Summary of PRG-SCHULTZ INTERNATIONAL, INC.

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
The Company conducts its operations through two reportable operating segments
- Domestic Accounts Payable Services and International Accounts Payable Services. The Company includes the unallocated portion of corporate selling, general and administrative expenses not specifically attributable to the Accounts Payable Services segments in a category referred to as Corporate Support. 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, a fee per hour, or a fee per other unit of service. The Company's results over the past several years have been affected by its involvement in the demonstration recovery audit contractor ("RAC") program of the Centers for Medicare and Medicaid Services ("CMS"), the federal agency that administers the Medicare program. The demonstration RAC program was designed by CMS to recover Medicare overpayments and identify Medicare underpayments through the use of recovery auditing. CMS awarded the Company a contract to audit Medicare spending in the State of California in 2005 as part of the RAC demonstration program. As a result of the expiration of the Company's RAC 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 three and six months ended June 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 RAC demonstration program. In late 2006, legislation was enacted that mandated that recovery auditing of Medicare be extended beyond the March 2008 end of the RAC 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. On February 9, 2009, the Company announced that it had entered into subcontracts with three of the four national RAC program contract awardees. The Company expects future revenues from its participation as a RAC subcontractor; however, the magnitude and timing of such revenues is not predictable. Management currently does not expect to receive any meaningful revenues from Medicare auditing until the second half of 2010.

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   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             Six Months
                                                         Ended                   Ended
                                                       June 30,                June 30,
                                                   2009        2008        2009        2008
  Revenues                                         100.0 %     100.0 %     100.0 %     100.0 %
  Cost of revenues                                  61.7        66.4        64.0        64.5

  Gross margin                                      38.3        33.6        36.0        35.5

  Selling, general and administrative expenses      24.3        22.2        24.8        24.4

  Operating income                                  14.0        11.4        11.2        11.1

  Interest expense, net                              1.6         1.5         1.7         1.8

  Earnings before income taxes                      12.4         9.9         9.5         9.3

  Income taxes                                       1.4         0.8         1.4         1.0

  Net earnings                                      11.0 %       9.1 %       8.1 %       8.3 %

Three and Six Months Ended June 30, 2009 Compared to the Corresponding Periods of the Prior Year
Accounts Payable Services
Revenues. Domestic and International Accounts Payable Services revenues for the three and six months ended June 30, 2009 and 2008 were as follows (in millions):

                                                       Three Months           Six Months
                                                           Ended                 Ended
                                                         June 30,              June 30,
                                                      2009       2008       2009       2008
  Domestic Accounts Payable Services revenues        $ 26.4     $ 28.3     $ 49.7     $ 56.5
  International Accounts Payable Services revenues     19.0       21.3       35.0       41.4

  Total Accounts Payable Services revenues           $ 45.4     $ 49.6     $ 84.7     $ 97.9

Total Accounts Payable Services revenues for the quarter ended June 30, 2009 decreased by $4.2 million, or 8.4%, compared to the quarter ended June 30, 2008. Total Accounts Payable Services revenues for the six months ended June 30, 2009 decreased by $13.2 million, or 13.5%, compared to the prior period.
Domestic Accounts Payable Service revenues decreased by $1.9 million, or 6.5%, in the second quarter of 2009 compared to the second quarter of 2008. For the six months ended June 30, 2009, revenues decreased by $6.8 million, or 12.1%, compared to the prior year period. The improved year over year revenue performance (lesser rate of decline) in the second quarter of 2009 as compared to the first quarter of 2009 is partially attributable to focused efforts to reduce the backlog of claims which built up during the previous three to six months. However, the vast majority of the Company's recovery audit clients are in the retail industry segment. Thus, the Company's operations are subject to the economic pressures the retail industry faces. Economic conditions which have adversely impacted the U.S. retail industry have negatively impacted the Company's revenues, particularly during the first quarter of 2009. Many of the Company's clients' purchases have declined making it more difficult to offset recovery claims. In addition, the liquidity of the Company's clients' vendor partners can significantly impact claim production, the claim approval process and the ability of clients to offset or otherwise make recoveries from their vendors. Management is also aware of speculation regarding an increase in retailer bankruptcies, which, if correct, could adversely impact future revenues. In addition, the first six months of 2008 included a small amount of revenue earned from auditing Medicare payments in California under the CMS demonstration program and there were no such revenues in the first six months of 2009.

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Revenues in the International Accounts Payable Services segment for the three months ended June 30, 2009 decreased by $2.3 million, or 10.9%, compared to the same period in 2008. For the six months ended June 30, 2009, revenues decreased by $6.4 million, or 15.4%, compared to the prior year period. The reported international revenues were adversely impacted by strengthening of the U.S. dollar relative to foreign currencies throughout the world, particularly during the latter half of 2008 and the first quarter of 2009. On a constant dollar basis adjusted for changes in foreign exchange ("FX") rates, International Accounts Payable Services revenues increased by 7.6% during the second quarter of 2009 as compared to the second quarter of 2008 and increased by 5.5% during the first six months of 2009 compared to the prior year period. These increases are principally attributable to revenue gains in Canada and Latin America and were derived from both incremental revenues from existing clients and, to a lesser extent, revenues from new clients.
Management believes there is opportunity to increase revenues in its core accounts payable services segments as a result of both market share growth and the growth of the addressable market for such services. Management also believes that the Company has growth opportunities related to the provision of adjacent services in the procure-to-pay value chain and to the CFO suite of its core client base, and from capitalizing on the Company's existing data mining and related competencies. Management believes that the pursuit of such opportunities will require modest investments and that without such investments, a reversal of the Company's declining revenue trend is not likely. Management intends to execute newly developed strategic initiatives to pursue these opportunities. No assurances can be provided, however, as to when any revenues from these opportunities will be recognized or the magnitude of any such revenues.
The Company also expects future revenues from its participation as a subcontractor in three of the Medicare RAC program's four geographic regions; however, the magnitude and timing of such revenues is not predictable. Management currently does not expect to receive any meaningful revenues from Medicare auditing until the second half of 2010.
Cost of Revenues ("COR"). COR consists principally of commissions and other forms of variable compensation paid or payable to the Company's auditors based primarily upon the level of overpayment recoveries and/or profit margins derived therefrom, fixed auditor salaries, compensation paid to various types of hourly support staff, and salaried operational and client service managers. Also included in COR are other direct and indirect costs incurred by these personnel, including office rent, travel and entertainment, telephone, utilities, maintenance and supplies, clerical assistance, and depreciation. A significant portion of the components comprising COR is variable and will increase or decrease with increases and decreases in revenues.
Accounts Payable Services COR for the three and six months ended June 30, 2009 and 2008 were as follows (in millions):

                                                    Three Months           Six Months
                                                        Ended                 Ended
                                                      June 30,              June 30,
                                                   2009       2008       2009       2008
    Domestic Accounts Payable Services COR        $ 14.5     $ 16.8     $ 29.1     $ 32.5
    International Accounts Payable Services COR     13.5       16.2       25.1       30.8

    Total Accounts Payable Services COR           $ 28.0     $ 33.0     $ 54.2     $ 63.3

COR as a percentage of revenue for Domestic Accounts Payable Services was 55.0% and 59.4% for the three months ended June 30, 2009 and 2008, respectively. This equates to gross margin percentages of 45.0% and 40.6%, respectively, for the Domestic Accounts Payable Services segment for the quarters ended June 30, 2009 and 2008. For the six months ended June 30, 2009 and 2008, COR as a percentage of revenue for Domestic Accounts Payable Services was 58.6% and 57.5%, respectively. This equates to gross margin percentages of 41.4% and 42.5%, respectively, for the Domestic Accounts Payable Services segment for the six month periods ended June 30, 2009 and 2008.

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The second quarter 2009 gross margin improvements are primarily attributable to a reduction in healthcare audit spending, reductions in indirect costs (principally reduced headcount), increased margins on management consulting projects, and severance charges included in the second quarter of 2008.
COR as a percentage of revenue for International Accounts Payable Services was 71.1% and 76.1% for the three months ended June 30, 2009 and 2008, respectively. This equates to gross margin percentages of 28.9% and 23.9%, respectively. For the six months ended June 30, 2009 and 2008 COR as a percentage of revenue for International Accounts Payable Services was 71.7% and 74.4%, respectively. This equates to gross margin percentages of 28.3% and 25.6%, respectively. COR as a percentage of revenue has historically, and continues to be, higher in the International Accounts Payable Services segment compared to the Domestic segment because of differences in the service delivery models which, in turn, are principally attributable to scale. The margin increases in the three-month and six-month periods ended June 30, 2009 compared to the same periods in 2008 are largely due to a higher percentage of International Accounts Payable Services revenues coming from geographic territories that have historically enjoyed higher margins.
Selling, General and Administrative Expenses ("SG&A"). SG&A expenses of the Accounts Payable Services segments include the expenses of sales and marketing activities, information technology services and allocated corporate data center costs, human resources, legal, accounting, administration, foreign currency transaction gains and losses, gains and losses on assets disposals, depreciation of property and equipment and amortization of intangibles related to the Accounts Payable Services segments.
Accounts Payable Services SG&A for the three and six months ended June 30, 2009 and 2008 were as follows (in millions):

                                                     Three Months           Six Months
                                                         Ended                 Ended
                                                       June 30,              June 30,
                                                    2009       2008       2009       2008
    Domestic Accounts Payable Services SG&A        $   4.5     $ 4.0     $  7.9     $  8.3
    International Accounts Payable Services SG&A       0.9       2.2        3.7        4.1

    Total Accounts Payable Services SG&A           $   5.4     $ 6.2     $ 11.6     $ 12.4

Domestic Accounts Payable Services SG&A expenses for the second quarter of 2009 increased by $0.5 million, or 12.5%, and decreased for the six months ended June 30, 2009 by $0.4 million, or 4.8%, from the same periods in 2008. The second quarter 2009 increase is primarily attributable to costs associated with the development and early stage execution of new strategic initiatives discussed above.
International Accounts Payable Services SG&A includes foreign currency transaction gains and losses, including the gains and losses related to intercompany balances. Gains and losses result from the re-translation 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 FX rates can significantly impact the amount of such gains and losses. During the three months ended June 30, 2009, the Company recognized $1.7 million of FX gains related to intercompany balances as compared to $0.1 million of FX losses for the same period in 2008. For the first six months of 2009, the Company recognized $1.1 million of FX gains related to intercompany balances as compared to $0.5 million of FX gains for the same period in 2008.
International Accounts Payable Services SG&A excluding the FX gains and losses related to intercompany balances increased by $0.4 million for the three months ended June 30, 2009 compared to the same period in 2008. Most of such increase is attributable to professional fees and other costs associated with the acquisition of the business and assets of First Audit Partners LLP ("FAP"), which was completed in July 2009 (see Note J - Subsequent Events included in Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q). For the six months ended June 30, 2009, International Accounts Payable Services SG&A excluding the FX gains and losses related to intercompany balances increased by $0.2 million compared to the same period in 2008.
Corporate Support
Corporate Support SG&A represents the unallocated portion of SG&A expenses which are not specifically attributable to Domestic or International Accounts Payable Services and include the expenses of information

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technology services, the corporate data center, human resources, legal, accounting, treasury, administration, hedging activities and stock-based compensation charges.
Corporate Support SG&A totaled the following for the three and six months ended June 30, 2009 and 2008 (in millions):

                                            Three Months          Six Months
                                               Ended                Ended
                                              June 30,             June 30,

2009 2008 2009 2008 Corporate Support SG&A $ 5.6 $ 4.8 $ 9.4 $ 11.4

Corporate Support SG&A increased by $0.8 million in the second quarter of 2009 and decreased by $2.0 million for the six months ended June 30, 2009, when compared to the same periods of 2008. The second quarter of 2009 includes $1.0 million of stock-based compensation expense as compared to $1.6 million of stock-based compensation expense included in the second quarter of 2008. The first six months of 2009 includes $1.0 million of stock-based compensation expense as compared to $4.6 million of stock-based compensation expense included in the same period in 2008. Excluding the stock-based compensation charges for both periods, Corporate Support SG&A increased by $1.4 million in the second quarter of 2009 and increased by $1.6 million in the six months ended June 30, 2009 as compared to the same periods in 2008. Such increases are attributable to a $0.7 million additional accrual for the settlement of the Fleming Post Confirmation Trust ("PCT") litigation (see Part II, Item 1 - Legal Proceedings), professional fees related to the litigation, severance charges, and increased compensation associated with hiring a new chief executive officer.
Other Items
Interest Expense. Net interest expense was $0.7 million and $0.8 million for the three months ended June 30, 2009 and 2008, respectively. Net interest expense was $1.4 million and $1.8 million for the six months ended June 30, 2009 and 2008, respectively. The decrease in interest expense resulted from the $26.3 million of debt repayments made during 2008. Interest expense in the six months ended June 30, 2009 primarily related to the term loan under the Company's senior credit facility, which had an outstanding balance of $16.6 million as of June 30, 2009.
Income Tax Expense. The Company's effective income tax expense rates as indicated in the accompanying Condensed Consolidated Financial Statements (Unaudited) do not reflect amounts that would normally be expected because of the Company's valuation allowance against its deferred tax assets. Reported income tax expense for the three and six month periods ended June 30, 2009 and 2008 primarily results from taxes on income of foreign subsidiaries. Liquidity and Capital Resources
As of June 30, 2009, the Company had $28.5 million in cash and cash equivalents and no borrowings under the revolver portion of its credit facility. The revolver had approximately $16.4 million of calculated availability for borrowings, however, management does not currently anticipate any borrowings under the revolver. As of June 30, 2009, the Company was in compliance with all of its debt covenants under the credit facility.
Operating Activities. Net cash provided by operating activities was $5.5 million and $2.4 million during the six months ended June 30, 2009 and 2008, respectively. During both six-month periods, significant decreases in current assets, particularly receivables, and current liability balances, particularly accounts payable, accrued payroll and other accrued expenses, were made. Such changes are itemized in the Company's Condensed Consolidated Statements of Cash Flows included in Part I, Item 1 of this Form 10-Q.
Investing Activities and Depreciation Expense. Depreciation and amortization expense for the six months ended June 30, 2009 and 2008 amounted to $2.7 million in each six-month period. Net cash used in investing activities was $1.4 million and $1.1 million during the six months ended June 30, 2009 and 2008, respectively. Cash used in investing activities for both periods was solely attributable to capital expenditures. The increase in capital

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expenditure spending in the first six months of 2009 compared to the first six months of 2008 was primarily related to investments to upgrade the Company's information technology infrastructure.
Capital expenditures are discretionary and management currently expects future capital expenditures to increase over the next several quarters as the Company continues to enhance its healthcare audit systems in preparation for its performance of the CMS RAC subcontracts and other healthcare audits and in preparation of the Company's strategic initiatives discussed above. Changes in operating plans and results could change these expectations.
Financing Activities and Interest Expense. Net cash used in financing activities was $2.9 million and $23.7 million for the six months ended June 30, 2009 and 2008, respectively. During the first six months of 2009, the Company made mandatory payments totaling $2.5 million on its term loan, reduced its capital lease obligations by $0.2 million and repurchased 78,754 shares of its outstanding common stock for approximately $0.2 million. During the first six months of 2008, the Company reduced the balance of its term loan by $23.4 million. This amount included $8.4 million of mandatory payments as well as a voluntary prepayment of $15.0 million. The Company also reduced its capital lease obligations by $0.2 million during the first six months of 2008.
Management believes that the Company will have sufficient borrowing capacity and cash generated from operations to fund its capital and operational needs for at least the next twelve months.
Secured Credit Facility
In September 2007, the Company entered into an amended and restated credit facility with Ableco LLC ("Ableco") consisting of a $20 million revolving credit facility and a $45 million term loan which was funded in October 2007. The principal portion of the $45 million term loan with Ableco must be repaid in quarterly installments of $1.25 million each commencing in April 2008. The loan agreement also requires an annual additional payment contingently payable based on an excess cash flow calculation as defined in the agreement. During the first six months of 2008, the Company reduced the balance on its term loan by $23.4 million. This reduction included $8.4 million of mandatory payments as well as a voluntary payment of $15.0 million. During the first quarter of 2008, the Company entered into an amendment of its credit facility, permitting the $15.0 million pre-payment without penalty and increasing the initial borrowing capacity under the revolver portion of its facility by $10 million.
The Company reduced the balance on its term loan by $2.5 million during the first six months of 2009. In March 2009, the Company entered into the second amendment of its credit facility, lowering certain of the debt covenant thresholds through March 10, 2010 and revising the borrowing base calculation, which had the effect of reducing the borrowing capacity under the revolver portion of the facility by $6.5 million as of June 30, 2009. The borrowing capacity is reduced over the term of the credit facility and availability is based on eligible accounts receivable and other factors. Availability under the revolver at June 30, 2009 was $16.4 million.
The remaining balance of the term loan is due on September 17, 2011. Interest on the term loan balance is payable monthly and accrues at the Company's option at either prime plus 2.0% or at LIBOR plus 4.75%, but under either option may not be less than 9.75%. Interest on outstanding balances under the revolving credit facility, if any, will accrue at the Company's option at either prime plus 0.25% or at LIBOR plus 2.25%. The Company must also pay a commitment fee of 0.5% per annum, payable monthly, on the unused portion of the revolving credit facility. As of June 30, 2009, there were no outstanding borrowings under the revolving credit facility. The weighted-average interest rates on term loan balances outstanding under the credit facility during the second quarter of 2009 and 2008, including fees, were 10.92% and 11.41%, respectively. The weighted-average interest rates on term loan balances outstanding under the credit facility during the first six months of 2009 and 2008, including fees, were 10.89% and 10.73%, respectively.
Due to the $15.0 million voluntary payment made in the first quarter of 2008, the annual additional contingent payment based on 2008 excess cash flow due in April 2009 was not required.
The credit facility is guaranteed by each of the Company's direct and indirect domestic wholly owned subsidiaries and certain of its foreign subsidiaries and is secured by substantially all of the Company's assets (including the stock of the Company's domestic subsidiaries and two-thirds of the stock of certain of the Company's foreign subsidiaries). The credit facility will mature on September 17, 2011.

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Stock Repurchase Program
In February 2008, the Board of Directors of the Company approved a stock repurchase program. Under the terms of the program, the Company may repurchase up to $10 million of its common stock from time to time through March 30, 2009. In March 2009, the Company's Board of Directors extended the stock repurchase program through March 31, 2010. The second amendment to the Company's secured credit facility permits the Company to repurchase up to $5.0 million of the Company's common stock during the period from April 1, 2009 to March 31, 2010. For the six months ended June 30, 2009, the Company repurchased 78,754 shares at an average price of $3.13 for a total purchase price of approximately $0.2 million, all of which were made in the first quarter. This equates to approximately 0.4% of the then outstanding shares.
2006 Management Incentive Plan . . .