Overview

We conduct our operations through three reportable operating segments: Recovery Audit Services - Americas, Recovery Audit Services - Europe/Asia-Pacific and New Services. The Recovery Audit Services - Americas segment represents recovery audit services (other than healthcare claims recovery audit services) we provide in the U.S., Canada and Latin America. The Recovery Audit Services - Europe/Asia-Pacific segment represents recovery audit services (other than healthcare claims recovery audit services) we provide in Europe, Asia and the Pacific region. The New Services segment includes Profit Optimization services (formerly referred to as analytics and advisory services) as well as healthcare claims recovery audit services. We include the unallocated portion of corporate selling, general and administrative expenses not specifically attributable to the three operating segments in Corporate Support.

Recovery auditing is a business service focused on finding overpayments created by errors in payment transactions, such as missed or inaccurate discounts, allowances and rebates, vendor pricing errors, erroneous coding and duplicate payments. Generally, we earn our recovery audit revenues by identifying overpayments made by our clients, assisting our clients in recovering the overpayments from their vendors, and collecting a specified percentage of the recoveries from our clients as our fee. The fee percentage we earn is based on specific contracts with our clients that generally also specify: (a) time periods covered by the audit; (b) the nature and extent of services we are to provide; and (c) the client's responsibilities to assist and cooperate with us. Clients generally recover claims by either taking credits against outstanding payables or future purchases from the relevant 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 we must satisfy prior to submitting claims for client approval. For some services we provide, such as certain of our Profit Optimization services, we earn our compensation in the form of a flat fee, a fee per hour, or a fee per other unit of service.

We earn the vast majority of our recovery audit revenues from clients in the retail industry due to many factors, including the high volume of transactions and the complicated pricing and allowance programs typical in this industry. Changes in consumer spending associated with economic fluctuations generally impact our recovery audit revenues to a lesser degree than they affect individual retailers due to several factors, including:

• Diverse client base - our clients include a diverse mix of discounters, grocery, pharmacy, department and other stores that tend to be impacted to varying degrees by general economic fluctuations, and even in opposite directions from each other depending on their position in the market and their market segment;

• Motivation - when our clients experience a downturn, they frequently are more motivated to use our services to recover prior overpayments to make up for relatively weaker financial performance in their own business operations;

• Nature of claims - the relationship between the dollar amount of recovery audit claims identified and client purchases is non-linear. Claim volumes are generally impacted by purchase volumes, but a number of other factors may have an even more significant impact on claim volumes, including new items being purchased, changes in discount, rebate, marketing allowance and similar programs offered by vendors and changes in a client's or a vendor's information processing systems; and

• Timing - the client purchase data on which we perform our recovery audit services is historical data that typically reflects transactions between our clients and their vendors that took place 3 to 15 months prior to the data being provided to us for audit. As a result, we generally experience a delayed impact from economic changes that varies by client and the impact may be positive or negative depending on the individual clients' circumstances.

While the net impact of the economic environment on our recovery audit revenues is difficult to determine or predict, we believe that for the foreseeable future, our revenues will remain at a level that will not have a significant adverse impact on our liquidity, and we have taken steps to mitigate any adverse impact of an economic downturn on our revenues and overall financial health. These steps include devoting substantial efforts to develop a lower cost service delivery model to enable us to more cost effectively serve our clients. Further, we continue to pursue our ongoing growth strategy to expand our business beyond our core recovery audit services to retailers by growing the portion of our business that provides recovery audit services to enterprises other than retailers and growing our New

Services segment which includes our healthcare claims recovery audit services and our Profit Optimization services. Our healthcare claims recovery audit services include services we provide as a participant in the Medicare Recovery Audit Contractor program (the "Medicare RAC program").

Results of Operations

The following table sets forth the percentage of revenues represented by certain
items in the Company's Condensed Consolidated Statements of Income and
Comprehensive Income (Unaudited) for the periods indicated:



                                                   Three Months                         Six Months
                                                      Ended                               Ended
                                                     June 30,                            June 30,
                                              2012              2011              2012              2011
Revenues                                        100.0 %           100.0 %           100.0 %           100.0 %
Operating expenses:
Cost of revenues                                 64.5              68.1              65.4              68.1
Selling, general and administrative
expenses                                         24.6              24.3              24.5              24.4
Depreciation of property and equipment            3.1               2.4               3.0               2.4
Amortization of intangible assets                 2.8               2.2               3.6               2.2

Total operating expenses                         95.0              97.0              96.5              97.1

Operating income                                  5.0               3.0               3.5               2.9
Foreign currency transaction (gains)
losses on short-term intercompany
balances                                          1.0              (0.8 )             0.2              (0.9 )
Interest expense, net                             1.0               0.9               1.0               0.8

Earnings before income taxes                      3.0               2.9               2.3               3.0
Income tax expense                                1.1               1.5               1.0               1.9

Net earnings                                      1.9 %             1.4 %             1.3 %             1.1 %

Three and Six Months Ended June 30, 2012 Compared to the Corresponding Periods of the Prior Year

Revenues. Revenues were as follows (in thousands):

                                                    Three Months Ended             Six Months Ended
                                                         June 30,                      June 30,
                                                    2012           2011          2012           2011
Recovery Audit Services - Americas               $   29,592      $ 27,901      $  58,405      $  57,014
Recovery Audit Services - Europe/Asia-Pacific        13,411        15,753         27,716         30,505
New Services                                          8,655         7,050         17,186         13,903

Total                                            $   51,658      $ 50,704      $ 103,307      $ 101,422

Total revenues increased for the three months ended June 30, 2012 by $1.0 million, or 1.9%, compared to the same period in 2011. Total revenues increased for the six months ended June 30, 2012 by $1.9 million, or 1.9%, compared to the same period in 2011.

Below is a discussion of our revenues for our three reportable operating segments.

Recovery Audit Services - Americas revenues increased by $1.7 million, or 6.1%, for the second quarter of 2012 compared to the second quarter of 2011. For the six months ended June 30, 2012, revenues increased by $1.4 million, or 2.4%, compared to the same period in the prior year. One of the factors contributing to changes in our reported revenues is the strength of the U.S. dollar relative to foreign currencies. Changes in the average value of the U.S. dollar relative to foreign currencies impact our reported revenues. On a constant dollar basis, adjusted for changes in foreign exchange ("FX") rates, revenues for the second quarter of 2012 increased by 8.8% compared to an increase of 6.1% as reported and increased by 4.2% during the first six months of 2012 compared to an increase of 2.4% as reported.

In addition to the impact of the change in FX rates, the year over year net increases in our Recovery Audit Services - Americas revenues in the three and six months ended June 30, 2012 were due to a number of factors. Revenues increased 10.1% in the second quarter and 11.3% in the six month period due to new clients, including those we now serve as a result of our acquisition of BSI. Partially offsetting these increases, revenues declined 2.0% in the second quarter and 4.8% in the six month period at our existing clients due to the 2011 periods containing some atypical revenues at several clients, including revenues from client-driven audit timeline changes and some individually significant claims. Revenues declined an additional 2.0% in the second quarter and 4.1% in the six month period due to discontinued clients, reductions in audit scope and demotions from primary auditor to secondary auditor. The most significant of these changes relates to a single discontinued client that recently returned to PRGX and for which we began generating revenues in the second quarter of 2012.

Recovery Audit Services - Europe/Asia-Pacific revenues decreased by $2.3 million, or 14.9%, for the three months ended June 30, 2012 compared to the same period in 2011. For the six months ended June 30, 2012, revenues decreased by $2.8 million, or 9.1%, compared to the six months ended June 30, 2011. The strengthening of the U.S. dollar relative to foreign currencies in Europe, Asia and Australia negatively impacted reported revenues in the second quarter and first six months of 2012. On a constant dollar basis, adjusted for changes in FX rates, revenues for the second quarter of 2012 decreased by 8.4% compared to a decrease of 14.9% as reported and decreased by 4.8% during the first six months of 2012 compared to a decrease of 9.1% as reported. These decreases on a constant dollar basis were due primarily to lower revenues at continuing clients, primarily due to fewer individually significant claims at continuing clients than generated in the 2011 periods, which resulted in declines of 13.8% in the second quarter and 9.7% in the six month period. Decreases due to discontinued clients were approximately 2.8% in the second quarter and 1.0% in the six month period. We partially offset these constant dollar decreases with revenues from new clients, which increased revenues by 8.2% in the second quarter and 5.9% in the six month period. While the new client increases are very positive, we experienced some unanticipated delays at several new clients and anticipate that we will earn the related revenues in the second half of 2012.

New Services revenues increased by $1.6 million, or 22.8%, for the three months ended June 30, 2012 compared to the same period in 2011. For the six months ended June 30, 2012, revenues increased by $3.3 million, or 23.6%, compared to the six months ended June 30, 2011. We generate New Services revenues from our Profit Optimization services and our healthcare claims recovery audit services, which are derived primarily from our participation in the Medicare RAC program. The increases in revenue are due to our healthcare claims recovery audit revenues tripling from the 2011 periods, partially offset by decreases in the three and six months ended June 30, 2012 of approximately 25% in our Profit Optimization services revenues. The increases in healthcare claims recovery audit revenues are due to improvements in our performance under the Medicare RAC program. A significant portion of first quarter 2012 healthcare claims recovery audit revenues related to claims identified in prior quarters but not accepted by the claims processor until the first quarter of 2012, which benefited the 2012 six month period. We anticipate that our healthcare claims recovery audit revenues will continue to exceed the comparable amounts for the 2011 periods through the remainder of 2012.

The decreases in our Profit Optimization revenues in the three and six months ended June 30, 2012 are due to the first half of 2011 containing several large projects that drove extremely high utilization levels, with no similar projects in the first half of 2012. We realigned the Profit Optimization organization and have generated sequential increases in quarterly revenues since the fourth quarter of 2011.

Cost of Revenues ("COR"). COR consists principally of commissions and other forms of variable compensation we pay to our 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 salaries for operational and client service managers for our recovery audit and our Profit Optimization services businesses. COR also includes other direct and indirect costs incurred by these personnel, including office rent, travel and entertainment, telephone, utilities, maintenance and supplies and clerical assistance. A significant portion of the components comprising COR is variable and will increase or decrease with increases or decreases in revenues.

COR was as follows (in thousands):

                                                     Three Months Ended            Six Months Ended
                                                          June 30,                     June 30,
                                                     2012           2011          2012          2011
Recovery Audit Services - Americas                $   16,070      $ 15,597      $ 32,022      $ 32,240
Recovery Audit Services - Europe/Asia-Pacific         10,006        12,068        21,081        23,658
New Services                                           7,236         6,858        14,427        13,219

Total                                             $   33,312      $ 34,523      $ 67,530      $ 69,117

COR as a percentage of revenues for Recovery Audit Services - Americas was 54.3% and 55.9% for the three months ended June 30, 2012 and 2011, respectively. For the six months ended June 30, 2012 and 2011, COR as a percentage of revenues for Recovery Audit Services - Americas was 54.8% and 56.5%, respectively. The decrease in COR as a percentage of revenues for the three and six months ended June 30, 2012 compared to the same periods in 2011 is primarily due to lower relative costs for the incremental revenues from new clients, including those we now serve as a result of our acquisition of BSI, and cost savings driven by our Next-Generation Recovery Audit service delivery model.

COR as a percentage of revenues for Recovery Audit Services - Europe/Asia-Pacific was 74.6% and 76.6% for the three months ended June 30, 2012 and 2011, respectively. For the six months ended June 30, 2012 and 2011, COR as a percentage of revenues for Recovery Audit Services - Europe/Asia-Pacific was 76.1% and 77.6%, respectively. The improvement in COR as a percentage of revenues in both the three and six month periods primarily resulted from changes in the mix of audit revenues and from changes in our methods of providing audit services in Europe. We subcontract a portion of our audit services in Europe to third-party audit firms, which we refer to as the associate model. We generally earn a lower gross margin from associate model audits than we earn from audits we perform ourselves, which we refer to as employee model audits. In the three and six month periods ended June 30, 2012 compared to the same periods in 2011, we generated a greater percentage of our revenues in this segment from employee model audits, which changed the mix of our revenues and positively impacted our COR as a percentage of revenues. We migrated two additional subcontractors to the employee model in January 2012 and June 2012, which contributed to the greater percentage of revenues generated from employee model audits. Although we incur some increased costs during the migration process, we expect that the migrations ultimately will result in higher gross margins for this segment and for the Company as a whole.

The higher COR as a percentage of revenues for Recovery Audit Services - Europe/Asia-Pacific (74.6% for the second quarter of 2012 and 76.1% for the six months ended June 30, 2012) compared to Recovery Audit Services - Americas (54.3% for the second quarter of 2012 and 54.8% for the six months ended June 30, 2012) is due primarily to differences in service delivery models, scale and geographic fragmentation. The Recovery Audit Services - Europe/Asia-Pacific segment generally serves fewer clients in each geographic market and on average generates lower revenues per client than those served by the Company's Recovery Audit Services - Americas segment.

New Services COR relates primarily to costs of Profit Optimization services and costs associated with the Medicare RAC program subcontracts. COR as a percentage of revenues for New Services was 83.6% and 97.3% for the three months ended June 30, 2012 and 2011, respectively. For the six months ended June 30, 2012 and 2011, COR as a percentage of revenues for New Services was 83.9% and 95.1%, respectively. The improvement in COR as a percentage of revenues for New Services is due to the dramatic increase in revenues in healthcare claims recovery audit, for which COR exceeded revenues in the 2011 periods but for which revenues exceeded COR in the 2012 periods. These improvements in healthcare claims recovery audit margins were partially offset by deterioration in the Profit Optimization margins due to the decline in revenues and resource utilization rates in this service line.

Selling, General and Administrative Expenses ("SG&A"). SG&A expenses of the Recovery Audit and New 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 other than those relating to short-term intercompany balances and gains and losses on asset disposals related to the Recovery Audit and New Services segments. Corporate Support SG&A represents the unallocated portion of SG&A expenses which are not specifically attributable to our segment activities and include the expenses of information technology services, the corporate data center, human resources, legal, accounting, treasury, administration and stock-based compensation charges.

SG&A expenses were as follows (in thousands):

                                                     Three Months Ended            Six Months Ended
                                                          June 30,                     June 30,
                                                     2012           2011          2012          2011
Recovery Audit Services - Americas                $    5,225      $  4,652      $ 10,087      $ 10,028
Recovery Audit Services - Europe/Asia-Pacific            868         1,398         2,119         2,561
New Services                                           1,516         1,338         2,913         2,566
Corporate support                                      5,087         4,909        10,214         9,572

Total                                             $   12,696      $ 12,297      $ 25,333      $ 24,727

Recovery Audit Services - Americas SG&A increased $0.6 million, or 12.3%, and $0.1 million, or 0.6% for the three and six months ended June 30, 2012, respectively compared to the same periods in 2011. The increases resulted primarily from costs related to an overtime pay claim and higher incentive compensation accruals, partially offset by lower severance costs related to the transformation of our Next-Generation Recovery Audit service delivery model.

Recovery Audit Services - Europe/Asia-Pacific SG&A decreased $0.5 million, or 37.9%, and $0.4 million, or 17.3% for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011. The decreases are due primarily to a reduction in a business acquisition obligation resulting from decreased revenues and profitability generated by the acquired business.

New Services SG&A increased $0.2 million, or 13.3%, and $0.3 million, or 13.5% for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011. The increases are related to our growth in New Services revenues and primarily are attributable to our continuing efforts to improve our processes and develop new tools for use in these businesses.

Corporate Support SG&A increased $0.2 million, or 3.6%, and $0.6 million, or 6.7% for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011. These increases are due primarily to higher incentive compensation accruals in the three and six month periods, as well as to higher stock-based compensation charges in the six month period.

Depreciation of property and equipment. Depreciation of property and equipment was as follows (in thousands):

                                                      Three Months Ended            Six Months Ended
                                                          June  30,                     June 30,
                                                      2012           2011          2012          2011
Recovery Audit Services - Americas                 $      990       $   769      $   1,905      $ 1,543
Recovery Audit Services - Europe/Asia-Pacific              87            95            127          183
New Services                                              502           350          1,060          669

Total                                              $    1,579       $ 1,214      $   3,092      $ 2,395

The increases in depreciation relate primarily to improvements we made to our IT infrastructure and to an increase in the depreciation of capitalized software development costs as we place developed software in service.

Amortization of intangible assets. Amortization of intangible assets was as follows (in thousands):

                                                      Three Months Ended            Six Months Ended
                                                          June  30,                     June 30,
                                                      2012           2011          2012          2011
Recovery Audit Services - Americas                 $      767       $   571      $   2,353      $ 1,144
Recovery Audit Services - Europe/Asia-Pacific             490           340          1,029          672
New Services                                              202           218            404          434

Total                                              $    1,459       $ 1,129      $   3,786      $ 2,250

The increases in amortization expense in our recovery audit segments are primarily due to the amortization of intangible assets recorded in connection with our recent acquisitions, including the December 2011 acquisition of BSI in Recovery Audit Services - Americas, and associate migrations in the third quarter of 2011, January 2012 and June 2012 within Recovery Audit Services - Europe / Asia Pacific. We anticipate that amortization expense in the third and fourth quarters of 2012 will approximately equal the amount incurred in the second quarter of 2012.

Foreign Currency Transaction (Gains) Losses on Short-term Intercompany Balances. Foreign currency transaction gains and losses on short-term intercompany balances result from the remeasurement of the foreign subsidiaries' balances payable to the U.S. parent from their local currency to their U.S. dollar equivalent. Substantial changes from period to period in foreign currency exchange rates may significantly impact the amount of such gains and losses. The strengthening of the U.S. dollar relative to other currencies results in recorded losses on intercompany balances receivable from our foreign subsidiaries while the relative weakening of the U.S. dollar results in recorded gains. In the three months ended June 30, 2012 and 2011, we recorded foreign currency transaction losses of $0.5 million and foreign currency transaction gains of $0.4 million, respectively, on short-term intercompany balances. In the six months ended June 30, 2012 and 2011, we recorded foreign currency transaction losses of $0.2 million and foreign currency transaction gains of $0.9 million, respectively, on short-term intercompany balances.

Net Interest Expense. Net interest expense was $0.5 million for both the three months ended June 30, 2012 and 2011. Net interest expense was $1.0 million and $0.8 million for the six months ended June 30, 2012 and 2011, respectively. The increase in net interest expense in the 2012 six month period is primarily due to interest expense associated with business acquisition obligations.

Income Tax Expense. Our income tax expense amounts as reported in the accompanying Condensed Consolidated Financial Statements (Unaudited) do not reflect amounts that normally would be expected due to several factors. The most significant of these factors is that for U.S. tax reporting purposes we have net operating loss carryforwards and other tax attributes which created deferred tax assets on our balance sheet. We reduce our deferred tax assets 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. Generally, these factors result in our recording no net income tax expense or benefit relating to our operations in the United States. Reported income tax expense for the three and six months ended June 30, 2012 and 2011 primarily results from taxes on the income of our foreign subsidiaries.

Liquidity and Capital Resources

As of June 30, 2012, we had $11.8 million in cash and cash equivalents and no borrowings under the revolver portion of our credit facility. The revolver had approximately $10.1 million of calculated availability for borrowings. The Company was in compliance with the covenants in its SunTrust credit facility as of June 30, 2012.

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