This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the Condensed Consolidated Financial Statements and the notes thereto, included in Item 1 of this Form 10-Q. This MD&A contains forward-looking statements. Please see "Forward-Looking Statements" for a discussion of the uncertainties, risks and assumptions associated with these statements. This MD&A also uses the non-generally accepted accounting principles ("GAAP") measure of income (loss) from continuing operations before inclusion of provision for income taxes, other income (expense), interest income (expense), and depreciation and amortization ("EBITDA"). See Note 17 to the Condensed Consolidated Financial Statements for EBITDA segment reconciliation information.

Overview

Hudson Highland Group, Inc. (the "Company" or "Hudson," "we," "us" and "our") has operated as an independent publicly traded company since April 1, 2003. Our businesses are specialized professional staffing services for permanent and contract and talent management services to businesses operating in many industries and in over 20 countries around the world. Our largest operations are in the United States ("U.S."), the United Kingdom ("U.K.") and Australia. We are organized into three reportable segments: Hudson Americas, Hudson Europe and Hudson Asia Pacific (each a "Hudson regional business"). These segments contributed approximately 16%, 48% and 36% of the Company's gross margin, respectively, for the nine months ended September 30, 2009.

Hudson Americas operates from 31 offices in the U.S. and Canada, with 96% of its gross margin generated in the U.S. during the nine months ended September 30, 2009. Hudson Europe operates from 41 offices in 14 countries, with 41% of its gross margin generated in the U.K. during the nine months ended September 30, 2009. Hudson Asia Pacific operates from 18 offices in 4 countries, with 67% of its gross margin generated in Australia during the nine months ended September 30, 2009.

The Hudson regional businesses provide professional contract consultants and permanent recruitment services to a wide range of clients. With respect to temporary and contract personnel, Hudson focuses on providing its clients with candidates who have specialized functional skills and competencies, such as accounting and finance, legal and information technology ("IT"). The length of a contract assignment can vary, but engagements at the professional level tend to be longer than those in the general clerical or industrial sectors. With respect to permanent recruitment, Hudson focuses on mid-level professionals typically earning between $50,000 and $150,000 annually and possessing the professional skills and/or profile required by clients. Hudson provides permanent recruitment services on both a retained and contingent basis. In larger markets, Hudson's sales strategy focuses on both clients operating in particular industry sectors, such as financial services or technology, and candidates possessing particular professional skills, such as accounting and finance, IT, legal and human resources. Hudson uses both traditional and interactive methods to select potential candidates for its clients, employing a suite of products that assesses talent and helps predict whether a candidate will be successful in a given role.

The Hudson regional businesses also provide human capital services, the largest of which are assessment and development services, through their Talent Management Solutions units. These services encompass candidate assessment, competency modeling, leadership development, performance management, and career transition. These services enable Hudson to offer clients a comprehensive set of management services across the entire employment life-cycle from attracting, assessing and selecting best-fit employees to engaging and developing those individuals to help build a high-performance organization.

Recent Economic Events

During 2008, the countries in which Hudson operates experienced varying degrees of economic contraction, some very significant. By the end of 2008, virtually all our markets experienced substantial declines in their gross domestic product ("GDP"). These declines continued into 2009, and in some markets accelerated during the first half of 2009. These economic conditions negatively affected all of our service offerings, except for career transition.

During the third quarter of 2009, some of the countries in which Hudson operates reported initial signs of improvement at the GDP level. Some macroeconomic reports indicated early signs of economic growth in the third quarter in the U.S., Australia, China and France. Industry-level reports indicated increased activity in the financial services sector of the U.K. Australia and New Zealand both continued to show low single digit growth in GDP, and China continues to produce high single digit growth in its GDP. Unemployment, traditionally a lagging economic indicator, remained at elevated levels and, in most markets, was still increasing in the third quarter of 2009.

The effects of the economy on the Company's operations, however, showed some signs of abating in the third quarter of 2009, particularly in two markets. In the U.K. and China, for example, results in the third quarter of 2009 improved over those of the second quarter of 2009, even though the third quarter is traditionally the weaker of the two quarters. The recovery in the U.K. was attributed at least in part to improvements in the financial services sector, and the recovery in China was attributable to large multinational companies easing hiring freezes at the end of the third quarter. In North America, Continental Europe, Australia and New Zealand, declines in the third quarter of 2009, compared to the same quarter of prior year, were similar to the second quarter of 2009 at the gross margin level.

As a result of these conditions, the financial results of the Company for the three and nine months ended September 30, 2009 were below the results of the prior year's respective periods in all three regions. The rate of decline in revenue from the prior year in the third quarter of 2009 was five percentage points better than the rate of decline in the second quarter of 2009 on approximately the same level of gross margin. The Company expects that the current economic conditions will continue to negatively impact its operating results for the remainder of 2009 and to extend into 2010. Therefore, historical results may not be indicative of future results. See "Liquidity Outlook" for additional information.

Goodwill Impairment Charges

Under Accounting Standard Codification ("ASC") Topic 350 "Intangible - Goodwill and Other", the Company is required to test goodwill and indefinite-lived intangible assets for impairment on an annual basis as of October 1, or more frequently if circumstances indicate that its carrying value might exceed its current fair value.

By the fourth quarter of 2008, the economic slowdown that had been evident earlier in the year in the U.S. and the U.K. spread rapidly to other industries and countries and had impacted virtually all our markets. Consequently, these conditions negatively impacted both the Company's stock price and its outlook for operating results. The Company's stock price declined approximately fifty percent as of December 31, 2008 compared to the stock price as of October 1, 2008. As a result, the Company's market capitalization declined below its book value, an indication that the aggregate fair value of its reporting units could potentially be less than their carrying value. Accordingly, management updated its impairment testing from October 1 (annual assessment date), through December 31, 2008 with the assistance of a third-party valuation firm utilizing both an income and market based approach.

At the conclusion of the testing, the Company determined that goodwill was impaired at all of its reporting units and recorded an impairment charge of $64.5 million in 2008. It also recorded an additional impairment charge on intangible assets of $2.6 million. The total charges of $67.1 million for 2008 were recorded under the caption of "Goodwill and other impairment charges" in the Company's Consolidated Statements of Operations included in the Company's 2008 Annual Report on Form 10-K.

The primary drivers that resulted in the goodwill impairment charge were the anticipated significant reduction in 2009 revenue, earnings and cash flows with modest expected recovery in 2010 onward and a reduction in the market price of the Company's stock.

During the first half of 2009, the Company experienced a continued deterioration in market conditions as anticipated. Over the course of the first six months of the year, the Company's stock price declined approximately thirty-five percent as of June 30, 2009 as compared to the stock price as of December 31, 2008. As a result, management performed an interim test for impairment of the $1.7 million additional purchase price payment for its Tong Zhi (Beijing) Consulting Service Ltd and Guangzhou Dong Li Consulting Service Ltd (collectively, "TKA") acquisition, which was recorded as goodwill at June 30, 2009. The Company concluded that the entire amount of recorded goodwill was impaired and recorded an impairment charge of $1.7 million at the same reporting unit.

The Company expects the aforementioned weak global economic conditions to negatively affect demand for the Company's services, its operating results and its market capitalization, for at least the remainder of 2009 and possibly part or all of 2010.

Contingencies

From time to time, in the ordinary course of business, the Company is subject to compliance audits by federal, state, local and foreign government regulatory, tax, and other authorities relating to a variety of regulations, including wage and hour laws, unemployment taxes, workers' compensation, immigration, and income, value-added and sales taxes. The Company is also subject to, from time to time in the ordinary course of business, various claims, lawsuits, and other complaints from, for example, clients, candidates, suppliers, and landlords, for both leased and subleased properties.

Periodic events can also change the number and type of audits, claims, lawsuits or complaints asserted against the Company. Events can also change the likelihood of assertion and the behavior of third parties to reach resolution regarding such matters. The present economic circumstances have given rise to many news reports and bulletins from clients, tax authorities and other parties about changes in their procedures for audits, payment, plans to challenge existing contracts and other such matters aimed at being more aggressive in the resolution of such matters in their own favor. The Company has appropriate procedures in place for identifying and communicating any matters of this type, whether asserted or likely to be asserted, and it evaluates its liabilities in light of the prevailing circumstances. Changes in the behavior of third parties could cause the Company to change its view of the likelihood of a claim and what might constitute a trend. In the last twelve months, the Company has not seen a marked difference in employee disputes or client disputes, though pressure on fees is increasing. In the same period, the Company has seen an increase in audits by tax authorities. We cannot determine if this is typical at this point in the Company's history or higher than typical, and in either event, we cannot determine if this is an indication of a trend for our Company given our operations in 20 countries and multiple municipalities. However, we do not expect at this time that such matters will have a material adverse effect on the Company's results of operations, financial condition or liquidity.

For matters that have reached the threshold of probable and estimable, the Company has established reserves for legal, regulatory and other contingent liabilities. During the quarter ended September 30, 2009, we successfully resolved a contract matter in Asia Pacific, and as of September 30, 2009, the Company had reserves in the amount of $0.7 million compared to $0.2 million as of December 31, 2008. Although the outcome of these matters cannot be determined, the Company believes that none of the currently pending matters, individually or in the aggregate, will have a material adverse effect on the Company's financial condition, results of operations or liquidity.

Financial Performance

As discussed in more detail in this MD&A, the following selected financial data
present an overview of our financial performance for the three and nine months
ended September 30, 2009 and 2008:



                                              Three Months Ended September 30,             Changes
$ in thousands                                 2009                     2008                Amount
Revenue                                   $       169,647          $       269,239        $  (99,592 )

Gross margin                                       64,190                  112,695           (48,505 )

Selling, general and administrative
expenses (a)                                       70,153                  109,993           (39,840 )
Business reorganization and
integration expenses                                2,878                    2,817                61

Operating loss                                     (8,841 )                   (115 )          (8,726 )

(Loss) income from continuing
operations                                         (7,623 )                    361            (7,984 )

Net loss                                  $        (6,853 )        $          (309 )      $   (6,544 )


                                              Nine Months Ended September 30,              Changes
$ in thousands                                 2009                     2008                Amount
Revenue                                   $       508,186          $       865,398        $ (357,212 )

Gross margin                                      191,078                  370,275          (179,197 )

Selling, general and administrative
expenses (a)                                      217,811                  356,752          (138,941 )
Business reorganization and
integration expenses                               12,279                    5,033             7,246
Goodwill and other impairment charges               1,549                       -              1,549

Operating (loss) income                           (40,561 )                  8,490           (49,051 )

(Loss) income from continuing
operations                                        (37,957 )                  2,824           (40,781 )

Net (loss) income                         $       (30,184 )        $         6,011        $  (36,195 )

(a) Selling, general and administrative expenses include depreciation and amortization expenses of $2.7 million and $3.9 million, respectively, for the three months ended September 30, 2009 and 2008 and $9.4 million and $11.3 million, respectively, for the six months ended September 30, 2009 and 2008.

• Gross margin was $64.2 million for the three months ended September 30, 2009, as compared to $112.7 million for the same period of 2008, a decrease of $48.5 million or 43%. Permanent recruitment gross margin declined $30.2 million or 51% and contracting gross margin declined $15.5 million or 38.1% for the three months ended September 30, 2009, compared to the same period of 2008. Gross margin was $191.1 million for the nine months ended September 30, 2009, as compared to $370.3 million for the same period of 2008, a decrease of $179.2 million or 48.4%. Permanent recruitment gross margin declined $113 million or 57.7% and contracting gross margin declined $54.9 million or 42% for the nine months ended September 30, 2009, compared to the same period of 2008.

• Selling, general and administrative expenses were $70.2 million for the three months ended September 30, 2009, as compared to $110 million for the same period of 2008, a decrease of $39.8 million or 36.2%. Selling, general and administrative expenses were $217.8 million for the nine months ended September 30, 2009, as compared to $356.8 million for the same period of 2008, a decrease of $138.9 million or 39%.

• Goodwill and other impairment charges of $1.5 million were included in the results for the nine months ended September 30, 2009.

To counteract the negative economic conditions worldwide, the Company rapidly reduced its operating costs. The Company's Board of Directors (the "Board") approved a restructuring program in the first half of 2009 ("2009 Plan") to counteract the ongoing declines in revenue. By May 1, 2009, the Board approved restructuring actions under the 2009 Plan for up to $16 million. For the nine months ended September 30, 2009, the Company incurred approximately $11 million of expenses in connection with the 2009 Plan. On November 3, 2009, the Board approved further restructuring actions, which will increase the total cost of the 2009 Plan to $19 million. The Company expects to substantially complete these actions before the end of 2009. The Company expects these actions will produce recurring cost savings through the remainder of 2009 and beyond, resulting in a more efficient operating model going forward. The Company expects to leverage these efficiencies as the economy recovers to improve its long-term profitability.

Strategic Actions

Our management's primary focus has been to move the Company to profitability through a focus on specialized professional recruitment through our staffing, project solutions and talent management businesses. We have focused our strategy on higher-margin specialized professional recruitment with a long-term financial goal of 7-10% EBITDA margins, which we believe is the measure most within the control of our operating leaders. We believe achievement of these long-term EBITDA margins will generate long-term profitability. We continue to execute this strategy through a combination of delivery of higher margin services, investments, cost restructuring, acquisitions and divestitures. In doing so, we continue to focus on retaining and maintaining key clients, retaining high performing revenue earners, integrating businesses to achieve synergies, discontinuing non-core businesses, streamlining support operations and reducing costs to achieve the Company's long-term profitability goals.

In April 2008, we acquired certain business assets of Propensity, Ltd., a professional services firm based in Texas specializing in accounting and finance services and providing both contract and permanent recruitment services. In February 2008, we completed the acquisition of the majority of the assets of Executive Coread SARL, a talent management and recruitment company in France.

In the last two years, we completed the sale of or discontinued four non-core businesses to improve our strategic focus:

• Hudson's Italy operations in April 2009 (2008 revenue of $4 million).

• Hudson's Japan operations in March 2009 (2008 revenue of $5 million).

• Hudson's Public Management division ("BPM") of Balance Ervaring op Projectbasis, B.V. ("Balance") in May 2008 (2007 revenue of $6 million).

• Hudson Americas' energy, engineering and technical staffing division ("ETS") in February 2008 (2007 revenue of $146 million).

Use of EBITDA

Management believes EBITDA is a meaningful indicator of the Company's performance that provides useful information to investors regarding the Company's financial condition and results of operations. EBITDA is also considered by management as the best indicator of operating performance and most comparable measure across our regions, because it does not include certain expenses that are generally outside the control of local management. Management also uses this measurement to evaluate capital needs and working capital requirements. EBITDA should not be considered in isolation or as a substitute for operating income, cash flows from operating activities, and other income or cash flow statement data prepared in accordance with GAAP or as a measure of the Company's profitability or liquidity. Furthermore, EBITDA, as presented below, may not be comparable with similarly titled measures reported by other companies. EBITDA, as presented below, is derived from (loss) income from continuing operations adjusted for provision (benefit) for income taxes, other expense (income), interest expense (income), and depreciation and amortization. The reconciliation of EBITDA to the most directly comparable GAAP financial measure is provided in the table below:

                                                   Three Months Ended             Nine Months Ended
                                                     September 30,                  September 30,
$ in thousands                                     2009           2008           2009            2008
(Loss) income from continuing operations        $   (7,623 )     $   361       $ (37,957 )     $  2,824
Adjustments to (loss) income from continuing
operations
(Benefit from) provision for income taxes           (1,215 )         464          (2,300 )        8,524
Other income, net                                      (99 )        (603 )          (773 )       (1,963 )
Interest expense (income), net                          96          (337 )           469           (895 )
Depreciation and amortization                        2,741         3,913           9,369         11,274

Total adjustments from (loss) income from
continuing operations to EBITDA (loss)               1,523         3,437           6,765         16,940
EBITDA (loss)                                   $   (6,100 )     $ 3,798       $ (31,192 )     $ 19,764

Results of Operations

The following table sets forth the Company's revenue, gross margin, operating
(loss) income, (loss) income from continuing operations, net (loss) income,
temporary contracting revenue, direct costs of temporary contracting, temporary
contracting gross margin and gross margin as a percent of revenue for the three
and nine months ended September 30, 2009 and 2008 (dollars in thousands).



                                             For The Three Months Ended           For The Nine Months Ended
                                                    September 30,                       September 30,
                                               2009                2008             2009               2008
Revenue:
Hudson Americas                            $      35,705        $   66,485      $     122,861        $ 221,254
Hudson Europe                                     67,898            98,301            202,014          324,329
Hudson Asia Pacific                               66,044           104,453            183,311          319,815

Total                                      $     169,647        $  269,239      $     508,186        $ 865,398

Gross margin:
Hudson Americas                            $       9,258        $   17,967      $      30,741        $  60,901
Hudson Europe                                     29,571            49,717             91,155          170,603
Hudson Asia Pacific                               25,361            45,011             69,182          138,771

Total                                      $      64,190        $  112,695      $     191,078        $ 370,275

Operating (loss) income:
Hudson Americas                            $      (3,264 )      $      290      $     (11,603 )      $    (800 )
Hudson Europe                                     (2,762 )           1,095            (10,531 )         13,289
Hudson Asia Pacific                                1,435             4,558             (4,131 )         17,305
Corporate expenses                                (4,250 )          (6,058 )          (14,296 )        (21,304 )

Total                                      $      (8,841 )      $     (115 )    $     (40,561 )      $   8,490

(Loss) income from continuing operations   $      (7,623 )      $      361      $     (37,957 )      $   2,824

Net (loss) income                          $      (6,853 )      $     (309 )    $     (30,184 )      $   6,011

TEMPORARY CONTRACTING DATA (a):
Temporary contracting revenue:
Hudson Americas                            $      34,437        $   63,134      $     118,528        $ 210,445
Hudson Europe                                     44,673            59,749            129,707          185,749
Hudson Asia Pacific                               48,122            70,089            132,922          212,397

Total                                      $     127,232        $  192,972      $     381,157        $ 608,591

Direct costs of temporary contracting:
Hudson Americas                            $      26,437        $   48,369      $      92,089        $ 160,018
Hudson Europe                                     35,612            46,121            102,051          143,303
Hudson Asia Pacific                               39,962            57,762            111,337          174,692

Total                                      $     102,011        $  152,252      $     305,477        $ 478,013

Temporary contracting gross margin:
Hudson Americas                            $       8,000        $   14,765      $      26,439        $  50,427
Hudson Europe                                      9,061            13,628             27,656           42,446
Hudson Asia Pacific                                8,160            12,327             21,585           37,705

Total                                      $      25,221        $   40,720      $      75,680        $ 130,578

Gross margin as a percent of revenue:
Hudson Americas                                     23.2 %            23.4 %             22.3 %           24.0 %
Hudson Europe                                       20.3 %            22.8 %             21.3 %           22.9 %
Hudson Asia Pacific                                 17.0 %            17.6 %             16.2 %           17.8 %

(a) Temporary contracting revenue is a component of our revenue. Temporary contracting gross margin and gross margin as a percent of revenue are shown to provide additional information on the Company's ability to manage its cost structure and provide further comparability relative to the Company's peers. Temporary contracting gross margin is derived by deducting the direct costs of temporary contracting from temporary contracting revenue. The Company's calculation of gross margin may differ from those of other companies.

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