Management's Discussion and Analysis of Financial Condition and Results of Operations as well as other sections of this quarterly report on Form 10-Q contain forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. The forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry in which we operate and management's beliefs and assumptions. Forward-looking statements may be identified by the use of words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," "projects," "forecasts," and similar expressions. Forward-looking statements are not guarantees of future performance and involve certain known and unknown risks, uncertainties and assumptions that are difficult to predict. Actual outcomes and results may differ materially from what is expressed, forecasted or implied in the forward-looking statements. Factors that may affect the outcome of the forward-looking statements include, among other things, our ability to attract and retain qualified executive search consultants; further declines in the global economy and our ability to execute successfully through business cycles; the timing, speed or robustness of any future economic recovery; social or political instability in markets where we operate, the impact of foreign currency exchange rate fluctuations; price competition; the ability to forecast, on a quarterly basis, variable compensation accruals that ultimately are determined based on the achievement of annual results; our ability to realize our tax loss carryforwards; the timing of the establishment or reversal of valuation allowance on deferred tax assets; the mix of profit and loss by country; an impairment of our goodwill and other intangible assets; delays in the development and/or implementation of new technology and systems; and, the ability to meet and achieve the expected savings resulting from cost-reduction initiatives and restructuring activities. For more information on the factors that could affect the outcome of forward-looking statements, refer to our Annual Report on Form 10-K for the year ended December 31, 2008 under Risk Factors in Item 1A. We caution the reader that the list of factors may not be exhaustive. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Executive Overview

Our Business

We are a leading provider of executive search and leadership consulting services. We help our clients build leadership teams by facilitating the recruitment, management and deployment of senior executives. Focusing on top-level services offers us several advantages that include access to and influence with key decision makers, increased potential for recurring search consulting engagements, higher fees per search, enhanced brand visibility, and leveraged global footprint, which create added barriers to entry for potential competitors. Working at the top of client organizations also allows us to attract and retain high-caliber consultants.

In addition to executive search, we provide a range of leadership advisory services to clients. These services include succession planning, executive assessment, talent retention management, executive development, transition consulting for newly appointed executives, and M&A human capital integration consulting.

We provide our services to a broad range of clients through the expertise of approximately 400 consultants located in major cities around the world. Our executive search services are provided on a retained basis. Revenue before reimbursements of out-of-pocket expenses ("net revenue") consists of retainers and indirect expenses billed to clients. Typically, we are paid a retainer for our executive search services equal to approximately one-third of the estimated first year compensation for the position to be filled. In addition, if the actual compensation of a placed candidate exceeds the estimated compensation, we often are authorized to bill the client for one-third of the excess. Indirect expenses are calculated as a percentage of the retainer with certain dollar limits per search.

Key Performance Indicators

We manage and assess Heidrick & Struggles' performance through various means, with the primary financial and operational measures including net revenue growth, operating income, operating margin, consultant headcount, new search confirmation trends, consultant productivity, and average fee per executive search.

Revenue growth is driven by a combination of additional consultants, an increase in executive search wins, higher consultant productivity and higher average fees per search or service. With the exception of compensation expense, incremental increases in revenue do not necessarily result in proportionate increases in costs, particularly operating and administrative expenses, thus potentially improving operating margins.

The number of consultants, confirmation trends, number of searches completed, productivity levels and the average fee per executive search will vary from quarter to quarter, affecting revenue growth and operating margin.

Our Compensation Model

At the consultant level, individuals are largely rewarded for their performance based on a system that directly ties a significant portion of their compensation to the amount of net revenue for which they are responsible. Credit towards the variable portion of a consultant's compensation is earned by generating net revenue for winning and for executing search work. Each quarter, we review and update the expected annual performance of all consultants and accrue variable compensation accordingly. The amount of variable compensation that is accrued for each consultant is based on a tiered payout model. The more net revenue that is generated by the consultant, the higher the percentage credited towards the consultant's variable compensation and thus accrued by our company as expense. The mix of individual consultants who generate the revenue can significantly affect the total amount of compensation expense recorded and thus operating margins. As a result, the variable portion of the compensation expense may fluctuate significantly from quarter to quarter. This bonus is discretionary and is based on company-wide profitability targets approved by the Human Resources and Compensation Committee of the Board of Directors.

In the first quarter of 2008, we changed the deferral arrangement of bonuses for consultants and management globally. The portion of the bonus previously deferred into restricted stock units is now a cash deferral, which will be paid ratably over a three-year period. A premium of 10% was applied to the bonus amount deferred in 2008. The portion of the bonus that will be deferred varies between 10% and 15% depending on the employee's level or position. The compensation expense related to the amounts being deferred is recognized on a graded vesting attribution method over the requisite service period, which for 2009, began on January 1, 2009 and continues through the final payment date, which is three years from the date of the original deferral. For 2009, the deferral date will be in the first quarter of 2010. These amounts are recorded as a component of other non-current liabilities in the Consolidated Balance Sheet. We will continue to grant restricted stock units under other existing programs.

2009 Outlook

We currently are aligning our cost structure for 2009 based on annualized search confirmations reported in the first quarter, which would produce approximately $400 million in net revenues. Our goal is to achieve at least a breakeven operating margin for 2009, excluding restructuring charges.

On April 27, 2009, our Board of Directors approved a second targeted restructuring plan to reduce overall costs and improve efficiencies in our operations. This restructuring plan includes plans to further reduce our global workforce by approximately 8 to 10 percent, resulting in expected additional annualized savings of approximately $20 million. Based on analysis performed to date, we currently expect to record a restructuring charge of between $6 million to $10 million in the second quarter of 2009, which will result in approximately $12.5 million of cash expenditures in 2009.

Results of Operations

We operate our executive search and leadership consulting services in three geographic regions: the Americas, Europe, and Asia Pacific.

For segment purposes, reimbursements of out-of-pocket expenses classified as revenue are reported separately and, therefore, are not included in the net revenue by geographic region. We believe that analyzing trends in revenue before reimbursements (net revenue) and analyzing operating expenses as a percentage of net revenue more appropriately reflect our core operations.

The following table summarizes, for the periods indicated, the results of our operations as a percentage of revenue before reimbursements (net revenue):

                                                        Three Months Ended
                                                            March 31,
                                                       2009           2008
        Revenue:
        Revenue before reimbursements (net revenue)     100.0 %        100.0 %
        Reimbursements                                    5.1            4.4

        Total revenue                                   105.1          104.4

        Operating expenses:
        Salaries and employee benefits                   89.0           72.2
        General and administrative expenses              32.3           20.7
        Reimbursements                                    5.1            4.4
        Restructuring charges                            15.0             -

        Total operating expenses                        141.4           97.3

        Operating income (loss)                         (36.3 )          7.1

        Non-operating income (expense):
        Interest income, net                              0.8            1.3
        Other, net                                       (1.1 )         (0.7 )

        Net non-operating income (expense)               (0.3 )          0.6

        Income (loss) before income taxes               (36.6 )          7.7
        Provision for (benefit from) income taxes       (15.4 )          3.1

        Net income (loss)                               (21.2 )%         4.6 %

Note: Totals and sub-totals may not equal the sum of individual line items due to rounding.

The following table sets forth, for the periods indicated, our revenue and operating income (loss) by segment (in thousands):

                                                             Three Months Ended
                                                                  March 31,
                                                             2009          2008
    Revenue:
    Americas                                               $  46,387     $  77,337
    Europe                                                    28,072        52,866
    Asia Pacific                                              14,682        22,936

    Revenue before reimbursements (net revenue)               89,141       153,139
    Reimbursements                                             4,558         6,802

    Total                                                  $  93,699     $ 159,941


    Operating income (loss):
    Americas                                               $  (7,474 )   $  11,724
    Europe                                                    (2,634 )       5,261
    Asia Pacific                                              (1,067 )       2,722

    Total regions                                            (11,175 )      19,707
    Corporate                                                 (7,843 )      (8,831 )

    Operating income (loss) before restructuring charges     (19,018 )      10,876
    Restructuring charges                                    (13,362 )          -

    Total                                                  $ (32,380 )   $  10,876

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

Total revenue. Consolidated total revenue decreased $66.2 million, or 41.4%, to $93.7 million in 2009 from $159.9 million in 2008. The decrease in total revenue was due primarily to the decrease in revenue before reimbursements (net revenue).

Revenue before reimbursements (net revenue). Consolidated net revenue decreased $64.0 million, or 41.8%, to $89.1 million for the three months ended March 31, 2009 from $153.1 million for the three months ended March 31, 2008. The negative impact of exchange rate fluctuations resulted in approximately 6 percentage points of the decline. Revenue decreased in all the industry practice groups. The number of confirmed executive searches was approximately 38% lower than in the 2008 first quarter and 7% lower compared to the 2008 fourth quarter. There were 403 executive search consultants as of March 31, 2009, compared to 419 as of December 31, 2008 and 408 as of March 31, 2008. Since December 31, 2008, we severed 37 consultants as part of our January 2009 reduction in force and 10 consultants resigned or were terminated. We also promoted 13 of our associates to consultants as part of our annual promotion process, acquired 7 consultants as part our acquisition in Eastern Europe and hired 11 consultants in our faster growing regions or practices. Productivity, as measured by annualized net revenue per consultant, decreased to $0.9 million from $1.5 million in the 2008 first quarter, and the average fee per executive search decreased to $98,900 for the three months ended March 31, 2009 compared to $106,700 for the three months ended March 31, 2008.

Net revenue in the Americas was $46.4 million for the three months ended March 31, 2009, a decrease of $30.9 million, or 40.0%, from $77.3 million in the first quarter of 2008. Revenue declined in all industry groups. Net revenue in Europe was $28.1 million for the three months ended March 31, 2009, a decrease of $24.8 million, or 46.9%, from $52.9 million in the first quarter of 2008. Revenue declined in all industry groups. The negative impact of exchange rate fluctuations resulted in approximately twelve percentage points of the revenue decline in the first quarter of 2009. In Asia Pacific, net revenue was $14.7 million for the three months ended March 31, 2009, a decrease of $8.3 million, or 36.0%, from $22.9 million in the first quarter of 2008. Revenue in the Financial Services and Industrial groups experienced the largest declines. The negative impact of exchange rate fluctuations resulted in approximately eight percentage points of the revenue decline in the first quarter of 2009.

Salaries and employee benefits. Consolidated salaries and employee benefits expense decreased $31.3 million, or 28.3%, to $79.3 million for the three months ended March 31, 2009 from $110.6 million for the three

months ended March 31, 2008. The decrease in salaries and employee benefits expense is primarily a result of a $24.5 million decrease in performance-related compensation expense related to lower net revenue and operating margin expectations for 2009 and a $7.9 million decrease due to the reduction in base compensation primarily related to the reduction in force, partially offset by a $1.1 million increase in compensation expense deferred from prior years.

As a percentage of net revenue, salaries and employee benefits expense was 89.0% in the first quarter of 2009, compared to 72.2% in the first quarter of 2008. Although we have implemented various cost savings initiatives, this percentage increase reflects a more rapid decline in our revenue than the reductions in our cost structure. Excluding a positive impact of $8.4 million due to exchange rate fluctuations, which management believes provides a better comparison of operational performance, consolidated salaries and employee benefits decreased 20.6% in the first quarter of 2009 compared to the same quarter in 2008.

General and administrative expenses. Consolidated general and administrative expenses decreased $2.8 million, or 9.0%, to $28.8 million for the three months ended March 31, 2009 from $31.7 million for the three months ended March 31, 2008. The decrease primarily reflects savings of $5.0 million associated with cost containment initiatives. This decrease was partially offset by an increase in professional service fees of $0.9 million primarily related to a process benchmarking study aimed at achieving operational cost reductions and a charge of $0.7 million associated with exiting our Wall Street office in conjunction with the consolidation of our New York offices.

As a percentage of net revenue, general and administrative expenses were 32.3% in the first quarter of 2009, compared to 20.7% in the first quarter of 2008. Excluding a positive impact of $2.6 million due to exchange rate fluctuations, which management believes provides a better comparison of operational performance, consolidated general and administrative expenses decreased approximately 0.7% in the first quarter of 2009 compared to the same quarter in 2008.

Restructuring charges. In the first quarter of 2009, we recorded restructuring charges of $13.4 million in connection with initiatives to reduce our overall costs and improve operational efficiencies, consisting of $12.5 million of cash charges and $0.9 million of non-cash write-offs. These charges relate to severance and other employee-related costs associated with reductions in our workforce. The workforce reductions affected 197 employees globally, of which 108 were in the Americas, 41 in Europe, 31 in Asia Pacific and 17 in Corporate. By segment, the restructuring charges recorded in the first quarter of 2009 were $6.4 million in the Americas, $5.7 million in Europe, $0.7 million in Asia Pacific and $0.6 million in Corporate.

Operating income (loss). Our consolidated operating loss was $32.4 million for the three months ended March 31, 2009 compared to operating income of $10.9 million for the three months ended March 31, 2008. The operating loss is primarily due to a decrease in net revenue of $64.0 million and restructuring charges of $13.4 million, partially offset by decreases in salaries and employee benefits expense of $31.3 million and general and administrative expenses of $2.8 million. Despite the reductions made to salaries and employee benefits and continued savings in general and administrative expenses, we did not keep pace with the sharp decline in net revenue. This, along with the restructuring charge recorded during the first quarter of 2009, resulted in a loss for the period. Each region was affected in the same way.

The Americas reported an operating loss of $7.5 million for the three months ended March 31, 2009, a decrease of $19.2 million compared to operating income of $11.7 million for the three months ended March 31, 2008. The decrease is due to lower net revenue of $31.0 million offset by a $12.2 million decrease in salaries and employee benefits expense and a $0.4 million increase in general and administrative expenses. The decrease in salaries and employee benefits expense is due to a decrease in performance-related compensation expense due to lower net revenue and operating margin expectations for 2009. The increase in general and administrative expenses is due to a charge of $0.7 million associated with exiting our Wall Street in conjunction with the consolidation of our New York offices offset by lower travel expenses and other cost containment initiatives in the first quarter of 2009 compared to the first quarter of 2008.

Europe reported an operating loss of $2.6 million for the three months ended March 31, 2009, a decrease of $7.9 million compared to operating income of $5.3 million for the three months ended March 31, 2008. The decrease is due to lower net revenue of $24.8 million offset by a $13.9 million decrease in salaries and employee benefits expense and a $3.0 million decrease in general and administrative expenses. The decrease in salaries and employee benefits expense is due to a decrease in performance-related compensation expense due to lower net revenue and operating margin expectations for 2009 and a decrease in fixed salaries related to the reduction in force in January 2009. The decrease in general and administrative expenses is due to lower travel expenses and other cost containment initiatives in the first quarter of 2009 compared to the first quarter of 2008.

Asia Pacific reported an operating loss of $1.1 million for the three months ended March 31, 2009, a decrease of $3.8 million compared to operating income of $2.7 million for the three months ended March 31, 2008. The decrease in operating income is a result of a decrease in revenue of $8.3 million offset by decreases of $3.6 million in salaries and employee benefits expense and $0.9 million in general and administrative expenses. The decrease in salaries and employee benefits expense represents a decrease in performance-related compensation expense due to lower net revenue and operating margin expectations for 2009. The decrease in general and administrative expenses is primarily due to lower travel expenses and other cost containment initiatives in the three months ended March 31, 2009 compared to the three months ended March 31, 2008.

Corporate expenses for the three months ended March 31, 2009 were $7.8 million compared to $8.8 million for the three months ended March 31, 2008. The decrease was primarily the result of a $1.6 million decrease in compensation expense partially offset by a $0.6 million increase in general and administrative expenses. The decrease in compensation-related expense is due to $1.1 million charge recorded in the first quarter of 2008 related to an executive separation and transition agreement and a decrease in performance-related compensation expense due to our lower net revenue and operating margin expectations for 2009. The increase in general and administrative expenses is due to higher fees for professional services of $0.9 million primarily related to a process benchmarking study aimed at achieving operational cost reductions partially offset by cost containment initiatives.

Net non-operating income (expense). Net non-operating expense was $0.2 million for the three months ended March 31, 2009, compared to net non-operating income of $1.0 million for the three months ended March 31, 2008.

Net interest income in the first quarter of 2009 was $0.7 million compared to $2.0 million for the three months ended March 31, 2008. Interest income decreased due to lower interest rates and cash balance during the first quarter of 2009 compared to the first quarter of 2008.

Net other non-operating expense was $0.9 million in the first quarter of 2009, compared to $1.1 million in the first quarter of 2008. Other non-operating expense consists primarily of exchange gains and losses on cash and intercompany balances, which are denominated in currencies other than the functional currency and are not considered permanent in nature.

Income taxes. In the first quarter of 2009, we reported a loss before taxes of $32.6 million and recorded an income tax benefit of $13.7 million, which reflected an effective income tax benefit rate of 42% for the first quarter of 2009.

In the first quarter of 2008, we reported income before taxes of $11.8 million and recorded an income tax provision of $4.8 million, which reflected an effective income tax rate of 40.3% for the first quarter of 2008.

Liquidity and Capital Resources

General. We continually evaluate our liquidity requirements, capital needs and availability of capital resources based on our operating needs. We believe that our existing cash balances together with the funds expected to be generated from operations and funds available under our committed revolving credit facility will be sufficient to finance our operations for the foreseeable future, as well as to finance the cash payments associated with our restructuring charges, stock repurchase program, and cash dividends. Our ability to undertake major acquisitions may depend, in part, on access to additional funds.

We pay the non-deferred portion of annual bonuses in the first quarter following the year to which they relate. Employee bonuses are accrued throughout the year and are based on our performance and the performance of the individual employee.

In the second quarter of 2009, we paid the final earn-out payment of $11.6 million associated with the Highland Partners acquisition and anticipate paying approximately $10 million of payroll taxes related to 2008 bonuses in non-US countries.

We do not have material off-balance sheet arrangements, special purpose entities, trading activities of non-exchange traded contracts or transactions with related parties.

Lines of credit. Since October 2006, we have had a $100 million committed unsecured revolving facility (the "Facility"). There were no borrowings during the quarters ended March 31, 2009 or 2008, or outstanding under the Facility at either March 31, 2009 or December 31, 2008. During the quarter ended March 31, 2008, we were in compliance with the financial covenants of the Facility and no event of default existed.

As a result of the restructuring charge recorded in the first quarter of 2009, we were not in compliance with one of the financial covenants of our committed unsecured revolving facility (the "Facility"). We entered into an amendment (the "Amendment") to the Facility. Among other things, the Amendment amends the pricing grid contained in the definition of "Applicable Rate" set forth in the Credit Agreement to better reflect prevailing market rates applicable to loans extended under the financial tests set forth therein, amends the definition of "Commitment" to reduce the aggregate commitment of the lenders from $100 million to $75 million, waives compliance with one of the financial covenants for the fiscal quarter ending March 31, 2009 and amends one of the financial covenants for the duration of 2009.

Cash and cash equivalents. Cash and cash equivalents at March 31, 2009, December 31, 2008 and March 31, 2008 were $96.4 million, $234.5 million and $142.8 million, respectively.

Cash flows from operating activities. For the three months ended March 31, 2009, cash used in operating activities was $113.2 million, principally reflecting our net loss of $18.9 million and cash bonus payments of approximately $123 million and restructuring payments of $7.6 million during the first quarter of 2009.

For the three months ended March 31, 2008, cash used in operating activities was $112.8 million, principally reflecting our net income less the payment of cash bonuses of approximately $135 million during the first quarter of 2008 and an increase in trade receivables related to higher first quarter revenues.

Cash flows from investing activities. Cash used in investing activities was $13.3 million for the three months ended March 31, 2009 primarily due to capital expenditures of $8.2 million and the Ray & Berndtson Sp z o.o acquisition costs of $3.8 million.

. . .