations with respect to liens and encumbrances, dividends and retirement of capital stock, guarantees, sale and lease back transactions, consolidations and mergers, investments, capital expenditures, loans and advances, and indebtedness; compliance with pension, environmental and other laws, operating and capitalized leases, and limitations on transactions with affiliates and prepayment of other indebtedness.

     The senior secured credit facility contains customary events of default, including non-payment of principal, interest or fees, inaccuracy of representations or warranties in any material respect, failure to comply with covenants, cross-default to certain other indebtedness, loss of lien perfection or priority, material judgments, bankruptcy events and change of ownership or control.

     Transaction Costs of Financial Restructuring, Including Exchange Offer

     In connection with the exchange offer and the financial restructuring, the Company incurred a total of approximately $9.0 million of transaction costs including legal and financial advisory fees. These costs included fees and expenses of the Ad Hoc Committee for noteholders paid by the Company.

     Forbearance Agreement

     As of December 31, 2005, the Company was not in compliance with all of its financial covenants under its prior senior credit facility. On November 8, 2005, the Company entered into a Forbearance Agreement with the Lender and each of the Company’s domestic subsidiaries. Pursuant to the Forbearance Agreement, the Lender agreed to forbear from exercising any right or remedy under the prior senior credit facility and related credit documents (including, without limitation, the right to cease making revolving loans) or applicable law, but only to the extent that such right or remedy arose exclusively as a result of the occurrence of certain acknowledged events of default; however, the Lender did retain its right to prohibit certain payments to the holders of the Company’s 4³/4% convertible subordinated notes. In addition to the financial covenant defaults discussed above, the acknowledged events of default included the failure to provide information and documentation regarding certain of the Company’s subsidiaries.

     In consideration of the Lender’s willingness to enter the Forbearance Agreement, the Company paid the Lender a nonrefundable fee in the amount of $0.1 million and agreed to reimburse certain expenses of the Lender and its counsel. The Company satisfied all of its obligations under the Forbearance Agreement, and replaced the prior senior credit facility with its new senior facility, discussed above, on March 17, 2006. In consideration of the willingness of the Lender to enter into the Forbearance Agreement, the Company and its domestic subsidiaries released the Lender and certain of its affiliates from any and all damages and liabilities of whatever kind or nature, known or unknown, relating to or arising under the prior senior credit facility, excluding any ongoing obligations the Lender had pursuant to the prior senior credit facility.

     $10 million Bridge Loan

     On December 23, 2005, the Company entered into a Credit Agreement, Security Agreement and Pledge Agreement with Petrus Securities L.P. and Parkcentral Global Hub Limited (collectively, the “Petrus Entities”) and Blum Strategic Partners II GmbH & Co. K.G. and Blum Strategic Partners II, L.P. (collectively, the “Blum Entities”). These agreements provided for a term loan to PRG-Schultz USA Inc., a wholly owned subsidiary of the Company (the “Borrower”), in an aggregate principal amount of $10 million that matured on the earlier of the closing of the Company’s restructuring of its debt or August 15, 2006 (the “Bridge Loan”). This loan was repaid and replaced by the new credit facility on March 17, 2006.

     The Blum Entities are beneficial owners of the Company’s common stock and the new securities issued in the Company’s recent financial restructuring, and they have the right to designate a member of the Company’s Board of Directors and to have an observer present at all Board meetings. The Petrus Entities are also beneficial owners of the Company’s common stock and the new securities issued in the restructuring. The Petrus Entities and Blum Capital Partners L.P. served on the Ad Hoc Committee of noteholders of the Company’s convertible subordinated notes due November 2006.

     Prior Senior Credit Facility

     The Company’s prior senior credit facility with Bank of America (the “Lender”) provided for revolving credit loans up to a maximum amount of $30.0 million, limited by the Company’s accounts receivable balances. The prior senior credit facility provided for the availability of Letters of Credit subject to a $10.0 million sub-limit. The prior senior credit facility was retired and replaced by the new senior credit facility discussed above, in connection with the closing the exchange offer.

     Executive Severance Payments

     The July 31, 2005 retirements of the Company’s former Chairman, President and CEO, John M. Cook, and the Company’s former Vice Chairman, John M. Toma, resulted in an obligation to pay retirement benefits of $7.0 million to be paid in monthly cash installments principally over a three-year period, beginning February 1, 2006. On March 16, 2006, the terms of the applicable severance agreements were amended in conjunction with the Company’s financial restructuring. Pursuant to the terms of the severance agreements, as amended (1) the Company’s obligations to pay monthly cash installments to Mr. Cook and Mr. Toma have been extended from 36 months to 58 months and from 24 months to 46 months, respectively; however, the total dollar amount of monthly cash payments to be made to each remains unchanged, and (2) the Company agreed to pay a fixed sum of $150,000 to CT Investments, LLC, to defray the fees and expenses of the legal counsel and financial advisors to Messrs. Cook and Toma. The original severance agreements, and the severance agreements, as amended, provide for an annual reimbursement, beginning on or about February 1, 2007, to Mr. Cook and Mr. Toma for the cost of health insurance for themselves and their respective spouses (not to exceed $25,000 and $20,000, respectively, subject to adjustment based on changes in the Consumer Price Index), continuing until each reaches the age of 80. Charges of $3.9 million, $1.4 million and $2.3 million had been accrued in 2005, 2004 and 2003 and prior years, respectively, related to these retirement obligations.

     Bankruptcy Litigation

     On April 1, 2003, Fleming Companies, one of the Company’s larger U.S. Accounts Payable Services clients at the time filed for Chapter 11 bankruptcy reorganization. During the quarter ended March 31, 2003, the Company received approximately $5.6 million in payments on account from Fleming. On January 24, 2005, the Company received a demand from the Fleming Post Confirmation Trust (“PCT”), a trust which was created pursuant to Fleming’s Chapter 11 reorganization plan to represent the client, for preference payments received by the Company. The demand stated that the PCT’s calculation of the preferential payments was approximately $2.9 million. The Company disputed the claim. Later in 2005, the PCT filed suit against the Company seeking to recover approximately $5.6 million in payments that were made to the Company by Fleming during the 90 days preceding Fleming’s bankruptcy filing, and that are alleged to be avoidable either as preferences or fraudulent transfers under

the Bankruptcy Code. The Company believes that it has valid defenses to certain of the PCT’s claims in the proceeding. In December 2005, the PCT offered to settle the case for $2 million. The Company countered with an offer to waive its bankruptcy claim and to pay the PCT $250,000. The PCT rejected the Company’s settlement offer, and although the parties have agreed to settlement mediation, the litigation is ongoing.

     French Taxation Services Settlement

     On December 14, 2001, the Company consummated the sale of its French Taxation Services business (“ALMA”), as well as certain notes payable due to the Company, to Chequers Capital, a Paris-based private equity firm. In conjunction with this sale, the Company provided the buyer with certain warranties. Effective December 30, 2004, the Company, Meridian and ALMA (the “Parties”) entered into a Settlement Agreement (the “Agreement”) pursuant to which the Company paid a total of $4.7 million, to resolve the buyer’s warranty claims and a commission dispute with Meridian. During the fourth quarter of 2004, the Company recognized a loss on discontinued operations of $3.1 million for amounts not previously accrued to provide for those claims. No tax benefit was recognized in relation to the expense. The Agreement settles all remaining indemnification obligations and terminates all contractual relationships between the Parties and further specifies that the Parties will renounce all complaints, grievances and other actions.

     Contingent Obligation to Repay Industrial Development Authority of Ireland Grant

     During the period of May 1993 through September 1999, Meridian received grants from the Industrial Development Authority of Ireland (“IDA”) in the sum of 1.4 million Euros ($1.8 million at December 31, 2006 exchange rates). The grants were paid primarily to stimulate the creation of 145 permanent jobs in Ireland. As a condition of the grants, if the number of permanently employed Meridian staff in Ireland falls below 145 prior to September 23, 2007, the date the contingency expires, the grants are repayable in full. As of December 31, 2006, Meridian currently employed 213 permanent employees in Dublin, Ireland. The European Union (“EU”) has currently proposed legislation that will remove the need for suppliers to charge VAT on the supply of goods and services to clients within the EU. The effective date of the proposed legislation is currently unknown. Management estimates that the proposed legislation, if enacted as currently drafted, would eventually have a material adverse impact on Meridian’s results of operations from its VAT business. If Meridian’s results of operations were to decline as a result of the enactment of the proposed legislation, it is possible that the number of permanent employees that Meridian employs in Ireland could fall below 145 prior to September 2007. Should such an event occur, the full amount of the grants previously received by Meridian will need to be repaid to IDA. However, management currently estimates that any impact on employment levels related to a possible change in the EU legislation will not be realized until after September 2007. As any potential liability related to these grants is not currently determinable, the Company’s Consolidated Statement of Operations for the year ended December 31, 2006 included in Item 8. of this Form 10-K does not include any expense related to this matter. Management is monitoring this situation and if it appears probable Meridian’s permanent staff in Ireland will fall below 145 and that grants will need to be repaid to IDA, the Company will recognize an expense at that time.

     Limitation on Tax Loss and Credit Carryforwards

     On March 17, 2006, as a result of the financial restructuring, the company experienced an ownership change as defined under Section 382 of the Internal Revenue Code (“IRC”). This ownership change resulted in an annual IRC Section 382 limitation that mathematically limits the use of certain tax attribute carryforwards. Of the $34.1 million of U.S. federal net loss carryforwards available to the company, $27.1 million of the loss carryforwards are subject to an annual usage limitation of $1.4 million. The ownership change that took place in March 2006, resulted in the write-off of approximately $72.6 million in previously incurred and unexpired federal net operating loss carryforward amounts and the write-off of approximately $7.4 million in future tax deductions related to certain built-in losses associated with intangible and fixed assets. The following write-offs also took place in 2006 as a result of the ownership change: $34.1 million in unexpired capital loss carryforwards, $14.3 million in unexpired foreign tax credit carryforwards, and $0.2 million in unexpired R&D credit carryforward amounts. Approximately $191.9 million of previously incurred and unexpired state net operating losses were also written off as a result of this ownership change. The write-off of the tax attributes noted above resulted in a $62.8 reduction in the Company’s deferred tax assets which was offset by a corresponding reduction in the previously established valuation allowance against these assets.

     Off Balance Sheet Arrangements

     As of December 31, 2006, the Company did not have any material off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of the SEC’s Regulation S-K.

New Accounting Standards

     SFAS No. 123(R). In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment”(“SFAS No. 123(R)”). This pronouncement amended SFAS No. 123, “Accounting for Stock-Based Compensation,” and superseded Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123(R) requires that companies account for awards of equity instruments issued to employees under the fair value method of accounting and recognize such amounts in their statements of operations. The Company adopted SFAS No. 123(R) on January 1, 2006, using the modified prospective method and, accordingly, has not restated the consolidated statements of operations for periods prior to January 1, 2006. Under SFAS No. 123(R), the Company is required to measure compensation cost for all stock-based awards at fair value on the date of grant and recognize compensation expense in its consolidated statements of operations over the service period over which the awards are expected to vest. The Company recognizes compensation expense over the indicated vesting periods using the straight-line method. See Note 14 of “Notes to Consolidated Financial Statements” included in Item 8. to this Form 10-K for information about stock-based compensation recognized in 2006 under SFAS N0. 123(R).

     On December 15, 2005, the Company’s Compensation Committee of the Board of Directors authorized the immediate vesting of all outstanding unvested time-vesting options that had option prices that were out of the money as of such date (the “underwater” stock options). This action accelerated the vesting of 263,762 options as of November 30, 2005. The accelerated options had option prices that ranged from $31.60 per share to $172.50 per share and a weighted average option price per share of $49.70. The optionees whose options were accelerated included, among others, David Cole, the non-executive Chairman of the Board (15,000 options) and the following executive officers: James McCurry (50,000 options), James Moylan (37,500 options) and James Benjamin (7,500 options). The Compensation Committee’s decision to accelerate the vesting of these “underwater” stock options was made primarily to avoid recognizing compensation expense associated with these stock options in future financial statements upon the Company’s adoption of SFAS No. 123(R). Management estimated that compensation expense would be approximately $2.4 million, $1.2 million and $0.5 million lower in 2006, 2007 and 2008, respectively, than if the vesting had not been accelerated.

     SFAS No. 154. In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”, a replacement of Accounting Principles Board Opinion No. 20, “Accounting Changes”, and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements” (“SFAS No. 154”). SFAS No. 154 changes the requirements for the accounting for, and reporting of, a change in accounting principle (including voluntary changes). Previously, changes in accounting principles were generally required to be recognized by way of a cumulative effect adjustment within net income during the period of the change. SFAS No. 154 requires retrospective application to prior periods’ financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005; however, the statement does not change the transition provisions of any existing accounting pronouncements. The Company adopted this pronouncement beginning in fiscal year 2006. Such adoption did not have a material effect on its results of operations, financial position or cash flows.

     FIN No. 48. In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109” (“FIN No. 48”). This Interpretation prescribes a “more-likely-than-not” recognition threshold that must be met before a tax benefit can be recognized in the financial statements. The Interpretation also offers guidelines to determine how much of a tax benefit to recognize in the financial statements. The Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006. The Company is currently assessing and evaluating the impact this Interpretation will have on its consolidated financial statements.

     SFAS No. 157. In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, with earlier application encouraged. Any amounts recognized upon adoption as a cumulative effect adjustment will be recorded to the opening balance of retained earnings (deficit) in the year of adoption. The Company is currently evaluating the impact of adopting SFAS No. 157 on its consolidated financial statements.

     SAB 108. In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 was issued in order to eliminate the diversity of practice in how public companies quantify misstatements of financial statements, including misstatements that were not material to prior years’ financial statements. The Company adopted the provisions of SAB 108 effective December 31, 2006, as required. The adoption of such provisions did not impact the consolidated financial statements.

     SFAS No. 159. In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115” (“SFAS No. 159”). This standard permits an entity to choose to measure certain financial assets and liabilities at fair value. SFAS No. 159 also revises provisions of SFAS No. 115 that apply to available-for-sale and trading securities. This statement is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the effect, if any, that the adoption of this pronouncement will have on its consolidated financial statements.

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

     Foreign Currency Market Risk. Our functional currency is the U.S. dollar although we transact business in various foreign locations and currencies. As a result, our financial results could be significantly affected by factors such as changes in foreign currency exchange rates, or weak economic conditions in the foreign markets in which we provide services. Our operating results are exposed to changes in exchange rates between the U.S. dollar and the currencies of the other countries in which we operate. When the U.S. dollar strengthens against other currencies, the value of nonfunctional currency revenues decreases. When the U.S. dollar weakens, the functional currency amount of revenues increases. Overall, we are a net receiver of currencies other than the U.S. dollar and, as such, benefit from a weaker dollar. We are therefore adversely affected by a stronger dollar relative to major currencies worldwide. Given the number of variables involved in calculating our revenues and expenses derived from currencies other than the U.S. dollar, including multiple currencies and fluctuating transaction volumes, the Company believes that it cannot provide a quantitative analysis of the impact of hypothetical changes in foreign currency exchange rates that would be meaningful to investors.

     Interest Rate Risk. Our interest income and expense are most sensitive to changes in the general level of U.S. interest rates. In this regard, changes in U.S. interest rates affect the interest earned on our cash equivalents as well as interest paid on our debt. At December 31, 2006, there were borrowings of $25.0 million outstanding under the term loan portion of the Company’s senior credit facility. As of December 31, 2006, the Company had $17.0 million available for revolving loans under the senior credit facility, but had no borrowings under the revolver portion of the new credit facility. The interest on the term loan is based on a floating rate equal to the reserve adjusted London inter-bank offered rate, or LIBOR, plus 8.5% (or, at our option, a published prime lending rate plus 5.5%). The interest rate on outstanding revolving credit loans is based on LIBOR plus 3.75% (or, at our option, a published prime lending rate plus 1.0%). A hypothetical 100 basis point change in interest rates applicable to the term loan would result in an approximate $0.3 million change in pre-tax income. Assuming full utilization of the revolving credit facility, a hypothetical 100 basis point change in interest rates applicable to the revolver would result in an approximate $0.2 million change in pre-tax income.

     Derivative Instruments. As a multi-national company, the Company faces risks related to foreign currency fluctuations on its foreign-denominated cash flows, net earnings, new investments and large foreign currency denominated transactions. The Company uses derivative financial instruments from time to time to manage foreign currency risks. The use of financial instruments modifies the exposure of these risks with the intent to reduce the risk to the Company. The Company does not use financial instruments for trading purposes, nor does it use leveraged financial instruments. The Company did not have any derivative financial instruments outstanding as of December 31, 2006.

     Stock-Based Compensation. The Company estimates the fair value of awards of restricted shares and nonvested shares, as defined in SFAS 123(R), as being equal to the market value of the common stock. Also, under SFAS 123(R), companies must classify their share-based payments as either liability-classified awards or as equity-classified awards. Liability-classified awards are remeasured to fair value at each balance sheet date until the award is settled. The Company has classified its share-based payments that are settled in cash as liability-classified awards. The liability for liability-classified awards is generally equal to the fair value of the award as of the balance sheet date times the percentage vested at the time. The change in the liability amount from one balance sheet date to another is charged (or credited) to compensation cost. Based on the number of liability-classified awards outstanding as of December 31, 2006, a hypothetical $1.00 change in the market value of the Company’s common stock would result in $0.3 million change in pre-tax income.

ITEM 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

		Page
		Number
Reports of Independent Registered Public Accounting Firms			45 & 46
Consolidated Statements of Operations for the Years ended December 31, 2006, 2005 and 2004			47
Consolidated Balance Sheets as of December 31, 2006 and 2005			48
Consolidated Statements of Shareholders’ Equity (Deficit) for the Years ended December 31, 2006, 2005 and 2004			49
Consolidated Statements of Cash Flows for the Years ended December 31, 2006, 2005 and 2004			50
Notes to Consolidated Financial Statements			51

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of PRG-Schultz International, Inc.
Atlanta, Georgia

We have audited the accompanying consolidated balance sheet of PRG-Schultz International, Inc. and subsidiaries (the Company) as of December 31, 2006, and the related consolidated statements of operations, shareholders’ equity (deficit), and cash flows for the year ended December 31, 2006. We have also audited the financial statement schedule as listed in Item 15(a)(2) as Schedule II as of and for the year ended December 31, 2006. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes 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 audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PRG-Schultz International, Inc. and subsidiaries as of December 31, 2006 and the results of their operations and their cash flows for the year ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule presents fairly, in all material respects, the information set forth therein as of and for the year ended December 31, 2006.

As discussed in Note 1(o) to the consolidated financial statements, “Stock-Based Compensation,” the Company adopted the provisions of SFAS No. 123(R) during 2006.

Atlanta, Georgia		/s/ BDO SEIDMAN, LLP
March 21, 2007

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
PRG-Schultz International, Inc.:

We have audited the accompanying consolidated balance sheet of PRG-Schultz International, Inc. and subsidiaries (the Company) as of December 31, 2005 and the related consolidated statements of operations, shareholders’ equity (deficit), and cash flows for each of the years in the two-year period ended December 31, 2005. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule as listed in Item 15(a)(2). These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PRG-Schultz International, Inc. and subsidiaries as of December 31, 2005, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule for each of the years in the two-year period ended December 31, 2005, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Notes 1 and 8 to the consolidated financial statements, the Company has substantial debt obligations and, during 2005, it was required to enter into a forbearance agreement to obtain covenant relief. The Company has incurred significant losses in each of the years in the two-year period ended December 31, 2005 and has a shareholders’ deficit of $102.4 million at December 31, 2005. Realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the Company’s ability to return to profitability, to complete planned restructuring activities, and to generate cash flows from operations, as well as the Company maintaining credit facilities adequate to conduct its business. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Atlanta, Georgia		/s/ KPMG LLP
March 17, 2006

PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

		Years Ended December 31,
		2006				2005				2004
Revenues		$	266,095			$	292,152			$	350,602
Cost of revenues			193,747				195,091				217,059
Gross margin			72,348				97,061				133,543
Selling, general and administrative expenses			60,199				111,439				124,365
Impairment charges (Notes 1(j) and 7)			—				170,375				—
Operational restructuring expense (Note 16)			4,130				11,550				—
Operating income (loss)			8,019				(196,303	)			9,178
Interest (expense)			(17,145	)			(8,936	)			(9,142	)
Interest income			926				545				593
Loss on financial restructuring (Note 8)			(10,047	)			—				—
Earnings (loss) from continuing operations before income taxes and discontinued operations			(18,247	)			(204,694	)			629
Income taxes (Note 10)			2,019				821				76,197
Earnings (loss) from continuing operations before discontinued operations			(20,266	)			(205,515	)			(75,568	)
Discontinued operations (Note 2):
Earnings (loss) from discontinued operations, net of income tax benefit of $1,080 in 2004			(1,125	)			(2,704	)			(1,411	)
Net gains on sales of discontinued operations, net of income tax expense of $5,722 in 2004			292				479				5,496
Earnings (loss) from discontinued operations			(833	)			(2,225	)			4,085
Net earnings (loss)		$	(21,099	)		$	(207,740	)		$	(71,483	)
Basic and diluted earnings (loss) per common share (Note 6):
Earnings (loss) from continuing operations before discontinued operations		$	(3.20	)		$	(33.14	)		$	(12.23	)
Discontinued operations			(0.12	)			(0.36	)			0.66
Net earnings (loss)		$	(3.32	)		$	(33.50	)		$	(11.57	)
Weighted-average common shares outstanding (Note 6 ):
Basic and diluted			6,616				6,201				6,177

See accompanying Notes to Consolidated Financial Statements.

PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

		December 31,
		2006				2005
ASSETS (Note 8)
Current assets:
Cash and cash equivalents		$	35,013			$	11,848
Restricted cash (Note 13(c))			3,438				3,096
Receivables:
Contract receivables, less allowances of $1,919 in 2006 and $2,717 in 2005:
Billed			32,464				43,591
Unbilled			8,457				9,608
			40,921				53,199
Employee advances and miscellaneous receivables, less allowances of $1,306 in 2006 and $2,974 in 2005			2,534				2,737
Total receivables			43,455				55,936
Funds held for client obligations			42,304				32,479
Prepaid expenses and other current assets			2,667				3,113
Deferred income taxes (Note 10)			139				67
Total current assets			127,016				106,539
Property and equipment:
Computer and other equipment			52,083				65,575
Furniture and fixtures			6,326				7,744
Leasehold improvements			8,241				8,460
			66,650				81,779
Less accumulated depreciation and amortization			56,247				64,326
Property and equipment, net			10,403				17,453
Goodwill (Note 7)			4,600				4,600
Intangible assets, less accumulated amortization of $6,838 in 2006 and $5,453 in 2005 (Note 7)			23,062				24,447
Unbilled receivables			3,175				2,789
Deferred loan costs, net of accumulated amortization			6,822				2,650
Deferred income taxes (Note 10)			391				530
Other assets (Note 13(b))			3,198				3,054
		$	178,667			$	162,062
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Obligations for client payables		$	42,304			$	32,479
Accounts payable and accrued expenses			23,676				22,362
Accrued payroll and related expenses			41,026				44,031
Refund liabilities			10,112				11,741
Deferred revenue			3,930				4,583
Convertible subordinated notes, net of unamortized discount of $4 in 2005 (Note 8)			¾				466
Current portions of other debt obligations			750				¾
Total current liabilities			121,798				115,662
Convertible subordinated notes, net of unamortized discount of $929 in 2005 (Note 8)			¾				123,601
Senior notes, net of unamortized discount of $7,659 in 2006 (Note 8)			43,796				¾
Senior convertible notes, including unamortized premium of $5,519 in 2006 (Note 8)			68,030				¾
Other debt and capital lease obligations (Note 8)			25,096				16,800
Noncurrent compensation obligations (Note 13(e))			5,859				1,388
Refund liabilities			1,659				1,785
Other long-term liabilities			5,713				5,191
Total liabilities			271,951				264,427
Mandatorily redeemable participating preferred stock (Note 8)			11,199				¾
Shareholders’ equity (deficit) (Notes 8, 12 and 14):
Common stock, no par value; $.01 stated value per share. Authorized 50,000,000 shares; issued 8,398,770 shares in 2006 and 6,787,683 shares in 2005			84				68
Additional paid-in capital			513,920				494,826
Accumulated deficit			(571,818	)			(550,719	)
Accumulated other comprehensive income			2,041				2,400
Treasury stock at cost, 576,453 shares in 2006 and 2005			(48,710	)			(48,710	)
Unamortized portion of compensation expense			¾				(230	)
Total shareholders’ equity (deficit)			(104,483	)			(102,365	)
Commitments and contingencies (Notes 2, 3, 8, 9, 12 and 13)
		$	178,667			$	162,062

See accompanying Notes to Consolidated Financial Statements.

PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)

																		Accumulated								Unamortized
		Common Stock								Additional Paid-In				Accumulated				Other Comprehensive				Treasury				Portion of Compensation				Total Shareholders’				Comprehensive
		Shares				Amount				Capital				Deficit				Income (Loss)				Stock				Expense				Equity (Deficit)				Income (Loss)
Balance at December 31, 2003			6,748,961			$	67			$	492,878			$	(271,496	)		$	616			$	(48,710	)		$	(225	)		$	173,130
Comprehensive loss:
Net loss			—				—				—				(71,483	)			—				—				—				(71,483	)		$	(71,483	)
Other comprehensive income-foreign currency translation adjustments			—				—				—				—				1,124				—				—				1,124				1,124
Comprehensive loss			—				—				—				—				—				—				—				—			$	(70,359	)
Issuances of common stock:
Issuances under employee stock plans (including tax benefits of $17)			18,505				1				808				—				—				—				—				809
Restricted share forfeitures			(1,600	)			—				(154	)			—				—				—				154				—
Amortization of expense			—				—				—				—				—				—				4				4
Balance at December 31, 2004			6,765,866				68				493,532				(342,979	)			1,740				(48,710	)			(67	)			103,584
Comprehensive loss:
Net loss			—				—				—				(207,740	)			—				—				—				(207,740	)		$	(207,740	)
Other comprehensive income-foreign currency translation adjustments			—				—				—				—				660				—				—				660				660
Comprehensive loss			—				—				—				—				—				—				—				—			$	(207,080	)
Issuances of common stock:
Issuances under employee stock plans (including tax benefits of $1)			17,075				—				773				—				—				—				—				773
Restricted share forfeitures			(20,400	)			—				(1,029	)			—				—				¾				1,029				—
Restricted shares retired for payroll taxes			(1,358	)			—				(42	)			—				—				—				—				(42	)
Restricted share and option awards			26,500				—				1,592				—				—				¾				(1,592	)			—
Amortization of expense			—				—				—				—				—				—				400				400
Balance at December 31, 2005			6,787,683				68				494,826				(550,719	)			2,400				(48,710	)			(230	)			(102,365	)
Reclassification of unamortized portion of compensation expense			—				—				(230	)			—				—				—				230				—
Comprehensive loss:
Net loss			—				—				—				(21,099	)			—				—				—				(21,099	)		$	(21,099	)
Other comprehensive income-foreign currency translation adjustments			—				—				—				—				(359	)			—				—				(359	)			(359	)
Comprehensive loss			—				—				—				—				—				—				—				—			$	(21,458	)
Excess of fair value over redemption value of preferred stock issued			—				—				11,995				—				—				—				—				11,995
Issuance costs of preferred stock			—				—				(1,281	)			—				—				—				—				(1,281	)
Issuances of common stock:
Conversions of Series A preferred stock			1,614,995				16				4,571				—				—				—				—				4,587
Fractional shares issued pursuant to reverse split			92				—				—				—				—				—				—				—
Restricted share forfeitures			(4,000	)			—				—				—				—				—				—				—
Accumulated dividends on preferred stock			—				—				(895	)			—				—				—				—				(895	)
Stock-based compensation expense			—				—				4,934				—				—				—				—				4,934
Balance at December 31, 2006			8,398,770			$	84			$	513,920			$	(571,818	)		$	2,041			$	(48,710	)		$	—			$	(104,483	)