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, 2007

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

For the transition period from                      to                     

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		30339-5986
Suite 100		(Zip Code)
Atlanta, Georgia
(Address of principal executive offices)

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. þ

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

o Large accelerated filer		þ Accelerated filer		o Non-accelerated filer (Do not check if a smaller reporting company)		o Small reporting company

     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, 2007, of common shares of the registrant held by non-affiliates of the registrant was approximately $111.9 million, based upon the last sales price reported that date on The Nasdaq Global Market of $15.90 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 29, 2008 were 21,523,637 including shares held by affiliates.

Documents Incorporated by Reference

     Part III: Portions of Registrant’s Proxy Statement relating to the Company’s 2008 Annual Meeting of Shareholders.

 

 

PRG-SCHULTZ INTERNATIONAL, INC.

FORM 10-K
December 31, 2007

		Page
Part I
Item 1. Business			1
Item 1A. Risk Factors			9
Item 1B. Unresolved Staff Comments			16
Item 2. Properties			16
Item 3. Legal Proceedings			16
Item 4. Submission of Matters to a Vote of Security Holders			16
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			17
Item 6. Selected Financial Data			19
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			38
Item 8. Financial Statements and Supplementary Data			39
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			74
Item 9A. Controls and Procedures			74
Item 9B. Other Information			75
Part III
Item 10. Directors, Executive Officers and Corporate Governance			76
Item 11. Executive Compensation			76
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			76
Item 13. Certain Relationships and Related Transactions, and Director Independence			77
Item 14. Principal Accounting Fees and Services			77
Part IV
Item 15. Exhibits, Financial Statement Schedules			78
Signatures			82
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 THE CEO
EX-31.2 SECTION 302, CERTIFICATION OF THE CFO
EX-32.1 SECTION 906, CERTIFICATION OF THE 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 and government agencies having numerous payment transactions. These businesses and agencies include:

	•		retailers such as discount, department, specialty, grocery and drug stores, and wholesalers who sell to these retailers;
	•		business enterprises other than retailers/wholesalers such as automobile and aerospace manufacturers, financial services firms and pharmaceutical companies;
	•		federal and state government agencies such as the Centers for Medicare and Medicaid Services (“CMS”).

     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, errors occur in a small percentage of transactions. 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 derives some of its revenues on a “fee-for-service” basis where the fee is a flat fee, a fee per hour, or a fee per unit of usage.

     The Company currently provides services to clients in over 30 countries. For financial reporting purposes, prior to the second quarter of 2007, the Company had two reportable operating segments, Accounts Payable Services and Meridian. On May 30, 2007, the Company sold Meridian and therefore operating results for all periods presented have been reclassified to report Meridian as discontinued operations. Beginning with the fourth quarter of 2007, the Company segregated Accounts Payable Services into two reportable operating segments – Domestic and International. See Note 5 of “Notes to Consolidated Financial Statements” included in Item 8 of this Form 10-K for operating segment disclosures.

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, errors occur in a small percentage of transactions. 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 some 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, the United Kingdom and France large retailers routinely engage independent recovery audit firms as standard business practice. In other countries, 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, one smaller but substantial competitor, and numerous other smaller competitors. Most of the 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 generally 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 compared to most other firms providing accounts payable recovery audit services 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 factors significantly impacting the recovery audit industry:

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 continues in both the U.S. and internationally. 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, utilizing 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 and more payment errors 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 skilled professionals. 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. In furtherance of this objective, the Company is pursuing a three-part strategy as more particularly described below.

     Optimize the Core Accounts Payable Recovery Audit Business.

     Globally, the Company has reduced the number of management layers and is focusing a greater portion of its key resources on its existing client base, especially larger clients. Over the last two years, the Company has exited hundreds of clients that, in aggregate, lost money at the audit level. Also, 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.

     Efficiency in the core accounts payable recovery audit business is being enhanced by the processing of certain claim types and certain client audits at the Company’s Shared Service Centers and its Regional Audit Centers. The Company continues to enhance its 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. The Company also is working to maximize the value it delivers to its existing clients by identifying and auditing new categories of potential errors.

     Develop New Services

     The second component of the Company’s three-part strategy involves the Company’s emphasis on using its technology, professional experience and expertise to assist its clients in achieving objectives that do not directly involve recovery of past overpayments. Examples include such services as evaluating transaction accuracy and compliance, managing trade and vendor promotional programs, measuring purchasing effectiveness, merger and acquisition due diligence analysis, and monitoring processing efficiency in the procure-to-pay value chain.

     Pioneer Recovery Auditing into New Territories

     The Company believes there are significant untapped opportunities for recovery auditing to be successfully applied beyond the more traditional retail/wholesale industry, commercial and government agency applications

where the Company has been historically engaged. One of the best examples of the Company’s pursuit of such an opportunity is its Medicare recovery auditing. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Medicare.” This aspect of the Company’s three-part strategy involves the Company’s efforts to maximize its opportunities associated with Medicare recovery auditing. In addition, the Company will continue to identify and pursue other non-traditional applications of the Company’s recovery audit technologies, best practices, skills and experience.

PRG-Schultz Services

Accounts Payable Services

     Through the use of proprietary technology, audit techniques and methodologies, the Company’s trained and skilled 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 and duplicate payments.

     The Company has three main client types: retailers/wholesalers, business enterprises other than retailers/wholesalers (called “commercial” clients within the recovery audit industry) and government agencies. Each type is typically served with a different service delivery model, as more particularly described below.

     Retail/Wholesale

     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 often 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 likely to continue, and the Company’s revenues from its core retail/wholesale accounts payable recovery audit business are likely to continue to decline.

     Commercial

     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 declined significantly 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 larger retail/wholesale clients.

     Government Agencies

     The majority of the Company’s government agency services relate to the audit of the State of California Medicare spending in connection with the CMS recovery audit demonstration project. The principal activities involve the identification of overpayments and underpayments made to healthcare providers under the Medicare program. The Company identifies such improper payments 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. The Medicare recovery audit demonstration project is ending in March 2008 and, therefore, sustained revenues from Medicare auditing will be dependent on the national rollout of the program by CMS and the Company’s participation in the legislatively mandated national rollout. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Medicare.”

     New Services

     The Company intends to increase its emphasis on using its technology, professional experience and expertise to assist its clients in achieving objectives that do not directly involve recovery of past overpayments. Examples include such services as evaluating transaction accuracy and compliance, managing trade and vendor promotional programs, measuring purchasing effectiveness, merger and acquisition due diligence analysis, and monitoring processing efficiency in the procure-to-pay value chain.

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 improper payments 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 many cases client-specific procedural guidelines must be satisfied by the Company before claims are submitted 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 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.

     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 and security 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.

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 one of the Company’s incentive compensation plans that link compensation of the auditor or specialist to audit performance.

Clients

     The Company provides its services principally to large businesses and 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 32.6%, 27.3% and 25.9% of its revenues from continuing operations for the years ended December 31, 2007, 2006 and 2005, 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, 2007, 2006 and 2005.

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. The Company’s trademarks and trade names include, but are not limited to PRG-Schultz^®, ImDex^®, AuditPro™, SureF!nd™ , Direct F!nd™ and claimDex™.

Competition

     The Company has numerous existing accounts payable audit competitors, all but one of which are believed to be substantially smaller than the Company. The Company believes that only one of its competitors, also smaller than the Company, offers a full suite of international recovery audit services. 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 such as that done for large retailers, the Company believes that barriers to entry are significant 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 large 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 recovery audit firms. 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 not identified 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 recovery audit 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

     As of January 31, 2008, the Company had approximately 1,313 employees, of whom approximately 710 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 a net loss from continuing operations of $7.1 million for the year ended December 31, 2007 and 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 increase revenues and/or further reduce costs, 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 include 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, 2007, 2006 and 2005, our five largest clients accounted for approximately 32.6%, 27.3% and 25.9% 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. We have implemented a number of strategic business initiatives that are designed to stabilize revenues and further manage costs. 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 our strategy successfully, our results of operations and cash flows could be adversely affected. In addition, successful implementation of our 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 our future Medicare audit revenues will largely depend on our participation in the proposed national expansion of the Medicare recovery program.

          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 our participation under the demonstration project has made an important contribution to our revenues, the demonstration project contract expires on March 27, 2008 and we continue to incur significant costs in anticipation of our possible participation in the national expansion of the Medicare recovery audit program by CMS. Future revenues from Medicare recovery auditing will be largely dependent on our participation in the national expansion of the recovery audit program and the terms of any new contracts governing the services that we provide as a part of any such participation. In addition, as a result of the complex regulations governing Medicare payments and recoupments, including a multi-layered scheme for provider appeals of overpayment determinations, and the complexity of Medicare data, systems and processes, generally, it is more difficult and takes longer to achieve recoveries than in other areas of our business.

Recovery auditing of Medicare spending is subject to a number of pressures and uncertainties that could impact our future opportunities and revenues from this business.

          As contrasted with recovery auditing for our other retail/wholesale and commercial clients, recovery auditing of Medicare spending is a legislatively mandated program subject to, among other things, the efforts of healthcare providers and provider associations, including political pressures, to end or severely limit the CMS recovery audit program. These efforts and political pressures are expected to be ongoing throughout the life of the CMS recovery audit program and during 2007 resulted in a number of significant developments relating to the Medicare recovery audit program. In October 2007, a temporary “pause” was initiated in our review under the recovery audit demonstration project of certain payments made to rehabilitation hospitals. Further, on November 8, 2007, legislation was introduced in Congress proposing a one year halt to CMS’s recovery audit program and calling for an assessment of the program by the U.S. Government Accountability Office. Management is unable to fully assess the prospects for the success of the newly proposed legislation. However, as previously noted, the efforts by healthcare providers and provider associations to limit or end the program are expected to be ongoing. If CMS’s recovery audit program, including the planned national expansion of the program, is significantly limited or delayed, subjected to burdensome or commercially challenging requirements, terms and/or conditions, or altogether terminated, our future revenues, operating results and financial condition could be materially adversely impacted.

Our ability to significantly grow our Medicare recovery audit services is largely dependent on the viability and continued success of, and our participation in, the planned expansion of recovery auditing of Medicare spending to all 50 states.

          Given the expected continuation of the long-term trend of declining revenues from our core accounts payable recovery audit business, stabilization and growth of our revenues and improvement of our profitability are largely dependent on our ability to grow our new services lines, including our Medicare recovery audit services. We have expended substantial resources, beginning in 2005, in preparing for and performing the audit of Medicare spending under the California demonstration project, including capital expenditures and employee compensation costs related to this opportunity, for which we were awarded a contract in 2005. The demonstration project ends March 27, 2008.

          In late 2006, legislation was enacted that mandated that recovery audit of Medicare be extended beyond the March 2008 end of the demonstration project and that CMS enter into additional contracts with recovery audit contractors to expand recovery auditing of Medicare spending to all 50 states by January 1, 2010. Due to the uncertainties inherent in the Medicare recovery audit program, it is difficult to assess the overall impact of the proposed national rollout of recovery auditing of Medicare spending on the Company’s business. Nevertheless, management believes that should it participate in the national rollout of Medicare auditing, the Company will have the opportunity to expand its Medicare audit recovery business. However, the expansion of the Company’s Medicare recovery audit services is subject to numerous risks and variables, including the timing, terms and rollout schedule of the national expansion by CMS and changes in the political, legislative and regulatory environment. For example, on November 7, 2007, CMS significantly modified the request for proposal (“RFP”) issued in connection with the national rollout. The RFP was revised to, among other things, introduce provisions which limit the scope of the Medicare payments to be reviewed by participating recovery audit contractors to those made on or after October 1, 2007. The RFP also contains other terms that are significantly different from the terms applicable to the Medicare recovery audit demonstration project, including a provision which requires participating recovery audit contractors to repay to CMS the contingency fee associated with any claim that is subsequently overturned at any level of appeal. We can provide no assurance that the national expansion of recovery auditing of Medicare spending will occur in any given manner or timeframe, including the manner and timeframes set forth in the legislation enacted in 2006 or that we will participate in any such expansion. If we do not participate in the national rollout of Medicare recovery auditing, if the planned rollout is modified further by CMS, significantly delayed or altogether terminated, or if our Medicare recovery audit services are not expanded, it could have a material adverse impact on our future financial condition and operating results.

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, it is especially challenging to attract and retain highly qualified skilled auditors and other professionals 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 38.3% of our revenues from continuing operations were generated from international operations in 2007. 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 is declining.

          The service model for commercial clients is generally different from that for retailers. The substantial majority of our 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, our revenues from commercial audits have declined in recent years and are expected to continue to do so.

          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 accounts payable recovery audit services business is subject to price pressure.

          The accounts payable recovery audit business is highly competitive, with numerous other recovery audit firms and other providers of recovery audit services, and with many clients having developed their own internal audit capabilities. As a result of competition among the providers of recovery audit services and the availability of certain audit services from clients’ internal audit departments, our accounts payable recovery audit services business is subject to intense price pressure. Such price pressure could cause our profit margins to decline and have a material 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 and this 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.

The ownership change that occurred as a result of our 2006 exchange offer limits our ability to use our net operating losses.

          We have substantial tax loss and credit carry-forwards for U.S. federal income tax purposes. On March 17, 2006, as a result of the closing of its exchange offer, 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 limits the use of certain tax attribute carry-forwards. Of the $33.8 million of U.S. federal net loss carry-forwards available to the Company, $24.7 million of the loss carry-forwards are subject to an annual usage limitation of $1.4 million. We believe that such limitations and the loss of these carry-forwards may significantly increase our projected future tax liability.

Certain of our tax positions may be subject to challenge by the Internal Revenue Service and other tax authorities, and if successful, these challenges could increase our future tax liabilities and expense.

          For U.S. federal income tax purposes, as well as local country tax purposes in the jurisdictions where we operate, from time to time we take positions under provisions of applicable tax law that are subject to varying interpretations. Certain of our tax positions may be subject to challenge by the applicable taxing authorities, including, in the U.S., the Internal Revenue Service. If our tax positions are successfully challenged, our future tax liabilities and expense could significantly increase.

          For example, we have taken the position that we are entitled to interest deductions in respect of our previously outstanding senior convertible notes that were issued in our 2006 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 the facts and circumstances existing on the exchange date, and there is no assurance that the Internal Revenue Service would not take the position that the interest expense is not deductible.

          In addition, we have claimed certain tax deductions in the United Kingdom relating to the amortization and impairment of goodwill. However, applicable tax law in the United Kingdom providing for these deductions is subject to varying interpretations. The tax deductions claimed by us are reflected in our deferred tax asset related to

foreign net operating losses. The deferred tax asset represented by these deductions is offset by a corresponding valuation allowance.

          While we believe that our tax positions are proper based on applicable law and we believe that it is more likely than not that we will prevail with respect to any challenges to these positions, we can make no assurances that we would prevail if our positions are challenged. If our tax positions are successfully challenged by the U.S. or non-U.S. taxing authorities, it could increase our future tax liabilities and expense and have a material adverse impact on our financial position, results of operations and cash flows.

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 or the discontinuation of our use of certain of our intangible or other long-lived assets could result in additional impairment which could materially adversely impact future earnings. As of December 31, 2007, the Company’s goodwill and other intangible assets totaled $25.8 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. Future annual impairment testing under SFAS No. 142 could result in a determination that our goodwill or other intangible assets have been further impaired, and future 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 the internal recovery audit departments of our clients.

          The recovery audit industry is highly competitive. Our principal competitors for accounts payable recovery audit services tend to be privately owned. As a result, information available about our competitors is limited. For example, 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.

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, 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 material adverse effect on the market price of our common stock.

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

          Our current 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 secured 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.

          Our ability to make payments due 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 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. For example, for the year ended December 31, 2007, our stock traded as high as $20.14 per share and as low as $7.90 per share. Our stock price may increase or decrease in response to a number of events and factors, including:

	•		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.

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 58,000 square feet of its principal executive office space to independent third parties. 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 ended December 31, 2007, 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 secured credit facility specifically prohibit payment of cash dividends. As of February 29, 2008, there were 139 holders of record of the Company’s common stock and management believes there were in excess of 4,000 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 2007 and 2006.

2007 Calendar Quarter		High				Low
1st Quarter		$	16.87			$	7.90
2nd Quarter			16.87				12.94
3rd Quarter			20.14				11.58
4th Quarter			17.29				8.11

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

     The Company did not repurchase any of its outstanding common stock during 2007.

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, 2002 and shows total return on investment for the period beginning December 31, 2002 through December 31, 2007, 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

VALUE OF $100 INVESTED ON DECEMBER 31, 2002 AT:

Cumulative Total Return

		12/02				12/03				12/04				12/05				12/06				12/07
PRG-Schultz International, Inc.			100.00				55.06				56.52				6.85				8.99				9.63
NASDAQ Composite			100.00				149.34				161.86				166.64				186.18				205.48
RDG Technology Composite			100.00				150.41				153.60				158.73				174.21				201.07

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, 2007. 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, 2007 and 2006, 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, 2007 and the report of the Independent Registered Public Accounting Firms thereon are included in Item 8 of this Form 10-K.

     The Company’s Consolidated Financial Statements have been reclassified to reflect Meridian, 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,
		2007				2006				2005				2004				2003
		(In thousands, except per share data)
Statements of Operations Data:
Revenues		$	227,369			$	225,898			$	251,527			$	309,234			$	327,007
Cost of revenues			140,877				161,827				167,886				192,915				203,675
Gross margin			86,492				64,071				83,641				116,319				123,332
Selling, general and administrative expenses (1)			67,063				56,500				104,760				116,128				117,262
Impairment charges (2)			¾				¾				170,375				¾				198,677
Operational restructuring expense			1,644				4,130				11,167				¾				¾
Operating income (loss)			17,785				3,441				(202,661	)			191				(192,607	)
Interest expense, net			(13,815	)			(16,311	)			(8,278	)			(8,637	)			(8,847	)
Loss on debt extinguishment and financial restructuring			(9,397	)			(10,047	)			¾				¾				¾
Loss from continuing operations before income taxes and discontinued operations			(5,427	)			(22,917	)			(210,939	)			(8,446	)			(201,454	)
Income tax expense (benefit) (3)			1,658				1,165				63				74,897				(35,682	)
Loss from continuing operations before discontinued operations			(7,085	)			(24,082	)			(211,002	)			(83,343	)			(165,772	)
Discontinued operations:
Earnings (loss) from discontinued operations, net of income taxes			20,215				2,983				3,262				11,860				4,954
Net earnings (loss)		$	13,130			$	(21,099	)		$	(207,740	)		$	(71,483	)		$	(160,818	)

Basic and diluted earnings (loss) per common share:
Loss from continuing operations before discontinued operations		$	(0.62	)		$	(3.77	)		$	(34.03	)		$	(13.49	)		$	(26.84	)
Discontinued operations			1.66				0.45				0.53				1.92				0.80
Net earnings (loss)		$	1.04			$	(3.32	)		$	(33.50	)		$	(11.57	)		$	(26.04	)

		December 31,
		2007				2006				2005				2004				2003
										(In thousands)
Balance Sheet Data:
Cash and cash equivalents		$	42,364			$	30,228			$	8,361			$	9,122			$	26,658
Working capital			16,998				5,218				(9,123	)			5,882				1,715
Total assets			122,438				178,667				162,062				358,593				429,257
Long-term debt, excluding current installments			38,078				136,922				140,401				123,286				122,395
Redeemable preferred stock			¾				11,199				¾				¾				¾
Total shareholders’ equity (deficit)		$	2,349			$	(104,483	)		$	(102,365	)		$	103,584			$	173,130

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

Introduction

     Prior to the second quarter of 2007, the Company conducted its operations through two reportable operating segments, Accounts Payable Services and Meridian VAT Reclaim (“Meridian”). On May 30, 2007, the Company sold its Meridian business to Averio Holdings Limited, a Dublin, Ireland based company affiliated with management of Meridian (“Averio”). Meridian’s operating results for all periods presented in the accompanying consolidated financial statements have been reclassified and are now reported in discontinued operations. Unless stated otherwise, the discussion which follows pertains solely to the Company’s continuing operations.

     Beginning with the fourth quarter of 2007, the Company segregated Accounts Payable Services into two reportable operating segments – Domestic and International. The Domestic and International Accounts Payable Services segments principally consist of services that entail the review of client accounts payable disbursements to identify and recover overpayments. These operating segments include accounts payable services provided to retailers and wholesale distributors (the Company’s historical client base) and accounts payable and other services provided to various other types of business entities and governmental agencies, including the Centers for Medicare and Medicaid Services (“CMS”). The Domestic and International Accounts Payable Services segments conduct business in North America, South America, Europe, Australia and Asia.

     The Company’s revenues are based on specific contracts with its clients. Such contracts generally specify: (a) time periods covered by the audit; (b) the 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 derives some of its revenues on a “fee-for-service” basis where revenue is based upon a fixed 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.

     Medicare

     On March 29, 2005, the Company announced that 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 was effective on March 28, 2005 and expires March 27, 2008. To fully address the range of payment recovery opportunities, the Company has sub-contracted with Concentra Preferred Systems, Inc., a business unit of Concentra Network Services, now Viant, Inc. (“Viant”), the nation’s largest provider of specialized cost containment services for the healthcare industry, to add Viant’s clinical experience to the Company’s expertise in recovery audit services.

     The CMS contract was awarded as part of a demonstration program by CMS to recover overpayments and underpayments 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 continued to be incurred throughout 2006 and 2007 as the Company continued to build this business. During the second quarter of 2007, the Company’s CMS contract was amended to include recovery audit services for the State of Arizona’s Medicare spending. Revenues from the auditing of Medicare payments made in California made an important contribution to the Company’s overall revenues in the year ended December 31, 2007; however, for numerous reasons, including the end of the Medicare recovery audit demonstration project in March 2008, uncertainties relating to the national expansion of the Medicare recovery audit program, the Company’s limited ability to influence the timing of the processing of identified claims by third party claims processors and program limitations imposed by CMS, the Company’s revenues from its Medicare recovery audit efforts may end altogether or if continued, may vary significantly from period to period.

     In late 2006, legislation was enacted that mandated that recovery audit of Medicare be extended beyond the March 2008 end of the demonstration project and that CMS enter into additional contracts with recovery audit contractors to expand recovery auditing of Medicare spending to all 50 states by January 1, 2010. On October 19, 2007, CMS issued a Request for Proposal (“RFP”), which included a deadline for response of no later than November 19, 2007, and a planned initial rollout beginning April 1, 2008. The RFP contains certain terms that are significantly different from the terms applicable to the Medicare recovery audit demonstration project. For instance, the RFP requires participating recovery audit contractors to repay to CMS the contingency fee associated with any claim that is subsequently overturned at any level of appeal. Due to the uncertainties inherent in the Medicare recovery audit program, it is difficult to assess the overall impact of the proposed national rollout of recovery auditing of Medicare spending on the Company’s business. Nevertheless, management believes that should it participate in the national rollout of Medicare auditing the Company will have the opportunity to expand its Medicare audit recovery business. However, the expansion of the Company’s Medicare recovery audit services is subject to numerous risks and variables, including the timing, terms and rollout schedule of the national expansion by CMS and changes in the political, legislative and regulatory environment. For example, on November 7, 2007, CMS significantly modified the RFP to, among other things, introduce provisions which limit the scope of the Medicare payments to be reviewed by participating recovery audit contractors to those made on or after October 1, 2007. The amendment also extended the deadline for response to the RFP. The Company submitted its proposal responding to the RFP on December 14, 2007, before the applicable deadline. To date, CMS has not selected its preferred recovery audit contractors for the four regions to be covered by new contracts and the most recent information made available by CMS indicates that it plans to announce its selections this spring. As a result, the originally scheduled April 1, 2008 beginning of the national rollout may be delayed.

     CMS’s recovery audit contractor program is designed, among other things, to recover improper payments made to healthcare providers such as hospitals and physicians’ practices. These providers, both individually and collectively through provider associations, have sought and will likely continue to seek to end or severely limit this legislatively mandated program. The recovery audit program generally and recovery audit contractors, including the Company, have been and will likely continue to be the subject of complaints by health care providers and their associations, and efforts, including political pressures, to end or limit CMS’s recovery audit program are likely to continue for the foreseeable future. These complaints and pressures could lead to additional program changes and limitations or to the discontinuation of CMS’s recovery audit program entirely. As an example of the impact of such efforts and pressures, on November 8, 2007, legislation was introduced in Congress proposing a one year halt to CMS’s recovery audit program and calling for an assessment of the program by the U.S. Government Accountability Office. Although it is difficult to assess the prospects for the success of any particular legislative or other effort to limit or end the recovery audit program at this time, management believes that opposition efforts are likely to continue as long as the program is successful at recovering meaningful amounts of improper payments made to healthcare providers.

     Despite the anticipated end to the Medicare recovery audit demonstration project on March 27, 2008 and the uncertainties inherent in the Medicare recovery audit program, generally, including those relating to the rollout of the program to all 50 states as mandated by Congress, management believes it has an opportunity to significantly expand its Medicare audit recovery business if it participates in the national rollout.

Financial Restructurings

     During the fall of 2007, the Company undertook a financial restructuring designed to de-leverage the Company’s balance sheet and provide it with more financial flexibility. The 2007 restructuring included amending and restating the Company’s credit facility and redeeming the Company’s 11% senior notes, 10% senior convertible notes and 9% Series A convertible preferred stock. The Company’s credit facility was amended and restated to provide the Company with a $20 million revolving credit facility and a $45 million term loan, which was funded in October 2007. For details regarding the revised terms of the amended and restated credit facility, see “Liquidity and Capital Resources – Secured Credit Facility” below.

     As part of the redemption of its 11% senior notes and its 10% senior convertible notes, the Company solicited consents from the holders of its 11% senior notes and its 10% senior convertible notes to amend the indentures governing the notes to provide for simultaneous redemption of both series and to shorten the redemption period for the notes. The Company paid an aggregate of $0.2 million in consent fees and conversion fees to certain holders in connection with their prior agreements to consent to the amendment to the indenture governing the 11% senior notes

and to convert, upon the call for redemption, the 10% senior convertible notes and 9% Series A convertible preferred stock held by such holders. As expected, over 99% of the outstanding 10% senior convertible notes and shares of 9% Series A convertible preferred stock were converted by the holders into shares of the Company’s common stock prior to the applicable redemption dates. As a result, only an aggregate of approximately $0.2 million in 10% senior convertible notes and 9% Series A convertible preferred stock were outstanding and redeemed by the Company. The full $51.5 million in principal amount of the 11% senior notes were redeemed by the Company. The Company was also required to pay a $1.0 million prepayment fee to the holders of the 11% senior notes in connection with the redemption. The Company used the term loan portion of its amended and restated credit facility to supplement the funding of the redemption of the 11% senior notes, the 10% senior convertible notes and the 9% Series A convertible preferred stock.

     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 2006 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 11% senior notes, $59.6 million of new 10% senior convertible notes and new 9% Series A convertible preferred stock having an initial liquidation preference of $14.9 million. As discussed above, in connection with the 2007 restructuring, these securities have been converted or redeemed and are no longer outstanding. 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 restructurings.

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 operational restructuring plan and authorized implementation of the plan. The 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. 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 had been achieved and the operational restructuring plan as originally contemplated and approved in 2005 has been completed. Most of the savings were realized in the area of selling, general and administrative expenses. See “- Operational Restructuring Expense” for more details regarding the operational restructuring.

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 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.
			Periodic changes in unbilled receivables and refund liabilities are recorded as adjustments to revenue.
	•		Goodwill and Other Intangible Assets. During each of the fourth quarters of 2007 and 2006, the Company completed the required annual impairment testing of goodwill and other intangible assets in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (“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, valuation analyses of the Company’s goodwill balances as well as other intangible assets were performed. 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.

			During the third quarter of 2007, management re-evaluated its policy related to the amortization of its customer relationships intangible asset. The customer relationships intangible asset had been amortized since its acquisition in 2002 using the straight-line method over a twenty year expected life. Management’s re-evaluation concluded that the original twenty year life continued to be a reasonable expectation. However, because of the expectation that revenues and profits from these customers will likely decline in future years, management concluded that an accelerated method of amortization of the customer relationships intangible asset would be more appropriate. The accelerated method results in amortization of the net unamortized June 30, 2007 balance over the remaining 14.5 year life at a rate that declines at approximately 8% per year. The Company adopted the new method in the third quarter of 2007 and the resulting change in amortization is being accounted for on a prospective basis in accordance with SFAS No. 142. Amortization expense in 2007 was increased by $0.5 million as a result of the change.
	•		Income Taxes. The Company’s reported effective tax rates on loss from continuing operations before income taxes and discontinued operations approximated (30.6)%, (5.1)%, and (0.03)% for the years ended December 31, 2007, 2006 and 2005, respectively. The reflection of tax expense in spite of reported losses from continuing operations primarily results from taxes on foreign income and the non-recognition of tax benefits on operating loss carry-forwards through the use of a valuation allowance against deferred tax assets (discussed below).
			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.
			For the years ended December 31, 2007 and 2006, management determined that based on all available evidence, a valuation allowance of $79.8 million and $79.2 million, respectively, were appropriate as of

those dates, as compared to a valuation allowance in the amount of $139.3 million as of the year ended December 31, 2005. The significant reduction in the valuation allowance compared to 2005 was primarily attributable to the write-off in 2006 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.

			In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48 “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109” (“FIN No. 48”). The Interpretation prescribes a “more-likely-than-not” recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Interpretation also offers guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company adopted FIN No. 48 effective January 1, 2007. In accordance with FIN No. 48, paragraph 19, the Company’s policy for recording interest and penalties associated with tax positions is to record such items as a component of income before taxes. As a result of the implementation of FIN No. 48, the Company recognized a $0.3 million increase in liability for unrecognized tax benefits, which was accounted for as an increase to the January 1, 2007 accumulated deficit balance.
	•		Stock-Based Compensation.  In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”). This pronouncement amended SFAS No. 123, “Accounting for Stock-Based Compensation,” (“SFAS No. 123”) and superseded Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). 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, did not restate 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.
			Prior to January 1, 2006, the Company accounted for stock-based compensation, as permitted by SFAS No. 123, under the intrinsic value method described in APB 25 and related interpretations. Under the intrinsic value method, no stock-based employee compensation cost is recorded when the exercise price is equal to, or higher than, the market value of the underlying common stock on the date of grant. In accordance with APB 25 guidance, no stock-based compensation expense was recognized for the year ended December 31, 2005 except for compensation amounts relating to grants of shares of nonvested stock.
			The fair value of all time-vested options is estimated as of the date of grant using the Black-Scholes option valuation model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. The fair value of market condition options (also known as path-dependent options) may be estimated as of their date of grant using more complex option valuation models such as binomial lattice and Monte Carlo simulations. The Company chose to use the Monte Carlo simulation method for its valuations of market condition options. Option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, it is management’s opinion that existing models do not necessarily provide a reliable single measure of the fair value of the Company’s employee stock options.
			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 on the date of the award. 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. Equity-classified awards are measured at grant date fair value

and are not subsequently remeasured. The Company has classified its share-based payments which are settled in Company common stock as equity-classified awards and its share-based payments that are settled in cash as liability-classified awards. Compensation costs related to equity-classified awards are generally equal to the fair value of the award at grant-date amortized over the vesting period of the award. 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.

During the years ended December 31, 2007, 2006 and 2005, stock-based compensation charges aggregated $21.0 million, $6.4 million and $0.4 million, respectively. Stock-based compensation is discussed in more detail in Note 1(m) and Note 14 of “Notes to Consolidated Financial Statements” included in Item 8 of this Form 10-K.

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,
		2007				2006				2005
Statements of Operations Data:
Revenues			100.0	%			100.0	%			100.0	%
Cost of revenues			62.0				71.7				66.8
Gross margin			38.0				28.3				33.2
Selling, general and administrative expenses			29.5				25.0				41.7
Impairment charges			—				—				67.7
Operational restructuring expenses			0.7				1.8				4.4
Operating income (loss)			7.8				1.5				(80.6	)
Interest expense, net			6.1				7.2				3.3
Loss on debt extinguishment and financial restructuring			4.1				4.4				—
Loss from continuing operations before income taxes and discontinued operations			(2.4	)			(10.1	)			(83.9	)
Income tax expense			0.7				0.5				0.0
Loss from continuing operations before discontinued operations			(3.1	)			(10.6	)			(83.9	)
Discontinued operations
Earnings from discontinued operations and disposals, net of income taxes			8.9				1.3				1.3
Net earnings (loss)			5.8	%			(9.3	)%			(82.6	)%

     Prior to the second quarter of 2007, the Company had two reportable operating segments, Accounts Payable Services and Meridian. Also, the Company included the unallocated portion of corporate selling, general and administrative expenses not specifically attributable to Accounts Payable Services or Meridian in a category referred to as corporate support.

     On May 30, 2007, the Company completed the sale of Meridian and, as a result, Meridian’s operating results for all periods presented have been reclassified and are reported in discontinued operations.

     Beginning with the fourth quarter of 2007, the Company segregated Accounts Payable Services into two reportable operating segments – Domestic and International. The Company continues to include the unallocated portion of corporate selling, general and administrative expenses not specifically attributable to Domestic or International Accounts Payable Services in a category referred to as Corporate Support. See Note 5 of “Notes to Consolidated Financial Statements” included in Item 8 of this Form 10-K.

Domestic and International Accounts Payable Services

     Revenues. Accounts Payable Services revenues for the years ended December 31, 2007, 2006 and 2005 were as follows (in millions):

		2007				2006				2005
Domestic Accounts Payable Services revenues		$	140.4			$	140.4			$	154.3
International Accounts Payable Services revenues			87.0				85.5				97.2
Total Accounts Payable Services revenues		$	227.4			$	225.9			$	251.5

     Total Accounts Payable Services revenues for the year ended December 31, 2007 were $227.4 million compared to $225.9 million in 2006, an increase of $1.5 million, or less then 1%. The Company experienced a very slight decrease in its total Domestic Accounts Payable Service revenues in 2007 compared to 2006. The decline was primarily the result of the fact that an increase in revenues generated from the Medicare accounts payable recovery audits was insufficient to offset continued declines in the Company’s revenue from U.S. retail/wholesale clients. The decline in the retail/wholesale revenues was primarily attributable to fewer claims being processed as a result of improved client processes and the impact of the Company’s clients developing and strengthening their own internal audit capabilities as a substitute for the Company’s services. Further, the Company’s retail/wholesale 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 retail/wholesale clients in the Domestic Accounts Payable Services segment are likely to decline for the foreseeable future.

     Revenues in the International Accounts Payable business for 2007 were $87.0 million compared to $85.5 million in 2006, an increase of $1.5 million, or 1.8%. The international revenues were aided by a decline in the dollar relative to foreign currencies throughout the year, particularly in Europe and Canada. If adjusted for the change in exchange rates in Europe and Canada, International Accounts Payable revenues would have declined 5.4%.

     The declines in the Domestic retail/wholesale and International Accounts Payable Services revenues in 2006 versus 2005 are likewise attributable to the same factors discussed above.

     The Company intends to maximize the value it delivers to 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, managing trade and vendor promotional programs, 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 its Medicare recovery audit services. 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, expires March 27, 2008. The Company began generating revenue from the California Medicare audit in 2006 and revenue from Medicare auditing made an important contribution to the Company’s results in 2007. In late 2006, legislation was passed that mandated that recovery audit of Medicare be extended to all fifty states by January 1, 2010. In October 2007, CMS issued a request for proposal (“RFP”) relating to the national rollout of the Medicare recovery audit program and the Company submitted its proposal on December 14, 2007. The RFP and the associated Statement of Work divide the country into four geographic regions. Based on the latest information provided by CMS, the Company expects CMS to announce this spring its selection of the four contractors who will be offered the opportunity to participate in the national rollout. Due to the uncertainties inherent in the Medicare recovery audit program, it is difficult to assess the overall impact of the proposed national rollout of recovery auditing of Medicare spending on the Company’s business. Nevertheless, management believes that should it participate in the national rollout of Medicare auditing, the Company will have the opportunity to expand its Medicare recovery audit business.

     Cost of Revenues (“COR”). COR consists principally of salary and 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 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 foreign countries.

     Accounts Payable Services COR for the years ended December 31, 2007, 2006 and 2005 was as follows (in millions):

		2007				2006				2005
Domestic Accounts Payable Services COR		$	75.4			$	95.3			$	99.8
International Accounts Payable Services COR			65.5				66.5				68.1
Total Accounts Payable Services COR		$	140.9			$	161.8			$	167.9

     COR for Domestic Accounts Payable Services was $75.4 million, or 53.7%, of revenue for the year ended December 31, 2007. This amount includes $1.8 million of bonuses earned during the year. This compares to $95.3 million, or 67.9%, of revenue in 2006 which included $3.0 million of bonuses earned during the year, and $99.8 million, or 64.6%, of revenue in 2005. The dollar and percent of revenue improvement in Domestic Accounts Payable Services COR for 2007 compared to 2006 was primarily related to the execution of the Company’s key strategic initiatives. First, the strategy of focusing its efforts and resources on its largest clients continues to have a positive impact on their gross margin as a percent of revenue. The significant reduction in the Medicare claims processing backlog during the year also contributed to the improvement in the Company’s gross margin. In addition, in 2007 the Company continued to experience margin improvement from the headcount reduction that was announced in the fourth quarter of 2006. The Company also continues to incur certain fixed costs, such as rent and other occupancy type costs that are also a component of COR.

     COR for International Accounts Payable Services in 2007 was $65.5 million, or 75.1% of revenue. This amount includes $1.0 million of bonuses earned during the year. International Accounts Payable Services COR in 2006 was $66.5 million, or 77.8% of revenue. This amount included $1.1 million of bonuses earned during the year. This compares to $68.1 million, or 70.1% of revenue, in 2005. The dollar and percent to revenue improvement for the Company’s International Accounts Payable Services in 2007 compared to 2006 primarily resulted from the execution of the strategic initiatives of focusing efforts and resources on the larger clients. In addition, the 2006 fourth quarter headcount reductions also had a positive impact. Also, fixed expenses comprise a large portion of International Accounts Payable Services COR.

     Selling, General, and Administrative Expenses (“SG&A”). SG&A expenses include the expenses of sales and marketing activities, many 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.

     Accounts Payable Services SG&A for the years ended December 31, 2007, 2006 and 2005 were as follows (in millions):

		2007				2006				2005
Domestic Accounts Payable Services SG&A		$	18.9			$	20.7			$	30.9
International Accounts Payable Services SG&A			10.0				10.2				28.5
Total Accounts Payable Services SG&A		$	28.9			$	30.9			$	59.4

     Accounts Payable Services SG&A expenses for the year ended December 31, 2007 decreased by $2.0 million, or 6.4%, from the same period in 2006. Such expenses had already decreased in 2006 by $28.5 million, or 48.0%, from 2005. The reduction in both the Domestic and International Accounts Payable Services’ SG&A was 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.

Corporate Support

     SG&A. Corporate Support SG&A expenses include the expenses of 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 Domestic or International Accounts Payable Services and totaled the following for the years ended December 31, 2007, 2006 and 2005 (in millions):

		2007				2006				2005
Selling, general and administrative expenses		$	38.2			$	25.6			$	45.4

     Corporate Support SG&A for the year ended December 31, 2007 includes stock-based compensation charges of $21.0 million compared to stock-based compensation charges of $6.4 million for the same period in 2006. SG&A expenses excluding the stock-based compensation charges for the period ended December 31, 2007 were $2.0 million, or 10.4%, less than in the same period in 2006. The reduction of these other SG&A expenses was primarily related to a reduction in professional fees and the result of the Company’s continuing efforts to diligently manage its expenses.

     The 43.6% reduction in Corporate Support SG&A in 2006 compared to 2005 primarily resulted from the execution of the Company’s 2005 operational restructuring plan as described below.

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. 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, 2007, 2006 and 2005 was as follows (in millions):

		2007				2006				2005
Operational restructuring expense		$	1.6			$	4.1			$	11.2

     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 $15.3 million. As of December 31, 2005, the Company had recorded an $11.2 million charge related to the restructuring, $9.6 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 continues 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. Also, in 2007, the Company recorded additional restructuring charges for early lease termination costs of $1.3 million and leasehold improvement impairment charges of $0.3 million. Such costs were not included in the original 2005 restructuring plan.

Discontinued Operations

     On May 30, 2007, the Company sold its Meridian VAT reclaim business (“Meridian”) to Averio Holdings Limited, a Dublin, Ireland based company affiliated with management of Meridian (“Averio”). The Company received proceeds from the sale of approximately $22.4 million at closing and an additional $2.2 million on December 31, 2007. Averio is also required to pay the Company €1.5 million (Euros) each year on December 31, 2008 and 2009. However, the additional payments owed are subject to certain “place of supply” legislation remaining in effect in the European Union without amendment prior to the relevant payment date.

     Meridian had previously been reported as a separate reportable operating segment. Meridian’s operating results for all periods presented in the consolidated financial statements have been reclassified and are included in discontinued operations. The Company recognized a 2007 gain on sale of approximately $19.9 million as a result of the transaction. Such gain excludes the contingent payments due in December 2008 and 2009 which total approximately $4.4 million based on December 31, 2007 exchange rates.

     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 Channel Revenue business was sold for $0.4 million in cash to Outsource Recovery, Inc. 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 2006, the Company recognized a loss of $0.3 million relating to the sale of the Airline business unit.

     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. In addition to the initial proceeds, the sale agreement provided for additional sale proceeds up to $3.0 million payable in the form of a revenue-based royalty over four years. 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.

     Operating income of the discontinued operations up until their sale or closure for the three years ended December 31, 2007, 2006 and 2005 amounted to $0.8 million, $3.5 million and $3.5 million, respectively. Operating income excludes rent expense previously allocated to the Airline unit. Income tax expense of $0.4 million, $0.9 million and $0.8 million was allocated to earnings from discontinued operations in 2007, 2006 and 2005, respectively.

Income Tax Expense

     The Company’s reported effective tax rates on earnings (loss) from continuing operations before income taxes and discontinued operations approximated (31.7)%, (5.1)%, and (0.03)% for the years ended December 31, 2007, 2006 and 2005, respectively. The reflection of tax expense in spite of reported losses from continuing operations primarily results from taxes on foreign income and the non-recognition of tax benefits on operating loss carry-forwards through the use of a valuation allowance against deferred tax assets.

     As of December 31, 2007, the Company had approximately $33.8 million of U.S. federal loss carry-forwards available to reduce future taxable income. The loss carry-forwards expire through 2026.

     On March 17, 2006, the Company experienced an ownership change as defined under Section 382 of the IRC. This ownership change resulted in an annual IRC Section 382 limitation that limits the use of certain tax attribute carry-forwards. Of the $33.8 million of U.S. federal loss carry-forwards that are available to the Company as of December 31, 2007, $24.7 million of the loss carry-forwards 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 carry-forward 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 carry-forwards, $14.3 million in unexpired foreign tax credit carry-forwards, and $0.2 million in unexpired R&D credit carry-forward 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 for the year ended December 31, 2006.

Quarterly Results

     The following tables set forth certain unaudited condensed quarterly financial data for each of the last eight quarters during the Company’s fiscal years ended December 31, 2007 and 2006. 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 2006 quarterly information and the first quarter of 2007 to conform to the presentation adopted in the second quarter of 2007. Such reclassifications primarily relate to the presentation of the Meridian operating segment as discontinued.

		2007 Quarter Ended																2006 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		$	57,030			$	53,315			$	53,207			$	63,817			$	55,715			$	55,141			$	54,830			$	60,212
Cost of revenues			37,241				34,872				33,511				35,253				39,780				39,943				37,531				44,573
Gross margin			19,789				18,443				19,696				28,564				15,935				15,198				17,299				15,639
Selling, general and administrative expenses			13,682				14,486				17,562				21,333				14,066				12,737				16,605				13,092
Operational restructuring expense			—				—				1,644				—				408				1,580				153				1,989
Operating income			6,107				3,957				490				7,231				1,461				881				541				558
Interest expense, net			(4,141	)			(4,749	)			(3,133	)			(1,792	)			(2,567	)			(4,292	)			(5,278	)			(4,174	)
Gain (loss) on debt extinguishment and financial restructuring			—				—				—				(9,397	)			(10,129	)			—				82				—
Earnings (loss) from continuing operations before income taxes and discontinued operations			1,966				(792	)			(2,643	)			(3,958	)			(11,235	)			(3,411	)			(4,655	)			(3,616	)
Income tax expense			531				344				337				446				264				190				306				405
Earnings (loss) from continuing operations before discontinued operations			1,435				(1,136	)			(2,980	)			(4,404	)			(11,499	)			(3,601	)			(4,961	)			(4,021	)
Discontinued operations:
Earnings (loss) from discontinued operations and disposals, net			88				19,687				(11	)			451				1,205				(44	)			727				1,095
Net earnings (loss)		$	1,523			$	18,551			$	(2,991	)		$	(3,953	)		$	(10,294	)		$	(3,645	)		$	(4,234	)		$	(2,926	)
Basic earnings (loss) per share:
Earnings (loss) from continuing operations before discontinued operations		$	0.15			$	(0.15	)		$	(0.31	)		$	(0.21	)		$	(1.86	)		$	(0.61	)		$	(0.80	)		$	(0.58	)
Discontinued operations			0.01				2.17				(0.00	)			0.02				0.20				(0.01	)			0.11				0.15
Net earnings (loss)		$	0.16			$	2.02			$	(0.31	)		$	(0.19	)		$	(1.66	)		$	(0.62	)		$	(0.69	)		$	(0.43	)
Diluted earnings (loss) per share:
Earnings (loss) from continuing operations before discontinued operations		$	0.12			$	(0.15	)		$	(0.31	)		$	(0.21	)		$	(1.86	)		$	(0.61	)		$	(0.80	)		$	(0.58	)
Discontinued operations			0.01				2.17				(0.00	)			0.02				0.20				(0.01	)			0.11				0.15
Net earnings (loss)		$	0.13			$	2.02			$	(0.31	)		$	(0.19	)		$	(1.66	)		$	(0.62	)		$	(0.69	)		$	(0.43	)

Liquidity and Capital Resources

     As of December 31, 2007, the Company had $42.4 million in cash and cash equivalents and no borrowings under the revolver portion of its secured credit facility. The revolver had approximately $15.3 million of calculated availability for borrowings.

     Operating Activities. Net cash provided by (used in) operating activities was $30.3 million, $21.3 million and $(10.7 million) during the years ended December 31, 2007, 2006 and 2005, respectively. The increase in the 2007 net cash provided by operating activities was largely attributable to the $14.3 million increase in operating income over 2006. The 2007 improvement resulted primarily from the Company’s focus on its largest clients which positively impacted its gross margin dollars, the revenue contributions from the Medicare auditing program and its continued efforts in managing SG&A expenses,

     The increase in cash provided by operating activities for the year ended December 31, 2006 compared to the prior year 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.

     Investing Activities and Depreciation Expense. Depreciation and amortization expense for the years ended December 31, 2007, 2006 and 2005 amounted to $6.8 million, $10.1 million and $13.5 million, respectively. Net cash used in investing activities was $4.0 million, $1.3 million and $4.9 million during the years ended December 31, 2007, 2006 and 2005, respectively. Cash used in investing activities for all three years was attributable to capital expenditures net of proceeds from sales. The increase in 2007 compared to 2006 was primarily related to the Company’s initiative on developing and expanding its Medicare auditing capabilities. The 2007 total amount, though higher than 2006, was still significantly lower than the Company’s historical spending levels, which will result in the continued decline in depreciation expense in the foreseeable future. However, if the Company does not participate in the national rollout of the Medicare recovery audit program, it is likely that it will be necessary to record a significant impairment charge related to the Company’s capital expenditures related to the program.

     Financing Activities and Interest Expense. Net cash provided by (used in) in financing activities was $(36.2 million), $(0.2 million) and $14.9 million for the years ended December 31, 2007, 2006 and 2005, respectively. As a result of the 2007 induced conversions of the Company’s 10% senior convertible notes and Series A convertible preferred stock and the repayment of other debt obligations with funds generated from operations and the sale of Meridian, the Company’s long-term debt at December 31, 2007 was at its lowest point in ten years. Total debt at December 31, 2007 amounted to $45.9 million as compared to $148.9 million at December 31, 2006, including the manditorily redeemable participating preferred stock.

     Interest expense was $15.1 million, $17.1 million and $8.8 million for the years ended December 31, 2007, 2006 and 2005. Cash paid for interest during the years ended December 31, 2007, 2006 and 2005 amounted to $14.4 million, $5.7 million and $6.8 million, respectively. The Company’s interest expense for the year ended December 31, 2005 was primarily comprised of interest expense related to the $125 million 4.75% convertible subordinated notes due November 2006 and interest on borrowings outstanding under the Company’s prior senior credit facility.

     Interest expense in 2006 increased significantly as a result of the Company’s financial restructuring completed on March 17, 2006. The exchange of the 4.75% convertible subordinated notes due November 2006 for the new 10% senior convertible notes and 11% senior notes resulted in additional annual interest expense of approximately $7.7 million. The Company had the option to pay interest on the new 10% senior convertible notes in cash or in kind. Interest expense for 2006 also included $0.9 million related to the excess of fair value over face value of the 10% senior convertible notes which were issued on September 15, 2006 as “paid-in-kind” interest payments on the 10% senior convertible notes. The Company also incurred interest expense in 2006 on the $25 million term loan under its senior secured credit facility.

     Interest expense at the beginning of 2007 continued to relate primarily to the 10% senior convertible notes, the 11% senior notes and the $25 million term loan. During the first quarter of 2007, the Company repaid $9.6 million of the $25 million term loan. During the second quarter of 2007, the Company repaid the remaining $15.4 million balance of the term loan with a portion of the proceeds of the Meridian sale.

     In September 2007, the Company initiated the redemption of all of the then outstanding 11% senior notes, 10% senior convertible notes and 9% Series A convertible preferred stock. In September 2007, the Company also entered into an amended and restated credit facility with Ableco LLC (“Ableco”) consisting of a $20 million revolving credit facility and a $45 million term loan which was funded in October 2007.

     During 2007, prior to redemption, virtually all of the Series A convertible preferred stock the 10% senior convertible notes were converted into shares of common stock. In addition, during October 2007, the 11% senior notes were fully redeemed. The remaining outstanding 10% senior convertible notes and 9% Series A convertible preferred stock which totaled less than $0.2 million were also redeemed. The redemptions were funded with a portion of the Company’s unrestricted funds and the proceeds of the Ableco $45 million term loan.

     The face amount of the 11% senior notes redeemed exceeded their carrying amount net of unamortized discount and deferred loan costs by $8.4 million. Such amount, along with a $1.0 million prepayment premium, $9.4 million in total, is reported as a loss on debt extinguishment in the Consolidated Statement of Operations for the year ended December 31, 2007. Unamortized deferred loan costs of $2.1 million related to the 10% senior convertible notes that were converted to common stock were charged to additional paid-in capital in 2007. As a consequence of the early prepayment of the $25 million term loan in 2007 and the replacement of the revolving credit facility, the Company wrote-off $1.7 million of unamortized deferred loan costs in 2007. Such amount is included in interest expense in the Consolidated Statement of Operations for the year ended December 31, 2007. The Company incurred approximately $3.1 million of costs in connection with the amended and restated Ableco credit facility. Such amount has been capitalized and is being amortized over the life of the facility.

     As a result of the transactions described above, management expects interest expense in near future periods to be significantly less than that incurred over the last three years. See “Secured Credit Facility” below for further details regarding the Company’s remaining credit facility.

     Discontinued Operations. Net cash provided by (used in) the operating activities of discontinued operations was $(2.0 million), $1.5 million and $0.6 million during the years ended December 31, 2007, 2006 and 2005, respectively. Such cash flows were primarily attributable to the operations of Meridian prior to its sale in May 2007. The sale of Meridian provided net proceeds of $23.2 million in 2007. A substantial portion of such proceeds was required to be used to repay debt under the Company’s credit facility.

     Other Matters. The Company has announced that it expects to repay approximately $7.3 million of its existing term loan in March 2008. In addition to these mandatory repayments, the Company expects to amend its credit facility in the first quarter of 2008 so that a significant portion of the Company’s excess cash can be used to reduce total debt without paying a prepayment penalty.

     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.

     Stock Repurchase Program

     In February 2008, the Board of Directors of the Company approved a stock repurchase program. Under the terms of the program, the Company may repurchase up to $10 million of its common stock from time to time through March 30, 2009. The timing and amount of repurchases, if any, will depend upon the Company’s stock price, economic and market conditions, regulatory requirements, and other corporate considerations.

     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, 2007 is as follows:

		Payments Due by Period (in thousands)
						Less												More
						Than				1-3				3-5				Than
Contractual obligations		Total				1 Year				Years				Years				5 Years
Long-term debt obligations (1)		$	45,000			$	7,496			$	10,000			$	27,504			$	—
Operating lease obligations			40,744				7,928				11,896				10,235				10,685
Capital lease obligations (2)			1,097				432				665				—				—
Cash portions of stock-based compensation (3)			7,750				1,690				2,134				3,926				—
Payments to Messrs. Cook and Toma (4)			5,296				1,531				2,692				119				954
Severance			2,736				2,736				—				—				—
Total		$	102,623			$	21,813			$	27,387			$	41,784			$	11,639

     Secured Credit Facility

     In September 2007, the Company entered into an amended and restated credit facility with Ableco LLC (“Ableco”) consisting of a $20 million revolving credit facility and a $45 million term loan which was funded in October 2007. The principal portion of the $45 million term loan with Ableco must be repaid in quarterly installments of $1.25 million each commencing in April 2008. The loan agreement also requires an annual mandatory prepayment contingently payable based on an excess cash flow calculation as defined in the agreement. The first such payment will be due in April 2008 and management estimates such payment to be approximately $3.8 million. The remaining balance of the term loan is due in September 2011. Interest is payable monthly and accrues at the Company’s option at either prime plus 1.75% or at LIBOR plus 4.5%, but under either option may not be less than 9.75%. Interest on outstanding balances under the revolving credit facility, if any, will accrue at the Company’s option at either prime or at LIBOR plus 2%. The Company must also pay a commitment fee of 0.5% per annum, payable monthly, on the unused portion of the $20 million revolving credit facility. As of December 31, 2007, there were no outstanding borrowings under the revolving credit facility.

     The credit facility is guaranteed by each of the Company’s direct and indirect domestic wholly owned subsidiaries and certain of its foreign subsidiaries and is secured by substantially all of the Company’s assets (including the stock of the Company’s domestic subsidiaries and two-thirds of the stock of certain of the Company’s foreign subsidiaries). The credit facility will mature on September 17, 2011. As discussed above, the Company expects to amend the credit facility in the first quarter of 2008 to permit the Company to reduce its total debt under the facility using excess cash without paying a prepayment penalty.

     2006 Management Incentive Plan

     At the annual meeting of shareholders held on August 11, 2006, the shareholders of the Company approved a proposal granting authorization to issue up to 2.1 million shares of the Company’s common stock under the Company’s 2006 Management Incentive Plan (“2006 MIP”). On September 29, 2006, an aggregate of 682,301 Performance Units were awarded under the 2006 MIP to the seven executive officers of the Company. The awards had an aggregate grant date fair value of $4.0 million. At Performance Unit settlement dates (which vary by participant), participants are paid in common stock and in cash. Participants will receive a number of shares of Company common stock equal to 60% of the number of Performance Units being paid out, plus a cash payment

equal to 40% of the fair market value of that number of shares of common stock equal to the number of Performance Units being paid out. The awards were 50% vested at the award date and the remainder of the awards vest ratably over approximately the following eighteen months with the awards to be fully vested on March 17, 2008. On March 28, 2007, an additional executive officer of the Company was granted 20,000 Performance Units under the 2006 MIP. The award had a grant date fair value of $0.3 million and vests ratably over four years. The awards contain certain anti-dilution and change of control provisions. Also, the number of Performance Units awarded were automatically adjusted on a pro-rata basis upon the conversion into common stock of the Company’s senior convertible notes and Series A convertible preferred stock. During 2007 and 2006, an additional 1,436,484 Performance Units and 122,073 Performance Units, respectively, with aggregate grant date fair values of $24.0 million and $1.6 million, respectively, were granted as a result of this automatic adjustment provision.

     All Performance Units must be settled before April 30, 2016. The Company recognized compensation expense of $19.6 million and $3.4 million during the years ended December 31, 2007 and 2006, respectively, related to these 2006 MIP Performance Unit awards, including $17.7 million and $1.0 million, respectively, related to the automatic adjustments. The amount of compensation expense recognized was based on the assumption that none of the Performance Unit awards would be forfeited. As of December 31, 2007, a total of 2,260,858 Performance Unit awards were outstanding with an aggregate intrinsic value of $19.4 million. As of December 31, 2007, a total of 2,038,621 Performance Units are fully vested with an aggregate intrinsic value of $17.5 million.

     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 were 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 remained 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.

     Off Balance Sheet Arrangements

     As of December 31, 2007, 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

     FIN No. 48. In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48 “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109” (“FIN No. 48”). The Interpretation prescribes a “more-likely-than-not” recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Interpretation also offers guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company adopted FIN No. 48 effective January 1, 2007. In accordance with FIN No. 48, paragraph 19, the Company’s policy for recording interest and penalties associated with tax positions is to record such items as a component of income before taxes. As a result of the implementation of FIN No. 48, the Company recognized a $0.3 million increase in liability for unrecognized tax benefits, which was accounted for as an increase to the January 1, 2007 accumulated deficit balance.

     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 an additional one year deferral for non-financial assets and liabilities. 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.

     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 impact, if any, that the adoption of this pronouncement will have on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141(revised 2007), “Business Combinations” (“SFAS No. 141(R)”). SFAS No. 141(R) establishes principles and requirements for how the acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; recognizes and measures the goodwill acquired in a business combination or a gain from a bargain purchase; determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of a business combination. SFAS No. 141(R) is effective as of the beginning of an entity’s first fiscal year that begins after December 15, 2008. The Company has not determined the impact, if any, SFAS No. 141(R) will have on its future financial statements.

     In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS No. 160”). SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS No. 160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. SFAS No. 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008, earlier adoption is prohibited. The Company has not determined the impact, if any, SFAS No. 160 will have on its future 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, 2007, there were borrowings of $45.0 million outstanding under the term loan portion of the Company’s secured credit facility. As of December 31, 2007, the Company had $15.3 million available for revolving loans under the credit facility, but had no borrowings outstanding. Interest on the term loan accrues, at the Company’s option, at either prime plus 1.75% or at LIBOR plus 4.5%, but under either option may not be less than 9.75%. Interest on outstanding balances under the revolving credit facility, if any, will accrue at the Company’s option at either prime or at LIBOR plus 2%. A hypothetical 100 basis point increase in interest rates applicable to the term loan would result in an approximate $0.5 million increase 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.

     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, 2007, a hypothetical $1.00 change in the market value of the Company’s common stock would result in a $0.9 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			40 & 41
Consolidated Statements of Operations for the Years ended December 31, 2007, 2006 and 2005			42
Consolidated Balance Sheets as of December 31, 2007 and 2006			43
Consolidated Statements of Shareholders’ Equity (Deficit) for the Years ended December 31, 2007, 2006 and 2005			44
Consolidated Statements of Cash Flows for the Years ended December 31, 2007, 2006 and 2005			45
Notes to Consolidated Financial Statements			46

Report of Independent Registered Public Accounting Firm

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

We have audited the accompanying consolidated balance sheets of PRG Schultz International, Inc. and subsidiaries (the Company) as of December 31, 2007 and 2006 and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the two years in the period ended December 31, 2007. In connection with our audits of the financial statements, we have also audited the financial statement schedule as listed in Item 15(a)(2) as Schedule II. 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 and financial statement schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial statement schedule, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and financial statement schedule. 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, 2007 and 2006, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.

Also, in our opinion, the financial statement schedule, 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.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), PRG Schultz International, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 12, 2008 expressed an unqualified opinion thereon.

As discussed in Note 1(j) to the consolidated financial statements, “Income Taxes”, the Company adopted the provisions of FIN No. 48 during 2007.

Atlanta, Georgia		/s/ BDO Seidman, LLP
March 12, 2008

Report of Independent Registered Public Accounting Firm

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

We have audited the accompanying consolidated statements of operations, shareholders’ equity (deficit), and cash flows of PRG-Schultz International, Inc. and subsidiaries (the Company) for the year ended December 31, 2005. In connection with our audit of the consolidated financial statements, we have also audited the financial statement schedule for the year ended December 31, 2005 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 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 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 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 results of PRG-Schultz International, Inc. and subsidiaries’ operations and their cash flows for the year ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule for the year 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 the year ended 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 positive cash flows from operations, as well as 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.

/s/ KPMG LLP

Atlanta, Georgia
March 17, 2006, except for discontinued
   operations and operating segment adjustments
   as described in notes 2 and 5, respectively, as
   to which the date is March 12, 2008

PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

		Years Ended December 31,
		2007				2006				2005
Revenues		$	227,369			$	225,898			$	251,527
Cost of revenues			140,877				161,827				167,886
Gross margin			86,492				64,071				83,641
Selling, general and administrative expenses			67,063				56,500				104,760
Impairment charges (Notes 1(h) and 7)			—				—				170,375
Operational restructuring expense (Note 16)			1,644				4,130				11,167
Operating income (loss)			17,785				3,441				(202,661	)
Interest (expense)			(15,071	)			(17,145	)			(8,823	)
Interest income			1,256				834				545
Loss on debt extinguishment and financial restructuring (Note 8)			(9,397	)			(10,047	)			—
Loss from continuing operations before income taxes and discontinued operations			(5,427	)			(22,917	)			(210,939	)
Income tax expense (Note 10)			1,658				1,165				63
Loss from continuing operations before discontinued operations			(7,085	)			(24,082	)			(211,002	)
Discontinued operations (Note 2):
Earnings from discontinued operations, net of income tax expense of $408 in 2007, $854 in 2006 and $758 in 2005			347				2,691				2,783
Net gains on sales of discontinued operations			19,868				292				479
Earnings from discontinued operations			20,215				2,983				3,262
Net earnings (loss)		$	13,130			$	(21,099	)		$	(207,740	)
Basic and diluted earnings (loss) per common share (Note 6):
Loss from continuing operations before discontinued operations		$	(0.62	)		$	(3.77	)		$	(34.03	)
Discontinued operations			1.66				0.45				0.53
Net earnings (loss)		$	1.04			$	(3.32	)		$	(33.50	)
Weighted-average common shares outstanding (Note 6):
Basic and diluted			12,204				6,616				6,201

See accompanying Notes to Consolidated Financial Statements.

PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)

		December 31,
		2007				2006
ASSETS (Note 8)
Current assets:
Cash and cash equivalents		$	42,364			$	30,228
Restricted cash			—				139
Receivables:
Contract receivables, less allowances of $826 in 2007 and $1,795 in 2006:
Billed			30,251				31,246
Unbilled			6,440				8,457
			36,691				39,703
Employee advances and miscellaneous receivables, less allowances of $1,831 in 2007 and $1,306 in 2006			1,118				2,534
Total receivables			37,809				42,237
Prepaid expenses and other current assets			2,676				1,953
Deferred income taxes (Note 10)			64				139
Current assets of discontinued operation (Note 2)			—				52,320
Total current assets			82,913				127,016
Property and equipment:
Computer and other equipment			34,174				43,749
Furniture and fixtures			3,010				4,146
Leasehold improvements			3,964				5,095
			41,148				52,990
Less accumulated depreciation and amortization			(33,113	)			(44,180	)
Property and equipment, net			8,035				8,810
Goodwill (Note 7)			4,600				4,600
Intangible assets, less accumulated amortization of $8,728 in 2007 and $6,838 in 2006 (Note 7)			21,172				23,062
Unbilled receivables			2,072				3,175
Deferred loan costs, net of accumulated amortization (Note 8)			2,897				6,822
Deferred income taxes (Note 10)			279				391
Other assets			470				670
Noncurrent assets of discontinued operations (Note 2)			—				4,121
		$	122,438			$	178,667
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses		$	16,117			$	17,959
Accrued payroll and related expenses			31,435				37,224
Refund liabilities			9,897				10,112
Deferred revenue			620				545
Current portions of debt and capital lease obligations (Note 8)			7,846				750
Current liabilities of discontinued operation (Note 2)			—				55,208
Total current liabilities			65,915				121,798
Senior notes, net of unamortized discount of $7,659 in 2006 (Note 8)			—				43,796
Senior convertible notes, including unamortized premium of $5,519 in 2006 (Note 8)			—				68,030
Other debt and capital lease obligations (Note 8)			38,078				25,096
Noncurrent compensation obligations (Note 13(b))			8,548				5,859
Refund liabilities			1,676				1,659
Other long-term liabilities			5,872				5,713
Total liabilities			120,089				271,951
Mandatorily redeemable participating preferred stock (Note 8)			—				11,199
Shareholders’ equity (deficit) (Notes 8, 12 and 14):
Common stock, no par value; $.01 stated value per share. Authorized 50,000,000 shares; issued 22,100,090 shares in 2007 and 8,398,770 shares in 2006			221				84
Additional paid-in capital			605,592				513,920
Accumulated deficit			(559,018	)			(571,818	)
Accumulated other comprehensive income			4,264				2,041
Treasury stock at cost, 576,453 shares in 2007 and 2006			(48,710	)			(48,710	)
Total shareholders’ equity (deficit)			2,349				(104,483	)
Commitments and contingencies (Notes 2, 3, 8, 9, 12 and 13)
		$	122,438			$	178,667

See accompanying Notes to Consolidated Financial Statements.

PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
Years Ended December 31, 2007, 2006 and 2005
(In thousands, except share data)

																		Accumulated								Unamortized
										Additional								Other								Portion of				Total
		Common Stock								Paid-In				Accumulated				Comprehensive				Treasury				Compensation				Shareholders’				Comprehensive
		Shares				Amount				Capital				Deficit				Income (Loss)				Stock				Expense				Equity (Deficit)				Income (Loss)
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	)
Foreign currency translation adjustments			—				—				—				—				660				—				—				660				660
Comprehensive loss																																		$	(207,080	)
Issuances of common stock under employee stock plans (including tax benefits of $1)			17,075				—				773				—				—				—				—				773
Restricted share forfeitures			(20,400	)			—				(1,029	)			—				—				—				1,029				—
Restricted shares retired for payroll taxes			(1,358	)			—				(42	)			—				—				—				—				(42	)
Restricted share and option awards			26,500				—				1,592				—				—				—				(1,592	)			—
Amortization of stock compensation 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	)
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	)
FIN No. 48 tax liability			—				—				—				(330	)			—				—				—				(330	)
Comprehensive income:
Net earnings			—				—				—				13,130				—				—				—				13,130			$	13,130
Foreign currency translation adjustments			—				—				—				—				2,223				—				—				2,223				2,223
Comprehensive income																																		$	15,353
Issuances of common stock:
Conversions of Series A preferred stock			4,098,541				41				11,601				—				—				—				—				11,642
Conversions of convertible senior notes			9,593,779				96				65,104				—				—				—				—				65,200
Stock option exercises			9,000				—				57				—				—				—				—				57
Issuance costs of common stock			—				—				(72	)			—				—				—				—				(72	)
Accumulated dividends on preferred stock			—				—				(487	)			—				—				—				—				(487	)
Stock-based compensation expense			—				—				15,469				—				—				—				—				15,469
Balance at December 31, 2007			22,100,090			$	221			$	605,592			$	(559,018	)		$	4,264			$	(48,710	)		$	—			$	2,349