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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K



(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] 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


THE PROFIT RECOVERY GROUP
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.)

2300 WINDY RIDGE PARKWAY 30339-8426
SUITE 100 NORTH (Zip Code)
ATLANTA, GEORGIA
(Address of principal executive offices)


REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (770) 955-3815

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, NO PAR VALUE

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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

Common shares of the registrant outstanding at January 30, 1998 were
19,226,024. The aggregate market value, as of January 30, 1998, of such common
shares held by non-affiliates of the registrant was approximately $111,423,000
based upon the last sales price reported that date on The Nasdaq Stock Market of
$15.813 per share. (Aggregate market value estimated solely for the purposes of
this report. This shall not be construed as an admission for the purposes of
determining affiliate status.)

DOCUMENTS INCORPORATED BY REFERENCE

Part III: Portions of Registrant's Proxy Statement relating to the Annual
Meeting of Shareholders to be held on May 14, 1998.
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THE PROFIT RECOVERY GROUP INTERNATIONAL, INC.

FORM 10-K
DECEMBER 31, 1997



PAGE
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Part I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 10
Item 3. Legal Proceedings........................................... 10
Item 4. Submission of Matters to a Vote of Security Holders......... 10
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 11
Item 6. Selected Consolidated Financial Data........................ 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 13
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 20
Item 8. Financial Statements and Supplementary Data................. 21
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 43
Part III
Item 10. Directors and Executive Officers of the Registrant.......... 43
Item 11. Executive Compensation...................................... 43
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 43
Item 13. Certain Relationships and Related Transactions.............. 43
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 43
Signatures............................................................... 47

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PART I

ITEM 1. BUSINESS

The Company is a leading provider of accounts payable and other recovery
audit services to large retailers, wholesale distributors, healthcare providers,
technology companies and other large transaction-intensive companies, as well as
to certain governmental agencies. In businesses with large purchase volumes and
continuously fluctuating prices, some small percentage of erroneous overpayments
to vendors is inevitable. In addition, the complexity of various tax laws
results in overpayments to governmental agencies. Moreover, services such as
telecommunications, utilities and freight provided to businesses under complex
pricing arrangements can result in overpayments. All of these overpayments
result in "lost profits." The Company identifies and documents overpayments by
using sophisticated proprietary technology and advanced audit techniques and
methodologies, and by employing highly trained, experienced recovery audit
specialists. The Company continuously updates and refines its proprietary
databases that serve as a central repository reflecting its auditors'
experiences, vendor practices and knowledge of regional and national pricing
information, including seasonal allowances, discounts and rebates, but excluding
confidential client data.

The earliest of the Company's predecessors was formed in November 1990, and
in early 1991 the predecessors acquired the operating assets of Roy Greene
Associates, Inc. and Bottom Line Associates, Inc. which were formed in 1971 and
1985, respectively. In January 1995, the Company's predecessors acquired the
operating assets of Fial & Associates, Inc., a direct competitor.

The predecessor business entities that comprised the Company generally were
either Subchapter S corporations or partnerships, all under common ownership and
control. In April 1995, the Company's predecessors reorganized and its
international entities became C corporations. Additionally, prior to the
Company's March 1996 initial public offering, all domestic entities became C
corporations. Subsequent to the Company's initial public offering, the Company
has conducted its operations through its various wholly-owned domestic and
international subsidiaries.

In January 1997, the Company acquired the net operating assets of Shaps
Group, Inc., a California-based company providing recovery audit services to
manufacturers, and high technology companies. In February 1997, the Company
acquired all of the common stock of Accounts Payable Recovery Services, Inc., a
Texas-based company providing recovery audit services to healthcare entities and
energy companies. In May 1997, the Company acquired all of the common stock of
The Hale Group, a California-based company providing recovery audit services to
healthcare entities. In October 1997, the Company acquired 98.4% of Financiere
Alma, S.A. and subsidiaries, a Paris-based company providing tax recovery audit
services within France. In November 1997, the Company acquired the net operating
assets of TradeCheck, LLC, a Washington-based recovery audit firm specializing
in ocean freight shipments. The Company intends to continue pursuing domestic
and international strategic acquisitions, including direct competitors and
complementary businesses.

The Company has operations outside the United States in Australia, Belgium,
Canada, France, Germany, Mexico, The Netherlands, New Zealand, the United
Kingdom and portions of Asia, including Hong Kong, Indonesia, Malaysia,
Singapore, Taiwan and Thailand. See Note 11 of Notes to Consolidated Financial
Statements for international segment data concerning revenues, operating income
(loss) and indentifiable assets.

THE RECOVERY AUDIT INDUSTRY

Businesses with substantial volumes of payment transactions involving
multiple vendors, numerous discounts and allowances, fluctuating prices and
complex tax and pricing arrangements find it difficult to detect all payment
errors. These businesses include retailers, such as discount, department,
specialty, grocery and drug stores, wholesale distributors, manufacturers and
distributors of technology products and certain governmental agencies and
healthcare providers. Although these businesses process the vast majority of
payment transactions correctly, a small number of errors occur principally
because of communication failures between purchasing and payables departments,
complex pricing arrangements, personnel turnover and changes in information and
accounting systems. These errors include vendor pricing errors, missed or
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inaccurate discounts, allowances and rebates, incorrect freight charges and
duplicate payments. In the aggregate, these transaction errors can represent
meaningful lost profits that can be particularly significant for businesses with
relatively narrow profit margins. Although internal recovery audit departments
identify some payment errors, independent recovery audit firms often are
retained by businesses to identify additional overpayments.

In the U.S., large retailers routinely engage independent recovery audit
firms as standard business practice and other businesses increasingly are using
independent recovery audit firms. Outside the U.S., the Company believes that
large retailers and certain other businesses also increasingly are engaging
independent recovery audit firms. The U.S. retailing industry represented
approximately $2.5 trillion in revenues in 1996. The top 100 retailers worldwide
had aggregate revenues of approximately $1.4 trillion in 1996. The Company
believes that a typical U.S. retailer makes payment errors that are not
discovered internally, which in the aggregate can range from several hundred
thousand dollars to more than $1.0 million per billion dollars of revenues. In
addition, the Company believes that businesses in all industries also make
accounts payable errors.

Increasingly, businesses use technology to manage complex accounts payable
systems and realize greater operating efficiencies. Many businesses worldwide
communicate with vendors electronically to exchange inventory and sales data,
transmit purchase orders, submit invoices, forward shipping and receiving
information and remit payments. These paperless transactions are widely referred
to as "EDI" (Electronic Data Interchange), and implementation of this technology
is accelerating. EDI streamlines processing large numbers of transactions, but
does not eliminate payment errors because operator input errors may be
replicated automatically in thousands of transactions. EDI systems typically
generate significantly more individual transaction details in electronic form,
making these transactions easier to audit than traditional paper-based accounts
payable systems. Recovery audit firms, however, require sophisticated technology
in order to audit EDI accounts payable processes effectively.

Many businesses historically have maintained internal recovery audit
departments that review transactions before engaging independent recovery audit
firms. The Company believes that these businesses increasingly are outsourcing
internal recovery functions to independent recovery audit firms. Factors
contributing to this trend include (i) a need for significant investments in
technology, especially in an EDI environment, which the Company believes are
greater than even large businesses often can justify, (ii) an inability to
duplicate the breadth of industry and auditing expertise of independent recovery
audit firms, (iii) a desire to focus limited resources on core competencies, and
(iv) a desire for larger and more timely recoveries.

The domestic and international recovery audit industry is characterized by
several large and many small, local and regional firms. Many local and regional
recovery audit firms lack the centralized resources or broad client base to
support technology investments required to provide comprehensive recovery audit
services for large, complex accounts payable systems. These firms are even less
equipped to audit large EDI accounts payable systems. In addition, because of
limited resources, most of these firms subcontract work to third parties and may
lack experience and the knowledge of national promotions, seasonal allowances
and current recovery audit practices. As a result, the Company believes
significant opportunities exist for recovery audit firms with a national and
international presence, well-trained and experienced professionals and the
advanced technology required to audit increasingly complex accounts payable
systems.

THE PROFIT RECOVERY GROUP SOLUTION

The Company provides its domestic and international clients with
comprehensive recovery audit services by using sophisticated proprietary
technology and advanced audit techniques and methodologies, and by employing
highly trained, experienced recovery audit specialists. As a result, the Company
believes it is able to identify significantly more payment errors in both
traditional paper-based and EDI accounts payable systems. By leveraging its
technology investment across a large client base, the Company is able to
continue developing proprietary software tools and expand its technology
leadership in the recovery audit industry.

The Company is a leader in developing and utilizing sophisticated software
audit tools and techniques that enhance the identification and recovery of
payment errors. In EDI accounts payable systems, the
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Company's proprietary software audit tools and data processing capabilities
enable auditors to sort, filter and evaluate transactions in greater line-item
detail. The Company has developed and continuously updates and refines its
proprietary databases that serve as a central repository reflecting its
auditors' experiences, vendor practices and knowledge of regional and national
pricing information, including seasonal allowances, discounts and rebates. These
proprietary databases do not include confidential client information. The
Company's technology provides a uniform platform for its auditors to offer
consistent and proven audit techniques and methodologies regardless of the
client's size, industry or geographic scope of operations.

The Company also is a leader in establishing new recovery audit practices
to reflect evolving industry trends. The Company's auditors are highly trained
and many have joined the Company from finance-related management positions in
the retailing industry. To support its auditors, the Company provides data
processing, marketing, training and administrative services.

THE PROFIT RECOVERY GROUP STRATEGY

The Company's objective is to become the leading worldwide provider of
recovery audit services. The Company believes that it will have to significantly
increase its revenues to achieve this objective. Its strategy consists of the
following elements:

- Expand International Presence. The Company believes international
markets represent significant business opportunities and intends to
continue expanding its international presence. For example, based on 1996
sales, 63 of the top 100 retailers worldwide were headquartered outside
the U.S. Through sales and marketing efforts, the Company targets
countries having a concentration of transaction-intensive businesses. The
Company also enters new international markets by supporting its U.S.
clients' international operations. With the recent acquisition of 98.4%
of Financiere Alma, S.A. and its subsidiaries (collectively, "Alma"), the
Company has significantly increased its presence in France and the
Company intends to offer Alma's services to businesses in other European
countries. In the next twelve months, the Company anticipates that it
will commence operations in South Africa, Argentina and Brazil.

- Expand Client Base. The Company seeks to increase its worldwide retail
client base and expand its recovery audit services to other industries.
The Company recently has expanded its recovery audit services to the
healthcare and technology industries and intends to expand into other
industries, such as financial services, transportation and lodging and
gaming. The Company believes that its proprietary technology and audit
techniques and methodologies also can be applied to these industries. The
Company believes that its typical fee arrangement enhances its ability to
attract new clients because clients pay a contractually negotiated
percentage of overpayments identified by the Company and recovered for
the clients. The Company intends to leverage existing client
relationships into new audit engagements for clients' other operating
units. Based on 1996 sales, 28 of the top 100 retailers worldwide, each
of which had sales of at least $3.9 billion, were clients of the Company
in 1997. The Company principally targets large businesses having at least
$500 million in annual revenues, although smaller businesses may be
attractive clients. Retailers continue to constitute the substantial
majority of the Company's client and revenue base, and the Company's
current marketing efforts are primarily directed toward that industry.

- Pursue Strategic Acquisitions. The Company intends to continue pursuing
the acquisition of domestic and international businesses including both
direct competitors and businesses providing complementary recovery audit
services. As examples, in January 1995, the Company successfully
completed the acquisition of Fial & Associates, Inc., a direct
competitor; in January 1997, the Company acquired Shaps Group, Inc., a
firm providing recovery audit services to manufacturers and distributors
of technology products; in February 1997, the Company acquired Accounts
Payable Recovery Services, Inc., a firm providing recovery audit services
to healthcare entities and energy companies; in May 1997, the Company
acquired The Hale Group, a firm that provides recovery audit services
primarily to healthcare entities; in October 1997, the Company acquired
Alma, a firm that provides tax recovery

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audit services in France; and in November 1997, the Company acquired
TradeCheck, LLC, a firm that provides ocean freight recovery audit
services.

- Expand Recovery Audit Services. The Company seeks to expand its recovery
audit service offerings beyond its traditional accounts payable recovery
audit business. For example, the Company recently began offering tax
recovery and ocean freight audit services following its acquisitions of
Alma and TradeCheck. In addition, the Company intends to expand into or
establish its capabilities in other recovery audit services, including
telecommunications, utilities, freight and sales and property tax.

- Maintain High Client Retention Rates. The Company intends to maintain
and improve its high client retention rate by providing comprehensive
recovery audit services, utilizing highly trained auditors, and
continuing to refine its advanced audit technology. Of the Company's
accounts payable audit clients in 1996 that had claims exceeding $100,000
in that year, more than 90% continued to utilize the Company's services
in 1997.

- Maintain Technology Leadership. The Company believes its proprietary
technology provides a significant competitive advantage, especially in
audits of EDI accounts payable systems. The Company intends to continue
making substantial investments in technology to maintain its leadership
position and systems capabilities.

- Promote Outsourcing Arrangements. The Company seeks to capitalize on the
growing trend of businesses to outsource internal recovery audit efforts.
The Company believes that its outsourcing clients benefit significantly
from these arrangements because their recoveries generally are larger and
completed more quickly. The Company further believes that as clients
convert their systems to EDI, outsourcing arrangements involving recovery
audit work will become increasingly prevalent due in part to the absence
of traditional "audit trail" documents.

THE PROFIT RECOVERY GROUP SERVICES

The Company provides comprehensive accounts payable, tax and other
ancillary recovery audit services. In 1997, accounts payable recovery audit
services represented approximately 91.0% of the Company's revenues. Assuming the
Alma transaction had occurred on January 1, 1997, accounts payable recovery
audit services and tax recovery audit services would have represented on a pro
forma basis approximately 80.3% and 17.0%, respectively, of the Company's
revenues for 1997.

Accounts Payable Recovery Audit Services

Using its proprietary technology, audit techniques and methodologies, the
Company conducts either primary or secondary accounts payable audits. In primary
audits, the Company is the first independent recovery audit firm engaged. In
secondary audits, the Company audits behind another independent recovery audit
firm. A substantial majority of the accounts payable audits conducted by the
Company are primary audits.

Primary Audits. Although the Company is flexible in structuring recovery
audit programs to meet the individual needs of its clients, there are two basic
types of primary accounts payable audits conducted by the Company: (i) periodic
audits, which are usually performed nine to 18 months after a client's fiscal
year-end; and (ii) continuous audits, marketed as RecoverNow, which are
performed more closely following transaction dates.

In most periodic audits, which constitute the vast majority of the
Company's present audit engagements, the client's internal recovery audit
department conducts a preliminary review of accounts payable records to identify
payment errors. Upon completion of the client's internal recovery audit review
process, which may be as long as nine to 18 months after the client's fiscal
year-end, the Company begins its independent recovery audit.

Under the Company's RecoverNow program, clients provide the Company with
accounts payable data on a regular basis, often within 90 days following the
payment transaction. The Company believes its RecoverNow

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program generates larger client recoveries for several reasons, including: (i)
transaction data, especially paper-based records, are more complete and
accessible; (ii) the impact of vendor bankruptcies is minimized because claims
are made more timely and continuously throughout the year; (iii) certain
recoveries are facilitated when claims are made prior to the expiration of
seasonal or other special pricing promotions; and (iv) vendor relationships are
improved because of on-going communications regarding billing and payment
practices.

In some cases, the Company's clients outsource all or a portion of their
internal recovery audit functions to the Company. In these cases, the client
does not conduct an internal review prior to the Company's audit. In its
outsourcing engagements, the Company also may use client staff in the review
process. The Company believes that more businesses will outsource their recovery
audit functions in an effort to control personnel and technology costs, focus
resources on their core business functions, and increase recoveries.

Secondary Audits. In secondary audits, the Company conducts an accounts
payable audit after another independent recovery audit firm has completed its
audit. The Company usually receives a higher percentage recovery fee than
received from primary audits because it generally is more difficult to detect
payment errors in secondary audits. In most cases, the Company is able to
identify significant payment errors not previously detected by a client's
primary independent recovery audit firm. The Company utilizes secondary audits
as a marketing strategy to obtain new, primary audit clients and believes it has
been successful in implementing this strategy. Of the 28 secondary audits
performed in 1995 which individually provided revenues to the Company exceeding
$100,000, nine were converted to primary audit clients prior to December 31,
1997.

Tax Recovery Audit Services

With the recent acquisition of Alma, the Company now offers tax recovery
audit services in France. These services include the identification and recovery
of tax overpayments (other than income taxes), including business and personal
property taxes (referred to in France as "fiscal" taxes), workers compensation
taxes (referred to in France as "social" taxes), real property taxes (referred
to in France as "foncier" taxes), and value added taxes (referred to in France
as "TVA" taxes).

Using highly trained, experienced personnel together with proprietary audit
techniques and methodologies, Alma assists businesses in identifying and
recovering tax overpayments and reducing future tax obligations. Alma, with
assistance from professionals such as tax attorneys, physicians and surveyors,
applies its thorough understanding of the numerous complex French tax laws and
audits the factual information which underlies the tax in question. For example,
certain fiscal taxes are based upon a client's number of employees, payroll and
fixed assets. Certain social taxes are based upon industry segment and prior
years' claim history. Foncier or real property taxes are based on the size, use
and valuation of building improvements. Alma is constantly researching new and
expanded tax audit opportunities.

The time necessary to conduct a French tax audit and obtain governmental
approval of a claim can vary significantly based upon the type of audit. A
typical social tax audit, for example, is performed in six to nine months and
governmental approval can take an additional six to 12 months. In certain cases
when the tax authority denies a client's claim, litigation is necessary to seek
recovery. Like the Company's standard accounts payable recovery audits, the
Company receives a contractually negotiated percentage of the taxes recovered.

Ancillary Audit Services

In addition to accounts payable and tax recovery audit services, the
Company also offers ancillary recovery audit services. These ancillary services
may be offered individually or in conjunction with accounts payable and tax
recovery audit services.

- Freight Audits. The Company provides domestic freight audits using
FreightPro, the Company's proprietary freight recovery audit software, and
provides ocean freight audits. The Company also maintains centralized
domestic freight and shipping databases and has auditors who specialize in
freight audits. Freight audits are usually conducted in conjunction with
accounts payable recovery audits.

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- Lease Compliance Audits. Real estate lease and landlord compliance
audits involve an examination of all aspects of a client's facility lease
arrangements to assist the client in identifying lease overpayments or
expenses incurred through landlord noncompliance with lease terms.

- Telecommunications Audits. This program assists clients in reducing
their overall telecommunications costs. For example, overpayments often
can result from the incorrect application of rates and tariffs. Auditors
also review clients' equipment, usage and systems configuration needs and
make recommendations on how to reduce future telecommunications costs.

- Utility Audits. Auditors also review clients' electrical and natural gas
requirements and analyze alternative rates and billing plans to verify
that the billing was proper and that the proper tariff rate was applied.

- Expense Reduction Audits. With the recent acquisition of Alma, the
Company assists clients in reducing their costs for building and security
services.

CLIENT CONTRACTS

The Company's standard accounts payable client contract provides that the
Company is entitled to a contractual percentage of overpayments recovered for
clients. Clients generally recover claims by taking credits against outstanding
payables or future purchases from the involved vendors. In many cases, the
Company's auditors work on site with client personnel and continually monitor
credits taken. In other situations, Company auditors schedule periodic
reconciliations with clients to determine which claims have been processed for
credit. The Company's standard accounts payable client contract imposes a duty
on the client to process promptly all claims against vendors. In the interest of
maintaining good vendor relations, however, many clients modify the standard
client contract with the Company to provide that they retain discretion on
whether to pursue collection of a claim. In the Company's experience, it is
extremely unusual for a client to forego the collection of a large, valid claim.
In some cases, a vendor may dispute a claim by providing additional
documentation or information supporting its position. Consequently, many clients
revise the Company's standard client contract to clarify that the Company is not
entitled to payment of its fee until the client recovers the claim from its
vendor.

In addition to the client contracts, most accounts payable clients
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 prior to submitting
claims. With respect to accounts payable recovery audits for retailers,
wholesale distributors and governmental agencies, the Company recognizes
revenues at the time overpayment claims are presented to and approved by its
clients, as adjusted for estimated uncollectible claims. Estimated uncollectible
claims initially are established, and subsequently adjusted, for each individual
client based on a number of factors including historical experience. With
respect to accounts payable and other recovery audits for most entities other
than retailers, wholesale distributors and governmental agencies, the Company
recognizes revenues when it invoices clients for its portion of amounts
recovered.

The Company's standard tax recovery client contract provides that the
Company is entitled to a contractual percentage of the taxes recovered and
anticipated savings for a specified period following the audit. The Company
recognizes revenue from its fiscal, social and foncier tax recovery audit
services when it receives notification that the applicable governmental agency
has approved a claim, the client is entitled to a recovery, and an invoice is
submitted to the client requesting payment. For TVA recovery audit services, the
Company recognizes revenues when all documentation is filed with the appropriate
government agency.

TECHNOLOGY

The Company believes that its proprietary software audit tools and
proprietary databases, together with its centralized data processing
capabilities, provide it a competitive advantage over smaller local and regional
firms, especially when auditing complex EDI accounts payable systems. The
Company has devoted more than six years and has made substantial financial
investments in developing its proprietary technology. At

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January 31, 1998, the Company's information services department in the United
States had 64 employees, 10 of whom were dedicated to software development
activities, including updating and modifying the Company's existing proprietary
software. In addition, Alma's information services department had four employees
as of January 31, 1998.

Centralized Data Preparation and Verification

At the beginning of a typical accounts payable audit, magnetic media
containing accounts payable transaction data are delivered to the Company's
central data processing facility. Experienced programmers in the Company's
information services department write specialized conversion programs that
permit this data to be reformatted into standardized and proprietary formats
using IBM ES 9000 mainframe and IBM AS 400 midrange computers and Windows NT and
OS/2 Warp Connect servers. Statistical reports are then prepared to verify the
completeness and accuracy of the data. Generally, it is not necessary to rewrite
conversion programs for clients for each successive audit. This reformatted data
is compressed onto CD-ROM media and delivered to the Company's auditors who,
using the Company's proprietary field audit software, sort, filter and search
the data for overpayments. Standard reports and client-specific statistical data
also are produced for auditors.

PC-Based Software Modules

The Company has developed PC-based proprietary software modules for use
primarily in the field by its accounts payable auditors. These software modules
include the following:

- AuditPro is used in non-EDI systems to facilitate auditor-defined
searches of reformatted client accounts payable records for patterns
indicative of potential overpayments. In addition to using the standard
analytical reports produced by AuditPro, auditors may design sophisticated
custom inquiries to sort, filter and print client records.

- EDI Inquiry is a comprehensive module used to sort, filter and print
purchasing, receiving and payment records at the line-item level for
clients operating in an EDI environment. By utilizing line-item detail,
this module facilitates the search of a significantly greater number of
transaction records and improves auditor productivity.

- AuditPro 97 is a newly released module which will eventually replace both
AuditPro and EDI Inquiry. It can be utilized in both EDI and non-EDI
environments and includes considerably greater audit functionality than
the modules it replaces.

- Claims Management System enables the auditor to compile, print and report
on claims information by individual audit. This module also is used to
summarize audit findings for management reports that are typically
provided to clients at the conclusion of each engagement.

- FreightPro is used to audit and produce claims from electronic freight
records. Client freight billing data is compared with vendor routing guide
instructions to isolate potential overcharges.

- ReportPro is a specialized report generator designed to create and
display customized reports in conjunction with the Company's other
proprietary software modules.

Proprietary Databases

The Company has developed and continuously updates and refines its
proprietary accounts payable and other non-tax recovery audit databases that
serve as a central repository reflecting its auditors' experiences, vendor
practices and knowledge of regional and national pricing information, including
seasonal allowances, discounts and rebates. These proprietary databases do not
include confidential client information. Auditors use these databases to
identify discounts, allowances and other pricing information not previously
detected.

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AUDITOR HIRING AND TRAINING

Many of the Company's auditors formerly held finance-related management
positions in the retailing industry. These experienced auditors provide
important insights into certain aspects of the retailing industry. The Company
also has relied on its auditors to assist in creating its auditor training
programs and techniques and in developing its proprietary audit software. To
meet its growing need for additional auditors, the Company has begun hiring
recent college graduates, particularly those with multi-lingual capabilities.
While the Company has been able to hire a sufficient number of new auditors to
support its growth, there can be no assurance that the Company will be able to
continue hiring sufficient numbers of qualified auditors to meet its future
needs.

The Company provides intensive in-house training for auditors utilizing
many self-paced media including specialized computer-based training modules. The
Company utilizes experienced auditors as full-time field trainers to assess each
trainee's progress as he or she completes the training program. The in-house
training program is continuously upgraded based on feedback from auditors and on
changing industry protocols. Additional on-the-job training by experienced
auditors enhances the in-house training and enables newly hired auditors to
refine their skills. Because auditor compensation is based on team performance
results as well as nine different categories of individual competency composed
of job-based skills and personal success factors, the Company believes senior
auditors are motivated to continue training new auditors to maximize client
recoveries and audit team compensation. As the Company hires new auditors, there
can be no assurance that it will be able to continue providing the same in-depth
training or have sufficient numbers of experienced auditors to continue its
on-the-job training program.

CLIENT BASE

The Company provides its services principally to large
transaction-intensive businesses that include retailers, such as discount,
department, specialty, grocery and drug stores, wholesale distributors,
manufacturers and distributors of technology products, certain governmental
agencies and healthcare providers. Based on 1996 sales, 28 of the top 100
retailers worldwide, each having sales in excess of $3.9 billion, were clients
of the Company in 1997. Although the Company targets clients principally with
$500 million or more in annual revenues, smaller businesses may be attractive
clients. Retailers continue to constitute the substantial majority of the
Company's client and revenue base, and the Company's current marketing efforts
are primarily directed toward that industry.

For the years ended December 31, 1997, 1996 and 1995, the Company derived
33.8%, 34.6% and 30.1%, respectively, of its revenues form its five largest
clients. Wal-Mart Stores, Inc. and its affiliates (collectively "Wal-Mart"),
historically the Company's largest client, represented 10.4%, 14.4% and 12.7% of
revenues during 1997, 1996 and 1995, respectively. In 1997, Kmart Corporation
was the Company's largest client representing 12.3% of the revenues during the
period, due in large part to a nonrecurring situation involving concurrent
audits of multiple years. There can be no assurance that the Company's client
base will increase or that the Company's largest clients will continue to
utilize the Company's services at the same level. For example, one of the
Company's five largest accounts representing 4.6% of all of the Company's
domestic revenues for 1996 changed the Company's status from primary recovery
auditor in 1996 to secondary recovery auditor in 1997. This change resulted in
significantly lower revenues from that client in 1997. In addition, should one
or more of the Company's large clients file for bankruptcy or otherwise cease to
do business with the Company, or should one or more of the Company's large
client's vendors file for bankruptcy, the Company's business, financial
condition and results of operations could be materially and adversely affected.

SEASONALITY

The Company has experienced and expects to continue to experience
significant seasonality in its business. The Company typically realizes higher
revenues and operating income in the last two quarters of its fiscal year.
Should this trend not continue, the Company's profitability for any affected
quarter and the entire year could be materially and adversely impacted due to
ongoing selling, general and administrative expenses that are largely fixed over
the short term.

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SALES AND MARKETING

The Company markets its services primarily through one-on-one meetings with
executives of targeted clients. The decision to engage a recovery audit firm is
similar to the decision to engage most professional service firms and usually
involves a lengthy period of familiarization, investigation and evaluation by
the prospective client. The sales cycle often exceeds one year in both domestic
and international markets. In the U.S. and Canada, where the use of recovery
audit services is a generally accepted business practice among retailers, the
Company generally must displace a competing firm in order to expand market
share. In many other countries, recovery auditing is a new business service that
requires an initial educational process in order to gain acceptance.

At January 31, 1998, the Company's marketing staff consisted of 12 persons
in the United States headed by a senior officer and 36 persons in Europe. The
Company plans to expand its marketing staff in the U.S. and internationally as
its business grows and it enters new markets.

PROPRIETARY RIGHTS

The Company continuously develops new recovery audit software and enhances
existing proprietary software. The Company regards its proprietary software as
protected by trade secret and copyright laws of general applicability. In
addition, the Company attempts to safeguard its software through employee and
third-party nondisclosure agreements and other methods of protection. Despite
these precautions, it may be possible for unauthorized third parties to copy,
obtain or reverse engineer certain portions of the Company's software or
otherwise to obtain or use other information the Company regards as proprietary.
While the Company's competitive position may be affected by its ability to
protect its software and other proprietary information, the Company believes
that the protection afforded by trade secret and copyright laws is less
significant to the Company's success than the continued pursuit and
implementation of its operating strategies and other factors such as the
knowledge, ability and experience of its personnel.

The Company has registered its copyrights for AuditPro, EDI Inquiry, Claims
Management System, FreightPro and RecoverNow with the U.S. copyright office.
Third parties with functionally similar software could assert claims under the
Copyright Act of 1986, as amended, the federal patent law or state trade secret
laws that the Company's proprietary recovery audit software application products
infringe or may infringe the proprietary rights of such entities. These third
parties may seek damages from the Company as a result of such alleged
infringement, demand that the Company license certain proprietary rights from
them or otherwise demand that the Company cease and desist from its use or
license the allegedly infringing software. Such action may result in protracted
and costly litigation or royalty arrangements or otherwise have a material
adverse effect on the Company's business, financial condition or results of
operations. Although the Company believes that its recovery audit software does
not infringe on the intellectual property rights of others and the Company knows
of no such pending or other extended claims of infringement, there can be no
assurance that such a claim will not be asserted against the Company in the
future.

The Company's trademarks include "Profit Recovery Group International,"
"PRG," "AuditPro," "AuditPro 97," "EDI Inquiry," "Claims Management System,"
"FreightPro," "ReportPro" and "RecoverNow." The Company has registered "Profit
Recovery Group International," "PRG," "AuditPro," "RecoverNow" and the Company's
logo as federal trademarks with the U.S. Patent and Trademark Office. There can
be no assurance, however, that the Company will be successful in its attempt to
register such trademarks or that it otherwise will be able to continue to use
any of the foregoing trademarks.

The Company has filed applications for protection of certain of its
trademarks outside of the U.S. in the various countries where the Company
conducts business, and such protection is available. There can be no assurance,
however, that the Company will be successful in its attempt to register or
continue to use such trademarks outside of the U.S.

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COMPETITION

The recovery audit business is highly competitive. The competitive factors
affecting the market for the Company's recovery audit services include:
establishing and maintaining client relationships, quality and quantity of
claims identified, experience and professionalism of audit staff, rates for
services, technology and geographic scope of operations. The Company's principal
competitors for accounts payable recovery audit services include local and
regional firms and one firm, Howard Schultz & Associates, with a network of
affiliate organizations in the U.S. and abroad. The Company believes that Howard
Schultz & Associates has been in operation longer than the Company and may have
achieved greater revenues than the Company in 1997. The Company's competitors
for tax recovery audit services in France include major international accounting
firms, tax attorneys and several smaller tax recovery audit firms. There can be
no assurance that the Company will continue competing successfully with such
competitors.

The Company believes that as large, transaction-intensive businesses expand
internationally and implement EDI accounts payable systems, smaller recovery
audit firms will lack the technology and infrastructure necessary to remain
competitive unless they make substantial investments to upgrade and expand their
skills, technologies and geographic scope of operations.

EMPLOYEES

At January 31, 1998, the Company had 1,174 employees, 709 of whom were
located in the U.S., with 575 persons in the audit function, 12 persons in sales
and marketing, 64 persons in information services and the remainder in
corporate, finance and administrative functions. In addition to its 465
employees located outside the U.S., internationally the Company engaged 26
independent contractors at January 31, 1998. The Company believes its employee
relations are good.

ITEM 2. PROPERTIES

The Company's principal executive office is located in approximately 55,000
square feet of office space in Atlanta, Georgia. The Company subleases this
space through December 30, 2002 and has an option to renew the lease for five
years contingent upon the prime lease being renewed. The Company leases 25,000
square feet of office and warehouse space in Bentonville, Arkansas. This lease
has an initial five-year term that commenced on April 19, 1996, with an option
to renew for an additional five-year period. The Company leases 27,500 square
feet of office space in Levallois-Perret, France. This lease has a nine-year
term that commenced on January 1, 1997, with the Company having the right to
terminate the lease without penalty after the fourth and sixth years. In
addition, the Company maintains 45 other offices in close proximity to certain
of its larger clients. The leases for these offices vary in term and range from
1,000 to 10,000 square feet. The Company is negotiating a five-year lease for an
additional 15,000 square feet of space in Phoenix, Arizona. The Company
anticipates that additional space will be required as business expands and
believes that it will be able to obtain suitable space as needed. See Note 4 of
Notes to Consolidated Financial Statements of the Company.

ITEM 3. LEGAL PROCEEDINGS

The Company is not a party to any legal proceedings, individually or in the
aggregate, that it believes could have a material adverse effect on its
business, financial condition or results of operations.

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

During the fiscal fourth quarter covered by this report, no matter was
submitted to a vote of security holders of the Company.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's common stock is traded under the symbol "PRGX" on The Nasdaq
Stock Market (Nasdaq). During 1995 and the first quarter of 1996, the Company's
predecessors paid dividends and distributions to then-current equity owners
totalling $10.7 million and $4.9 million, respectively. The Company has not paid
cash dividends since its March 26, 1996 initial public offering and does not
intend to pay cash dividends in the foreseeable future. Moreover, restrictive
covenants included in the Company's bank credit facility specifically prohibit
payment of cash dividends. At January 31, 1998, there were approximately 1,200
beneficial holders of the Company's common stock and 123 holders of record. The
following table sets forth, for the quarters indicated, the range of high and
low prices for the Company's common stock as reported by Nasdaq since the
Company's initial public offering.



1997 CALENDAR QUARTER HIGH LOW
- --------------------- ------- -------

1st Quarter................................................. $18 1/4 $11 1/16
2nd Quarter................................................. 16 1/8 11 3/4
3rd Quarter................................................. 20 1/8 13 5/8
4th Quarter................................................. 19 1/2 13 7/8




1996 CALENDAR QUARTER
- ---------------------

1st Quarter (From March 26, 1996 through March 31, 1996).... $16 1/2 $11 (1)
2nd Quarter................................................. 22 1/2 15 1/4
3rd Quarter................................................. 24 1/4 11 1/2
4th Quarter................................................. 21 1/2 11 1/4


- ---------------

(1) Initial public offering price.

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth selected consolidated financial data for the
Company as of and for the five years ended December 31, 1997. Such historical
consolidated financial data as of and for the five years ended December 31, 1997
have been derived from the Company's Consolidated Financial Statements and Notes
thereto, which Consolidated Financial Statements have been audited by KPMG Peat
Marwick LLP, independent auditors. The audited Consolidated Balance Sheets as of
December 31, 1997 and 1996 and the related Consolidated Statements of Earnings,
Shareholders' Equity (Deficit) and Cash Flows for each of the years in the
three-year period ended December 31, 1997 and the report thereon, which in 1997
is based partially upon the report of other auditors, are included elsewhere
herein. The selected pro forma Statements of Earnings data for the four years
ended December 31, 1996 are unaudited. The data presented below should be read
in conjunction with the Consolidated Financial Statements and Notes thereto and
other financial information appearing elsewhere in this Form 10-K including
Management's Discussion and Analysis of Financial Condition and Results of
Operations.



YEARS ENDED DECEMBER 31,
------------------------------------------------
1997(1) 1996 1995(2) 1994 1993
-------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

STATEMENTS OF EARNINGS DATA:
HISTORICAL
Revenues................................... $112,363 $77,330 $56,031 $34,690 $25,262
Cost of revenues........................... 57,726 40,330 30,554 18,163 13,299
Selling, general and administrative
expenses................................. 37,254 25,961 19,035 12,343 8,899
Restructuring costs(3)..................... 1,208 -- -- -- --
-------- ------- ------- ------- -------
Operating income...................... 16,175 11,039 6,442 4,184 3,064
Interest (expense), net.................... (403) (100) (1,630) (544) (874)
Debt refinancing expenses.................. -- -- -- -- 414
-------- ------- ------- ------- -------
Earnings before income taxes.......... 15,772 10,939 4,812 3,640 1,776
Income taxes(4)............................ 6,149 7,789 305 -- --
-------- ------- ------- ------- -------
Net earnings.......................... $ 9,623 $ 3,150 $ 4,507 $ 3,640 $ 1,776
======== ======= ======= ======= =======
Cash dividends per share................... $ -- $ .28 $ .93 $ .10 $ --
======== ======= ======= ======= =======
PRO FORMA(5)
Historical earnings before income taxes.... $10,939 $ 4,812 $ 3,640 $ 1,776
Pro forma income taxes..................... 4,271 1,877 1,420 692
------- ------- ------- -------
Pro forma net earnings................ $ 6,668 $ 2,935 $ 2,220 $ 1,084
======= ======= ======= =======
PER SHARE
Earnings (pro forma earnings for 1996 and
1995) per share -- basic................. $ .52 $ .41 $ .24
======== ======= =======
Earnings (pro forma earnings for 1996 and
1995) per share -- diluted............... $ .51 $ .39 $ .21
======== ======= =======




DECEMBER 31,
-------------------------------------------------
1997(1) 1996(6) 1995 1994 1993
--------- ------- ------- ------- -------
(IN THOUSANDS)

BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 19,386 $16,891 $ 642 $ 1,284 $ 98
Working capital............................ 34,563 30,004 6,738 4,889 2,068
Total assets............................... 133,885 68,318 30,268 13,779 11,045
Long-term debt, excluding current
installments............................. 24,365 692 17,629 2,741 4,256
Loans from shareholders.................... -- -- 1,075 1,075 208
Total shareholders' equity (deficit)....... 63,072 40,559 (3,402) 2,356 (167)


- ---------------

(1) During 1997, the Company completed five acquisitions including Shaps Group,
Inc. (January), Accounts Payable Recovery Services, Inc. (February), The
Hale Group (May), 98.4% of Financiere Alma, S.A.

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and its subsidiaries (October) and TradeCheck, LLC (November). See Note 8
of Notes to Consolidated Financial Statements.
(2) Effective January 1, 1995, the Company acquired Fial & Associates, Inc. See
Note 8 of Notes to Consolidated Financial Statements.
(3) Includes a $1.2 million charge to restructure and realign certain facets of
the European management structure in recognition of emerging developments
such as the Alma acquisition. See Note 14 of the Notes to Consolidated
Financial Statements of the Company.
(4) In April 1995, the Company's predecessors reorganized and its international
entities became C corporations. Additionally, in connection with the
Company's March 1996 initial public offering, all domestic entities became
C corporations. As a result of these conversions to C corporations, the
Company incurred charges to operations of $305,000 in 1995 and $3.7 million
in 1996 for cumulative deferred income taxes. The Company's 1996 provision
for income taxes of $7.8 million consists of the above-mentioned $3.7
million charge for cumulative deferred income taxes combined with $4.1
million in tax provisions at a 39.0% composite effective rate for the three
quarters subsequent to the March 26, 1996 initial public offering.
(5) The Company's predecessor entities prior to its initial public offering on
March 26, 1996 generally were either corporations electing to be taxed as
Subchapter S corporations or partnerships. As a result, any income tax
liabilities were the responsibilities of the respective shareholders and
partners. Pro forma net earnings reflect, where applicable, a provision for
income taxes to include the additional tax expense as if the Company had
been subject to federal and state income taxes for all periods presented
rather than the individual shareholders and partners.
(6) Balance Sheet Data as of December 31, 1996 reflect the receipt of net
proceeds from the Company's March 26, 1996 initial public offering together
with the partial use of such proceeds to repay substantially all debt
obligations other than certain convertible debentures which were converted
to equity immediately prior to the offering. See Note 7 of Notes to
Consolidated Financial Statements.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

The Company is a leading provider of accounts payable and other recovery
audit services to large retailers, wholesale distributors, healthcare providers,
technology companies and other large transaction-intensive companies, as well as
to certain governmental agencies. In businesses with large purchase volumes and
continuously fluctuating prices, some small percentage of erroneous overpayments
to vendors is inevitable. In addition, the complexity of various tax laws
results in overpayments to governmental agencies. Moreover, services such as
telecommunications, utilities and freight provided to businesses under complex
pricing arrangements can result in overpayments. All of these overpayments
result in "lost profits." The Company identifies and documents overpayments by
using sophisticated proprietary technology and advanced audit techniques and
methodologies, and by employing highly trained, experienced recovery audit
specialists. The Company receives a contractually negotiated percentage of
amounts recovered.

The earliest of the Company's predecessors was formed in November 1990, and
in early 1991 acquired the operating assets of Roy Greene Associates, Inc. and
Bottom Line Associates, Inc., which were formed in 1971 and 1985, respectively.
In January 1995, the Company purchased certain assets of Fial & Associates,
Inc., a direct U.S. competitor. In January 1997, the Company acquired the net
operating assets of Shaps Group, Inc., a California-based company providing
recovery audit services to manufacturers and distributors of technology
products. In February 1997, the Company acquired all of the common stock of
Accounts Payable Recovery Services, Inc., a Texas-based company providing
recovery audit services to healthcare entities and energy companies. In May
1997, the Company acquired all of the common stock of The Hale Group, a
California-based company that also provides recovery audit services to
healthcare entities. In October 1997, the Company acquired 98.4% of Alma, a
Paris-based recovery audit firm specializing in identifying and recovering
various types of French corporate tax overpayments. In November 1997, the
Company acquired the net operating assets of TradeCheck, LLC, a Washington-based
recovery audit firm

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specializing in ocean freight shipments. The Company intends to continue
pursuing domestic and international strategic acquisitions, including direct
competitors and complementary businesses.

RESULTS OF OPERATIONS

The following table sets forth the percentage of revenues represented by
certain items in the Company's Consolidated Statements of Earnings for the
periods indicated:



YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
------ ------ ------

HISTORICAL
Revenues................................................ 100.0% 100.0% 100.0%
Cost of revenues........................................ 51.4 52.1 54.5
Selling, general and administrative expenses............ 33.2 33.6 34.0
Restructuring costs..................................... 1.0 -- --
----- ----- -----
Operating income................................ 14.4 14.3 11.5
Interest (expense), net................................. 0.4 0.2 2.9
----- ----- -----
Earnings before income taxes.................... 14.0 14.1 8.6
Income taxes............................................ 5.4 10.0 0.6
----- ----- -----
Net earnings.................................... 8.6% 4.1% 8.0%
===== ===== =====
PRO FORMA
Historical earnings before income taxes................. 14.1% 8.6%
Pro forma income taxes.................................. 5.5 3.3
----- -----
Pro forma net earnings.......................... 8.6% 5.3%
===== =====


1997 COMPARED WITH 1996

Revenues. The Company's revenues consist principally of contractual
percentages of overpayments recovered for clients that are primarily in the
retailing industry. Revenues increased 45.3% to $112.4 million for 1997, up from
$77.3 million in 1996.

Domestic revenues increased 30.2% to $81.7 million in 1997, up from $62.7
million in 1996. Of this 30.2% increase (i) 9.0% was contributed by existing
clients served in both the 1996 and 1997 periods; (ii) 13.3% was contributed by
the four recovery audit firms acquired in 1997; and (iii) 7.9% resulted from
provision of services to new clients (net of the effect of revenues in 1996 from
clients not served in 1997).

The Company considers international operations to be all operations located
outside of the United States. International revenues increased 109.9% to $30.7
million in 1997, up from $14.6 million in 1996. Of this 109.9% increase (i)
45.3% was contributed by operations of Alma subsequent to this October 1997
acquisition and (ii) 64.6% resulted from existing operations, primarily from
services provided to new clients. The Company continues to believe that the rate
of growth for its international operations will significantly exceed its rate of
domestic revenue growth for the foreseeable future if the revenue effect of
acquired businesses is excluded.

Cost of Revenues. Cost of revenues consists principally of commissions
paid or payable to the Company's auditors based primarily upon the level of
overpayment recoveries, and salaries and bonuses paid or payable to divisional
and regional managers. Also included in cost of revenues are other direct costs
incurred by these personnel including rental of field offices, travel and
entertainment, telephone, utilities, maintenance and supplies, and clerical
assistance. Cost of revenues as a percentage of revenues decreased to 51.4% in
1997 from 52.1% in 1996.

Domestically, cost of revenues as a percentage of revenues increased
slightly to 53.1% in 1997 from 52.7% in 1996. This increase related primarily to
cost of revenues associated with revenues subsequently recognized on claims in
process acquired as part of the Company's May 1997 acquisition of The Hale
Group. These

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17

claims carried higher auditor compensation rates than those customarily paid by
the Company. The remainder of these claims in progress is expected to be
resolved in 1998.

Internationally, cost of revenues as a percentage of revenues decreased to
46.8% in 1997, from 49.7% in 1996. This reduction was due in part to the
operations of Alma during the fourth quarter of 1997 which were conducted at a
cost of revenue percentage of 44.2%. Excluding Alma's revenues and cost of
revenues from the Company's 1997 international operations, international cost of
revenues as a percentage of revenues would have been 47.5%, or a 2.2% reduction
from 1996. This improvement resulted primarily from gross margin expansions
during 1997 in the Company's more established international locations.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses include the expenses of sales and marketing activities,
information technology services and the corporate data center, human resources,
legal and accounting, administration, headquarters-related depreciation of
property and equipment and amortization of intangibles. Selling, general and
administrative expenses as a percentage of revenues decreased to 33.2% in 1997,
from 33.6% in 1996.

Domestic selling, general and administrative expenses as a percentage of
revenues increased to 30.6% in 1997, up from 30.2% in 1996. The Company's 1997
domestic selling, general and administrative expense percentage is higher than
the comparable percentage in 1996 due to increased expenditures for various 1997
initiatives such as significantly expanded training programs and period costs
associated with intensified mergers and acquisition efforts.

Internationally, selling, general and administrative expenses as a
percentage of revenues decreased to 40.0% in 1997, down significantly from 47.9%
in 1996. This reduction was due in part to the operations of Alma during the
fourth quarter of 1997 which were conducted at a selling, general and
administrative percentage of 26.9%. Excluding Alma's revenues and selling,
general and administrative expenses from the Company's 1997 international
operations, international selling, general and administrative expenses as a
percentage of revenues would have been 43.6%, or a 4.3% reduction from 1996.
This improvement resulted primarily from various components of fixed costs being
spread over a rapidly growing revenue base.

In connection with acquired businesses, the Company has recorded intangible
assets including goodwill and deferred non-compete costs. Amortization of these
intangible assets totaled $1.9 million in 1997 and $1.2 million in 1996.

Restructuring Costs. In recognition of emerging developments such as the
Alma acquisition, the Company restructured and realigned certain facets of its
European management structure in the fourth quarter of 1997 and incurred a
pre-tax charge to earnings of $1.2 million. This charge consisted of employment
termination costs directly applicable to four of the Company's senior European
executives and residual contract costs due to an independent European advisor
for services no longer required by the Company. Of the $1.2 million charge,
$683,000 had been paid through December 31, 1997, and the remaining $525,000 is
currently estimated to be paid by June 30, 1998.

Operating Income. Operating income increased 46.5% to $16.2 million in
1997, up from $11.0 million in 1996. As a percentage of total revenues,
operating income increased to 14.4% of revenues in 1997, up slightly from 14.3%
in 1996. Excluding the effect of the $1.2 million nonrecurring pre-tax
restructuring charge on 1997 operations, operating income would have been $17.4
million or 15.5% of total revenues.

Interest Expense, Net. Interest expense, net, increased to $403,000 in
1997, up from $100,000 in 1996. Interest expense, net, for 1997 consisted of (i)
interest expense of $730,000, comprised primarily of interest on $24.8 million
of bank borrowings outstanding since October 1997 which were used to finance a
portion of the Alma acquisition, net of (ii) $327,000 of interest income derived
primarily from overnight investments.

Earnings Before Income Taxes. Earnings before income taxes increased 44.2%
to $15.8 million, up from $10.9 million in 1996. As a percentage of total
revenues, earnings before income taxes were 14.0% in 1997, down slightly from
14.1% in 1996. Excluding the effect of the $1.2 million nonrecurring pre-tax
restructuring on 1997 operations, earnings before income taxes as a percentage
on total revenues would have been 15.1%.

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18

Income Taxes. The Company's predecessor entities prior to its initial
public offering on March 26, 1996 generally were either corporations electing to
be taxed as Subchapter S corporations or partnerships. As a result, any income
tax liabilities were the responsibilities of the respective shareholders and
partners. In connection with the initial public offering, all domestic entities
became C corporations. As a result of these conversions to C corporations, the
Company incurred a charge to operations of $3.7 million in the first quarter of
1996 for cumulative deferred income taxes.

The provisions for income taxes for all periods subsequent to March 31,
1996 consist of federal, state and foreign income taxes at the Company's
composite effective rate of 39.0%. The Company's 1996 provision for income taxes
of $7.8 million consists of the above-mentioned $3.7 million charge for
cumulative deferred income taxes combined with $4.1 million in tax provisions at
a 39.0% composite effective rate for the three quarters subsequent to the March
26, 1996 initial public offering.

Pro Forma Income Taxes. The results of operations for 1996 have been
adjusted on a pro forma basis to reflect federal, state and foreign income taxes
at a composite effective rate of 39.0% as if the Company's predecessors had been
C corporations throughout the year.

1996 COMPARED WITH 1995

Revenues. Revenues increased 38.0% to $77.3 million for 1996, up from
$56.0 million in 1995. Of this $21.3 million increase, $13.7 million, or 64.3%,
related to existing and new domestic accounts and $7.6 million, or 35.7%,
related to revenue growth from international operations. Domestic revenue growth
in 1996 of $13.7 million consisted of $5.7 million related to 35 new client
accounts and $8.0 million related to provision of additional services to
existing accounts.

International revenues grew 108.1% to $14.6 million for 1996, up from $7.0
million for 1995. International revenues grew from 12.5% of total revenues in
1995 to 18.9% during 1996.

Cost of Revenues. Cost of revenues decreased to 52.1% of revenues in 1996,
down from 54.5% for 1995.

Domestically, the Company's cost of revenues as a percentage of revenues
decreased to 52.7% of revenues in 1996, down from 55.6% for 1995 due primarily
to Fial & Associates contracts-in-progress acquired in January 1995. These
auditor contracts, substantially all of which were concluded by December 31,
1995, carried higher auditor compensation rates than those customarily paid by
the Company. Excluding the effect of this temporary $1.9 million rate-related
differential, domestic cost of revenues as a percentage of domestic revenues
would have been 51.7% in 1995.

Internationally, cost of revenues increased to 49.7% of international
revenues in 1996, up from 47.2% during 1995. This increase resulted from an
increase in initial auditor compensation guarantees resulting from various new
markets entered by the Company in 1996.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses as a percentage of revenues decreased to 33.6% in 1996
from 34.0% in 1995.

Domestic selling, general and administrative expenses as a percentage of
domestic revenues were relatively flat at 30.2% in 1996 and 30.4% in 1995. The
Company's domestic selling, general and administrative expenses grew during 1996
at a rate approximately commensurate with its domestic revenue growth due
primarily to space, equipment and personnel additions at its corporate
headquarters facility in Atlanta, Georgia.

International selling, general and administrative expenses decreased to
47.9% of international revenues in 1996, down from 58.7% during 1995 due
principally to the 108.1% growth in international revenues in 1996 without a
proportionate increase in selling, general and administrative expenses.

Amortization of intangible assets totaled $1.2 million in both 1996 and
1995.

Operating Income. Operating income increased 71.4% to $11.0 million in
1996, up from $6.4 million in 1995. Operating income was 14.3% and 11.5% of
revenues for 1996 and 1995, respectively. Excluding the effect of the temporary
$1.9 million auditor compensation rate differential relating to
contracts-in-progress
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19

acquired in January 1995 from Fial & Associates, operating income for 1995 would
have been $8.3 million, or 15.0% of revenues.

Interest Expense, Net. Interest expense, net, decreased to $100,000 in
1996, down from $1.6 million in 1995. Interest expense, net, for 1996 consisted
of $495,000 of net interest expense incurred in the first quarter prior to the
Company's March 26, 1996 initial public offering, less $395,000 of net interest
income derived primarily from the net initial public offering proceeds during
the remaining three quarters of the year.

Earnings Before Income Taxes. Earnings before income taxes increased
127.3% to $10.9 million, up from $4.8 million in 1995. As a percentage of total
revenues, earnings before income taxes were 14.1% in 1996 and 8.6% in 1995.
Excluding the effect of the temporary $1.9 million auditor compensation rate
differential relating to contracts-in-progress acquired in January 1995 from
Fial & Associates, earnings before income taxes for 1995 would have been $6.7
million, or 12.1% of revenues.

Income Taxes. The predecessor business entities that comprised the Company
generally were either Subchapter S corporations or partnerships. As a result,
income tax liabilities were the responsibilities of the respective shareholders
and partners. In April 1995, the Company's predecessors reorganized and its
international entities became C corporations. Additionally, in connection with
the Company's March 1996 initial public offering, all domestic entities became C
corporations. As a result of these conversions to C corporations, the Company
incurred charges to operations of $305,000 in 1995 and $3.7 million in 1996 for
cumulative deferred income taxes. The Company's 1996 provision for income taxes
of $7.8 million consists of the above-mentioned $3.7 million charge for
cumulative deferred income taxes combined with $4.1 million in tax provisions at
a 39.0% composite effective rate for the three quarters subsequent to the March
26, 1996 initial public offering.

Pro Forma Income Taxes. The results of operations for 1996 and 1995 have
been adjusted on a pro forma basis to reflect federal, state and foreign income
taxes at a composite effective rate of 39.0% as if the Company's predecessors
had been C corporations throughout such periods.

QUARTERLY RESULTS

The following tables set forth certain unaudited quarterly financial data
for each of the Company's last eight quarters and such data expressed as a
percentage of the Company's revenues for the respective quarters. The
information has been derived from unaudited consolidated financial statements
that, in the opinion of management, reflect all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of such
quarterly information. The operating results for any quarter are not necessarily
indicative of the results to be expected for any future period.



1997 QUARTER ENDED 1996 QUARTER ENDED
-------------------------------------- --------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
------- ------- -------- ------- ------- ------- -------- -------
(IN THOUSANDS)

Revenues.......................... $20,960 $25,858 $29,627 $35,918 $15,615 $17,963 $21,964 $21,788
Cost of revenues.................. 11,529 13,331 14,693 18,173 8,623 9,480 11,002 11,225
Selling, general and
administrative expenses......... 8,196 8,723 8,790 11,545 6,031 6,040 6,623 7,267
Restructuring costs............... -- -- -- 1,208 -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Operating income......... 1,235 3,804 6,144 4,992 961 2,443 4,339 3,296
Interest income (expense), net.... 63 55 14 (535) (495) 106 162 127
------- ------- ------- ------- ------- ------- ------- -------
Earnings before income
taxes.................. 1,298 3,859 6,158 4,457 466 2,549 4,501 3,423
Income taxes...................... 506 1,491 2,400 1,752 3,700 994 1,759 1,336
------- ------- ------- ------- ------- ------- ------- -------
Net earnings (loss)...... $ 792 $ 2,368 $ 3,758 $ 2,705 $(3,234) $ 1,555 $ 2,742 $ 2,087
======= ======= ======= ======= ======= ======= ======= =======
PRO FORMA
Historical earnings before
income taxes.................. $ 466
Pro forma income taxes.......... 182
-------
Pro forma net earnings... $ 284
=======


17
20



1997 QUARTER ENDED 1996 QUARTER ENDED
-------------------------------------- --------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
------- ------- -------- ------- ------- ------- -------- -------

Revenues.................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues............................ 55.0 51.6 49.6 50.6 55.2 52.8 50.1 51.5
Selling, general and administrative
expenses.................................. 39.1 33.7 29.7 32.1 38.6 33.6 30.1 33.4
Restructuring costs......................... -- -- -- 3.4 -- -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Operating income................... 5.9 14.7 20.7 13.9 6.2 13.6 19.8 15.1
Interest income (expense), net.............. 0.3 0.2 0.1 (1.5) (3.2) 0.6 0.7 0.6
----- ----- ----- ----- ----- ----- ----- -----
Earnings before income taxes....... 6.2 14.9 20.8 12.4 3.0 14.2 20.5 15.7
Income taxes................................ 2.4 5.8 8.1 4.9 23.7 5.5 8.0 6.1
----- ----- ----- ----- ----- ----- ----- -----
Net earnings (loss)................ 3.8% 9.1% 12.7% 7.5% (20.7)% 8.7% 12.5% 9.6%
===== ===== ===== ===== ===== ===== ===== =====
PRO FORMA
Historical earnings before income taxes... 3.0%
Pro forma income taxes.................... 1.2
-----
Pro forma net earnings............. 1.8%
=====


The Company has experienced and expects to continue to experience
significant seasonality in its business. The Company typically realizes higher
revenues and operating income in the last two quarters of its fiscal year. This
trend is expected to continue and reflects the inherent purchasing and
operational cycles of the retailing industry, which is the principal industry
served by the Company. The Company's October 1997 acquisition of Alma is not
expected to affect this trend because Alma historically has experienced similar
seasonality in its revenues and operating income. Should the Company not
continue to realize increased revenues in future third and fourth quarter
periods, profitability for any affected quarter and the entire year could be
materially and adversely affected due to ongoing selling, general and
administrative expenses that are largely fixed over the short term.

LIQUIDITY AND CAPITAL RESOURCES

Through December 31, 1996, the Company's predecessors had acquired and
assimilated three operating companies and financed these acquisitions primarily
through a combination of bank and seller financing. Ongoing Company operations
and capital requirements prior to the Company's initial public offering were met
primarily with cash flows provided by operating activities and, to a lesser
extent, with the proceeds from bank and shareholder loans. On April 1, 1996, the
Company received its $34.8 million portion of the proceeds (net of underwriting
discounts and commissions) from its initial public offering. Of these proceeds,
approximately $1.1 million was subsequently utilized to pay expenses of the
offering, approximately $4.9 million was used to pay previously declared and
unpaid Subchapter S shareholder distributions and partnership distributions, and
approximately $14.6 million was used to pay principal and accrued interest on
substantially all outstanding interest-bearing debt (other than that portion of
certain convertible debt that was converted to Common Stock concurrent with the
initial public offering). All of the residual $14.2 million of net proceeds were
subsequently used to expand international operations, to acquire complementary
businesses and for general corporate purposes.

During October 1997, the Company increased its credit facility with
NationsBank, N.A. from $20.0 million to $30.0 million. The credit facility
permits the Company to borrow up to $30.0 million on a term loan basis to
finance mergers and acquisitions. Alternatively, the Company, at its option, may
utilize up to $10.0 million as a revolving line of credit for working capital
and utilize the remaining $20.0 million for mergers and acquisitions. Borrowings
under the credit facility can be made through September 1999. As of January 31,
1998, the Company had outstanding principal borrowings of $24.8 million under
the credit facility which accrue interest at LIBOR plus 1.75% per annum. Such
borrowings were made in October 1997 in connection with the financing of the
Alma acquisition.

Net cash provided by operating activities was $8.2 million, $1.9 million
and $2.5 million for 1997, 1996 and 1995, respectively.

18
21

Net cash used in investing activities was $30.8 million, $5.1 million and
$2.6 million for 1997, 1996 and 1995, respectively. During 1997, the Company
spent $26.1 million (net of cash acquired) as the cash portion of consideration
paid for four recovery audit firms.

Net cash provided by financing activities was $25.0 million in 1997 and
$19.4 million in 1996. Net cash used in financing activities was $586,000 in
1995. Net cash provided by financing activities in 1997 consists primarily of
$24.8 million borrowed from NationsBank, N.A. in October 1997 to finance a
portion of the Alma acquisition. Net cash provided by financing activities in
1996 reflects proceeds from the Company's initial public offering, net of
repayments of debt and other obligations paid from those proceeds.

During 1997, the Company acquired five recovery audit firms. The Company is
pursuing, and intends to continue to pursue, the acquisition of domestic and
international businesses including both direct competitors and businesses
providing other types of recovery services. Future acquisitions may include much
larger businesses than those acquired to date. There can be no assurance,
however, that the Company will be successful in consummating further
acquisitions due to factors such as receptivity of potential acquisition
candidates and valuation issues. Additionally, there can be no assurance that
future acquisitions, if consummated, can be successfully assimilated into the
Company. See "Forward-Looking Statements."

The Company is currently contemplating a public offering of approximately
2,000,000 shares of common stock. The Company anticipates that the proceeds from
this offering will be used to repay all outstanding indebtedness under its
credit facility with NationsBank, N.A., for international expansion, potential
future acquisitions and general corporate purposes, including working capital.
Even if the public offering is not consummated, the Company nevertheless
believes that its current working capital, its existing line of credit and cash
flow generated from future operations will be sufficient to meet the Company's
working capital and capital expenditure requirements through December 31, 1998
unless one or more acquisitions are consummated which require the Company to
seek additional debt or equity financing.

NEW ACCOUNTING STANDARDS

Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general purpose financial statements. This Statement requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The Company
believes that its components of comprehensive income will consist principally of
traditionally-determined net income and foreign currency translation
adjustments. This Statement is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required.

Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" establishes revised standards
for the manner in which public business enterprises report information about
operating segments. The Company does not believe that this Statement will
significantly alter the segment disclosures it currently provides. This
Statement is effective for fiscal years beginning after December 15, 1997.

YEAR 2000 ISSUE

Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the year
2000.

The Company believes that its principal year 2000 exposure is confined to
one accounting subsystem which is currently under intense review by outside
consultants. The Company believes that this subsystem will be revised or
replaced within the next 12 months. Consulting costs to revise or replace this
subsystem have not been estimated, but are not anticipated to be material to the
Company's business, operations or financial condition.

19
22

FORWARD-LOOKING STATEMENTS

Statements made in this 1997 Form 10-K that state the Company's or
management's intentions, hopes, beliefs, expectations or predictions of the
future are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. It is important to note that the
Company's actual results could differ materially from those contained in such
forward-looking statements. Additional information concerning factors that could
cause actual results to differ materially from those in forward-looking
statements is contained from time to time in the Company's SEC filings,
including the Risk Factors section of the Company's Prospectus dated July 29,
1997, included in its registration statement on Form S-3 (file number
333-31805).

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has not conducted transactions, established commitments or
entered into relationships requiring disclosures beyond those provided elsewhere
in this Form 10-K.

20
23

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



PAGE
NUMBER
------

Independent Auditors' Reports............................... 22
Consolidated Statements of Earnings for the Years ended
December 31, 1997, 1996 and 1995.......................... 24
Consolidated Balance Sheets as of December 31, 1997 and
1996...................................................... 25
Consolidated Statements of Shareholders' Equity (Deficit)
for the Years ended December 31, 1997, 1996 and 1995...... 26
Consolidated Statements of Cash Flows for the Years ended
December 31, 1997, 1996 and 1995.......................... 27
Notes to Consolidated Financial Statements.................. 28


21
24

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders
The Profit Recovery Group International, Inc.:

We have audited the accompanying Consolidated Balance Sheets of The Profit
Recovery Group International, Inc. and subsidiaries as of December 31, 1997 and
1996, and the related Consolidated Statements of Earnings, Shareholders' Equity
(Deficit), and Cash Flows for each of the years in the three-year period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the consolidated financial statements of Financiere Alma, S.A. and
subsidiaries, which financial statements reflect total assets constituting 12%
and total revenues constituting 6% in 1997 of the related consolidated totals.
Those financial statements where audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for Financiere Alma, S.A. and subsidiaries, is based solely on the report of the
other auditors.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.

In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of The Profit Recovery Group
International, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997 in conformity with generally accepted
accounting principles.

KPMG Peat Marwick LLP

Atlanta, Georgia
January 31, 1998

22
25

INDEPENDENT AUDITORS' REPORT

The Directors and Shareholders of
Financiere Alma, S.A.

We have audited the accompanying consolidated balance sheet of Financiere
Alma, S.A. and subsidiaries as of December 31, 1997 and the related consolidated
statements of earnings, shareholders' equity and cash flows for the three months
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Financiere
Alma, S.A. and subsidiaries as of December 31, 1997, and the results of their
operations and their cash flows for the three months ended December 31, 1997 in
conformity with accounting principles generally accepted in the United States.

ERNST & YOUNG Entrepreneurs
Department d'E&Y Audit

Any Antola

Paris, France
January 31, 1998

23
26

THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS



YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- ------- -------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)

HISTORICAL
Revenues.................................................... $112,363 $77,330 $56,031
Cost of revenues............................................ 57,726 40,330 30,554
Selling, general, and administrative expenses (Note 2)...... 37,254 25,961 19,035
Restructuring costs (Note 14)............................... 1,208 -- --
-------- ------- -------
Operating income.................................. 16,175 11,039 6,442
Interest (expense), net (Note 2)............................ (403) (100) (1,630)
-------- ------- -------
Earnings before income taxes...................... 15,772 10,939 4,812
Income taxes (Note 5)....................................... 6,149 7,789 305
-------- ------- -------
Net earnings...................................... $ 9,623 $ 3,150 $ 4,507
======== ======= =======
PRO FORMA
Historical earnings before income taxes..................... $10,939 $ 4,812
Pro forma income taxes (Note 5)............................. 4,271 1,877
------- -------
Pro forma net earnings............................ $ 6,668 $ 2,935
======= =======
PER SHARE (NOTE 13)
Earnings (pro forma earnings for 1996 and 1995) per
share -- basic............................................ $ .52 $ .41 $ .24
======== ======= =======
Earnings (pro forma earnings for 1996 and 1995) per
share -- diluted.......................................... $ .51 $ .39 $ .21
======== ======= =======


See accompanying Notes to Consolidated Financial Statements.

24
27

THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



DECEMBER 31,
----------------------
1997 1996
---------- ---------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE
DATA)

ASSETS
Current assets:
Cash and cash equivalents................................. $ 19,386 $16,891
Receivables:
Billed contract receivables............................. 12,100 3,864
Unbilled contract receivables........................... 41,771 30,734
Employee advances....................................... 2,299 1,363
-------- -------
Total receivables.................................. 56,170 35,961
-------- -------
Refundable income taxes................................... -- 2,049
Prepaid expenses and other current assets................. 2,430 528
-------- -------
Total current assets............................... 77,986 55,429
-------- -------
Property and equipment:
Computer and other equipment.............................. 10,658 5,753
Furniture and fixtures.................................... 2,111 1,569
Leasehold improvements.................................... 1,760 1,183
-------- -------
14,529 8,505
Less accumulated depreciation and amortization............ 5,760 2,272
-------- -------
8,769 6,233
-------- -------
Noncompete agreements, less accumulated amortization of
$3,797 in 1997 and $2,759 in 1996......................... 3,471 4,509
Deferred loan costs, less accumulated amortization of $40 in
1997 and $8 in 1996....................................... 24 56
Goodwill, less accumulated amortization of $986 in 1997 and
$157 in 1996.............................................. 39,591 393
Deferred income taxes (Note 5).............................. 3,585 1,174
Other assets................................................ 459 524
-------- -------
$133,885 $68,318
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to bank..................................... $ 81 $ --
Current installments of long-term debt (Note 3)........... 1,428 79
Accounts payable and accrued expenses..................... 4,835 1,383
Accrued payroll and related expenses...................... 26,075 16,356
Deferred income taxes (Note 5)............................ 9,917 7,607
Deferred revenue.......................................... 1,087 --
-------- -------
Total current liabilities.......................... 43,423 25,425
Long-term debt, excluding current installments (Note 3)..... 24,365 692
Deferred compensation (Note 6).............................. 2,563 1,642
Other long-term liabilities................................. 462 --
-------- -------
Total liabilities.................................. 70,813 27,759
-------- -------
Shareholders' equity (Notes 3 and 9):
Preferred stock, no par value. Authorized 1,000,000
shares; none issued or outstanding in 1997 and 1996..... -- --
Common stock, no par value; $.001 stated value per share.
Authorized 60,000,000 shares; issued and outstanding
19,193,676 shares in 1997 and 17,649,152 shares in
1996.................................................... 19 18
Additional paid-in capital................................ 48,195 34,188
Cumulative translation adjustments........................ (1,149) (31)
Retained earnings......................................... 16,007 6,384
-------- -------
Total shareholders' equity......................... 63,072 40,559
Commitments (Notes 2, 3, 4 and 8)
-------- -------
$133,885 $68,318
======== =======


See accompanying Notes to Consolidated Financial Statements.

25
28

THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995



RETAINED TOTAL
ADDITIONAL CUMULATIVE EARNINGS SHAREHOLDERS'
COMMON PAID-IN SUBSCRIPTIONS TRANSLATION (ACCUMULATED EQUITY
STOCK CAPITAL RECEIVABLE ADJUSTMENTS DEFICIT) (DEFICIT)
------ ---------- ------------- ----------- ------------ -------------
(IN THOUSANDS)

BALANCE AT DECEMBER 31,
1994....................... $ 57 $ -- $(3) $ (56) $ 2,358 $ 2,356
Net earnings................. -- -- -- -- 4,507 4,507
Proceeds from subscription
receivable................. -- -- 3 -- -- 3
Effect of reorganization
(Note 1(a))................ -- (1,550) -- -- 1,550 --
Distributions................ -- -- -- -- (10,716) (10,716)
Cumulative translation
adjustments................ -- -- -- 5 -- 5
Issuance of common stock in
acquisition of Fial &
Associates, Inc............ 1 442 -- -- -- 443
---- -------- --- ------- ------- -------
BALANCE AT DECEMBER 31,
1995....................... 58 (1,108) -- (51) (2,301) (3,402)
Net earnings................. -- -- -- -- 3,150 3,150
Effect of stock split........ (57) 57 -- -- -- --
Issuance of shares under
employee stock option
plans...................... -- 132 -- -- -- 132
Tax effect of issuance of
option shares to
employees.................. -- 115 -- -- -- 115
Effect of reorganization,
including termination of
Subchapter S and
partnership status (Note
1(a))...................... 2 (10,464) -- 51 10,411 --
Distributions................ -- -- -- -- (4,876) (4,876)
Cumulative translation
adjustments................ -- -- -- (31) -- (31)
Issuance of common stock..... 4 34,008 -- -- -- 34,012
Conversion of 5% convertible
debentures................. 11 11,448 -- -- -- 11,459
---- -------- --- ------- ------- -------
BALANCE AT DECEMBER 31,
1996....................... 18 34,188 -- (31) 6,384 40,559
Net earnings................. -- -- -- -- 9,623 9,623
Issuance of shares under
employee stock option
plans...................... -- 366 -- -- -- 366
Tax effect of issuance of
option shares to
employees.................. -- 263 -- -- -- 263
Cumulative translation
adjustments................ -- -- -- (1,118) -- (1,118)
Issuance of common stock in
acquisitions of
businesses................. 1 13,378 -- -- -- 13,379
---- -------- --- ------- ------- -------
BALANCE AT DECEMBER 31,
1997....................... $ 19 $ 48,195 $-- $(1,149) $16,007 $63,072
==== ======== === ======= ======= =======


See accompanying Notes to Consolidated Financial Statements.

26
29

THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
-------- -------- -------
(IN THOUSANDS)

Cash flows from operating activities:
Net earnings.............................................. $ 9,623 $ 3,150 $ 4,507
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization........................... 4,755 2,460 1,810
Loss on sale of property and equipment.................. 26 -- 79
Deferred compensation expense........................... 920 606 474
Deferred income taxes................................... 1,703 6,823 305
Foreign translation adjustments......................... (1,118) (31) 5
Changes in assets and liabilities, net of effect of
acquisition:
Receivables........................................... (12,388) (16,237) (6,755)
Refundable income taxes............................... 1,325 (2,049) --
Prepaid expenses and other current assets............. (929) (226) (237)
Other assets.......................................... 20 (316) (132)
Accounts payable and accrued expenses................. (452) (816) 957
Accrued payroll and related expenses.................. 4,644 8,520 1,518
Deferred revenue...................................... 103 -- --
Other long-term liabilities........................... (16) -- --
-------- -------- -------
Net cash provided by operating activities.......... 8,216 1,884 2,531
-------- -------- -------
Cash flows from investing activities:
Purchases of property and equipment....................... (4,655) (5,076) (2,048)
Acquisition of businesses................................. (26,096) -- (550)
Net decrease in notes receivable from affiliates.......... -- -- 11
-------- -------- -------
Net cash used in investing activities.............. (30,751) (5,076) (2,587)
-------- -------- -------
Cash flows from financing activities:
Net increase in (repayments of) note payable to bank...... (66) (1,763) 1,763
Proceeds from issuance of long-term debt.................. 24,750 -- 12,800
Proceeds from loans from shareholders..................... -- 2,600 --
Repayments of long-term debt.............................. (20) (7,104) (2,853)
Payments of deferred loan costs........................... -- -- (1,000)
Repayments of loans from shareholders..................... -- (3,675) (580)
Net proceeds from common stock............................ 366 34,259 1
Distributions............................................. -- (4,876) (10,717)
-------- -------- -------
Net cash provided by (used in) financing
activities....................................... 25,030 19,441 (586)
-------- -------- -------
Net change in cash and cash equivalents............ 2,495 16,249 (642)
Cash and cash equivalents at beginning of year.............. 16,891 642 1,284
-------- -------- -------
Cash and cash equivalents at end of year.................... $ 19,386 $ 16,891 $ 642
======== ======== =======
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.................... $ 592 $ 1,091 $ 1,207
======== ======== =======
Cash paid during the year for income taxes, net of refunds
received................................................ $ 3,266 $ 3,585 $ --
======== ======== =======
Supplemental disclosure of noncash investing and financing
activities:
In 1997 the Company purchased all the outstanding stock of
four companies and the majority of the outstanding stock
of a foreign company. In conjunction with the
acquisitions, the Company assumed liabilities as
follows:
Fair value of assets acquired........................... $ 50,619
Cash paid for the acquisitions.......................... (26,096)
Fair value of Shares issued for acquisitions............ (13,379)
--------
Liabilities assumed................................ $ 11,144
========


See accompanying Notes to Consolidated Financial Statements.

27
30

THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Description of Business and Basis of Presentation

Description of Business

The principal business of The Profit Recovery Group International, Inc. and
subsidiaries (the "Company") is providing accounts payable and other recovery
audit services to large retailers, wholesale distributors, healthcare providers,
technology companies and other large transaction-intensive companies, as well as
to certain governmental agencies. The Company provides its services throughout
North America, Western Europe, and Southeast Asia.

On March 26, 1996, the Company completed the initial public offering of its
common stock.

Basis of Presentation

Prior to a reorganization in April 1995, the Company was a combination of
the following eight entities with common control: The Profit Recovery Group,
Inc. ("PRG"); The Profit Recovery Group International, L.P. ("PRG L.P."); PRG
International Inc.; The Profit Recovery Group Asia, Inc. ("Asia"); The Profit
Recovery Group Canada, Inc. ("Canada"); The Profit Recovery Group France, Inc.
("France"); The Profit Recovery Group Mexico, Inc. ("Mexico"); and The Profit
Recovery Group U.K., Inc. ("UK").

The April 1995 reorganization principally included the contribution of the
capital stock in Asia, Canada, France, Mexico, and the UK (collectively referred
to as the "Foreign Operating Companies") to a newly formed subsidiary of PRG
L.P., PRG International Holding Co. ("PRG Holdco"). Subsequent to this
reorganization, the Company was a combination of the following three entities
with common ownership: The Profit Recovery Group International I, Inc.
("PRGI" -- formerly PRG), PRG L.P., and PRG Holdco and its five wholly owned
subsidiaries, which are the Foreign Operating Companies. All reorganization
transactions were between parties under common control and, accordingly, were
accounted for in a manner similar to that in a pooling-of-interests.

In connection with the Company's March 1996 initial public offering of its
common stock, a further reorganization was effected. Immediately subsequent to
this reorganization, the Company consisted of The Profit Recovery Group
International, Inc. as the publicly traded parent company and seven wholly owned
subsidiaries: PRGI, Asia, Canada, France, Mexico, UK, and The Profit Recovery
Group Belgium, Inc. ("Belgium"). All reorganization transactions were between
parties under common control and, accordingly, were accounted for in a manner
similar to that in a pooling-of-interests. Upon completion of the March 1996
reorganization, United States operations were conducted through PRGI and the
international operations through the other six subsidiaries. Various additional
operating entities, both domestic and international, have been acquired or
established subsequent to the March 1996 reorganization.

(b) Principles of Consolidation

The consolidated financial statements of the Company in 1997 and 1996, and
the combined financial statements of the Company for 1995 include the financial
statements of the aforementioned entities. All significant intercompany balances
and transactions have been eliminated in consolidation or combination.

Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates. A material estimate that is particularly
susceptible to change is the estimation of uncollectible claims (see (c) Revenue
Recognition).

28
31

THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(c) Revenue Recognition

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) client's
duties in assisting and cooperating with the Company, and (d) fee payable to the
Company 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 which 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. The Company defers revenue recognition until client
guidelines, of whatever nature, have been satisfied.

Accepted claims basis of revenue recognition

With respect to accounts payable and ancillary audit services for
retailers, wholesale distributors and governmental agencies (the Company's
historical client base), the Company recognizes revenues at the time overpayment
claims are presented to and approved by its clients, as adjusted for estimated
uncollectible claims.

For accounts payable and ancillary audit services provided to retailers,
wholesale distributors and governmental agencies, the Company believes that it
has completed substantially all contractual obligations to its client at the
time an identified and documented claim which satisfies all client-imposed
guidelines is presented to, and approved by, appropriate client personnel. The
Company further believes that at the time a claim is submitted and accepted by
its client, such claim represents a valid overpayment due to the client from its
vendor. Accordingly, the Company believes that it is entitled to its fee upon
acceptance of such claim by its client, subject to (a) customary and routine
claim disallowance adjustments by the vendor resulting primarily from the
receipt of previously unknown information, and (b) applicable laws.
Disallowances of client-approved claims are susceptible to experience-based
estimation.

The Company's standard client contract for accounts payable and ancillary
audit services provided to retailers, wholesale distributors and governmental
agencies imposes a duty on the client to process promptly all claims against
vendors. In the interest of vendor relations, however, many clients modify the
standard client contract with the Company to provide that they retain discretion
whether to pursue collection of a claim. In the Company's experience, it is
extremely unusual for a client to forego the collection of a large, valid claim.
In some cases, a vendor may dispute a claim by providing additional
documentation or information supporting its position. Consequently, many clients
revise the Company's standard client contract to clarify that the Company is not
entitled to payment of its fee until the client recovers the claim from its
vendor.

Submitted claims for accounts payable and ancillary audit services provided
to retailers, wholesale distributors and governmental agencies that are not
approved by clients for whatever reason are not considered when recognizing
revenues. Estimated uncollectible claims are initially established, and
subsequently adjusted, for each individual client based on historical collection
rates, types of claims identified, current industry conditions, and other
factors which, in the opinion of management, deserve recognition. The Company
records revenues for accounts payable and ancillary audit services provided to
retailers, wholesale distributors and governmental agencies at estimated net
realizable value without reserves. Accordingly, adjustments to uncollectible
claim estimates are directly charged or credited to earnings, as appropriate.

Approved claims for accounts payable and ancillary audit services provided
to retailers, wholesale distributors and governmental agencies are processed by
clients and generally taken as credits against outstanding payables or future
purchases from the vendors involved. Once credits are taken, the Company

29
32

THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

invoices its clients for a contractually stipulated percentage of the amounts
recovered. The Company's contract receivables for accounts payable and ancillary
audit services provided to retailers, wholesale distributors and governmental
agencies are largely unbilled because it does not control (a) the timing of a
client's claims processing activities, or (b) the timing of a client's payments
for current and future purchases. In the Company's experience, material
receivables are expected to be collected within one year after such receivables
are recorded.

During 1997, 1996 and 1995, revenues derived from accounts payable and
ancillary services provided to retailers, wholesale distributors and
governmental agencies represented 86.7%, 100.0% and 100.0%, respectively, of
total revenues for such years.

Invoice basis of revenue recognition

With regard to accounts payable and other recovery audit services provided
to most entities other than retailers, wholesale distributors and governmental
agencies, the Company recognizes revenues primarily when it invoices clients for
its portion of amounts already recovered. This deferral of revenue recognition
for these types of clients results principally from the Company's lack of a
historical experience base to accurately estimate uncollectible claims. Revenues
recognized in 1997 on the invoice basis represented 13.3% of total revenues for
the year. The Company did not serve entities other than retailers, wholesale
distributors and governmental agencies (the Company's historical client base) in
either 1996 or 1995.

(d) Cash Equivalents

Cash equivalents at December 31, 1997 and 1996 consisted of $2.5 million
and $11.9 million, respectively, of reverse repurchase agreements with
NationsBank, N.A. (South) which were fully collateralized by United States of
America Treasury Notes in the possession of such bank. The reverse repurchase
agreement in effect on December 31, 1997, matured and was settled on January 2,
1998. In addition, certain of the Company's French subsidiaries at December 31,
1997 had cash equivalents of $4.7 million in temporary investments held at a
French bank.

The Company does not intend to take possession of collateral securities on
future reverse repurchase agreement transactions conducted with banking
institutions of national standing. The Company does insist, however, that all
such agreements provide for full collateralization using obligations of the
United States of America having a current market value equivalent to or
exceeding the reverse repurchase agreement amount.

(e) Property and Equipment

Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized using the straight-line method over the
shorter of the lease term or estimated life of the asset.

(f) Direct Expenses

Direct expenses incurred during the course of the accounts payable audits
and other recovery audit services are expensed as incurred.

Non-management auditor compensation expense for substantially all of the
Company's domestic auditors and certain of its international auditors is
recorded at the time of related revenue recognition and subsequently paid as
such revenue is collected. Previously established auditor compensation accruals
are subsequently adjusted on a monthly basis to correspond with adjustments to
uncollectible claim estimates. In certain of the Company's international
locations fixed salaries are paid to non-management auditors. All non-auditor
Company employees are compensated on the basis of salary and in certain cases,
bonuses, which are charged to operations as incurred.
30
33

THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(g) Software Development Costs

Software development costs related to the development of the Company's
proprietary audit software are expensed as incurred.

(h) Intangibles

Goodwill. Goodwill represents the excess of the purchase price over the
estimated fair market value of net assets of acquired businesses. The Company
evaluates the unique relevant aspects of each individual acquisition when
establishing an appropriate goodwill amortization period, and amortizes all
goodwill amounts on a straight-line basis. Goodwill recorded as of December 31,
1997 is being amortized over periods ranging from seven to 20 years. The Company
assesses the recoverability of this intangible asset by determining whether the
amortization of the goodwill balance over its remaining life can be recovered
through undiscounted future operating cash flows of the acquired operation. The
amount of goodwill impairment, if any, is measured based on projected discounted
future operating cash flows using a discount rate reflecting the Company's
average cost of funds. The assessment of the recoverability of goodwill will be
impacted if estimated future operating cash flows are not achieved.

Noncompete Agreements. Noncompete agreements are recorded at cost and are
amortized on a straight-line basis over the terms of the respective agreements.

Deferred Loan Costs. Deferred loan costs are recorded at cost and are
amortized on a straight-line basis over the terms of the respective loan
agreements.

(i) Income Taxes

The Company's predecessors (prior to April 24, 1995 for international
entities and March 28, 1996 for domestic entities) consisted of Subchapter S
corporations and a partnership. As such, the Federal and state income taxes with
regard to these entities historically have been the responsibility of the
respective shareholders and partners. The results of operations for all periods
presented which include operations prior to April 1, 1996 have been adjusted on
a pro forma basis to reflect Federal and state income taxes at a composite rate
of 39% as if the Company's predecessors had been C corporations throughout such
periods.

In the second quarter of 1995, the Company's predecessors reorganized and
its international entities became C corporations. Additionally, in connection
with the Company's March 1996 initial public offering, all domestic entities
became C corporations. As a result of these conversions to C corporations, the
Company incurred charges to operations of $305,000 in the second quarter of 1995
and $3.7 million in the first quarter of 1996 for cumulative deferred income
taxes.

Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

(j) Foreign Currency Translation

The local currency has been used as the functional currency in the
countries in which the Company conducts business outside of the United States.
The assets and liabilities denominated in foreign currency are translated into
U.S. dollars at the current rate of exchange at the balance sheet date and
revenues and expenses are translated at the average monthly exchange rates. The
translation gains and losses are included as

31
34

THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

a separate component of shareholders' equity. Transaction gains and losses
included in results of operations are not material.

(k) Earnings (Pro Forma Earnings) Per Share

Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share." This pronouncement
required the restatement of all prior-period earnings per share data presented
to conform to its provisions. Basic earnings (pro forma earnings) per share is
computed by dividing net earnings (pro forma earnings) by the weighted average
number of shares of common stock outstanding during the year. Diluted earnings
(pro forma earnings) per share is computed by dividing net earnings (pro forma
earnings) by the sum of (1) the weighted average number of shares of common
stock outstanding during the period (2) the dilutive effect of the assumed
exercise of stock options using the treasury stock method and (3) dilutive
effect of other potentially dilutive securities.

For all periods prior to April 1, 1996, diluted pro forma earnings per
share has been computed by dividing the pro forma net earnings, which gives
effect to pro forma income taxes, by the weighted average number of common and
potential common shares outstanding during the period, after giving effect to
the reorganization enacted at the time of the Company's March 1996 initial
public offering. For purposes of determining the weighted average number of
common and potential common shares for all periods prior to April 1, 1996, the
Company has followed required supplementary guidance contained in Securities and
Exchange Commission Staff Accounting Bulletin Topic 4D and has treated all
common shares, warrants, options, and convertible debentures issued within one
year prior to its initial public offering as exercised and outstanding, using
the treasury stock method, regardless if the effect was antidilutive. In
addition, the aforementioned computation includes the equivalent number of
common shares derived from dividing the $4.9 million in 1996 dividends and
distributions by $11.00 per share.

(l) Employee Stock Options

Prior to January 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation", which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosures of SFAS No. 123.

(2) RELATED PARTY TRANSACTIONS

Prior to the Company's March 1996 initial public offering, the Company
periodically borrowed funds from its principal shareholders. These loans were
evidenced by promissory notes bearing interest at market rates. All loans from
shareholders were repaid in full immediately subsequent to the Company's initial
public offering.

Interest expense on loans from shareholders for the years ended December
31, 1996 and 1995 was approximately $38,000 and $140,000, respectively.

Financial advisory and management services historically have been provided
to the Company by two directors who are also shareholders of the Company. In
addition, a director elected in 1995 provided

32
35

THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

management advisory services to the Company from July 1995 through December
1996, but no longer provided such services effective January 1, 1997. Such
services by directors aggregated $165,000 in 1997, $293,000 in 1996, and
$406,000 in 1995. The Company has agreed to pay the above-mentioned two
directors a minimum of $140,000 in 1998 for financial advisory and management
services.

(3) LONG-TERM DEBT

Long-term debt at December 31, 1997 and 1996 is summarized as follows:



1997 1996
------- ----
(IN THOUSANDS)

Term bank loan with interest at LIBOR plus 1.75% (7.69% at
December 31, 1997), interest only payments through
September 1998, and monthly principal payments of $412,500
plus interest due commencing October 1998 and continuing
through September 2001; remaining unpaid balance due
September 2001............................................ $24,750 $ --
5.05% promissory note, principal and interest payable in
annual installments of $100,000 beginning December 1998
and continuing through December 2009...................... 790 771
Term loan with interest of PIBOR plus 1.25% (3.7% at
December 31, 1997) requiring quarterly payments of 44,704
French Francs, or $7,465 at December 31, 1997, including
interest, with final payment due April 2000............... 198 --
Other....................................................... 55 --
------- ----
25,793 771
Less current installments................................... 1,428 79
------- ----
Long-term debt, excluding current installments.... $24,365 $692
======= ====


During October 1997, the Company increased its credit facility with
NationsBank, N.A. from $20.0 million to $30.0 million. The credit facility
permits the Company to borrow up to $30.0 million on a term loan basis to
finance mergers and acquisitions. Alternatively, the Company, at its option, may
utilize up to $10.0 million as a revolving line of credit for working capital
and utilize the remaining $20.0 million for mergers and acquisitions. Borrowings
under the credit facility can be made through September 1999 although repayment
of individual term loan borrowings made before or during September 1999 are
repayable over 48 months. As of December 31, 1997, the Company had outstanding
principal borrowings of $24.8 million under the credit facility. Such borrowings
were made in October 1997 in connection with the financing of the Financiere
Alma, S.A. and subsidiaries acquisition (see note 8). The credit facility is
secured by substantially all assets of the Company and interest on borrowings
can be tied to either prime or LIBOR at the Company's discretion. The Company is
required to repay all amounts outstanding under the revolving line of credit
portion of the aggregate credit facility and to refrain from borrowing any
amounts under such line of credit portion for at least a 30-consecutive-day
period each year. The credit facility requires an annual commitment fee of 1/4
of 1% and contains customary covenants, including financial ratios and the
prohibition of cash dividend payments to shareholders. At December 31, 1997, the
Company was in compliance with all such covenants.

Approximate future minimum annual principal payments for long-term debt for
each of the five years subsequent to December 31, 1997 are as follows (in
thousands):



1998........................................................ $ 1,428
1999........................................................ 5,108
2000........................................................ 5,046
2001........................................................ 13,673
2002........................................................ 64


33
36

THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In December 1995, the Company extinguished a noncompete agreement
obligation. Such extinguishment resulted in a loss which was not material.

(4) LEASE COMMITMENTS

The Company is committed under noncancelable operating lease arrangements
for facilities and equipment. Rent expense for 1997, 1996, and 1995 was $3.0
million, $2.5 million, and $1.0 million, respectively. The future minimum annual
lease payments under these leases by year are summarized as follows (in
thousands):



YEAR ENDING DECEMBER 31,
- ------------------------

1998........................................................ $ 3,697
1999........................................................ 2,799
2000........................................................ 1,980
2001........................................................ 1,535
2002........................................................ 800
Thereafter.................................................. 3,932
-------
$14,743
=======


(5) INCOME TAXES

HISTORICAL

Prior to the April 1995 reorganization, the historical income taxes were
the responsibility of the shareholders and partners (see Note 1(i) Income
Taxes). In connection with the April 1995 reorganization, the Company
established a net deferred tax liability of approximately $305,000 as a charge
to the 1995 Consolidated Statement of Earnings related to the five Foreign
Operating Companies' termination of the Subchapter S corporation status. The
results of operations for the five Foreign Operating Companies from May 1995 to
December 1995 represented a taxable loss which was fully offset by a deferred
income tax valuation allowance. Such amounts and related deferred income tax
temporary differences were not significant.

In connection with the Company's March 1996 initial public offering, a
further reorganization occurred and the Subchapter S corporation status or
partnership status of all then remaining entities that comprised the Company was
terminated. These terminations resulted in the establishment of an additional
deferred tax liability of approximately $3.7 million and a corresponding charge
to the 1996 Consolidated Statement of Earnings.

34
37

THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The provision for income taxes for the years ended December 31, 1997 and
1996 consists of the following (in thousands):



1997 1996
------ ------

Current:
Federal................................................... $1,171 $ 413
State..................................................... 375 153
Foreign................................................... 2,900 400
------ ------
4,446 966
------ ------
Deferred:
Federal................................................... 921 5,997
State..................................................... 184 826
Foreign................................................... 598 --
------ ------
1,703 6,823
------ ------
Total............................................. $6,149 $7,789
====== ======


A reconciliation of income tax expense at the Federal statutory rates of
35% and 34% to actual tax expense for the years ended December 31, 1997 and
1996, respectively, follows (in thousands):



1997 1996
------ ------

Income taxes at Federal statutory rate...................... $5,520 $3,719
Establishment of deferred tax liability due to termination
of Subchapter S corporation status and partnership
status.................................................... -- 3,700
State income taxes, net of Federal income tax benefit....... 363 646
Pro forma income taxes that were the responsibility of the
shareholders and partners................................. -- (158)
Other, net.................................................. 266 (118)
------ ------
$6,149 $7,789
====== ======


35
38

THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of the components of deferred tax liabilities and assets as of
December 31, 1997 and 1996 follows (in thousands):



1997 1996
------- -------

Deferred tax liabilities:
Contract receivables...................................... $16,974 $11,987
Accelerated depreciation for tax purposes................. 532 234
Goodwill.................................................. 177 154
------- -------
Gross deferred tax liabilities.................... 17,683 12,375
------- -------
Deferred tax assets:
Cash to accrual conversion from termination of Subchapter
S and partnership status............................... 309 419
Accounts payable and accrued expenses..................... 438 --
Accrued payroll and related expenses...................... 5,912 3,961
Deferred compensation..................................... 961 875
Noncompete agreements..................................... 848 410
Deferred revenues......................................... 577 --
Deferred loan costs....................................... 182 277
Net operating loss carryforward of foreign subsidiary..... 385 --
Foreign tax credit carryforwards.......................... 1,554 --
Other..................................................... 185 --
------- -------
Gross deferred tax assets......................... 11,351 5,942
------- -------
Net deferred tax liabilities...................... $ 6,332 $ 6,433
======= =======


In assessing the realizability of deferred tax assets, the Company's
management considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. No valuation allowances were
deemed necessary since all deductible temporary differences are expected to be
utilized primarily against reversals of taxable temporary differences, and net
operating loss carryforwards and foreign tax credit carryforwards are expected
to be utilized through related future taxable and foreign source earnings. The
Company has no undistributed earnings of foreign subsidiaries, but does have a
net operating loss carryforward of $1.1 million which can be utilized
indefinitely against future taxable earnings of a foreign subsidiary, to the
extent there is no significant change in the ownership of the foreign
subsidiary. The Company's management believes the net operating loss
carryforward will be fully utilized against the forecasted future taxable
earnings of the foreign subsidiary. The Company has foreign income tax credit
carryforwards amounting to $1.6 million, of which $400,000 will expire in 2001
and $1.2 million will expire in 2002. The Company expects to generate sufficient
foreign-sourced income by implementing reasonable tax planning strategies to
fully utilize the foreign income tax credit carryforwards.

(UNAUDITED) PRO FORMA

The pro forma provision for income taxes reflects the income taxes as if
the Company were subject to all Federal and state income taxes for all periods
presented that include operations prior to April 1, 1996, rather than primarily
by the individual shareholders and partners. All pro forma income taxes have
been calculated using a 39% composite effective rate.

(6) EMPLOYEE BENEFIT PLANS

The Company maintains a 401(k) Plan in accordance with Section 401(k) of
the Internal Revenue Code, which allows eligible participating employees to
defer receipt of a portion of their compensation up to

36
39

THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

15% and contribute such amount to one or more investment funds. Employee
contributions are matched by the Company in a discretionary amount to be
determined by the Company each plan year up to $450 per participant. The Company
may also make discretionary contributions to the Plan as determined by the
Company each plan year. Company matching funds and discretionary contributions
vest at the rate of 20% each year beginning after the participants' first year
of service. Company contributions were approximately $130,000 in 1997, $114,000
in 1996 and $33,000 in 1995.

The Company also maintains deferred compensation arrangements for certain
key officers and executives. Total expense related to these deferred
compensation arrangements was approximately $920,000, $606,000, and $340,000 in
1997, 1996, and 1995, respectively.

Effective May 15, 1997, the Company established an employee stock purchase
plan pursuant to Section 423 of the Internal Revenue Code of 1986, as amended.
The plan covers 750,000 shares of the Company's common stock which may be
authorized but unissued shares, reacquired shares or shares bought on the open
market. The initial purchase period began on July 1, 1997 and ended on December
31, 1997. On January 19, 1998, share certificates for 32,348 shares were issued
to employees who were initial purchase period participants. The Company is not
required to recognize compensation expense related to this plan.

(7) COMMON STOCK

The following presents the common stock at December 31, 1995 for each
combined entity:



Common stock:
The Profit Recovery Group International I, Inc. (formerly
The Profit Recovery Group, Inc.) authorized 10,000,000
shares with $.01 par value; issued and outstanding
5,740,000 shares at December 31, 1995 and 5,380,000
shares at December 31, 1994............................ $57,400
PRG International Holding Co. -- authorized 1,000 shares
with $1.00 par value; issued and outstanding 1,000
shares at December 31, 1995............................ 1,000
-------
$58,400
=======


In connection with the April 1995 reorganization, the Company issued an
additional 480,000 shares of common stock in PRGI to the existing shareholders,
formed PRG Holdco with 1,000 shares of common stock, and consolidated the five
Foreign Operating Companies into PRG Holdco.

Subsequent to the Company's March 1996 initial public offering of its
common stock, all entities that comprise the Company are wholly owned
subsidiaries of the publicly traded parent company, The Profit Recovery Group
International, Inc., whose common stock is reflected in shareholders' equity on
the accompanying December 31, 1997 and 1996 Consolidated Balance Sheets.
Concurrent with the Company's initial public offering, The Profit Recovery Group
International, Inc. declared a two-for-one stock split effected in the form of a
stock dividend. All share and pro forma per share information has been adjusted
to reflect the effect of the stock split.

Immediately prior to the Company's March 26, 1996 initial public offering
of its common stock, holders of the $12.7 million in convertible debentures
elected to convert $12.3 million into equity of the Company. The remaining
debentures together with accrued interest on the entire $12.7 million were paid
in April 1996 with a portion of the initial public offering proceeds.
Additionally, $817,000 in deferred loan costs directly related to the debentures
was reclassified as a reduction in shareholders' equity concurrent with the
conversion of the debentures. In connection with the debentures origination, an
investment banking firm received a warrant to purchase 63,530 shares of PRGI's
common stock for $5.89 per share. This warrant was exercised in full immediately
prior to the Company's initial public offering.

37
40

THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company's initial public offering of its common stock was declared
effective by the United States Securities and Exchange Commission on March 26,
1996, and public trading in the registered shares commenced March 27, 1996. The
initial public offering consisted of 4.6 million shares priced at $11 per share
with the Company selling 3.4 million newly issued shares and certain
shareholders selling 1.2 million existing shares. The Company received $34.8
million as its portion of the proceeds (net of underwriting discounts and
commissions, but prior to offering expenses). On April 18, 1996, the Company
received notification from its initial public offering underwriting syndicate
that the syndicate had exercised its full over-allotment option to purchase an
additional 690,000 shares of Company common stock. All of these shares were then
sold to the underwriting syndicate by certain selling shareholders. The Company
received no proceeds from the sale of such shares.

Although the Company has issued no preferred stock through December 31,
1997, and has no present intentions to issue any preferred stock, such stock may
be issued at any time or from time to time in one or more series with such
designations, powers, preferences, rights, qualifications, limitations and
restrictions (including dividend, conversion and voting rights) as may be
determined by the Company's Board of Directors, without any further vote or
action by the shareholders.

(8) ACQUISITIONS

Effective January 1, 1995, PRGI acquired certain assets of Fial &
Associates, Inc., primarily consisting of contract receivables, net of related
commissions liabilities, with an estimated fair value of approximately $444,000,
and entered into a noncompete agreement for seven years with the former owner of
Fial, with an estimated fair value of $6.0 million. In exchange for the assets
and the noncompete agreement, PRGI issued 240,000 shares of PRGI's common stock,
paid $1.6 million in cash, and incurred an obligation of approximately $5.0
million. In the opinion of the Company's management, the common stock had an
estimated fair value of $1.85 per share. The acquisition was accounted for under
the purchase method of accounting and resulted in goodwill of $550,000 which is
being amortized over seven years using the straight-line method. Fial's
principal business was similar to PRGI's business. Fial provided its services
throughout the United States.

On January 2, 1997, the Company acquired the net operating assets of Shaps
Group, Inc., a California-based company providing recovery audit services to
manufacturers, and distributors of high technology products. The Company issued
375,000 shares of its common stock in the transaction which was accounted for as
a pooling-of-interests. Since prior years' financial positions and results of
operations of Shaps Group, Inc. are not material in relation to the Company's
historical financial statements, the Company did not restate its prior years'
consolidated financial statements.

On February 11, 1997, the Company acquired all of the common stock of
Accounts Payable Recovery Services, Inc., a Texas-based company providing
recovery audit services to healthcare entities and energy companies. This
transaction was accounted for as a purchase with consideration of $2.0 million
in cash and 130,599 shares of the Company's common stock valued at $15.25 per
share. This acquisition resulted in goodwill of $3.9 million which is being
amortized over 15 years using the straight-line method.

On May 23, 1997, the Company acquired all of the common stock of The Hale
Group, a California-based company providing recovery audit services to
healthcare entities. This transaction was accounted for as a purchase with
consideration of $1.1 million in cash and 74,998 shares of the Company's common
stock valued at $13.38 per share. This acquisition resulted in goodwill of $2.1
million which is being amortized over 15 years using the straight-line method.

On October 7, 1997, the Company acquired 98.4% of Financiere Alma, S.A. and
subsidiaries ("Alma"), a privately held recovery audit firm based in Paris,
France. This transaction was accounted for as a purchase with consideration of
$24.6 million in cash and approximately 859,000 restricted, unregistered shares
of the Company's common stock with an aggregate estimated fair value of $10.0
million, based on an independent external valuation. The Company has an
obligation to acquire the remaining interest in Alma by January 1999

38
41

THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

for $398,000 in cash and 13,900 unregistered shares of the Company's common
stock. This acquisition resulted in goodwill of $33.0 million which is being
amortized over 20 years using the straight-line method.

On November 21, 1997, the Company acquired the net operating assets of
TradeCheck, LLC, a Washington-based recovery audit firm specializing in ocean
freight shipments. This transaction was accounted for as a purchase with
consideration of $700,000 in cash and 40,000 shares of the Company's common
stock valued at $14.375 per share. This acquisition resulted in goodwill of $1.1
million which is being amortized over 15 years using the straight-line method.

Results of operations for all 1997 acquisitions accounted for under the
purchase method of accounting have been included in the 1997 Consolidated
Statement of Earnings from their respective dates of acquisition with the
exception of the October 7, 1997 acquisition of Alma, which was included
effective October 1, 1997.

The following represents the summary (unaudited) pro forma results of
operations as if the Alma acquisition had occurred at the beginning of 1996. The
pro forma results are not necessarily indicative of the results that will occur
in the future.



YEARS ENDED
DECEMBER 31,
-------------------
1997 1996
-------- -------

Revenues.................................................... $127,409 $98,586
======== =======
Net earnings................................................ $ 9,432 $ 2,500
======== =======
Pro forma net earnings...................................... $ 9,432 $ 6,018
======== =======
Earnings (pro forma net earnings for 1996) per share:
Basic..................................................... $ .49 $ .36
======== =======
Diluted................................................... $ .48 $ .33
======== =======


All businesses acquired by the Company during 1997, other than Alma,
previously maintained their respective accounting records using the cash basis
of accounting. Accordingly, it is not practicable to provide accrual basis pro
forma results of operations which include these entities. The Company believes,
however, that pro forma accrual basis results of operations for these entities,
if determined, would not be significant, either individually or in the
aggregate.

(9) STOCK OPTION PLAN

The Company's 1996 Stock Option Plan ("Plan") has authorized the grant of
options to purchase 3,500,000 shares of the Company's common stock to key
employees and directors. All options granted through December 31, 1997 have
10-year terms and vest and become fully exercisable on a ratable basis over four
or five years of continued employment.

Pro forma information regarding net earnings and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1997, 1996 and 1995:



1997 1996 1995
------- ------- -------

Risk-free interest rates.................................... 6.17% 6.26% 6.06%
Dividend yields............................................. -- -- --
Volatility factor of expected market price.................. .537 .396 .396
Weighted-average expected life of option.................... 6 years 6 years 6 years


39
42

THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, 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, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information for the years ended December 31, 1997, 1996 and 1995
follows (in thousands, except for pro forma earnings per share information):



1997 1996 1995
------- ------- -------

Historical earnings before income taxes................... $15,772 $10,939 $ 4,812
Income taxes (pro forma income taxes for 1996 and 1995)... 6,149 4,271 1,877
------- ------- -------
Net earnings (pro forma net earnings for 1996 and 1995)
before pro forma effect of compensation expense
recognition provisions of SFAS No. 123.................. 9,623 6,668 2,935
Pro forma effect of compensation expense recognition
provisions of SFAS No. 123.............................. 1,382 504 111
------- ------- -------
Pro forma net earnings.................................... $ 8,241 $ 6,164 $ 2,824
======= ======= =======
Pro forma net earnings per share:
Basic................................................... $ .45 $ .38 $ .24
======= ======= =======
Diluted................................................. $ .44 $ .36 $ .21
======= ======= =======


A summary of the Company's stock option activity and related information
for the years ended December 31 follows:



1997 1996 1995
--------------------- --------------------- -------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- --------- --------- --------- ------- ---------

Outstanding -- beginning of
year...................... 1,258,030 $ 9.60 633,000 $ 5.53 -- $ --
Granted..................... 1,030,263 15.47 677,030 13.16 633,000 5.53
Exercised................... (65,100) 5.36 (28,000) 5.30 -- --
Forfeited................... (15,300) 13.60 (24,000) 5.94 -- --
--------- --------- -------
Outstanding -- end of
year...................... 2,207,893 $12.44 1,258,030 $ 9.60 633,000 $5.53
========= ========= =======
Exercisable at end of
year...................... 287,946 $ 9.12 94,400 $ 5.30 -- $ --
Weighted average fair value
of options granted during
year...................... $ 8.96 $ 6.44 $ 2.67


Exercise prices for options outstanding as of December 31, 1997 ranged from
$5.30 to $19.88 per share. The weighted average remaining contract life of those
options was 8.6 years. Of the 2,207,893 options outstanding at December 31,
1997, 527,600 were granted at prices below the Company's initial public offering
price of $11.00 per share and 1,680,293 were granted at prices equal to or
greater than $11.00.

The 527,600 options outstanding at December 31, 1997 which were priced
below $11.00 per share carried a weighted-average exercise price of $5.60 per
share and had a weighted-average remaining contract life of 7.5 years. They
included 135,040 exercisable options at a price of $5.30 per share.

40
43

THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The 1,680,293 options outstanding at December 31, 1997 which were priced at
or above $11.00 per share carried a weighted-average exercise price of $14.59
per share and had a weighted-average remaining contract life of 9.0 years. They
included 131,706 options that were exercisable at a weighted-average price of
$13.21 per share.

(10) MAJOR CLIENTS

The Company had two major clients during 1997, each of which provided
revenues in excess of 10% of total revenues. Both major clients are mass
merchandisers operating in the retail industry.

During the years ended December 31, 1997, 1996, and 1995, the Company
derived 10.4%, 14.4% and 12.7%, respectively, of its total revenues from its
historically largest client. Additionally, during 1997 the Company derived 12.3%
of its total revenues from another client due in large part to a nonrecurring
situation involving concurrent audits of multiple years.

(11) INTERNATIONAL SEGMENTS

The Company has operations outside the United States. The following is a
summary of geographic area information, as measured by the area of
revenue-producing operations, for the years ended December 31, 1997, 1996, and
1995 (in thousands):



1997 1996 1995
-------- ------- -------

Revenues:
United States (U.S.)................................... $ 81,653 $62,701 $49,002
North America, excluding U.S........................... 10,907 7,811 3,778
Western Europe......................................... 17,233 4,422 2,422
Asia-Pacific........................................... 2,570 2,396 829
-------- ------- -------
Total.......................................... $112,363 $77,330 $56,031
======== ======= =======
Operating income (loss):
United States (U.S.)................................... $ 12,109 $10,680 $ 6,854
North America, excluding U.S........................... 2,971 899 30
Western Europe......................................... 3,541 (238) (137)
Asia-Pacific........................................... (2,446) (302) (305)
-------- ------- -------
Total.......................................... $ 16,175 $11,039 $ 6,442
======== ======= =======
Identifiable assets:
United States (U.S.)................................... $ 74,876 $59,237 $27,244
North America, excluding U.S........................... 5,362 4,593 1,541
Western Europe......................................... 50,942 2,155 851
Asia-Pacific........................................... 2,705 2,333 632
-------- ------- -------
Total.......................................... $133,885 $68,318 $30,268
======== ======= =======


(12) FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts for cash and cash equivalents, receivables, note
payable to bank, accounts payable and accrued expenses, accrued payroll and
related expenses, and deferred revenue approximate fair value because of the
short maturity of these instruments.

The fair values of each of the Company's long-term debt instruments are
based on the amount of future cash flows associated with each instrument
discounted using the Company's current borrowing rate for similar debt
instruments of comparable maturity. The estimated fair value of the Company's
long-term debt

41
44

THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

instruments at December 31, 1997 and 1996 was $25.9 million and $675,000,
respectively, and the carrying value of the Company's long-term debt at December
31, 1997 and 1996 was $25.8 million and $771,000, respectively.

Fair value estimates are made at a specific point in time, based on
relevant market information about the financial instrument. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.

(13) EARNINGS PER SHARE

The following table sets forth the computations of basic and diluted
earnings per share for the years ended December 31, 1997, 1996 and 1995 (in
thousands except for earnings per share information):



1997 1996 1995
------- ------- -------

Numerator:
Numerator for basic earnings (pro forma earnings for 1996
and 1995) per share.................................... $ 9,623 $ 6,668 $ 2,935
Interest accrued on convertible debt, net of income
taxes.................................................. -- 97 258
------- ------- -------
Numerator for diluted earnings (pro forma earnings for
1996 and 1995) per share.............................. $ 9,623 $ 6,765 $ 3,193
======= ======= =======
Denominator:
Denominator for basic earnings (pro forma earnings for
1996 and 1995) per share -- weighted-average shares
outstanding........................................... 18,415 16,268 12,000
Effect of dilutive securities:
Employee stock options............................... 494 545 348
Convertible debt..................................... -- 539 2,157
Common equivalent shares from the distribution
payable ($4,875,576) divided by the initial public
offering price of $11 per share (and weighted since
the initial public offering)........................ -- 105 443
------- ------- -------
Denominator for diluted earnings (pro forma
earnings for 1996 and 1995) per share........... 18,909 17,457 14,948
======= ======= =======
Earnings (pro forma earnings for 1996 and 1995) per
share -- basic............................................ $ .52 $ .41 $ .24
======= ======= =======
Earnings (pro forma earnings for 1996 and 1995) per
share -- diluted.......................................... $ .51 $ .39 $ .21
======= ======= =======


Options to purchase 473,000 shares of common stock, at prices ranging from
$16.00 to $19.88 per share, were outstanding during 1997 but were excluded from
the computation of diluted earnings per share because the options' exercise
price was greater than the average market price of the common shares and,
therefore, the effect would be antidilutive.

(14) RESTRUCTURING COSTS

In recognition of emerging developments such as the Alma acquisition, the
Company restructured and realigned certain facets of its European management
structure in the fourth quarter of 1997 and incurred a pre-tax charge to
earnings of $1.2 million. This charge consisted of employment termination costs
directly applicable to four of the Company's senior European executives and
residual contract costs due to an independent European advisor for services no
longer required by the Company. Of the $1.2 million charge, $683,000 had been
paid through December 31, 1997, and the remaining $525,000 is currently
estimated to be paid by June 30, 1998.

42
45

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

PART III

Pursuant to Instruction G(3) to Form 10-K, the information required in
Items 10 through 13 is incorporated by reference from the Company's definitive
proxy statement, which is expected to be filed pursuant to Regulation 14A on or
before April 10, 1998.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) Consolidated Financial Statements.

For the following consolidated financial information included herein,
see Index on Page 21:

Independent Auditors' Reports

Consolidated Statements of Earnings for the Years ended December 31,
1997, 1996 and 1995

Consolidated Balance Sheets as of December 31, 1997 and 1996

Consolidated Statements of Shareholders' Equity (Deficit) for the
Years ended December 31, 1997, 1996 and 1995

Consolidated Statements of Cash Flows for the Years ended December
31, 1997, 1996 and 1995

Notes to Consolidated Financial Statements

(b) All financial statement schedules are omitted for the reason that they
are either not applicable or not required or because the information is
contained in the consolidated financial statements or notes thereto.

(c) Reports on Form 8-K

On October 22, 1997, Registrant filed Form 8-K regarding Registrant's
October 7, 1997 acquisition of 98.4% of Financiere Alma, S.A. and its
subsidiaries (collectively, "Alma").

On November 21, 1997, Registrant filed Form 8-K/A to provide required
audited and pro forma financial statements regarding Alma.

(d) Exhibits



+2.1 -- Agreement and Plan of Reorganization dated January 4, 1995,
among The Profit Recovery Group, Inc., Fial & Associates,
Inc. and T. Charles Fial. The following is a list of omitted
schedules and exhibits which the Registrant agrees to
furnish supplementally to the Commission upon request:
Exhibits: A -- List of Purchasers, with Principal Amount of
Each Purchaser's Note; B -- Form of Note; C-1 and
C-2 -- Form of Amended and Restated Partnership Agreement;
D-1 and D-2 -- Form of Amended and Restated Certificate of
Limited Partnership; E -- Form of Registration Rights
Agreement; Schedules; 2F -- List of Shareholders and
Proportionate Obligation to Purchase; 2L -- Earnings Test;
3C -- List of Limited Partners and Their Respective Units;
3D -- List of Stockholders of General Partner and Their
Respective Ownership Interests; 3F -- Balance Sheet; and
3P -- Transactions with Affiliates.


43
46
+2.2 -- Note Purchase Agreement dated April 27, 1995, among The
Profit Recovery Group International, L.P. (the
"Partnership"), The Profit Recovery Group International I,
Inc., T. Charles Fial and certain limited partners and
purchasers named therein. The following is a list of omitted
schedules and exhibits which the Registrant agrees to
furnish supplementally to the Commission upon request:
Schedules: 1.1(c) -- Contracts and Agreements;
1.1(f) -- Fixed Assets; 3.6 -- Company Trade Area;
3.7 -- Affiliated Companies; 4.8 -- Employee Plans;
4.13 -- Seller's Tax Returns; 4.14 -- Employee Bonuses;
4.15 -- Accounts Receivable; 4.16 -- Independent
Contractors; 5.1-A -- Articles of Incorporation of
Purchaser; 5.1-B -- List of agreements among shareholders of
Purchaser; 5.7 -- Certain Liabilities of Purchaser;
5.8 -- Subsequent Events; Exhibits: 1.3(a) -- Bill of Sale;
1.3(b) -- Assignment and Assumption Agreement;
3.2 -- Consulting Agreement; 3.3 -- Form of Noncompetition
Agreement with Stockholder; 3.9 -- Stockholders' Agreement;
7.1(a)(vi) -- Form of Opinion of Counsel to Seller and
Stockholder; and 7.1(b)(ix) -- Form of Opinion of Counsel to
Purchaser.
+3.1 -- Articles of Incorporation of the Registrant.
+3.2 -- Amended and Restated Bylaws of the Registrant.
+4.1 -- Specimen Common Stock Certificate.
+4.2 -- See Articles of Incorporation and Bylaws of the Registrant,
filed as Exhibits 3.1 and 3.2, respectively.
*+10.1 -- Letter Agreement dated May 25, 1995 between Wal-Mart Stores,
Inc. and Registrant.
+10.2 -- 1996 Stock Option Plan dated as of January 25, 1996,
together with Forms of Non-qualified Stock Option Agreement.
+10.3 -- The Profit Recovery Group International I, Inc. 401(k) Plan.
+10.4 -- Form of Employment Agreement, dated March 20, 1996, between
the Registrant and John M. Cook.
+10.5 -- Form of Employment Agreement, dated March 20, 1996, between
the Registrant and John M. Toma.
+10.6 -- Form of Employment Agreement, dated March 20, 1996, between
the Registrant and Paul J. Dinkins.
+10.7 -- Form of Employment Agreement, dated March 20, 1996, between
the Registrant and Brian M. O'Toole.
+10.8 -- Form of Employment Agreement, dated March 20, 1996, between
the Registrant and Donald E. Ellis, Jr.
+10.9 -- Form of Consulting Agreement, dated January 1, 1996, between
The Profit Recovery Group International I, Inc. and SBC
Financial Corporation, Jonathan Golden, P.C. and Berkshire
Partners.
+10.10 -- Form of Indemnification Agreement between the Registrant and
the Directors and certain officers of the Registrant.
+10.11 -- First Amendment to Amended and Restated Loan and Security
Agreement dated January 3, 1996 among NationsBank of
Georgia, N.A. ("NationsBank"), the Partnership and certain
guarantors named therein.
+10.12 -- Amended and Restated Loan and Security Agreement dated April
27, 1995 among NationsBank, the Partnership and certain
guarantors named therein. The following is a list of omitted
schedules and exhibits which the Registrant agrees to
furnish supplementally to the Commission upon request:
Exhibits: A-1 -- Amended and Restated Promissory Note,
A-2 -- Amended and Restated Promissory Note,
B-1 -- Borrower's Business Locations, B-2 -- Other Business
Locations, C-1 -- Borrower's Corporate Names, C-2 -- Other
Corporate Names, D -- Litigation, E -- Form of Compliance
Certificate, F -- Berkshire Lenders, G -- Other Liens,
H -- Indebtedness.
+10.13 -- First Amendment to Loan and Security Agreement dated January
4, 1995 among NationsBank, The Profit Recovery Group, Inc.,
PRG International, Inc., the Partnership and the Foreign
Companies.

44
47
+10.14 -- Loan and Security Agreement dated March 24, 1994 among
NationsBank, The Profit Recovery Group, Inc., PRG
International Inc., the Partnership and the Foreign
Companies. The following is a list of omitted schedules and
exhibits which the Registrant agrees to furnish
supplementally to the Commission upon request: Exhibits:
A-1 -- Promissory Note, A-2 -- Promissory Note,
B-1 -- Borrower's Business Locations, B-2 -- Other Business
Locations, C-1 -- Borrower's Corporate Names, C-2 -- Other
Corporate Names, D -- Litigation, E -- Form of Compliance
Certificate, F -- Collateral Assignment of Policy, G --
Other Liens, H -- Indebtedness.
+10.15 -- Sublease dated October 29, 1993, between The Profit Recovery
Group International I, Inc. and International Business
Machines Corporation.
+10.16 -- Lease dated January 19, 1996 between the Partnership and "J"
Street Development Inc.
+10.17 -- Agreement dated January 19, 1996 between the Partnership and
May Construction Company, Inc. The following is a list of
omitted schedules and exhibits which Registrant agrees to
furnish supplementally to the Commission upon request:
Exhibit A -- General Conditions of the Contract for
Construction.
+10.18 -- Second Amendment to Amended and Restated Loan and Security
Agreement dated February 8, 1996 among NationsBank, the
Partnership, The Profit Recovery Group International I,
Inc., PRG International Holding Co. and the Foreign
Companies.
+10.19 -- First Sublease Amendment dated February 12, 1996 among
International Business Machines Corporation, the Partnership
and The Profit Recovery Group International I, Inc.
+10.20 -- Promissory Note dated February 8, 1996, in the amount of
$1,600,000 by the Partnership to CT Investments, L.L.C.
**10.21 -- Loan and Security Agreement by and among NationsBank, N.A.
(South) as Lender, and The Profit Recovery Group
International, Inc. as Borrower, and Certain Affiliates of
Borrower, as Guarantors, dated September 27, 1996.
***10.22 -- First Amendment dated March 7, 1997 to Employment Agreement
between the Registrant and John M. Cook.
****10.23 -- The Profit Recovery Group International, Inc. Employee Stock
Purchase Plan.
*****10.24 -- Contract for the Mandate of the President of the
Directorate, dated October 7, 1997, between Alma
Intervention and Marc Eisenberg.
*****10.25 -- Consulting Agreement, dated October 7, 1997, between the
Registrant and Lieb Finance S.A.
*****10.26 -- Second Amendment to Employment Agreement, dated September
17, 1997, between The Profit Recovery Group International I,
Inc. and John M. Cook.
*****10.27 -- Employment Agreement, dated October 17, 1997, between The
Profit Recovery Group International I, Inc. and Michael A.
Lustig.
*****10.28 -- Compensation Agreement, dated October 17, 1997, between The
Profit Recovery Group International I, Inc. and Michael A.
Lustig.
*****10.29 -- First Amendment to Loan and Security Agreement, dated
October 3, 1997, between NationsBank, N.A. and the
Registrant and its subsidiaries.
10.30 -- Lease Agreement dated January 30, 1998 between Wildwood
Associates and The Profit Recovery Group International I,
Inc.
+++10.31 -- Services Agreement dated April 7, 1993 between Registrant
and Kmart Corporation as amended by Addendum dated January
28, 1997.
10.32 -- Employment Agreement dated August 26, 1996 between
Registrant and Tony G. Mills; Compensation Agreement dated
August 26, 1996 between Registrant and Mr. Mills; and
description of 1998 compensation arrangement between
Registrant and Mr. Mills.
10.33 -- Employment Agreement dated August 23 between Registrant and
David A. Brookmire; Compensation Agreement dated August 23,
1996 between Registrant and Mr. Brookmire; and description
of 1998 compensation arrangement between Registrant and Mr.
Brookmire.
10.34 -- Description of 1998-2002 compensation arrangement between
Registrant and John M. Cook.
10.35 -- Description of 1998 compensation arrangement between
Registrant and John M. Toma.
10.36 -- Description of 1998 compensation arrangement between
Registrant and Michael A. Lustig.

45
48



10.37 -- Description of 1998 compensation arrangement between
Registrant and Donald E. Ellis, Jr.
++10.38 -- Employment Agreement between Registrant and Robert G.
Kramer; Compensation Agreement between Registrant and Mr.
Kramer; description of 1998 compensation arrangement between
Registrant and Mr. Kramer.
++10.39 -- Employment Arrangement between Registrant and Clinton
McKellar, Jr.; Compensation Arrangement between Registrant
and Mr. McKellar; description of 1998 compensation
arrangement between Registrant and Mr. McKellar.
21.1 -- Subsidiaries of the Registrant.
23.1 -- Consent of KPMG Peat Marwick LLP.
23.2 -- Consent of ERNST & YOUNG Entrepreneurs.
27.1 -- Financial Data Schedule (for SEC use only).


- ---------------

+ Incorporated by reference to Exhibit of same number of the Registrant's
Registration Statement on Form S-1 (Registration No. 333-1086).
*Confidential treatment pursuant to 17 CFR sec.sec. 200.80 and 230.406 has
been granted regarding certain portions of the indicated Exhibit, which
portions have been filed separately with the Commission.
++ To be filed by amendment.
+++ Confidential treatment pursuant to 17 CFR sec.sec. 200.80 and 240.24b-2
has been requested regarding certain portions of the indicated Exhibit,
which portions have been filed separately with the Commission.
** Incorporated by reference to Exhibit 10.1 of Registrant's Form 10-Q for
the quarterly period ended September 30, 1996.
*** Incorporated by reference to Exhibit of same number of the Registrant's
Form 10-K for the year ended December 31, 1996.
**** Incorporated by reference to Exhibit "A" to Registrant's proxy statement
dated April 15, 1997, which was issued in connection with Registrant's
1997 Annual Meeting of Shareholders.
***** Incorporated by reference to Exhibits 10.1-10.6 of Registrant's Form 10-Q
for the quarterly period ended September 30, 1997.

46
49

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

THE PROFIT RECOVERY GROUP
INTERNATIONAL, INC.

February 13, 1998 By: /s/ JOHN M. COOK
------------------------------------
John M. Cook
Chairman of the Board
and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.



SIGNATURE TITLE DATE
--------- ----- ----

/s/ JOHN M. COOK Chairman of the Board and February 13, 1998
- ----------------------------------------------------- Chief Executive Officer
John M. Cook (Principal Executive
Officer)

/s/ DONALD E. ELLIS, JR. Senior Vice President -- February 13, 1998
- ----------------------------------------------------- Finance, Treasurer and
Donald E. Ellis, Jr. Chief Financial Officer
(Principal Financial
Officer)

/s/ MICHAEL R. MELTON Vice President -- Finance February 13, 1998
- ----------------------------------------------------- (Principal Accounting
Michael R. Melton Officer)

/s/ STANLEY B. COHEN Director February 13, 1998
- -----------------------------------------------------
Stanley B. Cohen

/s/ MARC EISENBERG Director February 13, 1998
- -----------------------------------------------------
Marc Eisenberg

/s/ JONATHAN GOLDEN Director February 13, 1998
- -----------------------------------------------------
Jonathan Golden

/s/ GARTH H. GREIMANN Director February 13, 1998
- -----------------------------------------------------
Garth H. Greimann

/s/ FRED W.I. LACHOTZKI Director February 13, 1998
- -----------------------------------------------------
Fred W.I. Lachotzki

/s/ E. JAMES LOWREY Director February 13, 1998
- -----------------------------------------------------
E. James Lowrey


47
50


SIGNATURE TITLE DATE
--------- ----- ----

/s/ MICHAEL A. LUSTIG Director February 13, 1998
- -----------------------------------------------------
Michael A. Lustig

/s/ JOHN M. TOMA Vice Chairman and February 13, 1998
- ----------------------------------------------------- Director
John M. Toma


48