Summary of PRG-SCHULTZ INTERNATIONAL, INC.

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
Prior to the second quarter of 2007, the Company conducted its operations through two reportable operating segments, Accounts Payable Services and Meridian VAT Reclaim ("Meridian"). On May 30, 2007, the Company sold its Meridian business to Averio Holdings Limited, a Dublin, Ireland based company affiliated with management of Meridian ("Averio"). Meridian's operating results for all periods presented in the accompanying consolidated financial statements have been reclassified and are now reported in discontinued operations. Unless stated otherwise, the discussion which follows pertains solely to the Company's continuing operations.
Beginning with the fourth quarter of 2007, the Company segregated Accounts Payable Services into two reportable operating segments - Domestic and International. The Domestic and International Accounts Payable Services segments principally consist of services that entail the review of client accounts payable disbursements to identify and recover overpayments. These operating segments include accounts payable services provided to retailers and wholesale distributors (the Company's historical client base) and accounts payable and other services provided to various other types of business entities and governmental agencies. The Company conducts business in North America, South America, Europe, Australia and Asia.
The Company's revenues are based on specific contracts with its clients. Such contracts generally specify: (a) time periods covered by the audit; (b) the nature and extent of audit services to be provided by the Company; (c) the client's duties in assisting and cooperating with the Company; and (d) fees payable to the Company, generally expressed as a specified percentage of the amounts recovered by the client resulting from overpayment claims identified. Clients generally recover claims by either taking credits against outstanding payables or future purchases from the involved vendors, or receiving refund checks directly from those vendors. The manner in which a claim is recovered by a client is often dictated by industry practice. In addition, many clients establish client-specific procedural guidelines that the Company must satisfy prior to submitting claims for client approval. For some services provided by the Company, client contracts provide for compensation to the Company in the form of a flat fee or a rate per hour or per unit of usage for the rendering of that service.
Medicare
On March 29, 2005, the Company announced that the Centers for Medicare and Medicaid Services ("CMS"), the federal agency that administers the Medicare program, awarded the Company a contract to provide recovery audit services for the State of California's Medicare spending. The contract was awarded as part of a demonstration program by CMS to recover overpayments and identify underpayments through the use of recovery auditing. The three-year contract was effective on March 28, 2005 and expired on March 27, 2008. To fully address the range of payment recovery opportunities under the CMS demonstration project contract, the Company sub-contracted with Concentra Preferred Systems, Inc., a business unit of Concentra Network Services, now Viant, Inc. ("Viant"), the nation's largest provider of specialized cost containment services for the healthcare industry, to add Viant's clinical experience to the Company's expertise in recovery audit services.
The Company began to incur capital expenditures and employee compensation costs primarily related to the CMS demonstration project contract in 2005. Such capital expenditures and employee compensation costs continued to be incurred throughout 2006 and 2007 as the Company continued to build this business. Primarily as a result of the expiration of the demonstration program contract in March, 2008, revenues from the auditing of Medicare payments in California made only a small contribution to the Company's overall revenues in the nine months ended September 30, 2008. Pursuant to the Company's agreement with CMS, there will be no additional revenues to the Company or repayments to CMS relating to the CMS demonstration project contract.
In late 2006, legislation was enacted that mandated that recovery auditing of Medicare be extended beyond the March 2008 end of the demonstration program and that CMS enter into additional contracts with recovery audit contractors to expand recovery auditing of Medicare spending to all 50 states by January 1, 2010. In connection with the expansion, the Company submitted its proposal to participate in the expansion on December 14, 2007. After discussions with CMS and the submission of two subsequent "Final Proposal Revisions,", on October 3, 2008, the Company was notified by CMS that the Company had not been selected to take part in the national rollout of the Medicare recovery audit program. On October 29, 2008, the Company received a written debriefing from CMS regarding its decision not to award the Company a contract for any of the four regions of the national rollout. In this debriefing, CMS confirmed to the Company that, although the Company had one of the highest technical scores, it was not awarded a contract because it ultimately did not have the lowest contingency fee bid in any region. On November 3, 2008, the Company filed a protest of the CMS contract awards with the Government Accountability

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Office (the "GAO"). For the time being, CMS' implementation of the national Medicare recovery audit program has been "postponed" as a result of an automatic stay that results from the filing of a protest with GAO within a certain timeframe. At this time, the Company expects that the GAO will issue its decision on the protest on or before February 11, 2009. The Company cannot predict whether or not the protest will be successful. Even if the Company's protest is successful, there is no guarantee that the Company would ultimately be awarded a contract for any of the four regions covered by the expansion of the CMS recovery audit program.
Following the end of the Medicare recovery audit demonstration project in the first quarter of 2008, the Company took steps to limit its expenses related to its Medicare audit capabilities until such time as the results of the national rollout were announced, including the furlough of employees primarily involved with the Medicare audit. Following CMS' awards of contracts in the national rollout of the Medicare audit recovery program, the Company has taken, and continues to take, additional steps to further reduce such costs.
Critical Accounting Policies
The Company's significant accounting policies have been fully described in Note 1 of Notes to Consolidated Financial Statements of the Company's Annual Report on Form 10-K for the year ended December 31, 2007. Certain of these accounting policies are considered "critical" to the portrayal of the Company's financial position and results of operations, as they require the application of significant judgment by management. As a result, they are subject to an inherent degree of uncertainty. These "critical" accounting policies are identified and discussed in the Management's Discussion and Analysis of Financial Condition and Results of Operations section of the Company's Annual Report on Form 10-K for the year ended December 31, 2007. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. On an ongoing basis, management evaluates its estimates and judgments, including those considered "critical". The development, selection and evaluation of accounting estimates, including those deemed "critical," and the associated disclosures in this Form 10-Q have been discussed with the Audit Committee of the Board of Directors.
During the first quarter of 2008, management revised its estimation of expected refund rates. Such change in estimate resulted from a decline in actual refund rates observed during 2007. The impact of the change in estimate resulted in a $0.8 million reduction in the March 31, 2008 refund liability and a corresponding increase in first quarter 2008 revenues. The impact on the quarter ended September 30, 2008 was not significant and management does not expect that the change in estimate will have a material impact on future period results.
New Accounting Standards
In September 2006, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurements" ("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements. The standard describes three levels of inputs that may be used to measure fair value. Level 1: quoted price (unadjusted) in active markets for identical assets Level 2: inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument
Level 3: inputs to the valuation methodology are unobservable for the asset or liability
SFAS No. 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
Relative to SFAS No. 157, the FASB issued FASB Staff Positions ("FSP") 157-1 and 157-2. FSP 157-1 amends SFAS No. 157 to exclude SFAS No. 13, "Accounting for Leases," and its related interpretive accounting pronouncements that address leasing transactions, while FSP 157-2 delays the effective date of the application of

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SFAS No. 157 to fiscal years beginning after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis.
The Company adopted SFAS No. 157 as of January 1, 2008, with the exception of the application of the statement to non-recurring nonfinancial assets and nonfinancial liabilities. Non-recurring nonfinancial assets and nonfinancial liabilities for which the Company has not applied the provisions of SFAS No. 157 include those measured at fair value in goodwill and other intangible asset impairment testing. Assets and liabilities measured at fair value on a recurring basis as of September 30, 2008 included cash equivalents of $22.8 million which were valued based on Level 1 inputs and debt and capital lease obligations of $21.0 million which were valued based on Level 2 inputs. The Company did not have any assets valued based on Level 3 inputs.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115" ("SFAS No. 159"). This standard permits an entity to choose to measure certain financial assets and liabilities at fair value. SFAS No. 159 also revises provisions of SFAS No. 115 that apply to available-for-sale and trading securities. This statement is effective for fiscal years beginning after November 15, 2007. The adoption by the Company of SFAS No. 159 effective January 1, 2008 did not have any material impact on the Company's consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS No. 141(R)"). SFAS No. 141(R) establishes principles and requirements for how the acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; recognizes and measures the goodwill acquired in a business combination or a gain from a bargain purchase; determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of a business combination. SFAS No. 141(R) is effective as of the beginning of an entity's first fiscal year that begins after December 15, 2008. The Company has not determined the impact, if any, SFAS No. 141(R) will have on its future financial statements.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements" ("SFAS No. 160"). SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent's equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS No. 160 clarifies that changes in a parent's ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. SFAS No. 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company has not determined the impact, if any, SFAS No. 160 will have on its future financial statements.
Results of Operations
The following table sets forth the percentage of revenues represented by certain items in the Company's Condensed Consolidated Statements of Operations (Unaudited) for the periods indicated:

                                                   Three Months                  Nine Months
                                                      Ended                         Ended
                                                  September 30,                 September 30,
                                               2008           2007           2008           2007
Revenues                                        100.0 %        100.0 %        100.0 %        100.0 %
Cost of revenues                                 63.4           63.0           64.1           64.6

Gross margin                                     36.6           37.0           35.9           35.4

Selling, general and administrative
expenses                                         24.7           33.0           24.5           28.0
Operational restructuring expenses                  -            3.1              -            1.0

Operating income                                 11.9            0.9           11.4            6.4
Interest expense, net                             1.6            5.9            1.7            7.3

Earnings (loss) from continuing
operations before income taxes and
discontinued operations                          10.3           (5.0 )          9.7           (0.9 )

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                                                   Three Months                   Nine Months
                                                      Ended                          Ended
                                                  September 30,                  September 30,
                                                2008           2007           2008           2007

Income taxes                                       1.8           0.6             1.3           0.7

Earnings (loss) from continuing
operations before discontinued
operations                                         8.5          (5.6 )           8.4          (1.6 )

Earnings from discontinued operations                -          (0.0 )             -          12.1


Net earnings                                       8.5 %        (5.6 )%          8.4 %        10.5 %

Earnings from discontinued operations for the nine months ended September 30, 2007 includes the gain recognized on the sale of Meridian (11.9% of revenue). See "Discontinued Operations" below.
Three and Nine Months Ended September 30, 2008 Compared to the Corresponding Periods of the Prior Year
Accounts Payable Services
Revenues. Domestic and International Accounts Payable Services revenues for the three and nine months ended September 30, 2008 and 2007 were as follows (in millions):

                                                      Three Months            Nine Months
                                                         Ended                   Ended
                                                     September 30,           September 30,
                                                    2008        2007       2008        2007
Domestic Accounts Payable Services revenues        $  27.9     $ 32.9     $  84.3     $ 102.6
International Accounts Payable Services revenues      21.3       20.3        62.8        61.0

Total Accounts Payable Services revenues           $  49.2     $ 53.2     $ 147.1     $ 163.6

For the three months ended September 30, 2008 total Domestic and International Accounts Payable Services revenues decreased by approximately 7.6% compared to the same period in 2007. For the nine months ended September 30, 2008 total Domestic and International Accounts Payable Services revenues decreased by approximately 10.1% compared to the same period in 2007. Domestic Accounts Payable Services revenues include any revenues generated from the Medicare recovery audit demonstration program. The end of the Medicare demonstration program in the first quarter of 2008 was the primary factor leading to the decline in Domestic Accounts Payable Services revenues for the three and nine months ended September 30, 2008 compared to the same periods in the prior year. Excluding Medicare audit revenues, Domestic Accounts Payable Services revenues increased in the three month period ending September 30, 2008 compared to the same period in the prior year. Such increase resulted primarily from increased recoveries obtained for the Company's existing client base. The year over year increase in Domestic Accounts Payable Services revenues, excluding Medicare audit revenues, is not consistent with the Company's general declining trend of such revenues over the past several years. It should be noted, however, that a significant portion of the recent historical trend of declining Domestic Accounts Payable Services revenues, excluding Medicare audit revenues, resulted from the Company's strategy of exiting smaller, less profitable clients. Additionally, management believes that this historical declining revenues trend was related to several factors, including fewer claims being processed as a result of improved client processes and the impact of the Company's clients developing and strengthening their own internal audit capabilities as a substitute for the Company's services. Furthermore, the Company has observed that with the passage of time numerous clients make fewer transaction errors as a result of the training and methodologies provided by the Company as part of the Company's accounts payable recovery process.. International Accounts Payable Services revenues for the three months ended September 30, 2008 were $21.3 million compared to $20.3 million for the same period in 2007, a 4.4% improvement. Such improvement is net of an adverse impact of foreign currency translation. In local (functional) currencies the Company's International Accounts Payable Services revenues increased by 9.9% for the three months ended September 30, 2008 as compared to the same period in the prior year. For the nine months ended September 30, 2008 the International Accounts Payable Services business generated a 2.9% revenue increase compared to the same period in 2007, 2.4% measured in local currencies.
The Company intends to maximize the value it delivers to its existing clients by identifying and auditing new categories of potential errors. The Company also intends to increase its emphasis on using its technology and

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professional experience to assist its clients in achieving objectives that do not directly involve recovery of past overpayments. These objectives are related to such things as transaction accuracy and compliance, managing trade and vendor promotional programs, purchasing effectiveness, M&A due diligence analysis, and processing efficiency in the procure-to-pay value chain.
Cost of Revenues ("COR"). COR consists principally of commissions paid or payable to the Company's auditors based primarily upon the level of overpayment recoveries, and compensation paid to various types of hourly workers and salaried operational managers. Also included in COR are other direct costs incurred by these personnel, including rental of non-headquarters offices, travel and entertainment, telephone, utilities, maintenance and supplies and clerical assistance. A significant portion of the components comprising COR for the Company's Domestic Accounts Payable Services operations are variable and will increase or decrease with increases and decreases in revenues. The Company's International Accounts Payable Services also have a portion of their COR, although less than Domestic Accounts Payable Services, that will vary with revenues. The lower variability is due to the predominant use of salaried auditor compensation plans in most emerging-market countries.
Accounts Payable Services COR for the three and nine months ended September 30, 2008 and 2007 were as follows (in millions):

                                                    Three Months           Nine Months
                                                       Ended                  Ended
                                                   September 30,          September 30,
                                                  2008        2007       2008       2007
   Domestic Accounts Payable Services COR        $  16.8     $ 17.6     $ 49.3     $  58.4
   International Accounts Payable Services COR      14.3       15.9       45.1        47.2

   Total Accounts Payable Services COR           $  31.1     $ 33.5     $ 94.4     $ 105.6

COR as a percentage of revenues increased to 63.4% for the three months ended September 30, 2008 compared to 63.0% for the same period in 2007. The increase in the Company's COR as a percentage of revenue is primarily related to the continuation of the costs of its Medicare related infrastructure without corresponding revenues. For the nine months ended September 30, 2008, COR decreased to 64.1% compared to 64.6% for the same period in 2007. The improvement in COR for both the Domestic and International Accounts Payable Services for the 2008 nine-month period relative to the prior year period was primarily related to the Company's ongoing strategy of focusing its efforts and resources on its largest clients while exiting its smaller unprofitable clients. The execution of this strategy continues to have a positive impact on gross margin as a percentage of revenue.
During the nine months ended September 30, 2008, the Company incurred significant expenses to maintain its Medicare audit capabilities. However, as a result of the decision by CMS not to award a contract to the Company in connection with the national rollout of Medicare recovery auditing, the Company intends to reduce the costs associated with such Medicare audit capabilities.
Selling, General, and Administrative Expenses ("SG&A"). SG&A expenses include the expenses of sales and marketing activities, information technology services and the corporate data center, human resources, legal, accounting, administration, currency translation, headquarters-related depreciation of property and equipment and amortization of intangibles with finite lives. Due to the relatively fixed nature of the Company's SG&A expenses, these expenses as a percentage of revenues can vary markedly period to period based on fluctuations in revenues.
Accounts Payable Services SG&A for the three and nine months ended September 30, 2008 and 2007 were as follows (in millions):

                                                     Three Months           Nine Months
                                                        Ended                  Ended
                                                    September 30,          September 30,
                                                    2008       2007       2008        2007
   Domestic Accounts Payable Services SG&A        $    3.9     $ 4.5     $  12.2     $ 13.0
   International Accounts Payable Services SG&A        4.3       2.4         8.4        7.5

   Total Accounts Payable Services SG&A           $    8.2     $ 6.9     $  20.6     $ 20.5

SG&A expenses for the three months ended September 30, 2008 were $8.2 million or 17.1% of revenue compared to $6.9 million or 13.0% of revenue for the same period in 2007. Included in the International Accounts Payable Services SG&A for the three months ended September 30, 2008 is $1.8 million of foreign currency losses related to intercompany balances compared to $0.5 million of foreign currency gains for the same period in 2007. The foreign currency intercompany balance gains and losses are primarily related to the build up of the Company's

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intercompany transfer pricing balances over time. Gains and losses result from the re-measurement of the foreign subsidiaries payable to the U.S. parent from their local currency to their U.S. dollar equivalent and substantial changes from period to period in currency exchange rates can significantly impact the amount of such gains and losses. Excluding the foreign currency gains and losses, SG&A expenses for the three months ended September 30, 2008 would be $6.4 million, or 13.0% of revenue, compared to $7.4 million, or 13.9% of revenue, for the same period in 2007.
For the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007, Accounts Payable Services SG&A expenses increased by $0.1 million and as a percentage of revenue were 14.0% for the nine months ended September 30, 2008 compared to 12.5% for the same period ended September 30, 2007. Included in the International Accounts Payable Services SG&A for the nine months ended September 30, 2008 is $1.3 million of foreign currency losses on intercompany balances compared to $1.1 million of foreign currency gains for the same period in 2007. Excluding the foreign currency gains and losses, SG&A expenses for the nine months ended September 30, 2008 would be $19.2 million, or 13.1% of revenue, compared to $21.6 million, or 13.2% of revenue, for the same period in 2007. The reduction in total Accounts Payable Services SG&A was primarily the result of reducing the number of clients served, reducing the number of countries in which the Company operates, reducing headcount, and otherwise diligently managing the operating expenses of the business.
Corporate Support . . .