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; increased collectibility risk due to financial performance of our clients; 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 and consulting engagements, higher revenue 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 consulting 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 365 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, confirmation trends, consultant productivity, and average revenue per executive search.

Revenue growth is driven by a combination of an increase in executive search wins and leadership consulting projects, higher consultant productivity, higher average revenue per search or project and the hiring of additional consultants. 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 or projects completed, productivity levels and the average revenue per executive search will vary from quarter to quarter, affecting revenue growth and operating margin.

Our Compensation Model

At the consultant level, individuals are 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 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.

2009 Outlook

We expect fourth quarter 2009 net revenue between $103 million and $108 million, resulting in 2009 net revenue between $389 million and $394 million. With the changes we have made to improve our operating cost structure and excluding restructuring and impairment charges, we believe breakeven operating income in 2009 is achievable at the high end of our revenue guidance. Net income (loss) and earnings (loss) per share in 2009 are expected to reflect a full-year effective tax benefit rate between 23 percent and 26 percent, but may be impacted by country-level results and by discrete items that require immediate recognition in a particular quarter.

Results of Operations

We operate our executive search and leadership consulting services in three geographic regions: the Americas; Europe, which includes the Middle East and Africa; and Asia Pacific.

For segment purposes, reimbursements of out-of-pocket expenses classified as revenue and restructuring and impairment charges are reported separately and, therefore, are not included in the results of each geographic region. We believe that analyzing trends in revenue before reimbursements (net revenue), analyzing operating expenses as a percentage of net revenue, and operating income (loss) excluding restructuring and impairment charges more appropriately reflects our core operations. By segment, the restructuring and impairment charges recorded in the first nine months of 2009 were $13.0 million in the Americas, $9.1 million in Europe, $2.2 million in Asia Pacific and $1.1 million in Corporate.

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         Nine Months Ended
                                                     September 30,               September 30
                                                  2009           2008         2009          2008

Revenue:
Revenue before reimbursements (net revenue)        100.0 %        100.0 %      100.0 %      100.0 %
Reimbursements                                       4.6            4.4          4.8          4.6

Total revenue                                      104.6          104.4        104.8        104.6

Operating expenses:
Salaries and employee benefits                      65.9           68.6         74.2         70.0
General and administrative expenses                 27.6           18.2         29.9         19.6
Reimbursements                                       4.6            4.4          4.8          4.6
Restructuring and impairment charges                  -              -           8.9           -

Total operating expenses                            98.1           91.3        117.9         94.1

Operating income (loss)                              6.5           13.2        (13.0 )       10.5


Non-operating income (expense):
Interest income, net                                 0.1            0.7          0.3          0.9
Other, net                                           0.5            0.3         (1.4 )        0.1

Net non-operating income (expense)                   0.5            1.1         (1.1 )        0.9


Income (loss) before income taxes                    7.0           14.2        (14.1 )       11.4
Provision for (benefit from) income taxes            2.7            5.4         (3.5 )        4.4

Net income (loss)                                    4.3 %          8.8 %      (10.6 )%       7.0 %

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            Nine Months Ended
                                                                           September 30,                 September 30,
                                                                        2009           2008           2009           2008

Revenue:
Americas                                                              $  50,949      $  81,844      $ 145,669      $ 246,183
Europe                                                                   31,513         49,906         87,075        156,116
Asia Pacific                                                             21,061         26,568         53,035         78,676

Revenue before reimbursements (net revenue)                             103,523        158,318        285,779        480,975
Reimbursements                                                            4,747          7,009         13,812         22,108

Total                                                                 $ 108,270      $ 165,327      $ 299,591      $ 503,083

Operating income (loss):
Americas                                                              $   8,578      $  13,989      $   6,211      $  38,271
Europe                                                                    2,093          7,931            885         20,872
Asia Pacific                                                              4,303          5,443          5,453         14,784

Total regions                                                            14,974         27,363         12,549         73,927
Corporate                                                                (8,258 )       (6,505 )      (24,327 )      (23,526 )

Operating income (loss) before restructuring and impairment charges       6,716         20,858        (11,778 )       50,401
Restructuring and impairment charges                                         -              -         (25,439 )           -

Total                                                                 $   6,716      $  20,858      $ (37,217 )    $  50,401

Three Months Ended September 30, 2009 Compared to the Three Months Ended September 30, 2008

Total revenue. Consolidated total revenue decreased $57.1 million, or 34.5%, to $108.3 million in 2009 from $165.3 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 $54.8 million, or 34.6%, to $103.5 million for the three months ended September 30, 2009 from $158.3 million for the three months ended September 30, 2008. The negative impact of exchange rate fluctuations resulted in approximately 2 percentage points of the decline. Net revenue declined in all regions and industry groups. The number of confirmed executive searches decreased 16.9% compared to the third quarter of 2008. The number of consultants was 365 as of September 30, 2009 compared to 416 as of September 30, 2008. Productivity, as measured by annualized net revenue per consultant, was $1.1 million in the third quarter of 2009 compared to $1.5 million in the third quarter of 2008, and average revenue per executive search was $97,300 in the 2009 third quarter compared to $127,200 in the 2008 third quarter.

Net revenue in the Americas was $50.9 million for the three months ended September 30, 2009, a decrease of $30.9 million, or 37.7%, from $81.8 million in the third quarter of 2008. Net revenue in Europe was $31.5 million for the three months ended September 30, 2009, a decrease of $18.4 million, or 36.9%, from $49.9 million in the third quarter of 2008. The negative impact of exchange rate fluctuations resulted in approximately 6 percentage points of the net revenue decline in the third quarter of 2009. In Asia Pacific, net revenue was $21.1 million for the three months ended September 30, 2009, a decrease of $5.5 million, or 20.7%, from $26.6 million in the third quarter of 2008. The negative impact of exchange rate fluctuations resulted in approximately 2 percentage points of the net revenue decline in the third quarter of 2009.

Salaries and employee benefits. Consolidated salaries and employee benefits expense decreased $40.4 million, or 37.2%, to $68.2 million for the three months ended September 30, 2009 from $108.6 million for the three months ended September 30, 2008. The decrease in salaries and employee benefits expense is primarily a result of a $23.8 million decrease in performance-related compensation expense related to lower net revenue and operating margin expectations for 2009 and a $16.6 million decrease due to the reduction in base compensation primarily related to the two workforce reductions and a decrease in severance expense. At September 30, 2009 we had 1,395 total employees, down 20.6% compared to 1,756 total employees as of September 30, 2008.

As a percentage of net revenue, salaries and employee benefits expense was 65.9% in the third quarter of 2009, compared to 68.6% in the third quarter of 2008. Excluding a positive impact of $2.3 million due to exchange rate fluctuations, which we believe provides a better comparison of operational performance, consolidated salaries and employee benefits expense decreased by approximately 35% versus 37% as reported in the third quarter of 2009 compared to the same quarter in 2008.

General and administrative expenses. Consolidated general and administrative expenses decreased $0.2 million, or 0.8%, to $28.6 million for the three months ended September 30, 2009 from $28.8 million for the three months ended September 30, 2008. The

decrease primarily reflects savings of $3.8 million associated with cost containment initiatives including decreased travel and entertainment expenses and other operating and infrastructure expenses. The savings were offset by higher fees for professional services of $3.6 million, including $2.4 million related to a process improvement project aimed at increasing operational effectiveness and efficiency and $0.7 million of other professional services expenses. During the third quarter of 2009, we wrote off $0.8 million of costs related to a software development project of which $0.3 million was incurred during the third quarter of 2008.

As a percentage of net revenue, general and administrative expenses were 27.6% in the third quarter of 2009 compared to 18.2% in the third quarter of 2008. This increase was due to the sharp decline in net revenue in the third quarter of 2009 compared to the third quarter of 2008. Excluding a positive impact of $1.0 million due to exchange rate fluctuations, which we believe provides a better comparison of operational performance, consolidated general and administrative expenses increased by approximately 3% versus the decrease of 1% as reported in the third quarter of 2009 compared to the same quarter in 2008.

Operating income. Our consolidated operating income was $6.7 million for the three months ended September 30, 2009 compared to operating income of $20.9 million for the three months ended September 30, 2008. The decrease in operating income is primarily due to a decrease in net revenue of $54.8 million, offset by decreases in salaries and employee benefits expense of $40.4 million and general and administrative expenses of $0.2 million.

Each region experienced significant declines in net revenue partially offset by decreases in salary and employee benefits expense and general and administrative expenses. The decrease in salaries and employee benefits expense is due to a decrease in performance-related compensation expense related to lower net revenue and operating margin expectations for 2009 and a decrease in fixed salaries related to the workforce reductions in 2009 and lower search support staff costs. The slight decrease in general and administrative expenses is due to cost containment initiatives including a reduction in travel expenses in the third quarter of 2009 compared to the third quarter of 2008, partially offset by an increase in fees for professional services primarily related to a process improvement project aimed at increasing operational effectiveness and efficiency.

In the Americas, operating income for the three months ended September 30, 2009 decreased $5.4 million to $8.6 million from $14.0 million for the three months ended September 30, 2008. The decrease is due to lower net revenue of $30.9 million offset by a $23.9 million decrease in salaries and employee benefits expense and a $1.6 million decrease in general and administrative expenses.

In Europe, operating income for the three months ended September 30, 2009 decreased $5.8 million to $2.1 million from $7.9 million for the three months ended September 30, 2008. The decrease is due to lower net revenue of $18.4 million offset by a $12.0 million decrease in salaries and employee benefits expense and a $0.6 million decrease in general and administrative expenses.

In Asia Pacific, operating income for the three months ended September 30, 2009 decreased $1.1 million to $4.3 million from $5.4 million for the three months ended September 30, 2008. The decrease is due to lower net revenue of $5.5 million offset by a $3.5 million decrease in salaries and employee benefits expense and a $0.9 million decrease in general and administrative expenses.

Corporate expenses for the three months ended September 30, 2009 increased $1.8 million or 26.9% to $8.3 million from $6.5 million for the three months ended September 30, 2008. Compensation expense decreased by $1.0 million primarily due to the reduction in performance-related compensation expense related to lower net revenue and operating margin expectations for 2009. The savings were offset by a $0.5 million write-off of capitalized salaries expense related to a software development project. General and administrative expenses increased $2.8 million due to due to higher professional service fees of $3.1 million, partially offset by $0.3 million of cost containment initiatives. The increase in professional service fees is primarily due to $2.4 million incurred in the three months ended September 30, 2009 due to a process improvement project aimed at increasing operational effectiveness and efficiency and $0.2 million of other professional services expenses. Additionally, we wrote off $0.8 million of costs related to a software development project, of which $0.3 million was incurred during the third quarter of 2008.

Net non-operating income. Net non-operating income was $0.5 million for the three months ended September 30, 2009 compared to net non-operating income of $1.7 million for the three months ended September 30, 2008.

Net interest income was $0.1 million in the third quarter of 2009 compared to $1.2 million in the third quarter of 2008. Interest income decreased due to a lower cash balance and lower interest rates during the third quarter of 2009 compared to the third quarter of 2008.

Net other non-operating income was $0.5 million for the three months ended September 30, 2009 and September 30, 2008, respectively. Other non-operating income primarily consists of realized and unrealized gains and losses on our cost and equity method investments and 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 third quarter of 2009, we reported income before taxes of $7.2 million and recorded an income tax provision of $2.8 million. Our effective income tax rate for the third quarter of 2009 was 39.2%, which reflected an adjusted full-year expected annualized tax benefit rate of approximately 26 percent.

In the third quarter of 2008, we reported income before taxes of $22.5 million and recorded an income tax provision of $8.6 million. Our effective income tax rate for the third quarter of 2008 was 38.0%.

Nine Months Ended September 30, 2009 Compared to the Nine Months Ended September 30, 2008

Total revenue. Consolidated total revenue decreased $203.5 million, or 40.4%, to $299.6 million in 2009 from $503.1 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 $195.2 million, or 40.6%, to $285.8 million for the nine months ended September 30, 2009 from $481.0 million for the nine months ended September 30, 2008. The negative impact of exchange rate fluctuations resulted in approximately 4 percentage points of the decline. Net revenue declined in all regions and industry groups. The number of confirmed executive searches decreased 31.4% compared to the nine months ended 2008. The number of consultants decreased to 365 as of September 30, 2009 compared to 416 as of September 30, 2008. Productivity, as measured by annualized net revenue per consultant, decreased to $1.0 million in the nine months ended 2009 from $1.6 million in the nine months ended 2008, and average revenue per executive search was $99,500 for the nine months ended September 30, 2009 compared to $118,200 in for the nine months ended September 30, 2008.

Net revenue in the Americas was $145.7 million for the nine months ended September 30, 2009, a decrease of $100.5 million, or 40.8%, from $246.2 million for the nine months ended September 30, 2008. Net revenue in Europe was $87.1 million for the nine months ended September 30, 2009, a decrease of $69.0 million, or 44.2%, from $156.1 million for the nine months ended September 30, 2008. The negative impact of exchange rate fluctuations resulted in approximately 9 percentage points of the revenue decline for the nine months ended 2009. In Asia Pacific, net revenue was $53.0 million for the nine months ended September 30, 2009, a decrease of $25.6 million, or 32.6%, from $78.7 million for the nine months ended September 30, 2008. The negative impact of exchange rate fluctuations resulted in approximately 5 percentage points of the revenue decline for the nine months ended September 30, 2009.

Salaries and employee benefits. Consolidated salaries and employee benefits expense decreased $124.4 million, or 37.0%, to $212.1 million for the nine months ended September 30, 2009 from $336.5 million for the nine months ended September 30, 2008. The decrease in salaries and employee benefits expense is primarily a result of an $89.5 million decrease in performance-related compensation expense related to lower net revenue and operating margin expectations for 2009 and a $34.9 million decrease due to the reduction in fixed compensation primarily related to the two workforce reductions and a decrease in severance expense. At September 30, 2009 we had 1,395 total employees, down 20.6% compared to 1,756 total employees as of September 30, 2008.

As a percentage of net revenue, salaries and employee benefits expense was 74.2% in the first nine months of 2009, compared to 70.0% in the first nine months 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 $15.0 million due to exchange rate fluctuations, which we believe provides a better comparison of operational performance, consolidated salaries and employee benefits expense decreased by approximately 33% versus 37% as reported in the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008.

General and administrative expenses. Consolidated general and administrative expenses decreased $8.6 million, or 9.1%, to $85.4 million for the nine months ended September 30, 2009 from $94.0 million for the nine months ended September 30, 2008. The decrease primarily reflects savings of $12.9 million associated with cost containment initiatives and a decrease in infrastructure and other operating expenses. The decrease was partially offset by higher fees for professional services of $4.3 million primarily related to $3.0 million for a process improvement project aimed at increasing operational effectiveness and efficiency. Additionally, we wrote-off $0.8 million of costs related to a software development project, of which $0.3 million was incurred during the third quarter of 2008, and $0.4 million of software and maintenance agreement costs associated with VisualCV, Inc. during the nine months ended September 30, 2009.

As a percentage of net revenue, general and administrative expenses were 29.9% in the first nine months of 2009, compared to 19.6% in the first nine months of 2008. Excluding a positive impact of $5.6 million due to exchange rate fluctuations, which we believe provides a better comparison of operational performance, consolidated general and administrative expenses decreased by approximately 3% versus 9% as reported in the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008.

Restructuring and impairment charges. For the nine months ended September 30, 2009, we recorded restructuring charges of $21.6 million in connection with . . .