Edgar Filing: PRG SCHULTZ INTERNATIONAL INC

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006

[ ] 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

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PRG-SCHULTZ INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)

GEORGIA 58-2213805
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

600 GALLERIA PARKWAY 30339-5986
SUITE 100 (Zip Code)
ATLANTA, GEORGIA
(Address of principal executive offices)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (770) 779-3900

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|

Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
One):

|_| Large accelerated filer |X| Accelerated filer |_| Non-accelerated filer

Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|

Common shares of the registrant outstanding at July 31, 2006 were
65,117,547.

PRG-SCHULTZ INTERNATIONAL, INC.

FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2006

INDEX

PAGE NO.

PART I. Financial Information

Item 1. Financial Statements...................................................................1

Condensed Consolidated Statements of Operations for the Three and
Six Months Ended June 30, 2006 and 2005............................................1

Condensed Consolidated Balance Sheets as of June 30, 2006 and
December 31, 2005..................................................................2

Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2006 and 2005.......................................................3

Notes to Condensed Consolidated Financial Statements...................................4

Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.........................................................................16

Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................32

Item 4. Controls and Procedures................................................................33

PART II. Other Information

Item 1. Legal Proceedings......................................................................34

Item 1A. Risk Factors...........................................................................34

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds............................34

Item 3. Defaults Upon Senior Securities........................................................34

Item 4. Submission of Matters to a Vote of Security Holders....................................34

Item 5. Other Information......................................................................34

Item 6. Exhibits...............................................................................35

Signatures....................................................................................................37

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- ---------------------------------
2006 2005 2006 2005
------------- -------------- -------------- ----------------

Revenues............................................. $ 65,308 $ 78,162 $ 130,846 $ 153,309
Cost of revenues..................................... 47,267 50,997 93,546 99,592
------------- -------------- -------------- ----------------
Gross margin...................................... 18,041 27,165 37,300 53,717

Selling, general and administrative expenses......... 14,713 31,259 30,585 59,837
Operational restructuring expense (Note H)........... 1,580 -- 1,988 --
------------- -------------- -------------- ----------------
Operating income (loss)........................... 1,748 (4,094) 4,727 (6,120)
------------- -------------- -------------- ----------------

Interest expense, net................................ (4,269) (2,061) (6,812) (3,871)
Loss on financial restructuring (Note G)............. -- -- (10,129) --
------------- -------------- -------------- ----------------
Loss from continuing operations before income
taxes and discontinued operations.............. (2,521) (6,155) (12,214) (9,991)
Income taxes......................................... 338 412 988 1,099
------------- -------------- -------------- ----------------

Loss from continuing operations before
discontinued operations........................ (2,859) (6,567) (13,202) (11,090)

Discontinued operations (Note B):
Earnings (loss) from discontinued operations...... (786) 275 (737) (98)
------------- -------------- -------------- ----------------
Net loss..................................... $ (3,645) $ (6,292) $ (13,939) $ (11,188)
============= ============== ============== ================

Basic and diluted loss per common share:
Loss from continuing operations before
discontinued operations........................ $ (0.05) $ (0.10) $ (0.22) $ (0.18)
Discontinued operations........................... (0.01) -- (0.01) --
------------- -------------- -------------- ----------------
Net loss..................................... $ (0.06) $ (0.10) $ (0.23) $ (0.18)
============= ============== ============== ================

Weighted-average common shares outstanding (Note C ):
Basic............................................. 63,879 61,997 62,996 61,987
============= ============== ============== ================
Diluted........................................... 63,879 61,997 62,996 61,987
============= ============== ============== ================

See accompanying Notes to Condensed Consolidated Financial Statements.

PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

JUNE 30, DECEMBER 31,
2006 2005
(UNAUDITED)
--------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents (Note F)..................................................... $ 18,595 $ 11,848
Restricted cash ....................................................................... 3,718 3,096
Receivables:
Contract receivables, less allowances of $2,379 in 2006 and $2,717 in 2005...........
Billed.......................................................................... 34,522 43,591
Unbilled........................................................................ 9,141 9,608
--------------- ---------------
43,663 53,199
Employee advances and miscellaneous receivables, less allowances of $1,720 in 2006
and $2,974 in 2005................................................................. 2,050 2,737
--------------- ---------------
Total receivables............................................................... 45,713 55,936
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Funds held for client obligations...................................................... 43,836 32,479
Prepaid expenses and other current assets.............................................. 3,486 3,113
Deferred income taxes ................................................................. -- 67
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Total current assets............................................................ 115,348 106,539
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Property and equipment, at cost........................................................... 83,641 81,779
Less accumulated depreciation and amortization......................................... (70,421) (64,326)
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Property and equipment, net..................................................... 13,220 17,453
--------------- ---------------
Goodwill.................................................................................. 4,600 4,600
Intangible assets, less accumulated amortization of $6,146 in 2006 and $5,453 in 2005..... 23,754 24,447
Unbilled receivables...................................................................... 2,574 2,789
Deferred income taxes..................................................................... 416 530
Other assets.............................................................................. 10,955 5,704
--------------- ---------------
$170,867 $162,062
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Obligations for client payables........................................................ $ 43,836 $ 32,479
Accounts payable and accrued expenses.................................................. 21,751 22,362
Accrued payroll and related expenses................................................... 38,097 44,031
Refund liabilities..................................................................... 10,522 11,741
Deferred revenue....................................................................... 4,542 4,583
Convertible notes, net of unamortized discount of $2 in 2006 and $4 in 2005 (Note G)... 468 466
Current portion of other debt obligations (Note G)..................................... 250 --
--------------- ---------------
Total current liabilities....................................................... 119,466 115,662

Convertible notes, net of unamortized discount of $929 in 2005 (Note G)................... -- 123,601
Senior notes, net of unamortized discount of $8,320 in 2006 (Note G)...................... 43,316 --
Senior convertible notes, including unamortized premium of $5,097 in 2006 (Note G)........ 64,871 --
Other debt obligations (Note G)........................................................... 24,750 16,800
Deferred compensation..................................................................... 841 1,388
Refund liabilities........................................................................ 1,700 1,785
Other long-term liabilities............................................................... 5,026 5,191
--------------- ---------------
Total liabilities...................................................................... 259,970 264,427
--------------- ---------------
Mandatorily redeemable participating preferred stock (Note G)............................. 14,460 --
Shareholders' equity (deficit) (Notes C and G):
Common stock, no par value; $.001 stated value per share. Authorized 200,000,000
shares; issued 70,882,072 shares in 2006 and 67,876,832 shares in 2005.............. 71 68
Additional paid-in capital............................................................. 506,567 494,826
Accumulated deficit.................................................................... (564,658) (550,719)
Accumulated other comprehensive income................................................. 3,167 2,400
Treasury stock, at cost; 5,764,525 shares in 2006 and 2005............................. (48,710) (48,710)
Unamortized portion of restricted stock compensation expense........................... -- (230)
--------------- ---------------
Total shareholders' equity (deficit)............................................. (103,563) (102,365)
Commitments and contingencies (Note H).................................................... $ 170,867 $ 162,062
=============== ===============

See accompanying Notes to Condensed Consolidated Financial Statements.

PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)

SIX MONTHS ENDED
JUNE 30,
-------------------------------
2006 2005
-------------- -------------
Cash flows from operating activities:
Net loss...................................................................... $ (13,939) $ (11,188)
Loss from discontinued operations............................................. 737 98
-------------- -------------
Loss from continuing operations............................................... (13,202) (11,090)
Adjustments to reconcile loss from continuing operations to net cash provided
by (used in) operating activities:
Loss on financial restructuring............................................ 10,129 -
Depreciation and amortization.............................................. 5,724 7,516
Amortization of stock and stock option compensation expense................ 734 196
Amortization of debt discounts and deferred costs.......................... 578 502
Gain on sale of property, plant and equipment.............................. (6) -
Deferred income taxes...................................................... 181 -
Changes in assets and liabilities:
Restricted cash.......................................................... (391) (157)
Billed receivables....................................................... 10,658 11,153
Unbilled receivables..................................................... 682 1,199
Prepaid expenses and other current assets................................ (269) (2,547)
Other assets............................................................. 1,796 (343)
Accounts payable and accrued expenses.................................... 54 (5,013)
Accrued payroll and related expenses..................................... (6,777) (5,341)
Refund liability......................................................... (1,304) (2,301)
Deferred revenue......................................................... (347) (1,660)
Deferred compensation expense............................................ (547) (767)
Other long-term liabilities.............................................. (165) (367)
-------------- -------------
Net cash provided by (used in) operating activities.................. 7,528 (9,020)
-------------- -------------
Cash flows from investing activities:
Purchases of property and equipment, net disposals............................ (483) (3,542)
-------------- -------------
Net cash used in investing activities................................ (483) (3,542)
-------------- -------------
Cash flows from financing activities:
Net borrowings of debt........................................................ 8,200 12,500
Issuance costs of preferred stock............................................. (1,281) -
Payments for deferred loan cost............................................... (7,750) -
Net proceeds from common stock issuances...................................... - 772
-------------- -------------
Net cash provided by (used in) financing activities.................. (831) 13,272
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Cash flows from discontinued operations:
Operating cash flows........................................................ (973) (85)
Investing cash flows........................................................ 604 234
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Net cash provided by (used in) discontinued operations......... (369) 149
-------------- -------------
Effect of exchange rates on cash and cash equivalents........................... 902 (1,213)
-------------- -------------
Net increase (decrease) in cash and cash equivalents................. 6,747 (354)
Cash and cash equivalents at beginning of period................................ 11,848 12,596
-------------- -------------
Cash and cash equivalents at end of period...................................... $ 18,595 $ 12,242
============== =============

Supplemental disclosure of cash flow information:
Cash paid during the period for interest...................................... $ 1,093 $ 3,343
============== =============
Cash paid during the period for income taxes, net of refunds.................. $ 951 $ 707
============== =============

See accompanying Notes to Condensed Consolidated Financial Statements.

PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 AND 2005
(UNAUDITED)

NOTE A - BASIS OF PRESENTATION

The accompanying Condensed Consolidated Financial Statements (Unaudited) of
PRG-Schultz International, Inc. and its wholly owned subsidiaries (the
"Company") have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
with the instructions for Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and six-month
period ended June 30, 2006 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2006.

Disclosures included herein pertain to the Company's continuing operations
unless otherwise noted.

For further information, refer to the Consolidated Financial Statements and
Footnotes thereto included in the Company's Form 10-K for the year ended
December 31, 2005.

(1) STOCK-BASED COMPENSATION

In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123(R), "Share-Based
Payment." This pronouncement amended SFAS No. 123, "Accounting for Stock-Based
Compensation," and superseded Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees." 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, has not restated 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 that 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, "Accounting for Stock-Based
Compensation," under the intrinsic value method described in APB Opinion No. 25,
"Accounting for Stock Issued to Employees," 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
Opinion No. 25 guidance, no stock-based compensation expense was recognized for
the three-month or six-month periods ended June 30, 2005 except for compensation
amounts relating to grants of shares of non-vested stock (see Note C).

PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The following table illustrates the effect on net loss and net loss per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation," to stock-based employee
compensation, using the straight-line method, for periods prior to January 1,
2006 (in thousands, except for pro forma net loss per share information):

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2005 JUNE 30, 2005
----------------------- -----------------------

Net loss before pro forma effect of compensation
expense recognition provisions of SFAS No.123 ......... $(6,292) $(11,188)
Pro forma effect of compensation expense
recognition provisions of SFAS No. 123, net of
income taxes of $(441) and $(1,091).................... (682) (1,685)
------------ ----------------
Pro forma net loss....................................... $(6,974) $(12,873)
============ ================
Pro forma net earnings (loss) per share:
Basic and diluted - as reported.......................... $ (0.10) $ (0.18)
============ ================
Basic and diluted - pro forma............................ $ (0.11) $ (0.21)
============ ================

In applying the treasury stock method to determine the dilutive impact of
common stock equivalents, the calculation is performed in steps with the impact
of each type of dilutive security calculated separately. For each of the
three-month and six-month periods ended June 30, 2005, 16.1 million shares
related to the convertible notes were excluded from the computation of pro forma
diluted earnings per share calculated using the treasury stock method, due to
their antidilutive effect.

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) are
estimated as of their date of grant using more complex option valuation models
such as binomial lattice and the Monte Carlo simulations. The Company chose to
use the Monte Carlo simulations for its valuations. 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.

For time-vested option grants which resulted in compensation expense
recognition, the Company used the following assumptions in its Black-Scholes
valuation models: volatility - 68.4% to 69.2%, risk-free interest rates - 3.9%
to 4.5%, expected term - 5 years. For market based option grants which resulted
in compensation expense recognition, the following assumptions were used in a
Monte Carlo simulation valuation model: volatility - variable term structure -
40.6% to 74.8%, risk-free interest rate - variable term structure based on spot
rate curve of U.S. treasury securities, expected term - 4.7 years to 5.6 years,
median vesting period - 1.9 years to 3.8 years.

(2) NEW ACCOUNTING STANDARDS

In June 2006, the FASB issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109. This
Interpretation prescribes a "more-likely-than-not" recognition threshold that
must be met before a tax benefit can be recognized in the financial statements.
The Interpretation also offers guidelines to determine how much of a tax benefit
to recognize in the financial statements. The Interpretation also provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition. This Interpretation is effective
for fiscal years beginning after December 15, 2006. The Company is currently
assessing and evaluating the impact this Interpretation will have on its
financial statements.

PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE B - DISCONTINUED OPERATIONS

On October 30, 2001, the Company consummated the sale of its Logistics
Management Services business to Platinum Equity, a firm specializing in
acquiring and operating technology organizations and technology-enabled service
companies worldwide. The transaction yielded initial gross sale proceeds, as
adjusted, of approximately $9.5 million with up to an additional $3.0 million
payable in the form of a revenue-based royalty over four years, of which $2.2
million had been cumulatively received through June 30, 2006. During the first
quarters of 2006 and 2005, the Company recognized a gain on the sale of
discontinued operations of approximately $0.3 million and $0.2 million,
respectively, related to the receipt of a portion of the revenue-based royalty
from the sale, as adjusted for certain expenses accrued as part of the estimated
loss on the sale of that business. No gains or losses were recognized during the
second quarter of 2006 or 2005.

During the fourth quarter of 2005, the Company classified its Channel
Revenue and Airline businesses, and the Accounts Payable Service business units
in South Africa and Japan, as discontinued operations. The Company's
Consolidated Financial Statements have been reclassified to reflect the results
of these businesses as discontinued operations for all periods presented. The
carrying values of the assets and liabilities relating to these business units
are considered insignificant for all periods presented. The South Africa and
Japan Accounts Payable Services business units were closed during 2005.

On January 11, 2006, the Company consummated the sale of Channel Revenue.
Channel Revenue was sold for $0.4 million in cash to Outsource Recovery, Inc.
Outsource Recovery also undertook to pay the Company an amount equal to 12% of
gross revenues received by Outsource Recovery during each of the calendar years
2006, 2007, 2008 and 2009 with respect to Channel Revenue. The Company
recognized a first quarter 2006 gain on disposal of approximately $0.3 million.

On July 17, 2006, the Company completed the sale of its Airline business to
a former employee. During the three-month and six-month periods ended June 30,
2006, the Company recognized losses of $0.2 million and $0.4 million,
respectively, relating to the anticipated sale of the Airline business unit.

Earnings (loss) from discontinued operations for the three-month and
six-month periods ended June 30, 2006 and 2005 as reported in the accompanying
Condensed Consolidated Statements of Operations includes the gains and losses
related to the sales of discontinued business units as well as operating income
or loss related to the operations of these discontinued units. The net tax
effect on earnings (loss) from discontinued operations is not significant.

The following table summarizes earnings and losses from discontinued
operations for the three and six-month periods ended June 30, 2006 and 2005 (in
millions):

THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2006 2005 2006 2005
----------- ----------- ----------- ------------
Operating income (loss) from discontinued operations..... $ (0.6) $ 0.3 $ (0.9) $ (0.3)
Gain (loss) on disposal of discontinued operations....... (0.2) -- 0.2 0.2
------------ ----------- ----------- ------------
Earnings (loss) from discontinued operations........... $ (0.8) $ 0.3 $ (0.7) $ (0.1)
============ =========== =========== ============

NOTE C - STOCK COMPENSATION PLANS

Prior to January 1, 2006, the Company had two stock compensation plans: (1)
the Stock Incentive Plan and (2) the HSA Acquisition Stock Option Plan; and also
had an employee stock purchase plan.

The Company's Stock Incentive Plan, as amended, authorized the grant of
options or other stock based awards, with respect to up to 12,375,000 shares of
the Company's common stock to key employees, directors, consultants and
advisors. The majority of options granted through June 30, 2006 had 5-year terms
and vested and became fully exercisable on a ratable basis over four or five
years of continued employment.

PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The Company's HSA Acquisition Stock Option Plan, as amended, authorized the
grant of options to purchase 1,083,846 shares of the Company's common stock to
certain key employees and advisors who were participants in the 1999 Howard
Schultz & Associates International Stock Option Plan. The options had 5-year
terms and vested upon and became fully exercisable upon issuance. No additional
options can be issued under this plan.

Effective May 15, 1997, the Company established an employee stock purchase
plan (the "Plan") pursuant to Section 423 of the Internal Revenue Code of 1986,
as amended. The Plan covered 2,625,000 shares of the Company's common stock,
which could be authorized unissued shares, or shares reacquired through private
purchase or purchases on the open market. Under the Plan, employees could
contribute up to 10% of their compensation towards the semiannual purchase of
stock. The employee's purchase price was 85 percent of the fair market price on
the first business day of the purchase period. The Company was not required to
recognize compensation expense related to this Plan. Effective December 31,
2005, the Company terminated the Plan.

During 2005, the Company made inducement option grants outside of its stock
compensation plans to Mr. James B. McCurry. Mr. McCurry's options were granted
in two tranches, the first of which, pertaining to 500,000 shares, vested in
December 2005. The second tranche is subject to specific performance criteria
and becomes exercisable in three tiers of 500,000 shares each, as follows: Tier
1 will become exercisable at any time after July 29, 2006, if the closing market
price per share of the Company's Common Stock is $4.50 or higher for 45
consecutive trading days after July 29, 2006. Tier 2 will become exercisable at
any time after July 29, 2007, if the closing market price per share of the
Company's Common Stock is $6.50 or higher for 45 consecutive trading days after
July 29, 2007. Tier 3 will become exercisable at any time after July 29, 2008,
if the closing market price per share of the Company's Common Stock is $8.00 or
higher for 45 consecutive trading days after July 29, 2008. These options expire
July 29, 2012 and have an exercise price equal to the closing price of the
common stock on NASDAQ on July 29, 2005.

During 2005, the Company also made option grants to Mr. David A. Cole. Mr.
Cole received a non-qualified option to purchase 450,000 shares of the common
stock of the Company at an exercise price of $3.16 per share, equal to the
closing price of the Company's common stock on the Nasdaq National Market on
July 29, 2005. The terms of Mr. Cole's option grant are as follows: the
time-vesting tranche of his option, representing the right to purchase 150,000
shares, will become exercisable on the earlier of the 2006 annual meeting of
shareholders and June 30, 2006, and the performance-vesting tranche,
representing the balance of his option, will be exercisable as follows: (a) Tier
1, representing the right to purchase 100,000 shares, will become exercisable at
any time after the earlier of the 2006 annual meeting of shareholders and June
30, 2006 (the "2006 Vesting Date"), if the Company attains a specified target
Common Stock trading price for 45 consecutive trading days after the 2006
Vesting Date; (b) Tier 2, representing the right to purchase an additional
100,000 shares, will become exercisable at any time after the 2006 Vesting Date,
if the Company attains a specified target Common Stock trading price for 45
consecutive trading days after the 2006 Vesting Date; and (c) Tier 3,
representing the right to purchase an additional 100,000 shares, will become
exercisable at any time after the earlier of the 2007 annual meeting of
shareholders and June 30, 2007 (the "2007 Vesting Date"), if the Company attains
a specified target Common Stock trading price for 45 consecutive trading days
after the 2007 Vesting Date. Unless sooner terminated, the option will expire on
July 29, 2012.

On December 15, 2005, the Company's Compensation Committee of the Board of
Directors authorized the immediate vesting of all outstanding unvested
time-vesting options that had option prices that were out of the money as of
such date (the "underwater" stock options). This action accelerated the vesting
of 2,637,616 options as of November 30, 2005. The accelerated options had option
prices that ranged from $3.16 per share to $17.25 per share and a weighted
average option price per share of $4.97. The Compensation Committee's decision
to accelerate the vesting of these "underwater" stock options was made primarily
to avoid recognizing compensation expense associated with these stock options in
future financial statements upon the Company's adoption of SFAS No. 123(R),
"Share Based Payment." Management estimates that compensation expense will be
approximately $2.4 million, $1.2 million and $0.5 million lower in 2006, 2007
and 2008, respectively, than if the vesting had not been accelerated.

During the three-month and six-month periods ended June 30, 2006, the
stock-based compensation charges recorded in connection with the expensing of
stock options were $0.3 million and $0.7 million, respectively. Such charges are
included in selling, general and administrative expenses in the accompanying
Condensed Consolidated Statements of Operations (Unaudited). As of June 30,

PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

2006, there was $2.5 million of unrecognized stock-based compensation cost
related to stock options which is expected to be recognized over a weighted
average period of 2.07 years. No options were granted or exercised during the
six-month period ended June 30, 2006.

The following table summarizes information about stock options outstanding
at June 30, 2006:

NUMBER WEIGHTED- WEIGHTED- AGGREGATE
OF SHARES AVERAGE AVERAGE INTRINSIC
SUBJECT REMAINING EXERCISE VALUE
TO OPTION LIFE PRICE (IN MILLIONS)
-------------- -------------- -------------- ---------------
Exercisable 3,731,601 2.10 years $ 9.30 $ --
Non-vested 2,300,000 6.14 years $ 2.53 $ 0.1
-------------- ---------------
Total 6,031,601 3.64 years $ 6.72 $ 0.1
============== ===============

The weighted-average grant date fair value of nonvested options outstanding
as of June 30, 2006 was $1.62.

Non-vested stock awards representing 240,000 shares in the aggregate of the
Company's common stock were granted to six of the Company's officers in February
2005 and 25,000 shares were granted to a senior management employee in March
2005. The total 265,000 non-vested shares granted were subject to service-based
cliff vesting. The restricted awards vest three years following the date of the
grant, subject to early vesting upon occurrence of certain events including a
change of control, death, disability or involuntary termination of employment
without cause. The restricted awards will be forfeited if the recipient
voluntarily terminates his or her employment with the Company (or a subsidiary,
affiliate or successor thereof) prior to vesting. The shares are generally
nontransferable until vesting. During the vesting period, the award recipients
will be entitled to receive dividends with respect to the escrowed shares and to
vote the shares. As of June 30, 2006, former employees had cumulatively
forfeited 200,000 non-vested common shares. Over the remaining life of the
remaining 65,000 non-vested common shares, the Company will recognize $0.2
million in compensation expense before any future forfeitures, if any.

NOTE D - OPERATING SEGMENTS AND RELATED INFORMATION

The Company has two reportable operating segments, Accounts Payable
Services and Meridian VAT Reclaim ("Meridian").

ACCOUNTS PAYABLE SERVICES

The Accounts Payable Services segment consists of services that entail the
review of client accounts payable disbursements to identify and recover
overpayments. This operating segment includes accounts payable services provided
to retailers and wholesale distributors (the Company's historical client base)
and accounts payable services provided to various other types of business
entities. The Accounts Payable Services segment conducts business in North
America, Latin America, Europe, Australia and Asia.

MERIDIAN VAT RECLAIM

Meridian is based in Ireland and specializes in the recovery of value-added
taxes ("VAT") paid on business expenses for corporate clients located throughout
the world. Acting as an agent on behalf of its clients, Meridian submits claims
for refunds of VAT paid on business expenses incurred primarily in European
Union countries. Meridian provides a fully outsourced service dealing with all
aspects of the VAT reclaim process, from the provision of audit and invoice
retrieval services to the preparation and submission of VAT claims and the
subsequent collection of refunds from the relevant VAT authorities.

CORPORATE SUPPORT

In addition to the segments noted above, the Company includes the
unallocated portion of corporate selling, general and administrative expenses
not specifically attributable to Accounts Payable Services or Meridian in the
category referred to as corporate support.

PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The Company evaluates the performance of its operating segments based upon
revenues and operating income. The Company does not have any inter-segment
revenues. Segment information for the three and six months ended June 30, 2006
and 2005 is as follows (in thousands):

ACCOUNTS
PAYABLE CORPORATE
SERVICES MERIDIAN SUPPORT TOTAL
------------ ------------ ------------ ------------
THREE MONTHS ENDED JUNE 30, 2006
Revenues........................................... $ 55,141 $ 10,167 $ -- $ 65,308
Operating income (loss)............................ 6,987 867 (6,106) 1,748

THREE MONTHS ENDED JUNE 30, 2005
Revenues........................................... $ 65,766 $ 12,396 $ -- $ 78,162
Operating income (loss)............................ 5,744 3,230 (13,068) (4,094)

SIX MONTHS ENDED JUNE 30, 2006
Revenues........................................... $ 110,856 $ 19,990 $ -- $ 130,846
Operating income (loss) ........................... 13,949 2,335 (11,557) 4,727

SIX MONTHS ENDED JUNE 30, 2005
Revenues........................................... $ 130,692 $ 22,617 $ -- $ 153,309
Operating income (loss) ........................... 11,164 5,916 (23,200) (6,120)

NOTE E - COMPREHENSIVE INCOME

The Company applies the provisions of ("SFAS") No. 130, Reporting
Comprehensive Income. This Statement establishes items that are required to be
recognized under accounting standards as components of comprehensive income.
SFAS No. 130 requires, among other things, that an enterprise report a total for
comprehensive income in condensed financial statements of interim periods issued
to shareholders. For the three-month periods ended June 30, 2006 and 2005, the
Company's consolidated comprehensive loss was $(2.8) million and $(6.4) million,
respectively. For the six-month periods ended June 30, 2006 and 2005, the
Company's consolidated comprehensive income (loss) was $(13.2) million and
$(11.3) million, respectively. The difference between consolidated comprehensive
income (loss), as disclosed here, and traditionally determined consolidated net
earnings (loss), as set forth on the accompanying Condensed Consolidated
Statements of Operations (Unaudited), results from foreign currency translation
adjustments.

NOTE F - CASH EQUIVALENTS

Cash and cash equivalents include all cash balances and highly liquid
investments with an initial maturity of three months or less. The Company places
its temporary cash investments with high credit quality financial institutions.
At times, investments on deposit with such institutions may be in excess of the
Federal Deposit Insurance Corporation insurance limit.

At June 30, 2006 and December 31, 2005, the Company had cash and cash
equivalents of $18.6 million and $11.8 million, respectively, of which cash
equivalents represent approximately $0.9 million and $1.7 million, respectively.
The Company did not have any cash equivalents at U.S. banks at June 30, 2006 or
December 31, 2005. At June 30, 2006 and December 31, 2005, certain of the
Company's international subsidiaries held $0.9 million and $1.7 million,
respectively, in temporary investments, the majority of which were at banks in
Latin America and the United Kingdom.

NOTE G - FINANCIAL RESTRUCTURING

EXCHANGE OF CONVERTIBLE NOTES

On March 17, 2006, the Company completed an exchange offer for its $125
million of 4.75% Convertible Subordinated Notes due 2006. As a result of the
Exchange Offer, virtually all of the outstanding convertible notes were
exchanged for (a) $51.6 million in principal amount of 11.0% Senior Notes Due

PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

2011, (b) $59.8 million in principal amount of 10.0% Senior Convertible Notes
Due 2011, and (c) 124,530 shares, or $14.9 million liquidation preference, of
9.0% Senior Series A Convertible Participating Preferred Stock.

The material terms of these new securities include:

o The new senior notes bear interest at 11%, payable semiannually in
cash, and are callable at 104% of face in year 1, 102% in year 2, and
at par in years 3 through 5.

o The new senior convertible notes bear interest at 10%, payable
semiannually in cash or in kind, at the option of the Company. The new
senior convertible notes are convertible at the option of the holders,
upon satisfaction of certain conditions, (and in certain
circumstances, at the option of the Company) into shares of new Series
B preferred stock having a 10% annual dividend and a liquidation
preference equal to the principal amount of notes converted. Dividends
on the new Series B preferred stock may be paid in cash or in kind, at
the option of the Company. Each $1,000 of face amount of such notes is
convertible into approximately 2.083 shares of new Series B
convertible preferred stock; provided that upon the occurrence of
certain events, including approval by the shareholders of an amendment
to the Company's Articles of Incorporation to allow sufficient
additional shares of common stock to be issued for the conversion,
they will be convertible only into common stock at a rate of
approximately 1,538 shares per $1,000 principal amount. The new Series
B preferred stock will be convertible at the option of the holders
into shares of common stock at the rate of $0.65 of liquidation
preference per share of common stock, subject to certain conditions,
including approval by the shareholders of an amendment to the
Company's Articles of Incorporation to allow sufficient additional
shares of common stock to be issued for the conversion.

o The new Series A preferred stock has a 9% cumulative dividend; unpaid
dividends increase the stock's liquidation preference and redemption
value. The new Series A preferred stock is convertible at the option
of the holders into shares of common stock at the rate of $0.28405 of
liquidation preference per share of common stock. As of June 30, 2006,
7,113 shares of Series A preferred stock had been converted into
3,005,240 shares of common stock.

o The Series A and Series B preferred stock votes with the Company's
common stock on most matters requiring shareholder votes. The Company
has the right to redeem the new senior convertible notes at par at any
time after repayment of the new senior notes, subject to certain
conditions, including approval by the shareholders of an amendment to
the Company's Articles of Incorporation to allow sufficient additional
shares of common stock to be issued for the conversion. The Company
also has the right to redeem the new Series A and Series B preferred
stock at the stated liquidation preference at any time after repayment
of the new senior notes and the new senior convertible notes.

o Both the new senior notes and the new senior convertible notes will
mature on the fifth anniversary of issuance. The new Series A
preferred stock must be redeemed on the fifth anniversary of issuance.
The new series B preferred stock must be redeemed on the fifth
anniversary of issuance under certain conditions.

The aggregate fair value of the new instruments issued exceeded the book
value of the exchanged Convertible Subordinated Notes by $10.1 million. Such
amount was recognized as a loss on financial restructuring in the first quarter
of 2006. The Company incurred $1.3 million of costs related to the issuance of
the new preferred stock. Such amount was charged to additional paid-in capital
in the first quarter of 2006. The Company incurred costs of $5.1 million in
connection with the issuance of the new senior notes and senior convertible
notes. Such amount has been capitalized and will be amortized over the term of
the notes.

The excess of the fair value of the preferred stock over its stated
liquidation (redemption) value was credited to additional paid-in capital. The
excess of the principal balance of the new senior notes over their fair value
was recorded as a note discount and will be amortized on the interest method
over the term of the notes. The excess of the fair value of the new senior
convertible notes over their principal balance was recorded as a note premium
and will be amortized on the interest method over the term of the notes.

PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NEW SENIOR INDEBTEDNESS

On December 23, 2005, the Company entered into a Credit Agreement, Security
Agreement and Pledge Agreement with Petrus Securities L.P. and Parkcentral
Global Hub Limited (collectively, the "Petrus Entities") and Blum Strategic
Partners II GmbH & Co. K.G. and Blum Strategic Partners II, L.P. (collectively,
the "Blum Entities"). These agreements evidence a term loan to PRG-Schultz USA
Inc., a wholly owned subsidiary of the Company (the "Borrower"), in an aggregate
principal amount of $10 million. This loan was repaid upon closing of the new
senior credit facility on March 17, 2006.

The Borrower is the primary user under the new senior secured credit
facility, and the Company and each of its other existing and subsequent acquired
or organized direct and indirect domestic wholly-owned subsidiaries have
guaranteed the new facility. The Company's, the Borrower's and all of the
Company's other subsidiaries' obligations under the new senior secured credit
facility are secured by liens on substantially all of its 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 new senior secured credit facility will expire on the fourth
anniversary of the closing of the Exchange Offer. The term loan under the new
senior secured credit facility will amortize with quarterly payments beginning
on the first anniversary of the closing date of $250,000 per quarter for the
second year of the facility, and $500,000 per quarter for the third and fourth
years of the facility, with the balance due at maturity on the fourth
anniversary of closing.

The term loan under the new senior secured credit facility may be repaid at
the Company's option at any time; provided, that any such pre-payment in the
first year shall be subject to a prepayment penalty of 3.0% of the principal
amount pre-paid, and pre-payments in the second year shall be subject to a
pre-payment penalty of 2.0% of the principal amount pre-paid. The term loan may
be pre-paid at any time following the 2nd anniversary of the closing date
without penalty. The new senior secured credit facility also provides for
certain mandatory repayments, including a portion of the Company's consolidated
excess cash flow (which will be based on an adjusted EBITDA calculation), sales
of assets and sales of certain debt and equity securities, in each case subject
to certain exceptions and reinvestment rights.

The Company's ability to borrow under the revolving credit portion of the
new senior secured credit facility is limited to a borrowing base of a
percentage of its eligible domestic receivables, subject to adjustments. Based
on this borrowing base calculation, the Company had approximately $15.0 million
of availability under the revolving credit facility at the closing of the
exchange offer. Through June 30, 2006, the Company had not borrowed any funds
under the revolving credit loan.

The interest on the term loan is based on a floating rate equal to the
reserve adjusted London inter-bank offered rate, or LIBOR, plus 8.5% (or, at the
Company's option, a published prime lending rate plus 5.5%). The interest rate
on outstanding revolving credit loans is based on LIBOR plus 3.75% (or, at the
Company's option, a published prime lending rate plus 1.0%). The Company will
also pay an unused commitment fee on the revolving credit facility of 0.5%. The
new senior secured credit facility also required the payment of commitment fees,
closing fees and additional expense reimbursements of approximately $1.1 million
at closing.

PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

permits and licenses; inspection of properties, books and records; maintenance
of insurance; limitations with respect to liens and encumbrances, dividends and
retirement of capital stock, guarantees, sale and lease back transactions,
consolidations and mergers, investments, capital expenditures, loans and
advances, and indebtedness; compliance with pension, environmental and other
laws, operating and capitalized leases, and limitations on transactions with
affiliates and prepayment of other indebtedness.

The new senior secured credit facility contains customary events of
default, including non-payment of principal, interest or fees, inaccuracy of
representations or warranties in any material respect, failure to comply with
covenants, cross-default to certain other indebtedness, loss of lien perfection
or priority, material judgments, bankruptcy events and change of ownership or
control.

The Company incurred $2.6 million of costs related to the issuance of the
term loan and revolving loan agreement. Such amount has been capitalized and
will be amortized over the term of the indebtedness.

NOTE H - COMMITMENTS AND CONTINGENCIES

LEGAL PROCEEDINGS

Beginning on June 6, 2000, three putative class action lawsuits were filed
against the Company and certain of its present and former officers in the United
States District Court for the Northern District of Georgia, Atlanta Division.
These cases were subsequently consolidated into one proceeding styled: In re
Profit Recovery Group International, Inc. Sec. Litig., Civil Action File No.
1:00-CV-1416-CC (the "Securities Class Action Litigation"). On February 8, 2005,
the Company entered into a Stipulation of Settlement of the Securities Class
Action Litigation. On February 10, 2005, the United States District Court for
the Northern District of Georgia, Atlanta Division preliminarily approved the
terms of the Settlement. On May 26, 2005, the Court approved the Stipulation of
Settlement ("Settlement") entered into by the Company with the Plaintiff's
counsel, on behalf of all putative class members, pursuant to which it agreed to
settle the consolidated class action for $6.75 million, which payment was made
by the insurance carrier for the Company.

On April 1, 2003, Fleming Companies, one of the Company's larger U.S.
Accounts Payable Services clients at that time, filed for Chapter 11 Bankruptcy
Reorganization. During the quarter ended March 31, 2003, the Company received
$5.5 million in payments on account from this client. On January 24, 2005, the
Company received a demand for preference payments due from the trust
representing the client. The demand stated that the trust's calculation of the
Company's preferential payments was approximately $2.9 million. The Company
disputed the claim.

On March 30, 2005, the Company was sued by the Fleming Post-Confirmation
Trust ("PCT") in a bankruptcy proceeding of the Fleming Companies in the U.S.
Bankruptcy Court for the District of Delaware to recover approximately $5.5
million of alleged preferential payments. The PCT's claims were subsequently
amended to add a claim for alleged fraudulent transfers representing
approximately $2.0 million in commissions paid to the Company with respect to
claims deducted from vendors that the client subsequently re-credited to the
vendors. The Company believes that it has valid defenses to the PCT's claims in
the proceeding. In December 2005, the PCT offered to settle the case for $2
million. The Company countered with an offer to waive its bankruptcy claim and
to pay the PCT $250,000. The PCT rejected the Company's settlement offer and the
parties have agreed to enter into settlement mediation.

In the normal course of business, the Company is involved in and subject to
other claims, contractual disputes and other uncertainties. Management, after
reviewing with legal counsel all of these actions and proceedings, believes that
the aggregate losses, if any, will not have a material adverse effect on the
Company's financial position or results of operations.

INDEMNIFICATION AND CONSIDERATION CONCERNING CERTAIN FUTURE ASSET
IMPAIRMENT ASSESSMENTS

The Company's Meridian unit and an unrelated German concern named Deutscher
Kraftverkehr Euro Service GmbH & Co. KG ("DKV") are each a 50% owner of a joint
venture named Transporters VAT Reclaim Limited ("TVR"). Since neither owner,
acting alone, has majority control over TVR, Meridian accounts for its ownership
using the equity method of accounting. DKV provides European truck drivers with
a credit card that facilitates their fuel purchases. DKV distinguishes itself

PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

from its competitors, in part, by providing its customers with an immediate
advance refund of the value-added taxes ("VAT") they pay on their fuel
purchases. DKV then recovers the VAT from the taxing authorities through the TVR
joint venture. Meridian processes the VAT refund on behalf of TVR for which it
receives a percentage fee. In April 2000, TVR entered into a financing facility
with Barclays Bank plc ("Barclays"), whereby it sold the VAT refund claims to
Barclays with full recourse. Effective August 2003, Barclays exercised its
contractual rights and unilaterally imposed significantly stricter terms for the
facility, including markedly higher costs and a series of stipulated cumulative
reductions to the facility's aggregate capacity. TVR repaid all amounts owing to
Barclays during March 2004 and terminated the facility during June 2004. As a
result of changes to the facility occurring during the second half of 2003,
Meridian began experiencing a reduction in the processing fee revenues it
derives from TVR as DKV previously transferred certain TVR clients to another
VAT service provider. As of December 31, 2004, the transfer of all DKV customer
contracts from TVR to another VAT service provider was completed. TVR will
continue to process existing claims and collect receivables and pay these to
Meridian and DKV in the manner agreed between the parties.

Meridian agreed with DKV to commence an orderly and managed closeout of the
TVR business. Therefore, Meridian's future revenues from TVR for processing
TVR's VAT refunds, and the associated profits therefrom, ceased in October 2004.
(Meridian's revenues from TVR were $0.5 million and $2.3 million for the years
ended December 31, 2004 and 2003, respectively.) As TVR goes about the orderly
wind-down of its business in future periods, it will be receiving VAT refunds
from countries, and a portion of such refunds will be paid to Meridian in
liquidation of its investment in TVR. If there is a marked deterioration in
TVR's future financial condition from its inability to collect refunds from
countries, Meridian may be unable to recover some or all of its long-term
investment in TVR, which totaled $2.0 million at June 30, 2006 exchange rates
and $1.9 million at December 31, 2005 exchange rates. This investment is
included in Other Assets on the Company's accompanying Consolidated Balance
Sheets.

BANK GUARANTEE

In July 2003, Meridian entered into a deposit guarantee (the "Guarantee")
with Credit Commercial de France ("CCF") in the amount of 4.5 million Euros
($5.7 million at December 31, 2003 exchange rates). The Guarantee served as
assurance to VAT authorities in France that Meridian will properly and
expeditiously remit all French VAT refunds it receives in its capacity as
intermediary and custodian to the appropriate client recipients. The Guarantee
was secured by amounts on deposit with CCF equal to the amount of the Guarantee.
The annual interest rate earned on this money is 1.0% for 2004. On November 30,
2004, the Guarantee was replaced with a 3.5 million Euro letter of credit. In
May 2005, the Guarantee was reduced to 2.5 million Euros and on September 30,
2005 the standby letter of credit was replaced with a 2.5 million Euro ($3.2
million at June 30, 2006 exchange rates) cash deposit with CCF.

INDUSTRIAL DEVELOPMENT AUTHORITY GRANTS

During the period of May 1993 through September 1999, Meridian received
grants from the Industrial Development Authority of Ireland ("IDA") in the sum
of 1.4 million Euros ($1.8 million at June 30, 2006 exchange rates). The grants
were paid primarily to stimulate the creation of 145 permanent jobs in Ireland.
As a condition of the grants, if the number of permanently employed Meridian
staff in Ireland falls below 145, then the grants are repayable in full. This
contingency expires on September 23, 2007. Meridian currently employs 206
permanent employees in Dublin, Ireland. The European Union ("EU") has currently
proposed legislation that will remove the need for suppliers to charge VAT on
the supply of services to clients within the EU. The effective date of the
proposed legislation is currently unknown. Management estimates that the
proposed legislation, if enacted as currently drafted, would eventually have a
material adverse impact on Meridian's results of operations from its value-added
tax business. If Meridian's results of operations were to decline as a result of
the enactment of the proposed legislation, it is possible that the number of
permanent employees that Meridian employs in Ireland could fall below 145 prior
to September 2007. Should such an event occur, the full amount of the grants
previously received by Meridian will need to be repaid to IDA. However,
management currently estimates that any impact on employment levels related to a
possible change in the EU legislation will not be realized until after September
2007, if ever. As any potential liability related to these grants is not
currently determinable, the Company's accompanying Consolidated Statements of
Operations do not include any expense related to this matter. Management is
monitoring this situation and if it appears probable Meridian's permanent staff

PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

in Ireland will fall below 145 and that grants will need to be repaid to IDA,
Meridian will be required to recognize an expense at that time. This expense
could be material to Meridian's results of operations.

RETIREMENT OBLIGATIONS

The July 31, 2005 retirements of the Company's former Chairman, President
and CEO, John M. Cook, and the Company's former Vice Chairman, John M. Toma,
resulted in an obligation to pay retirement benefits of $7.6 million (present
value basis) to be paid in monthly cash installments principally over a
three-year period, beginning February 1, 2006. Charges of $3.9 million, $1.4
million and $2.3 million had been accrued in 2005, 2004 and 2003 and prior
years, respectively, related to these retirement obligations.

The March 16, 2006 amended severance agreements with Messrs. Cook and Toma
call for total cash payments of $7.0 million. The cash payments to Mr. Cook
began with a payment of $275,621 in April 2006 and will continue at $91,874 per
month for 57 months. The cash payments to Mr. Toma began with a payment of
$93,894 in April 2006 and will continue at $31,298 per month for 45 months.
Additionally, under the amended separation agreements, beginning on or about
February 1, 2007, the Company will reimburse Mr. Cook and Mr. Toma, until each
reaches the age of 80, for the cost of health insurance for them and their
respective spouses, provided that the reimbursement shall not exceed $25,000 per
year (subject to CPI adjustment) for Mr. Cook and $20,000 per year (subject to
CPI adjustment) for Mr. Toma. Finally, in April 2006, the Company reimbursed
$150,000 to CT Investments, LLC, to defray the fees and expenses of the legal
counsel and financial advisors to Messrs. Cook and Toma in connection with the
negotiation of amendments to their respective severance agreements. The
Company's entering into the amendments to the severance agreements with Messrs.
Cook and Toma was a condition precedent to the closing of the Company's exchange
offer restructuring its bondholder debt and the closing on its replacement
credit facility, both of which took place on March 17, 2006.

RESTRUCTURING OBLIGATIONS

On August 19, 2005, the Company announced that it had taken the initial
step in implementing an expense restructuring plan, necessitated by the
Company's declining revenue trend over the previous two and one-half years.
Revenues for the years 2002, 2003, 2004 and 2005 were $439.7 million, $367.4
million, $350.6 million and $292.2 million, respectively. With revenues
decreasing in 2003, 2004 and 2005, the Company's selling, general and
administrative expenses had increased as a percentage of revenue in each period
(33.6%, 35.5% and 38.1%, respectively). The expense restructuring plan
encompasses exit activities, including reducing the number of clients served,
reducing the number of countries in which the Company operates, and terminating
employees.

On September 30, 2005, the Company's Board of Directors approved the
completed restructuring plan and authorized implementation of the plan. The
Company expects that the implementation of the operational restructuring plan
will result in severance related and other charges of approximately $14.6
million. As of December 31, 2005, the Company had recorded an $11.6 million
charge related to the restructuring, $10.0 million of which was for severance
pay and benefits costs and $1.6 million of which related to early termination of
operating leases. Accordingly, pursuant to SFAS No. 112, Employers' Accounting
for Postemployment Benefits, and SFAS No. 88, Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits, the Company recorded expense for severance pay and
benefits of $10.0 million in the year ended December 31, 2005. As of December
31, 2005 the Company had paid out approximately $2.8 million of severance and as
of June 30, 2006 a total of $7.0 million of severance had been paid. The Company
anticipates that the majority of the remaining severance payments will be paid
out during the remainder of 2006. The $14.6 million estimate for the
restructuring plan includes $3.0 million of operating lease exit costs that the
Company expects to incur. As of December 31, 2005, the Company had accrued $1.2
million of early termination costs in accordance with SFAS No. 146, Accounting
for Costs Associated with Exit or Disposal Activities. The Company also recorded
leasehold improvement impairment charges of $0.4 million related to these leases
in 2005. The Company did not record any new charges for either early termination
costs or impairment charges during the six months ended June 30, 2006. The
Company is presently evaluating which, if any, additional operating leases to
exit as part of the restructuring plan.

PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The following table summarizes activity associated with the workforce
reduction and restructuring liabilities (in thousands) as of June 30, 2006:

ACCOUNTS CORPORATE
PAYABLE MERIDIAN SUPPORT TOTAL
Balance as of December 31, 2005 $ 2,567 $ 383 $ 5,266 $ 8,216
Severance accruals - 1st quarter 2006 (123) -- 531 408
Cash payments - 1st quarter 2006 (825) (38) (2,215) (3,078)
---------- ---------- ---------- ------------

Balance as of March 31, 2006 $ 1,619 $ 345 $ 3,582 $ 5,546
Severance accruals - 2nd quarter 2006 1,580 -- -- 1,580
Cash payments - 2nd quarter 2006 (563) -- (1,089) (1,652)
---------- ---------- ---------- ------------

Balance as of June 30, 2006 $ 2,636 $ 345 $ 2,493 $ 5,474
========== ========== ========== ============

INCOME TAXES

The Company has substantial historical net operating losses, credit
carryforwards and certain built-in losses for U.S. Federal Income Tax purposes.
The Company has completed an analysis and has determined that an ownership
change as defined in Section 382 of the Internal Revenue Code occurred
coincident with the exchange offering. As a result, the limitations imposed by
Section 382 of the Internal Revenue Code will significantly restrict the
Company's ability to fully utilize its U.S. tax losses and certain other tax
benefits to offset future taxable income.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

INTRODUCTION

The Company's revenues are based on specific contracts with its clients.
Such contracts generally specify: (a) time periods covered by the audit; (b)
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 liability overpayment claims
identified.

In addition to contractual provisions, most clients also establish specific
procedural guidelines that the Company must satisfy prior to submitting claims
for client approval. These guidelines are unique to each client and impose
specific requirements on the Company, such as adherence to vendor interaction
protocols, provision of advance written notification to vendors of forthcoming
claims, securing written claim validity concurrence from designated client
personnel and, in limited cases, securing written claim validity concurrence
from the involved vendors. Approved claims are processed by clients and are
generally realized by a cash payment or by a reduction to the vendor's accounts
payable balance.

The Company generally recognizes revenue on the accrual basis except with
respect to its Meridian VAT refunds business ("Meridian") and 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 the client has 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
existing contractual arrangement between the Company and the client exists; (b)
services have been rendered; (c) the fee billed to the client is fixed or
determinable; and (d) collectability is reasonably assured. In certain limited
circumstances, the Company will invoice a client prior to meeting all four of
these criteria. In those instances, revenue is deferred until all of the
criteria are met. Historically, there has been a certain amount of revenue that,
even though meeting the requirements of the Company's revenue recognition
policy, relates to underlying claims ultimately rejected by the Company's
clients' vendors. In that case, the Company's clients may request a refund of
such amount. The Company records such refunds as a reduction of revenue.

The contingent fee based VAT Reclaim division of the Company's Meridian
business, along with certain other international Accounts Payable Services
units, recognize revenue on the cash basis in accordance with guidance issued by
the Securities and Exchange Commission in Staff Accounting Bulletin ("SAB") No.
104, Revenue Recognition. Based on the guidance in SAB No. 104, Meridian defers
recognition of contingent fee revenues to the accounting period in which cash is
both received from the foreign governmental agencies reimbursing the value-added
tax ("VAT") claims and transferred to Meridian's clients.

The Company derives an insignificant amount of revenues on a
"fee-for-service" basis where revenue is based upon a flat fee, or fee per hour,
or fee per unit of usage. The Company recognizes revenue for these types of
services as they are provided and invoiced and when the revenue recognition
criteria described above in clauses (a) through (d) have been satisfied.

AUDIT CONTRACT FOR STATE OF CALIFORNIA MEDICARE

On March 29, 2005, the Company announced that the Centers for Medicare &
Medicaid Services ("CMS"), the federal agency that administers the Medicare
program, awarded the Company a contract to provide recovery audit services for
the State of California's Medicare spending. The three-year contract was
effective on March 28, 2005. To fully address the range of payment recovery
opportunities, the Company has sub-contracted with Concentra Preferred Systems,
the nation's largest provider of specialized cost containment services for the
healthcare industry, which will add its clinical experience to the Company's
expertise in recovery audit services.

The contract was awarded as part of a demonstration program by CMS to
recover overpayments through the use of recovery auditing. The Company began to
incur capital expenditures and employee compensation costs related to this

contract in 2005. Such capital expenditures and employee compensation costs will
continue to be incurred during 2006 as the Company continues to build this
business. The Company believes this contract represents a large opportunity in
the healthcare recovery audit sector and could have a beneficial impact on the
Company's future earnings. The amount of claims submitted to Medicare affiliated
contractors for processing (and the corresponding amount of potential future
revenues) increased substantially during the quarter.

HIRING OF N. LEE WHITE

On June 14, 2006, the Company entered into an employment agreement with N.
Lee White, under which Mr. White will serve as the Company's Executive Vice
President - U.S., beginning June 19, 2006. Mr. White succeeds James L. Benjamin,
who served in that position since 2002.

Mr. White is responsible for all U.S. operations and sales activities.
Prior to joining PRG-Schultz, Mr. White served as Chief Operating Officer and a
member of the Board of Managers with Zyman Group, a strategic growth strategies
consulting company, and was President, Chief Operating Officer and a member of
the Board of Directors of CommerceQuest, a business process management company.
Mr. White has held senior management positions with professional services firms
including AnswerThink, KPMG, and IBM. He earned an M.B.A. from the University of
Chicago Graduate School of Business and holds a B.A. from Dartmouth College.

OPERATIONAL RESTRUCTURING

On September 30, 2005, the Company's Board of Directors approved the
completed restructuring plan and authorized implementation of the plan. Almost
all of the planned savings are expected to come in the area of selling, general
and administrative expenses and only a small percentage of the Company's auditor
staff will be directly impacted by the reductions. The Company expects that the
implementation of the operational restructuring plan will result in severance
related and other charges of approximately $14.6 million. As of December 31,
2005, the Company had recorded an $11.6 million charge related to the
restructuring, $10.0 million of which was for severance pay and benefits costs
and $1.6 million of which related to early termination of operating leases.
Accordingly, pursuant to SFAS No. 112, Employers' Accounting for Postemployment
Benefits, and SFAS No. 88, Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits, the
Company recorded expense for severance pay and benefits of $10.0 million in the
year ended December 31, 2005. As of December 31, 2005 the Company had paid out
approximately $2.8 million of severance and as of June 30, 2006 a total of $7.0
million of severance had been paid. The Company anticipates that the majority of
the remaining severance payments will be paid out during the remainder of 2006.
The $14.6 million estimate for the restructuring plan includes $3.0 million of
operating lease exit costs that the Company expects to incur. As of December 31,
2005, the Company had accrued $1.2 million of early termination costs in
accordance with SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities. The Company also recorded leasehold improvement impairment
charges of $0.4 million related to these leases in 2005. The Company did not
record any new charges for either early termination costs or impairment charges
during the six months ended June 30, 2006. The Company is presently evaluating
which, if any, additional operating leases to exit as part of the restructuring
plan.

CRITICAL ACCOUNTING POLICIES

Except as set forth below with respect to FAS 123(R), 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, 2005. 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, 2005. 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.

Prior to January 1, 2006, the Company accounted for stock-based
compensation, as permitted by SFAS No. 123, "Accounting for Stock-Based
Compensation," under the intrinsic value method described in APB Opinion No. 25,
"Accounting for Stock Issued to Employees," 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
Opinion No. 25 guidance, no stock-based compensation expense was recognized for
the six month period ended June 30, 2005 except for compensation amounts
relating to grants of shares of non-vested common 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) are
estimated using the Monte Carlo simulations as of their date of grant. 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.

NEW ACCOUNTING STANDARDS

for fiscal years beginning after December 15, 2006. The Company is currently
assessing and evaluating the impact this Interpretation will have on its
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 SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Revenues............................................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues..................................... 72.4 65.2 71.5 65.0
------------ ------------ ------------ ------------
Gross margin.................................... 27.6 34.8 28.5 35.0

Selling, general and administrative expenses......... 22.5 40.0 23.4 39.0
Operational restructuring expenses 2.4 -- 1.5 --
------------ ------------ ------------ ------------
Operating income (loss)........................... 2.7 (5.2) 3.6 (4.0)

Interest expense, net................................ 6.6 2.7 5.2 2.5
Loss on financial restructuring...................... -- -- 7.7 --
------------ ------------ ------------ ------------
Loss from continuing operations before income
taxes and discontinued operations............. (3.9) (7.9) (9.3) (6.5)
Income taxes......................................... 0.5 0.5 0.8 0.7
------------ ------------ ------------ ------------
Loss from continuing operations before
discontinued operations....................... (4.4) (8.4) (10.1) (7.2)
Earnings (loss) from discontinued operations......... (1.2) 0.4 (0.6) (0.1)
------------ ------------ ------------ ------------

Net loss.......................................... (5.6)% (8.0)% (10.7)% (7.3)%
============ ============ ============ ============

The Company has two reportable operating segments, the Accounts Payable
Services segment and Meridian VAT Reclaim.

THREE AND SIX MONTHS ENDED JUNE 30, 2006 COMPARED TO THE CORRESPONDING PERIODS
OF THE PRIOR YEAR

ACCOUNTS PAYABLE SERVICES

Revenues. Accounts Payable Services revenues for the three months ended
June 30, 2006 and 2005 were as follows (in millions):

THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2006 2005 2006 2005
----------- ----------- ----------- ------------
Domestic Accounts Payable Services revenues:
Retail..................................... $ 31.9 $ 35.7 $ 62.7 $ 71.2
Commercial................................. 3.7 4.8 7.6 9.5
------------ ----------- ----------- ------------
35.6 40.5 70.3 80.7
International Accounts Payable Services revenues... 19.5 25.3 40.5 50.0
------------ ----------- ----------- ------------
Total Accounts Payable Services revenues... $ 55.1 $ 65.8 $ 110.8 $ 130.7
============ =========== =========== ============

For the three and six months ended June 30, 2006 compared to the three and
six months ended June 30, 2005, the Company experienced a decline in total
Accounts Payable Services revenues of 16.3% and 15.2%, respectively. This trend
is consistent with what the Company has been experiencing over the past several
years and was primarily attributable to a general reduction in revenue from
certain large audits because fewer claims were processed as a result of improved
client processes. Revenues decreased as the Company's clients developed and
strengthened their own internal audit capabilities as a substitute for the

Company's services. Further, the Company's clients made fewer transaction errors
as a result of the training and methodologies provided by the Company as part of
the Company's accounts payable recovery process. These trends are expected to
continue for the foreseeable future, and as a result, revenues from the Accounts
Payable Services are expected to continue to decline for the foreseeable future.

Revenues from the Company's domestic commercial Accounts Payable Services
clients declined during the three and six months ended June 30, 2006 as compared
to the same period of 2005. The Company believes the market for providing
disbursement audit services (which typically entail acquisition from the client
of limited purchase data and an audit focus on a select few recovery categories)
to commercial entities in the United States is reaching maturity with fewer
audit starts and lower fee rates due to increasing pricing pressures. In
response to the decline in performance for the commercial business, the Company
has begun to intentionally reduce the number of commercial clients serviced
based on profitability, and this trend is expected to continue. As a result of
the foregoing, revenues from domestic commercial Accounts Payable Services are
expected to continue to decline for the foreseeable future.

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 COR
support bases for domestic retail and domestic commercial operations are not
separately distinguishable and are not evaluated by management individually. 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 months and six months ended
June 30, 2006 and 2005 were as follows (in millions):

THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2006 2005 2006 2005
----------- ----------- ----------- ------------
Domestic Accounts Payable Services COR................ $ 22.7 $ 25.6 $ 45.6 $ 50.4
International Accounts Payable Services COR........... 16.2 18.1 32.2 35.6
------------ ----------- ----------- ------------
Total Accounts Payable Services COR................. $ 38.9 $ 43.7 $ 77.8 $ 86.0
============ =========== =========== ============

The dollar decrease in cost of revenues for the Accounts Payable Services
was primarily due to lower revenues, during the three and six months ended June
30, 2006 when compared to the same periods of the prior year. On a percentage
basis, COR as a percentage of revenues from the Accounts Payable services
increased to 70.6% for the three months ended June 30, 2006, up from 66.4% in
2005. COR as a percentage of revenues increased to 70.2% for the six months
ended June 30, 2006 as compared to 65.8% for the same period of the prior year.
The percentage variance is primarily related to the fixed versus variable
expense components within this category.

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. The
SG&A support bases for domestic retail and domestic commercial operations are
not separately distinguishable and are not evaluated by management individually.
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 six months ended June 30,
2006 and 2005 were as follows (in millions):

THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2006 2005 2006 2005
----------- ----------- ----------- ------------
Domestic Accounts Payable Services.................... $ 5.7 $ 8.2 $ 12.2 $ 17.6
International Accounts Payable Services............... 2.0 8.2 5.6 16.1
------------ ----------- ----------- ------------
Total Accounts Payable Services SG&A................ $ 7.7 $ 16.4 $ 17.8 $ 33.7
============ =========== =========== ============

On a dollar basis, for the three and six months ended June 30, 2006, SG&A
expenses decreased by $8.7 million or 53.0% and $15.9 million or 47.2%
respectively for the Company's Accounts Payable Services operations, when
compared to the same periods of 2005. This reduction is primarily related to the
Company's 2005 operational restructuring plan. When compared on a percentage to
revenue basis, SG&A for the three months ended June 30, 2006 was 14.0% as
compared to 24.9% in 2005. SG&A as a percentage of revenue for the six months
ended June 30, 2006 was 16.1% as compared to 25.8% in 2005.

MERIDIAN

Meridian's operating income for the three and six months ended June 30,
2006 and 2005 was as follows (in millions):

THREE MONTHS ENDED JUNE SIX MONTHS ENDED
30 JUNE 30
-------------------------- --------------------------
2006 2005 2006 2005
----------- ----------- ---------- ------------
Revenues......................................... $ 10.2 $ 12.4 $ 20.0 $ 22.6
Cost of revenues................................. 8.3 7.3 15.7 13.6
Selling, general and administrative expenses..... 1.0 1.8 1.9 3.0
----------- ----------- ---------- ------------
Operating income.............................. $ 0.9 $ 3.3 $ 2.4 $ 6.0
=========== =========== ========== ============

Revenues. Meridian recognizes revenue in its contingent fee based VAT
reclaim operations on the cash basis in accordance with SAB No. 104. Based on
the guidance in SAB No. 104, Meridian defers recognition of revenues to the
accounting period in which cash is both received from the foreign governmental
agencies reimbursing VAT claims and transferred to Meridian's clients. Since
Meridian has minimal influence over when the foreign governmental agencies make
their respective VAT reimbursement payments, Meridian's revenues can vary
markedly from period to period.

Revenue generated by Meridian decreased by $2.2 million for the three
months ended June 30, 2006 when compared to the same period of 2005. Fee income
on VAT refunds decreased by $2.7 million for the three months ended June 30,
2006 when compared to the same period of 2005 due to the timing of refunds from
local VAT authorities. However, the decrease in fee income was partially offset
by an increase in revenue as a result of a $0.3 million benefit from exchange
rate impact related to the strengthening of the Euro, Meridian's functional
currency, to the U.S. dollar and a $0.3 million increase in revenues from new
clients attributed to initiatives to develop new service offerings. Meridian is
in the process of developing a number of new business services such as fee for
work basis, accounts payable and employee expense processing for third parties,
tax return processing for governmental departments, and Local Agent Services
Division ("LASD") opportunities. The revenues from these services totaled $1.3
million for the quarter ended June 30, 2006 as compared to $1.1 million for the
quarter ended June 30, 2005. Revenue from such new business services is expected
to continue to increase in the second half of 2006.

COR. COR consists principally of 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 offices, travel
and entertainment, telephone, utilities, maintenance and supplies and clerical
assistance. COR for the Company's Meridian operations are largely fixed and, for
the most part, will not vary significantly with changes in revenue.

COR for the three and six months ended June 30, 2006 compared to the same
period of the prior year, on a dollar basis increased primarily due to increased
headcount in the Dublin processing center, increases in commissions paid to
joint venture partners, and consulting and IT costs related to Meridian's new
business services.

SG&A. Meridian's SG&A expenses include the expenses of marketing
activities, administration, professional services, property rentals and currency
translation. Due to the relatively fixed nature of Meridian's SG&A expenses,
these expenses as a percentage of revenues can vary markedly period to period
based on fluctuations in revenues.

On a dollar basis, the decrease in Meridian's SG&A for the three and six
months ended June 30, 2006 compared to 2005 was primarily related to lower
expenses for professional fees related to the new business development in 2006
as compared to 2005.

CORPORATE SUPPORT

SG&A. Corporate Support SG&A expenses include the expenses of sales and
marketing activities, information technology services associated with 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 Corporate Support SG&A expenses, these
expenses as a percentage of revenues can vary markedly period to period based on
fluctuations in revenues. Corporate support represents the unallocated portion
of corporate SG&A expenses not specifically attributable to Accounts Payable
Services or Meridian and totaled the following for the three and six months
ended June 30, 2006 and 2005 (in millions):

On a dollar basis, Corporate Support SG&A expenses for the three and six
months ended June 30, 2006, decreased by $7.1 million or 54.2% and $12.3 million
or 53.0%, respectively, for the Corporate Support operations, when compared to
the same period of 2005. This reduction is primarily related to the Company's
2005 operational restructuring plan. When compared on a percentage basis to
consolidated revenue, for the three months ended June 30, 2006 Corporate Support
SG&A was 9.2% as compared to 16.8% for the three months ended June 30, 2005.
SG&A as a percentage of consolidated revenue for the six months ended June 30,
2006 was 8.3% as compared to 15.1% for the same period of 2005.

RESTRUCTURING EXPENSE

The restructuring expense for the three and six months ended June 30, 2006
and 2005 was as follows (in millions):

DISCONTINUED OPERATIONS

On July 17,,2006, the Company completed the sale of its Airline business to
a former employee. During the three-month and six-month periods ended June 30,
2006, the Company recognized losses of $0.2 million and $0.4 million,
respectively, relating to the anticipated sale of the Airline business unit.

Earnings (loss) from discontinued operations for the three-month and
six-month periods ended June 30, 2006 and 2005 as reported in the accompanying
Condensed Consolidated Statements of Operations includes the gains and losses
related to the sales of discontinued business units as well as operating losses
related to the operations of these discontinued units. The net tax effect on
earnings (loss) from discontinued operations is not significant.

OTHER ITEMS

Debt Issuance Cost. In connection with the Company's completed financial
restructuring and related transactions, the Company incurred professional fees
and other transaction costs of approximately $7.7 million which has been
capitalized and will be amortized over the term of the new indebtedness.

Interest Expense. Net interest expense was $4.3 million and $2.1 million
for the three months ended June 30, 2006 and 2005, respectively. Interest
expense was $6.8 million and $3.9 million for the six months ended June 30, 2006
and 2005, respectively. The Company's interest expense for the periods ended
through March 31, 2006 was primarily comprised of interest expense and
amortization of the discount related to the Company's convertible notes due
November 2006 and interest on borrowings outstanding under the prior senior bank
credit facility. Interest expense for the three months ended June 30, 2006 was
primarily comprised interest expense and amortization related to the new senior
notes, senior convertible notes, and term loan; all of which were originated on
March 17, 2006.

Net interest expense will increase significantly as a result of the
Company's recently completed financial restructuring. The exchange of the
convertible notes due November 2006 for the new senior convertible notes and new
senior notes will initially result in additional annual interest expense of
approximately $7.7 million. Such amount will increase in time as a result of the
amortization of note discounts. Also, the Company has the option to pay interest
on the new senior convertible notes in cash or in kind. If paid in kind, further
increases in interest expense will occur. The Company also expects to incur
additional interest expense under its new senior secured credit facility.

Income Tax Expense (Benefit). The provisions for income taxes for the three
months and six months ended June 30, 2006 and 2005 consist of federal, state and
foreign income taxes at the Company's effective tax rate. For the three and six
months ended June 30, 2006 the Company's tax expense was $0.3 million and $1.0
million, respectively, representing effective tax rates of negative 13.4% and
negative 8.1%. For the three months and six months ended June 30, 2005, tax
expense was $0.4 million and $1.1 million, respectively, representing effective
tax rates of negative 6.7% and negative 11.0%. The negative tax rates for all
periods primarily results from the recognition of taxes on foreign taxable
income combined with the non-recognition of tax benefits on domestic losses.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by (used in) operating activities was $7.5 million for
the six months ended June 30, 2006, as compared to $(9.0) million for the prior
year period. Cash provided by operating activities during the six months ended
June 30, 2006 was primarily the result of the Company's net loss being offset by
the non-cash charge related to the financial restructuring and a higher focus on
working capital.

Net cash used in investing activities was $(0.5) million for the first six
months of 2006 and $(3.5) million in the first six months of 2005. Cash used in
investing activities during the first six months of 2006 and 2005 were primarily
related to capital purchases.

Net cash provided by (used in) financing activities was $(0.8) million in
the first six months of 2006 versus $13.3 million for the first six months of
2005. The net cash used in financing activities during the six months ended June
30, 2006 related to the refinancing of the 4.75% Subordinated Convertible Notes
and the payoff of the Bridge Loan. The net cash provided in the six months ended
June 30, 2005 related primarily to net borrowings on the Company's revolving
credit facility.

Net cash provided by (used in) discontinued operations was $(0.04) million
and $0.1 million during the six months ended June 30, 2006 and 2005,
respectively. Net cash from discontinued operations during the first six months
ended June 30, 2006 included a $0.4 million receipt of a payment related to the
sale of the Channel Revenue business and a $0.3 million receipt of a payment
related to a portion of the revenue-based royalty from the former Logistics
Management Services segment that was sold in October 2001. Net cash from
discontinued operations during the first six months ended June 30, 2005 included
a receipt of a $0.2 million payment related to a portion of the revenue-based
royalty from the former Logistics Management Services segment that was sold in
October 2001.

As of June 30, 2006, the Company had cash and cash equivalents of $18.6
million, and no borrowings against the credit facility. At June 30, 2006, total
debt included a $25.0 million variable rate term loan due 2010, $0.5 million of
the 4.75% Subordinated Convertible Notes due 2006, $51.6 million in principal
amount of 11.0% Senior Notes Due 2011, and $59.8 million in principal amount of
10.0% Senior Convertible Notes Due 2011. In addition, the Company had 117,417
shares of Series A Convertible Preferred stock outstanding with an aggregate
liquidation preference of $14.5 million that is due in 2011.

Management believes that the Company will have sufficient borrowing
capacity and cash generated from operations to fund its capital and operational
needs for at least the next twelve months; however, current projections reflect
that the Company's core accounts payable business will continue to decline and
the Company's new senior secured credit facility requires the Company to comply
with specific financial ratios and other performance covenants. Therefore, the
Company must successfully implement management's cost reduction plan and grow
its other business lines in order to stabilize and increase revenues and improve
profitability.

FINANCIAL RESTRUCTURING

On October 19, 2005 the Board of Directors of the Company formed a Special
Restructuring Committee to oversee the efforts of the Company, with the
assistance of its financial advisor, Rothschild Inc., to restructure the
Company's financial obligations, including its obligations under its convertible
notes due November 2006, and to improve the Company's liquidity. The Company
successfully completed the financial restructuring on March 17, 2006.

Pursuant to the financial restructuring, the Company exchanged:

o $400 principal amount of its 11.0% Senior Notes Due 2011, plus an
additional amount of principal equal to accrued and unpaid interest
due on the existing notes held by the tendering holders;

o $480 principal amount of its 10.0% Senior Convertible Notes Due 2011
convertible into new 10.0% Senior Series B Convertible Participating
Preferred Stock and/or common stock; and

o one share, $120 liquidation preference, of its 9.0% Senior Series A
Convertible Participating Preferred Stock convertible into common
stock;

for each $1,000 principal amount of outstanding 4.75% Convertible Subordinated
Notes due November 2006.

Approximately 99.6% of the aggregate $125 million outstanding convertible
notes were tendered for exchange and accepted by the Company.

The material terms of these new securities include:

o The new senior notes bear interest at 11%, payable semiannually in
cash, and are callable at 104% of face in year 1, 102% in year 2, and
at par in years 3 through 5.

o The new senior convertible notes bear interest at 10%, payable
semiannually in cash or in kind, at the option of the Company. The new
senior convertible notes are convertible at the option of the holders,
upon satisfaction of certain conditions, (and in certain
circumstances, at the option of the Company) into shares of new Series
B preferred stock having a 10% annual dividend and a liquidation
preference equal to the principal amount of notes converted. Dividends
on the new Series B preferred stock may be paid in cash or in kind, at
the option of the Company. Each $1,000 of face amount of such notes
are convertible into approximately 2.083 shares of new Series B
convertible preferred stock; provided that upon the occurrence of
certain events, including approval by the shareholders of an amendment
to the Company's Articles of Incorporation to allow sufficient
additional shares of common stock to be issued for the conversion,
they will be convertible only into common stock at a rate of
approximately 1,538 shares per $1,000 principal amount. The new Series
B preferred stock is convertible at the option of the holders into
shares of common stock at the rate of $0.65 of liquidation preference
per share of common stock, subject to certain conditions, including
approval by the shareholders of an amendment to the Company's Articles
of Incorporation to allow sufficient additional shares of common stock
to be issued for the conversion.

o The Series A and Series B preferred stock have the right to vote with
the Company's common stock on most matters requiring shareholder
votes. The Company has the right to redeem the new senior convertible
notes at par at any time after repayment of the new senior notes. The
Company also has the right to redeem the new Series A and Series B
preferred stock at the stated liquidation preference at any time after
repayment of the new senior notes and the new senior convertible
notes.

o Both the new senior notes and the new senior convertible notes mature
on the fifth anniversary of issuance. The new Series A preferred stock
must be redeemed on the fifth anniversary of issuance. The new series
B preferred stock must be redeemed on the fifth anniversary of
issuance under certain conditions.

Immediately following the closing of the financial restructuring
transactions, the existing common shareholders owned approximately 54% of the
equity of the Company. If all the new senior convertible notes had converted
into Series B preferred stock immediately on completion of the financial
restructuring, the existing common shareholders would have owned approximately
30% of the equity of the Company (excluding any potential future dilution from
the Company's management incentive plan).

As a part of its financial restructuring, the Company also entered into a
new senior secured credit facility with Ableco LLC ("Ableco") and The
CIT/Group/Business Credit, Inc., a portion of which is being syndicated to the
Company's prior bridge financing lenders, Petrus Securities L.P. and Parkcentral
Global Hub Limited (collectively, the "Petrus Entities") and Blum Strategic
Partners II GmbH & Co. K.G. and Blum Strategic Partners II, L.P. (collectively,
the "Blum Entities"). An affiliate of the Blum Entities was a member of the Ad
Hoc Committee of holders of the Company's convertible notes due November 2006,
with the right to designate one member of the Company's Board of Directors, and
together with its affiliates, the Company's largest shareholder. The new credit
facility includes (1) a $25.0 million term loan, and (2) a revolving credit
facility that provides for revolving loan borrowings of up to $20 million. No
borrowings are currently outstanding under the revolving credit facility.

PRG-Schultz USA, Inc., the Company's direct wholly-owned subsidiary (the
"borrower"), is the primary borrower under the new senior secured credit
facility, and the Company and each of its other existing and subsequent acquired
or organized direct and indirect domestic wholly-owned subsidiaries have
guaranteed the new facility. The borrower's and all of the Company's other
subsidiaries' obligations under the new senior secured credit facility are

secured by liens on substantially all of the Company's assets (including the
stock of our domestic subsidiaries and two-thirds of the stock of certain of our
foreign subsidiaries).

The new senior secured credit facility will expire on the fourth
anniversary of the closing of the exchange offering. The term loan under the new
senior secured credit facility will amortize with quarterly payments beginning
on the first anniversary of the closing date of $250,000 per quarter for the
second year of the facility, and $500,000 per quarter for the third and fourth
years of the facility, with the balance due at maturity on the fourth
anniversary of closing.

The term loan under the new senior secured credit facility may be repaid at
the Company's option at any time; provided, that any such pre-payment in the
first year shall be subject to a prepayment penalty of 3.0% of the principal
amount pre-paid, and pre-payments in the second year shall be subject to a
pre-payment penalty of 2.0% of the principal amount pre-paid. The term loan may
be pre-paid at any time following the 2nd anniversary of the closing date
without penalty. The new senior secured credit facility also provides for
certain mandatory repayments, including a portion of our consolidated excess
cash flow (which will be based on an adjusted EBITDA calculation), sales of
assets and sales of certain debt and equity securities, in each case subject to
certain exceptions and reinvestment rights.

The Company's ability to borrow revolving loans under the new senior
secured credit facility is limited to a borrowing base of a percentage of the
Company's eligible domestic receivables, subject to adjustments. Based on this
borrowing base calculation, the Company had approximately $16.5 million of
availability under the revolving credit facility at June 30, 2006. Through June
30, 2006, the Company had not borrowed any funds under the revolving credit
loan.

The interest on the term loan is based on a floating rate equal to the
reserve adjusted London inter-bank offered rate, or LIBOR, plus 8.5% (or, at the
Company's option, a published prime lending rate plus 5.5%). The interest rate
on outstanding revolving credit loans is based on LIBOR plus 3.75% (or, at the
Company's option, a published prime lending rate plus 1.0%). The Company will
also pay an unused commitment fee on its revolving credit facility of 0.5%. The
new senior secured credit facility also required the payment of commitment fees,
closing fees and additional expense reimbursements of approximately $1.1 million
at closing.

The new senior secured credit facility contains customary representations
and warranties, covenants and conditions to borrowing. The new senior secured
credit facility also contains a number of financial maintenance and restrictive
covenants that are customary for a facility of this type, including without
limitation (and subject to certain exceptions and qualifications): maximum
capital expenditures (to be measured annually); maximum total debt to EBITDA (to
be measured quarterly); minimum EBITDA (to be measured quarterly); minimum fixed
charge coverage ratio (to be measured quarterly); provision of financial
statements and other customary reporting; notices of litigation, defaults and
un-matured defaults with respect to material agreements; compliance with laws,
permits and licenses; inspection of properties, books and records; maintenance
of insurance; limitations with respect to liens and encumbrances, dividends and
retirement of capital stock, guarantees, sale and lease back transactions,
consolidations and mergers, investments, capital expenditures, loans and
advances, and indebtedness; compliance with pension, environmental and other
laws, operating and capitalized leases, and limitations on transactions with
affiliates and prepayment of other indebtedness.

TRANSACTION COSTS OF FINANCIAL RESTRUCTURING, INCLUDING EXCHANGE OFFER

The Company's financial advisor, Rothschild Inc., was compensated with a
monthly retainer of $0.1 million in addition to a fee of $1.5 million. In
addition, the Company incurred significant legal fees as part of the financial
restructuring. The Company paid certain expenses of the Ad Hoc Committee of
noteholders, including a monthly retainer of $0.1 million to the Committee's
financial advisor. The Company also paid the Ad Hoc Committee's legal fees and
financial advisory fees of approximately $1.0 million. In total, the Company
incurred approximately $9.7 million of transaction costs, including legal and

financial advisory fees, in connection with the exchange offer and the financial
restructuring, of which approximately $7.7 million was incurred in the first
quarter of 2006.

$10 MILLION BRIDGE LOAN

NEW SENIOR INDEBTEDNESS

The Company's prior senior credit facility with Bank of America (the
"Lender") provided for revolving credit loans up to a maximum amount of $30.0
million, limited by the Company's accounts receivable balances. The prior senior
credit facility provided for the availability of Letters of Credit subject to a
$10.0 million sub-limit. The prior senior credit facility was retired and
replaced by a new senior credit facility on March 17, 2006, in connection with
the closing the exchange offer.

As a part of its financial restructuring, the Company entered into a new
senior secured credit facility with Ableco LLC ("Ableco") and The
CIT/Group/Business Credit, Inc., a portion of which is being syndicated to the
Company's prior bridge financing lenders, Petrus Securities L.P. and Parkcentral
Global Hub Limited (collectively, the "Petrus Entities") and Blum Strategic
Partners II GmbH & Co. K.G. and Blum Strategic Partners II, L.P. (collectively,
the "Blum Entities"). An affiliate of the Blum Entities was a member of the Ad
Hoc Committee of holders of the Company's convertible notes due November 2006,
with the right to designate one member of the Company's Board of Directors, and
together with its affiliates, the Company's largest shareholder. The new credit
facility includes (1) a $25.0 million term loan, and (2) a revolving credit
facility that provides for revolving loan borrowings of up to $20 million. No
borrowings are currently outstanding under the revolving credit facility.

PRG-Schultz USA, Inc., the Company's direct wholly-owned subsidiary, is the
primary borrower under the new senior secured credit facility, and it and each
of the Company's other existing and subsequent acquired or organized direct and
indirect domestic wholly-owned subsidiaries have guaranteed the new facility.
The Company's, the borrower's and all of the Company's other subsidiaries'
obligations under the new senior secured credit facility are secured by liens on
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 term loan under the new senior secured credit facility may be repaid at
our option at any time; provided, that any such pre-payment in the first year
shall be subject to a prepayment penalty of 3.0% of the principal amount
pre-paid, and pre-payments in the second year shall be subject to a pre-payment
penalty of 2.0% of the principal amount pre-paid. The term loan may be pre-paid
at any time following the 2nd anniversary of the closing date without penalty.
The new senior secured credit facility also provides for certain mandatory
repayments, including a portion of our consolidated excess cash flow (which will
be based on an adjusted EBITDA calculation), sales of assets and sales of
certain debt and equity securities, in each case subject to certain exceptions
and reinvestment rights.

The Company's ability to borrow revolving loans under the new senior
secured credit facility is limited to a borrowing base of a percentage of its
eligible domestic receivables, subject to adjustments. Based on this borrowing
base calculation, the Company had approximately $15.0 million of availability
under the revolving credit facility at the closing of the exchange offer.
Through June 30, 2006, the Company had not borrowed any funds under the
revolving credit loan.

The interest on the term loan is based on a floating rate equal to the
reserve adjusted London inter-bank offered rate, or LIBOR, plus 8.5% (or, at the
Company's option, a published prime lending rate plus 5.5%). The interest rate
on outstanding revolving credit loans is based on LIBOR plus 3.75% (or, at the
Company's option, a published prime lending rate plus 1.0%). The Company will
also pay an unused commitment fee on the revolving credit facility of 0.5%. The
new senior secured credit facility also required the payment of the lenders'
commitment fees, closing fees and additional expense reimbursements of
approximately $1.0 million at closing.

EXECUTIVE SEVERANCE PAYMENTS

The March 16, 2006 amended severance agreements with the Company's former
Chairman, President and CEO, John M. Cook, and the Company's former Vice
Chairman, John M. Toma, call for total cash payments of $7.0 million. The cash
payments to Mr. Cook began with a payment of $275,621 in April 2006 and will
continue at $91,874 per month for 57 months. The cash payments to Mr. Toma began
with a payment of $93,894 in April 2006 and will continue at $31,298 per month
for 45 months. Additionally, under the amended separation agreements, beginning
on or about February 1, 2007, the Company will reimburse Mr. Cook and Mr. Toma,
until each reaches the age of 80, for the cost of health insurance for them and
their respective spouses, provided that the reimbursement shall not exceed
$25,000 (subject to CPI adjustment) for Mr. Cook and $20,000 (subject to CPI
adjustment) for Mr. Toma. Finally, in April 2006, the Company reimbursed
$150,000 to CT Investments, LLC, to defray the fees and expenses of the legal
counsel and financial advisors to Messrs. Cook and Toma in connection with the
negotiation of amendments to their respective severance agreements. The
Company's entering into the amendments to the severance agreements with Messrs.
Cook and Toma was a condition precedent to the closing of the Company's exchange
offer restructuring its bondholder debt and the closing on its replacement
credit facility, both of which took place on March 17, 2006.

BANKRUPTCY LITIGATION

On March 30, 2005, the Company was sued by the Fleming Post-Confirmation
Trust ("PCT") in a bankruptcy proceeding of the Fleming Companies in the U.S.
Bankruptcy Court for the District of Delaware to recover approximately $5.5
million of alleged preferential payments. The PCT's claims were subsequently
amended to add a claim for alleged fraudulent transfers representing
approximately $2.0 million in commissions paid to the Company with respect to
claims deducted from vendors that the client subsequently re-credited to the
vendors. The Company believes that it has valid defenses to the PCT's claims in
the proceeding. In early December 2005, the PCT offered to settle the case for
$2 million. The Company countered with an offer to waive its bankruptcy claim
and to pay the PCT $250,000. The PCT rejected the Company's settlement offer and
the parties have agreed to enter into settlement mediation.

OPERATIONAL RESTRUCTURING

FRENCH TAXATION SERVICES SETTLEMENT

On December 14, 2001, the Company consummated the sale of its French
Taxation Services business ("ALMA"), as well as certain notes payable due to the
Company, to Chequers Capital, a Paris-based private equity firm. In conjunction
with this sale, the Company provided the buyer with certain warranties.
Effective December 30, 2004, the Company, Meridian and ALMA (the "Parties")
entered into a Settlement Agreement (the "Agreement") pursuant to which the
Company paid a total of 3.4 million Euros on January 3, 2005 ($4.7 million at
January 3, 2005 exchange rates), to resolve the buyer's warranty claims and a
commission dispute with Meridian.

CONTINGENT OBLIGATION TO REPAY INDUSTRIAL DEVELOPMENT AUTHORITY OF IRELAND
GRANT

During the period of May 1993 through September 1999, Meridian received
grants from the Industrial Development Authority of Ireland ("IDA") in the sum
of 1.4 million Euros ($1.6 million at September 30, 2005 exchange rates). The
grants were paid primarily to stimulate the creation of 145 permanent jobs in
Ireland. As a condition of the grants, if the number of permanently employed
Meridian staff in Ireland falls below 145 prior to September 23, 2007, the date
the contingency expires, then the grants are repayable in full. Meridian
currently employs 206 permanent employees in Dublin, Ireland. The European Union
("EU") has currently proposed legislation that will remove the need for
suppliers to charge VAT on the supply of goods and services to clients within
the EU. The effective date of the proposed legislation is currently unknown.
Management estimates that the proposed legislation, if enacted as currently
drafted, would eventually have a material adverse impact on Meridian's results
of operations from its value-added tax business. If Meridian's results of
operations were to decline as a result of the enactment of the proposed
legislation, it is possible that the number of permanent employees that Meridian
employs in Ireland could fall below 145 prior to September 2007. Should such an
event occur, the full amount of the grants previously received by Meridian will
need to be repaid to IDA. However, management currently estimates that any
impact on employment levels related to a possible change in the EU legislation
will not be realized until after September 2007, if ever.

LIMITATION ON TAX LOSS AND CREDIT CARRYFORWARDS

PRINCIPAL PAYMENTS ON 4.75% SUBORDINATED CONVERTIBLE NOTES

On November 26, 2006 the Company will be required to pay in full the
remaining outstanding principal amount of its 4.75% Subordinated Convertible
Notes. That amount is approximately $0.5 million.

INTEREST PAYMENTS ON 11% SENIOR NOTES

On September 15, 2006, the Company will be required to pay approximately
$2.8 million in interest on its 11% Senior Notes.

NASDAQ DELISTING HEARING

The Company has previously announced that it had received a notice from
Nasdaq indicating that the Company had failed to comply with the $1.00 minimum
bid price required for continued listing by Nasdaq Marketplace Rule 4450(a)(5)
for over 180 days, and that, unless the Company requested a formal hearing, its
common stock would be delisted from the Nasdaq National Stock Market. The
Company filed a request for a hearing before the Nasdaq Qualifications Panel in
order to appeal the staff determination.

The Company intends to seek shareholder approval to implement a 1-for-10
reverse stock split in order to comply with the Nasdaq minimum bid price
requirement at its annual meeting of shareholders, scheduled to be held on
August 11, 2006, and the Company has filed and disseminated a definitive proxy
statement regarding the reverse stock split proposal.

The hearing before the Nasdaq Qualifications Panel (the "Panel") was held
on August 3, 2006. The Company's plan of compliance was presented to the Panel.
The Company will not be notified of the outcome until the Panel makes a formal
decision, which is expected within ten to thirty days following the hearing.
There can be no assurance that the Panel will decide to allow the Company to
remain listed or that the Company's actions will prevent the delisting of its
common stock from the Nasdaq National Market. However, management believes that
effectiveness of the reverse stock split following approval at the annual
meeting will bring the Company into compliance with all applicable Nasdaq
continued listing requirements.

FORWARD LOOKING STATEMENTS

Some of the information in this Form 10-Q contains forward-looking
statements which look forward in time and involve substantial risks and
uncertainties including, without limitation, (1) statements that contain
projections of the Company's future results of operations or of the Company's
financial condition, (2) statements regarding the adequacy of the Company's
current working capital and other available sources of funds, (3) statements
regarding goals and plans for the future, (4) statements regarding the potential
impact and outcome of the Company's exploration of strategic alternatives, (5),
expectations regarding future accounts payable and Meridian revenue trends, (6)
statements regarding the impact of potential regulatory changes. All statements
that cannot be assessed until the occurrence of a future event or events should
be considered forward-looking. These statements are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 and
can be identified by the use of forward-looking words such as "may," "will,"
"expect," "anticipate," "believe," "estimate" and "continue" or similar words.
Risks and uncertainties that may potentially impact these forward-looking
statements include, without limitation, the following:

o In four of the five annual periods ended December 31, 2005, we have
incurred significant losses and we have not generated enough cash from
operations to finance our business.
o Our current projections reflect that our core accounts payable
recovery audit business will continue to decline.
o We depend on our largest clients for significant revenues, so losing a
major client could adversely affect our revenues.
o Client and client vendor bankruptcies and financial difficulties could
reduce our earnings.
o Our strategic business initiatives may not be successful.
o Our failure to retain the services of key members of management and
highly skilled personnel could adversely impact our continued success.
o We rely on international operations for significant revenues.
o The market for providing disbursement audit services to commercial
clients in the U.S. is rapidly declining.
o We may not be able to continue to compete successfully with other
businesses offering recovery audit services, including client internal
recovery audit departments.
o We have significant indebtedness and fixed obligations, and our
operating cash flow may not be sufficient to satisfy these
obligations.
o Our senior credit facility contains financial performance
requirements, and there can be no guarantee that we will be able to
satisfy those requirements.
o Proposed legislation by the European Union, if enacted as currently
drafted, will have a materially adverse impact on Meridian's
operations.
o Meridian's revenue recognition policy causes its revenues to vary
markedly from period to period.
o We continue to incur expense in connection with the Medicare audit,
and there is no guaranty that actual revenues will justify the
required expenditures; further, even if the government deems the
Medicare pilot program sufficiently successful to justify further
ventures, there is no guaranty that we will be awarded future
contracts.
o Other risk factors detailed in the Company's Securities and Exchange
Commission filings, including the Company's Form 10-K for the year
ended December 31, 2005, as filed with the Securities and Exchange
Commission on March 23, 2006.

There may be events in the future, however, that the Company cannot
accurately predict or over which the Company has no control. The risks and
uncertainties listed in this section, as well as any cautionary language in this
Form 10-Q, provide examples of risks, uncertainties and events that may cause
our actual results to differ materially from the expectations we describe in our
forward-looking statements. You should be aware that the occurrence of any of
the events denoted above as risks and uncertainties and elsewhere in this Form
10-Q could have a material adverse effect on our business, financial condition
and results of operations

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Market Risk. Our functional currency is the U.S. dollar
although we transact business in various foreign locations and currencies. As a
result, our financial results could be significantly affected by factors such as
changes in foreign currency exchange rates, or weak economic conditions in the
foreign markets in which we provide services. Our operating results are exposed
to changes in exchange rates between the U.S. dollar and the currencies of the
other countries in which we operate. When the U.S. dollar strengthens against
other currencies, the value of nonfunctional currency revenues decreases. When
the U.S. dollar weakens, the functional currency amount of revenues increases.
Overall, we are a net receiver of currencies other than the U.S. dollar and, as
such, benefit from a weaker dollar. We are therefore adversely affected by a
stronger dollar relative to major currencies worldwide.

Interest Rate Risk. Our interest income and expense are most sensitive to
changes in the general level of U.S. interest rates. In this regard, changes in
U.S. interest rates affect the interest earned on our cash equivalents as well
as interest paid on our debt. At June 30, 2006, we had a $25.0 million term loan
outstanding which is variable-rate debt. The interest on the term loan is based
on a floating rate equal to the reserve adjusted London inter-bank offered rate,
or LIBOR, plus 8.5% (or, at our option, a published prime lending rate plus
5.5%). A hypothetical 100 basis point change in interest rates would result in
an approximate $0.3 million change in annual interest expense. As of June 30,
2006, the Company had $15.0 million available for revolving loans under the new
senior credit facility. No borrowings were outstanding under this revolving

portion of the new credit facility at June 30, 2006. The interest rate on any
outstanding balances on the revolving credit loan is based on LIBOR plus 3.75%
(or, at our option, a published prime lending rate plus 1.0%). Although there
were no borrowings outstanding under the revolving portion of the credit
facility at June 30, 2006, assuming $15.0 million of borrowings, a hypothetical
100 basis point change in interest rates would result in an approximate $0.2
million change in annual interest expense.

Derivative Instruments. As a multi-national company, the Company faces
risks related to foreign currency fluctuations on its foreign-denominated cash
flows, net earnings, new investments and large foreign currency denominated
transactions. The Company uses derivative financial instruments from time to
time to manage foreign currency risks. The use of financial instruments modifies
the exposure of these risks with the intent to reduce the risk to the Company.
The Company does not use financial instruments for trading purposes, nor does it
use leveraged financial instruments. The Company did not have any such
derivative financial instruments outstanding as of June 30, 2006 and December
31, 2005.

ITEM 4. CONTROLS AND PROCEDURES

The Company's management conducted an evaluation, with the participation of
its Chairman, President and Chief Executive Officer (CEO) and its Chief
Financial Officer (CFO), of the effectiveness of the Company's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 (the "Exchange Act")) as of the end of the
period covered by this Quarterly Report on Form 10-Q. Based upon that
evaluation, the CEO and CFO concluded that the Company's disclosure controls and
procedures were not effective in reporting, on a timely basis, information
required to be disclosed by the Company in the reports the Company files or
submits under the Exchange Act, because of unremediated material weaknesses in
its internal control over financial reporting, as described in Item 9A of the
Company's Form 10-K for the year ended December 31, 2005.

There were no changes in internal control over financial reporting during
the quarter ended June 30, 2006 that have materially affected, or are reasonably
likely to materially affect the Company's internal control over financial
reporting. The material weaknesses reported in the Company's Annual Report on
Form 10-K for the year ended December 31, 2005 related to ineffective internal
controls over revenue recognition and company level controls, including the
expertise of the accounting and finance staff. During the quarter ended June 30,
2006, management made additional progress in remediating certain aspects of the
weaknesses reported, specifically in the hiring and training of affected
personnel. However, other aspects of the weaknesses reported are still in the
remediation process and appear to continue to constitute material weaknesses.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note H(1) of Notes to Condensed Consolidated Financial Statements
(Unaudited) included in Part I. Item 1. of this Form 10-Q which is incorporated
by reference.

ITEM 1A. RISK FACTORS

There have been no material changes in the risks facing the Company as
described in the Company's Form 10-K for the year ended December 31, 2005.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The Company's senior credit facility entered into on March 17, 2006
prohibits the payment of any cash dividends on the Company's capital stock.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

EXHIBIT DESCRIPTION
NUMBER

3.1 Restated Articles of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.1 to the Registrant's
Form 8-K filed on July 25, 2006).

3.2 Restated Bylaws of the Registrant (incorporated by reference to
Exhibit 3.2 to the Registrant's Form 10-Q for the quarter ended
September 30, 2005).

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.

4.4 Indenture dated November 26, 2001 by and between Registrant and
Sun Trust Bank (incorporated by reference to Exhibit 4.3 to
Registrant's Registration Statement No. 333-76018 on Form S-3
filed December 27, 2001).

4.5 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).

4.6 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).

4.7 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).

4.8 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).

4.9 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
Report on Form 10-K for the year ended December 31, 2005).

4.10 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).

4.11 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).

10.1 Employment agreement with N. Lee White (incorporated by reference
to Exhibit 10.1 to the Registrant's Form 8-K filed on June 20,
2006).

31.1 Certification of the Chief Executive Officer, pursuant to Rule
13a-14(a) or 15d-14(a), for the quarter ended June 30, 2006.

31.2 Certification of the Chief Financial Officer, pursuant to Rule
13a-14(a) or 15d-14(a), for the quarter ended June 30, 2006.

32.1 Certification of the Chief Executive Officer and Chief Financial
Officer, pursuant to 18 U.S.C. Section 1350, for the quarter
ended June 30, 2006.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

PRG-SCHULTZ INTERNATIONAL, INC.

August 8, 2006 By: /s/ James B. McCurry
------------------------------------
James B. McCurry
President, Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)

August 8, 2006 By: /s/ PETER LIMERI
------------------------------------
Peter Limeri
Chief Financial Officer and
Treasurer
(Principal Financial Officer)