UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-28000

PRGX Global, Inc.

(Exact name of registrant as specified in its charter)

Georgia		58-2213805
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
600 Galleria Parkway		30339-5986
Suite 100		(Zip Code)
Atlanta, Georgia
(Address of principal executive offices)

Registrant’s telephone number, including area code: (770) 779-3900

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Name of each exchange on which registered
Common Stock, No Par Value		The NASDAQ Stock Market LLC (The Nasdaq Global Market)
Preferred Stock Purchase Rights		The NASDAQ Stock Market LLC (The Nasdaq Global Market)

Securities registered pursuant to Section 12(g) of the Act: None

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

     Note—Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

     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 þ No o

     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. þ

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act. (Check One):

o Large accelerated filer		o Accelerated filer		þ Non-accelerated filer		o Small reporting company
		(Do not check if a smaller reporting company)

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

     The aggregate market value, as of June 30, 2009, of common shares of the registrant held by non-affiliates of the registrant was approximately $44.7 million, based upon the last sales price reported that date on The Nasdaq Global Market of $2.70 per share. (Aggregate market value is estimated solely for the purposes of this report and shall not be construed as an admission for the purposes of determining affiliate status.)

     Common shares of the registrant outstanding as of March 26, 2010 were 23,285,392.

     Part III: Portions of Registrant’s Proxy Statement relating to the Company’s 2010 Annual Meeting of Shareholders.

 

 

PRGX Global, Inc.

FORM 10-K
December 31, 2009

		Page
Part I
Item 1. Business			1
Item 1A. Risk Factors			12
Item 1B. Unresolved Staff Comments			19
Item 2. Properties			19
Item 3. Legal Proceedings			19
Item 4. [Reserved]			19
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			20
Item 6. Selected Financial Data			22
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			41
Item 8. Financial Statements and Supplementary Data			42
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			81
Item 9A. Controls and Procedures			81
Item 9B. Other Information			81
Part III
Item 10. Directors, Executive Officers and Corporate Governance			82
Item 11. Executive Compensation			82
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			83
Item 13. Certain Relationships and Related Transactions, and Director Independence			84
Item 14. Principal Accounting Fees and Services			84
Part IV
Item 15. Exhibits, Financial Statement Schedules			85
Signatures			90
EX-2.1
EX-10.26
EX-10.31
EX-10.32
EX-10.32.1
EX-10.33
EX-21.1
EX-23.1
EX-31.1
EX-31.2
EX-32.1

PART I

ITEM 1. Business

     The following discussion includes “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are at times identified by words such as “plans,” “intends,” “expects,” or “anticipates” and words of similar effect and include statements regarding the Company’s financial and operating plans and goals. These forward-looking statements include any statements that cannot be assessed until the occurrence of a future event or events. Actual results may differ materially from those expressed in any forward-looking statements due to a variety of factors, including but not limited to those discussed herein and below under Item 1A “Risk Factors.”

     PRGX Global, Inc. and its subsidiaries (collectively, the “Company,” “we” or “us”), a United States of America (“U.S.”) based company, incorporated in the State of Georgia in 1996, is a business analytics and information services firm. At the heart of the Company’s client services portfolio is the core capability of data mining to deliver “actionable insights”. This core capability is represented in the Company’s go-to-market services message which is “Audit — Analytics — Advice”, with analytics central to the Company’s value proposition.

     “Actionable insights” allow the Company’s clients to improve their financial performance by reducing costs, improving business processes and directly increasing profitability. Hence, the Company’s recent rebranding to PRGX with its accompanying tag line of “Discover Your Hidden Profits.” This process of discovery is entirely about the Company’s clients entrusting it with their data so the Company can identify levers to improve its clients’ corporate and financial performance.

     Historically, the Company’s legacy business has been “recovery audit” which is a service provided based on the mining of a tremendous amount of the Company’s clients’ data, looking for overpayments to their third party suppliers. Most of the Company’s large retail clients in mature markets employ their own internal staff to audit and recover overpayments to suppliers, and additionally engage the Company as a supplement to this internal function. For other clients, including some large and mid-size retailers, healthcare companies and the Company’s “commercial” (non-retail, non-healthcare) clients, the Company serves as the complete outsourced provider of this standard function. We process over 1.5 million client files each year, including purchase orders, receipt and shipment data, invoices, payables data and point of sales data, and have over 4 petabytes of client data available for analysis.

     As part of the Company’s new strategy announced in 2009 (see “The PRGX Strategy” below for additional information), the Company launched similar integrated value propositions across other drivers of client profitability. As evidenced by the Company’s February 2010 acquisition of Etesius Limited, a spend analytics company based in Chelmsford, United Kingdom (see Note 19 of “Notes to Consolidated Financial Statements” included in Item 8 of this Form 10-K for information regarding this acquisition), the Company is bolstering its client proposition around spend analytics and sourcing/procurement excellence. The data that the Company processes from its clients can be used to create spend reporting at the line item level of detail, which in turn enables supplier rationalization, collaborative purchasing, strategic sourcing and procurement transformation, all of which can dramatically enhance the client’s bottom line. The Company is providing these insights through web based technologies using the “SAAS” (software as a service) delivery model. The Company’s SAAS model uses a monthly license fee allowing customers to rapidly tailor service levels such as frequency of data refresh and scope of reporting outputs. The Company’s range of software based solutions extends to fraud and compliance reporting, control monitoring and contract management. As the Company’s clients’ data volume and complexity continues to grow, the Company is utilizing its deep data management experience to incubate new “actionable insight” solutions in retail and healthcare as well as developing custom analytics services. Taken together, the Company’s software capability and solutions provide multiple routes to discovering hidden profits.

The PRGX Recovery Audit Service Line

     The Company is the leading worldwide provider of recovery audit services principally to large businesses and government agencies having numerous payment transactions and complex purchasing environments. These businesses and agencies include:

	•		retailers such as discount, department, specialty, grocery and drug stores, and wholesalers who sell to these retailers;
	•		business enterprises other than retailers/wholesalers such as manufacturers, financial services firms, and pharmaceutical companies;
	•		healthcare payers, both private sector health insurance companies and state and federal government payers such as the Centers for Medicare and Medicaid Services (“CMS”); and
	•		federal and state government agencies other than government healthcare payers.

     In businesses and agencies with large transaction volumes and continuously fluctuating prices or complex rate structures, some small percentage of erroneous overpayments to vendors or providers is inevitable. Although the vast majority of these payment transactions are processed correctly, errors occur in a small percentage of transactions. In the aggregate, these transaction errors can represent significant amounts of cash flow for the Company’s clients. The Company’s trained, experienced industry specialists use sophisticated proprietary technology and advanced recovery techniques and methodologies to identify overpayments on behalf of clients.

     Under virtually all of its recovery audit contracts, the Company receives a contractual percentage of overpayments and other savings it identifies and its clients recover or realize. In other instances, the Company derives some of its revenues on a “fee-for-service” basis where the fee is a flat fee, a fee per hour, or a fee per other unit of service.

     The Company conducts its operations through three reportable operating segments: Recovery Audit Services — Americas, Recovery Audit Services — Europe/Asia-Pacific and New Services. The Recovery Audit Services Americas segment represents recovery audit services (other than healthcare recovery audit services) provided in the U.S., Canada and Latin America. The Recovery Audit Services — Europe/Asia-Pacific segment represents recovery audit services (other than healthcare recovery audit services) provided in Europe, Asia and the Pacific region. The New Services segment represents services to healthcare organizations including recovery audit services, business analytics and advisory services. The Company includes the unallocated portion of corporate selling, general and administrative expenses not specifically attributable to the Recovery Audit Services and New Services segments in a segment referred to as corporate support. The Company revised its reportable segments during the fourth quarter of 2009 to reflect the current management and operational structure. Prior to 2009, the Company reported its results under two operating segments — Domestic Accounts Payable Services and International Accounts Payable Services. The presentation of prior years’ financial information in this Form 10-K has been restated to conform to the current presentation. See Note 5 of “Notes to Consolidated Financial Statements” included in Item 8 of this Form 10-K for operating segment disclosures.

     The Company currently provides services to clients in over 30 countries. The Americas and Europe/Asia-Pacific Recovery Audit Services segments principally consist of services that entail the review of client accounts payable disbursements to identify and recover overpayments. These operating segments include accounts payable services provided to retailers and wholesale distributors (the Company’s historical client base) and accounts payable and other services provided to various other types of business entities and governmental agencies.

     In January 2010, PRG-Schultz International, Inc. was renamed PRGX Global, Inc., with simultaneous updates to the Company’s logo, marketing communications and website. The purpose of the rebranding was to create a better marketing platform for communicating all of the value that the Company can deliver to clients.

The Recovery Audit Industry

     Businesses and government agencies with substantial volumes of payment transactions involving multiple vendors, numerous discounts and allowances, fluctuating prices and complex pricing arrangements or rate structures find it difficult to process every payment correctly. Although the vast majority of payment transactions are processed correctly, errors occur in a small percentage of transactions. These errors include, but are not limited to, missed or inaccurate discounts, allowances and rebates, vendor pricing errors and duplicate payments. In the aggregate, these transaction errors can represent significant amounts of cash flow for the Company’s clients. The errors are caused by factors such as communication failures between the purchasing and accounts payable departments, complex pricing arrangements or rate structures, personnel turnover and changes in information and accounting systems.

     Although some organizations (including some large retailers) maintain internal recovery audit departments to recover certain types of payment errors and identify opportunities to reduce costs, independent recovery audit firms, like the Company, are often retained as well due to their specialized knowledge and focused technologies. In the U.S., Canada, the United Kingdom and France, large retailers routinely engage independent recovery audit firms as standard business practice. In other countries, large retailers and many other types of businesses are also engaging independent recovery audit firms.

     The Company believes that the domestic and international recovery audit industry for accounts payable services in major markets worldwide is comprised of the Company, one smaller but substantial competitor, and numerous other smaller competitors. Most of the smaller recovery audit firms are believed to not possess multi-country service capabilities and lack the centralized resources or broad client base to support the technology investments required to provide comprehensive recovery audit services for large, complex accounts payable systems. These firms are generally less equipped to audit large, data intensive purchasing and accounts payable systems. In addition, many of these firms have limited resources, and may lack experience and the knowledge of national promotions, seasonal allowances and current recovery audit practices. As a result, the Company believes that compared to most other firms providing accounts payable recovery audit services it has competitive advantages based on its national and international presence, well-trained and experienced professionals, and advanced technology.

     As businesses have evolved, the Company and the recovery audit industry have evolved with them, innovating processes, error identification tools, and claim types to maximize recoveries. The following are a number of factors significantly impacting the recovery audit industry:

	•		Data Capture and Availability. Businesses are increasingly using technology to manage complex procurement and accounts payable systems and realize greater operating efficiencies. Many businesses worldwide communicate with vendors electronically — whether by Electronic Data Interchange (“EDI”) or the Internet — to exchange inventory and sales data, transmit purchase orders, submit invoices, forward shipping and receiving information and remit payments. These systems capture more detailed data and enable the cost effective review of more transactions by recovery auditors.
	•		Increasing Number of Auditable Claim Categories. Traditionally, the recovery audit industry identified simple, or “disbursement,” claim types such as the duplicate payment of invoices. Enhancements to accounts payable software, particularly large enterprise software solutions used by many large companies, have reduced the extent to which these companies make simple disbursement errors. However, the introduction of creative vendor discount programs, complex pricing arrangements and activity-based incentives has led to an increase in auditable transactions and potential sources of error. These transactions are complicated to audit as the underlying transaction data is difficult to access and recognizing mistakes is complex. Recovery audit firms such as the Company with significant industry-specific expertise and sophisticated technology are best equipped to audit these complicated, or “contract compliance,” claim categories.
	•		Globalization. As the operations of major retailers and other business enterprises become increasingly global, they often seek service providers with a global reach.
	•		Consolidation in the Retail Industry. Retailer consolidation continues in both the U.S. and internationally. As retailers grow larger, vendors become more reliant on a smaller number of customers and, as a result, the balance of power favors retailers rather than their vendors. This dynamic creates an environment that allows retailers to assert overpayment claims more easily.

•

Significant Promotional Activity. Trade promotion spending is substantial within the retail trade and significant sums are being spent in categories with numerous transactions and a high potential for errors, such as scan downs, or discounts at the point of sale. Because of the high volume of trade promotion within retail, there are significant opportunities for mistakes and, therefore, auditable claims.

•

Move Toward Standard Auditing Practices. Increasingly, vendors to the Company’s clients are insisting on the satisfaction of certain conditions, such as clearer post-audit procedures, better documentation and electronic communication of claims, before accepting the validity of a claim.

     The evolution of the recovery audit industry is expected to continue. In particular, the Company expects that the industry will continue to move towards the electronic capture and presentation of data, more automated, centralized processing and faster approvals and deductions of claims.

The PRGX Recovery Audit Solution

     The Company provides its domestic and international clients with comprehensive recovery audit services by using sophisticated proprietary technology and a business intelligence platform, utilizing advanced auditing techniques and methodologies, and by employing highly trained, experienced industry specialists. As a result, the Company believes it is able to identify significantly more payment errors than its clients are able to identify through their internal audit capabilities and more payment errors than many of its competitors are able to identify.

     The Company is a leader in developing and utilizing sophisticated software audit tools and techniques that enhance the identification and recovery of payment errors. By leveraging its technology investment across a large client base, the Company is able to continue developing proprietary software tools and expanding its technology leadership in the recovery audit industry. The Company is also a leader in establishing new recovery audit practices to reflect evolving industry trends.

     The Company’s auditors are highly skilled professionals. Many have joined the Company from finance-related management positions in the industries the Company serves. To support its clients, the Company provides its auditors and audit teams with data processing services, software and software support, sales and marketing assistance, and training and administrative services.

The PRGX Strategy

     During 2009, the Company’s executive management team performed an extensive review of the Company’s competitive advantages and marketplace opportunities and developed a revised business strategy. The five components of the new growth strategy are:

	1.		grow the accounts payable recovery audit business;
	2.		grow the healthcare recovery audit business;
	3.		expand data mining for profitability;
	4.		grow the advisory services business; and
	5.		build a strong team with a high-performance culture.

     These elements of the new growth strategy represent the reinvigoration of the core business while significantly expanding the services portfolio. The go-to-market strategy is built on a competency foundation that includes data mining, audit/forensics capabilities, finance and procure-to-pay business process expertise, and a proprietary business intelligence platform. The services that best leverage these capabilities are now referred to as audit, analytics and advice. The Company believes that these services can be combined to effectively discover and deliver hidden profits for its clients, enabling the creation of a new service category in the professional services marketplace: Profit Discovery.

Grow the Accounts Payable Recovery Audit Business

     The “Grow the Accounts Payable Recovery Audit Business” component of the new strategy is centered on expanding the Company’s traditional stronghold in recovery audit in the retail industry, along with a renewed focus on profitably delivering recovery audit services to non-retail (or what is internally referred to as “commercial”) clients.

     In order to facilitate growth in the accounts payable recovery audit market, the Company has reintroduced a dedicated sales force. In addition, several programs have been initiated to improve the quality of the Company’s client relationships and to better manage its existing accounts. The Company has established alliance agreements with several third party service providers to allow the Company to offer its clients a comprehensive suite of recovery audit services beyond accounts payable to include tax, real estate, and telecommunications audits. The new service offerings made possible by these alliance partners both broaden the scope of our audits with existing clients and will help establish new client relationships and business opportunities around the globe. With a keen focus on business development and audit strategy, the Company is optimistic about building this core part of its business.

     For the commercial market, a dedicated sales team has again been created for the commercial recovery audit market, enabling the aggressive pursuit of this client base. Through the centralization of audit services capabilities, the Company has substantially improved its ability to serve these clients profitably. Additional service delivery model adjustments are underway to further improve the gross margin of what is expected to become a larger portion of the Company’s recovery audit client base.

     Simultaneously, although over a slightly longer time frame, the Company is building the next-generation recovery audit business model by leveraging emergent technology and a global service footprint to significantly lower the cost-to-serve. This will enable the Company to serve current clients more efficiently and will also significantly expand the addressable target market.

Grow the Healthcare Recovery Audit Business

     The majority of the Company’s Healthcare Recovery Audit services to date relates to the auditing of Medicare spending as part of the legislatively mandated recovery audit contractor (“RAC”) program of the Centers for Medicare and Medicaid Services (“CMS”), the federal agency that administers the Medicare program. From March 28, 2005 through March 27, 2008, the Company was one of three recovery audit contractors that participated in CMS’s demonstration recovery audit contractor project after being awarded contracts by CMS. Under the demonstration project, the Company was responsible for auditing Medicare spending in the State of California and two other contractors were responsible for auditing Medicare spending in Florida and New York. Under CMS’s national RAC program, the auditing under which is still ramping up, the Company is operating as a subcontractor in three of the national RAC program’s four geographic regions. The principal services provided as part of the Medicare RAC program involve the identification of overpayments and underpayments made by Medicare to healthcare providers, such as hospitals and physicians’ practices. The Company identifies such improper payments by using various methods, including proprietary methods which are comparable to the Company’s proprietary techniques developed through many years of performing other types of recovery audits involving massive volumes of transaction data.

     The Company’s growth strategy in healthcare is to execute with excellence its role in the CMS RAC program, and leverage its healthcare services infrastructure to expand recovery audit services to other healthcare payers. The Company has invested heavily in the infrastructure and tools required to execute its RAC program subcontracts and expects to continue investing in this business over the next 9 to 12 months. We believe much of this infrastructure can be applied to audit medical claims paid by other healthcare payers. The Company has started building a sales capability to sell into other government entities, private payers, and self-administered employers.

Expand Data Mining for Profitability

     The Company has launched an integrated value proposition across drivers of client profitability other than the recovery of overpayments. As evidenced by the Company’s acquisition of Etesius Limited on February 25, 2010 (see Note 19 of “Notes to Consolidated Financial Statements” included in Item 8 of this Form 10-K for more information), the Company is bolstering its client proposition around spend analytics and sourcing/procurement excellence. All of the data that the Company processes from its clients can be used to create spend reporting at the line item level of detail, a capability which many of the Company’s clients do not possess in-house. These reports

are provided to the Company’s clients as a service, commonly known as “SAAS” or software as a service, at a frequency level and service level pre-defined by the client. The Company will also provide software solutions around fraud testing and prevention, compliance and controls, contract management and other elements of the procure to pay process.

Grow the Advisory Services Business

     Senior executives of complex organizations regularly require external help to identify and realize profit improvement opportunities. The Company’s advisory services combine data analytics with deep functional expertise and a practical hands-on approach to help these client executives improve their operating margins. Our immediate service offerings supporting the CFO suite include working capital optimization, corporate performance management, enterprise cost reduction and finance transformation. Additional service areas that leverage the Company’s analytical capabilities and long-standing client relationships are in development. These new services are designed to improve the profitability of its clients’ procure-to-pay cycle and merchandise optimization.

Build a Strong Team with a High-Performance Culture

     The final element of the Company’s strategy is to become a magnet for global talent and expertise relevant to its service lines and operations. As part of the Company’s overall transformation, a culture of results-oriented performance and collaboration must be built, and innovation and knowledge sharing must be facilitated. This transformation is crucial to ensure that the very best practices are captured, understood, and deployed consistently across every client globally. In addition, the Company intends to significantly increase its focus on recruiting. The success of the Company’s new strategy is predicated on finding and putting in place client-facing personnel who can identify the levers to add to clients’ profitability and effectively position the Company’s services.

PRGX Services

Accounts Payable Recovery Audit Services

     Recovery auditing is a business service focused on finding overpayments created by complex purchasing processes. Through the use of proprietary technology, audit techniques and methodologies, the Company’s trained and skilled auditors examine procurement records on a post-payment basis to identify overpayments, including those resulting from situations such as missed or inaccurate discounts, allowances and rebates, vendor pricing errors and duplicate payments.

     The Company serves two main client types in its core accounts payable recovery audit business: retailers/wholesalers and business enterprises other than retailers/wholesalers (called “commercial” clients within the recovery audit industry). Each type is typically served with a different service delivery model, as more particularly described below.

     Retail/Wholesale

     Accounts payable recovery audit services provided to retail/wholesale clients currently accounts for the substantial majority of the Company’s revenues. These audit services typically recur annually and are the most extensive of the Company’s recovery audit services, focusing on numerous recovery categories related to procurement and payment activities, as well as client/vendor promotions and allowances. These audits typically entail comprehensive and customized data acquisition from the client, frequently including purchasing, receiving, point-of-sale, pricing and deal documentation, emails, and payment data. Recovery audits for larger retail/wholesale clients often require year-round on-site work by multi-auditor teams.

     Commercial

     The service model for commercial clients is generally different from that for retailers. The substantial majority of the Company’s domestic commercial recovery audit services clients are served using a disbursement audit service model which entails obtaining limited data from the client and an audit focus on a select few recovery categories. Services to these types of clients to date have tended to be either periodic (typically, every two to three years) or

rotational in nature with different divisions of a given client being audited in pre-arranged periodic sequences. Accordingly, revenues derived from a given commercial client may change markedly from year to year. Additionally, the duration of a disbursement audit is often measured in weeks or months, as opposed to years, and the number of auditors assigned per client is usually between one and five.

     Healthcare Recovery Audit Services

     The principal services currently provided as part of healthcare recovery audit involve the identification of overpayments and underpayments made to healthcare providers, such as hospitals and physicians’ practices. The Company identifies such improper payments by using various methods, including proprietary methods which are comparable to the Company’s proprietary techniques developed through many years of performing other types of recovery audits involving massive volumes of transaction data. Auditing medical claims data requires in-depth expertise in healthcare procedures and billing processes, requiring a staff of healthcare professionals, including doctors and nurses.

     Three different categories of healthcare recovery auditing are:

	•		Administrative compliance — analysis of paid claims data to determine if services were provided based on contractual, policy and procedural standards;
	•		Coding and billing — analysis of paid claims data and corresponding medical records to determine payment accuracy; and
	•		Medical necessity — analysis of paid claims data and review of medical records to determine if services were reasonable and necessary.

     The Company’s clients for its healthcare recovery audit services include CMS and other governmental and private payers.

Business Analytics and Advisory Services

     The Company provides advisory services to senior finance executives to optimize working capital, reduce enterprise costs, transform the finance function and improve corporate performance. These services target client functional and process areas where the Company has established expertise. Recovery audit services operate in a mindset of continuous improvement, i.e., reporting on the over-payment “categories” and their root causes. The Company’s advisory services teams are well positioned to help clients resolve many of the root causes of errors identified as part of the Company’s recovery audit services.

     Further, the Company believes there are additional opportunities to expand the advisory services it provides to clients. Specific opportunities relate to services tailored for CFOs and controllers, direct procurement or merchandising for retailers, and indirect procurement leaders across all industries. The Company is investing in a portfolio of services that will target the CFO suite, and will continue to evaluate how to leverage deep category insights to help clients procure better.

     Both the business analytics and advisory services businesses have independent go-to-market elements, however the Company sees the opportunity for greater client value by leveraging analytics capabilities and insights in combination with the delivery of advisory services. To deliver on this promise, the first of what will eventually be several key ‘integrated value propositions,’ combining services across our continuum, are currently under development. With a combination of data analytics, deep functional expertise, and a practical hands-on approach, the Company is building a body of project work that it believes will serve as important qualifications for the future, and the Company is expanding its business analytics and advisory services teams as it makes additional investments in these areas in 2010.

Clients

     The Company provides its services principally to large and mid-sized businesses and government agencies having numerous payment transactions and complex procurement environments. Retailers/wholesalers continue to constitute the largest part of the Company’s client and revenue base. The Company’s five largest clients contributed

approximately 29.9%, 30.4% and 32.6% of its revenues from continuing operations for the years ended December 31, 2009, 2008 and 2007, respectively. For the years ended December 31, 2009 and 2008, Wal-Mart Stores Inc. (and its affiliated companies) accounted for approximately 12.3% and 11.2% of our total revenues, respectively. The Company did not have any clients who individually provided revenues in excess of 10.0% of total revenues from continuing operations during the year ended December 31, 2007.

Sales and Marketing

     Due to the highly confidential and proprietary nature of an organization’s purchasing patterns, procurement practices and payment data, as well as the typical desire to maximize the amount of funds recovered, most prospective clients conduct an extensive investigation prior to engaging a specific recovery audit firm. The Company has found that its service offerings that are the most annuity-like in nature, such as a contract compliance audit, typically require a relatively long sales cycle and a relatively high level of direct person-to-person contact.

     To support the overall recovery audit growth strategy the Company has developed new sales teams for Recovery Audit Services-Americas. Within this segment, sales roles have been created to separately target the retail recovery audit market, the commercial recovery audit market, and the healthcare recovery audit market. Different sales strategies have also been implemented to best serve each of the different markets (e.g. external sales vs. internal sales) and sales enablement resources have been created to support the different Americas sales teams. Recovery audit sales efforts are also coordinated with the business analytics and advisory services sales efforts to ensure that integrated solutions that meet client needs are being offered. Similar sales strategies and dedicated sales teams are also in use in the Europe/Asia-Pacific recovery audit market.

Client Contracts

     The Company typically provides services to its clients under terms of a contract. The Company’s compensation under recovery audit service contracts is in most all cases set as a stipulated percentage of improper payments or other savings recovered for or realized by clients. Recovery audit clients generally recover claims by either (a) taking credits against outstanding payables or future purchases from the involved vendors, or (b) receiving refund checks directly from those vendors. The manner in which a recovery audit claim is recovered by a client is often dictated by industry practice. In many cases, client-specific procedural guidelines must be satisfied by the Company before recovery audit claims are submitted for client approval. For some services provided by the Company such as advisory services, client contracts often provide for compensation to the Company in the form of a flat fee, or fee rate per hour, or a fee per other unit of service.

     Most of the Company’s contracts contain provisions that would permit the client to terminate the contract without cause prior to the completion of the term of the agreement by providing us with relatively short prior written notice of the termination. In addition to being subject to termination for material default, the Company’s CMS RAC program subcontracts are subject to termination or partial termination for convenience to the extent all or any portion of the work covered by the associated RAC prime contract is eliminated by CMS, or to the extent the Company’s performance of the subcontract results in an organizational conflict of interest that is not mitigated or able to be mitigated after joint consultation among CMS, the RAC prime contractor and the Company.

Technology

     The Company uses advanced, proprietary information systems and processes and a large-scale technology infrastructure to conduct its audits of clients’ payment transactions. Because of the ever increasing volume and complexity of the transactions of its clients, the Company believes that its proprietary technology and processes serve as important competitive advantages over both its principal competitors and its clients’ in-house internal recovery audit functions. To sustain these competitive advantages, the Company continually invests in technology initiatives for the purpose of sustaining and improving its advantages in delivering innovative solutions that improve both the effectiveness and efficiency of the Company’s services.

     The Company’s data acquisition, data processing and data management methodologies are aimed at maximizing efficiencies and productivity and maintaining the highest standards of transaction auditing accuracy.

     At the beginning of a typical recovery audit engagement, the Company utilizes a dedicated staff of data acquisition specialists and proprietary tools to acquire a wide array of transaction data from the client for the time period under review. The Company typically receives this data by secured electronic transmissions, magnetic media or paper. For paper-based data the Company uses a custom, proprietary imaging technology to scan the paper into electronic format. Upon receipt, the data is secured, catalogued, backed up and converted into standard, readable formats using third party and proprietary tools.

     Massive volumes of client data are cleansed and mapped by the Company’s technology professionals, primarily using high performance database and storage technologies, into standardized layouts at one of the Company’s data processing facilities. Statistical reports are also generated to verify the completeness and accuracy of the data.

     The data is then processed using algorithms (business rules) leveraging over thirty years’ experience to help uncover patterns or potential problems in clients’ various transactional streams. The Company delivers this data with a high probability of transaction errors to its auditors who, using the Company’s proprietary audit software, sort, filter and search the data to validate and identify actual transaction errors. The Company also maintains a secure database of audit information with the ability to query on multiple variables, including claim categories, industry codes, vendors and audit years, to facilitate the identification of additional recovery opportunities and provide recommendations for process improvements to clients.

     Once errors are validated, the information is presented to clients for approval and submission to vendors as “claims.” The Company offers an Internet-based claim presentation and collaboration tool, which leverages its proprietary imaging technology to help the client view, approve and submit claims to vendors.

     In the spend analytics business, the Company uses proprietary algorithms and technologies to clean and classify a client’s vendor spend data down to the line item level. This information is then presented to clients as a multi-dimensional data cube over a web-based interface. The Company believes these proprietary algorithms and technologies provide it with a competitive advantage over many of its competitors.

     The Company has implemented and manages several distinct technical and procedural controls to ensure the confidentiality and security of client data and other information. The data security program encompasses compliance with applicable regulatory requirements within a framework based on International Standards Organization publications and industry best practices.

Auditor Hiring, Training and Compensation

     Many of the Company’s auditors and specialists formerly held finance-related management positions in the industries the Company serves. Training provided in the field by the Company’s experienced auditors enables newly hired auditors to develop and refine their auditing skills and improve productivity. Additionally, the Company provides training for auditors utilizing both classroom training and training via self-paced media such as specialized computer-based training modules. Training programs are periodically upgraded based on feedback from auditors and changing industry protocols. Many of the Company’s auditors and specialists participate in one of the Company’s incentive compensation plans that link compensation of the auditor or specialist to audit performance.

Proprietary Rights

     From time to time, the Company develops new software and methodologies that replace or enhance existing proprietary software and methodologies. The Company relies primarily on trade secret and copyright protection for its proprietary software and other proprietary information. The Company owns or has rights to various copyrights, trademarks and trade names used in the Company’s business. The Company’s trademarks and trade names include, but are not limited to PRGX^SM, Discover Your Hidden Profits^SM, PRG-Schultz^®, imDex^®, AuditPro™, SureF!nd™ , Direct F!nd™ and claimDex™.

Competition

Accounts Payable Recovery Audit

     The Company has numerous accounts payable recovery audit competitors, all but one of which are believed to be substantially smaller than the Company. The Company believes that only one of its competitors, also believed to be smaller than the Company, offers a full suite of international recovery audit services. Barriers to effective entry and longevity as a viable accounts payable auditor are believed to vary based on the complexity of the audit. For complex audits, including contract compliance auditing such as that done for large retailers, the Company believes that barriers to entry are significant as a result of numerous factors including, but not limited to, significant technology infrastructure requirements, the need to gather, summarize and examine volumes of client data at the line-item level of detail, the need to establish effective audit techniques and methodologies, and the need to hire and train audit professionals to work in a very specialized manner that requires technical proficiency with numerous recovery categories.

     The Company believes that the barriers to entry for less complex duplicate and statement disbursement audit services are relatively low and that this market is highly competitive. It is the Company’s belief that the low barriers to entry for these types of services result from limited technology infrastructure requirements, the need for relatively minimal high-level data, and an audit focus on a select few recovery categories. The Company’s revenues for the less complex duplicate and statement disbursement audit services total less than 5% of its total revenues for 2009.

     While the Company believes that it has the greatest depth and breadth of audit expertise, data and technology capabilities, scale and global presence in the industry, the Company faces competition from the following:

Client Internal Recovery Audit Departments. A number of large retailers (particularly those in the discount, grocery and drug sectors) have developed an internal recovery audit process to review transactions prior to turning them over to external recovery audit firms. Regardless of the level of recoveries made by internal recovery audit departments, the Company has observed that virtually all large retail clients retain at least one (primary), and sometimes two (primary and secondary), external recovery audit firms to capture errors not identified by their internal recovery audit departments.

Other Accounts Payable Recovery Audit Firms. The competitive landscape in the recovery audit industry is comprised of:

	•		Full-service accounts payable recovery audit firms. The Company believes that only one other company also offers a full suite of U.S. and international recovery audit services;
	•		A large number of smaller accounts payable recovery firms which have a limited client base and which use less sophisticated tools to mine disbursement claim categories at low contingency rates. These firms are most common in the U.S. market. Competition in most international markets, if any, typically comes from small niche providers;
	•		Firms that offer a hybrid of audit software tools and training for use by internal audit departments, and/or general accounts payable process improvement enablers; and
	•		Firms with specialized skills focused on recovery audit services for discrete sectors such as sales and use tax or real estate.

Other Providers of Recovery Audit Services. The major international accounting firms provide recovery audit services; however, the Company believes their practices tend to be focused on tax-related services.

Healthcare Recovery Audit Services

     A number of national and regional private payers also have developed their own post payment recovery audit capabilities. Nevertheless, these private payers typically also retain or engage one or more third party post payment audit service providers. The competitive landscape in the healthcare recovery audit includes:

	•		Firms that provide recovery audit services across multiple industries including healthcare;
	•		Firms that provide healthcare IT solutions and services to both the government and private payers; and

•

Firms that contract with federal and state governments’ integrity programs.

     Business Analytics Services

The Company’s business analytics services compete with a range of providers ranging from large, well known ERP software vendors, procurement specific software providers and smaller, very specialized analytics providers. In addition, in certain instances the Company may be competing against consulting firms that develop custom analytics tools on behalf of their clients.

     Advisory Services

The Company’s advisory services business faces competition from regional and local consulting firms as well as from privately and publicly held worldwide and national firms, many of whom have established and well known franchises and brands. These businesses compete generally on the basis of the range, quality and cost of the services and products provided to clients. The Company believes that it is differentiated from its competitors by virtue of synergies with the Company’s analytics capabilities and its direct channel to existing accounts payable recovery audit clients.

Regulation

     Various aspects of the Company’s business, including, without limitation, its data acquisition, processing and reporting protocols, are subject to extensive and frequently changing governmental regulation in both the U.S. and internationally. These regulations include extensive data protection and privacy requirements such as, in the U.S., the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), with respect to the Company’s healthcare claims recovery audit work, and, internationally, the European Data Protection Directive, as such Directive has been implemented by various members of the European Union in which the Company operates. Failure to comply with such regulations may, depending on the nature of the noncompliance, result in the termination or loss of contracts, the imposition of contractual damages, civil sanctions, damage to the Company’s reputation or in certain circumstances, criminal penalties.

Employees

     As of January 31, 2010, the Company had approximately 1,300 employees, of whom approximately 630 were located in the U.S. The majority of the Company’s employees are involved in the audit function. None of the Company’s employees are covered by a collective bargaining agreement and the Company believes its employee relations are satisfactory.

Website

     The Company makes available free of charge on its website, www.prgx.com, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports. The Company makes all filings with the Securities and Exchange Commission available on its website no later than the close of business on the date the filing was made. In addition, investors can access the Company’s filings with the Securities and Exchange Commission at www.sec.gov.

ITEM 1A. Risk Factors

Revenues from our accounts payable recovery audit business have declined over the last several years. We must successfully execute our recovery audit growth strategy in order to reverse this trend.

     Over time, our clients tend to resolve recurring transaction processing deficiencies. In addition, many of our clients have internal staffs that audit the transactions before we do. As the skills, experience and resources of our clients’ internal recovery audit staffs improve, they will identify many overpayments themselves and reduce some of our audit recovery opportunities. Based on these and other factors, including competitive rate pressures and loss of clients from time to time, without improved audit execution and acquisition of new clients, we believe that our accounts payable recovery audit business will continue to experience revenue declines.

We depend on our largest clients for significant revenues, so losing a major client could adversely affect our revenues and liquidity.

     We generate a significant portion of our revenues from our largest clients. For the years ended December 31, 2009, 2008 and 2007, our five largest clients accounted for approximately 29.9%, 30.4% and 32.6% of our revenues from continuing operations, respectively. For the years ended December 31, 2009 and 2008, Wal-Mart Stores Inc. (and its affiliated companies) accounted for approximately 12.3% and 11.2% of our total revenues, respectively. If we lose any of our major clients, our results of operations and liquidity could be materially and adversely affected.

We have a history of losses and may not be able to sustain profitability.

     We reported a net loss from continuing operations of $7.1 million for the year ended December 31, 2007 and net losses of $21.1 million, $207.7 million, $71.5 million, and $160.8 million for the years ended December 31, 2006, 2005, 2004 and 2003, respectively. Despite reporting a profit from continuing operations for the years ended December 31, 2009 and 2008, we can make no assurance that our ongoing cost management efforts or our attempts to increase our revenues will be successful on a sustained basis. If we are not able to increase revenues and effectively manage our costs, we may not be able to sustain profitability in the future or generate sufficient cash to fund our operations and pay our indebtedness.

Client and vendor bankruptcies and financial difficulties could reduce our earnings.

     Our clients generally operate in intensely competitive environments and, accordingly, bankruptcy filings by our clients are not uncommon. Bankruptcy filings by our large clients or the significant vendors who supply them or unexpectedly large vendor claim chargebacks lodged against one or more of our larger clients could have a materially adverse effect on our financial condition and results of operations. Similarly, our inability to collect our accounts receivable due to other financial difficulties of one or more of our large clients could adversely affect our financial condition and results of operations.

     Recent economic conditions which have adversely impacted the U.S. retail industry may continue to negatively impact our revenues. Since we audit our clients’ purchases on an average of 12-18 months in arrears, we may not know the full impact of the recent economic downturn on our business and revenues until late 2010 or later. We expect that if the retail industry economic conditions continue to erode, it could continue to have a negative impact on our revenues. Specifically, client liquidity and the liquidity of client vendors can significantly impact claim production, the claim approval process, and the ability of clients to offset or otherwise make recoveries from their vendors.

     If a client files for bankruptcy, we could be subject to an action to recover certain payments received in the 90 days prior to the bankruptcy filing known as “preference payments.” If we are unsuccessful in defending against such claims, we would be required to make unbudgeted cash payments which could strain our financial liquidity and our earnings would be reduced.

Our growth strategy may not be successful.

     As discussed in Item 1 “The PRGX Strategy,” our objective is to build on our position as the leading worldwide provider of recovery audit services and to develop and grow our business analytics and advisory services businesses.

Our strategic plan to achieve these objectives focuses on a series of initiatives designed to maintain our dedicated focus on clients and rekindle our growth. We are executing a number of initiatives that are designed to implement our strategy. These initiatives are ongoing and the results of the strategy and implementation will not be known until sometime in the future. Each of the initiatives requires sustained management focus, organization and coordination over time, as well as success in building relationships with third parties. If we are unable to implement our strategy successfully, our results of operations and cash flows could be adversely affected. In addition, implementation of our strategy will require material investments and cost increases which may not yield incremental revenues and improved financial performance as planned.

We have incurred significant costs in establishing the necessary resources to provide services for Medicare audit recovery work and we will continue to incur significant costs as a subcontractor in the national RAC program. Furthermore, revenues from our Medicare audit recovery work lag significantly behind these costs and may not justify the costs incurred.

     We have expended substantial resources in connection with preparing for and providing Medicare audit services under CMS’s RAC program. While our participation in the RAC demonstration project made an important contribution to our revenues in 2006 and 2007, the RAC demonstration project contract expired on March 27, 2008. We continue to incur significant costs relating to our participation as a subcontractor in the national RAC program. We incurred an operating loss of approximately $4.0 million during the year ended December 31, 2009 in connection with our RAC subcontractor program work. In addition, as a result of the complex regulations governing Medicare payments and recoupments, including a multi-layered scheme for provider appeals of overpayment determinations, the terms of the Company’s Medicare audit subcontracts and the complexity of Medicare data, systems and processes, generally, it is more difficult and takes longer to achieve recoveries than in other areas of our recovery audit business.

Recovery auditing of Medicare spending is subject to a number of pressures and uncertainties that could impact our future opportunities and revenues from this business.

     As contrasted with recovery auditing for our retail/wholesale and commercial clients, recovery auditing of Medicare spending is a legislatively mandated program subject to, among other things, the efforts of healthcare providers and provider associations, including political pressures, to end or severely limit the CMS recovery audit program. These efforts and political pressures are expected to be ongoing throughout the life of the CMS recovery audit program and during 2007, for example, resulted in a number of significant developments. In October 2007, CMS implemented a temporary “pause” in our review under the RAC demonstration program of certain payments made to rehabilitation hospitals. Further, on November 8, 2007, legislation was introduced in Congress proposing a one year halt to CMS’s recovery audit program and calling for an assessment of the program by the U.S. Government Accountability Office. Although the referenced legislation was not passed, and the national CMS RAC program is underway, similar legislative efforts to delay or eliminate the program could emerge at any time and management is unable to assess the prospects for the success of any such legislation. Furthermore, efforts by healthcare providers and provider associations to limit or end the program are expected to be ongoing. If CMS’s recovery audit program is significantly limited or delayed, subjected to burdensome or commercially challenging requirements, terms and/or conditions, or altogether terminated, our future revenues, operating results and financial condition could be materially adversely impacted.

Our participation in the national Medicare recovery audit program is as a subcontractor, and consequently, is subject to being reduced or eliminated should the prime contractors with whom we have contracted have their prime contracts with CMS terminated or should those contracts expire.

     Under CMS’s national recovery audit contractor program, we will be participating as a subcontractor in three of the national RAC program’s four geographic regions. Accordingly, we have entered into three separate contracts with the prime contractors and are not directly contracting with CMS. Under these circumstances, we generally bear the risk that the prime contractors will not meet their performance obligations to CMS under the prime contract, that the prime contractors will not pay us amounts due under the subcontracts and that the prime contractors will seek to minimize our role in RAC program. The failure of a prime contractor to perform its obligations to CMS could result in the termination of such contract with CMS which would, in turn, result in the termination of our subcontract. Additionally, CMS could choose to not exercise its option to extend its contract with any of the prime contractors at the end of any one-year term, which would also, in turn, result in our subcontract with that prime contractor

expiring. The termination or expiration of these subcontracts or the failure of the prime contractors to make required payments to us could have a material adverse effect on our business, financial condition and results of operations.

We may be unable to protect and maintain the competitive advantage of our proprietary technology and intellectual property rights.

     Our operations could be materially and adversely affected if we are not able to protect our proprietary software, audit techniques and methodologies, and other proprietary intellectual property rights. We rely on a combination of trade secret and copyright laws, nondisclosure and other contractual arrangements and technical measures to protect our proprietary rights. Although we presently hold U.S. and foreign registered trademarks and U.S. registered copyrights on certain of our proprietary technology, we may be unable to obtain similar protection on our other intellectual property. In addition, our foreign registered trademarks may not receive the same enforcement protection as our U.S. registered trademarks.

     Additionally, to protect our confidential and trade secret information, we generally enter into nondisclosure agreements with our employees, consultants, clients and potential clients. We also limit access to, and distribution of, our proprietary information. Nevertheless, we may be unable to deter misappropriation or unauthorized dissemination of our proprietary information, detect unauthorized use and take appropriate steps to enforce our intellectual property rights. Even though we take care to protect our own intellectual property, there is no guarantee that our competitors will not independently develop technologies that are substantially equivalent or superior to our technology. Moreover, although we believe that our services and products do not infringe on the intellectual property rights of others, we are also subject to the risk that someone else will assert a claim against us in the future for violating their intellectual property rights.

Security breaches or computer viruses could harm our business by disrupting our delivery of services, damaging our reputation or exposing us to liability.

     We receive, process, store and transmit our clients’ confidential data electronically. Unauthorized access to our computer systems or stored data could result in the theft or disclosure of confidential information or the deletion or modification of records or could cause interruptions in our operations. These security risks increase when we transmit information over the Internet or other electronic networks. Despite implemented security measures, computer viruses from electronic networks or in physical media could infiltrate our systems and disrupt our delivery of services or expose our clients’ confidential information. A security breach or computer virus could have a negative impact on our reputation, could expose us to liability to our clients, third parties or government authorities and could cause our present and potential clients to choose another service provider. Any of these developments could have a material adverse effect on our business, results of operations and financial condition.

Operational failures in our data processing facilities could harm our business and reputation.

     An interruption of data processing services caused by damage or destruction of our facilities or a failure of our data processing equipment could result in a loss of clients, difficulties in obtaining new clients and a reduction in revenue. In addition, we may also be liable to third parties or our clients because of such interruption. These risks increase with longer service interruptions. Despite any disaster recovery and business continuity plans and precautions we have implemented (including insurance) to protect against the effects of service delivery interruptions, such interruptions could result in a material adverse effect on our business, results of operations and financial condition.

Our failure to retain the services of key members of management and highly skilled personnel could adversely impact our operations and financial performance.

     Our future success depends largely on the efforts and skills of our executive officers and key employees. As such, we have entered into employment agreements with key members of management. While these employment agreements limit the ability of key employees to directly compete with us in the future, nothing prevents them from leaving our company.

     In addition, it is especially challenging to attract and retain highly qualified skilled auditors and other professionals in an industry where competition for skilled personnel is intense. Accordingly, our future performance also depends, in part, on the ability of our management team to work together effectively, manage our workforce,

and retain highly qualified personnel.

We rely on operations outside the U.S. for a significant portion of our revenues.

     Approximately 45.8% and 42.8% of our revenues from continuing operations were generated from operations outside the U.S. in 2009 and 2008, respectively. These international operations are subject to numerous risks, including:

	•		political and economic instability in the international markets we serve;
	•		difficulties in staffing and managing foreign operations and in collecting accounts receivable;
	•		fluctuations in currency exchange rates, particularly weaknesses in the British pound, the euro, the Canadian dollar, the Mexican peso, and the Brazilian real and other currencies of countries in which we transact business, which could result in currency translations that materially reduce our revenues and earnings;
	•		costs associated with adapting our services to our foreign clients’ needs;
	•		unexpected changes in regulatory requirements and laws;
	•		expenses and legal restrictions associated with transferring earnings from our foreign subsidiaries to us;
	•		burdens of complying with a wide variety of foreign laws and labor practices;
	•		business interruptions due to widespread disease, potential terrorist activities, or other catastrophes;
	•		reduced or limited protection of our intellectual property rights; and
	•		longer accounts receivable cycles.

     Because we expect a significant portion of our revenues to continue to come from operations outside the U.S., the occurrence of any of these events could materially and adversely affect our business, financial condition and results of operations.

Our revenues from providing accounts payable recovery audit services to commercial clients have been declining.

     The service model for commercial clients is generally different from that for retailers. The substantial majority of our domestic commercial accounts payable recovery audit clients are served using a disbursement audit service model which entails obtaining limited data from the client and an audit focus on a select few recovery categories. Historically, services to these types of clients have tended to be either periodic (typically, every two to three years) or rotational in nature with different divisions of a given client being audited in pre-arranged periodic sequences. Accordingly, revenues derived from a given commercial client may change markedly from year to year. Additionally, the duration of a disbursement audit is often measured in weeks or months, as opposed to years, and the number of auditors assigned per client is usually between one and five. We will need to successfully execute our strategies to lower our cost to serve commercial recovery audit clients, broaden the number of profitably served recovery audit clients and grow our other lines of business in order to stabilize and increase our revenues to replace declining revenues from this business.

Our recovery audit services, business analytics and advisory services businesses operate in highly competitive environments and are subject to pricing pressure.

     The recovery audit business is highly competitive, with numerous other recovery audit firms and other providers of recovery audit services, and with many clients having developed their own internal audit capabilities. As a result of competition among the providers of recovery audit services and the availability of certain audit services from clients’ internal audit departments, our recovery audit services business is subject to intense price pressure. Such price pressure could cause our profit margins to decline and have a material adverse effect on our business, financial condition, and results of operations.

     Our business analytics and advisory services businesses also have numerous competitors varying in size, market strength and specialization. These businesses face competition, in some cases, from firms who have established and well known franchises and brands. Frequently, these businesses must compete not only on service quality and expertise, but also on price. Intense price competition faced by these service lines could negatively impact our profit margins and have a potential adverse effect on our business, financial condition and results of operations.

Generally our client contracts contain provisions under which the client may terminate the agreement prior to the completion of the agreement.

     Many of our client contracts contain provisions that would permit the client to terminate the contract without cause prior to the completion of the term of the agreement by providing us with relatively short prior written notice of the termination. As a result, the existence of contractual relationships with our clients is not an assurance that we will continue to provide services for our clients through the entire terms of their respective agreements. If clients representing a significant portion of our revenues terminated their agreements unexpectedly, we may not, in the short-term, be able to replace the revenues and earnings from such contracts and this would have a material adverse effect on our operations and financial results. In addition, client contract terminations could also harm our reputation within the industry which could negatively impact our ability to obtain new clients.

Our failure to comply with applicable governmental privacy laws and regulations could substantially impact our business, operations and financial condition.

     We are subject to extensive and evolving federal, state and foreign privacy laws and regulations. Changes in privacy laws or regulations or new interpretations of existing laws or regulations could have a substantial effect on our operating methods and costs. Failure to comply with such regulations could result in the termination or loss of contracts, the imposition of contractual damages, civil sanctions, damage to the Company’s reputation, or in certain circumstances, criminal penalties, any of which could have a material adverse effect on our results of operations, financial condition, business and prospects. Determining compliance with such regulations is complicated by the fact that many of these laws and regulations have not been fully interpreted by governing regulatory authorities or the courts and many of the provisions of such laws and regulations are open to a wide range of interpretations. There can be no assurance that we are or have been in compliance with all applicable existing laws and regulations or that we will be able to comply with new laws or regulations.

The ownership change that occurred as a result of our 2006 exchange offer limits our ability to use our net operating losses.

     We have substantial tax loss and credit carry-forwards for U.S. federal income tax purposes. On March 17, 2006, as a result of the closing of its exchange offer, the Company experienced an ownership change as defined under Section 382 of the Internal Revenue Code (“IRC”). This ownership change resulted in an annual IRC Section 382 limitation that limits the use of certain tax attribute carry-forwards. Of the $47.4 million of U.S. federal net loss carry-forwards available to the Company, $21.9 million of the loss carry-forwards are subject to an annual usage limitation of $1.4 million. We believe that such limitations and the loss of these carry-forwards may significantly increase our projected future tax liability.

Certain of our tax positions may be subject to challenge by the Internal Revenue Service and other tax authorities, and if successful, these challenges could increase our future tax liabilities and expense.

     For U.S. federal income tax purposes, as well as local country tax purposes in the jurisdictions where we operate, from time to time we take positions under provisions of applicable tax law that are subject to varying interpretations. Certain of our tax positions may be subject to challenge by the applicable taxing authorities, including, in the U.S., the Internal Revenue Service. If our tax positions are successfully challenged, our future tax liabilities and expense could significantly increase.

     For example, during 2008, the Company acceded to a position taken by the taxing authorities in the United Kingdom (“UK”) regarding the denial of certain goodwill deductions taken on UK tax returns for 2003 through 2005. As a result, foreign net operating loss carry-forwards were reduced by approximately $17.0 million based on December 31, 2008 foreign exchange rates. Accordingly, deferred tax assets of $5.1 million were written off.

     While we believe that our tax positions are proper based on applicable law and we believe that it is more likely than not that we would prevail with respect to challenges to these positions, we can make no assurances that we would prevail if our positions are challenged or that business economics would justify the mounting of a legal defense against such challenges. If our tax positions are successfully challenged by the U.S. or non-U.S. taxing authorities, it could increase our future tax liabilities and expense and have a material adverse impact on our financial position, results of operations and cash flows.

Future impairment of goodwill, other intangible assets and long-lived assets would reduce our future earnings.

     As of December 31, 2009, the Company’s goodwill and other intangible assets totaled $28.7 million. We must perform annual assessments to determine whether some portion, or all, of our goodwill, intangible assets and other long-term assets are impaired. Future annual impairment testing under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350, “Intangibles — Goodwill and Other” (“FASB ASC 350”) could result in a determination that our goodwill or other intangible assets have been impaired, and future annual impairment testing under FASB ASC 350 could result in a determination that our long-lived assets have been impaired. Adverse future changes in the business environment or in our ability to perform audits successfully and compete effectively in our market or the discontinuation of our use of certain of our intangible or other long-lived assets could result in impairment which could materially adversely impact future earnings.

Our articles of incorporation, bylaws, shareholder rights plan and Georgia law may inhibit a change of control that shareholders may favor.

     Our articles of incorporation, bylaws and Georgia law contain provisions that may delay, deter or inhibit a future acquisition not approved by our Board of Directors. This could occur even if our shareholders receive attractive offers for their shares or if a substantial number, or even a majority, of our shareholders believe the takeover is in their best interest. These provisions are intended to encourage any person interested in acquiring us to negotiate with and obtain the approval of our Board of Directors in connection with the transaction. Provisions that could delay, deter or inhibit a future acquisition include the following:

	•		a classified Board of Directors;
	•		the requirement that our shareholders may only remove directors for cause;
	•		specified requirements for calling special meetings of shareholders; and
	•		the ability of the Board of Directors to consider the interests of various constituencies, including our employees, clients and creditors and the local community, in making decisions.

     Our articles of incorporation also permit the Board of Directors to issue shares of preferred stock with such designations, powers, preferences and rights as it determines, without any further vote or action by our shareholders. In addition, we have in place a “poison pill” shareholders’ rights plan that could trigger a dilutive issuance of common stock upon substantial purchases of our common stock by a third party that are not approved by the Board of Directors. These provisions also could discourage bids for our shares of common stock at a premium and have a material adverse effect on the market price of our common stock.

The terms of our credit facility place restrictions on us, which create risks of default and reduce our flexibility.

     Our current credit facility (see “New Credit Facility” included in Item 7 of this Form 10-K for information regarding our new credit facility) contains a number of affirmative, negative, and financial covenants which limit our ability to take certain actions and require us to comply with specified financial ratios and other performance covenants. No assurance can be provided that we will not violate the covenants of our secured credit facility in the future. If we are unable to comply with our financial covenants in the future, our lenders could pursue their contractual remedies under the credit facility, including requiring the immediate repayment in full of all amounts outstanding, if any. Additionally, we cannot be certain that, if the lenders demanded immediate repayment of any amounts outstanding, we would be able to secure adequate or timely replacement financing on acceptable terms or at all.

     Our ability to make payments due on our debt will depend upon our future operating performance, which is subject to general economic and competitive conditions and to financial, business and other factors, many of which we cannot control. If the cash flow from our operating activities is insufficient, we may take actions such as delaying or reducing capital expenditures, attempting to restructure or refinance our debt, selling assets or operations or seeking additional equity capital. Some or all of these actions may not be sufficient to allow us to service our debt obligations and we could be required to file for bankruptcy. Further, we may be unable to take any of these actions on satisfactory terms, in a timely manner or at all. In addition, our credit agreements may limit our ability to take several of these actions. Our failure to generate sufficient funds to pay our debts or to undertake any of these actions successfully could materially adversely affect our business, results of operations and financial condition.

Our stock price has been and may continue to be volatile.

     Our common stock is currently traded on The Nasdaq Global Market. The trading price of our common stock has been and may continue to be subject to large fluctuations. For example, for the year ended December 31, 2009, our stock traded as high as $6.98 per share and as low as $2.48 per share. Our stock price may increase or decrease in response to a number of events and factors, including:

	•		future announcements concerning us, key clients or competitors;
	•		quarterly variations in operating results and liquidity;
	•		changes in financial estimates and recommendations by securities analysts;
	•		developments with respect to technology or litigation;
	•		the operating and stock price performance of other companies that investors may deem comparable to our company;
	•		acquisitions and financings; and
	•		sales and purchases of blocks of stock by insiders.

     Fluctuations in the stock market, generally, also impact the volatility of our stock price. Finally, general economic conditions and stock market movements may adversely affect the price of our common stock, regardless of our operating performance.

ITEM 1B. Unresolved Staff Comments

     None.

ITEM 2. Properties

     The Company’s principal executive offices are located in approximately 132,000 square feet of office space in Atlanta, Georgia. The Company leases this space under an agreement expiring on December 31, 2014. The Company has subleased approximately 58,000 square feet of its principal executive office space to independent third parties. The Company’s various operating units lease numerous other parcels of operating space in the various countries in which the Company currently conducts its business.

     Excluding the lease for the Company’s principal executive offices, the majority of the Company’s real property leases are individually less than five years in duration. See Note 9 of “Notes to Consolidated Financial Statements” included in Item 8 of this Form 10-K.

ITEM 3. Legal Proceedings

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

ITEM 4. [Reserved]

PART II

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     The Company’s common stock is traded under the symbol “PRGX” on The Nasdaq Global Market (Nasdaq). The Company has not paid cash dividends on its common stock since it became a public company in 1996 and does not intend to pay cash dividends in the foreseeable future. Moreover, restrictive covenants included in the Company’s secured credit facility specifically prohibit payment of cash dividends and limits the amount of its common stock that the Company may repurchase to $1.0 million on an annual basis. As of February 28, 2010, there were 211 holders of record of the Company’s common stock and management believes there were in excess of 2,500 beneficial holders. The following table sets forth, for the quarters indicated, the range of high and low sales prices for the Company’s common stock as reported by Nasdaq during 2009 and 2008.

		High				Low
2009 Calendar Quarter
1st Quarter		$	4.91			$	2.74
2nd Quarter			4.04				2.48
3rd Quarter			6.01				2.60
4th Quarter			6.98				4.50

		High				Low
2008 Calendar Quarter
1st Quarter		$	9.57			$	6.77
2nd Quarter			10.72				8.45
3rd Quarter			12.30				8.29
4th Quarter			9.02				3.22

The Company did not repurchase any of its common stock during the quarter ended December 31, 2009.

Performance Graph

     Set forth below is a line graph presentation comparing the cumulative shareholder return on the Company’s common stock, on an indexed basis, against cumulative total returns of The Nasdaq Composite Index and the RDG Technology Composite Index. The graph assumes that the value of the investment in the common stock in each index was $100 on December 31, 2004 and shows total return on investment for the period beginning December 31, 2004 through December 31, 2009, assuming reinvestment of any dividends. Notwithstanding anything to the contrary set forth in any of the Company’s filings under the Securities Act of 1933, or the Securities Exchange Act of 1934 that might incorporate future filings, including this Annual Report on Form 10-K, in whole or in part, the Performance Graph presented below shall not be incorporated by reference into any such filings.

VALUE OF $100 INVESTED ON DECEMBER 31, 2004 AT:

Cumulative Total Return

		12/04				12/05				12/06				12/07				12/08				12/09
PRGX Global, Inc.			100.00				12.13				15.90				17.04				8.11				11.75
NASDAQ Composite			100.00				101.33				114.01				123.71				73.11				105.61
RDG Technology Composite			100.00				102.13				111.45				127.27				71.89				115.97

ITEM 6. Selected Financial Data

     The following table sets forth selected consolidated financial data for the Company as of and for the five years ended December 31, 2009. Such historical consolidated financial data have been derived from the Company’s Consolidated Financial Statements and Notes thereto, which have been audited by the Company’s Independent Registered Public Accounting Firms. The Consolidated Balance Sheets as of December 31, 2009 and 2008, and the related Consolidated Statements of Operations, Shareholders’ Equity (Deficit) and Cash Flows for each of the years in the three-year period ended December 31, 2009 and the report of the Independent Registered Public Accounting Firm thereon are included in Item 8 of this Form 10-K.

     The Company’s Consolidated Financial Statements have been reclassified to reflect Meridian, Communications Services, Channel Revenue, Airline, and the recovery audit services business units in Japan and South Africa as discontinued operations for all periods presented. All per share data has been restated to give effect to the one-for-ten reverse stock split which became effective August 14, 2006.

     The data presented below should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere in this Form 10-K 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,
		2009				2008				2007				2006				2005
						(In thousands, except per share data)
Statements of Operations Data:
Revenues		$	179,583			$	195,706			$	227,369			$	225,898			$	251,527
Cost of revenues			116,718				125,901				140,877				161,827				167,886
Gross margin			62,865				69,805				86,492				64,071				83,641
Selling, general and administrative expenses (1)			43,873				44,028				67,063				56,500				104,760
Impairment charges (2)			—				—				—				—				170,375
Operational restructuring expense			—				—				1,644				4,130				11,167
Operating income (loss)			18,992				25,777				17,785				3,441				(202,661	)
Gain on bargain purchase, net (3)			2,388				—				—				—				—
Interest expense, net			3,025				3,245				13,815				16,311				8,278
Loss on debt extinguishment and financial restructuring			—				—				9,397				10,047				—
Income (loss) from continuing operations before income taxes and discontinued operations			18,355				22,532				(5,427	)			(22,917	)			(210,939	)
Income tax expense (4)			3,028				3,502				1,658				1,165				63
Income (loss) from continuing operations before discontinued operations			15,327				19,030				(7,085	)			(24,082	)			(211,002	)
Discontinued operations:
Earnings from discontinued operations, net of income taxes			—				—				20,215				2,983				3,262
Net earnings (loss)		$	15,327			$	19,030			$	13,130			$	(21,099	)		$	(207,740	)
Basic earnings (loss) per common share:
Earnings (loss) from continuing operations before discontinued operations		$	0.67			$	0.87			$	(0.62	)		$	(3.77	)		$	(34.03	)
Earnings from discontinued operations			—				—				1.66				0.45				0.53
Net earnings (loss)		$	0.67			$	0.87			$	1.04			$	(3.32	)		$	(33.50	)
Diluted earnings (loss) per common share:
Earnings (loss) from continuing operations before discontinued operations		$	0.65			$	0.83			$	(0.62	)		$	(3.77	)		$	(34.03	)
Earnings from discontinued operations			—				—				1.66				0.45				0.53
Net earnings (loss)		$	0.65			$	0.83			$	1.04			$	(3.32	)		$	(33.50	)

		December 31,
		2009				2008				2007				2006				2005
										(In thousands)
Balance Sheet Data:
Cash and cash equivalents		$	33,026			$	26,688			$	42,364			$	30,228			$	8,361
Working capital			18,479				10,512				16,998				5,218				(9,123	)
Total assets			110,513				98,783				122,438				178,667				162,062
Long-term debt, excluding current installments			11,070				14,331				38,078				136,922				140,401
Redeemable preferred stock			—				—				—				11,199				—
Total shareholders’ equity (deficit)		$	41,439			$	22,710			$	2,349			$	(104,483	)		$	(102,365	)

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

     The Company conducts its operations through three reportable operating segments: Recovery Audit Services — Americas, Recovery Audit Services — Europe/Asia-Pacific and New Services. The Recovery Audit Services Americas segment represents recovery audit services (other than healthcare recovery audit services) provided in the U.S., Canada and Latin America. The Recovery Audit Services — Europe/Asia-Pacific segment represents recovery audit services (other than healthcare recovery audit services) provided in Europe, Asia and the Pacific region. The New Services segment represents services to healthcare organizations including recovery audit services, business analytics and advisory services. The Company includes the unallocated portion of corporate selling, general and administrative expenses not specifically attributable to the Recovery Audit Services and New Services segments in a segment referred to as corporate support. The Company revised its reportable segments during the fourth quarter of 2009 to reflect the current management and operational structure. Prior to 2009, the Company reported its results under two operating segments — Domestic Accounts Payable Services and International Accounts Payable Services. The presentation of prior years’ financial information in this Form 10-K has been restated to conform to the current presentation. See Note 5 of “Notes to Consolidated Financial Statements” included in Item 8 of this Form 10-K for operating segment disclosures.

     The Company’s revenues are based on specific contracts with its clients. Such contracts for recovery audit services generally specify: (a) time periods covered by the audit; (b) the nature and extent of services to be provided by the Company; (c) the client’s duties in assisting and cooperating with the Company; and (d) fees payable to the Company, generally expressed as a specified percentage of the amounts recovered by the client resulting from overpayment claims identified. Clients generally recover claims by either taking credits against outstanding payables or future purchases from the involved vendors, or receiving refund checks directly from those vendors. The manner in which a claim is recovered by a client is often dictated by industry practice. In addition, many clients establish client-specific procedural guidelines that the Company must satisfy prior to submitting claims for client approval. For some services provided by the Company, such as advisory services, client contracts provide for compensation to the Company in the form of a flat fee, a fee per hour, or a fee per other unit of service.

     The vast majority of the Company’s recovery audit clients are in the retail industry segment, which the Company believes has been significantly impacted by the recent global economic downturn. The decrease in consumer spending associated with the economic downturn has resulted in many of the Company’s clients reducing their purchases from vendors, which makes it more difficult for those clients to offset recovery claims that the Company discovers against current vendor invoices. In addition, many client vendors are experiencing their own financial issues, and the liquidity of these vendors can also negatively impact the claims recovery process. Because the vast majority of the Company’s current business is based on such recoveries, these factors may negatively impact the Company’s revenues in future periods. Client bankruptcy or insolvency proceedings could also adversely impact the Company’s future revenues.

     Despite the impact of the recent economic downturn on consumer spending and retailers’ purchases from their vendors, the effect on the Company’s financial results has generally been delayed, as the Company did not begin to experience any material negative effects from the downturn until the first half of 2009. One factor insulating the Company somewhat from an economic downturn is that the Company’s clients are frequently more motivated to use the Company’s services to recover prior overpayments to make up for relatively weaker financial performance in their own business operations. Also, the client purchase data on which the Company performs its recovery audit services is historical data, the age of which varies from client to client; however, such data typically reflects transactions between the Company’s clients and their vendors that generally took place 3 to 15 months prior to the data being provided to the Company for audit. The fact that the Company’s audits typically lag current client spending by up to 15 months has also delayed somewhat the corresponding adverse impact of the recent economic downturn on the Company’s revenues.

     Given that the data on which the Company performs its recovery audit services is typically 3 to 15 months removed from the actual dates of transactions between the Company’s clients and their vendors, the Company expects that it will not begin to recognize increased revenues from recovery auditing in the retail industry as a result of improving economic conditions until well after the positive effects of such improved conditions have been realized by its clients. While the net impact of the recent economic downturn on the Company’s recovery audit revenues is difficult to precisely determine or predict, the Company believes that its revenues will remain at a level that will not have a significant adverse impact on the Company’s liquidity, and management has taken steps to

mitigate any adverse impact of the economic downturn on the Company’s revenues and overall financial health. These steps include limiting salary increases for Company employees and devoting substantial efforts in the development of a lower “cost-to-serve” service model to enable the Company to more cost effectively serve commercial clients in an effort to reduce the Company’s dependency on customers in the retail industry. Further, management is working diligently to expand the Company’s business beyond its core recovery audit services to retailers, such as the Company’s efforts to expand its business analytics and advisory services businesses as discussed above under “Business” included in Item 1 of this Form 10-K.

     Another area in which the Company continues to devote considerable effort to expand its business beyond its core accounts payable retail recovery auditing is the Company’s work in the healthcare industry. The Company’s results in 2006 and 2007, and to a significantly lesser extent in 2008, were affected by its involvement in the demonstration recovery audit contractor (“RAC”) program of the Centers for Medicare and Medicaid Services (“CMS”), the federal agency that administers the Medicare program. The demonstration RAC program was designed by CMS to recover Medicare overpayments and identify Medicare underpayments through the use of recovery auditing. CMS awarded the Company a contract to audit Medicare spending in the State of California in 2005 as part of the RAC demonstration program. As a result of the expiration of the Company’s RAC demonstration program contract in March 2008, revenues from the auditing of Medicare payments in California made only a small contribution to the Company’s overall revenues for the year ended December 31, 2008. There will be no additional revenues to the Company or repayments to CMS relating to the RAC demonstration program.

     In late 2006, legislation was enacted that mandated that recovery auditing of Medicare be extended beyond the March 2008 end of the RAC demonstration program and that CMS enter into additional contracts with recovery audit contractors to expand recovery auditing of Medicare spending to all 50 states by January 1, 2010. On February 9, 2009, the Company announced that it had entered into subcontracts with three of the four national RAC program contract awardees. While the magnitude and exact timing of revenues from the Company’s participation as a RAC subcontractor is difficult to predict, management currently does not expect to receive any meaningful revenues from its Medicare auditing work until the second half of 2010. In preparation for its work as a RAC subcontractor, the Company has incurred costs primarily relating to staffing and upgrading its technology systems. The Company incurred an operating loss of $4.0 million during the year ended December 31, 2009 related this effort.

     CMS is responsible for implementation of the overall national RAC program, and the Company’s future revenues from its RAC program subcontracts are heavily dependent on CMS’s implementation schedule and priorities, both of which are beyond the Company’s control. The national RAC program is still in the early stages of implementation and has experienced delays that make it very difficult to predict the timing of the Company’s revenues from this program.

     Results of Operations

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

		Years Ended December 31,
		2009				2008				2007
Statements of Operations Data:
Revenues			100.0	%			100.0	%			100.0	%
Cost of revenues			65.0				64.3				62.0
Gross margin			35.0				35.7				38.0
Selling, general and administrative expenses			24.4				22.5				29.5
Operational restructuring expenses			—				—				0.7
Operating income			10.6				13.2				7.8
Gain on bargain purchase, net			1.3				—				—
Interest expense, net			1.7				1.7				6.1
Loss on debt extinguishment and financial restructuring			—				—				4.1
Earnings (loss) from continuing operations before income taxes and discontinued operations			10.2				11.5				(2.4	)
Income tax expense			1.7				1.8				0.7
Earnings (loss) from continuing operations before discontinued operations			8.5				9.7				(3.1	)
Discontinued operations:
Earnings from discontinued operations, net of income taxes			—				—				8.9
Net earnings			8.5	%			9.7	%			5.8	%

     Recovery Audit and New Services

     Revenues. Recovery Audit and New Services revenues for the years ended December 31, 2009, 2008 and 2007 were as follows (in millions):

		2009				2008				2007
Recovery Audit Services — Americas		$	121.6			$	138.2			$	143.6
Recovery Audit Services — Europe/Asia-Pacific			52.5				53.6				59.1
New Services			5.5				3.9				24.7
Total		$	179.6			$	195.7			$	227.4

     Total revenues for the year ended December 31, 2009 decreased by $16.1 million, or 8.2%, compared to the year ended December 31, 2008. Total revenues for the year ended December 31, 2008 decreased by $31.7 million, or 13.9%, compared to the year ended December 31, 2007.

     Recovery Audit Services — Americas revenues decreased by $16.6 million, or 12.0%, in 2009 compared to 2008. Reported revenues were adversely impacted by the strengthening of the U.S. dollar relative to foreign currencies in Canada and Latin America. On a constant dollar basis, adjusted for changes in foreign exchange (“FX”) rates, Recovery Audit Services — Americas revenues decreased by 10.4% during 2009 as compared to 2008. Since the vast majority of the Company’s recovery audit clients are in the retail industry segment, the Company’s operations are subject to the economic pressures the retail industry faces. The recent unfavorable economic conditions which have adversely impacted the U.S. retail industry have negatively impacted the Company’s revenues. The liquidity of the Company’s clients’ vendors can negatively impact claim production, the claim approval process and the ability of the Company’s clients to offset or otherwise obtain recoveries from their vendors. Management believes that the year over year decreases in Recovery Audit Services — Americas revenues for the year ended December 31, 2009 are also related to several additional factors, including competitive rate pressures, fewer clients served, the impact of the Company’s clients developing and strengthening their own internal audit capabilities as a substitute for the

Company’s services and the impact of improved client processes and fewer recurring transaction errors. However, the impact of improved client processes and fewer recurring transaction errors is offset somewhat by the Company’s use of best practices and innovation to identify additional audit claim categories and recovery opportunities. Future revenues could be adversely impacted by an increase in retailer bankruptcies resulting from the recent economic downturn. For the year ended December 31, 2008, revenues decreased by $5.4 million or 3.8% compared to 2007. The revenues in 2008 were adversely impacted by a strengthening of the U.S. dollar relative to foreign currencies, particularly in the fourth quarter of 2008. On a constant dollar basis, adjusted for FX rates, Recovery Audit Services — Americas revenues decreased by 3.7% during 2008 compared to 2007. This decrease was primarily attributable to declines in the U.S. revenues due to continued competitive rate pressures, fewer clients served, fewer claims being processed as a result of improved client processes and the impact of the Company’s clients developing and strengthening their own internal audit capabilities as a substitute for the Company’s services.

     Revenues in the Recovery Audit Services — Europe/Asia-Pacific segment for the year ended December 31, 2009 decreased by $1.1 million, or 2.1%, compared to the year ended December 31, 2008. Reported revenues were adversely impacted by the strengthening of the U.S. dollar relative to foreign currencies in Europe, Asia and Australia. On a constant dollar basis, adjusted for changes in FX rates, Recovery Audit Services — Europe/Asia-Pacific revenues increased by 8.5% during 2009 as compared to 2008. These increases are principally attributable to revenues from the acquisition of First Audit Partners LLP (“FAP”) in July 2009. Revenues in the Recovery Audit Services — Europe/Asia-Pacific segment for 2008 decreased by $5.5 million, or 9.3% compared to 2007. The reported revenues were adversely impacted by a strengthening of the U.S. dollar relative to foreign currencies, primarily currencies in Europe, particularly in the fourth quarter of 2008. On a constant dollar basis adjusted for FX rates, Recovery Audit Services — Europe/Asia-Pacific revenues decreased by 7.1% during 2008 compared to 2007. The 2008 decline in Recovery Audit Services — Europe/Asia-Pacific revenues (on a FX adjusted basis) was primarily attributable to decreased revenues in Europe which had continued to decline at a rate consistent with the previous several years.

     Management believes there is opportunity to increase revenues in its core recovery audit services segments as a result of both market share growth and the growth of the addressable market for such services. Management also believes that the Company has growth opportunities related to the provision of adjacent services in the procure-to-pay value chain and to the CFO suite of its core client base, and from capitalizing on the Company’s existing data mining and related competencies. The pursuit of these opportunities will require investments and management believes that without such investments, a reversal of the Company’s overall declining revenue trend is not likely. Management intends to execute its strategic initiatives to pursue these opportunities. No assurances can be provided, however, as to when any revenues from these opportunities will be recognized or the magnitude of any such revenues.

     New Services revenues for the year ended December 31, 2009 increased by $1.6 million, or 41.0%, compared to the year ended December 31, 2008 but decreased by $20.8 million, or 84%, for 2008 compared to 2007. The 2009 and 2008 New Services revenues primarily consist of advisory services revenues while the 2007 New Services revenues relate almost entirely to the CMS RAC demonstration program. Management expects New Services revenues to significantly increase in 2010 due to increases in advisory services revenues and revenues from entry into analytics services. The Company also expects future revenues from its participation as a subcontractor in three of the Medicare RAC program’s four geographic regions. While the magnitude and timing of such revenues is difficult to predict, management currently does not expect to receive any meaningful revenues from Medicare auditing until the second half of 2010.

     Cost of Revenues (“COR”). COR consists principally of commissions and other forms of variable compensation paid or payable to the Company’s auditors based primarily upon the level of overpayment recoveries and/or profit margins derived therefrom, fixed auditor salaries, compensation paid to various types of hourly support staff, and salaried operational and client service managers for the Company’s recovery audit, business analytics and advisory services businesses. Also included in COR are other direct and indirect costs incurred by these personnel, including office rent, travel and entertainment, telephone, utilities, maintenance and supplies, clerical assistance, and depreciation. A significant portion of the components comprising COR is variable and will increase or decrease with increases and decreases in revenues.

     COR for the years ended December 31, 2009, 2008 and 2007 was as follows (in millions):

		2009				2008				2007
Recovery Audit Services — Americas		$	68.0			$	76.3			$	84.7
Recovery Audit Services — Europe/Asia-Pacific			40.3				41.3				47.7
New Services			8.4				8.3				8.5
Total		$	116.7			$	125.9			$	140.9

     COR as a percentage of revenues for Recovery Audit Services — Americas was 55.9%, 55.2% and 59.0% for the years ended December 31, 2009, 2008 and 2007, respectively. This equates to gross margin percentages of 44.1%, 44.8% and 41.0%, respectively, for the Recovery Audit Services — Americas segment.

     For Recovery Audit Services — Americas, the slight increase in COR as a percentage of revenues for 2009 as compared to 2008 was primarily attributed to COR not declining at the same rate the corresponding revenues declined. The dollar and percentage of revenue improvement in Recovery Audit Services — Americas COR for 2008 compared to 2007 was attributable to reductions in indirect costs (principally reduced headcount) and severance charges included in 2007 related to the execution of the Company’s optimization strategy to exit smaller less profitable clients.

     COR as a percentage of revenues for Recovery Audit Services — Europe/Asia-Pacific was 76.8%, 77.1% and 80.7% for the years ended December 31, 2009, 2008 and 2007, respectively. This equates to gross margin percentages of 23.2%, 22.9% and 19.3%, respectively.

     The slight dollar and percentage of revenues improvement for Recovery Audit Services — Europe/Asia-Pacific COR in 2009 primarily resulted from decreased commissions paid to third parties in Europe. The Company closed offices in many countries during 2007, resulting in improved gross margins in 2008 compared to 2007.

     The higher COR as a percentage of revenues for Recovery Audit Services — Europe/Asia-Pacific (76.8% for 2009) compared to Recovery Audit Services — Americas (55.9% for 2009) is primarily due to differences in service delivery models, scale and geographic fragmentation. The Recovery Audit Services — Europe/Asia-Pacific segment generally serves fewer clients in each geographic market and generates lower revenues per client than those served by the Company’s Recovery Audit Services — Americas segment.

     New Services COR in 2009 and 2008 relates entirely to costs of advisory services and the Company’s preparation for performance of the CMS RAC program subcontracts. The excess of New Services COR over revenues represents a portion of the Company’s investment in the New Services segment. Management expects such investment (COR exceeding revenues) to continue in 2010. New Services COR in 2007 relates primarily to performance in the RAC demonstration program which ended in March 2008.

     Selling, General and Administrative Expenses (“SG&A”). SG&A expenses of the Recovery Audit and New Services segments include the expenses of sales and marketing activities, information technology services and allocated corporate data center costs, human resources, legal, accounting, administration, foreign currency transaction gains and losses, gains and losses on assets disposals, depreciation of property and equipment and amortization of intangibles related to the Recovery Audit and New Services segments.

     Recovery Audit and New Services SG&A for the years ended December 31, 2009, 2008 and 2007 were as follows (in millions):

		2009				2008				2007
Recovery Audit Services — Americas		$	17.6			$	16.7			$	20.1
Recovery Audit Services — Europe/Asia-Pacific			5.3				8.4				6.4
New Services			1.2				1.9				2.4
Total		$	24.1			$	27.0			$	28.9

     Recovery Audit Services — Americas SG&A includes foreign currency transaction gains and losses, including the gains and losses related to intercompany balances. Gains and losses result from the re-translation of the foreign subsidiaries’ balances payable to the U.S. parent from their local currency to their U.S. dollar equivalent. Substantial changes from period to period in FX rates may significantly impact the amount of such gains and losses. During the years ended December 31, 2009, 2008 and 2007, Recovery Audit Services — Americas SG&A recognized $0.4 million, $0.2 million and $0.1 million, respectively, of FX gains related to intercompany balances.

     Recovery Audit Services — Americas SG&A excluding the FX gains related to intercompany balances, increased 6.5% for the year ended December 31, 2009 compared to 2008. Recovery Audit Services — Americas SG&A, excluding the FX gains related to intercompany balances for the year ended December 31, 2008, decreased by 16.3%, compared to 2007. The increase in 2009 Recovery Audit Services — Americas SG&A, excluding the intercompany FX gains, was primarily a result of costs incurred in connection with the Company’s execution of its new strategic initiatives. The decrease in 2008 Recovery Audit Services — Americas SG&A, excluding the intercompany FX gains, as compared to 2007 resulted primarily from headcount reductions and reductions in facilities costs.

     Recovery Audit Services — Europe/Asia-Pacific SG&A includes foreign currency transaction gains and losses, including the gains and losses related to intercompany balances. During the years ended December 31, 2009, 2008 and 2007, Recovery Audit Services — Europe/Asia-Pacific SG&A recognized $1.2 million, $(3.5 million) and $1.1 million, respectively, of FX gains (losses) related to intercompany balances.

     Recovery Audit Services — Europe/Asia-Pacific SG&A, excluding the FX gains (losses) related to intercompany balances increased 32.7% for the year ended December 31, 2009 compared to 2008. Recovery Audit Services — Europe/Asia-Pacific SG&A, excluding the FX gains (losses) related to intercompany balances, decreased 34.7% for the year ended December 31, 2008 compared to 2007. The increase in 2009 Recovery Audit Services — Europe/Asia-Pacific SG&A, excluding the intercompany FX gains (losses), was attributable to non-intercompany FX losses, severance costs and amortization expense associated with the acquisition of the business and certain assets of FAP, which was completed in July 2009 (see Note 17 — Business Acquisition in “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Form 10-K). The decrease in 2008 Recovery Audit Services — Europe/Asia-Pacific SG&A, excluding the intercompany FX gains (losses), as compared to 2007 resulted primarily from headcount reductions and the closing or consolidation of offices in numerous countries.

     New Services SG&A for the year ended December 31, 2009 decreased by $0.7 million, or 36.8%, compared to 2008. New Services SG&A for the year ended December 31, 2008 decreased by $0.5 million, or 20.8%, compared to 2007. The decreases in 2009 and 2008 are primarily attributable to decreased use of professional services.

     Corporate Support

     Corporate Support SG&A represents the unallocated portion of SG&A expenses which are not specifically attributable to Recovery Audit Services — Americas, Recovery Audit Services — Europe/Asia-Pacific or New Services and include the expenses of information technology services, the corporate data center, human resources, legal, accounting, treasury, administration and stock-based compensation charges.

     Corporate Support SG&A totaled the following for the years ended December 31, 2009, 2008 and 2007 (in millions):

		2009				2008				2007
Selling, general and administrative expenses		$	19.8			$	17.0			$	38.2

     Corporate Support SG&A for the years ended December 31, 2009, 2008 and 2007 includes stock-based compensation charges of $3.3 million, $2.2 million and $21.0 million, respectively. The disproportionate 2007 charge for stock-based compensation resulted primarily from the issuance of additional performance units in accordance with the anti-dilution provisions of the 2006 Management Incentive Plan (“2006 MIP”) that was negotiated as part of the Company’s financial restructuring completed in March 2006. See “2006 Management Incentive Plan” below for further details regarding the Company’s 2006 MIP.

     Corporate Support SG&A, excluding stock-based compensation charges, increased 11.5% for the year ended December 31, 2009 compared to the year ended December 31, 2008. Corporate Support SG&A, excluding stock-based compensation charges, decreased 14.0% for the year ended December 31, 2008 compared to the year ended December 31, 2007. The increase in these costs for 2009 compared to 2008 is attributable to a $0.7 million additional accrual for the settlement of the Fleming Post Confirmation Trust litigation (see Note 13 — Commitments and Contingencies in “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Form 10-K), severance charges, and increased compensation and recruiting costs associated with hiring a new chief executive officer. The decrease in these costs for 2008 compared to 2007 resulted from reductions in payroll and related taxes and benefits, occupancy costs, insurance, professional fees and other miscellaneous expenses.

     Interest Expense and Income

     Net interest expense for the years ended December 31, 2009, 2008 and 2007 amounted to $3.0 million, $3.2 million and $13.8 million, respectively. The reductions in net interest expense are directly attributable to the Company’s reductions in debt obligations over the past few years. See “Liquidity and Capital Resources - Financing Activities and Interest Expense” below for additional information related to the Company’s interest expense and income.

     Loss on Debt Extinguishment

     In 2007, the company recorded a $9.4 million charge as a result of debt extinguishments. See “Liquidity and Capital Resources - 2007 Financial Restructuring” below for additional information related to the Company’s debt extinguishments.

     Income Tax Expense

     The Company’s reported effective tax rates on earnings (loss) from continuing operations before income taxes and discontinued operations approximated 16.5%, 15.5%, and (30.6)% for the years ended December 31, 2009, 2008 and 2007, respectively. The 2009 and 2008 effective tax rates are less than the expected tax rate primarily due to a reduction in the Company’s deferred tax asset valuation allowance. The reflection of tax expense in 2007 in spite of reported losses from continuing operations primarily results from taxes on foreign income and the non-recognition of tax benefits on operating loss carry-forwards through the use of a valuation allowance against deferred tax assets.

     For the years ended December 31, 2009, 2008 and 2007, management determined that based on all available evidence, deferred tax asset valuation allowances of $58.3 million, $64.3 million and $79.8 million, respectively, were appropriate as of those dates. The reduction of the allowance during 2008 was partially attributable to a reduction of previously recognized foreign operating loss carry-forwards related to goodwill deductions taken in the United Kingdom (“UK”). During 2008, the Company acceded to a position taken by the taxing authorities in the UK regarding the denial of certain goodwill deductions taken on UK tax returns for 2003 through 2005. As a result, foreign net operating loss carry-forwards were reduced by approximately $17.0 million based on December 31, 2008 FX rates. Accordingly, deferred tax assets of $5.1 million were written off. This reduction in the Company’s deferred tax assets was offset by a corresponding reduction in the previously established valuation allowance against these assets.

     Additional $5.3 million and $5.7 million reductions in the December 31, 2009 and 2008, respectively, valuation allowance resulted from like reductions in deferred tax assets related to intangible asset amortization deductions for tax purposes related to intangible assets that have been previously written off for financial reporting purposes.

     On March 17, 2006, the Company experienced an ownership change as defined under Section 382 of the Internal Revenue Code (“IRC”). This ownership change resulted in an annual IRC Section 382 limitation that mathematically limits the use of certain tax attribute carry-forwards. Of the $47.4 million of U.S. federal loss carry-forwards available to the Company, $21.9 million of the loss carry-forwards are subject to an annual usage limitation of $1.4 million. As of December 31, 2009, the Company had approximately $47.4 million of U.S. federal loss carry-forwards available to reduce future taxable income. The loss carry-forwards expire through 2029.

     FASB ASC 740 prescribes a “more-likely-than-not” recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FASB ASC 740 also offers guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. In accordance with FASB ASC 740, the Company’s policy for recording interest and penalties associated with tax positions is to record such items as a component of income before taxes. As a result of the 2007 implementation of FASB ASC 740, the Company recognized a $0.3 million increase in liability for unrecognized tax benefits, which was accounted for as an increase to the January 1, 2007 accumulated deficit balance.

     Discontinued Operations

     On May 30, 2007, the Company sold its Meridian VAT reclaim business (“Meridian”) to Averio Holdings Limited, a Dublin, Ireland based company affiliated with management of Meridian. The Company received proceeds from the sale of approximately $22.4 million at closing and an additional $2.2 million on December 31, 2007. Meridian had previously been reported as a separate reportable operating segment. Meridian’s operating results for 2007 up until the sale date presented in the consolidated financial statements have been reclassified and are included in discontinued operations. The Company recognized a gain on sale during the year ended December 31, 2007 of approximately $19.9 million as a result of the transaction.

     Operating income of the discontinued operations for the year ended December 31, 2007 amounted to $0.8 million. Income tax expense of $0.4 million was allocated to earnings from discontinued operations in 2007.

Liquidity and Capital Resources

     As of December 31, 2009, the Company had $33.0 million in cash and cash equivalents and no borrowings under the revolver portion of its former credit facility. The revolver had approximately $14.3 million of calculated availability for borrowings.

     While management believes that the recent global economic downturn has contributed to a decrease in the revenues that the Company would have otherwise earned in recent periods, this decrease has not resulted in the need for the Company to draw down on its revolving credit facility to fund its operations and has not materially adversely impacted the Company’s overall liquidity position. In addition, the Company was in compliance with the covenants in its credit facility as of December 31, 2009 and expects to continue to be in compliance with its new credit facility (see “New Credit Facility” below) for the foreseeable future.

     Operating Activities. Net cash provided by operating activities was $18.2 million, $16.7 million and $30.3 million during the years ended December 31, 2009, 2008 and 2007, respectively. The $1.5 million increase in cash provided by operating activities in 2009 compared to 2008 was due to a $6.5 million improvement in the change in operating assets and liabilities from the beginning to the end of the relevant periods, partially offset by lower operating profit. The $6.5 million improvement in the change in operating assets and liabilities in 2009 compared to 2008 was the result of significant payments for long term compensation and severance liabilities in 2008 combined with a significant decrease in the refund liability in 2008 compared to the decrease in 2009. These improvements in cash flow in 2009 were partially offset by significant payments for foreign income taxes, the PCT legal settlement, and other accrued liabilities made during the year ended December 31, 2009. Such changes are itemized in the Company’s Consolidated Statements of Cash Flows included in Part II, Item 8 of this Form 10-K.

     The $13.6 million decline in cash provided by operating activities in 2008 compared to 2007 was primarily due to lower operating profit in 2008 (after taking into consideration the non-cash impacts of stock-based compensation) combined with a $7.4 million additional use of cash related to changes in operating assets and liabilities in 2008 compared to 2007. The difference in the year to year changes in operating assets and liabilities included a significant decrease in the refund liability in 2008 compared to 2007 and significant reductions in noncurrent compensation obligations and other long-term liabilities during 2008, including a $2.0 million cash distribution under the 2006 MIP.

     In addition to capital expenditures, the Company incurred an operating loss of approximately $4.0 million for the year ended December 31, 2009 related to the CMS RAC program. The Company expects a similar loss in 2010.

     For the years ended December 31, 2009 and 2008, the Company had one customer, Wal-Mart Stores Inc., that exceeded 10% of the Company’s total revenues. The loss of this customer would negatively impact the Company’s operating cash flows and would potentially have a material adverse impact on the Company’s liquidity.

     Investing Activities and Depreciation and Amortization Expense. Depreciation and amortization expense for the years ended December 31, 2009, 2008 and 2007 amounted to $6.1 million, $5.2 million and $6.8 million, respectively. Net cash used for property and equipment capital expenditures was $5.5 million $3.3 million and $4.0 million during the years ended December 31, 2009, 2008 and 2007, respectively. Purchases of property, plant and equipment during 2009, 2008 and 2007 primarily related to investments to upgrade the Company’s information technology infrastructure and to prepare for participation in the CMS RAC program.

     Capital expenditures are discretionary and management currently expects future capital expenditures to increase over the next several quarters as the Company continues to enhance its healthcare audit systems supporting its performance in the CMS RAC program and other healthcare audits and in preparation and execution of the Company’s strategic initiatives discussed above. The Company invested $1.0 million, $0.6 million and $1.0 million, in software development and infrastructure costs related to CMS RAC program in 2009, 2008 and 2007, respectively. Changes in operating plans and results could cause management to alter its capital expenditure plans.

     As discussed more fully in Note 17 — Business Acquisition in “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Form 10-K, in July 2009, the Company acquired the business and certain assets of FAP for a purchase price valued at $5.8 million. The purchase price included an initial cash payment of $1.6 million which was paid in July 2009.

     Financing Activities and Interest Expense. Net cash used in financing activities was $5.7 million, $28.0 million and $36.2 million for the years ended December 31, 2009, 2008 and 2007, respectively. During 2009, the Company made mandatory payments totaling $5.0 million on its then existing term loan and reduced its capital lease obligations by $0.3 million.

     During 2008, the Company reduced the balance of its term loan by $25.9 million. This amount included $10.9 million of mandatory payments as well as a voluntary prepayment of $15.0 million. In March 2008, the Company completed an amendment of its credit facility, permitting the $15.0 million pre-payment without penalty and increasing the borrowing capacity under the revolver portion of its credit facility by $10 million. The Company also reduced its capital lease obligations by $0.3 million during 2008. In December 2008, the Company repurchased 429,378 shares of its outstanding common stock for $1.7 million.

     New Credit Facility

     On January 19, 2010, the Company entered into a four-year revolving credit and term loan agreement with SunTrust Bank (“SunTrust”). The SunTrust credit facility consists of a $15.0 million committed revolving credit facility and a $15.0 million term loan. The SunTrust credit facility is guaranteed by the Company and its domestic subsidiaries and secured by substantially all of the assets of the Company. Amounts eligible for borrowing under the SunTrust revolver are based on eligible accounts receivable and other factors. Availability under the SunTrust revolver at January 31, 2010 was $5.7 million.

     The principal portion of the SunTrust term loan must be repaid in quarterly installments of $0.8 million each commencing in March 2010. The loan agreement requires mandatory prepayments with the net cash proceeds from certain asset sales, equity offerings and insurance proceeds received by the Company. The loan agreement also requires an additional annual prepayment if excess cash flow as defined in the agreement exceeds a certain threshold. The first of any such excess cash flow payments would be payable in April 2011. The remaining balance of the SunTrust term loan is due in January 2014. As of February 28, 2010, there were no outstanding borrowings under the SunTrust revolver. Interest on both the revolver and term loan are payable monthly and accrues at an index rate using the one-month LIBOR rate, plus an applicable margin as determined by the loan agreement. The applicable interest rate margin varies from 2.25% per annum to 3.5% per annum, dependent on the Company’s consolidated leverage ratio, and is determined in accordance with a pricing grid under the SunTrust loan agreement. The Company also must pay a commitment fee of 0.5% per annum, payable monthly, on the unused portion of the $15.0 million SunTrust revolving credit facility. As of January 31, 2010 the applicable interest rate under the SunTrust credit facility was 2.48%.

     The SunTrust credit facility includes customary affirmative, negative, and financial covenants binding on the Company, including delivery of financial statements and other reports, maintenance of existence, and transactions with affiliates. The negative covenants limit the ability of the Company, among other things, to incur debt, incur liens, make investments, sell assets, repurchase shares of it capital stock or declare or pay dividends on its capital stock. The financial covenants included in the SunTrust credit facility, among other things, limit the amount of capital expenditures the Company can make, set forth maximum leverage and net funded debt ratios for the Company and a minimum fixed charge coverage ratio, and also require the Company to maintain minimum consolidated earnings before interest, taxes, depreciation and amortization. In addition, the SunTrust credit facility includes customary events of default.

     The Company used substantially all the funds from the SunTrust term loan to repay in full the $14.2 million outstanding under the Ableco term loan.

     Management believes that the Company will have sufficient borrowing capacity and cash generated from operations to fund its capital and operational needs for at least the next twelve months.

     Former Credit Facility

     In September 2007, the Company entered into an amended and restated financing agreement with Ableco consisting of a $20 million revolving credit facility and a $45 million term loan which was funded in October 2007. The principal portion of the $45 million term loan with Ableco required quarterly principal payments of $1.25 million each commencing in April 2008. The loan agreement also required an annual additional payment

contingently payable based on an excess cash flow calculation as defined in the agreement. During 2009, the Company reduced the balance on its term loan by $5.0 million of mandatory payments. During 2008, the Company reduced the balance on its term loan by $25.9 million. This reduction included $10.9 million of mandatory payments as well as a voluntary payment of $15.0 million. During the first quarter of 2008, the Company completed an amendment of its amended and restated financing agreement, permitting the $15.0 million pre-payment without penalty and increasing the initial borrowing capacity under the revolver portion of its facility by $10 million. Certain components of the borrowing availability calculation were reduced over the term of the loan and availability was based on eligible accounts receivable and other factors. Availability under the revolver at December 31, 2009 was $14.3 million. The amended and restated financing agreement was replaced by a new facility in January 2010. See “New Credit Facility” above for more information.

     The remaining balance of the term loan was due on September 17, 2011. Interest on the term loan balance was payable monthly and accrued at the Company’s option at either prime plus 2.0% or at LIBOR plus 4.75%, but under either option may not be less than 9.75%. Interest on outstanding balances under the revolving credit facility, if any, accrued at the Company’s option at either prime plus 0.25% or at LIBOR plus 2.25%. The Company also paid a commitment fee of 0.5% per annum, payable monthly, on the unused portion of the revolving credit facility. As of December 31, 2009, there were no outstanding borrowings under the revolving credit facility. The balance on the term loan as of December 31, 2009 was $14.0 million. The weighted-average interest rates on term loan balances outstanding under the credit facility during 2009 and 2008, including fees, were 11.0% and 10.9%, respectively.

     Since the credit facility was replaced in January 2010, the annual additional contingent payment based on 2009 excess cash flow due in April 2010 will not be required.

     The credit facility was guaranteed by each of the Company’s direct and indirect domestic wholly owned subsidiaries and certain of its foreign subsidiaries and was secured by substantially all of the Company’s assets (including the stock of the Company’s domestic subsidiaries and two-thirds of the stock of certain of the Company’s foreign subsidiaries). The credit facility would have matured on September 17, 2011.

     The credit facility included customary affirmative, negative, and financial covenants binding on the Company, including delivery of financial statements and other reports, maintenance of existence, and transactions with affiliates. The negative covenants limited the ability of the Company to, among other things, incur debt, incur liens, sell assets, repurchase shares of its capital stock or declare or pay dividends on its capital stock. The financial covenants included in the credit facility, among other things, limited the amount of capital expenditures the Company could make, set forth a maximum leverage ratio for the Company and a minimum fixed charge coverage ratio, and also required the Company to maintain minimum consolidated earnings before interest, taxes, depreciation and amortization.

     2007 Financial Restructuring

     During the fall of 2007, the Company undertook a financial restructuring designed to de-leverage the Company’s balance sheet and provide it with more financial flexibility. The 2007 restructuring included amending and restating the Company’s credit facility and redeeming the Company’s 11% senior notes, 10% senior convertible notes and 9% Series A convertible preferred stock. The Company’s credit facility with Ableco LLC (“Ableco”) was amended and restated to provide the Company with a $20 million revolving credit facility and a $45 million term loan, which was funded in October 2007.

     As part of the redemption of its 11% senior notes and its 10% senior convertible notes, the Company solicited consents from the holders of its 11% senior notes and its 10% senior convertible notes to amend the indentures governing the notes to provide for simultaneous redemption of both series and to shorten the redemption period for the notes. The Company paid an aggregate of $0.2 million in consent fees and conversion fees to certain holders in connection with their prior agreements to consent to the amendment to the indenture governing the 11% senior notes and to convert, upon the call for redemption, the 10% senior convertible notes and 9% Series A convertible preferred stock held by such holders. As expected, over 99% of the outstanding 10% senior convertible notes and shares of 9% Series A convertible preferred stock were converted by the holders into shares of the Company’s common stock prior to the applicable redemption dates. As a result, only an aggregate of approximately $0.2 million in 10% senior convertible notes and 9% Series A convertible preferred stock were outstanding and redeemed by the Company. The full $51.5 million in principal amount of the 11% senior notes were redeemed by the Company. The Company was also required to pay a $1.0 million prepayment fee to the holders of the 11% senior

notes in connection with the redemption. The Company used the term loan portion of its amended and restated credit facility to supplement the funding of the redemption of the 11% senior notes, the 10% senior convertible notes and the 9% Series A convertible preferred stock.

     The face amount of the 11% senior notes redeemed exceeded their carrying amount net of unamortized discount and deferred loan costs by $8.4 million. Such amount, along with a $1.0 million prepayment premium, $9.4 million in total, is reported as a loss on debt extinguishment in the Consolidated Statement of Operations for the year ended December 31, 2007. Unamortized deferred loan costs of $2.1 million related to the 10% senior convertible notes that were converted to common stock were charged to additional paid-in capital in 2007. As a consequence of the prepayment of the $25 million term loan in 2007 and the replacement of the revolving credit facility, the Company wrote-off $1.7 million of unamortized deferred loan costs in 2007. Such amount is included in interest expense in the Consolidated Statement of Operations for the year ended December 31, 2007. The Company incurred approximately $3.1 million of costs in connection with the amended and restated Ableco credit facility. Such amount was capitalized and amortized over the life of the facility.

     The aggregate impact of the transactions described above resulted in interest expense of $3.2 million, $4.1 million and $15.1 million for the years ended December 31, 2009, 2008 and 2007. Cash paid for interest during the years ended December 31, 2009, 2008 and 2007 amounted to $1.9 million, $3.2 million and $14.4 million, respectively.

     Discontinued Operations

     Net cash provided by (used in) the operating activities of discontinued operations was $(2.0 million) during the year ended December 31, 2007. Such cash flows were primarily attributable to the operations of Meridian prior to its sale in May 2007. The sale of Meridian provided net proceeds of $23.2 million in 2007. A substantial portion of such proceeds was required to be used to repay debt under the Company’s credit facility.

     Stock Repurchase Program

     In February 2008, the Board of Directors of the Company approved a stock repurchase program. Under the terms of the program, as extended by the Board of Directors, the Company may repurchase up to $10 million of its common stock from time to time through March 31, 2011. The new credit facility permits the Company to repurchase up to $1.0 million of its common stock annually. For the year ended December 31, 2009, the Company repurchased 78,754 shares at an average price of $3.10 for a total purchase price of approximately $0.2 million. This equates to approximately 0.4% of the then outstanding shares. For the year ended December 31, 2008, the Company repurchased 429,378 shares at an average price of $3.93 for a total purchase price of approximately $1.7 million. This equates to approximately 2% of the then outstanding shares.

     Contractual Obligations and Other Commitments

     As discussed in “Notes to Consolidated Financial Statements” included in Item 8 of this Form 10-K, the Company has certain contractual obligations and other commitments. A summary of those commitments as of December 31, 2009, adjusted to include the terms of the new credit facility and the Etesius Limited acquisition which occurred subsequent to December 31, 2009, is as follows:

		Payments Due by Period (in thousands)
						Less												More
						Than								3-5				Than
Contractual obligations		Total				1 Year				1-3 Years				Years				5 Years
Long-term debt obligations (1)		$	15,000			$	3,000			$	9,000			$	3,000			$	—
Operating lease obligations			32,193				6,958				19,090				5,822				323
Capital lease obligations (2)			273				273				—				—				—
Cash portions of stock-based compensation (3)			635				424				211				—				—
Purchase price payments to former FAP owners (4)			5,733				2,701				3,032				—				—
Payments to Messrs. Cook and Toma (5)			2,256				1,182				180				894				—
Purchase price payments to Etesius Limited shareholders (6)			4,000				2,800				500				700				—
Severance			1,126				1,126				—				—				—
Total		$	61,216			$	18,464			$	32,013			$	10,416			$	323

     2006 Management Incentive Plan

     At the annual meeting of shareholders held on August 11, 2006, the shareholders of the Company approved a proposal granting authorization to issue up to 2.1 million shares of the Company’s common stock under the Company’s 2006 Management Incentive Plan (“2006 MIP”). On September 29, 2006, an aggregate of 682,301 Performance Units were awarded under the 2006 MIP to the seven executive officers of the Company. The awards had an aggregate grant date fair value of $4.0 million. At Performance Unit settlement dates (which vary by participant), participants are paid in common stock and in cash. Participants will receive a number of shares of Company common stock equal to 60% of the number of Performance Units being settled, plus a cash payment equal to 40% of the fair market value of that number of shares of common stock equal to the number of Performance Units being settled. The awards were 50% vested at the award date and the remainder of the awards vested ratably over approximately the following eighteen months with the awards fully vesting on March 17, 2008. On March 28, 2007, an additional executive officer of the Company was granted 20,000 Performance Units under the 2006 MIP. The award had a grant date fair value of $0.3 million and was scheduled to vest ratably over four years. The awards contain certain anti-dilution and change of control provisions. Also, the number of Performance Units awarded were automatically adjusted on a pro-rata basis upon the conversion into common stock of the Company’s senior convertible notes and Series A convertible preferred stock. During 2007 and 2006, an additional 1,436,484 Performance Units and 122,073 Performance Units, respectively, with aggregate grant date fair values of $24.0 million and $1.6 million, respectively, were granted as a result of this automatic adjustment provision.

     All Performance Units must be settled before April 30, 2016. The Company recognized compensation expense (credit) of $(0.2 million), $(0.4 million) and $19.6 million during the years ended December 31, 2009, 2008 and 2007, respectively, related to these 2006 MIP Performance Unit awards, including $17.7 million related to the

automatic adjustments for the year ended December 31, 2007. The 2009 and 2008 compensation credits resulted from the remeasurement of the liability-classified portion of the awards to fair value. The fair value of these awards is based on the market price of the Company’s common stock. The amount of compensation expense recognized is based on the assumption that none of the Performance Unit awards will be forfeited.

     During 2009, an aggregate of 1,474,129 Performance Units under the 2006 MIP were settled by eight current and former executive officers. These settlements resulted in the issuance of 884,473 shares of common stock and cash payments totaling $1.9 million. As of December 31, 2009, a total of 268,988 Performance Units were outstanding and fully vested under the 2006 MIP.

     During 2008, an aggregate of 493,137 Performance Units under the 2006 MIP were settled by six executive officers. These settlements resulted in the issuance of 295,879 shares of common stock and cash payments totaling $2.0 million.

     Acquisitions

     In July 2009 the Company acquired the business and certain assets of FAP for a purchase price valued at $5.8 million. The purchase price included an initial cash payment of $1.6 million and requires additional deferred payments of $0.8 million paid in January 2010 and a $1.3 million payment in July 2010. Additional variable consideration may also be due based on the operating results generated by the acquired business over the next four years. The Company currently estimates the fair value of variable consideration to be $2.1 million.

     In February 2010, the Company acquired all the issued and outstanding capital stock of Etesius Limited, a privately-held European provider of purchasing and payables technologies and spend analytics based in Chelmsford, United Kingdom. The purchase price included an initial cash payment of $2.8 million and additional deferred payments of $1.2 million over four years. Additional variable consideration of up to $3.8 million may also be payable based on the future performance of certain segments of the Company’s service lines over the next four years.

     Executive Severance Payments

     The July 31, 2005 retirements of the Company’s former Chairman, President and CEO, John M. Cook, and the Company’s former Vice Chairman, John M. Toma, resulted in an obligation to pay retirement benefits of approximately $7.6 million (present value basis) to be paid in monthly cash installments principally over a three-year period, beginning February 1, 2006. On March 16, 2006, the terms of the applicable severance agreements were amended in conjunction with the Company’s financial restructuring. Pursuant to the terms of the severance agreements, as amended (1) the Company’s obligations to pay monthly cash installments to Mr. Cook and Mr. Toma were extended from 36 months to 58 months and from 24 months to 46 months, respectively; however, the total dollar amount of monthly cash payments to be made to each remained unchanged, and (2) the Company agreed to pay a fixed sum of $150,000 to defray the fees and expenses of the legal counsel and financial advisors to Messrs. Cook and Toma. The original severance agreements, and the severance agreements, as amended, also provide for an annual reimbursement, beginning on or about February 1, 2007, to Mr. Cook and Mr. Toma for the cost of health insurance for themselves and their respective spouses (not to exceed $25,000 and $20,000, respectively, subject to adjustment based on changes in the Consumer Price Index), continuing until each reaches the age of 80. At December 31, 2009, the Company’s accrued payroll and related expenses and noncurrent compensation obligations include $1.2 million and $0.8 million, respectively, related to these obligations.

     Off Balance Sheet Arrangements

     As of December 31, 2009, the Company did not have any material off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of the SEC’s Regulation S-K.

Critical Accounting Policies

     The Company’s significant accounting policies are more fully described in Note 1 of “Notes to Consolidated Financial Statements” included in Item 8 of this Form 10-K. However, certain of the Company’s accounting policies

are particularly important to the portrayal of its financial position and results of operations and require the application of significant judgment by management. As a result, they are subject to an inherent degree of uncertainty. Accounting policies that involve the use of estimates that meet both of the following criteria are considered by management to be “critical” accounting policies. First, the accounting estimate requires the Company to make assumptions about matters that are highly uncertain at the time that the accounting estimate is made. Second, alternative estimates in the current period, or changes in the estimate that are reasonably likely in future periods, would have a material impact on the presentation of the Company’s financial condition, changes in financial condition or results of operations.

     In addition to estimates that meet the “critical” estimate criteria, the Company also makes many other accounting estimates in preparing its consolidated financial statements and related disclosures. All estimates, whether or not deemed critical, affect reported amounts of assets, liabilities, revenues and expenses, as well as disclosures of contingent assets and liabilities. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, refund liabilities, accounts receivable allowance for doubtful accounts, goodwill and other intangible assets and income taxes. Management bases its estimates and judgments on historical experience, information available prior to the issuance of the consolidated financial statements and on various other factors that are believed to be reasonable under the circumstances. This information forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Materially different results can occur as circumstances change and additional information becomes known, including changes in those estimates not deemed “critical”.

     Management believes the following critical accounting policies, among others, involve its more significant estimates and judgments used in the preparation of its consolidated financial statements. The development and selection of accounting estimates, including those deemed “critical,” and the associated disclosures in this Form 10-K have been discussed with the audit committee of the Board of Directors.

	•		Revenue Recognition. The Company recognizes revenues on the accrual basis except with respect to certain International units where revenues are recognized on the cash basis in accordance with FASB ASC 605 “Revenue Recognition". Revenues are generally recognized for a contractually specified percentage of amounts recovered when it has been determined that our clients have received economic value (generally through credits taken against existing accounts payable due to the involved vendors or refund checks received from those vendors), and when the following criteria are met: (a) persuasive evidence of an arrangement exists; (b) services have been rendered; (c) the fee billed to the client is fixed or determinable; and (d) collectibility is reasonably assured. Additionally, for purposes of determining appropriate timing of recognition and for internal control purposes, the Company relies on customary business practices and processes for documenting that the criteria described in (a) through (d) above have been met. Such customary business practices and processes may vary significantly by client. On occasion, it is possible that a transaction has met all of the revenue recognition criteria described above but revenues are not recognized, unless management can otherwise determine that criteria (a) through (d) above have been met, because the Company’s customary business practices and processes specific to that client have not been completed. The determination that each of the aforementioned criteria has been met, particularly the determination of the timing of economic benefit received by the client and the determination that collectibility is reasonably assured, requires the application of significant judgment by management and a misapplication of this judgment could result in inappropriate recognition of revenues.
	•		Unbilled Receivables & Refund Liabilities. Unbilled receivables are usually contractual and relate to claims for which our client has received economic value. Unbilled receivables arise when a portion of the Company’s fee is deferred at the time of the initial invoice. At a later date (which can be up to a year after the original invoice, or a year after completion of the audit period), the unbilled receivable amount is invoiced. Notwithstanding the deferred due date, the Company and the client acknowledge that this unbilled receivable has been earned at the time of the original invoice, it just has a deferred due date.
			Refund liabilities result from reductions in the economic value previously received by the Company’s clients with respect to vendor claims identified by the Company and for which the Company has previously recognized revenues. Such refund liabilities are recognized by either offsets to amounts otherwise due from clients or by cash refunds to clients. The Company computes the estimate of its refund liabilities at any given time based on actual historical refund data.

			Periodic changes in unbilled receivables and refund liabilities are recorded as adjustments to revenues.
			During the first quarter of 2008, management revised its estimate of expected refund rates in its Recovery Audit Services — Americas. Such change in estimate resulted from a decline in actual Recovery Audit Services — Americas refund rates observed during 2007. The impact of this change in estimate resulted in a $0.8 million increase in first quarter 2008 income from continuing operations. During the fourth quarter of 2008, management changed its method of estimating the refund liability related to its Recovery Audit Services — Europe/Asia-Pacific segment to be more consistent with the methodology used in the Recovery Audit Services — Americas. The impact of the change in estimate resulted in a $0.9 million decrease in fourth quarter 2008 income from continuing operations. The combined impact of the 2008 refund liability estimate changes was to decrease income from continuing operations by $0.1 million, or less than $0.01 per basic and diluted share. Management does not expect that these changes in estimate will have a material impact on future period results.
	•		Goodwill and Other Intangible Assets. During each of the fourth quarters of 2009, 2008 and 2007, the Company completed the required annual impairment testing of goodwill and other intangible assets in accordance with FASB ASC 350. As a result of this testing, the Company concluded that there was no impairment of goodwill and other intangible assets.
			During the third quarter of 2007, management re-evaluated its policy related to the amortization of its customer relationships intangible asset. The customer relationships intangible asset had been amortized since its acquisition in 2002 using the straight-line method over a twenty year expected life. Management’s re-evaluation concluded that the original twenty year life continued to be a reasonable expectation. However, because of the expectation that revenues and profits from these customers will likely decline in future years, management concluded that an accelerated method of amortization of the customer relationships intangible asset would be more appropriate. The accelerated method results in amortization of the net unamortized June 30, 2007 balance over the remaining 14.5 year life at a rate that declines at approximately 8% per year. The Company adopted the new method in the third quarter of 2007 and the resulting change in amortization is being accounted for on a prospective basis in accordance with FASB ASC 350. Amortization expense in 2007 increased by $0.5 million as a result of this change in method.
	•		Income Taxes. The Company’s effective tax rate is based on historical and anticipated future taxable income, statutory tax rates and tax planning opportunities available to the Company in the various jurisdictions in which it operates. Significant judgment is required in determining the effective tax rate and in evaluating the Company’s tax positions. Tax regulations require items to be included in the tax returns at different times than the items are reflected in the financial statements. As a result, the Company’s effective tax rate reflected in its Consolidated Financial Statements included in Item 8 of this Form 10-K is different than that reported in its tax returns. Some of these differences are permanent, such as expenses that are not deductible on the Company’s tax returns, and some are temporary differences, such as depreciation expense. Temporary differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in the Company’s tax returns in future years for which it has already recorded the tax benefit in the statement of operations. The Company establishes valuation allowances to reduce net deferred tax assets to the amounts that it believes are more likely than not to be realized. These valuation allowances are adjusted in light of changing facts and circumstances. Deferred tax liabilities generally represent tax expense recognized in the Company’s consolidated financial statements for which payment has been deferred, or expense for which a deduction has already been taken on the Company’s tax returns but has not yet been recognized as an expense in its consolidated financial statements.
			FASB ASC 740, “Income Taxes", requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are deductible. In making this determination, management considers all available positive and negative evidence affecting specific deferred tax assets, including the Company’s past and anticipated future performance, the reversal of deferred tax liabilities, the length of carry-back and carry-forward periods, and the implementation of tax planning strategies.

			Objective positive evidence is necessary to support a conclusion that a valuation allowance is not needed for all or a portion of deferred tax assets when significant negative evidence exists. Cumulative losses in recent years are the most compelling form of negative evidence considered by management in this determination.
			FASB ASC 740 prescribes a “more-likely-than-not” recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Interpretation also offers guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. In accordance with FASB ASC 740, the Company’s policy for recording interest and penalties associated with tax positions is to record such items as a component of income before taxes. As a result of the implementation of FASB ASC 740 in 2007, the Company recognized a $0.3 million increase in liability for unrecognized tax benefits, which was accounted for as an increase to the January 1, 2007 accumulated deficit balance.
	•		Stock-Based Compensation. The Company accounts for stock-based compensation in accordance with the requirements of FASB ASC 718, “Share Compensation” (“FASB ASC 718”). FASB ASC 718 requires that companies account for awards of equity instruments issued to employees under the fair value method of accounting and recognize such amounts in their statements of operations. Under FASB ASC 718, the Company is required to measure compensation cost for all stock-based awards at fair value on the date of grant and recognize compensation expense in its consolidated statements of operations over the service period over which the awards are expected to vest. The Company recognizes compensation expense over the indicated vesting periods using the straight-line method.
			The fair value of all time-vested options is estimated as of the date of grant using the Black-Scholes option valuation model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, it is management’s opinion that existing models do not necessarily provide a reliable single measure of the fair value of the Company’s employee stock options.
			The Company estimates the fair value of awards of restricted shares and nonvested shares, as defined in FASB ASC 718, as being equal to the market value of the common stock on the date of the award. Also, under FASB ASC 718, companies must classify their share-based payments as either liability-classified awards or as equity-classified awards. Liability-classified awards are remeasured to fair value at each balance sheet date until the award is settled. Equity-classified awards are measured at grant date fair value and are not subsequently remeasured. The Company has classified its share-based payments which are settled in Company common stock as equity-classified awards and its share-based payments that are settled in cash as liability-classified awards. Compensation costs related to equity-classified awards are generally equal to the fair value of the award at grant-date amortized over the vesting period of the award. The liability for liability-classified awards is generally equal to the fair value of the award as of the balance sheet date times the percentage vested at the time. The change in the liability amount from one balance sheet date to another is charged (or credited) to compensation cost.
			During the years ended December 31, 2009, 2008 and 2007, stock-based compensation charges aggregated $3.3 million, $2.2 million and $21.0 million, respectively. Stock-based compensation is discussed in more detail in Note 1(l) and Note 14 of “Notes to Consolidated Financial Statements” included in Item 8 of this Form 10-K.

New Accounting Standards

     Refer to Note 1 of “Notes to Consolidated Financial Statements” for a discussion of recent accounting standards and pronouncements.

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

     Foreign Currency Market Risk. Our reporting currency is the U.S. dollar although we transact business in various foreign locations and currencies. As a result, our financial results could be significantly affected by factors such as changes in foreign currency exchange rates, or weak economic conditions in the foreign markets in which we provide services. Our operating results are exposed to changes in exchange rates between the U.S. dollar and the currencies of the other countries in which we operate. When the U.S. dollar strengthens against other currencies, the value of foreign functional currency revenues decreases. When the U.S. dollar weakens, the value of the foreign functional currency revenues increases. Overall, we are a net receiver of currencies other than the U.S. dollar and, as such, benefit from a weaker dollar. We are therefore adversely affected by a stronger dollar relative to major currencies worldwide. During the year ended December 31, 2009, we recognized $16.7 million of operating income from operations located outside the U.S., virtually all of which was originally accounted for in currencies other than the U.S. dollar. Upon translation into U.S. dollars, such operating income would increase or decrease, assuming a hypothetical 10% change in weighted-average foreign currency exchange rates against the U.S. dollar, by approximately $0.2 million.

     Interest Rate Risk. Our interest income and expense are sensitive to changes in the general level of U.S. interest rates. In this regard, changes in U.S. interest rates affect the interest earned on our cash equivalents as well as interest paid on our debt. On January 19, 2010, the Company entered into a four-year revolving credit and term loan agreement with SunTrust. Under the new credit facility, the Company had $5.7 million of calculated borrowing availability under its revolving credit facility and $15.0 million outstanding under a term loan as of January 31, 2010. Interest on both the revolver and term loan are payable monthly and accrued at an index rate using the one-month LIBOR rate, plus an applicable margin as determined by the loan agreement. The applicable interest rate margin varies from 2.25% per annum to 3.5% per annum. There are no borrowings outstanding under the revolving credit facility. However, assuming full utilization of the revolving credit facility, a hypothetical 100 basis point change in interest rates applicable to the revolver would result in an approximate $0.1 million change in annual pre-tax income. A hypothetical 100 basis point change in interest rates applicable to the term loan would result in an approximate $0.2 million change in annual pre-tax income.

     Stock-Based Compensation. The Company estimates the fair value of awards of restricted shares and nonvested shares, as defined in FASB ASC 505-50, as being equal to the market value of the common stock. In addition, companies must classify their share-based payments as either liability-classified awards or as equity-classified awards. Liability-classified awards are remeasured to fair value at each balance sheet date until the award is settled. The Company has classified its share-based payments that are settled in cash as liability-classified awards. The liability for liability-classified awards is generally equal to the fair value of the award as of the balance sheet date times the percentage vested at the time. The change in the liability amount from one balance sheet date to another is charged (or credited) to compensation cost. Based on the number of liability-classified awards outstanding as of December 31, 2009, a hypothetical $1.00 change in the market value of the Company’s common stock would result in a $0.1 million change in pre-tax income.

ITEM 8.		Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

		Page
		Number
Report of Independent Registered Public Accounting Firm			43
Consolidated Statements of Operations for the Years ended December 31, 2009, 2008 and 2007			44
Consolidated Balance Sheets as of December 31, 2009 and 2008			45
Consolidated Statements of Shareholders’ Equity (Deficit) for the Years ended December 31, 2009, 2008 and 2007			46
Consolidated Statements of Cash Flows for the Years ended December 31, 2009, 2008 and 2007			47
Notes to Consolidated Financial Statements			48

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders
PRGX Global, Inc.
Atlanta, Georgia

We have audited the accompanying consolidated balance sheets of PRGX Global, Inc. and subsidiaries (the Company) as of December 31, 2009 and 2008 and the related consolidated statements of operations, shareholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2009. In connection with our audits of the financial statements, we have also audited the financial statement schedule listed in the accompanying index. These consolidated financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. We believe that our audits provide 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 PRGX Global, Inc. and subsidiaries at December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.

Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 1(h) to the consolidated financial statements, “Income Taxes”, the Company changed its method for recognizing and measuring tax positions in 2007 due to the adoption of Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109” (included in FASB Accounting Standards Codification Topic 740).

Atlanta, Georgia		/s/ BDO Seidman, LLP

March 29, 2010

PRGX GLOBAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

		Years Ended December 31,
		2009				2008				2007
Revenues		$	179,583			$	195,706			$	227,369
Cost of revenues			116,718				125,901				140,877
Gross margin			62,865				69,805				86,492
Selling, general and administrative expenses			43,873				44,028				67,063
Operational restructuring expense (Note 16) )			—				—				1,644
Operating income			18,992				25,777				17,785
Gain on bargain purchase, net (Note 17)			2,388				—				—
Interest expense			(3,229	)			(4,090	)			(15,071	)
Interest income			204				845				1,256
Loss on debt extinguishment (Note 8)			—				—				(9,397	)
Earnings (loss) from continuing operations before income taxes and discontinued operations			18,355				22,532				(5,427	)
Income tax expense (Note 10)			3,028				3,502				1,658
Earnings (loss) from continuing operations before discontinued operations			15,327				19,030				(7,085	)
Discontinued operations (Note 2):
Earnings from discontinued operations, net of income tax expense of $408			—				—				347
Gain on sale of discontinued operations			—				—				19,868
Earnings from discontinued operations			—				—				20,215
Net earnings		$	15,327			$	19,030			$	13,130
Basic earnings per common share (Note 6):
Earnings (loss) from continuing operations before discontinued operations		$	0.67			$	0.87			$	(0.62	)
Earnings from discontinued operations			—				—				1.66
Net earnings		$	0.67			$	0.87			$	1.04
Diluted earnings per common share (Note 6):
Earnings (loss) from continuing operations before discontinued operations		$	0.65			$	0.83			$	(0.62	)
Earnings from discontinued operations			—				—				1.66
Net earnings		$	0.65			$	0.83			$	1.04
Weighted-average common shares outstanding (Note 6):
Basic			22,915				21,829				12,204
Diluted			23,560				23,008				12,204

See accompanying Notes to Consolidated Financial Statements.

PRGX GLOBAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)

		December 31,
		2009				2008
ASSETS (Note 8)
Current assets:
Cash and cash equivalents		$	33,026			$	26,688
Restricted cash			256				61
Receivables:
Contract receivables, less allowances of $1,032 in 2009 and $921 in 2008:
Billed			28,034				28,143
Unbilled			4,481				5,568
			32,515				33,711
Employee advances and miscellaneous receivables, less allowances of $351 in 2009 and $311 in 2008			276				285
Total receivables			32,791				33,996
Prepaid expenses and other current assets			2,306				2,264
Deferred income taxes (Note 10)			29				—
Total current assets			68,408				63,009
Property and equipment:
Computer and other equipment			28,583				24,164
Furniture and fixtures			2,888				2,885
Leasehold improvements			2,975				2,992
			34,446				30,041
Less accumulated depreciation and amortization			(24,443	)			(22,140	)
Property and equipment, net			10,003				7,901
Goodwill (Note 7)			4,600				4,600
Intangible assets, less accumulated amortization of $13,573 in 2009 and $10,932 in 2008 (Note 7)			24,104				18,968
Unbilled receivables			1,410				1,789
Deferred loan costs, net of accumulated amortization (Note 8)			1,431				2,170
Deferred income taxes (Note 10)			253				—
Other assets			304				346
		$	110,513			$	98,783
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses		$	15,707			$	16,275
Accrued payroll and related expenses			19,884				22,536
Refund liabilities			7,467				7,870
Deferred revenues			916				502
Current portions of debt and capital lease obligations (Note 8)			3,260				5,314
Business acquisition obligations (Note 17)			2,695				—
Total current liabilities			49,929				52,497
Long-term debt and capital lease obligations (Note 8)			11,070				14,331
Deferred income taxes (Note 10)			—				234
Noncurrent compensation obligations (Note 13(b))			978				2,849
Refund liabilities			733				897
Other long-term liabilities			6,364				5,265
Total liabilities			69,074				76,073
Commitments and contingencies (Notes 3, 8, 9, 12 and 13)
Shareholders’ equity (Notes 12 and 14):
Common stock, no par value; $.01 stated value per share. Authorized 50,000,000 shares; 23,272,892 shares issued and outstanding in 2009 and 21,789,645 shares issued and outstanding in 2008			233				218
Additional paid-in capital			562,563				559,359
Accumulated deficit			(524,661	)			(539,988	)
Accumulated other comprehensive income			3,304				3,121
Total shareholders’ equity			41,439				22,710
		$	110,513			$	98,783

See accompanying Notes to Consolidated Financial Statements.

PRGX GLOBAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
Years Ended December 31, 2009, 2008 and 2007
(In thousands, except share data)

																		Accumulated
										Additional								Other								Total
		Common Stock								Paid-In				Accumulated				Comprehensive				Treasury				Shareholders’				Comprehensive
		Shares				Amount				Capital				Deficit				Income (Loss)				Stock				Equity (Deficit)				Income (Loss)
Balance at December 31, 2006			8,398,770			$	84			$	513,920			$	(571,818	)		$	2,041			$	(48,710	)		$	(104,483	)
FASB ASC 740 tax liability			—				—				—				(330	)			—				—				(330	)
Comprehensive income:
Net earnings			—				—				—				13,130				—				—				13,130			$	13,130
Foreign currency translation adjustments			—				—				—				—				2,223				—				2,223				2,223
Comprehensive income																														$	15,353
Issuances of common stock:
Conversions of Series A preferred stock			4,098,541				41				11,601				—				—				—				11,642
Conversions of convertible senior notes			9,593,779				96				65,104				—				—				—				65,200
Stock option exercises			9,000				—				57				—				—				—				57
Issuance costs of common stock			—				—				(72	)			—				—				—				(72	)
Accumulated dividends on preferred stock			—				—				(487	)			—				—				—				(487	)
Stock-based compensation expense			—				—				15,469				—				—				—				15,469
Balance at December 31, 2007			22,100,090				221				605,592				(559,018	)			4,264				(48,710	)			2,349
Comprehensive income:
Net earnings			—				—				—				19,030				—				—				19,030			$	19,030
Foreign currency translation adjustments			—				—				—				—				(1,143	)			—				(1,143	)			(1,143	)
Comprehensive income																														$	17,887
Issuances of common stock:
Restricted share awards			399,507				4				(4	)			—				—				—				—
2006 MIP Performance Unit settlements			295,879				3				(3	)			—				—				—				—
Purchase of treasury stock			—				—				—				—				—				(1,687	)			(1,687	)
Retirement of treasury stock			(1,005,831	)			(10	)			(50,387	)			—				—				50,397				—
Stock-based compensation expense			—				—				4,161				—				—				—				4,161
Balance at December 31, 2008			21,789,645				218				559,359				(539,988	)			3,121				—				22,710
Comprehensive income:
Net earnings			—				—				—				15,327				—				—				15,327			$	15,327
Foreign currency translation adjustments			—				—				—				—				183				—				183				183
Comprehensive income																														$	15,510
Issuances of common stock:
Restricted share awards			817,905				8				(8	)			—				—				—				—
Restricted shares remitted by employees for taxes			—				—				(116	)			—				—				—				(116	)
Stock option exercises			9,375				—				26				—				—				—				26
2006 MIP Performance Unit settlements			884,473				9				(9	)			—				—				—				—
Forfeited restricted share awards			(149,752	)			(1	)			1				—				—				—				—
Purchase of treasury stock			—				—				—				—				—				(246	)			(246	)
Retirement of treasury stock			(78,754	)			(1	)			(245	)			—				—				246				—
Stock-based compensation expense			—				—				3,555				—				—				—				3,555
Balance at December 31, 2009			23,272,892			$	233			$	562,563			$	(524,661	)		$	3,304			$	—			$	41,439