NOTE 5 – STOCK-BASED COMPENSATION

The Company accounts for stock-based compensation in accordance with FASB ASC 718 "Compensation – Stock Compensation", as interpreted by the SEC Staff Accounting Bulletins No. 107 and No. 110. Under ASC 718, stock-based compensation is based on the fair value of the award on the date of grant, which is recognized over the related service period, net of estimated forfeitures. 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 service period is the period over which the related service is performed, which is generally the same as the vesting period. The Company uses the Black-Scholes option-pricing model to determine the compensation expense related to stock options.

Incentive Compensation Plan

The Company maintains the Hudson Highland Group, Inc. 2009 Incentive Stock and Awards Plan (the “ISAP”) pursuant to which it can issue equity-based compensation incentives to eligible participants. The ISAP permits the granting of stock options and restricted stock as well as other types of equity-based awards. The Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”) will establish such conditions as it deems appropriate on the granting or vesting of stock options or restricted stock. While the Company historically granted both stock options and restricted stock to its employees, since 2008 the Company has granted primarily restricted stock to its employees.

The ISAP provides that an aggregate of 1,600,000 shares of the Company’s common stock are reserved for issuance to participants. On September 30, 2011, there were 271,979 shares of the Company’s common stock available for future issuance. The Compensation Committee administers the ISAP and may designate any of the following as a participant under the ISAP: any officer or other employee of the Company or its affiliates or individuals engaged to become an officer or employee, consultants or other independent contractors who provide services to the Company or its affiliates and non-employee directors of the Company.

The Company also maintains the Director Deferred Share Plan (the “Director Plan”) pursuant to which it can issue restricted stock units to its non-employee directors. A restricted stock unit is equivalent to one share of the Company’s common stock and is payable only in common stock issued under the ISAP upon a director ceasing service as a member of the Board of Directors of the Company.

Stock Options

During the nine months ended September 30, 2011, the Company granted to its Chairman and Chief Executive Officer 400,000 stock options with service-based vesting conditions that will vest (i) 50% on the second anniversary of the date of grant, and (ii) 50% on the third anniversary of the date of grant. The stock options were granted outside of the Company’s ISAP in connection with the Chairman and Chief Executive Officer’s commencement of employment with the Company in May 2011.

For the three months ended September 30, 2011 and 2010, the Company recognized $151 and $12, respectively, of stock-based compensation expense related to stock options. For the nine months ended September 30, 2011 and 2010, the Company recognized $367 and $142, respectively, of stock-based compensation expense related to stock options.

As of September 30, 2011, the Company had approximately $1,188 of total unrecognized stock-based compensation expense related to outstanding non-vested stock options. The Company expects to recognize that cost over a weighted average service period of approximately 2.13 years.

Changes in the Company’s stock options for the nine months ended September 30, 2011 were as follows:

	Number of Options Outstanding			Weighted Average Exercise Price per Share

Options outstanding at Jaurary 1, 2011		1,548,300		$	12.64
Granted		400,000			5.18
Expired		(547,950	)		10.50
Options outstanding at September 30, 2011		1,400,350			11.35
Options exercisable at September 30, 2011		975,350		$	14.04

Restricted Stock

During the nine months ended September 30, 2011, the Company granted 743,625 shares of restricted stock to various employees. Shares of restricted stock with only service-based vesting conditions and shares of restricted stock with performance-based vesting conditions are valued at the closing market value of the Company’s common stock on the date of grant. The Company recognizes compensation cost for the awards with performance conditions if and when the Company concludes that it is probable that the performance conditions will be achieved. Of the 743,625 shares granted, (i) 14,000 shares vested immediately, (ii) 381,625 shares vest ratably over a three year period from the date of grant, (iii) 3,000 shares vest ratably over a four year period from the date of grant (iv) 316,000 shares vest ratably over a three year period from the date of grant based on the Company’s gross margin and earnings before interest, income taxes, depreciation and amortization (“EBITDA”) for the year ending December 31, 2011, (v) 15,000 shares vest one-third on December 1 in each of 2011, 2012 and 2013, (vi) 10,000 shares vest one-third on February 16 in each of 2012, 2013 and 2014, and (vii) 4,000 shares vest one-fourth on April 1 in each of 2012, 2013, 2014 and 2015.

For the three months ended September 30, 2011 and 2010, the Company recognized $793 and $430, respectively, of stock-based compensation expense related to restricted stock. For the nine months ended September 30, 2011 and 2010, the Company recognized $2,209 and $1,178, respectively, of stock-based compensation expense related to restricted stock.

As of September 30, 2011, the Company had $3,644 of total unrecognized stock-based compensation expense related to outstanding non-vested restricted stock. The Company expects to recognize that cost over a weighted average service period of approximately 1.54 years.

Changes in the Company’s restricted stock for the nine months ended September 30, 2011 were as follows:

	Number of Shares of Restricted Stock			Weighted Average Grant Date Fair Value

Non-vested restricted stock at Jaurary 1, 2011		953,037		$	3.64
Granted		743,625			6.22
Vested		(271,540	)		3.90
Forfeited		(89,263	)		2.80
Non-vested restricted stock at September 30, 2011		1,335,859		$	5.08

Restricted Stock Units

During the nine months ended September 30, 2011, the Company granted 27,376 restricted stock units to its non-employee directors pursuant to the Director Plan. The restricted stock units vest immediately upon grant and are credited to each of the non-employee director’s retirement accounts under the Director Plan.

In addition, during the nine months ended September 30, 2011, the Company granted 100,000 restricted stock units to its Chairman and Chief Executive Officer. The restricted stock units will vest (i) 50% on the second anniversary of the date of grant, (ii) 25% on the third anniversary of the date of grant, and (iii) 25% on the fourth anniversary of the date of grant. Restricted stock units are valued at the closing market value of the Company’s common stock on the date of grant. The 100,000 restricted stock units were granted outside of the ISAP in connection with the Chairman and Chief Executive Officer’s commencement of employment with the Company in May 2011.

For the three months ended September 30, 2011 and 2010, the Company recognized $52 and $0, respectively, of stock-based compensation expense related to restricted stock units. For the nine months ended September 30, 2011 and 2010, the Company recognized $245 and $147, respectively, of stock-based compensation expense related to restricted stock units.

As of September 30, 2011, the Company had approximately $439 of total unrecognized stock-based compensation expense related to outstanding restricted stock units. The Company expects to recognize that cost over a weighted average service period of approximately 2.41 years.

Changes in the Company’s restricted stock units for the nine months ended September 30, 2011 were as follows:

	Number of Shares of Restricted Stock Unit			Weighted Average Grant-Date Fair Value

Non-vested restricted stock units, beginning of year		-		$	-
Granted		127,376			5.37
Vested		(27,376	)		6.05
Non-vested restricted stock units at September 30, 2011		100,000		$	5.18

Defined Contribution Plans

The Company maintains the Hudson Highland Group, Inc. 401(k) Savings Plan (the “401(k) plan”). The 401(k) plan allows eligible employees to contribute up to 15% of their earnings to the 401(k) plan. The Company has the discretion to match employees’ contributions up to 3% through a contribution of the Company’s common stock. Vesting of the Company’s contribution occurs over a five-year period. For the three months ended September 30, 2011 and 2010, the Company recognized $176 and $179, respectively, of expense for the 401(k) plan. For the nine months ended September 30, 2011 and 2010, the Company recognized $584 and $430, respectively, of expense for the 401(k) plan. In March 2011, the Company issued 91,944 shares of its common stock with a value of $602 to satisfy the 2010 contribution liability to the 401(k) plan. In March 2010, the Company issued 121,016 shares of its common stock with a value of $541 plus cash of $111 to satisfy the 2009 contribution liability to the 401(k) plan.