Hudson Global, Inc. - Annual Report: 2008 (Form 10-K)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark one)

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008

OR

COMMISSION FILE NUMBER 000-50129

HUDSON HIGHLAND GROUP, INC.

(Exact Name of Registrant as Specified in its Charter)

560 Lexington Avenue, New York, New York 10022

(Address of Principal Executive Offices)

(212) 351-7300

(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15 (d) of the Securities Act.    Yes  ¨    No  x

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨    Smaller reporting company  ¨

Indicate by checkmark whether the Registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes  ¨    No  x

The aggregate market value of the voting common stock held by non-affiliates of the Registrant was approximately $265,594,000 as of June 30, 2008.

The number of shares of Common Stock, $.001 par value, outstanding as of January 31, 2009 was 25,175,914.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2009 Annual Meeting of Stockholders are incorporated by reference into Part III.

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PART I

Hudson Highland Group, Inc. (the “Company” or “Hudson”, “we”, “us” and “our”) is one of the world’s largest specialized professional staffing and talent management solutions providers. The Company provides professional staffing services on a permanent and contract consulting basis and a range of talent management services to businesses operating in many industries. The Company helps its clients in recruiting and developing employees for professional-level functional and managerial positions.

The Company is organized into three reportable segments, Hudson Americas, Hudson Europe and Hudson Asia Pacific. These reportable segments constituted approximately 16%, 47% and 37% of the Company’s gross margin, respectively, for the year ended December 31, 2008. The Hudson regional businesses were historically the combination of 54 acquisitions made between 1999 and 2001, which became the eResourcing division of Monster Worldwide, Inc. (“Monster”), formerly TMP Worldwide, Inc. Some of the Company’s constituent businesses have operated for more than 20 years. On March 31, 2003, Monster distributed all of the outstanding shares of the Company to its stockholders of record on March 14, 2003 (the “Distribution”). Since the Distribution, the Company has operated as an independent publicly held company, adding one mid-sized and eight smaller acquisitions, and divesting or reorganizing a number of business units after determining that those businesses did not fit the Company’s long-term strategy.

Hudson’s three 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 candidates with 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.

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

Hudson Americas operates from 32 offices in the United States and Canada, with 96% of its 2008 gross margin generated in the United States. Hudson Europe operates from 43 offices in 15 countries, with 44% of its 2008 gross margin coming from the United Kingdom operations. Hudson Asia Pacific operates from 20 offices in 5 countries, with 64% of its 2008 gross margin stemming from Australia.

Corporate expenses are reported separately from the three reportable segments and pertain to certain functions, such as executive management, corporate governance, human resources, accounting, administration, tax and treasury that are not attributable to the reportable segments.

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DISCONTINUED OPERATIONS

In the second quarter of 2008, the Company completed the sale of substantially all of the assets of Balance Public Management B.V. (“BPM”), a division of Balance Ervaring op Projectbasis, B.V. (“Balance”), a subsidiary of the Company, which was part of the Hudson Europe regional business. In the first quarter of 2008, the Company completed the sale of substantially all of the assets of its Hudson Americas energy, engineering and technical staffing division (“ETS”), which was part of the Hudson Americas regional business.

In the fourth quarter of 2007, the Company sold its Netherlands reintegration subsidiary, Hudson Human Capital Solutions B.V. (“HHCS”), which was part of the Hudson Europe regional business, and its Australian blue-collar market’s Trade & Industrial subsidiary (“T&I”), which was part of the Hudson Asia Pacific regional business.

In the fourth quarter of 2006, the Company sold its Highland Partners (“Highland”) executive search business, which was a separate reportable segment of the Company.

As the result of the sales, BPM, ETS, HHCS, T&I and Highland operations have been accounted for as discontinued operations. Accordingly, amounts in the Consolidated Financial Statements and related notes for all historical periods have been restated to reflect these operations as discontinued operations.

SALES AND MARKETING

Each of Hudson’s regional businesses maintains a sales force composed of business development specialists that is aligned along functional practice areas or industry sector groups as appropriate for the market. These business development specialists at times receive incentives for cross-selling services with other practices and business units as the client need arises. In addition, each region has a business liaison for international sales opportunities that arise for global recruitment and/or talent management needs from a client or prospect.

The Company’s global marketing and communications function is responsible for brand and marketing strategy, client and candidate lead generation campaigns, public relations and corporate/employee communications. This team closely coordinates with the operational leadership and regional/practice/business unit marketing and sales teams to generate leads, support sales efforts and build a strong brand reputation—both in the external market and within the organization.

We use three principal channels for marketing our services and promoting our brand: (1) in the United Kingdom, Australia, New Zealand, and other countries where it is an accepted practice, we use client-paid and Company-paid advertising for vacant positions; (2) public relations to promote our experts and offerings, and original research on business management and human capital issues of particular relevance to senior business managers; and (3) the Internet, both for promoting the Company’s services to clients and attracting, assisting and managing candidates.

CLIENTS

The Company’s clients include small to large-sized corporations and government agencies. No one client accounted for more than 5% of total annual revenue in 2008. At December 31, 2008, there were approximately 500 Hudson Americas clients, 5,200 Hudson Europe clients and 2,700 Hudson Asia Pacific clients.

COMPETITION

The markets for the Company’s services and products are highly competitive. There are few barriers to entry, so new entrants occur frequently, resulting in considerable market fragmentation. Companies in this industry compete on price, service quality, new capabilities and technologies, client attraction methods, and speed of completing assignments.

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EMPLOYEES

The Company employs approximately 3,100 people worldwide. In most jurisdictions, our employees are not represented by a labor union or a collective bargaining agreement. The Company regards its relationships with its employees as satisfactory.

SEGMENT AND GEOGRAPHIC DATA

Financial information concerning the Company’s reportable segments and geographic areas of operation is included in Note 16 in the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K.

AVAILABLE INFORMATION

We maintain a Web site with the address www.hudson.com. We are not including the information contained on our Web site as part of, or incorporating it by reference into, this report. Through our Web site, we make available free of charge (other than an investor’s own Internet access charges) our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to these reports in a timely manner after we provide them to the Securities and Exchange Commission.

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The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks occur, our business, financial condition, operating results, and cash flows could be materially adversely affected.

Our operations will be affected by global economic fluctuations, including the current global economic downturn.

Demand for our services fluctuates with changes in economic conditions of the markets in which we operate. Those conditions include slower employment growth, or reductions in employment, as is being experienced at the present time, as a result of the global recession. Because we operate from many offices with fixed overhead, we have only limited flexibility to reduce expenses during economic downturns. Further, we may face increased pricing pressures during these times. For example, during 2008, employers in most of our operating regions reduced their overall workforce to reflect the reduced demand for their products and services. The economic slowdown that had been evident primarily with our clients in the financial services sector in the U.S. and the U.K. accelerated in the second half of 2008 and spread rapidly to other industries and countries. By the fourth quarter of 2006, virtually all of our markets showed declines in their gross domestic product. At the same time, 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. We expect weak global economic conditions to persist throughout 2009, resulting in a further reduction in demand for our services, which could have a material adverse effect on our business, financial condition and operating results. We also expect the stronger U.S. dollar to persist in 2009, at least against some of its major non-U.S. currencies.

Our revenue can vary because our clients can terminate their relationship with us at any time with limited or no penalty.

We provide professional mid-market staffing services on a temporary assignment-by-assignment basis, which clients can generally terminate at any time or reduce their level of use when compared to prior periods. Our professional recruitment business is also significantly affected by our clients hiring needs and their views of their future prospects. Clients may, on very short notice, reduce or postpone their recruiting assignments with us and therefore, affect demand for our services. Given the current economic conditions, many companies may decrease their spending on projects and staffing, including our clients who may terminate or reduce their level of services with us, which could have a material adverse effect on our business, financial condition and operating results.

We face risks in collecting our accounts receivable.

In virtually all of our businesses, we invoice customers after providing services, which creates accounts receivable. Delays or defaults in payments owed to us could have a significant adverse impact on our financial condition and results of operations. Factors that could cause a delay or default include, but are not limited to, business failures, turmoil in the financial and credit markets, and global economic conditions. Given current economic conditions, we are particularly susceptible to delays or defaults in payment by our customers.

If we are unable to implement effectively our cost reduction initiatives, including outsourcing, our ability to compete could be adversely impacted and our regional operations could be disrupted.

We are undertaking a series of cost reduction initiatives. In 2008, we initiated a number of structural cost reduction and productivity improvement initiatives in our operations to reduce costs and improve profitability. Our future profitability depends upon our continued success in implementing these restructuring initiatives and

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achieving anticipated cost reductions. The impact of these cost-reduction actions on our revenue, operating results and cash flows may be influenced by factors including, our ability to successfully complete these ongoing efforts and our ability to generate the level of cost savings we expect or that are necessary to enable us to effectively compete in the staffing industry.

On January 30, 2009, we entered into an outsourcing agreement with a company located in India for certain back-office processes currently performed in Australia and New Zealand. The processes being outsourced are payroll, invoicing, accounts payable, accounts receivable and transactional accounting. The efficient operation of that regional business is dependent on the stability of the Indian political environment. Substantially all of the specially-trained employees at the Indian company are Indian nationals. Because substantially all of the named operations will be transferred, it may not be possible to replace the Indian-based employees in another location, should operations at this Indian company be disrupted. This could impact the operational efficiency of the regional business.

We have had periods of negative cash flows and operating losses that may reoccur in the future.

We have experienced negative cash flows and shown operating and net losses in the past. For example, our cash flows from operations were negative in two quarters during 2008 and we had a net loss from continuing operations of $77.4 million for the year ended December 31, 2008, which was primarily attributable to a $67.1 million non-cash charge for impairment related to goodwill, intangibles and other assets. We cannot provide any assurance that we will have positive cash flows or operating profitability in the future, particularly to the extent the global economy remains in a recession. If our revenue declines or if operating expenses exceed our expectations, we may not be profitable and may not generate positive operating cash flows.

We have limited borrowing availability under our credit facility, which may negatively impact our liquidity.

Extensions of credit under our credit facility are permitted based on a borrowing base, which is an agreed percentage of eligible accounts receivable, less required reserves, letters of credit and outstanding borrowings. As of December 31, 2008, we had $5.3 million of outstanding borrowings and $5.4 million of letters of credit issued under our credit facility and we were able to borrow an additional $19.7 million under our credit facility. As of February 16, 2009, we had $11.2 million of outstanding borrowings and $5.2 million of letters of credit issued under our credit facility and we were able to borrow an additional $2.3 million under our credit facility, when the receivables of January 2009 are taken into account.

Our ability to borrow under the credit facility is tied to a borrowing base of our eligible accounts receivable. If the amount or quality of our accounts receivable deteriorates, then our ability to borrow under the credit facility will be directly affected. We expect weak global economic conditions to persist throughout 2009, resulting in a reduction in demand for our services, which may reduce our eligible accounts receivable and thus our borrowing capacity under the credit facility. Our lender periodically audits our accounts receivable to determine, among other things, borrowing base eligibility, and such audits may result in reductions to our borrowing base. In addition, our lender can impose other conditions, such as payroll and other reserves for any reason without notice. As a result, we cannot provide any assurance that we will be able to borrow under our credit agreement if we need money to fund working capital or other needs. If sources of liquidity are not available or if we cannot generate sufficient cash flows from operations, then we may be required to obtain additional sources of funds through additional operating improvements, capital markets transactions, asset sales or financing from third parties, or a combination thereof and under certain conditions such transactions could substantially dilute the ownership of existing stockholders. We cannot provide assurance that these additional sources of funds will be available, or if available, would have reasonable terms, particularly in light of the current credit market turmoil.

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Our credit facility restricts our operating flexibility.

Our credit facility also contains various restrictions and covenants that restrict our operating flexibility including:

These restrictions and covenants could have important consequences for investors, including the need to use a portion of our cash flow from operations for debt service rather than for our operations, restrictions on our ability to incur additional debt financing for future working capital or capital expenditures, a lesser ability to take advantage of significant business opportunities, such as acquisition opportunities, or to react to market conditions by selling lesser-performing assets.

The amounts available under our credit facility are dependent on the level of our eligible accounts receivable generated in the United States, Australia and United Kingdom. Reduction in these eligible accounts receivable, as is occurring at present due to the economic downturn and the reduction in demand for our services, reduces the amounts we may borrow. If we were forced to issue equity or equity linked instruments in order to obtain additional financing, under current circumstances, it would be highly dilutive to our stockholders. In addition, under the credit agreement our lender has the right to require additional reserves at any time for any reason without prior notice to us. These actions would also reduce the amounts available to us under the credit facility.

In addition, a default or amendment or waiver to our credit agreement to avoid a default may result in higher rates of interest and the inability to obtain additional borrowings. For example, the amendment to our credit facility that we entered into on December 30, 2008 to eliminate a minimum quarterly EBITDA covenant resulted in higher interest rates and a reduction in the amount that we may borrow under the credit facility. Finally, debt incurred under our credit facility bears interest at variable rates. Any increase in interest expense could reduce the funds available for operations.

Our operating results fluctuate from quarter to quarter and therefore quarterly results cannot be used to predict future periods’ results.

Our operating results fluctuate quarter to quarter primarily due to the vacation periods during the first quarter in the Asia Pacific region and the third quarter in the Americas and Europe regions. Demand for our services is typically lower during traditional national vacation periods when clients are on vacation as well.

We face risks relating to our international operations.

We conduct operations in more than twenty countries. For the years ended December 31, 2008, 2007 and 2006, approximately 75%, 76% and 74%, respectively, of our revenue was earned outside of the United States. Our financial results could be materially affected by a number of factors particular to international operations. These include, but are not limited to, difficulties in staffing and managing international operations, operational issues such as longer customer payment cycles and greater difficulties in collecting accounts receivable, changes in tax laws or other regulatory requirements; issues relating to uncertainties of laws and enforcement relating to the regulation and protection of intellectual property; and currency fluctuation. If we are forced to discontinue any of our international operations, we could incur material costs to close down such operations.

Regarding the foreign currency risk inherent in international operations, the results of our local operations are reported in the applicable foreign currencies and then translated into U.S. dollars at the applicable foreign

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currency exchange rates for inclusion in our financial statements. In addition, we generally pay operating expenses in the corresponding local currency. Because of devaluations and fluctuations in currency exchange rates or the imposition of limitations on conversion of foreign currencies into U.S. dollars, we are subject to currency translation exposure on the revenue and income of our operations in addition to economic exposure. For example, in the second half of 2008, the U.S. dollar strengthened against all of our major non-U.S. currencies, which had a negative impact on our results of operations for 2008, and we expect the stronger U.S. dollar to persist in 2009, at least against some of our major non-U.S. currencies. Our consolidated U.S. dollar cash balance could be lower because significant amount of cash is generated outside the United States. This risk could have a material adverse effect on our business, financial condition and operating results.

Our investment strategy subjects us to risks.

From time to time, we make investments, including acquisitions, as part of our growth plans. We may not be able to find suitable investments, or the investments we make may not perform as expected because they are dependent on a variety of factors, including our ability to effectively integrate acquired personnel and operations, our ability to sell new products and services and our ability to retain the clients of acquired firms or gain new clients. Furthermore, we may need to borrow more money from lenders or sell equity or debt securities to the public to finance future investments and the terms of these financings may be adverse to us.

We face risks associated with our dispositions of underperforming or non-core assets.

We have disposed of several non-core businesses since the third quarter of 2006. We have retained liabilities of these businesses and may be responsible for certain potential indemnification claims by the purchasers. We may not be able to settle the liabilities at the recorded value in our financial statements and indemnification claims may adversely affect our financial results. Further, we may have risks associated with our ability to effectively restructure our operations following these dispositions.

We rely on our information systems, and if we lose that technology or fail to further develop our technology, our business could be harmed.

Our success depends in large part upon our ability to store, retrieve, process, and manage substantial amounts of information, including our client and candidate databases. To achieve our strategic objectives and to remain competitive, we must continue to develop and enhance our information systems. This may require the acquisition of equipment and software and the development, either internally or through independent consultants, of new proprietary software. Our inability to design, develop, implement and utilize, in a cost-effective manner, information systems that provide the capabilities necessary for us to compete effectively, or any interruption or loss of our information processing capabilities, for any reason, could harm our business, results of operations or financial condition.

Our markets are highly competitive.

The markets for our services are highly competitive. Our markets are characterized by pressures to reduce prices, provide high levels of service, incorporate new capabilities and technologies, accelerate job completion schedules and attract and retain highly skilled professionals who possess the skills and experience necessary to fulfill our clients’ employee search needs.

Furthermore, we face competition from a number of sources. These sources include other executive search firms and professional search, staffing and consulting firms. Several of our competitors have greater financial and marketing resources than we do.

Due to competition, we may experience reduced margins on our products and services, and loss of market share and our customers. If we are not able to compete effectively with current or future competitors as a result of these and other factors, our business, financial condition and results of operations could be materially adversely affected.

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We have no significant proprietary technology that would preclude or inhibit competitors from entering the mid-market professional staffing contract and consulting markets. We cannot provide assurance that existing or future competitors will not develop or offer services and products that provide significant performance, price, creative or other advantages over our services. In addition, we believe that with continuing development and increased availability of information technology, the industries in which we compete may attract new competitors. Specifically, the increased use of the Internet may attract technology-oriented companies to the professional staffing industry. We cannot provide assurance that we will be able to continue to compete effectively against existing or future competitors. Any of these events could have a material adverse effect on our business and operating results.

We may be exposed to employment-related claims, legal liability and costs from both clients and employers that could adversely affect our business, financial condition and results of operations, and our insurance coverage may not cover all of our potential liability.

We are in the business of employing people and placing them in the workplaces of other businesses. Risks relating to these activities include:

We are exposed to potential claims with respect to the recruitment process. A client could assert a claim for matters such as breach of a blocking arrangement or recommending a candidate who subsequently proves to be unsuitable for the position filled. Similarly, a client could assert a claim for deceptive trade practices on the grounds that we failed to disclose certain referral information about the candidate or misrepresented material information about the candidate. Further, the current employer of a candidate whom we place could file a claim against us alleging interference with an employment contract. In addition, a candidate could assert an action against us for failure to maintain the confidentiality of the candidate’s employment search or for alleged discrimination or other violations of employment law by one of our clients.

We may incur fines and other losses or negative publicity with respect to these problems. In addition, some or all of these claims may give rise to litigation, which could be time-consuming to our management team, costly and could have a negative effect on our business. In some cases, we have agreed to indemnify our clients against some or all of these types of liabilities. We cannot assure you that we will not experience these problems in the future, that our insurance will cover all claims, or that our insurance coverage will continue to be available at economically-feasible rates.

From time to time, we may still incur liabilities associated with pre-spin off activities with Monster. Under the terms of our Distribution Agreement with Monster, these liabilities will be retained by us. If these liabilities are significant, the retained liabilities could have a material adverse effect on our business, financial condition and operating results.

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We depend on our key management personnel.

Our continued success will depend to a significant extent on our senior management, including Jon F. Chait, our Chairman and Chief Executive Officer. The loss of the services of Mr. Chait or one or more key employees could have a material adverse effect on our business, financial condition and operating results. In addition, if one or more key employees join a competitor or form a competing company, the resulting loss of existing or potential clients could have a material adverse effect on our business, financial condition and operating results.

There may be volatility in our stock price.

The market price for our common stock has fluctuated in the past and could fluctuate substantially in the future. For example, during 2008, the market prices of our common stock reported on the NASDAQ Global Market ranged from a high of $13.00 to a low of $2.00. Factors such as general macroeconomic conditions adverse to workforce expansion, the announcement of variations in our quarterly financial results or changes in our expected financial results could cause the market price of our common stock to fluctuate significantly. Further, due to the volatility of the stock market generally, the price of our common stock could fluctuate for reasons unrelated to our operating performance.

Government regulations may result in the prohibition, regulation or restriction of certain types of employment services we offer or in the imposition of additional licensing or tax requirements that may reduce our future earnings.

In many jurisdictions in which we operate, the contract staffing industry is heavily regulated. For example, governmental regulations can restrict the length of contracts of contract employees and the industries in which they may be used. In some countries, special taxes, fees or costs are imposed in connection with the use of contract workers.

The countries in which we operate may:

Any future regulations that make it more difficult or expensive for us to continue to provide our staffing services may have a material adverse effect on our financial condition, results of operations and liquidity.

Provisions in our organizational documents and Delaware law will make it more difficult for someone to acquire control of us.

Our certificate of incorporation and by-laws and the Delaware General Corporation Law contain several provisions that make more difficult an acquisition of control of us in a transaction not approved by our Board of Directors, including transactions in which stockholders might otherwise receive a premium for their shares over then current prices, and that may limit the ability of stockholders to approve transactions that they may deem to be in their best interests. Our certificate of incorporation and by-laws include provisions:

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In addition, Section 203 of the Delaware General Corporation Law generally provides that a corporation may not engage in any business combination with any interested stockholder during the three-year period following the time that the stockholder becomes an interested stockholder, unless a majority of the directors then in office approve either the business combination or the transaction that results in the stockholder becoming an interested stockholder or specified stockholder approval requirements are met.

In February 2005, our Board of Directors declared a dividend of one preferred share purchase right (a “Right”) for each outstanding share of our common stock payable upon the close of business on February 28, 2005 to the stockholders of record on that date. Each Right entitles the registered holder to purchase from us one one-hundredth (1/100^th) of a share of our Series A Junior Participating Preferred Stock, (“Preferred Shares”) at a price of $60 per one one-hundredth of a Preferred Share, subject to adjustment. These Rights may make the cost of acquiring us more expensive and, therefore, make an acquisition more difficult.

None.

All of the Company’s operating offices are located in leased premises. Our principal office is currently located at 560 Lexington Avenue, New York, New York, where we occupy space under a lease expiring in March 2017.

In the United States, Hudson Americas operates from 42 leased locations with space of approximately 342,000 aggregate square feet, which includes 2 leased locations with space of approximately 60,000 aggregate square feet, which are shared between the Hudson Americas and corporate functions.

Outside the United States, in the 21 countries in which the Company is located, Hudson Europe is the lessee of 44 locations with approximately 323,000 aggregate square feet, Hudson Asia Pacific is the lessee of 23 locations with approximately 300,000 aggregate square feet, and Hudson Americas is a lessee of two locations with approximately 29,000 aggregate square feet. All leased space is considered to be adequate for the operation of its business, and no difficulties are foreseen in meeting any future space requirements.

The Company is involved in various legal proceedings that are incidental to the conduct of its business. The Company is not involved in any pending or threatened legal proceedings that it believes could reasonably be expected to have a material adverse effect on its financial condition, cash flows or results of operations.

No matter was submitted to a vote of the Company’s security holders during the fourth quarter of the fiscal year covered by this report.

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EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth certain information, as of February 18, 2009, regarding the executive officers of Hudson Highland Group, Inc.:

The following biographies describe the business experience of our executive officers:

Jon F. Chait has served as Chairman and Chief Executive Officer since the Company was spun off from Monster in March 2003. He joined Monster in October 2002 expressly in contemplation of the spin-off. Prior to joining the Company, Mr. Chait was the Chairman of Spring Group, PLC, a provider of workforce management solutions, from May 2000 through June 2002 and Chief Executive Officer from May 2000 to March 2002. From 1998 through 2000, Mr. Chait founded and acted as Chairman and Chief Executive Officer of Magenta Limited, a developer of web-enabled human resource solutions, which was subsequently sold to Spring Group, PLC. Mr. Chait served as the Managing Director—International Operations of Manpower Inc. from 1995 to July 1998, Chief Financial Officer from August 1993 to 1998, Executive Vice President, Secretary and Director from 1991 to 1998 and Executive Vice President from September 1989 to July 1998 of Manpower International Inc., a provider of temporary employment services. Mr. Chait is also a director of the Marshall and Ilsley Corporation, a bank holding company.

Mary Jane Raymond has served as the Executive Vice President and Chief Financial Officer since December 2005. Prior to that, Ms. Raymond was the Chief Risk Officer of The Dun & Bradstreet Corporation during 2005. From 2002 to 2005, Ms. Raymond served as the Vice President and Corporate Controller of the Dun & Bradstreet Corporation. Ms. Raymond served as the Merger Integration Vice President of Lucent Technologies, Inc. from 1998 to 2002 and as Financial Vice President in International from 1997 to 1998. From 1988 to 1997, Ms. Raymond served in various positions with Cummins, Inc.

Margaretta R. Noonan has served as Executive Vice President and Chief Administrative Officer since February 2005. Prior to that Ms. Noonan served as Executive Vice President, Human Resources since she joined the Company in April 2003. Prior to joining the Company, Ms. Noonan served as Senior Vice President, Global Human Resources and corporate officer of Monster Worldwide, Inc. Prior to joining Monster in 1998, Ms. Noonan was Vice President, Human Resources—Stores, for the Lord & Taylor division of May Department Stores Company, a large retail department store, from February 1997 to May 1998 and was Vice President, Human Resources, of Kohl’s Corporation, a large retail department store, from November 1992 to February 1997.

Richard S. Gray has served as Senior Vice President, Marketing and Communications since February 2005. Prior to that, Mr. Gray served as Vice President, Marketing and Communications since joining the Company in May 2003. Prior to joining the Company, Mr. Gray was Senior Vice President for Ogilvy Public Relations Worldwide, a large public relations firm, in Chicago, Illinois from September 2002 until May 2003. Before joining Ogilvy Public Relations Worldwide, Mr. Gray was Vice President, Marketing and Communications for Lante Corporation, an internet consulting boutique, in Chicago, Illinois from November 1998 until November 2001.

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Latham Williams has served as Senior Vice President, Legal Affairs and Administration, Corporate Secretary since February 2007. Prior to that, Mr. Williams served as Vice President, Legal Affairs and Administration, Corporate Secretary since joining the Company in April 2003. Prior to joining the Company, Mr. Williams was a Partner, Leader Diversity Practice Group and Co-Leader Global Legal Practice in Monster’s executive search division. Prior to joining Monster in 2001, Mr. Williams was an equity partner with the international law firm of Sidley Austin LLP from 1993 to 2000, specializing in health care joint ventures, mergers and acquisitions. Before joining Sidley Austin, Mr. Williams was an equity partner in the Chicago-based law firm of Gardner, Carton & Douglas and was with the firm from 1981 to 1993.

Neil J. Funk has served as Vice President, Internal Audit since joining the Company in August 2003. Prior to joining the Company, Mr. Funk was a Senior Manager at Deloitte & Touche LLP, a multi-national auditing and consulting firm, from September 2000 until July 2003. Before joining Deloitte & Touche, Mr. Funk was with Prudential Financial, Inc., a large insurance company, specializing in personal financial planning from March 2000 until August 2000. Before joining Prudential Financial, Inc., Mr. Funk was District Audit Manager for PRG-Schultz, Inc., a recovery audit company, based in Atlanta, Georgia from September 1997 until February 2000.

Elaine A. Kloss has served as Vice President, Finance and Treasurer since June 2005. Prior to joining the Company, Ms. Kloss was Vice President and Treasurer of NUI Utilities, Inc., a public company with natural gas distribution operations from January 2004 to January 2005. Prior to that, she served as Treasury Associate for Resources Global Professionals, Inc., an international professional services firm, from 2002 to 2004. Ms. Kloss served as Vice President and Treasurer with Ventiv Health, Inc., a diversified contract pharmaceutical sales company, from 1999 to 2001. Ms. Kloss also has held various treasury and financial positions at New York Life Insurance Company, Joseph E. Seagram & Sons, Inc., AT&T and the Board of Governors of the Federal Reserve System.

Frank P. Lanuto has served as Vice President and Corporate Controller since June 2008. Prior to joining the Company, Mr. Lanuto served as Executive Vice President and Chief Financial Officer of Initiative Media Worldwide, a subsidiary of The Interpublic Group of Companies. Inc., from September 2005 to March 2008. Prior to that, Mr. Lanuto served as Chief Financial Officer of Publicis Healthcare Communications, from April 2003 to August 2005. Prior to that, he served as Executive Vice President, Corporate Finance of Bcom3 Group, Inc. from December 2001 to March 2003 and Senior Vice President and Director, Group Financial Reporting of Bcom3 Group from May 2000 to November 2001. Mr. Lanuto served in various positions for Omnicom Group Inc. from 1993 to 2000, including Chief Operating Officer and Chief Financial Officer of its Rapp Collins Worldwide (New York office) business.

Executive officers are elected by, and serve at the discretion of, the Board of Directors. There are no family relationships between any of our directors or executive officers.

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PART II

MARKET FOR COMMON STOCK

The Company’s common stock is listed for trading on the NASDAQ Global Market under the symbol “HHGP.” On December 31, 2008, there were approximately 1,045 holders of record of the Company’s common stock.

The following is a list by fiscal quarter of the market prices of the Company’s common stock.

We have never declared or paid cash dividends on our common stock, and we currently do not intend to declare or pay cash dividends on our common stock. Any payment of cash dividends will depend upon our financial condition, capital requirements, earnings and other factors deemed relevant by our Board of Directors. In addition, the terms of our credit facility prohibit us from paying dividends and making other distributions.

ISSUER PURCHASES OF EQUITY SECURITIES

The Company’s purchases of its common stock during the fourth quarter of fiscal 2008 were as follows:

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The following information in this Item 5 of this Annual Report on Form 10-K is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934 or to the liabilities of Section 18 of the Securities Exchange Act of 1934, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent we specifically incorporate it by reference into such a filing.

PERFORMANCE INFORMATION

The following graph compares on a cumulative basis changes since December 31, 2003 in (a) the total stockholder return on the Company’s common stock with (b) the total return on the Russell 2000 Index and (c) the total return on the companies in a peer group selected in good faith by the Company, in each case assuming reinvestment of dividends. Such changes have been measured by dividing (a) the difference between the price per share at the end of and the beginning of the measurement period by (b) the price per share at the beginning of the measurement period. The graph assumes $100 was invested on December 31, 2003 in the Company’s common stock, the Russell 2000 Index and the peer group consisting of Kforce Inc., MPS Group, Inc., Manpower, Inc., Spherion Corporation, CDI Corp. and Robert Half International Inc. The returns of each component company in the peer group have been weighted based on each company’s relative market capitalization.

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The following table shows selected financial data of the Company that has been adjusted to reflect the classification of certain businesses as discontinued operations. The data has been derived from, and should be read together with, the Consolidated Financial Statements and corresponding notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Items 7 and 8 of this Form 10-K.

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This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Consolidated Financial Statements and the notes thereto, included in Item 8 of this Form 10-K. This MD&A contains forward-looking statements. Please see note “Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements. This MD&A also uses the non-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 16 to the Consolidated Financial Statements for EBITDA segment reconciliation information.

Executive 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, when we were spun-off from Monster Worldwide, Inc. (“Monster”). 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 U.S., the U.K. and Australia. We are organized into three reportable segments of Hudson Americas, Hudson Europe and Hudson Asia Pacific. These segments contributed approximately 16%, 47% and 37% of the Company’s gross margin, respectively, for the year ended December 31, 2008. Our management’s primary focus since the spin-off has been to move the Company to profitability, particularly at the level most in the control of the country level operating leaders. We have focused on specialized professional recruitment through out staffing, project solutions and talent management businesses. 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. We have measured our improvements at the level of gross margin, less selling, general and administrative expenses, less depreciation and amortization.

Financial Performance

As discussed in more detail in this MD&A, the following financial data present an overview of our financial performance for 2008, 2007 and 2006:

Recent Economic Events

During 2008, significant instability in the financial services markets negatively impacted worldwide economies. The issues in the financial services markets that originated in the sub-prime mortgage market in 2007 evolved into a constriction of credit and finally a widespread reduction of business liquidity. At the same time, the economic slowdown that had been evident primarily with our clients in the financial services sector in the

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U.S. and the U.K. accelerated in the second half of 2008 and spread rapidly to other industries and countries, including Asia. With approximately 84% of our gross margin earned outside of the U.S., we are heavily exposed to the economic downturn in our major international markets. By the fourth quarter 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. Consequently, financial results for 2008 were below the results of the prior year in all regions: Asia Pacific, Europe, and North America. The Company experienced reduced demand in both contract and permanent recruitment from prior year levels, with the largest percentage decline from the permanent recruitment business.

The Company expects weak global economic conditions to persist throughout 2009, resulting in a further reduction in demand for its services. The Company also expects the stronger U.S. dollar to persist in 2009, at least against some of its major non-U.S. currencies, which reduces reported earnings of foreign subsidiaries. This situation reduces the value in U.S. dollar of dividends paid by its foreign subsidiaries to the U.S. parent corporation and increases the cost of management fees. Such dividends and management fees are a significant source of funding of the U.S. parent entity.

In response to the spreading economic slowdown, the Company took steps in 2008 to counteract the declines in its gross margin. We initiated the 2008 restructuring program, which included a reduction in support functions, exits from underutilized properties and the elimination of certain support services under contract. The Company expects these actions to produce further cost savings in 2009 and improve its long-term profitability.

Goodwill and Other 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.

As a result of the deterioration in market conditions over the course of the fourth quarter, the Company’s stock price declined approximately fifty percent as of December 31, 2008 as compared to the stock price as of October 1, 2008. This caused the Company’s market capitalization to decline below its book value, an indication that the aggregate fair value of its reporting units could potentially be less than their carrying value. As a result of these events, management updated its impairment testing from October 1, through December 31, 2008.

At the conclusion of its testing, the Company determined that goodwill was impaired at all of its reporting units and recorded an impairment charge of $64.5 million. 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 results for the year ended December 31, 2006 included an impairment charge of $1.3 million related to goodwill associated with the Alder Novo acquisition. The total charges of $67.1 million for 2008 and $1.3 million for 2006 have been recorded under the caption of “Goodwill and other impairment charges” in the accompanying Consolidated Statements of Operations.

Strategic Actions

Our strategy, since our inception, has been focused on building our specialized professional recruitment through our staffing, project solutions and talent management businesses. We believe that this core mix has growth potential for the next decade. 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 investments, divestitures and cost restructuring.

In April 2008, we acquired certain business assets of Propensity, Ltd. (“Propensity”), a professional services firm based in Texas specializing in accounting and finance services and providing both contract and permanent placement services.

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In February 2008, we completed the acquisition of the majority of the assets of Executive Coread SARL (“Coread”), a talent management and recruitment company in France.

In May 2007, we acquired the business assets of Tong Zhi (Beijing) Consulting Service Ltd. and Guangzhou Dong Li Consulting Service Ltd. (collectively, “TKA”), an information technology recruiting business, which has operations located in three major cities in China.

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

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

We strive to improve profitability at lower margin businesses primarily in the U.K. and Australia through price negotiations and a more efficient delivery of services. We periodically elect to exit certain of these business arrangements. We expect to continue our focus on improving profitability of client contracts.

On March 5, 2008, our Board of Directors approved a program to streamline our support operations in each of the Hudson regional businesses to match our focus on specialization. The costs associated with this program are principally employee termination benefits, lease termination payments and contract cancellation costs. We are taking these actions to help reduce our costs and increase our long-term profitability. We initially estimated that the pre-tax cost of the program would be between $5 million to $7 million for the year ending December 31, 2008. On October 27, 2008, our Board of Directors approved an increase to the cost of the program to $12 million for additional actions similar to those already approved. The program included costs for actions to reduce support functions to match them to the scale of businesses after divestitures ($6.5 million to $10 million), exit underutilized properties ($1 million to $2 million) and eliminate contracts for certain discontinued services ($0.5 million to $1 million). For the year ended December 31, 2008, we incurred $11.9 million of business reorganization expenses under this plan. The actions we took under this plan partially mitigated declines in our gross margin in 2008 and we expect them to produce further cost savings during 2009. We substantially completed the program by the end of 2008, though some actions will require completion during the first quarter of 2009.

On February 10, 2009, our Board of Directors approved a plan to continue to streamline our operations in each of the Hudson regional businesses in response to the current economic conditions and to align with our focus on specialization. We estimate that the pre-tax cost of this program will be $5 million and we expect these actions to be completed in the first quarter of 2009. This program includes costs for actions to exit underutilized

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properties ($3 million) and reduce support functions and staff to match them to the scale of the businesses ($2 million).

We anticipate the future cash expenditures for the actions described above to be paid out primarily over the following twelve months and to be approximately equal to the estimated costs.

Discontinued Operations

In the second quarter of 2008, the Company completed the sale of substantially all of the assets of BPM, which was part of the Hudson Europe regional business. In the first quarter of 2008, the Company completed the sale of substantially all of the assets of ETS, which was part of the Hudson Americas regional business. In the fourth quarter of 2007, the Company sold its Netherlands reintegration subsidiary, HHCS, which was part of the Hudson Europe regional business, and T&I, which was part of the Hudson Asia Pacific regional business. In the fourth quarter of 2006, the Company sold Highland, which was a separate reportable segment of the Company.

As the result of the sales, BPM, ETS, HHCS, T&I and Highland operations have been accounted for as discontinued operations. Accordingly, amounts in the financial statements and related notes for all historical periods have been restated to reflect these operations as discontinued operations.

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 result of operations. EBITDA is also considered by the 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 generally accepted accounting principles 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. We achieved EBITDA profitability in 2005, which continued through 2007. The Company recorded an EBITDA loss of $58.6 million in 2008, which included one time non-cash charges of $67.1 million primarily for the impairment of goodwill and intangible assets and write down of other long-term assets. The reconciliation of the EBITDA used to the most directly comparable GAAP financial measure is provided in the table below:

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with generally accepted accounting

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principles in the United States of America (“US GAAP”). The preparation of financial statements in accordance with US GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. US GAAP provides the framework from which to make these estimates, assumptions and disclosures. We choose accounting policies within US GAAP that our management believes are appropriate to accurately and fairly report our operating results and financial position in a consistent manner. Our management regularly assesses these policies in light of current and forecasted economic conditions. Our accounting policies are stated in Note 2 to our Consolidated Financial Statements included in Item 8. We believe the following accounting policies are critical to understanding our results of operations and affect the more significant judgments and estimates used in the preparation of our Consolidated Financial Statements that are inherently uncertain:

Revenue Recognition

The Company recognizes revenue for temporary services at the time services are provided and revenue is recorded on a time and materials basis. Temporary contracting revenue is reported on a gross basis when the Company acts as the principal in the transaction and is at risk for collection in accordance with Emerging Issues Task Force (“EITF”) Issue No. 99-19, “Reporting Revenues Gross as a Principal Versus Net as an Agent.” The Company’s revenues are derived from its gross billings, which are based on (i) the payroll cost of its worksite employees; and (ii) a markup computed as a percentage of the payroll cost.

The Company recognizes revenue for permanent placements based on the nature of the fee arrangement. Revenue generated when the Company permanently places an individual with a client on a contingent basis is recorded at the time of acceptance of employment, net of an allowance for estimated fee reversals. Revenue generated when the Company permanently places an individual with a client on a retained basis is recorded ratably over the period services are rendered, net of an allowance for estimated fee reversals.

The EITF reached a consensus on Issue No. 06-3, “Disclosure Requirements for Taxes Assessed by a Governmental Authority on Revenue-Producing Transactions.” The consensus provides that the presentation of taxes on either a gross or net basis is an accounting policy decision. The Company collects various taxes assessed by governmental authorities and records these amounts on a net basis.

Accounts Receivable

The Company’s accounts receivable balances are composed of trade and unbilled receivables. The Company maintains an allowance for doubtful accounts and makes ongoing estimates as to the collectability of the various receivables. If the Company determines that the allowance for doubtful accounts is not adequate to cover estimated losses, an expense to provide for doubtful accounts is recorded in selling, general and administrative expenses. If an account is determined to be uncollectible, it is written off against the allowance for doubtful accounts. Management’s assessment and judgment are vital requirements assessing the ultimate realization of these receivables, including the current credit-worthiness, financial stability and effect of market conditions on each customer.

Income Taxes

We account for income taxes using the asset and liability method in accordance with SFAS No. 109, “Accounting for Income Taxes,” (“SFAS No. 109”), as amended. This statement establishes financial accounting and reporting standards for the effects of income taxes that result from an enterprise’s activities during the current and preceding years. It requires an asset and liability approach for financial accounting and reporting of income taxes.

As of December 31, 2008, we had current net deferred tax assets of $4,861 and non-current net deferred tax assets of $1,506. The calculation of net deferred tax assets assumes sufficient future earnings for the realization of such assets as well as the continued application of currently anticipated tax rates. Included in net deferred tax

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assets is a valuation allowance of $146,764 for deferred tax assets where management believes it is more likely than not that the deferred tax assets will not be realized in the relevant jurisdiction. Based on our assessments, no additional valuation allowance is required. If we determine that a deferred tax asset will not be realizable, an adjustment to the deferred tax asset will result in a reduction of earnings at that time.

In June 2006, the Financial Accounting Standards Board (the “FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”) – an interpretation of SFAS No. 109, “Accounting for Income Taxes.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109. FIN 48 prescribes a two-step evaluation process for tax positions taken or expected to be taken in a tax return. The first step is recognition and the second is measurement. FIN 48 also provides guidance on derecognizing, measurement, classification, disclosures, transition and accounting for interim periods. In May 2007, the FASB issued FASB Staff Position (“FSP”) No. 48-1, “Definition of Settlement in FASB Interpretation No. 48, an amendment of FASB Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes” (“FSP No. FIN 48-1”). FSP No. FIN 48-1 provides guidance on how to determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits.

We adopted FIN 48 effective January 1, 2007. As a result, we recognized an increase in the liability for unrecognized tax benefits, interest and penalties of $3,537 (net of tax effect), which, as required, was accounted for as a reduction to the January 1, 2007 balance of retained earnings. The cumulative effect of the adjustment consisted of $1,969 for income taxes related to both foreign and U.S. state and local jurisdictions, $671 of interest and $897 of penalties related to uncertain tax benefits. Accrued interest and penalties were $1,568 as of January 1, 2007. The Company had approximately $5,884 and $6,890 of unrecognized tax benefits, excluding interest and penalties of $1,625 and $2,019, which if recognized in the future, would affect the annual effective income tax rate as of December 31, 2008 and 2007, respectively. See Note 11 to the Consolidated Financial Statements for further information regarding FIN 48. We elected to continue our historical practice of classifying applicable interest and penalties as a component of the provision for income taxes.

We provide tax reserves for Federal, state, local and international exposures relating to periods subject to audit. The development of reserves for these exposures requires judgments about tax issues, potential outcomes and timing, and is a critical estimate. We assess our tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances and information available at the reporting dates. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with greater than 50% likelihood of being realized upon settlement with a tax authority that has full knowledge of all relevant information. For those tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. Where applicable, associated interest and penalties have also been recognized. Although the outcome relating to these exposures are uncertain, we believe that our reserves reflect the probable outcome of known tax contingencies. In certain circumstances, the ultimate outcome of exposures and risks involves significant uncertainties which render them inestimable. If actual outcomes differ materially from these estimates, including those that cannot be quantified, they could have a material impact on our results of operations.

Contingencies

The Company is subject to proceedings, lawsuits and other claims related to labor, service and other matters. The Company is required to assess the likelihood of any adverse judgments or outcomes to these matters and potential ranges of probable losses. The Company makes a determination of the amount of reserves required, if any, for these contingencies after careful analysis of each individual issue. The required reserves may change in the future due to new developments in each matter, new developments externally in matters with other companies similar to those we have or changes in approach, such as a change in settlement strategy in dealing with these matters.

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Goodwill

Under 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.

SFAS No. 142 requires a two-step process to identify potential goodwill impairment and to measure the amount of the impairment loss to be recognized, if applicable. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, then goodwill of the reporting unit is not considered impaired and the second step of the impairment test is unnecessary. In contrast, if the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test shall be performed to measure the amount of impairment loss, if any.

Step two of the impairment test, if necessary, consists of determining the implied fair value of each reporting unit’s goodwill. In calculating the implied fair value of goodwill, the fair values of the reporting units are allocated to all of the other assets and liabilities of the reporting units based on their fair values. The excess of the fair value of each reporting unit over the amounts assigned to its other assets and liabilities is equal to the implied fair value of its goodwill. The goodwill impairment is measured as the excess of the carrying amount of goodwill over its implied fair value.

A reporting unit is an operating segment or one level below an operating segment (referred to as a component). A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component. Based on SFAS No. 142 accounting guidance, the Company determined that Hudson North America, Netherlands, China, France and Ukraine are our reporting units, which carry goodwill.

To estimate the fair value of a reporting unit, the Company utilized the income approach, a valuation technique, which indicates the fair value of the invested capital of a reporting unit based on the value of the cash flows that it is expected to generate in the future. The discounted cash flow method, an application of the income approach, estimates the future cash flows of the reporting unit and discounts these cash flows to their present value equivalents at a rate of return that considers the relative risk of achieving the cash flows and the time value of money. These cash flows indicate the fair value of the invested capital of the reporting unit on a marketable, controlling basis.

Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates, operating margins, corporate overhead allocations, cash flow adjustments related to capital expenditures, and working capital investments and risk-adjusted discount rates used to calculate the present value of the projected future cash flows. We base our fair value estimates on assumptions we believe to be reasonable.

The Company also considers the market approach, which indicates the fair value of the invested capital of the Company based on the Company’s market capitalization. We use the quoted market price method to estimate the fair value of the Company based on the quoted market price in the active markets (NASDAQ). We estimate the Company’s market capitalization by multiplying the quoted per share market price by the number of shares outstanding. As an additional measure, the Company reconciles the aggregate fair value of all its reporting units as determined by the discounted cash flow method with its total market capitalization to determine the reasonableness of the fair value calculations.

Intangibles and Long-lived Assets

The Company evaluates the recoverability of the carrying value of its long-lived assets, excluding goodwill, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Under such

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circumstances, the Company assesses whether the projected undiscounted cash flows of its businesses are sufficient to recover the existing unamortized cost of its long-lived assets. If the undiscounted projected cash flows are not sufficient, the Company calculates the impairment amount by discounting the cash flows using its weighted average cost of capital. The amount of the impairment is written-off against earnings in the period in which the impairment has been determined in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

Business Reorganization and Merger and Integration Plans

The Company has recorded significant charges and accruals in connection with its business reorganization, merger and integration plans. These reserves include estimates pertaining to lease termination payments, employee termination benefits and contract cancellation costs resulting from its actions. Although the Company does not anticipate significant changes, the actual costs may differ from these estimates.

Foreign Currency Translation

The financial position and results of operations of the Company’s international subsidiaries are determined using local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rate in effect at each year-end. Statements of Operations accounts are translated at the average rate of exchange prevailing during each period. Translation adjustments arising from the use of differing exchange rates from period to period are included in the other comprehensive income (loss) account in stockholders’ equity, other than translation adjustments on short-term inter-company balances, which are included in other income (expense). Gains and losses resulting from other foreign currency transactions are included in other income (expense). Inter-company receivable balances of a long-term investment nature are considered part of the Company’s permanent investment in a foreign jurisdiction and the gains or losses on these balances are reported in other comprehensive income.

Self-Insurance Liabilities

The Company utilizes a combination of insurance and self insurance for employee related health care benefits (a portion of which is paid by its employees). Self-insurance claims filed and claims incurred but not reported are accrued based upon our estimates of ultimate cost for self-insured claims incurred using actuarial assumptions followed in the insurance industry and historical experience. Liabilities associated with the risks that the Company retains are estimated by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions. Although the Company’s claims experience has not displayed substantial volatility in the past, actual experience could materially vary from its historical experience in the future. Factors that affect these estimates include, but are not limited to, inflation, the number and severity of claims and regulatory changes. In the future, if the Company concludes an adjustment to self insurance accruals is required, the liability will be adjusted accordingly.

Stock-Based Compensation

Under SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123R), the Company uses the Black-Scholes option pricing model to determine the fair value of its stock options. The Black-Scholes model includes various assumptions, including the expected life of stock options, the expected risk free interest rate and the historic volatility of the Company’s stock price. These assumptions reflect the Company’s best estimates, but they involve inherent uncertainties based on market conditions generally outside the control of the Company. As a result, if other assumptions had been used, total stock-based compensation cost, as determined in accordance with SFAS No. 123R could have been materially impacted. Furthermore, if the Company uses different assumptions for future grants, stock-based compensation cost could be materially impacted in future periods.

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The Company determines its assumptions for the Black-Scholes option pricing model in accordance with SFAS No. 123R and Staff Accounting Bulletin No. 107, “Interaction between Statement of Financial Accounting Standards Statement No. 123 (revised 2004), Share-Based Payment and certain Securities and Exchange Commission rules and regulations and provides the staffs views regarding the valuation of share-based payment arrangements for public companies (“SAB No. 107”).”

In December 2007, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 110, “Certain Assumptions Used in Valuation Methods—Expected Term” (“SAB No. 110”). SAB No. 110 allows companies to continue to use the simplified method, as defined in SAB No. 107, to estimate the expected term of stock options under certain circumstances. The simplified method for estimating expected term uses the mid-point between the vesting term and the contractual term of the stock option. We have analyzed the circumstances in which the use of the simplified method is allowed. We have opted to use the simplified method for stock options we granted in 2008 because management believes that the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term due to the limited period of time the Company’s shares of common stock have been publicly traded.

For awards with graded vesting conditions, the values of the awards are determined by valuing each tranche separately and expensing each tranche over the required service period. The Company is required to record stock-based compensation expense net of estimated forfeitures. The Company estimated its forfeiture rate based on historical data. The future forfeiture rate could differ from these estimates.

Recent Accounting Pronouncements

In November 2008, the FASB ratified EITF Issue No. 08-7, “Accounting for Defensive Intangible Assets,” (“EITF 08-7”). EITF 08-7 applies to defensive intangible assets, which are acquired intangible assets that the acquirer does not intend to actively use but intends to hold to prevent its competitors from obtaining access to them. As these assets are separately identifiable, EITF 08-7 requires an acquiring entity to account for defensive intangible assets as a separate unit of accounting. Defensive intangible assets must be recognized at fair value in accordance with SFAS No. 141R and SFAS No. 157. EITF 08-7 is effective for defensive intangible assets acquired in fiscal years beginning on or after December 15, 2008. The Company is currently evaluating the impact of the adoption of EITF 08-7 on its results of operations or financial condition.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141R”), which replaces FASB Statement No. 141. SFAS No. 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non controlling interest in the acquiree, and the goodwill acquired in a business combination. SFAS No. 141R also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. SFAS No. 141R is effective as of the beginning of an entity’s fiscal year that begins after December 15, 2008, which will be the Company’s fiscal year beginning January 1, 2009. The Company is currently evaluating the impact of adopting SFAS No. 141R on its results of operations or financial condition.

In February 2007, the FASB issued FSAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115” (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value, with changes in fair value recognized in earnings each reporting period. The Company adopted SFAS No. 159 on January 1, 2008 and the adoption did not have a material impact on its results of operations or financial condition as the Company did not elect to apply the option to measure any of its financial assets or liabilities at fair value.

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In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measurements required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. The adoption of SFAS No. 157 did not have a material impact on its results of operations or financial condition. In February 2008, FASB issued FSP 157-2 “Partial Deferral of the Effective Date of Statement 157” (“FSP No. 157-2”). FSP No. 157-2 delays the effective date of SFAS No. 157, for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008. In October 2008, the FASB issued FSP No. 157-3 “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active” (“FSP 157-3”), which applies to financial assets within the scope of accounting pronouncements that require or permit fair value measurements in accordance with SFAS No. 157. FSP 157-3 clarifies the application of SFAS No. 157 in a market that is not active and defines additional key criteria in determining the fair value of a financial asset when the market for that financial asset is not active. The adoption of SFAS No. 157 for financial assets and liabilities and FSP No. 157-3 did not have a material effect on the Company’s results of operations or financial condition. The Company does not currently expect the adoption of FSP No. 157-2 for nonfinancial assets and nonfinancial liabilities to have a material impact on its results of operations or financial condition.

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 revenue, temporary contracting gross margin, and gross margin as a percentage of revenue for the years ended December 31, 2008, 2007 and 2006 (dollars in thousands).

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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 reported revenue, direct costs, gross margin and selling, general and administrative expenses 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 without distortion due to currency fluctuations.

The Company believes that these calculations are a useful measure, indicating the actual change in operations, since changes in currency translation rates are outside the control of local management. Earnings from subsidiaries have not historically been repatriated to the United States, although the Company paid dividends from foreign subsidiaries to the United States in 2008 and 2007. 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 (dollars in thousands).

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The Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007

Hudson Americas

Hudson Americas’ revenue was $273.6 million for the year ended December 31, 2008, as compared to $291.5 million for 2007, a decrease of $17.9 million (6.1%). Revenues decreased primarily due to decreases of $10.0 million (43.2%) in permanent recruitment services and $6.8 million (2.6%) in contracting revenue. About half of the decline in permanent recruitment services was due to a decision of a specific client to bring an outsourced recruitment function in-house. The decrease in contracting revenue was primarily due to decreases in Information Technology of $22.2 million (27.6%) and Financial Solutions of $9.7 million (23.3%) as clients bought fewer outside services in response to economic conditions. These decreases were partially offset by an increase in Legal Services of $23.8 million (16.3%). Financial Solutions also closed certain offices in 2007, with the effect realized for a full year in 2008.

Hudson Americas’ direct costs were $198.6 million for the year ended December 31, 2008, as compared to $204.0 million for 2007, a decrease of $5.4 million (2.6%). The decrease in direct costs was consistent with the decrease in Hudson Americas’ contracting revenue as noted above.

Hudson Americas’ gross margin was $75.0 million for the year ended December 31, 2008, as compared to $87.5 million for 2007, a decrease of $12.5 million (14.3%). Contracting and permanent recruitment gross margins in 2008 were $62.2 million and $13.1 million, respectively. The decrease in gross margin resulted from the greater decrease in permanent recruitment service revenue compared to contracting service revenue. Gross margin, as a percentage of revenue, was 27.4% for the year ended December 31, 2008, compared to 30.0% for 2007. The decrease in gross margin resulted primarily from $8.4 million (39.2%) and $3.0 million (4.6%) decreases in permanent recruitment and contracting gross margin, respectively. The decrease in permanent recruitment gross margin was a direct result of the decrease in permanent recruitment revenue as

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noted above. The decrease in contracting gross margin consisted of decreases in Information Technology of $5.1 million (26.8%) and Financial Solutions of $2.8 million (21.9%), partially offset by an increase in Legal Services of $4.7 million (15.3%), in each case as a result of the factors mentioned above.

Hudson Americas’ selling, general and administrative expenses were $75.6 million for the year ended December 31, 2008, as compared to $95.5 million for 2007, a decrease of $19.9 million (20.8%). Selling, general and administrative expenses as a percentage of revenue decreased to 27.6% for the year ended December 31, 2008, compared to 32.8% for 2007. The decrease in selling, general and administrative expenses was primarily due to decreases in sales compensation of $11.0 million (20.7%), support staff salaries of $4.2 million (32.7%) and professional and other fees of $2.5 million (55.7%). The decrease in sales compensation resulted, in part, from the recognition of a non-recurring $3.6 million non-cash acquisition-related charge during 2007, our 2008 reorganization plan and an improved focus on productivity. The decrease in support staff salaries was primarily related to our 2008 reorganization program.

Hudson Americas incurred $3.1 million of reorganization expenses during the year ended December 31, 2008, as compared to $0.5 million for 2007. Reorganization expenses incurred during the year ended December 31, 2008 included severance costs and costs relating to terminating a number of contracts, including exiting several leases in the U.S., related to the Company’s 2008 reorganization program and final adjustments for lease termination costs related to the Company’s 2006 reorganization program.

Based on the results of the annual impairment test that was commenced on October 1, 2008 and updated through December 31, 2008, the Company recorded, for 2008, a non-cash charge of $38.2 million for the impairment of goodwill related to Hudson Americas. The Company also recorded for 2008 a $2.2 million write down of other long-term assets and $0.4 million of impairment charges for intangible assets.

Hudson Americas’ EBITDA was a loss of $39.8 million for the year ended December 31, 2008, as compared to a loss of $4.2 million for 2007, an increase in EBITDA loss of $35.6 million. The increase in EBITDA loss resulted primarily due to the goodwill, intangible assets and other long-term asset impairment charges of $40.8 million, as described above. Hudson Americas’ EBITDA loss as a percentage of revenue increased to 14.5% for the year ended December 31, 2008, compared to 1.4% for 2007.

Hudson Americas’ operating loss was $44.4 million for the year ended December 31, 2008, as compared to an operating loss of $8.5 million for 2007, an increase in operating loss of $35.9 million. The increase in the operating loss resulted primarily from the same factors as discussed above with respect to EBITDA. Hudson Americas’ operating loss as a percentage of revenue increased to 16.2% for the year ended December 31, 2008, compared to 2.9% for 2007.

Hudson Europe

Hudson Europe’s revenue was $411.5 million for the year ended December 31, 2008, as compared to $466.4 million for 2007, a decrease of $54.9 million (11.8%). On a constant currency basis, Hudson Europe’s revenue decreased $49.0 million (10.5%), during the year ended December 31, 2008, as compared to 2007. The largest decrease in revenue, as measured in constant currency, was $28.3 million (12.9%) from temporary contracting in the U.K. followed by $23.8 million (26.9%) from permanent recruitment services in the U.K. These decreases were partially offset by increases in temporary contracting revenue of $6.4 million (15.3%) and talent management consulting services revenue of $1.8 million (4.9%) in Continental Europe. The increases in Continental Europe were primarily due to increases in France of $3.6 million (13.0%), the Netherlands of $3.0 million (7.1%) and Belgium of $1.6 million (3.4%). The increase in France was the result of increased branding, practice specialization and commercial wins with large clients, as well as the successful integration of the Coread Talent Management Business following its February 2008 acquisition. The increase in the Netherlands was the result of continued demand in the public sector for Hudson Europe’s services, mainly in the technical and infrastructure engineering areas.

Hudson Europe’s direct costs were $195.2 million for the year ended December 31, 2008, as compared to $228.9 million for 2007, a decrease of $33.7 million (14.7%). On a constant currency basis, direct costs

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decreased $25.2 million (11.0%), for the year ended December 31, 2008, as compared to 2007. The decrease in direct costs, as measured in constant currency, was consistent with the decrease in contracting revenue, primarily in the U.K. of $23.6 million.

Hudson Europe’s gross margin was $216.3 million for the year ended December 31, 2008, as compared to $237.5 million for 2007, a decrease of $21.2 million (8.9%). On a constant currency basis, gross margin decreased $23.8 million (10.0%), during the year ended December 31, 2008, as compared to 2007. As measured in constant currency, Hudson Europe’s gross margin, as a percentage of revenue, was 51.2% for the year ended December 31, 2008, compared to 50.9% for 2007. The decrease in gross margin, as measured in constant currency, resulted primarily from a decrease in the U.K. of $28.8 million (22.1%), partially offset by increases in France of $3.2 million (11.7%), Belgium of $0.7 million (1.6%) and the Netherlands of $0.4 million (3.0%).

Hudson Europe’s selling, general and administrative expenses were $199.0 million for the year ended December 31, 2008, as compared to $212.0 million for 2007, a decrease of $13.0 million (6.1%). On a constant currency basis, selling, general and administrative expenses decreased $14.3 million (6.7%), for the year ended December 31, 2008, as compared to 2007. As measured in constant currency, Hudson Europe’s selling, general and administrative expenses, as a percentage of revenue, were 47.4% for the year ended December 31, 2008, compared to 45.4% for 2007. The decrease in selling, general and administrative expenses, as measured in constant currency, was driven primarily by lower sales staff compensation of $10.1 million (8.0%), travel and entertainment costs of $1.9 million (29.2%), professional fees of $1.2 million (31.2%) and marketing and promotional expenses of $1.2 million (12.1%). These decreases were partially offset by an increase in support staff compensation of $1.9 million (10.0%). Lower sales staff compensation was the result of a reduction in fee earner headcount and lower bonus payments driven by the lower level of business. Support staff compensation increased due to transitional management arrangements in the Netherlands, additional operational management in the U.K. and regional European personnel.

Hudson Europe incurred $3.0 million of reorganization expenses during the year ended December 31, 2008, as compared to $2.4 million for 2007. Reorganization expenses incurred during the year ended December 31, 2008 included severance costs and costs for the reorganization of certain support functions related to the Company’s 2008 reorganization program.

Based on the results of the annual impairment test that was commenced on October 1, 2008 and updated through December 31, 2008, the Company recorded, for 2008, a non-cash charge of $19.6 million for the impairment of goodwill related to Hudson Europe.

Hudson Europe’s EBITDA was $0.4 million for the year ended December 31, 2008, as compared to EBITDA of $29.2 million for 2007. On a constant currency basis, EBITDA decreased $31.5 million for the year ended December 31, 2008, as compared to 2007. As measured in constant currency, Hudson Europe’s EBITDA, as a percentage of revenue, was 0.6% for the year ended December 31, 2008, compared to 6.3% for 2007. The decrease in EBITDA, as measured in constant currency, resulted primarily from the $19.6 million impairment of goodwill and a $9.0 million reduction in EBITDA in the U.K for the reasons discussed above.

Hudson Europe’s operating loss was $5.4 million for the year ended December 31, 2008, as compared to operating income of $23.1 million for 2007. On a constant currency basis, operating income decreased $31.8 million for the year ended December 31, 2008, as compared to 2007. Hudson Europe’s operating (loss) income, as a percentage of revenue, was - 2.0% for the year ended December 31, 2008, compared to 5.0% for 2007. The decrease in operating income, as measured in constant currency, resulted primarily from the same factors as discussed above with respect to EBITDA.

Hudson Asia Pacific

Hudson Asia Pacific’s revenue was $395.1 million for the year ended December 31, 2008, as compared to $415.1 million for 2007, a decrease of $20.1 million (4.8%). On a constant currency basis, Hudson Asia Pacific’s

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revenue decreased $29.6 million (7.1%), during the year ended December 31, 2008, as compared to 2007. Australia accounted for the largest decrease in revenue, as measured in constant currency, which principally resulted from decreases in contracting revenue of $7.3 million (3.5%), permanent recruitment services of $6.0 million (9.1%) and talent management consulting service of $2.8 million (19.1%). The decreases in Australia were primarily due to our withdrawal from low margin business, lower demand earlier in the year for outplacement services and weaker economic conditions. New Zealand’s contracting and permanent recruitment revenues decreased by $7.8 million (12.7%) and $2.6 million (21.3%), respectively, primarily attributed to declining economic conditions in the latter part of 2008.

Hudson Asia Pacific’s direct costs were $222.2 million for the year ended December 31, 2008, as compared to $234.3 million for 2007, a decrease of $12.0 million (5.1%). On a constant currency basis, direct costs decreased $15.5 million (6.6%) for the year ended December 31, 2008, as compared to 2007. The decrease in direct costs was consistent with the decrease in contracting revenue as noted above.

Hudson Asia Pacific’s gross margin was $172.8 million for the year ended December 31, 2008, as compared to $180.9 million for 2007, a decrease of $8.1 million (4.4%). On a constant currency basis, gross margin decreased $14.1 million (7.8%) for the year ended December 31, 2008, as compared to 2007. As measured in constant currency, gross margin, as a percentage of revenue, was 43.2% for the year ended December 31, 2008, compared to 43.6% for 2007. The decrease in gross margin resulted primarily from the larger decline in permanent recruitment revenue compared to temporary contracting revenue in Australia of $5.8 million (8.9%) related to permanent recruitment service. Decreases in New Zealand’s permanent recruitment services and contract services of $2.6 million (21.2%) and $1.9 million (16.5%), respectively, also contributed to the decline in gross margin. Gross margin in Asia remained flat when compared to 2007.

Hudson Asia Pacific’s selling, general and administrative expenses were $155.6 million for the year ended December 31, 2008, compared to $151.4 million for 2007, an increase of $4.2 million (2.8%). On a constant currency basis, selling, general and administrative expenses decreased $1.1 million (0.7 %) for the year ended December 31, 2008, as compared to 2007. Selling, general and administrative expenses, as a percentage of revenue, were 39.0% for the year ended December 31, 2008, compared to 36.5% for 2007. The decrease in selling, general and administrative expenses was less than proportional to the decline in gross margin as a result of certain investments made earlier in the year, including a new office in Beijing.

Hudson Asia Pacific incurred $4.5 million of reorganization expenses during the year ended December 31, 2008, as compared to none for 2007. Reorganization expenses incurred during the year ended December 31, 2008 included severance costs and contract termination costs related to the Company’s 2008 reorganization program.

Based on the results of the annual impairment test that was commenced on October 1, 2008 and updated through December 31, 2008, the Company recorded, for 2008, a non-cash charge of $6.7 million for the impairment of goodwill related to Hudson Asia Pacific.

Hudson Asia Pacific’s EBITDA was $10.1 million for the year ended December 31, 2008, compared to $33.4 million for 2007, a decrease of $23.3 million or 69.7%. On a constant currency basis, EBITDA decreased $24.0 million, or 72.6%, for the year ended December 31, 2008, compared to 2007. EBITDA, as a percentage of revenue, was 2.4% for the year ended December 31, 2008, compared to 8.1% for 2007. The decrease in EBITDA was primarily due to reduced business levels as described above, the goodwill impairment charge of $6.7 million and reorganization charges of $4.5 million.

Hudson Asia Pacific’s operating income was $6.0 million for the year ended December 31, 2008, as compared to $29.5 million for 2007, a decrease of $23.5 million (79.7%). On a constant currency basis, operating income decreased $24.3 million for the year ended December 31, 2008, compared to 2007. Operating income, as a percentage of revenue, was 1.3% for the year ended December 31, 2008, compared to 7.1% for 2007. The decrease in operating income, as measured in constant currency, resulted primarily from the same factors as discussed above with respect to EBITDA.

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Corporate and Other

Corporate expenses were $28.5 million for the year ended December 31, 2008, as compared to $26.8 million for 2007, an increase of $1.7 million or 6.3%. This increase was due to higher professional fees of $5.3 million and the resolution of outstanding litigation of $1.3 million and was partially offset by decreases in support staff compensation of $2.4 million, travel related expenses of $1.5 million and marketing and promotion costs of $0.4 million as compared to 2007.

Other income was $3.5 million for the year ended December 31, 2008, as compared to $3.4 million in 2007. Other income in 2008 primarily consisted of foreign exchange gains compared to 2007, which included a gain on the sale of the U.K. office and support services business.

Interest income, net was $1.1 million for the year ended December 31, 2008, compared to $0.7 million for 2007. The increase was primarily due to the Company’s lower borrowings under its credit facility during the year ended December 31, 2008, compared to 2007, resulting in reduced interest expense.

Provision for Income Taxes

The provision for income taxes for the year ended December 31, 2008 was $8.6 million on a $68.8 million loss from continuing operations, as compared to a provision of $16.9 million on $20.8 million of income from continuing operations for 2007. The effective rate differs from the statutory rate due to the tax impact of U.S. and foreign tax losses for which the Company receives no benefit of $18.4 million, nondeductible goodwill impairment charges of $9.3 million, taxes related to foreign income of $1.4 million, other nondeductible expenses of $4.4 million and a net benefit for state and local taxes of $0.7 million. Our effective rate will change from year to year based on non-recurring and recurring factors including, but not limited to, the geographical mix of earnings, enacted tax legislation, state and local taxes, and tax audit settlements. The effective rate for income taxes for the year ended December 31, 2008 was - 12.5% as compared to 81.3% for 2007.

Net (Loss) Income from Continuing Operations

Net loss from continuing operations was $77.4 million for the year ended December 31, 2008, as compared to a net income of $3.9 million for 2007. The net loss for the year ended December 31, 2008 included non-cash charges of $67.1 million related to impairment of goodwill and intangible assets and a write down of long-term assets. Basic and diluted loss per share from continuing operations were $3.07 for the year ended December 31, 2008, as compared to basic and diluted earnings per share of $0.15 for 2007.

Discontinued Operations

Net income from discontinued operations was $3.1 million for the year ended December 31, 2008 and related principally to Highland, BPM and ETS. Included in this amount was $5.4 million of gains on sale consisting principally of $3.4 million for Highland due to its achievement of certain 2007 metrics as defined in the sale agreement and a $2.7 million gain on the sale of BPM, partially offset by a $0.7 million loss on sale of ETS. Also included in this amount were operating losses from discontinued operations of $5.6 million, which included charges of $2.8 million primarily for the settlement of retained liabilities of ETS, as well as the cost of final liquidation of the Highland entities of $1.9 million. Partially offsetting the operating losses is an income tax benefit of $3.3 million principally associated with the wind down of the Highland business. Net income from discontinued operations was $11.1 million for the year ended December 31, 2007 and included the dispositions of HHCS and T&I, and the 2007 operating results of BPM and ETS. Basic and diluted earnings per share from discontinued operations were $0.12 for the year ended December 31, 2008, as compared to $0.44 of basic earnings per share and $0.43 diluted earnings per share for 2007.

Net (Loss) Income

Net loss was $74.3 million for the year ended December 31, 2008, compared to net income of $15.0 million for 2007. Basic and diluted loss per share were $2.95 for the year ended December 31, 2008 compared to basic earnings per share of $0.59 and diluted earnings per share of $0.58 for the year ended December 31, 2007.

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The Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006

Hudson Americas

Hudson Americas’ revenue was $291.5 million for the year ended December 31, 2007, down 5.0% from $306.7 million for 2006. Revenues decreased against the prior year in both contract staffing services (68% of the total decline) and permanent placement (32% of the total decline). Contracting revenue was down 4% and permanent placement revenue was down 15% compared to 2006. The decrease in contracting revenue was primarily due to decreases in Information Technology (9%) and Financial Solutions (12%), partially offset by an increase in Legal (1%). The largest decreases in permanent placement revenue were in Management Search (19%) and Financial Solutions (23%).

Hudson Americas’ direct costs for the year ended December 31, 2007 were $204.0 million compared to $215.3 million for 2006, a decrease of 5.2%. The decrease in direct costs was consistent with the decrease in Hudson Americas’ temporary contracting revenue in 2007 compared to 2006.

Hudson Americas’ gross margin for the year ended December 31, 2007 was $87.5 million, lower by $3.9 million, or 4.3%, from $91.5 million for the year ended December 31, 2006. The $87.5 million gross margin included temporary contracting gross margin of $65.3 million and permanent placement gross margin of $21.5 million. The decrease in gross margin of $3.9 million was primarily from a decrease of $4.8 million in permanent

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placement partially offset by an increase in temporary contracting margin of $1.2 million. The decrease in permanent placement was primarily Management Search (24%), Financial Solutions (24%) and Legal Services (16%). The increase in the temporary contracting gross margin was within Information Technology (5%) and Legal Services (2%), partially offset by a decrease in Financial Solutions (7%). Total gross margin as a percentage of revenue was 30.0% for the year-ended December 31, 2007 versus 29.8% for the same period in 2006. The increase in gross margin as a percentage of revenue was attributable to the increase in temporary contracting gross margin as a percentage of revenue (24.4% in 2007 compared to 23.0% in 2006), substantially offset by a decrease in permanent placement gross margin as a percentage of revenue (24.6% in 2007 compared to 28.7% in 2006).

Hudson Americas’ selling, general and administrative expenses were $95.5 million for the year ended December 31, 2007, lower by 7.4% from $103.2 million for 2006. Selling, general and administrative expenses were 32.8% and 33.6% as a percentage of revenue for 2007 and 2006, respectively. The decrease in selling, general and administrative expenses was primarily due to decreases in compensation from lower headcount and lower commission expenses ($4.2 million) associated with the decreases in permanent placement revenue, administrative expenses ($2.7 million) and depreciation and amortization ($2.0 million), partially offset by non-cash compensation related to the JMT acquisition ($3.6 million). For the year ended December 31, 2007, selling, general and administrative expenses included $1.8 million resulting from the completion of the prior period sales tax review, compared to $1.1 million for 2006. Based on current available information, the Company does not believe that there will be any material expense in future periods related to prior period sales tax matters. In 2007, the Company paid approximately $0.6 million of payroll taxes related to new IRS guidance on employee expense reimbursements.

Hudson Americas had reorganization expenses of $0.5 million for the year ended December 31, 2007, compared to $1.3 million in 2006. The 2007 charge related to costs for exiting three leases in the U.S. and final adjustments for employee severance on the Company’s 2006 reorganization program. The Company substantially completed its 2006 reorganization program and does not expect significant expenses related to this program in the future.

Hudson Americas’ EBITDA was a loss of $4.2 million for the year ended December 31, 2007, an improvement of $3.4 million compared to a loss of $7.6 million for 2006. The increase in EBITDA was primarily attributable to lower headcount and lower commission expenses of $4.2 million and lower administrative costs of $2.7 million, offset by acquisition-related expense related to the JMT acquisition of $3.6 million.

Hudson Americas’ operating loss was $8.5 million for the year ended December 31, 2007, an improvement of $5.4 million, compared to an operating loss of $13.9 million for 2006. The improvement was due to the same factors as described above in EBITDA and decreased depreciation and amortization expenses on furniture and fixtures and client lists.

Hudson Europe

Hudson Europe’s revenue was $466.4 million for the year ended December 31, 2007, up 2.6% from $454.4 million for 2006. On a constant currency basis, Hudson Europe’s revenue decreased approximately 5.7% in 2007 compared to 2006. The largest decrease in constant currency revenue was from lower temporary contracting revenue in the U.K. (19%), including the impact of exiting the U.K. office support and the Scottish industrial businesses (“U.K. Divestitures”) which had revenue of $20.1 million in 2006. The constant currency decrease was partially offset by increases of permanent placement and talent management consulting services in both Belgium (20%) and the U.K. (9%), strong demand for permanent placements in France (17%) and Central and Eastern Europe (19%) and increased temporary contracting billings in the Netherlands (4%).

Hudson Europe’s direct costs for the year ended December 31, 2007 were $228.9 million, a reduction of $18 million, or 7.3%, compared to $246.9 million for 2006. On a constant currency basis, direct costs decreased 14.8% for 2007 in comparison to 2006. The decrease was primarily the result of lower temporary contracting costs in the U.K. (20%), which included the U.K. Divestitures.

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Hudson Europe’s gross margin for the year ended December 31, 2007 was $237.5 million, higher by $30.0 million, or 14.4%, compared to 2006. On a constant currency basis, gross margin as a percentage of revenue was 50.9% for 2007, an increase from 45.7% for 2006, primarily due to a reduction in lower margin business in the U.K., together with the growth in permanent placement and talent management consulting services. On a constant currency basis, gross margin increased by 5.2% for the year ended December 31, 2007 when compared to 2006. Hudson Europe’s largest constant currency increases were in U.K. permanent placement (9%), Belgium (19%), France (17%) and Central and Eastern Europe (21%), partially offset by lower gross margin from temporary contracting (17%) primarily due to the U.K. Divestitures. Hudson Europe’s temporary gross margin as a percentage of temporary contracting revenue increased to 20.0% in 2007 from 19.0% in 2006.

Hudson Europe’s selling, general and administrative expenses were $212.0 million for the year ended December 31, 2007, higher by 10.9% from $191.2 million for 2006. Selling, general and administrative expenses for 2007 and 2006 were 45.4% and 42.1% as a percentage of revenue, respectively. On a constant currency basis, the 2007 selling, general and administrative expenses increased by 1.7% compared to 2006. The largest increases in selling, general and administrative expenses for 2007 came from sales and delivery costs (4%) and support salaries (10%), partially offset by lower depreciation and amortization expense (19%), occupancy costs (8%) and bad debt expense (115%). Acquisition-related expense related to the Balance acquisition was $1.7 million in both 2007 and 2006.

Hudson Europe had reorganization expenses of $2.4 million for the year ended December 31, 2007, compared to $2.7 million in 2006. These expenses related to the costs of exiting leases in the U.K. and in the Netherlands, where the leased space exceeded the current requirements of the business, partially offset by recoveries on older reorganization programs. The Company completed its 2006 reorganization program and expects no further expenses related to this program.

Hudson Europe’s EBITDA was $29.2 million for the year ended December 31, 2007, an increase of $8.7 million compared to $20.5 million for 2006. Hudson Europe achieved an EBITDA of 6.3% of revenue in 2007 compared to 4.5% in 2006. Key EBITDA contributors included France (143%), Belgium (71%) and Nordics (367%). EBITDA in the U.K. (9%) included the impact of the U.K. Divestitures which had $1.6 million of EBITDA in 2006. These EBITDA contributions were partially offset by a net loss in Italy, primarily related to severance for a change in leadership ($1.0 million).

Hudson Europe’s operating income was $23.1 million for the year ended December 31, 2007, compared to $13.7 million for 2006. Hudson Europe’s 2007 improvement in operating results was essentially due to the same factors as discussed above with respect to EBITDA.

Hudson Asia Pacific

Hudson Asia Pacific’s revenue was $415.1 million for the year ended December 31, 2007, up 5.8% from $392.3 million for 2006. On a constant currency basis, Hudson Asia Pacific’s revenue decreased approximately 4.4% compared to 2006. The largest constant currency revenue decrease came from temporary contracting in Australia (11%), largely due to the continued strategic exit from low margin business. The region also experienced a decline in permanent placement revenue in Japan (40%), due to its transition to a business model less focused on retained search. These decreases were offset in part by growth in permanent placement in China (70%), Australia (8%) and Hong Kong (39%). During 2007, the Company acquired TKA, which contributed $2.6 million to China’s $4.4 million constant currency revenue increase for 2007 over 2006.

Hudson Asia Pacific’s direct costs for the year ended December 31, 2007 were $234.3 million, an increase of $0.8 million, or 0.3%, compared to $233.5 million for 2006. On a constant currency basis, direct costs decreased by $23.6 million or (10.1%) compared to 2006. The decrease in direct costs is consistent with the withdrawal from lower margin contracts.

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Hudson Asia Pacific’s gross margin for the year ended December 31, 2007 was $180.9 million, an increase of $22.0 million, or 13.9% from $158.8 million for 2006. Gross margin, as a percentage of revenue, was 43.6% for 2007, an increase from 40.5% for 2006, primarily due to an increased percentage of total gross margin coming from permanent placement services combined with increased temporary contracting margins. On a constant currency basis, gross margin increased by 3.9% for the year ended December 31, 2007 when compared to the year ended December 31, 2006. The gross margin increase was from increases in permanent placement in Australia (7%), China (75%), Hong Kong (38%) Singapore (15%), and partially offset by a decrease in Japan (40%).

Hudson Asia Pacific’s selling general and administrative expenses were $151.4 million for the year ended December 31, 2007, higher by 15.4% from $131.2 million for 2006. Selling, general and administrative expenses as a percent of revenue were 36.5% and 33.4% for 2007 and 2006, respectively. On a constant currency basis, 2007 selling, general and administrative expenses increased by 5.5% compared to 2006. The increased expenses in 2007 were the result of increases in China (93%), mainly from the TKA acquisition (41%) and related increased occupancy costs resulting from a relocation to a larger office space during 2007, and Hong Kong (54%) for sales and delivery compensation costs.

Hudson Asia Pacific had nominal reorganization expenses for the year ended December 31, 2007, compared to $0.8 million in 2006. The Company substantially completed its 2006 reorganization program and does not expect significant expenses related to this program in the future.

Hudson Asia Pacific’s EBITDA was $33.4 million for the year ended December 31, 2007, an increase of 11.6%, or $3.5 million, from $30.0 million for 2006. EBITDA as a percentage of revenue increased to 8.1% for 2007 compared to 7.6% in 2006, with an increase in Australia being mostly offset by a decrease in Japan. Australia’s EBITDA as a percentage of revenue increased to 7.7% in 2007 from 6.3% in 2006, primarily due to the continued focus on moving to higher margin business. Japan reported EBITDA losses in the current year compared to income in the prior year due to its business model transition.

Hudson Asia Pacific’s operating income was $29.5 million for the year ended December 31, 2007, an increase of 10.1%, or $2.7 million, from $26.8 million for 2006. Hudson Asia Pacific’s 2007 improvement in operating results was primarily due to the same factors discussed above, partially offset by higher depreciation and amortization expenses in the region, primarily on amortization of leasehold improvements.

Corporate and Other

Corporate expenses for the year ended December 31, 2007 were $26.8 million compared to $31.1 million for 2006. Corporate expenses in 2007 decreased primarily as a result of lower depreciation and amortization expense ($3.1 million), professional fees ($1.4 million) and marketing expenses ($1.2 million), partially offset by higher travel costs ($1.1 million) and other administrative costs ($1.0 million).

Other non-operating income (expenses), including interest, was $4.1 million for the year ended December 31, 2007, higher by $4.2 million when compared to ($0.05) million for 2006. Interest income for 2007 was $0.7 million compared to an expense of $1.6 million in 2006. Non-operating expense for 2007 included a gain on the sale of the U.K. office and support services.

Provision for Income Taxes

The provision for income taxes for the year ended December 31, 2007 was $16.9 million on income from continuing operations of $20.8 million, compared with a provision of $3.5 million on a loss from continuing operations of $5.3 million for 2006. The change in the Company’s tax provision for the year ended December 31, 2007 compared to 2006 was primarily related to increased profits in countries where there are no tax loss carry forwards to offset taxable income. Included in the 2006 tax provision is a release of valuation allowances on tax

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loss carry forwards against $48.1 million of foreign pretax income. The effective tax rate differs from the U.S. Federal statutory rate of 35%, due to the inability to recognize tax benefits on net U.S. losses, state taxes, non-deductible expenses such as certain acquisition-related payments, variations from the U.S. tax rate in foreign jurisdictions, and taxes on repatriation of foreign profits.

Income from Continuing Operations

Income from continuing operations was $3.9 million for the year ended December 31, 2007, compared to a loss of $8.8 million for 2006. Basic and diluted earnings per share from continuing operations were $0.15 for the year ended December 31, 2007, compared to basic and diluted loss per share of $0.36 for the year ended December 31, 2006. Basic average shares outstanding increased in 2007 as a result of various employee stock compensation awards that vested or were issued or granted at various times during 2007. For 2006, dilutive earnings per share calculations do not differ from basic earnings per share because the effects of any potential common stock were anti-dilutive and therefore not included in the calculation of dilutive earnings per share.

Discontinued Operations

BPM, ETS, HHCS, T&I and the former Highland segment comprise the Company’s discontinued operations. Income from discontinued operations was $11.1 million for year ended December 31, 2007, compared to income of $29.2 million for 2006. The 2007 results include a gain of $6.8 million related to the Australian and Netherlands discontinued operations, compared to the 2006 gain from the sale of Highland of $20.4 million. Basic and diluted earnings per share from discontinued operations were $0.44 and $0.43, respectively, for the year ended December 31, 2007, compared to basic and diluted earnings per share of $1.19 for 2006.

Net Income

Net income was $15.0 million for the year ended December 31, 2007, compared to $20.4 million for 2006. Basic and diluted earnings per share were $0.59 and $0.58, respectively, for the year ended December 31, 2007 compared to basic and diluted earnings of $0.83 per share in the year ended December 31, 2006. Basic average shares outstanding increased in 2007 as a result of various employee stock compensation awards that vested or were issued or granted at various times during 2007. For 2006, dilutive earnings per share calculations do not differ from basic earnings per share because the effects of any potential common stock were anti-dilutive and therefore not included in the calculation of dilutive earnings per share. For 2006, the Company used loss from continuing operations as its control number in determining earnings per share.

Liquidity and Capital Resources

The Company’s liquidity needs arise primarily from funding working capital requirements and capital investment in information technology and facilities.

The Company has an Amended and Restated Credit Agreement (the “Credit Agreement”), dated July 31, 2007 with Wells Fargo Foothill, Inc. and another lender. The Company entered into an amendment to the Credit Agreement on December 30, 2008. The Credit Agreement provides the Company with the ability to borrow up to $75.0 million, including the issuance of letters of credit. The Company’s available borrowings under the Credit Agreement are based on an agreed percentage of eligible accounts receivable principally related to the Company’s North America, U.K. and Australia operations, as defined in the Credit Agreement, less required reserves. As of December 31, 2008 the Company’s minimum borrowing base was $55.4 million. As a result of the December 30, 2008 amendment, the Company must maintain a minimum borrowing base of $25.0 million. As of December 31, 2008, the Company had $5.3 million of outstanding borrowings under the Credit Agreement and a total of $5.4 million of outstanding letters of credit, resulting in available borrowings of $19.7 million after deducting the minimum borrowing base. The December 30, 2008 amendment eliminated the minimum EBITDA covenant requiring the Company’s quarterly EBITDA for a trailing twelve-month period to be not less than $25.0 million.

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The maturity date of the Credit Agreement is July 31, 2012. Borrowings may be made with an interest rate based on the prime rate plus a margin based on borrowing availability or an interest rate based on the LIBOR rate plus a margin based on borrowing availability. The December 31, 2008 amendment established minimum interest rates and increased the aforementioned prime rate and LIBOR rate margins, thus increasing the interest rates the Company will pay on borrowings under the Credit Agreement. The interest rate on outstanding borrowings was 3.25% as of December 31, 2008. Borrowings under the Credit Agreement are secured by substantially all of the assets of the Company.