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 17%, 48% and 35% of the Company's gross margin, respectively, for the six months ended June 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 six months ended June 30, 2009. Hudson Europe operates from 41 offices in 14 countries, with 40% of its gross margin generated in the U.K. during the six months ended June 30, 2009. Hudson Asia Pacific operates from 19 offices in 4 countries, with 68% of its gross margin generated in Australia during the six months ended June 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, such as 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, most very significant. By the end of 2008, virtually all of our markets experienced substantial 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 operations. Economic conditions have continued to decline during the first half of 2009. These economic conditions negatively affected both our temporary contracting and permanent recruitment business lines. With respect to temporary contracting, we experienced that clients discontinued non-essential projects and used in-house staff instead of temporary personnel. With respect to 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 and six months ended June 30, 2009 were below the results of the prior year periods in all three regions in which the Company operates. The Company expects that the current economic conditions will continue to negatively impact our operating results for at least the remainder of 2009 and they may extend into 2010. Therefore, historical results may not be indicative of future results. See section "Liquidity Outlook" for additional information.

Goodwill Impairment Charges

Under Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets" ("SFAS No. 142"), 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 with our clients in the financial services sectors 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 the Company's stock price, which declined approximately fifty percent as of December 31, 2008 as compared to the stock price as of October 1, 2008, as well as the projected future operating results. 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. The Company estimated the fair value of the Company's reporting units with the assistance of a valuation firm using 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. In connection with its testing, management also determined that certain intangible and other long-term assets were impaired and recorded an additional impairment charge 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 the 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 TKA acquisition, which was recorded as goodwill at June 30, 2009. The Company updated its step one and step two procedures for the China reporting unit as of June 30, and concluded that the entire amount of recorded goodwill was impaired. As a result, the Company 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.

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 six months
ended June 30, 2009 and 2008:



                                                      Three Months Ended June 30,        Changes
$ in thousands                                         2009                 2008          Amount
Revenue                                            $     173,848        $     303,128   $ (129,280 )

Gross margin                                              64,884              134,403      (69,519 )

Selling, general and administrative expenses (a)          72,169              126,539      (54,370 )
Business reorganization and integration expenses           3,562                1,024        2,538
Goodwill and other impairment charges                      1,549                   -         1,549

Operating (loss) income                                  (12,396 )              6,840      (19,236 )

(Loss) income from continuing operations                 (15,499 )              1,858      (17,357 )

Net (loss) income                                  $     (17,771 )      $       4,956   $  (22,727 )

                                                      Six Months Ended June 30,       Changes
$ in thousands                                          2009               2008        Amount
Revenue                                             $     338,539        $ 596,159   $ (257,620 )

Gross margin                                              126,888          257,580     (130,692 )

Selling, general and administrative expenses (a)          147,658          246,760      (99,102 )
Business reorganization and integration expenses            9,401            2,216        7,185
Goodwill and other impairment charges                       1,549               -         1,549

Operating (loss) income                                   (31,720 )          8,604      (40,324 )

(Loss) income from continuing operations                  (30,333 )          2,460      (32,793 )

Net (loss) income                                   $     (23,330 )      $   6,320   $  (29,650 )

(a) Selling, general and administrative expenses include depreciation and amortization expenses of $2.8 million and $3.5 million, respectively, for the three months ended June 30, 2009 and 2008 and $6.6 million and $7.4 million, respectively, for the six months ended June 30, 2009 and 2008.

• Revenue was $174 million for the three months ended June 30, 2009, as compared to $303 million for the same period of 2008, a decrease of $129 million, or 43%. Contracting revenue declined $78 million or 37% and permanent recruitment revenue declined $44 million or 61% for the three months ended June 30, 2009, compared to the same period of 2008. Revenue was $339 million for the six months ended June 30, 2009, as compared to $596 million for the same period of 2008, a decrease of $258 million, or 43%. Contracting revenue declined $162 million or 39% and permanent recruitment revenue declined $81 million or 59% for the six months ended June 30, 2009, compared to the same period of 2008.

• Gross margin was $65 million for the three months ended June 30, 2009, as compared to $134 million for the same period of 2008, a decrease of approximately $69 million or 52%. Permanent recruitment gross margin declined $45 million or 62% and contracting gross margin declined $20 million or 44% for the three months ended June 30, 2009, compared to the same period of 2008. Gross margin was $127 million for the six months ended June 30, 2009, as compared to $258 million for the same period of 2008, a decrease of $131 million or 51%. Permanent recruitment gross margin declined $83 million or 61% and contracting gross margin declined $39 million or 44% for the six months ended June 30, 2009, compared to the same period of 2008.

• Selling, general and administrative expenses were $72 million for the three months ended June 30, 2009, as compared to $127 million for the same period of 2008, a decrease of $54 million, or 43%. Selling, general and administrative expenses were $148 million for the six months ended June 30, 2009, as compared to $247 million for the same period of 2008, a decrease of $99 million, or 40%. Selling, general and administrative expenses decreased primarily due to the reductions in support costs achieved through reorganization actions and closure of non-core businesses and facilities, lower commissions associated with the lower revenue and reductions in management costs.

• Goodwill and other impairment charges of $1.5 million were included in the three and six months results ended June 30, 2009.

The Company implemented in early 2008 a restructuring program in the U.S. and the U.K. to streamline its overhead as a result of recent divestitures. It expanded the program in the second half of 2008 as economic conditions worsened. In the first quarter of 2009, the Company's Board of Directors approved a plan ("2009 Plan") and the Company initiated additional actions to counteract the ongoing declines in revenue. In the second quarter of 2009, the Company expanded the restructuring plan due to an expectation that business conditions caused by the economic contraction would persist. On April 24, 2009 and May 1, 2009, the Company's Board of Directors approved further restructuring actions, which allow the total cost of the 2009 Plan to be increased to $16 million. The Company expects these actions to produce cost savings in 2009 and improve its long-term profitability. We incurred approximately $9 million of expenses in connection with the 2009 plan during the six months ended June 30, 2009. The Company expects to substantially 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 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 will generate long-term profitability. We continue to execute this strategy through a combination of delivery of higher margin services, investments, acquisitions, divestitures and cost restructuring. In doing so, we have acquired and integrated businesses to achieve synergies, sold or discontinued non-core businesses, streamlined support operations and reduced costs to achieve the Company's long-term profitability goals. We will continue to review opportunities to expand our operations in specialized professional recruitment.

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 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 (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 June 30,            Six Months Ended June 30,
$ in thousands                                  2009                 2008              2009               2008

(Loss) income from continuing operations   $      (15,499 )      $      1,858      $     (30,333 )      $   2,460
Adjustments to (loss) income from
continuing operations
Provision (benefit) for income taxes                2,975               6,281             (1,085 )          8,060
Other income, net                                     (54 )            (1,095 )             (674 )         (1,358 )
Interest expense (income), net                        182                (204 )              372             (558 )
Depreciation and amortization                       2,840               3,537              6,628            7,362

Total adjustments from (loss) income
from continuing operations to EBITDA                5,943               8,519              5,241           13,506

EBITDA                                     $       (9,556 )      $     10,377      $     (25,092 )      $  15,966

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 six months ended June 30, 2009 and 2008 (dollars in thousands).



                                              For The Three Months Ended June 30,             For The Six Months Ended June 30,
                                                 2009                     2008                  2009                     2008
Revenue:
Hudson Americas                            $         43,133         $         71,507      $         87,155         $        154,769
Hudson Europe                                        68,187                  115,696               134,116                  226,028
Hudson Asia Pacific                                  62,528                  115,925               117,268                  215,362

Total                                      $        173,848         $        303,128      $        338,539         $        596,159

Gross margin:
Hudson Americas                            $         10,512         $         20,186      $         21,482         $         42,940
Hudson Europe                                        31,280                   63,326                61,584                  120,883
Hudson Asia Pacific                                  23,092                   50,891                43,822                   93,757

Total                                      $         64,884         $        134,403      $        126,888         $        257,580

Operating (loss) income:
Hudson Americas                            $         (2,547 )       $            318      $         (8,339 )       $         (1,090 )
Hudson Europe                                        (2,547 )                  7,762                (7,768 )                 12,195
Hudson Asia Pacific                                  (2,066 )                  8,027                (5,566 )                 12,748
Corporate expenses                                   (5,236 )                 (9,267 )             (10,047 )                (15,249 )

Total                                      $        (12,396 )       $          6,840      $        (31,720 )       $          8,604

(Loss) income from continuing operations   $        (15,499 )       $          1,858      $        (30,333 )       $          2,460

Net (loss) income                          $        (17,771 )       $          4,956      $        (23,330 )       $          6,320

TEMPORARY CONTRACTING DATA (a):
Temporary contracting revenue:
Hudson Americas                            $         41,875         $         67,798      $         84,091         $        147,310
Hudson Europe                                        43,081                   62,956                85,034                  126,000
Hudson Asia Pacific                                  45,038                   76,758                84,800                  142,309

Total                                      $        129,994         $        207,512      $        253,925         $        415,619

Direct costs of temporary contracting:
Hudson Americas                            $         32,607         $         51,216      $         65,652         $        111,649
Hudson Europe                                        34,051                   48,640                66,439                   97,182
Hudson Asia Pacific                                  38,289                   62,809                71,375                  116,930

Total                                      $        104,947         $        162,665      $        203,466         $        325,761

Temporary contracting gross margin:
Hudson Americas                            $          9,268         $         16,582      $         18,439         $         35,661
Hudson Europe                                         9,030                   14,316                18,595                   28,818
Hudson Asia Pacific                                   6,749                   13,949                13,425                   25,379

Total                                      $         25,047         $         44,847      $         50,459         $         89,858

Gross margin as a percent of revenue:
Hudson Americas                                        22.1 %                   24.5 %                21.9 %                   24.2 %
Hudson Europe                                          21.0 %                   22.7 %                21.9 %                   22.9 %
Hudson Asia Pacific                                    15.0 %                   18.2 %                15.8 %                   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.

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. The Company uses constant currency to depict the current period results at the exchange rates of the prior year. 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 and six months ended June 30, 2009 (dollars in thousands).

                                                             For The Three Months Ended June 30,                                          For The Six Months Ended June 30,
                                                                  2009                                  2008                                  2009                                  2008
                                                                  Currency          Constant                                                  Currency          Constant
                                             As reported         translation        currency         As reported         As reported         translation        currency         As reported
Revenue:
Hudson Americas                             $      43,133       $          69       $  43,202       $      71,507       $      87,155       $         181       $  87,336       $     154,769
Hudson Europe                                      68,187              15,268          83,455             115,696             134,116              34,023         168,139             226,028
Hudson Asia Pacific                                62,528              14,082          76,610             115,925             117,268              33,550         150,818             215,362

Total                                             173,848              29,419         203,267             303,128             338,539              67,754         406,293             596,159


Direct costs:
Hudson Americas                                    32,621                   9          32,630              51,321              65,673                  25          65,698             111,829
. . .