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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
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number 0-28000
 PRG-Schultz International, Inc.
  Georgia(State or other jurisdiction of 
incorporation or organization)
    
    58-2213805(I.R.S. Employer
Identification No.)600 Galleria Parkway
    
    30339-5986Suite 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 registeredCommon 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
 o þ
 o þ
 Note
 þ o
 þ
  o Large accelerated filer
    
    þ Accelerated filer
    
    o Non-accelerated filer
(Do not check if a smaller reporting company)
    
    o Small reporting company
 o þ
   Documents Incorporated by Reference




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##### 



PRG-SCHULTZ INTERNATIONAL, INC.
 FORM 10-K
December 31, 2007
 PagePart IItem 1. Business
    
    
    1Item 1A. Risk Factors
    
    
    9Item 1B. Unresolved Staff Comments
    
    
    16Item 2. Properties
    
    
    16Item 3. Legal Proceedings
    
    
    16Item 4. Submission of Matters to a Vote of Security Holders
    
    
    16Part IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
    
    
    17Item 6. Selected Financial Data
    
    
    19Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    38Item 8. Financial Statements and Supplementary Data
    
    
    39Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    74Item 9A. Controls and Procedures
    
    
    74Item 9B. Other Information
    
    
    75Part IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    76Item 11. Executive Compensation
    
    
    76Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
    
    
    76Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    77Item 14. Principal Accounting Fees and Services
    
    
    77Part IVItem 15. Exhibits, Financial Statement Schedules
    
    
    78Signatures
    
    
    82EX-21.1 SUBSIDIARIES OF THE REGISTRANTEX-23.1 CONSENT OF BDO SEIDMAN, LLPEX-23.2 CONSENT OF KPMG LLPEX-31.1 SECTION 302, CERTIFICATION OF THE CEOEX-31.2 SECTION 302, CERTIFICATION OF THE CFOEX-32.1 SECTION 906, CERTIFICATION OF THE CEO AND CFO




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PART I
 
 ITEM 1. Business
 Risk Factors
  
    
    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).
   Note 5
 The Recovery Audit Industry
  1




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Data Capture and Availability.
 Increasing Number of Auditable Claim Categories.
 Globalization.
 Consolidation in the Retail Industry.
 Significant Promotional Activity.
 Move Toward Standard Auditing Practices
 2




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The PRG-Schultz Solution
    The PRG-Schultz Strategy
  Optimize the Core Accounts Payable Recovery Audit Business.
   Develop New Services
  Pioneer Recovery Auditing into New Territories
  3




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Managements
Discussion and Analysis of Financial Condition and Results of Operations  Medicare
 PRG-Schultz Services
 Accounts Payable Services
   Retail/Wholesale
   Commercial
  Government Agencies
  4




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Managements Discussion and Analysis of Financial Condition and Results of Operations  Medicare
 New Services
  Client Contracts
  Technology
      5




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Auditor Hiring, Training and Compensation
  Clients
  Sales and Marketing
  Proprietary Rights
  PRG-Schultz®, ImDex®, AuditPro, SureF!nd Direct F!nd and claimDex.
 6




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Competition
    Client Internal Recovery Audit Departments
 Other Recovery Audit Firms
 
    
    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
 Regulation
  7




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Employees
  Website
 www.prgx.com www.sec.gov/edgar.shtml
 8




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ITEM 1A. Risk Factors
 We have a history of losses and may not be able to improve our performance to achieve
profitability.
  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.
  We depend on our largest clients for significant revenues, so losing a major client could adversely
affect our revenues.
  Client and vendor bankruptcies and financial difficulties could reduce our earnings.
    9




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Our strategic business initiatives may not be successful.
  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.
  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.
  10




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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.
   We may be unable to protect and maintain the competitive advantage of our proprietary technology
and intellectual property rights.
   Our failure to retain the services of key members of management and highly skilled personnel could
adversely impact our continued success.
  11




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We rely on international operations for a significant portion of our revenues.
  
    
    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.
  The market for providing disbursement audit services to commercial clients is declining.
   Our accounts payable recovery audit services business is subject to price pressure.
  12




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Generally our client contracts contain provisions under which the client may terminate the
agreement prior to the completion of the agreement.
  Our failure to comply with applicable governmental privacy laws and regulations could substantially
impact our business, operations and financial condition.
  The ownership change that occurred as a result of our 2006 exchange offer limits our ability to use
our net operating losses.
  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.
    13




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Future impairment of goodwill, other intangible assets and long-lived assets would reduce our
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.
  Our articles of incorporation, bylaws, shareholder rights plan and Georgia law may inhibit a change
of control that shareholders may favor.
  
    
    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.
  14




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The terms of our credit facility place restrictions on us, which create risks of default and reduce
our flexibility.
   Our stock price has been and may continue to be volatile.
  
    
    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.
  15




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ITEM 1B. Unresolved Staff Comments
  
 ITEM 2. Properties
  Note 9
 
 ITEM 3. Legal Proceedings
   
 ITEM 4. Submission of Matters to a Vote of Security Holders
  16




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PART II
 
 ITEM 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
  2007 Calendar Quarter
    
    High
    
    Low1st Quarter
    
    $
    16.87
    
    
    $
    7.902nd Quarter
    
    
    16.87
    
    
    
    12.943rd Quarter
    
    
    20.14
    
    
    
    11.584th Quarter
    
    
    17.29
    
    
    
    8.11
 2006 Calendar Quarter
    
    High
    
    Low1st Quarter
    
    $
    7.60
    
    
    $
    3.902nd Quarter
    
    
    7.20
    
    
    
    2.703rd Quarter
    
    
    6.38
    
    
    
    2.034th Quarter
    
    
    8.36
    
    
    
    4.67
  17




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Performance Graph
  COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
 
 VALUE OF $100 INVESTED ON DECEMBER 31, 2002 AT:
 Cumulative Total Return
 12/02
    
    12/03
    
    12/04
    
    12/05
    
    12/06
    
    12/07PRG-Schultz International, Inc.
    
    
    100.00
    
    
    
    55.06
    
    
    
    56.52
    
    
    
    6.85
    
    
    
    8.99
    
    
    
    9.63NASDAQ Composite
    
    
    100.00
    
    
    
    149.34
    
    
    
    161.86
    
    
    
    166.64
    
    
    
    186.18
    
    
    
    205.48RDG Technology Composite
    
    
    100.00
    
    
    
    150.41
    
    
    
    153.60
    
    
    
    158.73
    
    
    
    174.21
    
    
    
    201.07
 18




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ITEM 6. Selected Financial Data
   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
    
    
    $
    327,007Cost of revenues
    
    
    140,877
    
    
    
    161,827
    
    
    
    167,886
    
    
    
    192,915
    
    
    
    203,675Gross margin
    
    
    86,492
    
    
    
    64,071
    
    
    
    83,641
    
    
    
    116,319
    
    
    
    123,332Selling, general and
administrative expenses (1)
    
    
    67,063
    
    
    
    56,500
    
    
    
    104,760
    
    
    
    116,128
    
    
    
    117,262Impairment charges (2)
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    170,375
    
    
    
    3⁄4
    
    
    
    198,677Operational restructuring expense
    
    
    1,644
    
    
    
    4,130
    
    
    
    11,167
    
    
    
    3⁄4
    
    
    
    3⁄4Operating 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
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4Loss 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
    
    
    
    4,954Net 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
    
    
    
    0.80Net earnings (loss)
    
    $
    1.04
    
    
    $
    (3.32
    )
    
    $
    (33.50
    )
    
    $
    (11.57
    )
    
    $
    (26.04
    )
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December 31,2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003(In thousands)Balance Sheet Data:Cash and cash equivalents
    
    $
    42,364
    
    
    $
    30,228
    
    
    $
    8,361
    
    
    $
    9,122
    
    
    $
    26,658Working capital
    
    
    16,998
    
    
    
    5,218
    
    
    
    (9,123
    )
    
    
    5,882
    
    
    
    1,715Total assets
    
    
    122,438
    
    
    
    178,667
    
    
    
    162,062
    
    
    
    358,593
    
    
    
    429,257Long-term debt, excluding
current installments
    
    
    38,078
    
    
    
    136,922
    
    
    
    140,401
    
    
    
    123,286
    
    
    
    122,395Redeemable preferred stock
    
    
    3⁄4
    
    
    
    11,199
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4Total shareholders equity (deficit)
    
    $
    2,349
    
    
    $
    (104,483
    )
    
    $
    (102,365
    )
    
    $
    103,584
    
    
    $
    173,130
 
 (1)
    
    The Company adopted the provisions of SFAS 123(R) in 2006 and recognized $21.0 million and
$6.4 million of stock-based compensation charges during the years ended December 31, 2007 and
2006, respectively. See Note 1(m)and Note 14of Notes to Consolidated Financial Statements
included in Item 8 of this Form 10-K.(2)
    
    During 2005 and 2003, the Company recognized impairment charges related to goodwill and
intangible assets. See Note 1(h)and Note 7of Notes to Consolidated Financial Statements
included in Item 8 of this Form 10-K.(3)
    
    During 2004, the Company recognized an increase in the valuation allowance against its
remaining net deferred tax assets. Lower than expected effective tax rates in 2007, 2006 and
2005 are primarily attributable to non-recognition of loss carry-forward benefits. See Note
1(j)and Note 10of Notes to Consolidated Financial Statements included in Item 8 of this
Form 10-K. 20




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ITEM 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Introduction
     Medicare
   21




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Financial Restructurings
 Liquidity
and Capital Resources  Secured Credit Facility
  22




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Liquidity and Capital Resources  Financial Restructuring 
 Operational Restructuring
 Operational
Restructuring Expense
 Critical Accounting Policies
 Managements Discussion and Analysis of Financial Condition and Results of Operations
 Note 1
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
    
    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
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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
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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 10of 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
 26




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##### Table of Contents



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 Note1(m) and Note 14of Notes to Consolidated
Financial Statements included in Item 8 of this Form 10-K.
 Results of Operations
  Years Ended December 31,2007
    
    2006
    
    2005Statements of Operations Data:Revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of revenues
    
    
    62.0
    
    
    
    71.7
    
    
    
    66.8Gross margin
    
    
    38.0
    
    
    
    28.3
    
    
    
    33.2Selling, general and administrative expenses
    
    
    29.5
    
    
    
    25.0
    
    
    
    41.7Impairment charges
    
    
    
    
    
    
    
    
    
    
    67.7Operational restructuring expenses
    
    
    0.7
    
    
    
    1.8
    
    
    
    4.4Operating income (loss)
    
    
    7.8
    
    
    
    1.5
    
    
    
    (80.6
    )Interest expense, net
    
    
    6.1
    
    
    
    7.2
    
    
    
    3.3Loss 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
    
    
    
    0.0Loss from continuing operations before discontinued
operations
    
    
    (3.1
    )
    
    
    (10.6
    )
    
    
    (83.9
    )Discontinued operationsEarnings from discontinued operations and
disposals, net of income taxes
    
    
    8.9
    
    
    
    1.3
    
    
    
    1.3Net earnings (loss)
    
    
    5.8
    %
    
    
    (9.3
    )%
    
    
    (82.6
    )%
   Note 5
 27




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##### Table of Contents



Domestic and International Accounts Payable Services
 Revenues.
 2007
    
    
    2006
    
    
    2005Domestic Accounts Payable Services revenues
    
    $
    140.4
    
    
    $
    140.4
    
    
    $
    154.3International Accounts Payable Services revenues
    
    
    87.0
    
    
    
    85.5
    
    
    
    97.2Total Accounts Payable Services revenues
    
    $
    227.4
    
    
    $
    225.9
    
    
    $
    251.5
      Cost of Revenues (COR).
 28




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##### Table of Contents



2007
    
    
    2006
    
    
    2005Domestic Accounts Payable Services COR
    
    $
    75.4
    
    
    $
    95.3
    
    
    $
    99.8International Accounts Payable Services COR
    
    
    65.5
    
    
    
    66.5
    
    
    
    68.1Total Accounts Payable Services COR
    
    $
    140.9
    
    
    $
    161.8
    
    
    $
    167.9
   Selling, General, and Administrative Expenses (SG&A).
  2007
    
    
    2006
    
    
    2005Domestic Accounts Payable Services SG&A
    
    $
    18.9
    
    
    $
    20.7
    
    
    $
    30.9International Accounts Payable Services SG&A
    
    
    10.0
    
    
    
    10.2
    
    
    
    28.5Total Accounts Payable Services SG&A
    
    $
    28.9
    
    
    $
    30.9
    
    
    $
    59.4
  29




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##### Table of Contents



Corporate Support
 SG&A.
 2007
    
    
    2006
    
    
    2005Selling, general and administrative expenses
    
    $
    38.2
    
    
    $
    25.6
    
    
    $
    45.4
   Operational Restructuring Expense
   2007
    
    
    2006
    
    
    2005Operational restructuring expense
    
    $
    1.6
    
    
    $
    4.1
    
    
    $
    11.2
   30




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##### Table of Contents



Discontinued Operations
      Income Tax Expense
    31




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##### Table of Contents



Quarterly Results
  2007 Quarter Ended
    
    
    2006 Quarter EndedMar. 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
    
    
    $
    60,212Cost of revenues
    
    
    37,241
    
    
    
    34,872
    
    
    
    33,511
    
    
    
    35,253
    
    
    
    39,780
    
    
    
    39,943
    
    
    
    37,531
    
    
    
    44,573Gross margin
    
    
    19,789
    
    
    
    18,443
    
    
    
    19,696
    
    
    
    28,564
    
    
    
    15,935
    
    
    
    15,198
    
    
    
    17,299
    
    
    
    15,639Selling, general and administrative expenses
    
    
    13,682
    
    
    
    14,486
    
    
    
    17,562
    
    
    
    21,333
    
    
    
    14,066
    
    
    
    12,737
    
    
    
    16,605
    
    
    
    13,092Operational restructuring expense
    
    
    
    
    
    
    
    
    
    
    1,644
    
    
    
    
    
    
    
    408
    
    
    
    1,580
    
    
    
    153
    
    
    
    1,989Operating income
    
    
    6,107
    
    
    
    3,957
    
    
    
    490
    
    
    
    7,231
    
    
    
    1,461
    
    
    
    881
    
    
    
    541
    
    
    
    558Interest 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
    
    
    
    405Earnings (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
    
    
    
    1,095Net 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
    
    
    
    0.15Net 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
    
    
    
    0.15Net earnings (loss)
    
    $
    0.13
    
    
    $
    2.02
    
    
    $
    (0.31
    )
    
    $
    (0.19
    )
    
    $
    (1.66
    )
    
    $
    (0.62
    )
    
    $
    (0.69
    )
    
    $
    (0.43
    )
 Liquidity and Capital Resources
  32




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##### Table of Contents



Operating Activities.
  Investing Activities and Depreciation Expense.
 Financing Activities and Interest Expense.
     33




---



##### Table of Contents



Secured
Credit Facility
 Discontinued Operations.
 Other Matters.
 .
 Stock Repurchase Program
  34




---



##### Table of Contents



Contractual Obligations and Other Commitments
  Payments Due by Period (in thousands)Less
    
    
    
    
    
    
    
    
    
    
    MoreThan
    
    
    1-3
    
    
    3-5
    
    
    ThanContractual obligations
    
    Total
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    5 YearsLong-term debt obligations (1)
    
    $
    45,000
    
    
    $
    7,496
    
    
    $
    10,000
    
    
    $
    27,504
    
    
    $
    Operating lease obligations
    
    
    40,744
    
    
    
    7,928
    
    
    
    11,896
    
    
    
    10,235
    
    
    
    10,685Capital 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
    
    
    
    954Severance
    
    
    2,736
    
    
    
    2,736
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    102,623
    
    
    $
    21,813
    
    
    $
    27,387
    
    
    $
    41,784
    
    
    $
    11,639
 
 (1)
    
    Excludes variable rate interest (minimum 9.75% per annum) payable monthly .(2)
    
    Includes interest imputed at 11.3%.(3)
    
    Represents the portions of Performance Units outstanding under the 2006 MIP payable in cash.
Amounts presented are based on
the market price of the Companys common stock at December 31, 2007. Actual payments are due to
be made on April 30 of each year and will be based on the market price of the Companys common
stock at the settlement dates  see 2006 Management Incentive Plan below.(4)
    
    In connection with the Companys 2006 financial restructuring, required payments to Messrs.
Cook and Toma were revised  see Executive Severance Payments below. Secured Credit Facility
   2006 Management Incentive Plan
  35




---



##### Table of Contents



Executive Severance Payments
  Off Balance Sheet Arrangements
  New Accounting Standards
 FIN No. 48. Accounting for Uncertainty in Income Taxes  an Interpretation of FASB
Statement No. 109
 SFAS No. 157. Fair Value
Measurements
 36




---



##### Table of Contents



SFAS No. 159. The Fair Value Option for
Financial Assets and Financial Liabilities  Including an amendment of FASB Statement No. 115
 Business Combinations
 Noncontrolling Interests in Consolidated Financial
Statements
 37




---



##### Table of Contents



ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
 Foreign Currency Market Risk.
 Interest Rate Risk
 Stock-Based Compensation.
 38




---



##### Table of Contents



ITEM 8. Financial Statements and Supplementary Data
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 PageNumberReports of Independent Registered Public Accounting Firms
    
    
    40 & 41Consolidated Statements of Operations for the Years ended December 31, 2007, 2006 and 2005
    
    
    42Consolidated Balance Sheets as of December 31, 2007 and 2006
    
    
    43Consolidated Statements of Shareholders Equity (Deficit) for the Years ended December
31, 2007, 2006 and 2005
    
    
    44Consolidated Statements of Cash Flows for the Years ended December 31, 2007, 2006 and 2005
    
    
    45Notes to Consolidated Financial Statements
    
    
    46
 39




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
   ,
  Internal Control 
Integrated Framework
  Atlanta, Georgia
    
    /s/ BDO Seidman, LLPMarch 12, 2008
 40




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
      
 41




---



##### Table of Contents



PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
 Years Ended December 31,2007
    
    
    2006
    
    
    2005Revenues
    
    $
    227,369
    
    
    $
    225,898
    
    
    $
    251,527Cost of revenues
    
    
    140,877
    
    
    
    161,827
    
    
    
    167,886Gross margin
    
    
    86,492
    
    
    
    64,071
    
    
    
    83,641Selling, general and administrative expenses
    
    
    67,063
    
    
    
    56,500
    
    
    
    104,760Impairment charges (Notes 1(h) and 7)
    
    
    
    
    
    
    
    
    
    
    170,375Operational restructuring expense (Note 16)
    
    
    1,644
    
    
    
    4,130
    
    
    
    11,167Operating income (loss)
    
    
    17,785
    
    
    
    3,441
    
    
    
    (202,661
    )Interest (expense)
    
    
    (15,071
    )
    
    
    (17,145
    )
    
    
    (8,823
    )Interest income
    
    
    1,256
    
    
    
    834
    
    
    
    545Loss 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
    
    
    
    63Loss 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
    
    
    
    2,783Net gains on sales of discontinued operations
    
    
    19,868
    
    
    
    292
    
    
    
    479Earnings from discontinued operations
    
    
    20,215
    
    
    
    2,983
    
    
    
    3,262Net 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
    
    
    
    0.53Net 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.
 42




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##### Table of Contents



PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
 December 31,2007
    
    
    2006ASSETS (Note 8)Current assets:Cash and cash equivalents
    
    $
    42,364
    
    
    $
    30,228Restricted cash
    
    
    
    
    
    
    139Receivables:Contract receivables, less allowances of $826 in 2007 and $1,795 in 2006:Billed
    
    
    30,251
    
    
    
    31,246Unbilled
    
    
    6,440
    
    
    
    8,45736,691
    
    
    
    39,703Employee advances and miscellaneous receivables, less allowances of $1,831 in 2007 and
$1,306 in 2006
    
    
    1,118
    
    
    
    2,534Total receivables
    
    
    37,809
    
    
    
    42,237Prepaid expenses and other current assets
    
    
    2,676
    
    
    
    1,953Deferred income taxes (Note 10)
    
    
    64
    
    
    
    139Current assets of discontinued operation (Note 2)
    
    
    
    
    
    
    52,320Total current assets
    
    
    82,913
    
    
    
    127,016Property and equipment:Computer and other equipment
    
    
    34,174
    
    
    
    43,749Furniture and fixtures
    
    
    3,010
    
    
    
    4,146Leasehold improvements
    
    
    3,964
    
    
    
    5,09541,148
    
    
    
    52,990Less accumulated depreciation and amortization
    
    
    (33,113
    )
    
    
    (44,180
    )Property and equipment, net
    
    
    8,035
    
    
    
    8,810Goodwill (Note 7)
    
    
    4,600
    
    
    
    4,600Intangible assets, less accumulated amortization of $8,728 in 2007 and $6,838 in 2006 (Note 7)
    
    
    21,172
    
    
    
    23,062Unbilled receivables
    
    
    2,072
    
    
    
    3,175Deferred loan costs, net of accumulated amortization (Note 8)
    
    
    2,897
    
    
    
    6,822Deferred income taxes (Note 10)
    
    
    279
    
    
    
    391Other assets
    
    
    470
    
    
    
    670Noncurrent assets of discontinued operations (Note 2)
    
    
    
    
    
    
    4,121$
    122,438
    
    
    $
    178,667LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable and accrued expenses
    
    $
    16,117
    
    
    $
    17,959Accrued payroll and related expenses
    
    
    31,435
    
    
    
    37,224Refund liabilities
    
    
    9,897
    
    
    
    10,112Deferred revenue
    
    
    620
    
    
    
    545Current portions of debt and capital lease obligations (Note 8)
    
    
    7,846
    
    
    
    750Current liabilities of discontinued operation (Note 2)
    
    
    
    
    
    
    55,208Total current liabilities
    
    
    65,915
    
    
    
    121,798Senior notes, net of unamortized discount of $7,659 in 2006 (Note 8)
    
    
    
    
    
    
    43,796Senior convertible notes, including unamortized premium of $5,519 in 2006 (Note 8)
    
    
    
    
    
    
    68,030Other debt and capital lease obligations (Note 8)
    
    
    38,078
    
    
    
    25,096Noncurrent compensation obligations (Note 13(b))
    
    
    8,548
    
    
    
    5,859Refund liabilities
    
    
    1,676
    
    
    
    1,659Other long-term liabilities
    
    
    5,872
    
    
    
    5,713Total liabilities
    
    
    120,089
    
    
    
    271,951Mandatorily redeemable participating preferred stock (Note 8)
    
    
    
    
    
    
    11,199Shareholders 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
    
    
    
    84Additional paid-in capital
    
    
    605,592
    
    
    
    513,920Accumulated deficit
    
    
    (559,018
    )
    
    
    (571,818
    )Accumulated other comprehensive income
    
    
    4,264
    
    
    
    2,041Treasury 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.
 43




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##### Table of Contents



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
    
    
    
    
    
    
    UnamortizedAdditional
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    Portion of
    
    
    TotalCommon Stock
    
    
    Paid-In
    
    
    Accumulated
    
    
    Comprehensive
    
    
    Treasury
    
    
    Compensation
    
    
    Shareholders
    
    
    ComprehensiveShares
    
    
    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
    )
    
    $
    103,584Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (207,740
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (207,740
    )
    
    $
    (207,740
    )Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    660
    
    
    
    
    
    
    
    
    
    
    
    660
    
    
    
    660Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (207,080
    )Issuances of common stock under employee
stock plans (including tax benefits of $1)
    
    
    17,075
    
    
    
    
    
    
    
    773
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    773Restricted 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
    
    
    
    400Balance 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,995Issuance costs of preferred stock
    
    
    
    
    
    
    
    
    
    
    (1,281
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,281
    )Issuances of common stock:Conversions of Series A preferred stock
    
    
    1,614,995
    
    
    
    16
    
    
    
    4,571
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,587Fractional
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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,934Balance 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
    
    
    $
    13,130Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,223
    
    
    
    
    
    
    
    
    
    
    
    2,223
    
    
    
    2,223Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    15,353Issuances of common stock:Conversions of Series A preferred stock
    
    
    4,098,541
    
    
    
    41
    
    
    
    11,601
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,642Conversions of convertible senior notes
    
    
    9,593,779
    
    
    
    96
    
    
    
    65,104
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    65,200Stock option exercises
    
    
    9,000
    
    
    
    
    
    
    
    57
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57Issuance costs of common stock
    
    
    
    
    
    
    
    
    
    
    (72
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (72
    )Accumulated dividends on preferred stock
    
    
    
    
    
    
    
    
    
    
    (487
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (487
    )Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    15,469
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,469Balance at December 31, 2007
    
    
    22,100,090
    
    
    $
    221
    
    
    $
    605,592
    
    
    $
    (559,018
    )
    
    $
    4,264
    
    
    $
    (48,710
    )
    
    $
    
    
    
    $
    2,349
 See accompanying Notes to Consolidated Financial Statements.
 44




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##### Table of Contents



PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 Years Ended December 31,2007
    
    
    2006
    
    
    2005Cash flows from operating activities:Net earnings (loss)
    
    $
    13,130
    
    
    $
    (21,099
    )
    
    $
    (207,740
    )Earnings from discontinued operations
    
    
    20,215
    
    
    
    2,983
    
    
    
    3,262Loss from continuing operations
    
    
    (7,085
    )
    
    
    (24,082
    )
    
    
    (211,002
    )Adjustments to reconcile loss from continuing operations to net
cash provided by (used in) operating activities:Loss on debt extinguishment and financial restructuring
    
    
    9,397
    
    
    
    10,047
    
    
    
    3⁄4Impairment charges
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    170,375Impairment charges included in operational restructuring
    
    
    344
    
    
    
    546
    
    
    
    372Depreciation and amortization
    
    
    6,769
    
    
    
    10,114
    
    
    
    13,511Amortization of debt discount, premium and deferred loan costs
    
    
    3,257
    
    
    
    1,858
    
    
    
    1,301Stock-based compensation expense
    
    
    20,956
    
    
    
    6,436
    
    
    
    358Loss on disposals of property, plant and equipment, net
    
    
    298
    
    
    
    28
    
    
    
    9Deferred income taxes
    
    
    187
    
    
    
    67
    
    
    
    (2,847
    )Income tax benefit relating to stock option exercises
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    1Changes in assets and liabilities:Restricted cash
    
    
    139
    
    
    
    335
    
    
    
    (52
    )Billed Receivables
    
    
    3,495
    
    
    
    13,152
    
    
    
    14,365Unbilled Receivables
    
    
    3,120
    
    
    
    765
    
    
    
    2,999Prepaid expenses and other current assets
    
    
    (651
    )
    
    
    818
    
    
    
    1,070Other assets
    
    
    343
    
    
    
    382
    
    
    
    (739
    )Accounts payable and accrued expenses
    
    
    (1,047
    )
    
    
    4,687
    
    
    
    (274
    )Accrued payroll and related expenses
    
    
    (6,425
    )
    
    
    (4,262
    )
    
    
    3,515Refund liabilities
    
    
    (198
    )
    
    
    (1,755
    )
    
    
    (3,131
    )Deferred revenue
    
    
    22
    
    
    
    (1,330
    )
    
    
    143Noncurrent compensation obligations
    
    
    (2,798
    )
    
    
    2,969
    
    
    
    (807
    )Other long-term liabilities
    
    
    165
    
    
    
    521
    
    
    
    93Net cash provided by (used in) operating activities
    
    
    30,288
    
    
    
    21,296
    
    
    
    (10,740
    )Cash flows from investing activities:Purchases of property and equipment, net of disposal proceeds
    
    
    (4,002
    )
    
    
    (1,316
    )
    
    
    (4,868
    )Net cash used in investing activities
    
    
    (4,002
    )
    
    
    (1,316
    )
    
    
    (4,868
    )Cash flows from financing activities:Payments on senior and convertible notes
    
    
    (52,637
    )
    
    
    (905
    )
    
    
    3⁄4Payments on term loan
    
    
    (25,000
    )
    
    
    3⁄4
    
    
    
    3⁄4Term loan borrowings
    
    
    45,000
    
    
    
    25,000
    
    
    
    3⁄4Net borrowings (repayments) of other debt obligations
    
    
    (524
    )
    
    
    (16,800
    )
    
    
    16,800Payments for deferred loan costs
    
    
    (2,999
    )
    
    
    (6,197
    )
    
    
    (2,648
    )Net proceeds from common stock issuances
    
    
    57
    
    
    
    3⁄4
    
    
    
    772Preferred stock redemptions
    
    
    (44
    )
    
    
    3⁄4
    
    
    
    3⁄4Issuance costs on common and preferred stock
    
    
    (72
    )
    
    
    (1,281
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    (36,219
    )
    
    
    (183
    )
    
    
    14,924Cash flows from discontinued operations:Operating cash flows
    
    
    (2,044
    )
    
    
    1,503
    
    
    
    648Investing cash flows
    
    
    23,151
    
    
    
    (71
    )
    
    
    (33
    )Net cash provided by discontinued operations
    
    
    21,107
    
    
    
    1,432
    
    
    
    615Effect of exchange rates on cash and cash equivalents
    
    
    962
    
    
    
    638
    
    
    
    (692
    )Net change in cash and cash equivalents
    
    
    12,136
    
    
    
    21,867
    
    
    
    (761
    )Cash and cash equivalents at beginning of year
    
    
    30,228
    
    
    
    8,361
    
    
    
    9,122Cash and cash equivalents at end of year
    
    $
    42,364
    
    
    $
    30,228
    
    
    $
    8,361Supplemental disclosure of cash flow information:Cash paid during the year for interest
    
    $
    14,388
    
    
    $
    5,701
    
    
    $
    6,782Cash paid during the year for income taxes, net of refunds received
    
    $
    1,029
    
    
    $
    1,513
    
    
    $
    2,298
 See accompanying Notes to Consolidated Financial Statements.
 45




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##### Table of Contents



PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 (a) Description of Business and Basis of Presentation
 Description of Business
  
    
    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).
  Basis of Presentation
 (see Note 16). (see Note 8).
 Reverse Stock Split
  Reclassifications
 (see Note 2
 (b) Principles of Consolidation
   46




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##### Table of Contents



PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (c) Discontinued Operations
 (see Note 2).
 (d) Revenue Recognition
       47




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PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (e) Cash and Cash Equivalents
   (f) Property and Equipment
  Accounting for the Impairment or Disposal of
Long-Lived Assets.
 (g) Internally Developed Software
 Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use.
  (h) Goodwill and Other Intangible Assets
 Goodwill and Other Intangible Assets. Accounting for the Impairment or Disposal of
Long-Lived Assets Note 7
  48




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##### Table of Contents



PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   (i) Direct Expenses
  (j) Income Taxes
  Accounting for Income Taxes
 Accounting for Uncertainty in Income Taxes  an Interpretation of FASB Statement No. 109
 (k) Foreign Currency
  49




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##### Table of Contents



PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  (l) Earnings Per Common Share
 Earnings Per Share 
 (m) Stock-Based Compensation
 Share-Based Payment Accounting for Stock-Based Compensation Accounting for
Stock Issued to Employees
 (see Note 14).
 Accounting for Stock-Based Compensation - Transition and Disclosure
 Ranges of RatesPrincipally UsedRisk-free interest rates
    
    2.73%  4.56%Dividend yields
    
    NoneVolatility factor of expected market price
    
    .744  .889Weighted-average expected term of option
    
    5  6 years
 50




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##### Table of Contents



PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  2005Net loss before pro forma effect of compensation expense
recognition provisions of SFAS No. 123
    
    $
    (207,740
    )Stock-based compensation expense included in net loss
reported
    
    
    358Pro forma effect of compensation expense recognition
provisions of SFAS No. 123, net of income taxes of $3,438
    
    
    (5,309
    )Pro forma net loss for purposes of computing basic and
diluted pro forma earnings (loss) per share
    
    $
    (212,691
    )Pro forma net earnings (loss) per share:Basic and diluted  as reported
    
    $
    (33.50
    )Basic and diluted  pro forma
    
    $
    (34.30
    )
 (see Note 6
   2007
    
    2006
    
    2005Risk-free interest rates
    
    4.05%  4.17%
    
    4.6%
    
    3.9%  4.5%Dividend yields
    
    
    
    
    
    Volatility factor of expected market price
    
    .856  .889
    
    .842
    
    .684  .692Weighted-average expected term of option
    
    4  4.5 years
    
    5 years
    
    5 years
  51




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##### Table of Contents



PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  (n) Comprehensive Income (Loss)
 Reporting Comprehensive Income 
 (o) Segment Reporting
 Disclosures about Segments of an Enterprise and Related Information
 Note 5
 (p) New Accounting Standards
 Fair Value Measurements
 The Fair Value Option for Financial Assets
and Financial Liabilities  Including an amendment of FASB Statement No. 115
 52




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##### Table of Contents



PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Business Combinations
 Noncontrolling Interests in Consolidated
Financial Statements
 (2) DISCONTINUED OPERATIONS
 
  Assets and Liabilities of Discontinued Operations
    
    December 31, 2006Current assets of discontinued operations:Cash and cash equivalents
    
    $
    4,785Restricted cash
    
    
    3,299Receivables
    
    
    1,218Prepaid expenses and other current assets
    
    
    714Funds held for client obligations
    
    
    42,304$
    52,320Noncurrent assets of discontinued operations:Property and equipment, net
    
    $
    1,593Other assets
    
    
    2,528$
    4,121Current liabilities of discontinued operations:Accounts payable and accrued expenses
    
    $
    5,717Accrued payroll and related expenses
    
    
    3,802Deferred revenue
    
    
    3,385Obligations for client payables
    
    
    42,304$
    55,208
 53




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##### Table of Contents



PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    Years Ended December 31,Business sold:
    
    2007
    
    
    2006
    
    
    2005Logistics Management Services
    
    $
    
    
    
    $
    289
    
    
    $
    479Channel Revenue
    
    
    
    
    
    
    316
    
    
    
    Airline
    
    
    
    
    
    
    (313
    )
    
    
    Meridian
    
    
    19,868
    
    
    
    
    
    
    
    $
    19,868
    
    
    $
    292
    
    
    $
    479
  Years Ended December 31,2007
    
    
    2006
    
    
    2005Revenues
    
    $
    17,386
    
    
    $
    41,619
    
    
    $
    46,518Operating income
    
    $
    755
    
    
    $
    3,545
    
    
    $
    3,541
  (3) RELATED PARTY TRANSACTIONS
  54




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PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    (4) MAJOR CLIENTS
  (5) OPERATING SEGMENTS AND RELATED INFORMATION
      55




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PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (see Note 16) (see Note 14) (see
Note 7)
 Domestic
    
    
    InternationalAccounts
    
    
    AccountsPayable
    
    
    Payable
    
    
    CorporateServices
    
    
    Services
    
    
    Support
    
    
    Total2007Revenues
    
    $
    140,385
    
    
    $
    86,984
    
    
    $
    
    
    
    $
    227,369EBITDA
    
    $
    51,827
    
    
    $
    12,525
    
    
    $
    (39,798
    )
    
    $
    24,554Severance and restructuring expenses
    
    
    
    
    
    
    
    
    
    
    1,644
    
    
    
    1,644Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    20,956
    
    
    
    20,956Adjusted EBITDA
    
    $
    51,827
    
    
    $
    12,525
    
    
    $
    (17,198
    )
    
    $
    47,1542006Revenues
    
    $
    140,415
    
    
    $
    85,483
    
    
    $
    
    
    
    $
    225,898EBITDA
    
    $
    32,150
    
    
    $
    9,440
    
    
    $
    (28,035
    )
    
    $
    13,555Severance and restructuring expenses
    
    
    3,404
    
    
    
    2,187
    
    
    
    2,449
    
    
    
    8,040Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    6,436
    
    
    
    6,436Adjusted EBITDA
    
    $
    35,554
    
    
    $
    11,627
    
    
    $
    (19,150
    )
    
    $
    28,0312005Revenues
    
    $
    154,279
    
    
    $
    97,248
    
    
    $
    
    
    
    $
    251,527EBITDA
    
    $
    (142,666
    )
    
    $
    (3,260
    )
    
    $
    (43,224
    )
    
    $
    (189,150
    )Impairment charges
    
    
    168,699
    
    
    
    1,676
    
    
    
    
    
    
    
    170,375Severance and restructuring expenses
    
    
    424
    
    
    
    4,340
    
    
    
    10,329
    
    
    
    15,093Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    358
    
    
    
    358Adjusted EBITDA
    
    $
    26,457
    
    
    $
    2,756
    
    
    $
    (32,537
    )
    
    $
    (3,324
    )
 56




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PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  2007
    
    
    2006
    
    
    2005Loss from continuing operations
before discontinued operations
    
    $
    (7,085
    )
    
    $
    (24,082
    )
    
    $
    (211,002
    )Income taxes
    
    
    1,658
    
    
    
    1,165
    
    
    
    63Interest, net
    
    
    13,815
    
    
    
    16,311
    
    
    
    8,278Loss on financial restructuring
    
    
    9,397
    
    
    
    10,047
    
    
    
    Depreciation and amortization
    
    
    6,769
    
    
    
    10,114
    
    
    
    13,511EBITDA
    
    
    24,554
    
    
    
    13,555
    
    
    
    (189,150
    )Impairment charges
    
    
    
    
    
    
    
    
    
    
    170,375Severance and restructuring charges
    
    
    1,644
    
    
    
    8,040
    
    
    
    15,093Stock-based compensation
    
    
    20,956
    
    
    
    6,436
    
    
    
    358Adjusted EBITDA
    
    $
    47,154
    
    
    $
    28,031
    
    
    $
    (3,324
    )
  2007
    
    
    2006Domestic Accounts Payable Services
    
    $
    54,274
    
    
    $
    62,925International Accounts Payable Services
    
    
    18,296
    
    
    
    16,564Corporate Support
    
    
    
    
    
    
    Total allocated assets
    
    
    72,570
    
    
    
    79,489Unallocated assets:Cash and cash equivalents
    
    
    42,364
    
    
    
    30,228Deferred loan costs
    
    
    2,897
    
    
    
    6,822Deferred income taxes
    
    
    343
    
    
    
    530Prepaid expenses and other assets
    
    
    4,264
    
    
    
    5,157Assets of discontinued operations
    
    
    
    
    
    
    56,441Total assets
    
    $
    122,438
    
    
    $
    178,667
   2007
    
    
    2006
    
    
    2005United States
    
    $
    140,388
    
    
    $
    140,415
    
    
    $
    154,279United Kingdom
    
    
    30,548
    
    
    
    30,578
    
    
    
    34,196Canada
    
    
    18,707
    
    
    
    16,650
    
    
    
    19,808France
    
    
    12,084
    
    
    
    12,717
    
    
    
    12,739Mexico
    
    
    5,225
    
    
    
    4,581
    
    
    
    5,722Spain
    
    
    3,270
    
    
    
    2,453
    
    
    
    2,208Brazil
    
    
    3,211
    
    
    
    3,790
    
    
    
    4,674Germany
    
    
    2,459
    
    
    
    2,399
    
    
    
    3,886Australia
    
    
    2,428
    
    
    
    1,553
    
    
    
    2,779Sweden
    
    
    1,806
    
    
    
    1,524
    
    
    
    2,599Belgium
    
    
    1,089
    
    
    
    1,119
    
    
    
    1,288Other
    
    
    6,154
    
    
    
    8,119
    
    
    
    7,349$
    227,369
    
    
    $
    225,898
    
    
    $
    251,527
 57




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PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  2007
    
    
    2006United States
    
    $
    35,339
    
    
    $
    41,788United Kingdom
    
    
    670
    
    
    
    798All Other
    
    
    1,165
    
    
    
    1,379$
    37,174
    
    
    $
    43,965
 (6) EARNINGS (LOSS) PER COMMON SHARE
  2007
    
    
    2006
    
    
    2005Numerator for basic and diluted earnings (loss)
per common share:Loss from continuing operations before
discontinued operations
    
    $
    (7,085
    )
    
    $
    (24,082
    )
    
    $
    (211,002
    )Preferred dividends
    
    
    (487
    )
    
    
    (895
    )
    
    
    Loss for purposes of computing basic
and diluted loss per common share from
continuing operations
    
    
    (7,572
    )
    
    
    (24,977
    )
    
    
    (211,002
    )Earnings from discontinued operations
    
    
    20,215
    
    
    
    2,983
    
    
    
    3,262Earnings (loss) for purposes of
computing basic and diluted net
earnings (loss) per common share
    
    $
    12,643
    
    
    $
    (21,994
    )
    
    $
    (207,740
    )Denominator:Denominator for basic earnings (loss) per
common share  weighted-average shares
outstanding
    
    
    12,204
    
    
    
    6,616
    
    
    
    6,201Effect of dilutive securities
    
    
    
    
    
    
    
    
    
    
    Denominator for diluted earnings (loss) per
common share
    
    
    12,204
    
    
    
    6,616
    
    
    
    6,201Basic and diluted earnings (loss) per common share:Loss from continuing operations before
discontinued operations
    
    $
    (0.62
    )
    
    $
    (3.77
    )
    
    $
    (34.03
    )Discontinued operations
    
    
    1.66
    
    
    
    0.45
    
    
    
    0.53Net earnings (loss)
    
    $
    1.04
    
    
    $
    (3.32
    )
    
    $
    (33.50
    )
 (Note 14)
 58




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PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (7) GOODWILL AND OTHER INTANGIBLE ASSETS
 (a) Goodwill
 Goodwill and Other Intangible Assets,
 (Note 16).
  (see Note 5)
 (b) Other Intangible Assets
  Estimated
    
    December 31,
    
    
    December 31,Useful Life
    
    2007
    
    
    2006Amortized intangible assets:Customer relationships:
    
    20 yearsGross carrying amount
    
    
    
    $
    27,700
    
    
    $
    27,700Accumulated amortization
    
    
    
    
    (8,728
    )
    
    
    (6,838
    )Net carrying amount
    
    
    
    
    18,972
    
    
    
    20,862Unamortized intangible assets:Trade name
    
    Indefinite
    
    
    2,200
    
    
    
    2,200Total intangible assets
    
    
    
    $
    21,172
    
    
    $
    23,062
   59




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PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    (8) DEBT, CAPITAL LEASES AND MANDATORILY REDEEMABLE PARTICIPATING PREFERRED STOCK
 2006 Financial Restructuring
   10% Senior
    
    
    9% Series A11% Senior
    
    
    Convertible
    
    
    PreferredNotes
    
    
    Notes
    
    
    StockImputed borrowing rates used for valuation
    
    
    16
    %
    
    
    17
    %
    
    
    18
    %Fair values of cash flows based on imputed rates
    
    $
    42,795
    
    
    $
    42,891
    
    
    $
    10,109Fair values of conversion features
    
    
    
    
    
    
    21,993
    
    
    
    16,777Total estimated fair value
    
    
    42,795
    
    
    
    64,884
    
    
    
    26,886Face value of instruments issued
    
    
    51,455
    
    
    
    59,566
    
    
    
    14,891Excess of face value over fair value
    
    $
    8,660Excess of fair value over face value
    
    
    
    
    
    $
    5,318
    
    
    $
    11,995
  60




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PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     2007 Repayments, Conversions, Redemptions and New Credit Facility
     61




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PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  10% Senior11% Senior
    
    
    ConvertibleNotes
    
    
    NotesInitial carrying value  estimated fair value
at date of issuance  March 17, 2006
    
    $
    42,795
    
    
    $
    64,884Fair value of additional notes issued September
15, 2006 as paid-in-kind interest payment
(Face value of $2,945)
    
    
    
    
    
    
    3,869Amortization of discount (premium)
    
    
    1,001
    
    
    
    (723
    )Carrying value December 31, 2006
    
    $
    43,796
    
    
    $
    68,030Amortization of discount (premium)
    
    
    1,016
    
    
    
    (853
    )Carrying value of notes converted into common
stock prior to redemption (Face value of
$62,360)
    
    
    
    
    
    
    (67,015
    )Carrying value of notes redeemed in October 2007
    
    
    (44,812
    )
    
    
    (162
    )Balance December 31, 2007
    
    $
    
    
    
    $
    
  9% Series APreferred StockInitial carrying value  liquidation value at date of issuance
 March 17, 2006
    
    $
    14,891Liquidation value of preferred shares converted to common shares
    
    
    (4,587
    )Accumulated dividends (accrual basis)
    
    
    895Liquidation value December 31, 2006 (accrual basis)
    
    $
    11,199Accumulated dividends (accrual basis)
    
    
    487Liquidation value of preferred shares converted to common
shares prior to redemption
    
    
    (11,642
    )Liquidation value of preferred shares redeemed in October 2007
    
    
    (44
    )Balance December 31, 2007
    
    $
    
    62




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##### Table of Contents



PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    Capital Lease Obligation
  Future Minimum Payments
  Year Ending December 31,2008
    
    $
    7,8462009
    
    
    5,3142010
    
    
    5,2602011
    
    
    27,5042012
    
    
    Thereafter
    
    
    $
    45,924
 (9) LEASE COMMITMENTS
  Accounting for Costs Associated with Exit or Disposal Activities,
 63




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PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Accounting for Operating Leases with Scheduled
Rent Increases,
   Operating
    
    
    CapitalYear Ending December 31,
    
    Leases
    
    
    Leases2008
    
    $
    7,928
    
    
    $
    4322009
    
    
    6,477
    
    
    
    3632010
    
    
    5,419
    
    
    
    3022011
    
    
    5,121
    
    
    
    2012
    
    
    5,114
    
    
    
    Thereafter
    
    
    10,685
    
    
    
    Total payments
    
    $
    40,744
    
    
    
    1,097Less amounts representing interest
    
    
    
    
    
    
    173Principal balance at December 31, 2007
    
    
    
    
    
    $
    924
 (10) INCOME TAXES
 Accounting for Income
Taxes 
 2007
    
    
    2006
    
    
    2005Earnings (loss) from continuing operations
    
    $
    1,658
    
    
    $
    1,165
    
    
    $
    63Earnings (loss) from discontinued operations
    
    
    408
    
    
    
    854
    
    
    
    758Gain on disposal of discontinued operations
    
    
    
    
    
    
    
    
    
    
    Shareholders equity, compensation expense
for tax purposes in excess of financial
purposes
    
    
    
    
    
    
    
    
    
    
    1Effect of cumulative translation adjustment
    
    
    
    
    
    
    (1
    )
    
    
    2$
    2,066
    
    
    $
    2,018
    
    
    $
    824
  2007
    
    
    2006
    
    
    2005United States
    
    $
    (9,775
    )
    
    $
    (20,247
    )
    
    $
    (190,189
    )Foreign
    
    
    4,348
    
    
    
    (2,670
    )
    
    
    (20,750
    )$
    (5,427
    )
    
    $
    (22,917
    )
    
    $
    (210,939
    )
 64




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PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  2007
    
    
    2006
    
    
    2005Current:Federal
    
    $
    130
    
    
    $
    
    
    
    $
    State
    
    
    
    
    
    
    
    
    
    
    159Foreign
    
    
    1,341
    
    
    
    1,098
    
    
    
    2,7511,471
    
    
    
    1,098
    
    
    
    2,910Deferred:Federal
    
    
    (130
    )
    
    
    
    
    
    
    (1,553
    )State
    
    
    
    
    
    
    
    
    
    
    (178
    )Foreign
    
    
    317
    
    
    
    67
    
    
    
    (1,116
    )187
    
    
    
    67
    
    
    
    (2,847
    )Total
    
    $
    1,658
    
    
    $
    1,165
    
    
    $
    63
  2007
    
    
    2006
    
    
    2005Statutory federal income tax rate
    
    $
    (1,899
    )
    
    $
    (8,021
    )
    
    $
    (73,829
    )State income taxes, net of federal benefit
    
    
    (571
    )
    
    
    (853
    )
    
    
    (15
    )Nondeductible goodwill
    
    
    
    
    
    
    
    
    
    
    28,215Change in deferred tax asset valuation allowance
    
    
    565
    
    
    
    (60,072
    )
    
    
    42,358IRC Sec. 382 limitation impacts
    
    
    
    
    
    
    62,797
    
    
    
    Loss on extinguishment of debt
    
    
    2,325
    
    
    
    3,516
    
    
    
    Foreign taxes
    
    
    1,207
    
    
    
    821
    
    
    
    Other, net
    
    
    31
    
    
    
    2,977
    
    
    
    3,334$
    1,658
    
    
    $
    1,165
    
    
    $
    63
  2007
    
    
    2006Deferred income tax assets:Accounts payable and accrued expenses
    
    $
    2,908
    
    
    $
    2,641Accrued payroll and related expenses
    
    
    16,861
    
    
    
    14,224Deferred compensation
    
    
    
    
    
    
    329Depreciation
    
    
    3,165
    
    
    
    2,622Non-compete agreements
    
    
    560
    
    
    
    779Bad debts
    
    
    2,244
    
    
    
    1,893Foreign operating loss carry-forward of foreign subsidiary
    
    
    10,116
    
    
    
    9,692Federal operating loss carry-forward
    
    
    11,830
    
    
    
    11,944Intangible assets
    
    
    34,816
    
    
    
    40,511State operating loss carry-forwards
    
    
    2,042
    
    
    
    1,747Other
    
    
    5,280
    
    
    
    4,688Gross deferred tax assets
    
    
    89,822
    
    
    
    91,070Less valuation allowance
    
    
    79,805
    
    
    
    79,240Gross deferred tax assets net of valuation allowance
    
    
    10,017
    
    
    
    11,830Deferred income tax liabilities:Intangible assets
    
    
    8,150
    
    
    
    8,885Capitalized software
    
    
    1,166
    
    
    
    2,057Other
    
    
    358
    
    
    
    358Gross deferred tax liabilities
    
    
    9,674
    
    
    
    11,300Net deferred tax assets
    
    $
    343
    
    
    $
    530
 65




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PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     Accounting for Uncertainty in Income Taxes  an Interpretation of FASB Statement No. 109
  Liability forUnrecognizedTax BenefitsBalance at January 1, 2007
    
    $
    1,834Reductions for Tax Positions  Current Year
    
    
    Additions for Tax Positions  Current Year
    
    
    Balance at December 31, 2007
    
    $
    1,834
  66




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PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   (11) EMPLOYEE BENEFIT PLANS
   (12) SHAREHOLDERS EQUITY (DEFICIT)
  Note 8
 (13) COMMITMENTS AND CONTINGENCIES
 (a) Legal Proceedings
 In re Profit Recovery Group International, Inc. Sec. Litig
 67




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PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 et seq
    (b) Retirement Obligations
  68




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PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (14) STOCK-BASED COMPENSATION
       Weighted-
    
    
    Weighted-Average
    
    
    Average
    
    AggregateExercise
    
    
    Remaining
    
    IntrinsicPrice
    
    
    Contractual
    
    ValueOptions
    
    Shares
    
    
    (Per Share)
    
    
    Term
    
    ($ 000s)Outstanding at January 1, 2007
    
    
    490,375
    
    
    $
    48.70Granted
    
    
    618,846
    
    
    
    13.43Exercised
    
    
    (9,000
    )
    
    
    6.29
    
    
    
    
    $
    69Forfeited
    
    
    (70,798
    )
    
    
    91.10Expired
    
    
    (51,967
    )
    
    
    96.00Outstanding at December 31, 2007
    
    
    977,456
    
    
    $
    21.17
    
    
    5.78 years
    
    $
    665Exercisable at December 31, 2007
    
    
    168,856
    
    
    $
    62.69
    
    
    2.82 years
    
    $
    148
   69




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PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     70




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PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
      (15) FAIR VALUE OF FINANCIAL INSTRUMENTS
   71




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PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   (16) WORKFORCE REDUCTION AND RESTRUCTURING
 Employers Accounting for Postemployment Benefits, Employers Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits Accounting for Costs Associated with Exit or Disposal Activities 
 72




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PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Domestic
    
    
    InternationalAccounts
    
    
    AccountsPayable
    
    
    Payable
    
    
    Corporate
    
    
    RestructuringServices
    
    
    Services
    
    
    Support
    
    
    LiabilitiesBalance as of January 1, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2005 Accruals:Severance and related
    
    $
    425
    
    
    $
    3,707
    
    
    $
    5,454
    
    
    
    9,586Lease termination costs
    
    
    
    
    
    
    397
    
    
    
    812
    
    
    
    1,209Non cash impairment charges
    
    
    
    
    
    
    235
    
    
    
    137
    
    
    
    2005 Payments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,962
    )Balance as of December 31, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,8332006 Accruals:Severance and related
    
    
    484
    
    
    
    1,197
    
    
    
    531
    
    
    
    2,212Lease termination costs
    
    
    
    
    
    
    
    
    
    
    1,372
    
    
    
    1,372Non cash impairment charges
    
    
    
    
    
    
    
    
    
    
    546
    
    
    
    2006 Payments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,751
    )2006 Allocations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,262Balance as of December 31, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,9282007 Accruals:Lease termination costs
    
    
    
    
    
    
    
    
    
    
    1,300
    
    
    
    1,300Non cash impairment charges
    
    
    
    
    
    
    
    
    
    
    344
    
    
    
    3442007 Payments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,015
    )2007 Allocations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    872Balance as of December 31, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4,429Cumulative charges
    
    $
    909
    
    
    $
    5,536
    
    
    $
    10,496
 Accounting for Operating Leases with Scheduled Rent Increases.
 73




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##### Table of Contents



ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 ITEM 9A. Controls and Procedures
 
    
 Internal Control  Integrated
Framework
   74




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##### Table of Contents



.
  Atlanta, Georgia
    
    /s/ BDO Seidman, LLPMarch 12, 2008
 
 ITEM 9B. Other Information.
  75




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##### Table of Contents



PART III
 
 ITEM 10. Directors, Executive Officers and Corporate Governance
  www.prgx.com.
 
 ITEM 11. Executive Compensation
  
 ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  76




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##### Table of Contents



Securities Authorized for Issuance Under Equity Compensation Plans
  Equity Compensation Plan Information
  Weighted-average exercise
    
    
    Number of securities remainingNumber of securities to be issued
    
    
    price of outstanding
    
    
    available for future issuance underupon exercise of outstanding
    
    
    options, warrants and
    
    
    equity compensation plans (excludingPlan category
    
    options, warrants and rights
    
    
    rights (1)
    
    
    securities reflected in column (a))(a)
    
    
    (b)
    
    
    (c)Equity compensation
plans approved by
security holders:Options
    
    
    927,456
    
    
    $
    22.47
    
    
    
    97,967Share awards (2)
    
    
    1,356,515
    
    
    
    
    
    
    
    77,794Equity compensation
plans not approved
by security holders
(3)
    
    
    50,000
    
    
    
    2.80
    
    
    
    Total
    
    
    2,333,971
    
    
    $
    21.17
    
    
    
    175,761
 
 (1)
    
    Excludes impact of restricted stock and share awards which is $0.00 per share.(2)
    
    Amounts presented represent 60% of Performance Unit awards under the Companys 2006
Management Incentive Plan. Performance Unit awards are required to be settled 60% in common
stock and 40% in cash.(3)
    
    Inducement Option Grant  See Note 14of Notes to Consolidated Financial Statements
included in Item 8 of this Form 10-K. 
 ITEM 13. Certain Relationships and Related Transactions, and Director Independence
 -
 
 ITEM 14. Principal Accounting Fees and Services
  77




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##### Table of Contents



PART IV
 
 ITEM 15. Exhibits, Financial Statement Schedules
 (a)
    
    Documents filed as part of the report(1)
    
    Consolidated Financial Statements:For the following consolidated financial information included herein, see Index on Page 45.
 PageReports of Independent Registered Public Accounting Firms
    
    40 & 41Consolidated Statements of Operations for the Years ended December
31, 2007, 2006 and 2005
    
    42Consolidated Balance Sheets as of December 31, 2007 and 2006
    
    43Consolidated Statements of Shareholders Equity (Deficit) for the
Years ended December 31, 2007, 2006 and 2005
    
    44Consolidated Statements of Cash Flows for the Years ended December
31, 2007, 2006 and 2005
    
    45Notes to Consolidated Financial Statements
    
    46
 (2)
    
    Financial Statement Schedule:
 Schedule II  Valuation and Qualifying Accounts
    
    S-1
 (3)
    
    Exhibits
 ExhibitNumber
    
    Description3.1
    
    Restated Articles of Incorporation of the Registrant, as amended
and corrected through August 11, 2006 (restated solely for the
purpose of filing with the Commission) (incorporated by reference
to Exhibit 3.1 to the Registrants Report on Form 8-K filed on
August 17, 2006).3.2
    
    Amended and Restated Bylaws of the Registrant (incorporated by
reference to Exhibit 3.1 to the Registrants Form 8-K filed on
December 11, 2007).4.1
    
    Specimen Common Stock Certificate (incorporated by reference to
Exhibit 4.1 to the Registrants Form 10-K for the year ended
December 31, 2001).4.2
    
    See Restated Articles of Incorporation and Bylaws of the
Registrant, filed as Exhibits 3.1 and 3.2, respectively.4.3
    
    Shareholder Protection Rights Agreement, dated as of August 9,
2000, between the Registrant and Rights Agent, effective May 1,
2002 (incorporated by reference to Exhibit 4.3 to the
Registrants Form 10-Q for the quarterly period ended June 30,
2002).4.3.1
    
    First Amendment to Shareholder Protection Rights Agreement, dated
as of March 12, 2002, between the Registrant and Rights Agent
(incorporated by reference to Exhibit 4.3 to the Registrants
Form 10-Q for the quarterly period ended September 30, 2002).4.3.2
    
    Second Amendment to Shareholder Protection Rights Agreement,
dated as of August 16, 2002, between the Registrant and Rights
Agent (incorporated by reference to Exhibit 4.3 to the
Registrants Form 10-Q for the quarterly period ended September
30, 2002).4.3.3
    
    Third Amendment to Shareholder Protection Rights Agreement, dated
as of November 7, 2006, between the Registrant and Rights Agent
(incorporated by reference to Exhibit 4.1 to the Registrants
Form 8-K filed on November 14, 2005).4.3.4
    
    Fourth Amendment to Shareholder Protection Rights Agreement,
dated as of November 14, 2006, between the Registrant and Rights
Agent (incorporated by reference to Exhibit 4.1 to the
Registrants Form 8-K filed on November 30, 2005).4.3.5
    
    Fifth Amendment to Shareholder Protection Rights Agreement, dated
as of March 9, 2006, between the Registrant and Rights Agent
(incorporated by reference to Exhibit 4.9 to the Registrants
Form 10-K for the year ended December 31, 2005).
 78




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##### Table of Contents



ExhibitNumber
    
    Description4.3.6
    
    Sixth Amendment to Shareholder Protection Rights Agreement, dated
as of September 17, 2007, between the Registrant and Rights Agent
(incorporated by reference to Exhibit 4.1 to the Registrants
Form 8-K filed on September 21, 2007).4.4
    
    Indenture dated November 26, 2001 by and between Registrant and
Sun Trust Bank (incorporated by reference to Exhibit 4.3 to the
Registrants Registration Statement No. 333-76018 on Form S-3
filed December 27, 2001).4.5
    
    Indenture dated as of March 17, 2006 governing 10% Senior
Convertible Notes due 2011, with Form of Note appended
(incorporated by reference to Exhibit 4.1 to the Registrants
Form 8-K filed on March 23, 2006).4.5.1
    
    Supplemental Indenture to 10% Senior Convertible Notes Indenture
dated September 4, 2007 (incorporated by reference to Exhibit
10.2 to the Registrants Form 8-K filed on September 5, 2007).4.6
    
    Indenture dated as of March 17, 2006 governing 11% Senior Notes
due 2011, with Form of Note appended (incorporated by reference
to Exhibit 4.2 to the Registrants Form 8-K filed on March 23,
2006).4.6.1
    
    Supplemental Indenture to 11% Senior Notes Indenture dated
September 4, 2007 (incorporated by reference to Exhibit 10.1 to
the Registrants Form 8-K filed on September 5, 2007).+10.1
    
    1996 Stock Option Plan, dated as of January 25, 1996, together
with Forms of Non-qualified Stock Option Agreement (incorporated
by reference to Exhibit 10.2 to the Registrants March 26, 1996
Registration Statement No. 333-1086 on Form S-1).+10.2
    
    Form of Indemnification Agreement between the Registrant and
Directors and certain officers, including named executive
officers, of the Registrant (incorporated by reference to Exhibit
10.4 to the Registrants Form 10-K for the year ended December
31, 2003).+10.3
    
    Discussion of Management and Professional Incentive Plan
(incorporated by reference to Exhibit 10.27 to the Registrants
Form 10-K for the year ended December 31, 2000).+10.4
    
    Form of the Registrants Non-Qualified Stock Option Agreement
(incorporated by reference to Exhibit 10.2 to the Registrants
Form 10-Q for the quarterly period ended June 30, 2001).10.5
    
    Noncompetition, Nonsolicitation and Confidentiality Agreement
among The Profit Recovery Group International, Inc., Howard
Schultz & Associates International, Inc., Howard Schultz, Andrew
Schultz and certain trusts, dated January 24, 2002 (incorporated
by reference to Exhibit 10.34 to the Registrants Form 10-K for
the year ended December 31, 2001).10.6
    
    Office Lease Agreement between Galleria 600, LLC and PRG-Schultz
International, Inc. (incorporated by reference to Exhibit 10.43
to the Registrants Form 10-K for the year ended December 31,
2001).10.6.1
    
    First Amendment to Office Lease Agreement between Galleria 600,
LLC and PRG-Schultz International, Inc. (incorporated by
reference to Exhibit 10.65 to the Registrants Form 10-K for the
year ended December 31, 2002).+10. 7
    
    Amended Stock Incentive Plan (incorporated by reference to
Exhibit 10.3 to the Registrants Form 10-Q for the quarterly
period ended June 30, 2002).+10.8
    
    Amended HSA-Texas Stock Option Plan (incorporated by reference to
Exhibit 10.4 to the Registrants Form 10-Q for the quarterly
period ended June 30, 2002).10.9
    
    Investor Rights Agreement, dated as of August 27, 2002, among
PRG-Schultz International, Inc., Berkshire Fund V, LP, Berkshire
Investors LLC and Blum Strategic Partners II, L.P. (incorporated
by reference to Exhibit 10.7 to the Registrants Form 10-Q for
the quarterly period ended September 30, 2002).10.9.1
    
    Amendment to Investor Rights Agreement dated March 28, 2006
(incorporated by reference to Exhibit 10.8 to the Registrants
Form 10-Q for the quarter ended March 31, 2006).10.10
    
    Registration Rights Agreement, dated as of August 27, 2002, by
and between PRG-Schultz International, Inc., Blum Strategic
Partners II, L.P. and other affiliates of Blum Capital Partners,
LP (incorporated by reference to Exhibit 10.8 to the Registrants
Form 10-Q for the quarterly period ended September 30, 2002).10.11
    
    Registration Rights Agreement, dated as of August 27, 2002, by
and between PRG-Schultz International, Inc., Berkshire Fund V, LP
and Berkshire Investors LLC (incorporated by reference to Exhibit
10.9 to the Registrants Form 10-Q for the quarterly period ended
September 30, 2002).+10.12
    
    PRG Schultz International, Inc. 2004 Executive Incentive Plan as
approved by shareholders on May 18, 2004 (incorporated by
reference to Exhibit 10.1 to the Registrants Form 10-Q for the
quarterly period ended June 30, 2004).
 79




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##### Table of Contents



ExhibitNumber
    
    Description+10.13
    
    Form of Non-employee Director Option Agreement (incorporated by
reference to Exhibit 99.1 to the Registrants Report on Form 8-K
filed on February 11, 2005).*10.14
    
    Medicare & Medicaid Services Contract dated March 7, 2005
(incorporated by reference to Exhibit 10.8 to the Registrants
Form 10-Q for the quarter ended March 31, 2005).*10.15
    
    Stipulation of Settlement dated as of February 8, 2005
(incorporated by reference to Exhibit 10.9 to the Registrants
Form 10-Q for the quarter ended March 31, 2005).10.15.1
    
    Supplement to Settlement Agreement dated as of February 8, 2005
(incorporated by reference to Exhibit 10.6 to the Registrants
Form 10-Q for the quarter ended September 30, 2005).+10.16
    
    Amended and Restated Employment Agreement between Registrant and
Mr. James B. McCurry, dated as of December 17, 2007 (incorporated
by reference to Exhibit 10.1 to the Registrants Form 8-K filed
on December 19, 2007).+10.17
    
    Retainer Agreement between Registrant and Mr. David A. Cole,
dated as of July 20, 2005 (incorporated by reference to Exhibit
99.2 to the Registrants Form 8-K filed on July 25, 2005).+10.17.1
    
    Amendment to Retainer Agreement with David A. Cole dated October
19, 2005 (incorporated by reference to Exhibit 10.67 to the
Registrants Form 10-K for the year ended December 31, 2005).10.18
    
    Separation and Release Agreement between Registrant and Mr. John
M. Cook, dated as of August 2, 2005 (incorporated by reference to
Exhibit 99.1 to Registrants Form 8-K filed on August 8, 2005).10.18.1
    
    First Amendment to Separation and Release Agreement with John M.
Cook dated March 16, 2006 (incorporated by reference to Exhibit
99.1 to the registrants Form 8-K filed on March 22, 2006).10.19
    
    Separation and Release Agreement between Registrant and Mr. John
M. Toma, dated as of August 2, 2005 (incorporated by reference to
Exhibit 99.2 to Registrants Form 8-K filed on August 8, 2005).10.19.1
    
    First Amendment to Separation and Release Agreement with John M.
Toma dated March 16, 2006 (incorporated by reference to Exhibit
99.2 to the registrants Form 8-K filed on March 22, 2006).10.20
    
    Separation and Release Agreement between Registrant and Mr.
Richard J. Bacon, dated as of October 25, 2005 (incorporated by
reference to Exhibit 10.5 to the Registrants Form 10-Q for the
quarter ended September 30, 2005).10.21
    
    Release Agreement and Covenant Not to Sue between Registrant and
Mr. James E. Moylan, Jr., effective as of February 18, 2006.
(incorporated by reference to Exhibit 10.24 to the Registrants
Form 10-K for the year ended December 31, 2006).+10.22
    
    Employment Agreement between the Registrant and Peter Limeri
entered into on November 11, 2005 (incorporated by reference to
Exhibit 99.1 to the Registrants Form 8-K filed on November 17,
2005).10.23
    
    Amended and Restated Standstill Agreement, dated as of July 16,
2007, between Registrant and Blum Capital Partners, L.P. and
certain of its affiliates (incorporated by reference to Exhibit
10.1 to the Registrants Form 8-K filed on July 16, 2007).10.24
    
    Vesting on December 15, 2005 of certain employee stock options
outstanding as of November 30, 2005 (incorporated by reference to
Exhibit 10.60 to the Registrants Form 10-K for the year ended
December 31, 2005).10.25
    
    Credit Agreement dated December 23, 2005 among the Registrant,
certain of its U.S. subsidiaries, Petrus Securities L.P.,
ParkCentral Global Hub Limited, Blum Strategic Partners II GmbH &
Co. Kg. and Blum Strategic Partners II, L.P. (incorporated by
reference to Exhibit 10.61 to the Registrants Form 10-K for the
year ended December 31, 2005).10.26
    
    Security Agreement dated December 23, 2005 among the Registrant,
certain of its U.S. subsidiaries, Petrus Securities L.P.,
ParkCentral Global Hub Limited, Blum Strategic Partners II GmbH &
Co. Kg. and Blum Strategic Partners II, L.P. (incorporated by
reference to Exhibit 10.62 to the Registrants Form 10-K for the
year ended December 31, 2005).10.27
    
    Pledge Agreement dated December 23, 2005 among the Registrant,
certain of its U.S. subsidiaries, Petrus Securities L.P.,
ParkCentral Global Hub Limited, Blum Strategic Partners II GmbH &
Co. Kg. and Blum Strategic Partners II, L.P. (incorporated by
reference to Exhibit 10.63 to the Registrants Form 10-K for the
year ended December 31, 2005).10.28
    
    Restructuring Support Agreement dated December 23, 2005
(incorporated by reference to Exhibit 10.66 to the Registrants
Form 10-K for the year ended December 31, 2005).10.28.1
    
    Amended and Restated Restructuring Support Agreement
(incorporated by reference to Exhibit 10.1 to the Registrants
Form 10-Q for the quarter ended March 31, 2006).
 80




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ExhibitNumber
    
    Description+10.29
    
    Employment Agreement with Larry Robinson dated January 1, 2006
(incorporated by reference to Exhibit 10.68 to the Registrants
Form 10-K for the year ended December 31, 2005).+10.30
    
    Employment Agreement with Brad Roos dated June 1, 2001
(incorporated by reference to Exhibit 10.69 to the Registrants
Form 10-K for the year ended December 31, 2005).+10.31
    
    Expatriate Assignment Agreement with Brad Roos (incorporated by
reference to Exhibit 10.1 to the Registrants Form 8-K filed on
February 14, 2008).10.32
    
    Houlihan Lokey Agreement dated October 21, 2005 (incorporated by
reference to Exhibit 10.71 to the Registrants Form 10-K for the
year ended December 31, 2005).10.32.1
    
    Amendment Letter with Houlihan Lokey dated February 1, 2006
(incorporated by reference to Exhibit 10.72 to the Registrants
Form 10-K for the year ended December 31, 2005).10.33
    
    Rothschild Inc. Agreement dated as of September 14, 2005
(incorporated by reference to Exhibit 10.73 to the Registrants
Form 10-K for the year ended December 31, 2005).10.33.1
    
    Letter Agreement with Rothschild Inc. dated February 1, 2006
(incorporated by reference to Exhibit 10.74 to the Registrants
Form 10-K for the year ended December 31, 2005).10.34
    
    Registration Rights Agreement dated March 17, 2006 (incorporated
by reference to Exhibit 10.2 to the Registrants Form 10-Q for
the quarter ended March 31, 2006).10.35
    
    Amended and Restated Financing Agreement dated September 17, 2007
(incorporated by reference to Exhibit 10.1 to the Registrants
Form 8-K filed on September 21, 2007).10.36
    
    Security Agreement dated March 17, 2006 (incorporated by
reference to Exhibit 10.4 to the Registrants Form 10-Q for the
quarter ended March 31, 2006).10.37
    
    2006 Performance Bonus Plan (incorporated by reference to Exhibit
10.5 to the Registrants Form 10-Q for the quarter ended March
31, 2006).+10.38
    
    Amended and Restated 2006 Management Incentive Plan (incorporated
by reference to Exhibit 10.1 to the Registrants Form 10-Q for
the quarter ended September 30, 2006).+10.38.1
    
    Form of Performance Unit Agreement under 2006 Amended and
Restated Management Incentive Plan (incorporated by reference to
Exhibit 10.2 to the Registrants Form 10-Q for the quarter ended
September 30, 2006).+10.38.2
    
    Form of Amendment to Performance Unit Agreement (incorporated by
reference to Exhibit 10.1 to the Registrants Form 8-K filed on
December 11, 2007).+10.39
    
    Employment Agreement with Norman Lee White, dated June 19, 2006
(incorporated by reference to Exhibit 10.1 to the Registrants
Report on Form 8-K filed on June 20, 2006).+10.40
    
    Form of Non-Employee Director Stock Option Agreement
(incorporated by reference to Exhibit 10.1 to the Registrants
Report on Form 8-K filed on September 18, 2007).10.41
    
    Option Termination Agreement with James B. McCurry dated
September 29, 2006 (incorporated by reference to Exhibit 10.1 to
the Registrants Report on Form 8-K filed on October 5, 2006).+*10.42
    
    2007 Performance Bonus Plan (incorporated by reference to Exhibit
10.1 to the Registrants Report on Form 10-Q for the quarter
ended March 31, 2007).14.1
    
    Code of Ethics for Senior Financial Officers (incorporated by
reference to Exhibit 14.1 to the Registrants Form 10-K for the
year ended December 31, 2003).21.1
    
    Subsidiaries of the Registrant.23.1
    
    Consent of BDO Seidman, LLP23.2
    
    Consent of KPMG LLP.31.1
    
    Certification of the Chief Executive Officer, pursuant to Rule
13a-14(a) or 15d-14(a), for the year ended December 31, 2007.31.2
    
    Certification of the Chief Financial Officer, pursuant to Rule
13a-14(a) or 15d-14(a), for the year ended December 31, 2007.32.1
    
    Certification of the Chief Executive Officer and Chief Financial
Officer, pursuant to 18 U.S.C. Section 1350, for the year ended
December 31, 2007.
 
 *
    
    Confidential treatment, pursuant to 17 CFR Secs. §§ 200.80 and 240.24b-2, has been
granted regarding certain portions of the indicated Exhibit, which portions have been filed
separately with the Commission.+
    
    Designates management contract or compensatory plan or arrangement. 81




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SIGNATURES
  PRG-SCHULTZ INTERNATIONAL, INC.By:
    
    /s/ JAMES B. MCCURRY

James B. McCurryPresident, Chairman of the Board andChief Executive Officer(Principal Executive Officer)Date:
    
    March 10, 2008
  Signature
    
    Title
    
    Date/s/ JAMES B. MCCURRY
James B. McCurry
    
    President, Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
    
    March 10, 2008/s/ PETER LIMERI
Peter Limeri
    
    Chief Financial Officer and Treasurer
(Principal Financial Officer)
    
    March 10, 2008/s/ ROBERT B. LEE
Robert B. Lee
    
    Controller
(Principal Accounting Officer)
    
    March 10, 2008/s/ DAVID A. COLE
David A. Cole
    
    Director
    
    March 10, 2008/s/ PATRICK G. DILLS
Patrick G. Dills
    
    Director
    
    March 10, 2008/s/ N. COLIN LIND
N. Colin Lind
    
    Director
    
    March 10, 2008/s/ PHILIP J. MAZZILLI, JR.
Philip J. Mazzilli, Jr.
    
    Director
    
    March 10, 2008/s/ STEVEN P. ROSENBERG
Steven P. Rosenberg
    
    Director
    
    March 10, 2008
 82




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##### Table of Contents



SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(In thousands)
 Additions
    
    DeductionsChargeBalance at
    
    (Credit) to
    
    Credit to
    
    Balance atBeginning
    
    Costs and
    
    the respective
    
    End ofDescription
    
    of Year
    
    Expenses
    
    receivable (1)
    
    Year2007Allowance for doubtful accounts receivable
    
    $
    1,795
    
    
    
    (961
    )
    
    
    (8
    )
    
    $
    826Allowance for doubtful employee advances
and miscellaneous receivables
    
    $
    1,306
    
    
    
    525
    
    
    
    
    
    
    $
    1,831Deferred tax valuation allowance
    
    $
    79,240
    
    
    
    565
    
    
    
    
    
    
    $
    79,8052006Allowance for doubtful accounts receivable
    
    $
    2,638
    
    
    
    (590
    )
    
    
    (253
    )
    
    $
    1,795Allowance for doubtful employee advances
and miscellaneous receivables
    
    $
    2,974
    
    
    
    460
    
    
    
    (2,128
    )
    
    $
    1,306Deferred tax valuation allowance
    
    $
    139,312
    
    
    
    (60,072
    )
    
    
    
    
    
    $
    79,2402005Allowance for doubtful accounts receivable
    
    $
    2,160
    
    
    
    1,190
    
    
    
    (712
    )
    
    $
    2,638Allowance for doubtful employee advances
and miscellaneous receivables
    
    $
    3,333
    
    
    
    540
    
    
    
    (899
    )
    
    $
    2,974Deferred tax valuation allowance
    
    $
    96,954
    
    
    
    42,358
    
    
    
    
    
    
    $
    139,312
 
 (1)
    
    Write-offs, net of recoveries S-1




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