PROFIT RECOVERY GROUP INTERNATIONAL INC, 10-K405, 1999-03-18

PROFIT RECOVERY GROUP INTERNATIONAL INC
10-K405, 1999-03-18
ENGINEERING, ACCOUNTING, RESEARCH, MANAGEMENT

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

<TABLE>
<C> <S>
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 0-28000
</TABLE>

THE PROFIT RECOVERY GROUP
INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

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

Common shares of the registrant outstanding at February 17, 1999 were
26,967,879. The aggregate market value, as of February 17, 1999, of such common
shares held by non-affiliates of the registrant was approximately $722,562,000
based upon the last sales price reported that date on The Nasdaq Stock Market of
$34.375 per share. (Aggregate market value estimated solely for the purposes of
this report. This shall not be construed as an admission for the purposes of
determining affiliate status.)

DOCUMENTS INCORPORATED BY REFERENCE

Part III: Portions of Registrant's Proxy Statement relating to the Annual
Meeting of Shareholders to be held on May 11, 1999.
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THE PROFIT RECOVERY GROUP INTERNATIONAL, INC.

FORM 10-K
DECEMBER 31, 1998

<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Part I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 9
Item 3. Legal Proceedings........................................... 9
Item 4. Submission of Matters to a Vote of Security Holders......... 9
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 9
Item 6. Selected Consolidated Financial Data........................ 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 12
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 19
Item 8. Financial Statements and Supplementary Data................. 20
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 44
Part III
Item 10. Directors and Executive Officers of the Registrant.......... 44
Item 11. Executive Compensation...................................... 44
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 44
Item 13. Certain Relationships and Related Transactions.............. 44
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 44
Signatures............................................................... 49
</TABLE>
<PAGE> 3

PART I

ITEM 1. BUSINESS

The Profit Recovery Group International, Inc. and subsidiaries (the
"Company") is a leading provider of accounts payable and other recovery audit
services to large businesses and certain governmental agencies having numerous
payment transactions with many vendors. These businesses include:

- retailers such as discount, department, specialty, grocery and drug
stores;

- manufacturers of pharmaceuticals, consumer electronics, chemicals and
aerospace and medical products;

- wholesale distributors of computer components, food products and
pharmaceuticals;

- technology companies that engage in telecommunications, computer
equipment assembly and software development; and

- healthcare providers such as hospitals and health maintenance
organizations.

In businesses with large purchase volumes and continuously fluctuating
prices, some small percentage of erroneous overpayments to vendors is
inevitable. In addition, the complexity of various tax laws results in
overpayments to governmental agencies. Services such as freight,
telecommunications and utilities provided to businesses under complex pricing
arrangements also can result in overpayments. All of these overpayments result
in "lost profits." The Company's trained, experienced audit specialists use
sophisticated proprietary technology and advanced audit techniques and
methodologies to identify overpayments to vendors and tax authorities. The
Company receives a contractual percentage of overpayments it identifies and its
clients recover. The Company continuously updates and refines its proprietary
databases that serve as a central repository reflecting its auditors'
experiences, vendor practices and knowledge of regional and national pricing
information, including seasonal allowances, discounts and rebates, but excluding
confidential client data.

The Company currently conducts business in 23 countries under three
distinct operating segments. See Note 11 of Notes to Consolidated Financial
Statements for worldwide operating segment disclosures.

THE RECOVERY AUDIT INDUSTRY

Businesses with substantial volumes of payment transactions involving
multiple vendors, numerous discounts and allowances, fluctuating prices and
complex tax and pricing arrangements find it difficult to detect all payment
errors. Although these businesses process the vast majority of payment
transactions correctly, a small number of errors occur principally because of
communication failures between purchasing and payables departments, complex
pricing arrangements, personnel turnover and changes in information and
accounting systems. These errors include vendor pricing errors, missed or
inaccurate discounts, allowances and rebates, incorrect freight charges and
duplicate payments. In the aggregate, these transaction errors can represent
meaningful lost profits that can be particularly significant for businesses with
relatively narrow profit margins. For example, the Company believes that a
typical U.S. retailer makes payment errors that are not discovered internally,
which in the aggregate can range from several hundred thousand dollars to more
than $1.0 million per billion dollars of revenues.

Although internal recovery audit departments identify some payment errors,
independent recovery audit firms often are retained by businesses to identify
additional overpayments. In the U.S. and Canada, large retailers routinely
engage independent recovery audit firms as standard business practice and
businesses in other industries increasingly are using independent recovery audit
firms. Outside the U.S., the Company believes that large retailers and certain
other businesses also increasingly are engaging independent recovery audit
firms.

Increasingly, businesses use technology to manage complex accounts payable
systems and realize greater operating efficiencies. Many businesses worldwide
communicate with vendors electronically to exchange inventory and sales data,
transmit purchase orders, submit invoices, forward shipping and receiving
informa-

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tion and remit payments. These paperless transactions are widely referred to as
EDI, and implementation of this technology is accelerating. EDI streamlines
processing large numbers of transactions, but does not eliminate payment errors
because operator input errors may be replicated automatically in thousands of
transactions. EDI systems typically generate significantly more individual
transaction details in electronic form, making these transactions easier to
audit than traditional paper-based accounts payable systems. Recovery audit
firms, however, require sophisticated technology in order to audit EDI accounts
payable processes effectively.

The Company believes that many businesses increasingly are outsourcing
internal recovery functions to independent recovery audit firms. Factors
contributing to this trend include the following:

- a need for significant investments in technology, especially in an EDI
environment, which the Company believes are greater than even large
businesses often can justify;

- an inability to duplicate the breadth of industry and auditing expertise
of independent recovery audit firms;

- a desire to focus limited resources on core competencies; and

- a desire for larger and more timely recoveries.

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

THE PROFIT RECOVERY GROUP SOLUTION

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

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

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

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THE PROFIT RECOVERY GROUP STRATEGY

The Company's objective is to be the leading worldwide provider of recovery
audit services. Its strategy to achieve this objective consists of the following
elements:

- Pursue Acquisitions. The Company intends to continue pursuing the
acquisition of domestic and international businesses, including both
direct competitors and businesses providing complementary recovery audit
services. The following sets forth a list of acquisitions completed from
January 1, 1997 through December 31, 1998:

<TABLE>
<CAPTION>
PRIMARY PRIMARY RECOVERY
COMPANY ACQUIRED DATE REGION SERVED AUDIT OR OTHER SERVICE
- ---------------------------------- ---- ------------- ----------------------
<S> <C> <C> <C>
1. Shaps Group, Inc.............. January 1997 U.S. Accounts Payable
2. Accounts Payable Recovery
Services, Inc................ February 1997 U.S. Accounts Payable
3. The Hale Group................ May 1997 U.S. Accounts Payable
4. Financiere Alma S.A. and
subsidiaries................. October 1997 France Taxation
5. TradeCheck, LLC............... November 1997 U.S. Ocean Freight
6. Precision Data Link........... March 1998 U.S. Air Freight
7. The Medallion Group........... June 1998 U.S. Air Freight
8. Novexel S.A................... July 1998 France Government Grant
Procurement
9. Loder, Drew & Associates,
Inc.......................... August 1998 U.S. Accounts Payable
10. Cost Recovery Professionals
Pty Ltd...................... September 1998 Australia Accounts Payable
11. Robert Beck & Associates, Inc.
and related businesses....... October 1998 U.S. Accounts Payable
12. IP Strategies SA.............. November 1998 Belgium Government Grant
Procurement
13. Industrial Traffic
Consultants, Inc............. December 1998 U.S. Ground Freight
</TABLE>

- Expand International Operations. The Company believes international
markets represent significant business opportunities and intends to
continue expanding its international operations in the following ways:

- establishing a local presence to attract new clients;

- opening offices to serve the expanding operations of multi-national
clients; and

- acquiring established recovery audit companies and other businesses.

Currently, the Company operates outside the United States in the following
locations:

- - Argentina
- - Australia
- - Belgium
- - Brazil
- - Canada
- - China
- - France
- - Germany
- - Hong Kong
- - Indonesia
- - Malaysia
- - Mexico
- - The Netherlands
- - New Zealand
- - The Philippines
- - Singapore
- - South Africa
- - South Korea
- - Switzerland
- - Taiwan
- - Thailand
- - United Kingdom

In the last 12 months, PRG commenced operations in the following
locations:

<TABLE>
<S> <C>
- - Argentina - The Philippines
- - Brazil - South Africa
- - China - South Korea
</TABLE>

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The Company may commence operations during 1999 in additional countries,
including Italy, Portugal and Spain.

- Expand Client Base. The Company seeks to increase its worldwide client
base within the industries it serves. The Company believes that its
typical fee arrangement enhances its ability to attract new clients
because clients pay a contractually negotiated percentage of overpayments
identified by the Company and recovered by its clients. The Company
principally targets large businesses having at least $500.0 million in
annual revenues, although smaller businesses may also be attractive
clients.

- Expand Recovery Audit Services. The Company seeks to expand its recovery
audit services beyond its traditional accounts payable recovery audit
business. Areas targeted for further expansion include freight,
telecommunications, utilities, and sales and property tax recovery
audits. For example, the Company recently began offering air freight
audit services with its acquisitions of Precision Data Link and The
Medallion Group.

- Maintain High Client Retention Rates. The Company has historically
maintained very high rates of client retention. The Company intends to
maintain and improve its high client retention rates by providing
comprehensive recovery audit services, utilizing highly trained auditors,
and continuing to refine its advanced audit technology.

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

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

THE PROFIT RECOVERY GROUP SERVICES

The Company provides accounts payable and other recovery audit services.
The Company expects that accounts payable recovery audit services will continue
to represent a majority of its revenues in 1999.

Accounts Payable Recovery Audit Services

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

Primary Audits. Although the Company is flexible in structuring recovery
audit programs to meet the individual needs of its clients, there are two basic
types of primary accounts payable audits conducted by the Company: (1) periodic
audits, which are usually commenced up to 18 months after a client's fiscal year
end; and (2) continuous audits, marketed as RecoverNow, which are commenced more
closely following transaction dates.

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

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Under the Company's RecoverNow program, clients provide the Company with
accounts payable data on a regular basis, often within 90 days following the
payment transaction. The Company believes its RecoverNow program generates
larger client recoveries for several reasons, including the following:

- transaction data, especially paper-based records, are more complete and
accessible;

- the impact of vendor bankruptcies is minimized because claims are made
more timely and continuously throughout the year;

- certain recoveries are facilitated when claims are made prior to the
expiration of seasonal or other special pricing promotions; and

- vendor relationships are improved because of on-going communications
regarding billing and payment practices.

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

Secondary Audits. In secondary audits, which are conducted primarily for
retail clients, the Company conducts an accounts payable audit after another
independent recovery audit firm has completed its audit. The Company usually
receives a higher percentage recovery fee than it receives from primary audits
because it generally is more difficult to detect payment errors in secondary
audits. In most cases, the Company is able to identify significant payment
errors not previously detected by a client's primary independent recovery audit
firm. The Company utilizes secondary audits as a marketing strategy to obtain
new, primary audit clients and believes it has been successful in implementing
this strategy.

Other Audit Services

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

- Tax Audits. The Company began offering tax recovery audit services in
France with the October 1997 acquisition of Financiere Alma S.A. and
subsidiaries ("Alma"). These services include the identification and
recovery of business and personal property, workers compensation, real
property and value added tax overpayments.

- Freight Audits. The Company provides air, ground and ocean freight
audits using its various proprietary freight recovery audit software.
Certain of the Company's auditors specialize in freight audits. The
Company may conduct freight audits in conjunction with accounts payable
recovery audits.

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

- Telecommunications Audits. This service assists clients in reducing
their overall telecommunications costs. Auditors review clients'
equipment, usage and systems configuration needs and recommend ways to
reduce future telecommunications costs.

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

- Expense Reduction Audits. In France, the Company assists clients in
reducing their costs for building and security services.

- Government Grant Procurement Audits. With the recent acquisitions of
Novexel S.A. and IP Strategies SA, the Company assists clients in
securing available government grants and subsidies.

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CLIENT CONTRACTS

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

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

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

Ancillary recovery audit services other than tax recovery audits include
freight audits, lease compliance audits, telecommunications audits, utility
audits and expense reduction audits. The Company recognizes revenues for these
audits at the time overpayment claims are presented to and approved by its
clients, as adjusted for estimated uncollectible claims.

On average, the Company collects its accounts receivable between 140 and
170 days after revenues are recognized.

TECHNOLOGY

The Company believes that its proprietary software audit tools and
proprietary databases, together with its centralized data processing
capabilities, provide it with a competitive advantage, especially when auditing
complex EDI accounts payable systems. The Company has made substantial financial
investments in developing its proprietary technology and expects to continue to
do so. The Company also maintains an information services department dedicated
to software development activities, including updating and modifying the
Company's existing proprietary software.

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Data Preparation and Verification

At the beginning of a typical accounts payable recovery audit engagement,
the Company obtains transaction data from its client for the time period under
audit. The Company receives this data typically by magnetic media, which is then
reformatted into standardized and proprietary layouts at one of the Company's
data processing facilities using the following:

- IBM AS 400 midrange computers;

- Windows NT and OS/2 Warp Connect servers; and

- other PC-based platforms.

The Company's experienced programmers then prepare statistical reports to
verify the completeness and accuracy of the data. The Company delivers this
reformatted data to its auditors who, using the Company's proprietary PC-based
field audit software, sort, filter and search the data for overpayments. The
Company also produces client-specific standard reports and statistical data for
its auditors. These reports and data often reveal patterns of activity or
unusual relationships suggestive of potential overpayment situations.

Proprietary Databases

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

AUDITOR HIRING AND TRAINING

Many of the Company's auditors formerly held finance-related management
positions in the industries the Company serves. To meet its growing need for
additional auditors, the Company also hires recent college graduates,
particularly those with multi-lingual capabilities. While the Company has been
able to hire a sufficient number of new auditors to support its growth, the
Company may be unable to continue hiring sufficient numbers of qualified
auditors to meet its future needs.

The Company provides intensive in-house training for auditors utilizing
many self-paced media including specialized computer-based training modules. The
Company utilizes experienced auditors as full-time field trainers to assess each
trainee's progress as he or she completes the training program. The in-house
training program is continuously upgraded based on feedback from auditors and on
changing industry protocols. Additional on-the-job training by experienced
auditors enhances the in-house training and enables newly hired auditors to
refine their skills. Because auditor compensation is based on team performance
results, the Company believes senior auditors are motivated to continue training
new auditors to maximize client recoveries and audit team compensation. As the
Company hires new auditors, it may be unable to continue providing the same
in-depth training or have sufficient numbers of experienced auditors to continue
its on-the-job training program.

CLIENT BASE

The Company provides its services principally to large businesses and
certain governmental agencies having numerous payment transactions with many
vendors. The Company principally targets large businesses having at least $500.0
million in annual revenues, although smaller businesses also may be attractive
clients. Retailers constitute an important part of the Company's client and
revenue base.

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For the years ended December 31, 1998, 1997 and 1996, the Company derived
22.2%, 33.8% and 34.6%, respectively, of its revenues from its five largest
clients. None of the Company's clients individually represented 10% or greater
of the Company's consolidated revenues for the year ended December 31, 1998.

SEASONALITY

The Company has experienced and expects to continue to experience
significant seasonality in its business. The Company typically realizes
substantially higher revenues and operating income in the last two quarters of
its fiscal year.

SALES AND MARKETING

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

PROPRIETARY RIGHTS

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

The Company owns or has rights to various copyrights, trademarks and trade
names used in the Company's business. These include AuditPro(R), AuditPro
97(TM), EDI Inquiry(TM), Claims Management System(TM), FreightPro(TM), Profit
Recovery Group International(R), PRG(R), RBAdvantage(TM), RecoverNow(R),
ReportPro(TM), ScanSearch(TM) and Sentinel(TM).

COMPETITION

The recovery audit business is highly competitive. The competitive factors
affecting the market for the Company's recovery audit services include:

- establishing and maintaining client relationships;

- quality and quantity of claims identified;

- experience and professionalism of audit staff;

- rates for services;

- technology; and

- geographic scope of operations.

The Company's principal competitors for accounts payable recovery audit
services include local and regional firms and one firm, Howard Schultz &
Associates, Inc., with a network of affiliate organizations in the U.S. and
abroad. The Company's competitors for tax recovery audit services in France
include major international accounting firms, tax attorneys and several smaller
tax recovery audit firms.

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

EMPLOYEES

At December 31, 1998, the Company had approximately 1,880 employees, 1,230
of whom were located in the U.S. The majority of the Company's employees are
involved in the audit function. The Company believes its employee relations are
good.

ITEM 2. PROPERTIES

The Company's principal executive office is located in approximately 79,400
square feet of office space in Atlanta, Georgia. The Company leases this space
under various agreements with primary terms expiring from December 2002 through
February 2005. The Company's various operating units lease numerous other
parcels of operating space in the 23 countries in which the Company currently
conducts its business. Most of the Company's real property leases are
individually less than 5 years in duration. The Company anticipates that
additional space will be required as its business continues to expand, and
believes that it will be able to obtain suitable space as needed. See Note 4 of
Notes to Consolidated Financial Statements of the Company.

ITEM 3. LEGAL PROCEEDINGS

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

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

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

PART II

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

The Company's common stock is traded under the symbol "PRGX" on The Nasdaq
Stock Market (Nasdaq). The Company has not paid cash dividends since its March
26, 1996 initial public offering and does not intend to pay cash dividends in
the foreseeable future. Moreover, restrictive covenants included in the
Company's bank credit facility specifically prohibit payment of cash dividends.
At February 17, 1999, there were approximately 2,500 beneficial holders of the
Company's common stock and 201 holders of record. The following table sets
forth, for the quarters indicated, the range of high and low prices for the
Company's common stock as reported by Nasdaq during 1998 and 1997.

<TABLE>
<CAPTION>
1998 CALENDAR QUARTER HIGH LOW
- --------------------- ------- -------
<S> <C> <C>
1st Quarter................................................. $23 $15 1/2
2nd Quarter................................................. 29 1/2 21 3/8
3rd Quarter................................................. 34 18 7/8
4th Quarter................................................. 39 1/8 20 1/8

1997 CALENDAR QUARTER
- ------------------------------------------------------------
1st Quarter................................................. $18 1/4 $11 1/16
2nd Quarter................................................. 16 1/8 11 3/4
3rd Quarter................................................. 20 1/8 13 5/8
4th Quarter................................................. 19 1/2 13 7/8
</TABLE>

9
<PAGE> 12

On October 29, 1998, in connection with the acquisition of stock and
certain net assets of Robert Beck & Associates, Inc. and related businesses
("RBA"), the Company issued 644,434 restricted, unregistered shares of its
common stock to the former shareholders of RBA. The shares were issued pursuant
to the exemption from registration provided by Section 4(2) of the Securities
Act of 1933, as amended.

On November 20, 1998, in connection with the acquisition of the net assets
of IP Strategies SA ("IP Strategies"), the Company issued 79,566 restricted,
unregistered shares of its common stock to the former shareholders of IP
Strategies. The shares were issued pursuant to the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended.

On December 10, 1998, in connection with the acquisition of the net assets
of Industrial Traffic Consultants, Inc. ("ITC"), the Company issued 48,274
restricted, unregistered shares of its common stock to the former shareholders
of ITC. The shares were issued pursuant to the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth selected consolidated financial data for the
Company as of and for the five years ended December 31, 1998. Such historical
consolidated financial data as of and for the five years ended December 31, 1998
have been derived from the Company's Consolidated Financial Statements and Notes
thereto, which Consolidated Financial Statements have been audited by KPMG LLP,
independent auditors. The audited Consolidated Balance Sheets as of December 31,
1998 and 1997 and the related Consolidated Statements of Earnings, Shareholders'
Equity (Deficit) and Cash Flows for each of the years in the three-year period
ended December 31, 1998 and the report thereon, which in 1998 and 1997 is based
partially upon the report of other auditors, are included elsewhere herein. The
selected pro forma Statements of Earnings data for the three years ended
December 31, 1996 are unaudited. The data presented below should be read in
conjunction with the Consolidated Financial Statements and Notes thereto and
other financial information appearing elsewhere in this Form 10-K including
Management's Discussion and Analysis of Financial Condition and Results of
Operations.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1998(1) 1997(2) 1996 1995(3) 1994
-------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF EARNINGS DATA:
HISTORICAL
Revenues.................................. $202,827 $112,363 $77,330 $56,031 $34,690
Cost of revenues.......................... 101,931 57,726 40,330 30,554 18,163
Selling, general and administrative
expenses................................ 67,526 37,254 25,961 19,035 12,343
Restructuring costs(4).................... -- 1,208 -- -- --
-------- -------- ------- ------- -------
Operating income..................... 33,370 16,175 11,039 6,442 4,184
Interest (expense), net................... (3,509) (403) (100) (1,630) (544)
-------- -------- ------- ------- -------
Earnings before income taxes......... 29,861 15,772 10,939 4,812 3,640
Income taxes(5)........................... 11,715 6,149 7,789 305 --
-------- -------- ------- ------- -------
Net earnings......................... $ 18,146 $ 9,623 $ 3,150 $ 4,507 $ 3,640
======== ======== ======= ======= =======
Cash dividends per share.................. $ -- $ -- $ .28 $ .93 $ .10
======== ======== ======= ======= =======
</TABLE>

10
<PAGE> 13

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1998(1) 1997(2) 1996 1995(3) 1994
-------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
PRO FORMA(6)
Historical earnings before income taxes... $10,939 $ 4,812 $ 3,640
Pro forma income taxes.................... 4,271 1,877 1,420
------- ------- -------
Pro forma net earnings............... $ 6,668 $ 2,935 $ 2,220
======= ======= =======
PER SHARE
Earnings (pro forma earnings for 1996 and
1995) per share -- basic................ $ .82 $ .52 $ .41 $ .24
======== ======== ======= =======
Earnings (pro forma earnings for 1996 and
1995) per share -- diluted.............. $ .80 $ .51 $ .39 $ .21
======== ======== ======= =======
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1998(1)(7) 1997(2) 1996(8) 1995 1994
---------- -------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................. $ 28,344 $ 19,386 $16,891 $ 642 $ 1,284
Working capital........................... 28,543 34,563 30,004 6,738 4,889
Total assets.............................. 387,382 133,885 68,318 30,268 13,779
Long-term debt, excluding current
installments............................ 112,886 24,365 692 17,629 2,741
Loans from shareholders................... -- -- -- 1,075 1,075
Total shareholders' equity (deficit)...... 165,504 63,072 40,559 (3,402) 2,356
</TABLE>

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

(1) During 1998, the Company completed eight acquisitions including Precision
Data Link (March), The Medallion Group (June), Novexel S.A. (July), Loder,
Drew & Associates, Inc. (August), Cost Recovery Professionals Pty Ltd
(September), Robert Beck & Associates, Inc. and related businesses
(October), IP Strategies SA (November) and Industrial Traffic Consultants,
Inc. (December). See Note 8 of Notes to Consolidated Financial Statements.
(2) During 1997, the Company completed five acquisitions including Shaps Group,
Inc. (January), Accounts Payable Recovery Services, Inc. (February), The
Hale Group (May), 98.4% of Financiere Alma, S.A. and its subsidiaries
(October) and TradeCheck, LLC (November). See Note 8 of Notes to
Consolidated Financial Statements.
(3) Effective January 1, 1995, the Company acquired Fial & Associates, Inc.
(4) Represents a charge to restructure and realign certain facets of the
European management structure in recognition of emerging developments such
as the Alma acquisition. See Note 14 of Notes to Consolidated Financial
Statements.
(5) In April 1995, the Company's predecessors reorganized and its international
entities became C corporations. Additionally, in connection with the
Company's March 1996 initial public offering, all domestic entities became C
corporations. As a result of these conversions to C corporations, the
Company incurred charges to operations of $305,000 in 1995 and $3.7 million
in 1996 for cumulative deferred income taxes. The Company's 1996 provision
for income taxes of $7.8 million consists of the above-mentioned $3.7
million charge for cumulative deferred income taxes combined with $4.1
million in tax provisions at a 39.0% composite effective rate for the three
quarters subsequent to the March 26, 1996 initial public offering.
(6) The Company's predecessor entities prior to its initial public offering on
March 26, 1996 generally were either corporations electing to be taxed as
Subchapter S corporations or partnerships. As a result, any income tax
liabilities were the responsibilities of the respective shareholders and
partners. Pro forma net earnings reflect, where applicable, a provision for
income taxes to include the additional tax expense as if the Company had
been subject to federal and state income taxes for all periods presented
rather than the individual shareholders and partners.

11
<PAGE> 14

(7) Balance Sheet Data as of December 31, 1998 reflect the receipt of net
proceeds from the Company's March 1998 public offering of 2.0 million common
shares. See Note 7 of Notes to Consolidated Financial Statements.
(8) Balance Sheet Data as of December 31, 1996 reflect the receipt of net
proceeds from the Company's March 1996 initial public offering together with
the partial use of such proceeds to repay substantially all debt obligations
other than certain convertible debentures which were converted to equity
immediately prior to the offering. See Note 7 of Notes to Consolidated
Financial Statements.

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

OVERVIEW

The Company is a leading provider of accounts payable and other recovery
audit services to large businesses and certain governmental agencies having
numerous payment transactions with many vendors. These businesses include
retailers, manufacturers, wholesale distributors, technology companies and
healthcare providers.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
HISTORICAL
Revenues................................................ 100.0% 100.0% 100.0%
Cost of revenues........................................ 50.3 51.4 52.1
Selling, general and administrative expenses............ 33.3 33.2 33.6
Restructuring costs..................................... -- 1.0 --
----- ----- -----
Operating income................................ 16.4 14.4 14.3
Interest (expense), net................................. (1.7) (0.4) (0.2)
----- ----- -----
Earnings before income taxes.................... 14.7 14.0 14.1
Income taxes............................................ 5.8 5.4 10.0
----- ----- -----
Net earnings.................................... 8.9% 8.6% 4.1%
===== ===== =====
PRO FORMA
Historical earnings before income taxes................. 14.1%
Pro forma income taxes.................................. 5.5
-----
Pro forma net earnings.......................... 8.6%
=====
</TABLE>

1998 COMPARED WITH 1997

Revenues. The Company's revenues consist principally of contractual
percentages of overpayments recovered for clients that continue to be heavily
concentrated in the retail industry. Revenues increased 80.5% to $202.8 million
in 1998, up from $112.4 million in 1997.

Domestic revenues increased to $143.5 million in 1998, up 75.7% from $81.7
million in 1997. Of this 75.7% increase, (i) 17.7% was contributed by existing
clients served in both the 1997 and 1998 periods;

12
<PAGE> 15

(ii) 52.9% was contributed by the four domestic recovery audit firms acquired in
1998; and (iii) 5.1% resulted from new clients.

The Company considers international operations to be all operations located
outside of the United States. International revenues increased 93.3% to $59.4
million in 1998, up from $30.7 million in 1997. Of this 93.3% increase, (i)
11.1% was contributed by four international recovery audit firms acquired in
1998, and (ii) 82.2% resulted from existing operations. The Company continues to
believe that the rate of growth for its international operations will
significantly exceed its rate of domestic revenue growth for the foreseeable
future if the revenue effect of acquired businesses is excluded.

Cost of Revenues. Cost of revenues consists principally of commissions
paid or payable to the Company's auditors based primarily upon the level of
overpayment recoveries, and salaries and bonuses paid or payable to divisional
and regional managers. Also included in cost of revenues are other direct costs
incurred by these personnel including rental of field offices, travel and
entertainment, telephone, utilities, maintenance and supplies, and clerical
assistance. Cost of revenues as a percentage of revenues decreased to 50.3% in
1998 from 51.4% in 1997.

Domestically, cost of revenues as a percentage of revenues decreased to
51.7%, down from 53.1% in 1997. The 1998 improvement relates primarily to the
operations of Loder, Drew & Associates, Inc., which the Company acquired
effective July 1, 1998. Loder, Drew & Associates, Inc. conducts its business at
a lower cost of revenues ratio than the Company's core domestic retail,
wholesale and government operations.

Internationally, cost of revenues as a percentage of revenues was 46.8% in
both 1998 and 1997.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses include the expenses of sales and marketing activities,
information technology services and the corporate data center, human resources,
legal and accounting, administration, headquarters-related depreciation of
property and equipment and amortization of intangibles. Selling, general and
administrative expenses as a percentage of revenues increased slightly to 33.3%
in 1998, up from 33.2% in 1997.

Domestic selling, general and administrative expenses as a percentage of
revenues increased to 32.1% in 1998, up from 30.6% in 1997. The Company's 1998
domestic selling, general and administrative expense percentage is higher than
the comparable percentage in 1997 due to increased expenditures for various 1998
initiatives such as significantly expanded auditor hiring and training programs,
significant additional resource commitments in the Company's information
technology functions, and period costs associated with intensified mergers and
acquisitions efforts.

Internationally, selling, general and administrative expenses as a
percentage of revenues decreased to 36.1% in 1998, down significantly from 40.0%
in 1997. This improvement resulted primarily from various components of fixed
costs being spread over a rapidly growing revenue base.

In connection with acquired businesses, the Company has recorded intangible
assets including goodwill and deferred non-compete costs. Amortization of these
intangible assets totaled $5.9 million in 1998 and $1.9 million in 1997.

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

Operating Income. Operating income increased 106.3% to $33.4 million in
1998, up from $16.2 million in 1997. As a percentage of revenues, operating
income increased to 16.4% of revenues in 1998, up from 14.4% in 1997. Excluding
the effect of the $1.2 million nonrecurring pre-tax restructuring charge on 1997
operations, operating income would have been $17.4 million or 15.5% of total
revenues.

13
<PAGE> 16

Interest (Expense), Net. Net interest expense for 1998 was $3.5 million,
up considerably from $403,000 during 1997. The 1998 increase relates principally
to interest on bank borrowings in connection with the Company's purchases of
Alma, The Medallion Group ("Medallion"), Novexel S.A. ("Novexel"), Loder, Drew
and Associates, Inc. ("Loder Drew"), Cost Recovery Professionals Pty Ltd
("CRP"), Robert Beck & Associates, Inc. and certain related businesses,
("Beck"), IP Strategies SA ("IPS") and Industrial Traffic Consultants, Inc.
("ITC").

Earnings Before Income Taxes. Earnings before income taxes increased 89.3%
to $29.9 million in 1998, up from $15.8 million in 1997. As a percentage of
total revenues, earnings before income taxes were 14.7% in 1998 and 14.0% in
1997. Excluding the effect of the $1.2 million nonrecurring pre-tax
restructuring charge on 1997 operations, earnings before income taxes as a
percentage of total revenues would have been 15.1%.

Income Taxes. The provisions for income taxes for 1998 and 1997 consist of
federal, state and foreign income taxes at the Company's composite effective
rate which approximates 39.0%.

Weighted-Average Shares Outstanding -- Basic. The Company's
weighted-average shares outstanding for purposes of calculating basis earnings
per share increased to 22.0 million for 1998, up from 18.4 million for 1997.
This increase related primarily to 2.0 million common shares issued in a public
offering of March 16, 1998 and common shares issued in connection with
acquisitions of various companies.

1997 COMPARED WITH 1996

Revenues. Revenues increased 45.3% to $112.4 million for 1997, up from
$77.3 million in 1996.

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

International revenues increased 109.9% to $30.7 million in 1997, up from
$14.6 million in 1996. Of this 109.9% increase, (i) 45.3% was contributed by
operations of Alma subsequent to this October 1997 acquisition and (ii) 64.6%
resulted from existing operations, primarily from services provided to new
clients.

Cost of Revenues. Cost of revenues as a percentage of revenues decreased
to 51.4% in 1997 from 52.1% in 1996.

Domestically, cost of revenues as a percentage of revenues increased
slightly to 53.1% in 1997 from 52.7% in 1996. This increase related primarily to
cost of revenues associated with revenues subsequently recognized on claims in
process acquired as part of the Company's May 1997 acquisition of The Hale
Group. These claims carried higher auditor compensation rates than those
customarily paid by the Company. The remainder of these claims in progress were
resolved in 1998.

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

Selling, General and Administrative Expenses. Selling, general and
administrative expenses as a percentage of revenues decreased to 33.2% in 1997,
down from 33.6% in 1996.

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

14
<PAGE> 17

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

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

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

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

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

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

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

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

15
<PAGE> 18

QUARTERLY RESULTS

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

<TABLE>
<CAPTION>
1998 QUARTER ENDED 1997 QUARTER ENDED
-------------------------------------- --------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
------- ------- -------- ------- ------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues......................... $33,144 $38,934 $61,803 $68,946 $20,960 $25,858 $29,627 $35,918
Cost of revenues................. 17,956 20,326 30,078 33,571 11,529 13,331 14,693 18,173
Selling, general and
administrative expenses........ 13,029 13,991 19,312 21,194 8,196 8,723 8,790 11,545
Restructuring costs.............. -- -- -- -- -- -- -- 1,208
------- ------- ------- ------- ------- ------- ------- -------
Operating income........ 2,159 4,617 12,413 14,181 1,235 3,804 6,144 4,992
Interest income (expense), net... (324) 186 (1,451) (1,920) 63 55 14 (535)
------- ------- ------- ------- ------- ------- ------- -------
Earnings before income
taxes................. 1,835 4,803 10,962 12,261 1,298 3,859 6,158 4,457
Income taxes..................... 715 1,884 4,297 4,819 506 1,491 2,400 1,752..
------- ------- ------- ------- ------- ------- ------- -------
Net earnings............ $ 1,120 $ 2,919 $ 6,665 $ 7,442 $ 792 $ 2,368 $ 3,758 $ 2,705
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
1998 QUARTER ENDED 1997 QUARTER ENDED
-------------------------------------- --------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
------- ------- -------- ------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues................. 54.2 52.2 48.7 48.7 55.0 51.6 49.6 50.6
Selling, general and
administrative expenses........ 39.3 35.9 31.2 30.7 39.1 33.7 29.7 32.1
Restructuring costs.............. -- -- -- -- -- -- -- 3.4
------- ------- ------- ------- ------- ------- ------- -------
Operating income........ 6.5 11.9 20.1 20.6 5.9 14.7 20.7 13.9
Interest income (expense), net... (1.0) 0.4 (2.3) (2.8) 0.3 0.2 0.1 (1.5)
------- ------- ------- ------- ------- ------- ------- -------
Earnings before income
taxes................. 5.5 12.3 17.8 17.8 6.2 14.9 20.8 12.4
Income taxes..................... 2.1 4.8 7.0 7.0 2.4 5.8 8.1 4.9
------- ------- ------- ------- ------- ------- ------- -------
Net earnings............ 3.4% 7.5% 10.8% 10.8% 3.8% 9.1% 12.7% 7.5%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>

The Company has experienced and expects to continue to experience
significant seasonality in its business. The Company typically realizes higher
revenues and operating income in the last two quarters of its fiscal year. This
trend reflects the inherent purchasing and operational cycles of the retailing
industry, which continues to be the principal industry served by the Company.
The Company's recent larger acquisitions, including the October 1997 acquisition
of Alma, the August 1998 acquisition of Loder Drew and the October 1998
acquisition of Beck are not expected to affect this trend because these entities
have historically experienced similar seasonality in their revenues and
operating income. Should the Company not continue to realize increased revenues
in future third and fourth quarter periods, profitability for any affected
quarter and the entire year could be materially and adversely affected due to
ongoing selling, general and administrative expenses that are largely fixed over
the short term.

LIQUIDITY AND CAPITAL RESOURCES

16
<PAGE> 19

had $112.3 million in outstanding principal borrowings under its credit
facility. In January 1999, the Company completed a public offering of its common
stock which provided net proceeds to the Company of $92.8 million. After
application of these net proceeds to repay borrowings under the credit facility,
the outstanding principal borrowings under the facility approximated $19.5
million as of February 15, 1999.

Net cash provided by operating activities was $11.3 million in 1998, $8.2
million in 1997 and $1.9 million in 1996. Excluding the effect of increased
accounts receivable at December 31, 1998 from two large domestic audits which
were in their start-up phases, net cash provided by operating activities would
have been $14.8 million.

Net cash used in investing activities was $131.2 million in 1998, $30.8
million in 1997 and $5.1 million in 1996. During 1998, the Company spent $113.3
million (net of cash acquired) as the cash portion of consideration paid for
eight recovery audit firms.

Net cash provided by financing activities was $128.9 million in 1998, $25.0
million in 1997 and $19.4 million in 1996. Net cash provided by financing
activities in 1998 consisted primarily of $112.6 million in credit facility
borrowings and $43.0 million in net proceeds from the sale of common stock,
offset in part by a $24.9 million in debt repayments. Net proceeds from the sale
of common stock primarily relate to the Company's public sale of 2.0 million
newly issued common shares in an underwritten offering which was completed in
March 1998.

On August 6, 1998, the Company acquired all the assets and assumed certain
liabilities of Loder Drew effective as of July 1, 1998. Loder Drew is an
international recovery auditing firm primarily serving clients in the
manufacturing, financial services and other non-retail sectors. Pursuant to the
acquisition agreements, the initial consideration paid for Loder Drew consisted
of $70.0 million in cash and 803,535 restricted, unregistered shares of the
Company's common stock. Additionally, the acquisition agreements provided that
the former owners of Loder Drew would be eligible to receive additional purchase
price consideration up to a maximum of $70.0 million in cash conditioned on the
performance of Loder Drew through December 31, 1999. Of this $70.0 million,
$30.0 million was based on the financial performance of Loder Drew for the six
months ended December 31, 1998. Since the financial performance of Loder Drew
for the six months ended December 31, 1998 exceeded applicable thresholds, the
entire $30.0 million was recorded on the accompanying December 31, 1998
Consolidated Balance Sheet as additional goodwill and corresponding accrued
business acquisition consideration. The $30.0 million payment is due in the
Spring of 1999, and the Company intends to borrow the entire amount under its
existing $200.0 million credit facility. Of the above-mentioned $70.0 million,
up to $40.0 million in additional purchase price consideration is payable in the
Spring of 2000 based upon the financial performance of the Loder Drew division
during calendar 1999. The Company is presently unable to estimate what portion,
if any, of this $40.0 million will ultimately become due and payable since the
required financial performance payment thresholds for 1999 significantly exceed
Loder Drew's actual performance for 1998. The Company currently anticipates that
any portion of the $40.0 million which ultimately becomes due and payable will
be borrowed under its existing $200.0 million credit facility to the extent that
excess cash derived from the increased financial performance of the Loder Drew
division is insufficient to satisfy any required payment.

During the two year period ended December 31, 1998, the Company acquired
thirteen recovery audit firms. The Company is pursuing, and intends to continue
to pursue, the acquisition of domestic and international businesses including
both direct competitors and businesses providing other types of recovery
services. There can be no assurance, however, that the Company will be
successful in consummating further acquisitions due to factors such as
receptivity of potential acquisition candidates and valuation issues.
Additionally, there can be no assurance that future acquisitions, if
consummated, can be successfully assimilated into the Company.

The Company from time to time issues restricted, unregistered common stock
in partial consideration for the business entities it acquires. The timing and
quantity of any future securities issuances are not susceptible to estimation.
Additionally, if the Company is successful in arranging for future acquisitions
which individually or collectively are large relative to the Company's size, it
may need to secure additional debt or equity financing. There are no current
plans to seek such financing.
17
<PAGE> 20

The Company believes that its current working capital, availability
remaining under its $200.0 million credit facility and cash flow generated from
future operations will be sufficient to meet the Company's working capital and
capital expenditure requirements through December 31, 1999 unless one or more
acquisitions are consummated which require the Company to seek additional debt
or equity financing.

NEW ACCOUNTING STANDARDS

Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. This
pronouncement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999 although earlier application is encouraged. The Company has
chosen to adopt this pronouncement effective with its fiscal year which begins
January 1, 2000 and does not believe that it will materially affect its reported
results of operations or financial condition upon adoption.

Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
defines such costs and requires that they be expensed as incurred. This
pronouncement is effective for financial statements for fiscal years beginning
after December 15, 1998 although earlier application is encouraged. The Company
has chosen to adopt this pronouncement effective January 1, 1999 and does not
believe that it will materially affect its reported results of operations or
financial condition upon adoption.

YEAR 2000 ISSUE

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

The Company has undertaken, but not completed, an assessment of its Year
2000 issues. The assessment is scheduled for completion in March 1999, pending
receipt of information from third parties whose software and hardware are
integral components of the Company's information technology systems. Preliminary
analysis indicates that exposure is limited by the fact that the Company has
virtually no active information technology systems that are more than two years
old and has no non-information technology systems that could materially impact
the Company's operations.

The Company has a significant dependence on personal computer systems both
for internal accounting and for completion of audit engagements for its clients.
It recently has completed an inventory of those personal computer systems and
expended approximately $750,000 during 1998 to replace older hardware and
software which was possibly not Year 2000 compliant. Another $250,000 is
expected to be spent in 1999 to complete the required upgrades. The Company has
adopted and enforced corporate standards for operating systems and
administrative applications.

The Company has not verified that its financial accounting software is Year
2000 compliant because it made a decision totally independent of any Year 2000
issue to replace substantially all of its existing financial packages.
Replacement of certain general accounting components was completed in January
1999. Replacement of the balance of the financial accounting systems is
scheduled for mid-year 1999. As of December 31, 1998, the Company has estimated
that it will incur additional capital expenditures of approximately $2.6 million
through 1999 to complete its financial accounting systems project. Any portion
of this cost which cannot be funded from current operations will be financed
under the Company's existing $200.0 million credit facility.

One of the existing internally developed financial system components is not
Year 2000 compliant. The Company has initiated a complete rewrite of that
component as part of its overall plan to replace the existing financial systems.
This component is reasonably complex, and there is some risk that it will not be
completed on schedule. Failure to complete the system by the end of 1999 could
result in inability of the Company's systems to accurately determine its
revenues or calculate incentive compensation for its employees. In the unlikely
event that the replacement is not completed in time to handle Year 2000
transactions, the Company

18
<PAGE> 21

would be forced to hire temporary staff to perform the tasks manually. The
potential cost cannot be estimated, but the Company believes that the impact
would be immaterial to its financial position or results of operations.

Certain of the Company's international operations continue to utilize an
older version of the Company's proprietary recovery audit software which is not
Year 2000 compliant. Plans are in place to upgrade all operations to the current
version by mid-year 1999. The only significant issue in completing the upgrade
is developing a training plan in the native language of the users. If the
upgrade is not completed, affected international auditors may be required to
utilize other less effective audit tools, techniques and processes, and the
Company could suffer a loss of revenues outside the U.S. as a result.

The Company has made and continues to make acquisitions of other companies
in the recovery audit business. It is possible that the Company might acquire a
business with a significant risk from Year 2000 issues. The Company's
preliminary risk assessment did not include assessment of risks within Alma,
which was acquired by the Company in October 1997. Alma's financial systems are
separate from and independent of the Company's other financial systems, and are
subject to similar risks which are in the process of being specifically
identified and quantified. Should completion of the Year 2000 Alma risk
assessment indicate the existence of significant problems, the Company could
experience a loss of revenues from Alma's operations. The Company's long-range
plan includes conversion of Alma's financial systems to the same packaged
software utilized by the rest of the Company.

The Company's business operations involve working with outputs from its
clients' financial systems. Each of the Company's clients is assessing its own
risks related to Year 2000 issues which may cause them to upgrade or replace
certain of their systems. The Company believes that its investment in advanced
technology is a competitive advantage as clients and potential clients are
implementing new and more sophisticated accounts payable systems. In the case of
clients which experience a temporary inability to process payables due to Year
2000 issues, the Company's risk of lost revenues is mitigated by the fact that
it audits in arrears and would have advance notice of client problems in making
vendor payments.

FORWARD-LOOKING STATEMENTS

Statements made in Management's Discussion and Analysis of Financial
Condition and Results of Operations which look forward in time involve risks and
uncertainties and are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such risks and uncertainties
include the following:

- the Company's assessment of the state of its Year 2000 readiness;

- unanticipated expenditures and potential risks;

- the adequacy of the Company's current working capital and other available
sources of funds;

- the ability of the Company to successfully implement its operating
strategy and acquisition strategy;

- the Company's ability to manage rapid expansion, including, without
limitation, the assimilation of acquired companies;

- changes in economic cycles;

- competition from other companies;

- changes in laws and governmental regulations applicable to the Company;
and

- other risk factors detailed in this Form 10-K and in the risk factors
section of the Company's Prospectus dated January 8, 1999 contained in
its Registration Statement on Form S-3 (No. 333-67711).

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has not conducted transactions, established commitments or
entered into relationships requiring disclosures beyond those provided elsewhere
in this Form 10-K.
19
<PAGE> 22

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Independent Auditors' Reports............................... 21
Consolidated Statements of Earnings for the Years ended
December 31, 1998, 1997 and 1996.......................... 23
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... 24
Consolidated Statements of Shareholders' Equity (Deficit)
for the Years ended December 31, 1998, 1997 and 1996...... 25
Consolidated Statements of Cash Flows for the Years ended
December 31, 1998, 1997 and 1996.......................... 26
Notes to Consolidated Financial Statements.................. 27
</TABLE>

20
<PAGE> 23

INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying Consolidated Balance Sheets of The Profit
Recovery Group International, Inc. and subsidiaries as of December 31, 1998 and
1997, and the related Consolidated Statements of Earnings, Shareholders' Equity
(Deficit), and Cash Flows for each of the years in the three-year period ended
December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the consolidated financial statements of Financiere Alma, S.A. and
subsidiaries, which financial statements reflect total assets constituting 7%
and 12% and total revenues constituting 12% and 6% in 1998 and 1997,
respectively, of the related consolidated totals. Those financial statements
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Financiere Alma, S.A.
and subsidiaries, is based solely on the report of the other auditors.

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

In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of The Profit Recovery Group
International, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998 in conformity with generally accepted
accounting principles.

KPMG LLP

Atlanta, Georgia
February 10, 1999

21
<PAGE> 24

INDEPENDENT AUDITORS' REPORT

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

We have audited the consolidated balance sheets of Financiere Alma, S.A.
and subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of earnings, shareholders' equity and cash flows for the year ended
December 31, 1998 and the three months ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our 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 Financiere
Alma, S.A. and subsidiaries as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for the year ended December 31, 1998 and
the three months ended December 31, 1997 in conformity with accounting
principles generally accepted in the United States.

ERNST & YOUNG Entrepreneurs
Departmente d'E&Y Audit

Any Antola

Paris, France
January 25, 1999

22
<PAGE> 25

THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
---------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
HISTORICAL
Revenues.................................................... $202,827 $112,363 $77,330
Cost of revenues............................................ 101,931 57,726 40,330
Selling, general and administrative expenses (Note 2)....... 67,526 37,254 25,961
Restructuring costs (Note 14)............................... -- 1,208 --
-------- -------- -------
Operating income.................................. 33,370 16,175 11,039
Interest (expense), net (Note 2)............................ (3,509) (403) (100)
-------- -------- -------
Earnings before income taxes...................... 29,861 15,772 10,939
Income taxes (Note 5)....................................... 11,715 6,149 7,789
-------- -------- -------
Net earnings...................................... $ 18,146 $ 9,623 $ 3,150
======== ======== =======
PRO FORMA
Historical earnings before income taxes..................... $10,939
Pro forma income taxes (Note 5)............................. 4,271
-------
Pro forma net earnings............................ $ 6,668
=======
PER SHARE (NOTE 13)
Earnings (pro forma earnings for 1996) per share -- basic... $ .82 $ .52 $ .41
======== ======== =======
Earnings (pro forma earnings for 1996) per
share -- diluted.......................................... $ .80 $ .51 $ .39
======== ======== =======
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

23
<PAGE> 26

THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1997
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE
DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 28,344 $ 19,386
Receivables:
Billed contract receivables............................. 26,348 12,100
Unbilled contract receivables........................... 68,001 41,771
Employee advances....................................... 6,791 2,299
-------- --------
Total receivables.................................. 101,140 56,170
-------- --------
Prepaid expenses and other current assets................. 2,520 2,430
-------- --------
Total current assets............................... 132,004 77,986
-------- --------
Property and equipment:
Computer and other equipment.............................. 26,123 10,658
Furniture and fixtures.................................... 2,738 2,111
Leasehold improvements.................................... 4,410 1,760
-------- --------
33,271 14,529
Less accumulated depreciation and amortization............ 10,514 5,760
-------- --------
Property and equipment, net........................ 22,757 8,769
-------- --------
Noncompete agreements, less accumulated amortization of
$4,793 in 1998 and $3,797 in 1997......................... 2,475 3,471
Deferred loan costs, less accumulated amortization of $236
in 1998 and $40 in 1997................................... 1,802 24
Goodwill, less accumulated amortization of $5,967 in 1998
and $986 in 1997.......................................... 223,508 39,591
Deferred income taxes (Note 5).............................. 3,158 3,585
Other assets................................................ 1,678 459
-------- --------
$387,382 $133,885
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to bank..................................... $ 49 $ 81
Current installments of long-term debt (Note 3)........... 630 1,428
Accounts payable and accrued expenses..................... 13,556 4,835
Accrued business acquisition consideration (Note 8)....... 30,000 --
Accrued payroll and related expenses...................... 44,678 26,075
Deferred income taxes (Note 5)............................ 13,310 9,917
Deferred tax recovery audit revenue....................... 1,238 1,087
-------- --------
Total current liabilities.......................... 103,461 43,423
Long-term debt, excluding current installments (Note 3)..... 112,886 24,365
Deferred compensation (Note 6).............................. 3,453 2,563
Other long-term liabilities................................. 2,078 462
-------- --------
Total liabilities.................................. 221,878 70,813
-------- --------
Shareholders' equity (Notes 3, 6, 7 and 9):
Preferred stock, no par value. Authorized 1,000,000
shares; none issued or outstanding in 1998 and 1997..... -- --
Common stock, no par value; $.001 stated value per share.
Authorized 60,000,000 shares; issued and outstanding
24,037,919 shares in 1998 and 19,193,676 shares in
1997.................................................... 24 19
Additional paid-in capital................................ 133,725 48,195
Retained earnings......................................... 34,153 16,007
Accumulated other comprehensive loss...................... (2,398) (1,149)
-------- --------
Total shareholders' equity......................... 165,504 63,072
-------- --------
Commitments and contingencies (Notes 2, 3, 4 and 8)
$387,382 $133,885
======== ========
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

24
<PAGE> 27

THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME (LOSS)-
RETAINED FOREIGN TOTAL
ADDITIONAL EARNINGS CURRENCY SHAREHOLDERS'
COMMON PAID-IN (ACCUMULATED TRANSLATION COMPREHENSIVE EQUITY
STOCK CAPITAL DEFICIT) ADJUSTMENTS INCOME (DEFICIT)
------ ---------- ------------ -------------- ------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995..... $ 58 $ (1,108) $(2,301) $ (51) $ -- $ (3,402)
Comprehensive income:
Net earnings................... -- -- 3,150 -- 3,150 3,150
Other comprehensive income
(loss) - foreign currency
translation adjustments (no
tax effect).................. -- -- -- (31) (31) (31)
Comprehensive income......... -- -- -- -- 3,119 --
Effect of reorganization,
including termination of
Subchapter S and partnership
status (Note 1(a))............. 2 (10,464) 10,411 51 -- --
Conversion of 5% convertible
debentures..................... 11 11,448 -- -- -- 11,459
Effect of stock split............ (57) 57 -- -- -- --
Distributions.................... -- -- (4,876) -- -- (4,876)
Issuances of common stock:
Issuances under employee stock
option plans (including tax
benefits of $115)............ -- 247 -- -- -- 247
Other common stock issuances... 4 34,008 -- -- -- 34,012
---- -------- ------- ------- ------ --------
BALANCE AT DECEMBER 31, 1996..... 18 34,188 6,384 (31) -- 40,559
Comprehensive income:
Net earnings................... -- -- 9,623 -- 9,623 9,623
Other comprehensive income
(loss) - foreign currency
translation adjustments (no
tax effect).................. -- -- -- (1,118) (1,118) (1,118)
Comprehensive income......... -- -- -- -- 8,505 --
Issuances of common stock:
Issuances under employee stock
option plans (including tax
benefits of $263)............ -- 629 -- -- -- 629
Other common stock issuances... 1 13,378 -- -- -- 13,379
---- -------- ------- ------- ------ --------
BALANCE AT DECEMBER 31, 1997..... 19 48,195 16,007 (1,149) -- 63,072
Comprehensive income:
Net earnings................... -- -- 18,146 -- 18,146 18,146
Other comprehensive income
(loss) - foreign currency
translation adjustments (no
tax effect).................. -- -- -- (1,249) (1,249) (1,249)
Comprehensive income......... -- -- -- -- 16,897 --
Issuances of common stock:
Issuances under employee stock
option plans (including tax
benefits of $1,096).......... -- 4,365 -- -- -- 4,365
Other common stock issuances... 5 81,165 -- -- -- 81,170
---- -------- ------- ------- ------ --------
BALANCE AT DECEMBER 31, 1998..... $ 24 $133,725 $34,153 $(2,398) $ -- $165,504
==== ======== ======= ======= ====== ========
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

25
<PAGE> 28

THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings.............................................. $ 18,146 $ 9,623 $ 3,150
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization........................... 11,353 4,755 2,460
Loss on sale of property and equipment.................. 168 26 --
Deferred compensation expense........................... 890 920 606
Deferred income taxes................................... 3,820 1,703 6,823
Foreign translation adjustments......................... (1,249) (1,118) (31)
Changes in assets and liabilities, net of effects of
acquisitions:
Receivables........................................... (36,607) (12,388) (16,237)
Refundable income taxes............................... -- 1,325 (2,049)
Prepaid expenses and other current assets............. (42) (929) (226)
Other assets.......................................... (303) 20 (316)
Accounts payable and accrued expenses................. 650 (452) (816)
Accrued payroll and related expenses.................. 13,579 4,644 8,520
Deferred revenue...................................... 125 103 --
Other long-term liabilities........................... 724 (16) --
--------- -------- --------
Net cash provided by operating activities.......... 11,254 8,216 1,884
--------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment....................... (17,881) (4,655) (5,076)
Acquisitions of businesses (net of cash acquired)......... (113,340) (26,096) --
--------- -------- --------
Net cash used in investing activities.............. (131,221) (30,751) (5,076)
--------- -------- --------
Cash flows from financing activities:
Net repayments of notes payable to bank................... (32) (66) (1,763)
Proceeds from issuance of long-term debt.................. 112,640 24,750 --
Proceeds from loans from shareholders..................... -- -- 2,600
Repayments of long-term debt.............................. (24,917) (20) (7,104)
Repayments of loans from shareholders..................... -- -- (3,675)
Deferred loan costs....................................... (1,797) -- --
Net proceeds from common stock............................ 43,031 366 34,259
Distributions............................................. -- -- (4,876)
--------- -------- --------
Net cash provided by financing activities.......... 128,925 25,030 19,441
--------- -------- --------
Net change in cash and cash equivalents............ 8,958 2,495 16,249
Cash and cash equivalents at beginning of year.............. 19,386 16,891 642
--------- -------- --------
Cash and cash equivalents at end of year.................... $ 28,344 $ 19,386 $ 16,891
========= ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.................... $ 2,636 $ 592 $ 1,091
========= ======== ========
Cash paid during the year for income taxes, net of refunds
received................................................ $ 6,494 $ 3,266 $ 3,585
========= ======== ========
Supplemental disclosure of noncash investing and financing
activities:
In conjunction with acquisitions of businesses, the
Company assumed liabilities as follows:
Fair value of assets acquired........................... $ 199,034 $ 50,619 $ --
Cash paid for the acquisitions.......................... (113,340) (26,096) --
Fair value of shares issued for acquisitions............ (42,504) (13,379) --
--------- -------- --------
Liabilities assumed................................ $ 43,190 $ 11,144 $ --
========= ======== ========
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

26
<PAGE> 29

THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Description of Business and Basis of Presentation

Description of Business

The principal business of The Profit Recovery Group International, Inc. and
subsidiaries (the "Company") is providing accounts payable and other recovery
audit services to large businesses and certain government agencies having
numerous payment transactions with many vendors. These businesses include, but
are not limited to, retailers, manufacturers, wholesale distributors, technology
companies, and healthcare providers. The Company provides its services
throughout the United States and in twenty-two other countries.

Basis of Presentation

On March 26, 1996, the Company completed the initial public offering of its
common stock. In connection with the offering, a reorganization was effected.
Immediately subsequent to this reorganization, the Company consisted of The
Profit Recovery Group International, Inc. as the publicly traded parent company
and seven wholly owned subsidiaries. All reorganization transactions were
between parties under common control and, accordingly, were accounted for in a
manner similar to that in a pooling-of-interests. Various additional operating
entities, both domestic and international, have been acquired or established
subsequent to the March 1996 reorganization.

(b) Principles of Consolidation

The consolidated financial statements for the years ended December 31,
1998, 1997 and 1996 include the financial statements of the Company and its
wholly and majority owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.

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

The Company's revenues are based on specific contracts with its clients.
Such contracts generally specify (a) time periods covered by the audit, (b)
nature and extent of audit services to be provided by the Company, (c) client's
duties in assisting and cooperating with the Company, and (d) fee payable to the
Company expressed as a specified percentage of the amounts recovered by the
client resulting from liability overpayment claims identified. In addition to
contractual provisions, most clients also establish specific procedural
guidelines which the Company must satisfy prior to submitting claims for client
approval. These guidelines are unique to each client and impose specific
requirements on the Company such as adherence to vendor interaction protocols,
provision of advance written notification to vendors of forthcoming claims,
securing written claim validity concurrence from designated client personnel
and, in limited cases, securing written claim validity concurrence from the
involved vendors. The Company defers revenue recognition until client
guidelines, of whatever nature, have been satisfied.

Accepted claims basis of revenue recognition

With respect to accounts payable and ancillary audit services for
retailers, wholesale distributors and governmental agencies (the Company's
historical client base), the Company recognizes revenues at the time

27
<PAGE> 30
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

overpayment claims are presented to and approved by its clients, as adjusted for
estimated uncollectible claims.

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

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

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

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

During 1998, 1997 and 1996 revenues derived from accounts payable and
ancillary services provided to retailers, wholesale distributors and
governmental agencies represented 65.5%, 86.7% and 100.0%, respectively, of
total revenues for such years.

Invoice basis of revenue recognition

With regard to accounts payable and other recovery audit services provided
to most entities other than retailers, wholesale distributors and governmental
agencies, the Company recognizes revenues primarily when it invoices clients for
its portion of amounts already recovered. This deferral of revenue recognition
for these types of clients results principally from the Company's lack of a
historical experience base to accurately estimate uncollectible claims. Revenues
recognized in 1998 and 1997 on the invoice basis represented 34.5%

28
<PAGE> 31
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and 13.3%, respectively, of total revenues for such years. The Company did not
serve entities other than retailers, wholesale distributors and governmental
agencies (the Company's historical client base) in 1996.

(d) Cash Equivalents

Cash equivalents at December 31, 1998 and 1997 included $6.3 million and
$2.5 million, respectively, of reverse repurchase agreements with NationsBank,
N.A. (South) which were fully collateralized by United States of America
Treasury Notes in the possession of such bank. The reverse repurchase agreement
in effect on December 31, 1998 matured and was settled on January 4, 1999. In
addition, certain of the Company's French subsidiaries at December 31, 1998 and
1997 had cash equivalents of $7.1 million and $4.7 million, respectively, in
temporary investments held at a French bank.

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

(e) Property and Equipment

Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets (3 years
for computer and other equipment and 5 years for furniture and fixtures).
Leasehold improvements are amortized using the straight-line method over the
shorter of the lease term or estimated life of the asset.

(f) Direct Expenses

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

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

(g) Internal Use Computer Software

Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" provides guidance on a variety of issues
relating to costs of internal use software including which of these costs should
be capitalized and which should be expensed as incurred. This pronouncement is
effective for fiscal years beginning after December 15, 1998 although earlier
application is encouraged. The Company chose to early adopt this pronouncement
effective January 1, 1998 since it provides definitive accounting guidance on a
large-scale information systems development project initiated by the Company
during the first quarter of 1998.

(h) Intangibles

Goodwill. Goodwill represents the excess of the purchase price over the
estimated fair market value of net assets of acquired businesses. The Company
evaluates the unique relevant aspects of each individual acquisition when
establishing an appropriate goodwill amortization period, and amortizes all
goodwill amounts on a straight-line basis. Goodwill recorded as of December 31,
1998 is being amortized over periods ranging
29
<PAGE> 32
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

from seven to 25 years. The Company assesses the recoverability of this
intangible asset by determining whether the amortization of the goodwill balance
over its remaining life can be recovered through undiscounted future operating
cash flows of the acquired operation. The amount of goodwill impairment, if any,
is measured based on projected discounted future operating cash flows using a
discount rate reflecting the Company's average cost of funds. The assessment of
the recoverability of goodwill will be impacted if estimated future operating
cash flows are not achieved.

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

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

(i) Income Taxes

The Company's predecessors (prior to April 24, 1995 for international
entities and March 28, 1996 for domestic entities) consisted of Subchapter S
corporations and a partnership. As such, the federal and state income taxes with
regard to these entities historically have been the responsibility of the
respective shareholders and partners. The results of operations for the year
ended December 31, 1996 have been adjusted on a pro forma basis to reflect
federal and state income taxes at a composite rate of 39% as if the Company's
predecessors had been C corporations throughout that entire year.

In connection with the Company's March 1996 initial public offering, all
domestic entities became C corporations. As a result of these conversions to C
corporations, the Company incurred a charge to operations of $3.7 million in the
first quarter of 1996 for cumulative deferred income taxes.

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

(j) Foreign Currency Translation

The local currency has been used as the functional currency in the
countries in which the Company conducts business outside of the United States.
The assets and liabilities denominated in foreign currency are translated into
U.S. dollars at the current rate of exchange at the balance sheet date and
revenues and expenses are translated at the average monthly exchange rates. The
translation gains and losses are included as a separate component of
shareholders' equity. Transaction gains and losses included in results of
operations are not material.

(k) Earnings (Pro Forma Earnings) Per Share

The Company applies the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share." Basic earnings (pro forma
earnings) per share is computed by dividing net earnings (pro forma earnings) by
the weighted average number of shares of common stock outstanding during the
year. Diluted earnings (pro forma earnings) per share is computed by dividing
net earnings (pro forma earnings) by the sum of (1) the weighted average number
of shares of common stock outstanding during the period, (2) the dilutive effect
of the assumed exercise of stock options using the treasury stock method, and
(3) dilutive effect of other potentially dilutive securities.

30
<PAGE> 33
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

(l) Employee Stock Options

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

(m) Comprehensive Income

Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." This statement establishes rules for the reporting of
comprehensive income and its components. Comprehensive income for the Company
consists of net earnings and foreign currency translation adjustments, and is
presented in the accompanying Consolidated Statements of Shareholders' Equity
(Deficit). The adoption of SFAS 130 had no impact on total shareholders' equity.
Prior year financial statements have been reclassified to conform to the SFAS
130 requirements.

(2) RELATED PARTY TRANSACTIONS

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

Interest expense on loans from shareholders for the year ended December 31,
1996 was approximately $38,000.

Financial advisory and management services historically have been provided
to the Company by two directors who are also shareholders of the Company. In
addition, a director elected in 1995 provided management advisory services to
the Company from July 1995 through December 1996, but no longer provided such
services effective January 1, 1997. Such services by directors aggregated
$140,000 in 1998,

31
<PAGE> 34
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$165,000 in 1997, and $293,000 in 1996. The Company has agreed to pay the
above-mentioned two directors a minimum of $72,000 in 1999 for financial
advisory and management services.

(3) LONG-TERM DEBT

Long-term debt at December 31, 1998 and 1997 is summarized as follows:

<TABLE>
<CAPTION>
1998 1997
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Principal outstanding under $200.0 million senior bank
credit facility (with weighted average interest rate of
6.98% at December 31, 1998). Principal due on July 29,
2003 at credit facility maturity.......................... $112,300 $ --
Term bank loan under $30.0 million senior bank credit
facility; $5.4 million of then outstanding borrowings
transferred to replacement senior bank credit facility on
July 29, 1998............................................. -- 24,750
Other....................................................... 1,216 1,043
-------- -------
113,516 25,793
Less current installments................................... 630 1,428
-------- -------
Long-term debt, excluding current installments.... $112,886 $24,365
======== =======
</TABLE>

On July 29, 1998, the Company replaced its existing $30.0 million senior
bank credit facility with a five-year, $150.0 million senior bank credit
facility. Subject to adherence to standard loan covenants, borrowings under the
new credit facility are available for working capital, acquisitions of other
companies in the recovery audit industry, capital expenditures and general
corporate purposes. The Company transferred $5.4 million in outstanding
borrowings to the new credit facility on July 29, 1998. On September 18, 1998,
the Company increased its credit facility from $150.0 million to $200.0 million
and the facility was syndicated between ten banking institutions led by
NationsBank, N.A. as agent for the group. As of December 31, 1998, the Company
had $112.3 million in outstanding principal borrowings under its credit
facility. The Company is not required to make principal payments under the
credit facility until its maturity on July 29, 2003 unless the Company violates
its debt covenants. The credit facility is secured by substantially all assets
of the Company and interest on borrowings can be tied to either prime or LIBOR
at the Company's discretion. The credit facility requires a fee for committed
but unused credit capacity which can range between .20% and .45% per annum
depending upon the Company's leverage ratio. As of December 31, 1998, the
applicable rate for unused credit capacity was .375%. The credit facility
contains customary covenants, including financial ratios and the prohibition of
cash dividend payments to shareholders. At December 31, 1998, the Company was in
compliance with all such covenants.

On January 13, 1999, the Company successfully completed a public offering
of 3.5 million shares of its common stock. Of the 3.5 million shares sold, 2.7
million shares were sold by the Company and 800,000 shares were sold by certain
selling shareholders. The net proceeds from the 2.7 million shares sold by the
Company combined with the net proceeds from an additional 191,000 shares
subsequently sold by the Company in January 1999 upon exercise by the
underwriting syndicate of their over-allotment option were approximately $92.8
million, and were applied to reduce outstanding borrowings under the $200.0
million bank credit facility.

32
<PAGE> 35
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Approximate future minimum annual principal payments for long-term debt for
each of the five years subsequent to December 31, 1998 are as follows (in
thousands):

(4) LEASE COMMITMENTS

The Company is committed under noncancelable operating lease arrangements
for facilities and equipment. Rent expense for 1998, 1997, and 1996 was $3.7
million, $3.0 million, and $2.5 million, respectively. The future minimum annual
lease payments under these leases by year are summarized as follows (in
thousands):

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
1999........................................................ $ 5,049
2000........................................................ 4,746
2001........................................................ 4,351
2002........................................................ 4,139
2003........................................................ 2,068
Thereafter.................................................. 2,525
-------
$22,878
=======
</TABLE>

(5) INCOME TAXES

HISTORICAL

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

The provision for income taxes for the years ended December 31, 1998, 1997
and 1996 consists of the following (in thousands):

<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Current:
Federal................................................... $ 2,617 $1,171 $ 413
State..................................................... 570 375 153
Foreign................................................... 4,708 2,900 400
------- ------ ------
7,895 4,446 966
------- ------ ------
Deferred:
Federal................................................... 2,487 921 5,997
State..................................................... 306 184 826
Foreign................................................... 1,027 598 --
------- ------ ------
3,820 1,703 6,823
------- ------ ------
Total............................................. $11,715 $6,149 $7,789
======= ====== ======
</TABLE>

33
<PAGE> 36
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes the significant differences between the U.S.
federal statutory tax rate and the Company's effective tax rate for financial
statement purposes.

<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate........................... 35% 35% 34%
Foreign loss providing no tax benefit....................... 1 -- --
State income taxes, net of federal benefit.................. 3 2 6
Nondeductible goodwill...................................... 1 -- --
S corporation termination................................... -- -- 34
Other, net.................................................. (1) 2 (3)
-- -- --
39% 39% 71%
== == ==
</TABLE>

A summary of the components of deferred tax liabilities and assets as of
December 31, 1998 and 1997 follows (in thousands):

<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Deferred income tax liabilities:
Contract receivables...................................... $26,425 $16,974
Prepaid expenses.......................................... 28 --
Accelerated depreciation for tax purposes................. (62) 532
Goodwill.................................................. 328 177
Acquisition related cash to accrual adjustments........... 384 --
Capitalized software...................................... 1,547 --
------- -------
Gross deferred tax liabilities.................... 28,650 17,683
------- -------
Deferred income tax assets:
Accounts payable and accrued expenses..................... 149 438
Accrued payroll and related expenses...................... 10,633 5,912
Cash to accrual conversion from termination of Subchapter
S and partnership status............................... 133 309
Deferred compensation..................................... 1,383 961
Noncompete agreements..................................... 929 848
Deferred revenues......................................... -- 577
Deferred loan costs....................................... 104 182
Foreign operating loss carryforward of foreign
subsidiary............................................. 720 385
Foreign tax credit carryforwards.......................... 4,071 1,554
State operating loss carryforwards........................ 228 --
Other..................................................... 868 185
------- -------
Gross deferred tax assets......................... 19,218 11,351
------- -------
Less valuation allowance.................................. 720 --
------- -------
Net deferred tax liabilities...................... $10,152 $ 6,332
======= =======
</TABLE>

SFAS No. 109 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. During 1998, a valuation allowance of $720,000
was established for certain foreign operating losses associated with the
Company's foreign subsidiary in Singapore. No other valuation allowances were
deemed necessary for any other deferred tax assets since all deductible
temporary differences are expected to be utilized primarily against reversals of
taxable temporary differences, and net operating loss carryforwards and foreign
tax credit carryforwards are expected to be utilized through related further
taxable and foreign source earnings.

34
<PAGE> 37
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company currently has foreign income tax credit carryforwards amounting
to $4.1 million, of which $1.0 million will expire in 2002 and $3.1 million will
expire in 2003. The Company expects to generate sufficient foreign-sourced
income by implementing reasonable tax planning strategies to fully utilize the
foreign income tax credit carryforwards.

(UNAUDITED) PRO FORMA

The pro forma provision for income taxes reflects the income taxes as if
the Company were subject to all federal and state income taxes for the three
months ended March 31, 1996, rather than primarily by the individual
shareholders and partners. Pro forma income taxes have been calculated using a
39% composite effective rate.

(6) EMPLOYEE BENEFIT PLANS

The Company maintains a 401(k) Plan in accordance with Section 401(k) of
the Internal Revenue Code, which allows eligible participating employees to
defer receipt of a portion of their compensation up to 15% and contribute such
amount to one or more investment funds. Employee contributions are matched by
the Company in a discretionary amount to be determined by the Company each plan
year up to $900 per participant. The Company may also make discretionary
contributions to the Plan as determined by the Company each plan year. Company
matching funds and discretionary contributions vest at the rate of 20% each year
beginning after the participants' first year of service. Company contributions
were approximately $425,000 in 1998, $130,000 in 1997 and $114,000 in 1996.

The Company also maintains deferred compensation arrangements for certain
key officers and executives. Total expense related to these deferred
compensation arrangements was approximately $890,000, $920,000, and $606,000 in
1998, 1997, and 1996, respectively.

Effective May 15, 1997, the Company established an employee stock purchase
plan pursuant to Section 423 of the Internal Revenue Code of 1986, as amended.
The plan covers 750,000 shares of the Company's common stock which may be
authorized unissued shares, reacquired shares or shares bought on the open
market. Through December 31, 1998, share certificates for 67,533 shares had been
issued to employees under the plan. The Company is not required to recognize
compensation expense related to this plan.

(7) COMMON STOCK

Subsequent to the Company's March 1996 initial public offering of its
common stock, all entities that comprise the Company are wholly owned
subsidiaries of the publicly traded parent company, The Profit Recovery Group
International, Inc., whose common stock is reflected in shareholders' equity on
the accompanying December 31, 1998 and 1997 Consolidated Balance Sheets.
Concurrent with the Company's initial public offering, The Profit Recovery Group
International, Inc. declared a two-for-one stock split effected in the form of a
stock dividend. All share and pro forma per share information has been adjusted
to reflect the effect of the stock split.

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

35
<PAGE> 38
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

On March 16, 1998, the Company sold 2.0 million newly issued shares of its
common stock and certain selling shareholders sold an additional 2.4 million
outstanding shares in an underwritten follow-on offering. The offering was
priced at $21.00 per share. The proceeds of the offering (net of underwriting
discounts and commissions) were distributed by the underwriting syndicate on
March 20, 1998. The Company then used a portion of its net proceeds from the
offering to repay the $24.8 million outstanding principal balance on its bank
credit facility, along with accrued interest, on March 20, 1998. In April 1998,
the Company received notification from its underwriting syndicate that the
syndicate had exercised its full over-allotment option to purchase an additional
660,000 shares of Company common stock. All of these shares were then sold to
the syndicate by certain selling shareholders. The Company received no proceeds
from the sale of such shares.

On January 8, 1999, the Company sold 2.7 million newly issued shares of its
common stock and certain selling shareholders sold an additional 800,000
outstanding shares in an underwritten follow-on offering. The offering was
priced at $34.00 per share. The proceeds of the offering (net of underwriting
discounts and commissions) were distributed by the underwriting syndicate on
January 13, 1999. The net proceeds from the 2.7 million shares sold by the
Company, combined with the net proceeds from an additional 191,000 shares
subsequently sold by the Company in late January 1999 upon exercise by the
underwriting syndicate of their over-allotment option, were applied to reduce
outstanding borrowings under the Company's $200.0 million bank credit facility.
Additionally, 334,000 shares were sold in late January 1999 by certain selling
shareholders in connection with the over-allotment option. The Company received
no proceeds from the sale of such shares.

Although the Company has issued no preferred stock through December 31,
1998, and has no present intentions to issue any preferred stock, such stock may
be issued at any time or from time to time in one or more series with such
designations, powers, preferences, rights, qualifications, limitations and
restrictions (including dividend, conversion and voting rights) as may be
determined by the Company's Board of Directors, without any further vote or
action by the shareholders.

(8) ACQUISITIONS

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

On February 11, 1997, the Company acquired all of the common stock of
Accounts Payable Recovery Services, Inc., a Texas-based company providing
recovery audit services to healthcare entities and energy companies. This
transaction was accounted for as a purchase with consideration of $2.0 million
in cash and 130,599 restricted, unregistered shares of the Company's common
stock valued at $15.25 per share. This acquisition resulted in goodwill of $3.9
million which is being amortized over 15 years using the straight-line method.
36
<PAGE> 39
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

On October 7, 1997, the Company acquired 98.4% of Financiere Alma, S.A. and
subsidiaries ("Alma"), a privately held recovery audit firm based in Paris,
France. This transaction was accounted for as a purchase with consideration of
$24.6 million in cash and approximately 859,000 restricted, unregistered shares
of the Company's common stock with an aggregate fair value of $10.0 million.
This acquisition resulted in goodwill of $33.0 million which is being amortized
over 20 years using the straight-line method. The Company acquired the remaining
interest in Alma in January 1999, as contractually required.

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

On March 20, 1998, the Company acquired the net assets of Ginger Quill,
Inc., d/b/a Precision Data Link, a 22-person air freight recovery audit firm
located in Salt Lake City, Utah. This transaction was accounted for as a
purchase with consideration of $5.4 million in cash and 437,837 restricted,
unregistered shares of the Company's common stock valued at $14.00 per share.
This acquisition resulted in goodwill of $11.5 million which is being amortized
over 25 years using the straight-line method.

On June 19, 1998, the Company acquired the net assets of The Medallion
Group, a 27-person air freight recovery audit operation located in Salt Lake
City, Utah. This transaction was accounted for as a purchase with consideration
of $5.2 million in cash and 213,721 restricted, unregistered shares of the
Company's common stock valued at $16.66 per share. This acquisition resulted in
goodwill of $11.2 million which is being amortized over 25 years using the
straight-line method.

On July 30, 1998, the Company acquired all of the outstanding capital stock
of Novexel S.A., a Lyon, France-based company that assists business entities in
securing European Union grants. This transaction was accounted for as a purchase
and involved cash of $3.7 million and 165,863 restricted, unregistered shares of
the Company's common stock valued at $18.43 per share. This acquisition resulted
in goodwill of $6.1 million which is being amortized over 20 years using the
straight-line method.

On August 6, 1998, the Company acquired substantially all the assets and
assumed certain liabilities of Loder, Drew & Associates, Inc. ("Loder Drew"), a
California-based international recovery auditing firm primarily serving clients
in the manufacturing, financial services and other non-retail sectors. The
transaction was accounted for as a purchase with initial consideration of $70.0
million in cash and 803,535 restricted, unregistered shares of the Company's
common stock valued at $16.58 per share. Additionally, the prior owners of Loder
Drew are entitled to additional purchase price consideration of $30.0 million in
cash as of December 31, 1998, based on the financial performance of Loder Drew
for the six month period then ended, and are eligible for further purchase price
consideration up to a maximum of $40.0 million in cash conditioned on future
financial performance of Loder Drew for the year ending December 31, 1999. This
acquisition resulted in goodwill through December 31, 1998 of $112.0 million
which is being amortized over 25 years using the straight-line method.

On September 28, 1998, the Company acquired the net assets of Cost Recovery
Professionals Pty Ltd, an Australia-based recovery auditing firm primarily
serving clients in the retail sector. The transaction was accounted for as a
purchase with consideration of $1.4 million and 100,000 restricted, unregistered
shares of

37
<PAGE> 40
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the Company's common stock valued at $18.46 per share. This acquisition resulted
in goodwill of $3.3 million which is being amortized over 25 years using the
straight-line method.

On October 29, 1998, the Company acquired all the issued and outstanding
common stock of Robert Beck & Associates, Inc. ("RBA"), a direct retail sector
recovery auditing competitor based in Ringwood, Illinois. The Company also
simultaneously purchased either the common stock or substantially all net assets
of certain other entities that provided management services to RBA. The
acquisitions were accounted for under the purchase method of accounting, and the
collective consideration paid for RBA and related entities consisted of $26.1
million in cash and 644,434 restricted, unregistered shares of the Company's
common stock valued at $18.54 per share. This acquisition resulted in
preliminary goodwill of $36.3 million which is being amortized over 25 years
using the straight-line method. The purchase price allocation for this
acquisition will not be finalized until the third quarter of 1999 since
additional liabilities have yet to be determined for employee relocation costs
and certain other costs pursuant to EITF Issue 95-3, "Recognition of Liabilities
in Connection with a Purchase Business Combination".

On November 20, 1998, the Company acquired the net assets of IP Strategies
SA, a Belgium-based firm that assists business entities in securing European
Union grants. This transaction was accounted for as a purchase and involved cash
of $1.9 million and 79,566 restricted, unregistered shares of the Company's
common stock valued at $20.42 per share. This acquisition resulted in goodwill
of $3.3 million which is being amortized over 20 years using the straight-line
method.

On December 10, 1998, the Company acquired the net assets of Industrial
Traffic Consultants, Inc., a ground freight processing and auditing firm based
in Longwood, Florida. This transaction was accounted for as a purchase and
involved cash of $1.9 million and 48,274 restricted, unregistered shares of the
Company's common stock valued at $21.27 per share. This acquisition resulted in
goodwill of $2.6 million which is being amortized over 25 years using the
straight-line method.

Results of operations for all 1998 and 1997 acquisitions accounted for
under the purchase method of accounting have been included in the accompanying
Consolidated Statements of Earnings from their respective dates of acquisition
except for (a) the October 7, 1997 acquisition of Alma, which was included
effective October 1, 1997, (b) the August 6, 1998 acquisition of Loder Drew,
which was included effective July 1, 1998, and (c) the October 29, 1998
acquisition of RBA, which was included effective October 1, 1998.

The following represents the summary (unaudited) pro forma results of
operations as if the Alma, Loder Drew and RBA acquisitions had occurred at the
beginning of 1997 (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Revenues.................................................... $232,644 $164,764
======== ========
Net earnings................................................ $ 17,695 $ 7,404
======== ========
Earnings per share:
Basic..................................................... $ .77 $ .36
======== ========
Diluted................................................... $ .75 $ .35
======== ========
</TABLE>

The Company has not included pro forma accrual basis results of operations
for the various smaller acquisitions it made during 1998 and 1997 since these
entities have historically maintained their respective accounting records using
the cash basis of accounting. The Company believes, however, the pro forma
accrual basis results of operations for these entities, if determined, would not
be significant, either individually or in the aggregate.

38
<PAGE> 41
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(9) STOCK OPTION PLAN

The Company's Stock Incentive Plan, as amended, has authorized the grant of
options to purchase 4,500,000 shares of the Company's common stock to key
employees and directors. All options granted through December 31, 1998 have
10-year terms and vest and become fully exercisable on a ratable basis over four
or five years of continued employment.

Pro forma information regarding net earnings and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1998, 1997 and 1996:

<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rates.................................... 5.0% 6.17% 6.26%
Dividend yields............................................. -- -- --
Volatility factor of expected market price.................. .550 .537 .396
Weighted-average expected life of option.................... 6 years 6 years 6 years
</TABLE>

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information for the years ended December 31, 1998, 1997 and 1996
follows (in thousands, except for pro forma net earnings per share information):

<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Historical earnings before income taxes................... $29,861 $15,772 $10,939
Income taxes (pro forma income taxes for 1996)............ 11,715 6,149 4,271
------- ------- -------
Net earnings (pro forma net earnings for 1996) before pro
forma effect of compensation expense recognition
provisions of SFAS No. 123.............................. 18,146 9,623 6,668
Pro forma effect of compensation expense recognition
provisions of SFAS No. 123.............................. 2,691 1,382 504
------- ------- -------
Pro forma net earnings.................................... $15,455 $ 8,241 $ 6,164
======= ======= =======
Pro forma net earnings per share:
Basic................................................... $ .70 $ .45 $ .38
======= ======= =======
Diluted................................................. $ .68 $ .44 $ .36
======= ======= =======
</TABLE>

39
<PAGE> 42
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<TABLE>
<CAPTION>
1998 1997 1996
--------------------- --------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding -- beginning
of year................. 2,207,893 $12.44 1,258,030 $ 9.60 633,000 $5.53
Granted................... 1,698,500 27.55 1,030,263 15.47 677,030 13.16
Exercised................. (227,580) 9.32 (65,100) 5.36 (28,000) 5.30
Forfeited................. (50,800) 14.87 (15,300) 13.60 (24,000) 5.94
--------- --------- ---------
Outstanding -- end of
year.................... 3,628,013 $19.67 2,207,893 $12.44 1,258,030 $9.60
========= ========= =========
Exercisable at end of
year.................... 515,735 $11.74 287,946 $ 9.12 94,400 $5.30
Weighted average fair
value of options granted
during year............. $ 15.72 $ 8.96 $ 6.44
</TABLE>

The following table summarizes information about stock options outstanding
at December 31, 1998:

<TABLE>
<CAPTION>
EXERCISABLE
NUMBER WEIGHTED- WEIGHTED- ------------------------
OF SHARES AVERAGE AVERAGE NUMBER WEIGHTED-
RANGE OF SUBJECT REMAINING EXERCISE OF AVERAGE
EXERCISE PRICES TO OPTION LIFE PRICE SHARES EXERCISE PRICE
--------------- --------- ---------- --------- ------- --------------
<S> <C> <C> <C> <C> <C>
$5.30 - $10.99..................... 393,200 6.46 years $ 5.63 149,600 $ 5.70
$11.00 - $21.00.................... 1,900,313 8.21 years 14.80 366,135 14.21
Over $21.00........................ 1,334,500 9.67 years 30.76 -- --
</TABLE>

The weighted average remaining contract life of options outstanding at
December 31, 1998 was 8.6 years.

(10) MAJOR CLIENTS

The Company did not have any major clients during 1998 which individually
provided revenues in excess of 10% of total revenues. The Company did, however,
have two major clients during 1997, each of which provided revenues in excess of
10% of total revenues. Both major clients are mass merchandisers operating in
the retail industry.

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

(11) OPERATING SEGMENTS AND RELATED INFORMATION

The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," in 1998 which changes the methodology by
which the Company reports information about its operating segments. The
information for 1997 and 1996 has been restated from the prior year's
presentation in order to conform to the 1998 presentation.

The Company has three reportable operating segments consisting of Accounts
Payable Services, Freight Services and Tax Services. Each segment represents a
strategic business unit that offers a different type of recovery audit service.
These business units are managed separately because each business requires
different technology and marketing strategies.

40
<PAGE> 43
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Accounts Payable Services consist of the review of client accounts payable
disbursements to identify and recover overpayments. This operating segment
includes accounts payable services provided to retailers, wholesale distributors
and governmental agencies (the Company's historical client base) and accounts
payable services provided to various other types of business entities by the
Company's Loder Drew & Associates division. The Accounts Payable Services
operating segment conducts business in twenty-three countries.

Freight Services consist primarily of various businesses acquired by the
Company in 1998 and 1997 which audit freight-related disbursements to identify
and recover overpayments. Areas of current specialization include ocean freight,
ground freight and overnight freight. This operating segment currently serves
primarily businesses located in the United States, although rapid international
expansion is planned.

Tax Services consist primarily of various European businesses acquired by
the Company in 1998 and 1997 which audit tax-related disbursements to identify
and recover overpayments (primarily within France) and assist business entities
throughout Europe in securing available grants.

The accounting policies of the three reportable operating segments are the
same as those described in Note (1). Revenues from Accounts Payable Services
provided to retailers, wholesale distributors and governmental agencies are
accounted for using the "accepted claims basis of revenue recognition" as set
forth in Note (1)(c). Revenues from Accounts Payable Services provided by the
Company's Loder Drew & Associates division and revenues from the Freight
Services and Tax Services operating segments are accounted for using the
"invoice basis of revenue recognition" as set forth in Note (1)(c).

The Company evaluates the performance of its operating segments based upon
revenues and operating income. Intersegment revenues are not significant.

Segment information as of or for the years ended December 31, 1998, 1997
and 1996 follows (in thousands):

<TABLE>
<CAPTION>
ACCOUNTS
PAYABLE FREIGHT TAX
SERVICES SERVICES SERVICES TOTAL
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1998
Revenues....................................... $170,231 $6,786 $25,810 $202,827
Operating income............................... 22,674 4,002 6,694 33,370
Total assets................................... 354,955 2,257 30,170 387,382
Capital expenditures........................... 16,565 376 940 17,881
Depreciation and amortization.................. 10,858 113 382 11,353
1997
Revenues....................................... $105,649 $ 82 $ 6,632 $112,363
Operating income............................... 14,192 66 1,917 16,175
Total assets................................... 118,489 -- 15,396 133,885
Capital expenditures........................... 4,598 -- 57 4,655
Depreciation and amortization.................. 4,755 -- -- 4,755
1996
Revenues....................................... $ 77,330 $ -- $ -- $ 77,330
Operating income............................... 11,039 -- -- 11,039
Total assets................................... 68,318 -- -- 68,318
Capital expenditures........................... 5,076 -- -- 5,076
Depreciation and amortization.................. 2,460 -- -- 2,460
</TABLE>

41
<PAGE> 44
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table presents revenues by country based upon the location of
clients served (in thousands):

<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
United States........................................... $143,473 $ 81,653 $62,701
France.................................................. 26,265 8,279 1,178
United Kingdom.......................................... 13,540 8,153 3,244
Canada.................................................. 11,012 8,463 6,473
Mexico.................................................. 3,568 2,444 1,338
Other................................................... 4,969 3,371 2,396
-------- -------- -------
$202,827 $112,363 $77,330
======== ======== =======
</TABLE>

The following table presents long-lived assets by country based on location
of the asset (in thousands):

<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
United States........................................... $203,004 $ 18,410 $11,015
France.................................................. 39,483 33,093 248
United Kingdom.......................................... 562 243 113
Canada.................................................. 297 263 119
Mexico.................................................. 94 72 56
Other................................................... 8,780 233 164
-------- -------- -------
$252,220 $ 52,314 $11,715
======== ======== =======
</TABLE>

(12) FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts for cash and cash equivalents, receivables, notes
payable to bank, accounts payable and accrued expenses, accrued business
acquisition consideration, accrued payroll and related expenses, and deferred
tax recovery audit revenue approximate fair value because of the short maturity
of these instruments.

The fair values of each of the Company's long-term debt instruments are
based on the amount of future cash flows associated with each instrument
discounted using the Company's current borrowing rate for similar debt
instruments of comparable maturity. The estimated fair value of the Company's
long-term debt instruments at December 31, 1998 and 1997 was $111.4 million and
$25.9 million, respectively, and the carrying value of the Company's long-term
debt at December 31, 1998 and 1997 was $113.5 million and $25.8 million,
respectively.

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

42
<PAGE> 45
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(13) EARNINGS PER SHARE

The following table sets forth the computations of basic and diluted
earnings per share for the years ended December 31, 1998, 1997 and 1996 (in
thousands except for earnings per share information):

<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Numerator:
Numerator for basic earnings (pro forma earnings for
1996) per share...................................... $18,146 $ 9,623 $ 6,668
Interest accrued on convertible debt, net of income
taxes................................................ -- -- 97
------- ------- -------
Numerator for diluted earnings (pro forma earnings
for 1996) per share................................ $18,146 $ 9,623 $ 6,765
======= ======= =======
Denominator:
Denominator for basic earnings (pro forma earnings for
1996) per share -- weighted-average shares
outstanding.......................................... 22,038 18,415 16,268
Effect of dilutive securities:
Employee stock options............................... 752 494 545
Convertible debt..................................... -- -- 539
Common equivalent shares from the distribution
payable ($4,875,576) divided by the initial public
offering price of $11 per share (and weighted since
the initial public offering)....................... -- -- 105
------- ------- -------
Denominator for diluted earnings (pro forma
earnings for 1996) per share.................... 22,790 18,909 17,457
======= ======= =======
Earnings (pro forma earnings for 1996) per
share -- basic.......................................... $ .82 $ .52 $ .41
======= ======= =======
Earnings (pro forma earnings for 1996) per
share -- diluted........................................ $ .80 $ .51 $ .39
======= ======= =======
</TABLE>

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

(14) RESTRUCTURING COSTS

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

43
<PAGE> 46

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

Not applicable.

PART III

Pursuant to Instruction G(3) to Form 10-K, the information required in
Items 10 through 13 is incorporated by reference from the Company's definitive
proxy statement, which is expected to be filed pursuant to Regulation 14A on or
before April 10, 1999.

PART IV

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

(a) Consolidated Financial Statements.

For the following consolidated financial information included herein,
see Index on Page 20:

<TABLE>
<S> <C>
Independent Auditors' Reports............................... 21
Consolidated Statements of Earnings for the Years ended
December 31, 1998, 1997 and 1996.......................... 23
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... 24
Consolidated Statements of Shareholders' Equity (Deficit)
for the Years ended December 31, 1998, 1997 and 1996...... 25
Consolidated Statements of Cash Flows for the Years ended
December 31, 1998, 1997 and 1996.......................... 26
Notes to Consolidated Financial Statements.................. 27
</TABLE>

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

On November 10, 1998, Registrant filed Form 8-K regarding Registrant's
October 29, 1998 acquisition of Robert Beck & Associates, Inc. and certain
related businesses.

On December 4, 1998, Registrant filed Form 8-K to update the financial
statements and pro forma financial information contained in Registrant's August
12, 1998 Form 8-K relating to Registrant's acquisition of Loder Drew &
Associates, Inc. on August 6, 1998.

(d) Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <C> <S>
**2.1 -- Stock Purchase Agreement dated as of October 29, 1998 among
the Company, PRGI, Robert Beck & Associates, Inc., and the
shareholders of Robert Beck & Associates, Inc. (incorporated
by reference to Exhibit 2.1 to Registrant's Form 8-K filed
November 10, 1998).
**2.2 -- Stock Purchase Agreement dated as of October 29, 1998 among
the Company, PRGI, Taylor, Blackburn & Associates, Inc., and
the shareholders of Taylor, Blackburn & Associates, Inc.
(incorporated by reference to Exhibit 2.2 to Registrant's
Form 8-K filed November 10, 1998).
**2.3 -- Stock Purchase Agreement dated as of October 29, 1998 among
the Company, PRGI, John E. Flatley & Associates, Inc., and
the shareholder of John E. Flatley & Associates, Inc.
(incorporated by reference to Exhibit 2.3 to Registrant's
Form 8-K filed November 10, 1998).
</TABLE>

44
<PAGE> 47

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <C> <S>
**2.4 -- Asset Purchase Agreement dated as of October 29, 1998 among
the Company, PRGI, and Vincent Creadon, a sole
proprietorship. (incorporated by reference to Exhibit 2.4 to
Registrant's Form 8-K filed November 10, 1998).
**2.5 -- Asset Purchase Agreement dated as of October 29, 1998 among
the Company, PRGI, and John H. Cavins, a sole
proprietorship. (incorporated by reference to Exhibit 2.5 to
Registrant's Form 8-K filed November 10, 1998).
**2.6 -- Asset Purchase Agreement dated as of October 29, 1998 among
the Company, PRGI, RBA Audits, Inc., and the shareholders of
RBA Audits, Inc. (incorporated by reference to Exhibit 2.6
to Registrant's Form 8-K filed November 10, 1998).
**2.7 -- Asset Purchase Agreement dated as of October 29, 1998 among
the Company, PRGI, and John M. Kirkeide, a sole
proprietorship. (incorporated by reference to Exhibit 2.7 to
Registrant's Form 8-K filed November 10, 1998).
**2.8 -- Asset Purchase Agreement dated as of October 29, 1998 among
the Company, PRGI, and Robert N. Beck, Jr., a sole
proprietorship. (incorporated by reference to Exhibit 2.8 to
Registrant's Form 8-K filed November 10, 1998).
**2.9 -- Asset Purchase Agreement dated as of October 29, 1998 among
the Company, PRGI, Savant Consulting, L.L.C., and the
members of Savant Consulting, L.L.C. (incorporated by
reference to Exhibit 2.9 to Registrant's Form 8-K filed
November 10, 1998).
**2.10 -- Representations, Covenants and Indemnification Agreement.
(incorporated by reference to Exhibit 2.10 to Registrant's
Form 8-K filed November 10, 1998).
*2.11 -- Asset Purchase Agreement dated as of July 31, 1998 among the
Company, The Profit Recovery Group International I, Inc.,
Loder, Drew & Associates, Inc., Ronald K. Loder and H.
Richard Byrne. (incorporated by reference to Exhibit 2.1 to
Registrant's Form 8-K filed August 12, 1998).
**2.12(a) -- Share Purchase Agreement dated as of October 7, 1997 among
the Company, PRG France and certain individual Stockholders
of Alma Intervention S.A.
**2.12(b) -- Share Purchase Agreement dated as of October 7, 1997 among
the Company, PRG France and certain individual Stockholders
of Alma Intervention S.A.
**2.13 -- Share Purchase Agreement dated as of October 7, 1997 among
the Company, PRG France and Epargne Capitalisation
Intermediaire and Epargne Developpement.
**2.14 -- Share Purchase Agreement dated as of October 7, 1997 among
the Company, PRG France and Sophie Davet.
**2.15 -- Share Purchase Agreement dated as of October 7, 1997 among
the Company, PRG France and Marc Eisenberg and Eric
Eisenberg.
**2.16 -- Share Purchase Agreement dated as of October 7, 1997 among
the Company, PRG France and Banque Internationale a
Luxembourg S.A. for share capital of Financiere Alma S.A.
and Alma Intervention S.A.
**2.17 -- Share Purchase Agreement dated as of October 7, 1997 among
the Company, PRG France and Banque Internationale a
Luxembourg S.A. for share capital of Alma Intervention S.A.
**2.18 -- Warranty Agreement dated as of October 7, 1997 among the
Company, PRG France, Marc Eisenberg and Eric Eisenberg.
**2.19 -- Indemnity Escrow and Stock Pledge Agreement dated as of
October 7, 1997 among the Company, PRG France, Marc
Eisenberg, Eric Eisenberg, Banque Internationale a
Luxembourg S.A. and Arnall Golden & Gregory, LLP.
</TABLE>

45
<PAGE> 48

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1 -- Articles of Incorporation of the Registrant (incorporated by
reference to Exhibit 3.1 to Registrant's March 26, 1996
registration statement number 333-1086 on Form S-1).
3.2 -- Bylaws of the Registrant (incorporated by reference to
Exhibit 3.2 to Registrant's March 26, 1996 registration
statement number 333-1086 on Form S-1).
4.1 -- Specimen Common Stock Certificate (incorporated by reference
to Exhibit 4.1 to Registrant's March 26, 1996 registration
statement number 333-1086 on Form S-1).
4.2 -- See Articles of Incorporation and Bylaws of the Registrant,
filed as Exhibits 3.1 and 3.2, respectively.
***10.1 -- Letter Agreement dated May 25, 1995 between Wal-Mart Stores,
Inc. and Registrant (incorporated by reference to Exhibit
10.1 to Registrant's March 26, 1996 registration statement
number 333-1086 on Form S-1).
10.2 -- 1996 Stock Option Plan dated as of January 25, 1996,
together with Forms of Non-qualified Stock Option Agreement
(incorporated by reference to Exhibit 10.2 to Registrant's
March 26, 1996 registration statement number 333-1086 on
Form S-1).
10.3 -- The Profit Recovery Group International I, Inc., 401(K) Plan
(incorporated by reference to Exhibit 10.3 to Registrant's
March 26, 1996 registration statement number 333-1086 on
Form S-1).
10.4 -- Form of Employment Agreement dated March 20, 1996 between
Registrant and John M. Cook (incorporated by reference to
Exhibit 10.4 to Registrant's March 26, 1996 registration
statement number 333-1086 on Form S-1).
10.5 -- Form of Employment Agreement dated March 20, 1996 between
Registrant and John M. Toma (incorporated by reference to
Exhibit 10.5 to Registrant's March 26, 1996 registration
statement number 333-1086 on Form S-1).
10.6 -- Form of Employment Agreement dated March 20, 1996 between
Registrant and Donald E. Ellis, Jr. (incorporated by
reference to Exhibit 10.8 to Registrant's March 26, 1996
registration statement number 333-1086 on Form S-1).
10.7 -- Form of Consulting Agreement dated January 1, 1996 between
The Profit Recovery Group International I, Inc. and SBC
Financial Corporation, Jonathan Golden, P.C. and Berkshire
Partners (incorporated by reference to Exhibit 10.9 to
Registrant's March 26, 1996 registration statement number
333-1086 on Form S-1).
10.8 -- Form of Indemnification Agreement between the Registrant and
the Directors and certain officers of the Registrant
(incorporated by reference to Exhibit 10.10 to Registrant's
March 26, 1996 registration statement number 333-1086 on
Form S-1).
10.9 -- First Amendment dated March 7, 1997 to Employment Agreement
between Registrant and John M. Cook (incorporated by
reference to Exhibit 10.22 to Registrant's Form 10-K for the
year ended December 31, 1996).
10.10 -- The Profit Recovery Group International, Inc. Employee Stock
Purchase Plan (incorporated by reference to Exhibit "A" to
Registrant's proxy statement dated April 15, 1997, which was
issued in connection with Registrant's 1997 Annual Meeting
of Shareholders).
10.11 -- Contract for the Mandate of the President of the Directorate
dated October 7, 1997 between Alma Intervention and Marc
Eisenberg (incorporated by reference to Exhibit 10.1 to
Registrant's Form 10-Q for the quarterly period ended
September 30, 1997).
10.12 -- Consulting Agreement dated October 7, 1997 between
Registrant and Lieb Finance S.A. (incorporated by reference
to Exhibit 10.2 to Registrant's Form 10-Q for the quarterly
period ended September 30, 1997).
</TABLE>

46
<PAGE> 49

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.13 -- Second Amendment to Employment Agreement dated September 17,
1997 between The Profit Recovery Group International I, Inc.
and John M. Cook (incorporated by reference to Exhibit 10.3
to Registrant's Form 10-Q for the quarterly period ended
September 30, 1997).
10.14 -- Employment Agreement dated October 17, 1997 between The
Profit Recovery Group International I, Inc. and Michael A.
Lustig (incorporated by reference to Exhibit 10.4 to
Registrant's Form 10-Q for the quarterly period ended
September 30, 1997).
10.15 -- Compensation Agreement dated October 17, 1997 between The
Profit Recovery Group International I, Inc. and Michael A.
Lustig (incorporated by reference to Exhibit 10.5 to
Registrant's Form 10-Q for the quarterly period ended
September 30, 1997).
10.16 -- Lease Agreement dated January 30, 1998 between Wildwood
Associates and The Profit Recovery Group International I,
Inc. (incorporated by reference to Exhibit 10.30 to
Registrant's Form 10-K for the year ended December 31,
1997).
****10.17 -- Services Agreement dated April 7, 1993 between Registrant
and Kmart Corporation as amended by Addendum dated January
28, 1997 (incorporated by reference to Exhibit 10.31 to
Registrant's Form 10-K for the year ended December 31,
1997).
10.18 -- Employment Agreement dated August 26, 1996 between
Registrant and Tony G. Mills; Compensation Agreement dated
August 26, 1996 between Registrant and Mr. Mills; and
description of 1998 compensation arrangement between
Registrant and Mr. Mills (incorporated by reference to
Exhibit 10.32 to Registrant's Form 10-K for the year ended
December 31, 1997).
10.19 -- Sublease dated October 29, 1993, between The Profit Recovery
Group I, Inc. and International Business Machines
Corporation (incorporated by reference to Exhibit 10.15 to
Registrant's March 26, 1996 registration statement number
333-1086 on Form S-1).
10.20 -- Employment Agreement dated August 23, 1996 between
Registrant and David A. Brookmire; Compensation Agreement
dated August 23, 1996 between Registrant and Mr. Brookmire;
and description of 1998 compensation arrangement between
Registrant and Mr. Brookmire (incorporated by reference to
Exhibit 10.33 to Registrant's Form 10-K for the year ended
December 31, 1997).
10.21 -- Description of 1998-2002 compensation arrangement between
Registrant and John M. Cook (incorporated by reference to
Exhibit 10.34 to Registrant's Form 10-K for the year ended
December 31, 1997).
10.22 -- Description of 1998 compensation arrangement between
Registrant and John M. Toma (incorporated by reference to
Exhibit 10.35 to Registrant's Form 10-K for the year ended
December 31, 1997).
10.23 -- Description of 1998 compensation arrangement between
Registrant and Michael A. Lustig (incorporated by reference
to Exhibit 10.36 to Registrant's Form 10-K for the year
ended December 31, 1997).
10.24 -- Description of 1998 compensation arrangement between
Registrant and Donald E. Ellis, Jr. (incorporated by
reference to Exhibit 10.37 to Registrant's Form 10-K for the
year ended December 31, 1997).
10.25 -- Employment Agreement between Registrant and Robert G.
Kramer; Compensation Agreement between Registrant and Mr.
Kramer; description of 1998 compensation arrangement between
Registrant and Mr. Kramer (incorporated by reference to
Exhibit 10.38 to Registrant's Form 10-K for the year ended
December 31, 1997).
</TABLE>

47
<PAGE> 50

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.26 -- Employment Arrangement between Registrant and Clinton
McKellar, Jr.; Compensation Arrangement between Registrant
and Mr. McKellar; description of 1998 compensation
arrangement between Registrant and Mr. McKellar
(incorporated by reference to Exhibit 10.39 to Registrant's
Form 10-K for the year ended December 31, 1997).
10.27 -- Syndication Amendment and Assignment dated as of September 17, 1998 by and among
the Registrant, certain of subsidiaries of the Registrant and various banking institutions;
Credit Agreement dated as of July 29, 1998 among the Registrant, certain subsidiaries of
the Registrant and various banking institutions (incorporated by reference to Exhibit 10.1
to Registrant's Form 10-Q for the quarterly period ended September 30, 1998).
10.28 -- Sublease agreement dated June 1, 1998, by and between Electrolux, LLC and a subsidiary of
the Registrant (incorporated by reference to Exhibit 10.2 to Registrant's Form 10-Q for the
quarterly period ended September 30, 1998).
10.29 -- Sub-Sublease agreement dated August 19, 1998 by and between a subsidiary of the Registrant
and Manhattan Associates, Inc. (incorporated by reference to Exhibit 10.2 to Registrant's
Form 10-Q for the quarterly period ended September 30, 1998).
10.30 -- Lease agreement dated July 17, 1998 by and between Wildwood Associates and a subsidiary of
the Registrant. (incorporated by reference to Exhibit 10.4 to Registrant's Form 10-Q for
the quarterly period ended September 30, 1998).
10.31 -- The Profit Recovery Group International, Inc. Stock Incentive Plan. (incorporated by
reference to Exhibit 10.5 to Registrant's Form 10-Q for the quarterly period ended
September 30, 1998).
10.32 -- Description of The Profit Recovery Group International, Inc. Executive Incentive Plan.
(incorporated by reference to Exhibit 10.6 to Registrant's Form 10-Q for the quarterly
period ended September 30, 1998).
21.1 -- Subsidiaries of the Registrant.
23.1 -- Consent of KPMG LLP.
23.2 -- Consent of ERNST & YOUNG Entrepreneurs.
27.1 -- Financial Data Schedule (for SEC use only).
</TABLE>

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

* The Company has received confidential treatment of portions of this
Agreement. Accordingly, portions thereof have been omitted and filed
separately with the Securities and Exchange Commission. In addition, in
accordance with Item 601(b)(2) of Regulation S-K, the schedules have been
omitted and a list briefly describing the schedules is at the end of the
Exhibit. The Registrant will furnish supplementally a copy of any omitted
schedule to the Commission upon request.
** In accordance with Item 601(b)(2) of Regulation S-K, the schedules have
been omitted and a list briefly describing the schedules is contained at
the end of the Exhibit. The Company will furnish supplementally a copy of
any omitted schedule to the Commission upon request.
*** Confidential treatment pursuant to 17 CFR sec.sec. 200.80 and 230.406 has
been granted regarding certain portions of the indicated Exhibit, which
portions have been filed separately with the Commission.
**** Confidential treatment pursuant to 17 CFR sec.sec. 200.80 and 240.24b-2 has
been granted regarding certain portions of the indicated Exhibit, which
portions have been filed separately with the Commission.

48
<PAGE> 51

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

THE PROFIT RECOVERY GROUP
INTERNATIONAL, INC.

March 18, 1999 By: /s/ JOHN M. COOK
------------------------------------
John M. Cook
Chairman of the Board
and Chief Executive Officer

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

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JOHN M. COOK Chairman of the Board and March 18, 1999
- ----------------------------------------------------- Chief Executive Officer
John M. Cook (Principal Executive
Officer)

/s/ DONALD E. ELLIS, JR. Senior Vice President -- March 18, 1999
- ----------------------------------------------------- Finance, Treasurer and
Donald E. Ellis, Jr. Chief Financial Officer
(Principal Financial
Officer)

/s/ MICHAEL R. MELTON Vice President -- Finance March 18, 1999
- ----------------------------------------------------- (Principal Accounting
Michael R. Melton Officer)

/s/ STANLEY B. COHEN Director March 18, 1999
- -----------------------------------------------------
Stanley B. Cohen

/s/ MARC S. EISENBERG Director March 18, 1999
- -----------------------------------------------------
Marc S. Eisenberg

/s/ JONATHAN GOLDEN Director March 18, 1999
- -----------------------------------------------------
Jonathan Golden

/s/ GARTH H. GREIMANN Director March 18, 1999
- -----------------------------------------------------
Garth H. Greimann

/s/ FRED W.I. LACHOTZKI Director March 18, 1999
- -----------------------------------------------------
Fred W.I. Lachotzki

/s/ RONALD K. LODER Director March 18, 1999
- -----------------------------------------------------
Ronald K. Loder

/s/ E. JAMES LOWREY Director March 18, 1999
- -----------------------------------------------------
E. James Lowrey
</TABLE>

49
<PAGE> 52

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ MICHAEL A. LUSTIG Director March 18, 1999
- -----------------------------------------------------
Michael A. Lustig

/s/ JOHN M. TOMA Vice Chairman and Director March 18, 1999
- -----------------------------------------------------
John M. Toma
</TABLE>

<PAGE> 1

EXHIBIT 21.1

SUBSIDIARIES OF REGISTRANT

<TABLE>
<CAPTION>
STATE OF INCORPORATION
OR FOREIGN JURISDICTION
NAME OF SUBSIDIARY OF ORIGINATION
- ------------------ -----------------------
<S> <C>

The Profit Recovery Group International I, Inc. ...... Georgia
The Profit Recovery Group Asia, Inc. ................. Georgia
The Profit Recovery Group Canada, Inc. ............... Georgia
The Profit Recovery Group France, Inc. ............... Georgia
The Profit Recovery Group Mexico, Inc. ............... Georgia
The Profit Recovery Group U.K., Inc. ................. Georgia
The Profit Recovery Group Belgium, Inc. .............. Georgia
The Profit Recovery Group Australia, Inc. ............ Georgia
The Profit Recovery Group New Zealand, Inc. .......... Georgia
The Profit Recovery Group Netherlands, Inc. .......... Georgia
The Profit Recovery Group Germany, Inc. .............. Georgia
The Profit Recovery Group South Africa, Inc. ......... Georgia
PRG International Holding Company, Inc. .............. Georgia
PRGRS, Inc. .......................................... Delaware
PRGLS, Inc. .......................................... Delaware
PRGFS, Inc. .......................................... Delaware
The Profit Recovery Group Singapore PTE LTD. ......... Singapore
PRG France S.A. ...................................... France
Financiere Alma, S.A. ................................ France
Alma Intervention, S.A. .............................. France
B&F Associes, S.A.R.L. ............................... France
Club Affairs Alma, S.A.R.L. .......................... France
Meridian VAT Reclaim France S.A.R.L. ................. France
Novexel S.A. ......................................... France
PRG Argentina S.A. ................................... Argentina
PRG Do Brasil Ltda. ................................... Brasil
PRG Belium SPRL ...................................... Belgium
IP Strategies S.A. ................................... Belgium
</TABLE>

<PAGE> 1
EXHIBIT 23.1

INDEPENDENT AUDITORS' CONSENT

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

We consent to incorporation by reference in the registration statements (Nos.
333-64125, 333-30885 and 333-08707) on Form S-8 of The Profit Recovery Group
International, Inc. of our report dated February 10, 1999, relating to the
consolidated balance sheets of The Profit Recovery Group International, Inc.
and subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of earnings, shareholders' equity (deficit), and cash flows for each
of the years in the three-year period ended December 31, 1998, which report
appears in the December 31, 1998 annual report on Form 10-K of The Profit
Recovery Group International, Inc.

KPMG LLP

Atlanta, Georgia
March 18, 1999

<PAGE> 1

EXHIBIT 23.2

INDEPENDENT AUDITORS' CONSENT

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

We consent to incorporation by reference in the registration statements (Nos.
333-64125, 333-30885 and 333-08707) on Form S-8 of the Profit Recovery Group
International, Inc. of our report dated January 25, 1999 relating to the
consolidated balance sheets of Financiere Alma, S.A. and subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of earnings,
shareholders' equity, and cash flows for the year ended December 31, 1998 and
the three months ended December 31, 1997, which report appears in the December
31, 1998 annual report on Form 10-K of The Profit Recovery Group International,
Inc.

ERNST & YOUNG ENTREPRENEURS
Department d'E&Y Audit

Paris France
March 18, 1999
Any Antola

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. FOR THE
YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 28,344
<SECURITIES> 0
<RECEIVABLES> 101,140
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 132,004
<PP&E> 33,271
<DEPRECIATION> 10,514
<TOTAL-ASSETS> 387,382
<CURRENT-LIABILITIES> 103,461
<BONDS> 112,886
0
0
<COMMON> 24
<OTHER-SE> 165,480
<TOTAL-LIABILITY-AND-EQUITY> 387,382
<SALES> 0
<TOTAL-REVENUES> 202,827
<CGS> 0
<TOTAL-COSTS> 101,931
<OTHER-EXPENSES> 67,526
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,509
<INCOME-PRETAX> 29,861
<INCOME-TAX> 11,715
<INCOME-CONTINUING> 18,146
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,146
<EPS-PRIMARY> .82
<EPS-DILUTED> .80

</TABLE>