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 of Hudson Americas, Hudson Europe and Hudson Asia Pacific ("Hudson regional business"). These segments contributed approximately 18%, 49% and 33% of the Company's gross margin, respectively, for the three months ended March 31, 2009.

Hudson Americas operates from thirty-one offices in the U.S. and Canada, with 96% of its gross margin generated in the U.S. during the three months ended March 31, 2009. Hudson Europe operates from forty-two offices in fifteen countries, with 38% of its gross margin generated in the U.K. during the three months ended March 31, 2009. Hudson Asia Pacific operates from twenty-two offices in five countries, with 69% of its gross margin generated in Australia during the three months ended March 31, 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. 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, information technology, 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 organizational effectiveness and development services through their talent management offerings. 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 declines, some very significant. By the end of 2008, virtually all of our markets showed declines in their gross domestic product. The U.S. dollar strengthened against all of our major non-U.S. currencies which reduced the dollar-denominated value of our foreign earnings and cash flow from our foreign sales. The economic conditions continued to decline during the first quarter of 2009 and consequently affected both our temporary contracting and permanent recruitment business lines. In temporary contracting, we experienced that clients discontinued non-essential projects and brought hiring in-house. In permanent recruitment, there was evidence of client reluctance to hire or fill vacancies. As a result of these conditions, the financial results of the Company for the three months ended March 31, 2009 were below the results of the prior year in all three regions as discussed below.

Financial Performance

As discussed in more detail in this MD&A, the following financial data present
an overview of our financial performance for the three months ended March 31,
2009 and 2008:



                                                       Three Months Ended March 31,         Changes
$ in thousands                                           2009                 2008           Amount
Revenue                                             $      164,990       $      294,032    $ (129,042 )

Gross margin                                                62,313              124,152       (61,839 )

Selling, general and administrative expenses (a)            76,092              121,138       (45,046 )
Business reorganization and integration expenses             5,935                1,395         4,540

Operating (loss) income                                    (19,714 )              1,619       (21,333 )

(Loss) income from continuing operations                   (15,227 )                383       (15,610 )

Net (loss) income                                   $       (5,559 )     $        1,364    $   (6,923 )

(a) Selling, general and administrative expenses includes depreciation and amortization expenses of $3,790 and $3,825, respectively, for the three months ended March 31, 2009 and 2008.

• Revenue was $165 million for the three months ended March 31, 2009, as compared to $294 million for the same period of 2008, a decrease of $129 million, or 44%. Of this decline, $84 million was in contracting services and $37 million was in permanent recruitment services. These declines were 40% and 58%, respectively, for the three months ended March 31, 2009, compared to the same period of 2008.

• Gross margin was $62 million for the three months ended March 31, 2009, as compared to $124 million for the same period of 2008, a decrease of $62 million or 50%. Of this decline, $38 million was in permanent recruitment services and $20 million was in contracting services. These declines were 59% and 44%, respectively, for the three months ended March 31, 2009, compared to the same period of 2008.

• Selling, general and administrative expenses were $76 million for the three months ended March 31, 2009, as compared to $121 million for the same period of 2008, a decrease of $45 million, or 37%. Selling, general and administrative expenses decreased primarily due to the reductions in support costs achieved through reorganization actions and closure of non-core assets and facilities, lower commission associated with the lower revenue and reductions in management costs.

In response to the economic conditions, the Company took steps in the first quarter of 2009 to counteract the declines in revenue. In the first quarter of 2009, the Company decided to expand the restructuring actions it undertook during 2008 to further reduce expenses and streamline operations. In February 2009, the Company's Board of Directors approved a plan ("2009 Plan") to reduce expenses by consolidating management, support functions and exit from underutilized properties. The Company expects these actions to produce cost savings in 2009 and improve its long-term profitability. We incurred substantially all of the estimated cost of the plan of approximately $5 million in connection with this plan during the three months ended March 31, 2009. On April 24, 2009 and May 1, 2009, the Company's Board of Directors approved further restructuring actions, which will increase the total cost of 2009 Plan to $16 million. The Company expects to complete the 2009 Plan in 2009.

Strategic Actions

Our management's primary focus has been to move the Company to profitability, particularly at the level most in the control of the country level operating leaders and build our specialized professional recruitment through out 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 will generate long-term profitability. We have executed this strategy through a combination of delivery of higher margin services, investments, divestitures and cost restructuring. In doing so, we have sold or discontinued non-core businesses, taken actions to streamline support operations to match the business focus and reduced costs to increase the Company's long-term profitability.

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 placement 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.

We expect to continue our review of opportunities to expand our operations in specialized professional recruitment.

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

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

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

• Hudson Americas' energy, engineering and technical staffing division 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 income (loss) from continuing operations adjusted for provision 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
                                                                         March 31,
$ in thousands                                                       2009          2008
(Loss) income from continuing operations                          $   (15,227 )   $   383
Adjustments to (loss) income from continuing operations
Provision for income taxes                                             (4,059 )     1,784
Other income, net                                                        (619 )      (197 )
Interest income, net                                                      191        (351 )
Depreciation and amortization                                           3,790       3,825

Total adjustments from (loss) income from continuing operations
to EBITDA                                                                (697 )     5,061

EBITDA                                                            $   (15,924 )   $ 5,444

Results of Operations

Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008

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
months ended March 31, 2009 and 2008 (dollars in thousands).



                                                   For the three months ended
                                                            March 31,
                                                      2009               2008
      Revenue:
      Hudson Americas                            $       44,023       $   83,262
      Hudson Europe                                      66,227          111,333
      Hudson Asia Pacific                                54,740           99,437

      Total                                      $      164,990       $  294,032

      Gross margin:
      Hudson Americas                            $       10,962       $   22,755
      Hudson Europe                                      30,622           58,532
      Hudson Asia Pacific                                20,729           42,865

      Total                                      $       62,313       $  124,152

      Operating (loss) income:
      Hudson Americas                            $       (5,791 )     $   (1,406 )
      Hudson Europe                                      (5,611 )          4,286
      Hudson Asia Pacific                                (3,500 )          4,720
      Corporate expenses                                 (4,812 )         (5,981 )

      Total                                      $      (19,714 )     $    1,619

      (Loss) income from continuing operations   $      (15,227 )     $      383

      Net (loss) income                          $       (5,559 )     $    1,364

      TEMPORARY CONTRACTING DATA (a):
      Temporary contracting revenue:
      Hudson Americas                            $       42,216       $   79,512
      Hudson Europe                                      41,952           63,044
      Hudson Asia Pacific                                39,762           65,551

      Total                                      $      123,930       $  208,107

      Direct costs of temporary contracting:
      Hudson Americas                            $       33,046       $   60,434
      Hudson Europe                                      32,387           48,542
      Hudson Asia Pacific                                33,086           54,120

      Total                                      $       98,519       $  163,096

      Temporary contracting gross margin:
      Hudson Americas                            $        9,170       $   19,078
      Hudson Europe                                       9,565           14,502
      Hudson Asia Pacific                                 6,676           11,431

      Total                                      $       25,411       $   45,011

      Gross margin as a percent of revenue:
      Hudson Americas                                      21.7 %           24.0 %
      Hudson Europe                                        22.8 %           23.0 %
      Hudson Asia Pacific                                  16.8 %           17.4 %

(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.

Constant Currency

The Company defines the term "constant currency" to mean that financial data for a period are translated into U.S. dollars using the same foreign currency exchange rates that were used to translate financial data for the previously reported period. Changes in revenue, direct costs, gross margin, selling, general and administrative expenses and operating (loss) income include the effect of changes in foreign currency exchange rates. Variance analysis usually describes period-to-period variances that are calculated using constant currency as a percentage. The Company's management reviews and analyzes business results in constant currency and believes these results better represent the Company's underlying business trends.

The Company believes that these calculations are a useful measure, indicating the actual change in operations. Earnings from subsidiaries are, at times, repatriated to the U.S., and there are no significant gains or losses on foreign currency transactions between subsidiaries. Therefore, changes in foreign currency exchange rates generally impact only reported earnings and not the Company's economic condition. The table below summarizes the impact of foreign exchange adjustments on our operating results for the three months ended March 31, 2009 (dollars in thousands).

                                                        For the three months ended March 31,
                                                               2009                              2008
                                                               Currency        Constant
                                            As reported       translation      currency       As reported
Revenue:
Hudson Americas                            $      44,023     $         111     $  44,134     $      83,262
Hudson Europe                                     66,227            18,795        85,022           111,333
Hudson Asia Pacific                               54,740            19,469        74,209            99,437

Total                                            164,990            38,375       203,365           294,032


Direct costs:
Hudson Americas                                   33,061                15        33,076            60,507
Hudson Europe                                     35,605            11,420        47,025            52,801
Hudson Asia Pacific                               34,011            13,067        47,078            56,572

Total                                            102,677            24,502       127,179           169,880


Gross margin:
Hudson Americas                                   10,962                96        11,058            22,755
Hudson Europe                                     30,622             7,375        37,997            58,532
Hudson Asia Pacific                               20,729             6,402        27,131            42,865

Total                                      $      62,313     $      13,873     $  76,186     $     124,152


Selling, general and administrative (a):
Hudson Americas                            $      15,132     $         134     $  15,266     $      22,701
Hudson Europe                                     33,795             8,358        42,153            54,406
Hudson Asia Pacific                               22,353             6,243        28,596            38,050
Corporate                                          4,812                 3         4,815             5,981

Total                                      $      76,092     $      14,738     $  90,830     $     121,138


Operating (loss) income:
Hudson Americas                            $      (5,791 )   $         (44 )   $  (5,835 )   $      (1,406 )
Hudson Europe                                     (5,611 )          (1,521 )      (7,132 )           4,286
Hudson Asia Pacific                               (3,500 )            (621 )      (4,121 )           4,720
Corporate                                         (4,812 )              (3 )      (4,815 )          (5,981 )

Total                                      $     (19,714 )   $      (2,189 )   $ (21,903 )   $       1,619

(a) Selling, general and administrative expenses include acquisition-related expenses and depreciation and amortization and exclude merger and integration expenses (recoveries) of $0 and $75, respectively, for the three months ended March 31, 2009 and 2008.

Hudson Americas

Hudson Americas' revenue was $44.0 million for the three months ended March 31, 2009, as compared to $83.3 million for the same period of 2008, a decrease of $39.3 million or 47.1%. Of this decline, $37.3 million was in contracting services and $2.0 million was in permanent recruitment services. These declines were 46.9% and 52.0%, respectively, compared to the same period of 2008. The decrease in contracting revenue resulted predominantly from Legal Services, which declined by $28.5 million or 52.9% followed by a decrease in Information Technology of $5.7 million or 33.3% with the balance of the revenue decline in Financial Solutions.

The primary driver of the decline in Legal Services was an unusually large, short-term client project in the prior year, which accounted for approximately $22.0 million in revenue in the first quarter of 2008. The remainder of the decline in Legal Services, or $6.5 million, was due to client projects completed through 2008, including some in the fourth quarter of 2008. Clients that cut projects, restricted outside hiring in favor of existing full time staff as a response to the economic conditions and the Company's exit from unprofitable markets since the first quarter of 2008 contributed to the declines in revenue in Information Technology and Financial Solutions. Clients choosing not to refill positions contributed to the decline in permanent recruitment revenue. Some clients also took advantage of employee attrition as a cost reduction and cash preservation measure in an uncertain economic environment.

Hudson Americas' direct costs were $33.1 million for the three months ended March 31, 2009, as compared to $60.5 million for the same period of 2008, a decrease of $27.4 million or 45.4%. The decrease was due to fewer contractors on billing and was a direct result of the factors affecting the contracting revenue as noted above.

Hudson Americas' gross margin was $11.0 million for the three months ended March 31, 2009, as compared to $22.8 million for the same period of 2008, a decrease of $11.8 million or 51.8%. The majority of Hudson America gross margin decline, or $9.9 million, was from the decline in contracting services and was, as noted above, primarily in Legal Services. Legal services, Information Technology and Financial Solutions declined $7.0 million, $1.6 million and $1.6 million, respectively, or 58.4%, 37.3%, and 49.6% respectively, for the three months ended March 31, 2009, compared to the same period of 2008. Contracting services gross margin was 21.7% for the three months ended March 31, 2009, as compared to 24.0% for the same period of 2008. The decline was driven by approximately a 3 percent reduction in bill rates and underutilization of client production space for the Legal Services business. Gross margin, as a percentage of revenue, was 24.9% for the three months ended March 31, 2009, as compared to 27.3% for the same period of 2008. This decline was primarily driven by the decline in permanent recruitment services revenue and the factors affecting the contracting revenue gross margin.

Hudson Americas' selling, general and administrative expenses were $15.1 million for the three months ended March 31, 2009, as compared to $22.7 million for the same period of 2008, a decrease of $7.6 million or 33.4%. The decrease in selling, general and administrative expenses was driven primarily by reductions in support costs achieved through restructuring and the sale or closure of non-core assets, lower commissions associated with the lower revenue and reductions in management costs. Hudson Americas' selling, general and administrative expenses, as a percentage of revenue, were 34.4% for the three months ended March 31, 2009, as compared to 27.3% for the same period of 2008.

Hudson Americas incurred $1.6 million of reorganization expenses during the three months ended March 31, 2009, as compared to $1.5 million for the same period of 2008. Reorganization expenses incurred during the three months ended March 31, 2009 included primarily payment of employee termination benefits related to the 2009 Plan.

Hudson Americas' EBITDA loss was $4.8 million for the three months ended March 31, 2009, as compared to a $0.2 million loss for the same period of 2008, an increase in EBITDA loss of $4.6 million. Hudson Americas' EBITDA loss, as a percentage of revenue, was 10.9% for the three months ended March 31, 2009, as compared to 0.3% for the same period of 2008. The increase in EBITDA loss was primarily due to the reduced gross margin of $11.8 million partially offset by reductions in selling, general and administrative expenses of $7.6 million.

Hudson America's operating loss was $5.8 million for the three months ended March 31, 2009, as compared to a $1.4 million loss for the same period of 2008, an increase in operating loss of $4.4 million. Operating loss, as a percentage of revenue, was 13.2% for the three months ended March 31, 2009, as compared to 0.2% for the same period of 2008. The increase in operating loss resulted primarily from the same factors as discussed above with respect to EBITDA.

Hudson Europe

Hudson Europe's revenue was $66.2 million for the three months ended March 31, 2009, as compared to $111.3 million for the same period of 2008, a decrease of $45.1 million or 40.5%. On a constant currency basis, Hudson Europe's revenue decreased $26.3 million or 23.6%, for the three months ended March 31, 2009, as compared to the same period of 2008. The revenue decrease of $26.3 million was primarily due to decreases of $14.1 million in permanent recruitment and $7.8 million in contracting revenue, and $2.6 million in Talent Management. In constant currency, these declines were 42.9%, 12.4%, and 21.1% in permanent recruitment, contracting revenue, and Talent Management, respectively, compared to the same period of 2008.

The majority of this constant currency decline, or $17.3 million, was in the U.K., where both permanent recruitment revenue and contracting revenue declined, as compared to the same period of 2008. The declines in permanent recruitment and contracting revenues were $6.8 million and $8.7 million, or 43.8% and 17.3%, respectively, compared to the same period of 2008. Continued weakness in the . . .