KORN FERRY - Annual Report: 2005 (Form 10-K)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For the fiscal year ended April 30, 2005

OR

Commission File Number 001-14505

KORN/FERRY INTERNATIONAL

(Exact Name of Registrant as Specified in its Charter)

1900 Avenue of the Stars, Suite 2600

Los Angeles, California 90067

(Address of principal executive offices) (Zip code)

(310) 552-1834

(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 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.  x

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes  x    No  ¨

The number of shares outstanding of our common stock as of July 5, 2005 was 40,379,772 shares. The aggregate market value of the Registrant’s common stock held by non-affiliates of the Registrant on October 31, 2004, (assuming that the Registrant’s only affiliates are its officers, directors and 10% or greater stockholders) was approximately $594,264,000, based upon the closing market price of $17.40 on that date of a share of common stock as reported on the New York Stock Exchange.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for its 2005 Annual Meeting of Stockholders scheduled to be held on September 13, 2005 are incorporated by reference into Part III of this Form 10-K.

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KORN/FERRY INTERNATIONAL

Index to Annual Report on Form 10-K for the Fiscal Year Ended April 30, 2005

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PART I.

Item 1.    Business

Business Overview

Korn/Ferry International is the leading provider of executive search, outsourced recruiting and leadership development solutions with the broadest global presence in the recruitment industry. Since 1969, when we opened our first office in Los Angeles, we have expanded to 70 cities in 36 countries. In 1998, we extended our market reach into the middle-market with the introduction of Futurestep, our middle-management recruitment service. As of April 30, 2005, we have approximately 1,575 employees, including 398 executive recruitment and 76 Futurestep consultants who are primarily responsible for client services. Our clients include many of the world’s largest and most prestigious public and private companies, middle-market and emerging growth companies, as well as governmental and not-for-profit organizations. We have established strong client loyalty; more than 82% of the executive recruitment assignments we performed in fiscal 2005 were on behalf of clients for whom we had conducted previous assignments over the last three fiscal years.

We were originally formed as a California corporation in November 1969 and reincorporated as a Delaware corporation in fiscal 2000.

We provide the following human capital solutions:

Executive Search:    Executive search, our flagship business, focuses on board level, chief executive and other senior executive positions for clients predominantly in the consumer, financial services, industrial, life sciences and technology industries. The relationships that we develop through this business are valuable for introducing our other service offerings to clients.

Leadership Development Solutions:    Our comprehensive blend of leadership services, including Strategic Management Assessment, Executive Development and Executive Center, assists clients with the ongoing assessment and development of their leadership teams. We assist clients in understanding the expertise, behaviors and values critical to their strategy and how their management team aligns with these important characteristics. We provide clients with the resources to address existing misalignment of management through focused coaching and development as well as a state-of-the-art framework, Executive Center, for monitoring employee performance against key success factors.

Middle-Management Recruitment:    Futurestep, our middle-management recruitment business, draws from Korn/Ferry’s 35 years of industry experience to create customized recruitment strategies based on clients’ individual workforce needs. In addition to middle-management search, Futurestep has become a pioneer in Recruitment Process Outsourcing (“RPO”) and now offers project recruitment, fully outsourced RPO, and interim solutions. Futurestep combines solution-oriented service with customized technologies to deliver strong candidates at fast cycle times.

We file annual, quarterly and current reports, proxy statements, and other documents with the Securities and Exchange Commission (the “SEC”), pursuant to the Securities Exchange Act of 1934, or (the “Exchange Act”). You may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Our reports, proxy statements, and other documents filed electronically with the SEC are available at the website maintained by the SEC at www.sec.gov.

We also make available free of charge on our Internet website at www.kornferry.com our annual, quarterly, and current reports, and, if applicable, amendments to those reports, filed or furnished pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after we electronically file such reports with, or furnish them to, the SEC.

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Our Corporate Governance Guidelines, Code of Business Conduct and Ethics and the charters of the Audit Committee, Compensation and Personnel Committee and Nominating Committee and Corporate Governance Committee of our Board of Directors are also posted on our Internet website at www.kornferry.com. Stockholders may request copies of these documents by writing to our Corporate Secretary at 1900 Avenue of the Stars, Suite 2600, Los Angeles, California 90067.

Financial information regarding our business segments for the last three fiscal years is contained in the Notes to our Consolidated Financial Statements.

Industry Overview

Executive Recruitment:    The executive recruitment market concentrates on searches for positions with annual compensation of $150,000 or more, which generally involve board level, chief executive and other senior executive positions. The industry is comprised of retained and contingency search firms. Retained firms typically charge a fee for their services equal to approximately one-third of the annual cash compensation for the position being filled regardless of whether a position has been filled. Contingency firms generally work on a non-exclusive basis and are compensated only upon successfully placing a recommended candidate. We are a retained executive search firm.

We also provide leadership development solutions, which include management assessment, executive coaching and development and a web-based performance management application.

Middle-Management Recruitment:    The middle-management recruitment market focuses on searches for middle and lower management positions with annual compensation generally in the $75,000 to $150,000 range. This market has undergone a fundamental transformation over the past several years towards a technology-based environment, and has also seen the emergence of outsourced recruitment services commonly referred to as RPO. Technology and the Internet have made identifying, targeting and reaching potential candidates much quicker. This market also benefits from the efficiencies of maintaining large databases of qualified candidates thereby reducing placement times.

Industry Trends

With the global economy steadily improving, we believe that the business outlook for the recruitment industry remains positive. The economic upswing combined with the shortage of qualified executives fuel job growth and hiring. We believe that the following current market trends will contribute to the long-term growth of the recruitment industry:

Consolidation of Human Capital Solution Providers—In choosing their recruitment and human resource service providers, companies are actively in search of preferred providers in order to create efficiencies and consolidate vendor relationships. Companies that can address a broad range of recruitment needs are becoming increasingly attractive. Clients are seeking trusted partners who understand their business and unique organizational culture and who can manage the multiple needs of their business on a global scale.

Aging Population—In many major economic centers, the workforce population is aging at a rapid pace. Increasingly, baby boom generation of executives are beginning to retire, with a lack of qualified professionals to replace them. It is projected that there will be twice as many people retiring this decade as there were in the previous one. Moreover, the supply of available qualified candidates is constricting, making it more difficult for employers to secure executives. We believe that this trend will have a positive impact on our business, as employers increasingly seek service providers who can provide solutions to the impending talent shortage.

Globalization of Business—As the world markets continue to integrate into one global economy, many successful companies are adding strength to their internal talent with experienced executives who can operate effectively in a global economy. The rapidly changing competitive environment challenges multinational and

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local companies to identify qualified executives with the right combination of skills, experience and cultural compatibility. Today, clients are turning to firms that combine proven expertise with specialized knowledge of key industries and local markets, enabling them to address their ongoing global recruitment needs.

Increased Outsourcing of Recruitment Functions—More companies are focusing on core competencies and outsourcing non-core, back office functions to providers who can efficiently provide high quality services. A shortage of qualified management-level candidates has made identifying and recruiting exceptional candidates more difficult. Companies increasingly rely on experienced global executive recruitment firms to address their management recruitment needs. By hiring global executive recruitment firms, companies can expect to:

Increased Use of Advanced Technology—Emphasis in the recruitment business is shifting from candidate identification to candidate assessment and placement. This new emphasis is being driven by enhancements in technology, as it is becoming easier to identify desirable candidates in on-line and off-line databases. In addition, information technology and the Internet are creating efficient ways to manage the recruitment process in identifying, recruiting and assessing candidates.

Other Industry Trends—In addition to the industry trends mentioned above, we believe the following factors will also contribute to the growth of the recruitment industry:

Growth Strategy

Our objective is to expand our position as the leading provider of executive search, outsourced recruiting and leadership development solutions. The principal elements of our strategy include:

Recruiting and Retaining Key Consultants

In an ongoing strategic effort to promote the firm as the leading career destination, we successfully recruited 50 new consultants globally during fiscal year 2005. The new additions originate from a diverse range of backgrounds and areas of expertise, and were recruited based on their track records as top performers in the human capital industry. The number of new consultants in the current year was partially offset by attrition. We believe we have continued to upgrade our professional staff in the current year, and that the recruitment and retention of key consultants will be an ongoing driver of growth.

Broadening our Product and Service Offerings

In addition to being the leading provider of executive recruitment, we also offer clients middle-management recruitment, RPO, project recruitment, fully outsourced RPO and interim solutions through Futurestep and

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Leadership Development Solutions. We will continue to develop and add new products and services that our clients demand and that we feel are consistent with our brand positioning.

Global Account Management

In an effort to better coordinate global recruiting and to gain operational efficiencies, we expect that multinational clients will increasingly turn to strategic partners that can manage their recruitment needs on a centralized basis. This will require vendors with a global network of offices and technological support systems to manage multiple hires across geographical regions. Our global account management program, Integrated Services, continues to identify account leaders for multinational clients, provides training and software support to manage such accounts, and develops guidelines and protocols to support and increase the rate of cross-border assignments for these clients.

Expanding our Market Reach and Presence through Technology and Assessment Solutions

Information technology has become a critical element to the recruitment business. We have made significant investments in developing a state-of-the-art technology infrastructure, including a worldwide network and our proprietary executive recruitment software, e-Korn/Ferry. In fiscal 2005, we continued such investments through the deployment of enhanced tools and information sharing for competitive advantage. We rolled out three major upgrades of Searcher, our proprietary candidate database and global engagement management system, while laying the groundwork for the next generation search tool, K/F One. We embarked on a similar program to upgrade and modernize Futurestep’s technology, introducing workflow and reporting enhancements in support of Futurestep’s Managed Services offering. Leadership Development Solutions also received significant upgrades to its Management Assessment technology and its Talent Management Platform, Executive Center. Search Assessment, an assessment technology process for our core search business, is now used in 22% of all senior search engagements. We will continue to refine our technology, including our exclusive candidate assessment tools, in order to strengthen our relationships with our existing clients, attract new clients, expand into new markets and position ourselves to gain a competitive advantage in marketing complementary services.

Leveraging our Leadership and Brand Name in Executive Recruitment

We believe that there are significant opportunities to extend our market share and develop new client relationships by aggressively marketing our proven global recruitment expertise. Our leadership in executive recruitment enables us to grow our business by increasing the number of recruitment assignments we handle for existing clients in all areas of recruitment. We also believe that our strong relationships and well-recognized brand name will enable us to introduce new services to our existing client base and potential new clients and also allow us to build communities of candidates to directly market our services.

Our Services and Organization

We address the global recruitment needs of our clients at all levels of management by offering the following services:

Executive Recruitment Services

Overview.    Our executive recruitment services are typically used to fill executive-level positions, such as board directors, chief executive officers, chief financial officers, chief operating officers, chief information officers and other senior executive officers. Once we are retained by a client to conduct an assignment, we assemble a team comprised of consultants with appropriate geographic, industry and functional expertise. Our search consultants serve as management advisors and work closely with the client in identifying, assessing and placing a qualified candidate. In fiscal 2005, we performed more than 5,700 executive recruitment assignments.

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We use a search methodology that has been developed through 35 years of experience in conducting executive recruitment. We emphasize a close working relationship with the client and a comprehensive understanding of the client’s business issues, strategy and culture, as well as an in-depth knowledge of the skills necessary to succeed within a client’s organization. Initially, the search team consults with the client to better understand its history, culture, structure, expectations, challenges, future direction and operations. In these meetings, the team identifies the specific needs of the client and develops a profile of an ideal candidate for the position. Early in the process, the team also works with the client to develop the general parameters of a compensation package that will attract highly qualified candidates.

Once the position is defined, the research team identifies, through the use of our proprietary databases and other information resources, companies that are in related industries facing similar challenges and issues with operating characteristics similar to those of the client. In addition, the team consults with its established network of resources, and our databases containing profiles of over 2.9 million executives to assist in identifying individuals with the right backgrounds and personal abilities. These sources are a critical element in assessing the marketplace. The original list of candidates is carefully screened through phone interviews, video conferences and in-person meetings. The client is then presented final qualified candidates to interview. We conduct thorough due diligence and background verification of the candidate throughout the process, sometimes with the assistance of an independent third party.

The finalist for the position will usually meet with the client for a second and possibly a third round of discussions. At this point, the compensation package will have been discussed in detail, increasing the likelihood that an offer will be accepted. Generally, the search consultants will participate in the negotiations until a final offer is made and accepted. Throughout the process, ongoing communication with the client is critical to keep client management apprised of progress.

Industry Specialization.    Consultants in our five global markets and three regional specialty practice groups bring an in-depth understanding of the market conditions and strategic and management issues faced by clients within their specific industry and geography. We are continually looking to expand our specialized expertise through internal development and strategic hiring in targeted growth areas.

Percentage of Fiscal 2005 Assignments by Industry Specialization

Functional Expertise.    We have organized executive recruitment centers of functional expertise, composed of consultants who have extensive backgrounds in placing executives in certain functions, such as board directors, chief executive officers and other senior executive officers. Our Board Services Practice, for example, was first established in 1972 to assist clients assemble an effective, knowledgeable and cohesive board of directors to meet the growing demands of accountability and more effective board performance. The shortage of experienced directors, the tightening of governance policies and the desire of companies to broaden the expertise of their board are raising the standards required to identify and recruit directors with the qualified skills. We have significant expertise in this area and have built a proprietary database with the names and backgrounds of all the

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Fortune 1000 directors, plus a significant number of middle-market and high-growth company board members, to assist in board searches. Members of functional groups are located throughout our regions and across our industry groups.

Percentage of Fiscal 2005 Assignments by Functional Expertise

Regions

North America—We opened our first office in Los Angeles in 1969, and currently have 22 offices throughout the United States and Canada. In fiscal 2005, the region generated fee revenue of $225.9 million from over 2,400 assignments, with an average of 200 consultants.

Europe—We opened our first European office in London in 1972, and currently have 19 offices in 17 countries throughout the region. In fiscal 2005, fee revenue was $110.4 million from over 1,600 assignments, with an average of 110 consultants.

Asia/Pacific—We opened our first Asia/Pacific office in Tokyo in 1973, and have 15 offices in ten countries throughout the region. In fiscal 2005, fee revenue was $51.2 million from over 1,000 assignments, with an average of 61 consultants.

South America—We opened our first South American office in Brazil in 1974. We expanded our practice to Mexico through the 1977 acquisition of a less than 50% interest in a company in Mexico City and currently conduct operations in Mexico through subsidiaries in which we hold a minority interest. As of April 30, 2005, we operate a network of seven offices in six countries covering the entire South American region and two offices in Mexico. The region, excluding Mexico, our unconsolidated subsidiary, generated fee revenue of $10.8 million in fiscal 2005. We handled over 630 assignments in fiscal 2005 in this region, with an average of 19 consultants. Our share of the operating results for our Mexico subsidiaries is included in equity in earnings of unconsolidated subsidiaries on the consolidated statements of operations.

Client Base.    Our 4,160 clients include many of the world’s largest and most prestigious public and private companies, including 47% of the Fortune 500 companies in the current fiscal year. In fiscal 2005, no single client represented more than 1.5% of fee revenue. We have established strong client loyalty; more than 82% of the executive recruitment assignments we performed in fiscal 2005 were on behalf of clients for whom we had conducted previous assignments over the last three fiscal years.

Competition.    We are the leading provider of executive search, outsourced recruiting and leadership development services. Other multinational executive recruitment firms include Spencer Stuart & Associates, Egon Zehnder International, Russell Reynolds Associates, Inc. and Heidrick & Struggles International, Inc. Although these firms are our primary competitors, we also compete with smaller boutique firms that specialize in specific regional, industry or functional searches. We believe our brand name, multi-product offerings, cutting-edge technology, global network, prestigious clientele, strong specialty practices and quality of services are recognized worldwide. We also believe that our long-term incentive compensation arrangements as well as other executive benefits distinguish us from most of our competitors and are important in retaining key consultants.

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Leadership Development Solutions.    In 2004, we consolidated our strategic management assessment and executive coaching services under the name Leadership Development Solutions, with services in Europe, North and South America, Australia and Japan. This comprehensive blend of leadership service helps corporate management evaluate the individual and collective performance of their team. These solutions further extend the range of leadership capital solutions available to our clients, and are valuable tools for the chief executive, board of directors and other senior officers in pursuing organizational transformation and aligning themselves with the company’s strategic goals and internal values. These solutions were introduced in response to our clients’ demand for a tool to address the challenges of changing company relationships and global restructuring and, for venture capital and private equity firms, to evaluate the leadership team in existing or prospective portfolio companies. This process is performed by consultants with extensive experience in interviewing and evaluating senior executives and who understand local cultural differences and the relevant business and industry challenges. The assessment process is backed by a statistically validated and proprietary assessment instrument that was developed by leading assessment experts and is supported by a proprietary systems platform.

Another crucial component is development and coaching. We offer a global network of coaches who are highly skilled and certified at developing future leaders through individual and team-based coaching. Additionally, we offer clients a Web-based, highly customizable human capital management system called Executive Center. Executive Center automates and streamlines the traditionally cumbersome process of setting objectives and tracking and evaluating performance. Through Executive Center’s individual and team-based analysis and reporting capabilities, talent assessment and management can be greatly simplified, allowing for skills and experience gaps as well as succession planning to be more efficiently addressed.

Middle-Management Recruitment Services

Overview.    Futurestep offers clients a portfolio of services, including middle-management search, RPO, project recruitment and interim solutions. Each Futurestep service benefits from the in-depth industry and functional-area expertise of our global consultant network, guaranteeing that clients work with professionals who understand their business and have the knowledge to qualify candidates effectively.

Futurestep combines traditional search expertise with a multi-tiered portfolio of recruitment solutions. Futurestep consultants, based in 13 countries, have instant access to one of the world’s largest databases of prescreened middle-management professionals. Our global candidate pool complements our international presence and multi-channel sourcing strategy to ensure speed, efficiency and quality service for clients worldwide. Futurestep’s middle-management search uses multiple sourcing channels, validated cultural assessments and a global database of more then one million prescreened professionals to offer a low overhead approach that accelerates the recruitment process and provides a diverse set of candidates matched with specific cultural and strategic requirements.

For multiple recruiting projects, Futurestep consultants work with clients to analyze existing internal recruitment capabilities and develop a co-sourcing platform that emphasizes shared ownership of the recruitment process. Futurestep also offers outsourced recruiting solutions to clients seeking a fully integrated, single source for their recruitment needs.

For clients needing professionals on an interim basis, Futurestep offers an interim solutions service that delivers direct access to highly qualified professionals, fulfilling an organization’s critical needs for a temporary, flexible workforce. Whether the client needs a mid-level position filled on a monthly or yearly basis, Futurestep draws interim executives from one of the world’s largest talent pools of prescreened, middle management professionals in the industry.

Regions.    We opened our first Futurestep office in Los Angeles in May 1998. In January 2000, we acquired the ESS business of PA Consulting with operations in Europe and Asia/Pacific. At April 30, 2005, we had Futurestep operations in 13 cities in North America, 8 in Europe and 9 in Asia/Pacific.

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Competition.    Futurestep competes for assignments with contingency and/or staffing firms who do not have the same pricing structure or provide the full suite of services and, to a lesser extent, in the technology based middle-management recruitment industry, with firms such as Monster Worldwide.

Although technology oriented companies may be drawn to the recruitment business by their ability to leverage their existing technology, their lack of a recognized brand name, experienced consultants and global footprint act as significant barriers to entry.

Organization

Our executive recruitment business is managed on a geographic basis throughout our four regions: North America, Europe, Asia/Pacific and South America. Futurestep is managed on a worldwide basis with operations in North America, Europe and Asia/Pacific.

Professional Staff and Employees

As of April 30, 2005, we had approximately 1,256 executive recruitment employees consisting of 398 consultants and 858 associates, researchers, administrative and support staff. In addition, we had 14 consultants in our two unconsolidated Mexico offices. Futurestep had 280 employees at April 30, 2005 consisting of 76 consultants and 228 administrative and support staff. Corporate had 39 professionals at April 30, 2005. We have not been a party to a collective bargaining agreement and consider our relations with our employees to be good. Korn/Ferry International is an equal opportunity employer.

In executive search, senior associates, associates and researchers support the efforts of our consultants with candidate sourcing and identification, but do not generally lead an assignment. We have extensive training and professional development programs. Promotion to senior client partner is based on a variety of factors, including demonstrated superior execution and business development skills, the ability to identify solutions to complex issues, personal and professional ethics, a thorough understanding of the market, the ability to develop and help build effective teams. In addition, we have a program for recruiting experienced professionals into our firm.

The following table provides information relating to each of our business segments for fiscal 2005:

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Risk Factors

The risks described below are the material risks facing our company. Additional risks not presently known to us or that we currently deem immaterial may also impair our business operations. Our business, financial condition or results of operations could be materially adversely affected by any of these risks.

Competition in our industry could result in our losing market share and charging lower prices for services, which could reduce our revenue.

We compete for executive search business with numerous executive search firms and businesses that provide job placement services. Traditional executive search competitors include Spencer Stuart & Associates, Egon Zehnder International, Russell Reynolds Associates, Inc. and Heidrick and Struggles International, Inc. In each of our markets, our competitors may possess greater resources, greater name recognition and longer operating histories than we do, which may give them an advantage in obtaining future clients and attracting qualified professionals in these markets. There are no extensive barriers to entry into the executive search industry, and new recruiting firms continue to enter the market. We believe the continuing development and increased availability of information technology will continue to attract new competitors. Increased competition may lead to pricing pressures that could negatively impact our business.

If we fail to attract and retain qualified and experienced consultants, our revenue could decline and our business could be harmed.

We compete with other executive search firms for qualified consultants. Attracting and retaining consultants in our industry is particularly important because, generally, a small number of consultants have primary responsibility for a client relationship. Because client responsibility is so concentrated, the loss of key consultants may lead to the loss of client relationships. This risk is heightened due to the general portability of a consultant’s business. Any decrease in the quality of our reputation, reduction in our compensation levels or restructuring of our compensation program, whether as a result of insufficient revenue, a decline in the market price of our common stock or for any other reason, could impair our ability to retain existing or attract additional qualified consultants with the requisite experience, skills or established client relationships. Our failure to retain our most productive consultants or maintain the quality of service to which our clients are accustomed and the ability of a departing consultant to move business to his or her new employer could result in a loss of clients and harm our business.

Economic conditions in the geographic regions and the industries from which we derive a significant portion of our fee revenue could undermine our future profitability.

Demand for our services is significantly affected by the general level of economic activity in the geographic regions and industries in which we operate. When economic activity slows, many companies hire fewer permanent employees. Continued uncertainty with respect to the recovery of the capital markets may cause prospective employers to defer employment decisions, thereby impacting our revenue. In addition, in fiscal 2005, our total assignments included 18% related to the technology industry and 17% related to the financial services/investments industry, both of which have experienced volatility recently. Any significant economic downturn, on a global basis, in North America, or in other regions or industries where our operations are heavily concentrated, could harm our business, results of operations and financial condition.

If we are unable to retain our executive officers and key personnel, or integrate new members of our senior management that are critical to our business, we may not be able to successfully manage our business in the future.

Our future success depends upon the continued service of our executive officers and other key management personnel. If we lose the services of one or more of our executives or key employees, or if one or more of them decides to join a competitor or otherwise compete directly or indirectly with us, we may not be able to successfully manage our business or achieve our business objectives.

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If we are unable to maintain our professional reputation and brand name, our business will be harmed.

We depend on our overall reputation and brand name recognition to secure new engagements and hire qualified professionals. Our success also depends on the individual reputations of our professionals. We obtain a majority of our new engagements from existing clients or from referral by those clients. Any client who is dissatisfied with our assignments can adversely affect our ability to secure new engagements.

If any factor, including poor performance, hurts our reputation, we may experience difficulties in competing successfully for both new engagements and qualified consultants. Failing to maintain our professional reputation and the goodwill associated with our brand name could seriously harm our business.

We are subject to potential legal liability from clients, employees and candidates. Insurance coverage may not be available to cover all of our potential liability and available coverages may not be sufficient to cover all claims that we may incur.

Our ability to obtain liability insurance, its coverage levels, deductibles and premiums are all dependent on market factors, our loss history and insurers’ perception of our overall risk profile. We are exposed to potential claims with respect to the executive search process. A client could assert a claim for matters such as breach of an off-limit agreement or recommending a candidate who subsequently proves to be unsuitable for the position filled. Further, the current employer of a candidate whom we placed 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, violations of employment law or other matters. We cannot assure you that our insurance will cover all claims or that insurance coverage will be available at economically acceptable rates.

We rely heavily 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. 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 of new proprietary software, either internally or through independent consultants. If we are unable to design, develop, implement and utilize, in a cost-effective manner, information systems that provide the capabilities necessary for us to compete effectively, or for any reason, any interruption or loss of our information processing capabilities, could harm our business, results of operations and financial condition.

We face risks associated with political instability, legal requirements and currency fluctuations in our international operations.

We operate in 36 countries and, as of the year ended April 30, 2005, generate nearly half our fee revenue from operations outside of North America. There are certain risks inherent in transacting business worldwide, such as:

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We have no hedging or similar foreign currency contracts, and therefore fluctuations in the value of foreign currencies could impact our global operations. We cannot assure you that one or more of these factors will not harm our business, financial condition or results of operations.

We may be limited in our ability to recruit employees from our clients and we could lose those opportunities to our competition, which could harm our business.

Either by agreement with clients, or for client relations or marketing purposes, we sometimes refrain from, for a specified period of time, recruiting employees from a client when conducting searches on behalf of other clients. These off-limit agreements can generally remain in effect for up to two years following completion of an assignment. The duration and scope of the off-limit agreement, including whether it covers all operations of the client and its affiliates or only certain divisions of a client, generally are subject to negotiation or internal policies and may depend on factors such as the scope, size and complexity of the client’s business, the length of the client relationship and the frequency with which we have been engaged to perform executive searches for the client. Our inability to recruit employees from these clients may make it difficult for us to obtain search assignments from, or to fulfill search assignments for, other companies in that client’s industry. We cannot assure you that off-limit agreements will not impede our growth or our ability to attract and serve new clients, or otherwise harm our business.

We have provisions that make an acquisition of us more difficult and expensive.

Antitakeover provisions in our Certificate of Incorporation, our Bylaws and the Delaware laws make it more difficult and expensive for us to be acquired in a transaction that is not approved by our Board of Directors. Some of the provisions in our Certificate of Incorporation and Bylaws include:

These provisions could discourage an acquisition attempt or other transaction in which stockholders could receive a premium over the current market price for the common stock.

Item 2.    Properties

Our corporate office is located in Los Angeles, California. We lease all 70 of our executive recruitment and Futurestep offices located in North America, Europe, Asia/Pacific and South America. As of April 30, 2005, we leased an aggregate of approximately 519,000 square feet of office space. The leases generally are for terms of one to twelve years and contain customary terms and conditions. We believe that our facilities are adequate for our current needs and we do not anticipate any difficulty replacing such facilities or locating additional facilities to accommodate any future growth.

Item 3.    Legal Proceedings

From time to time, we are involved in litigation both as plaintiff and defendant, relating to claims arising out of our operations. As of the date of this report, we are not engaged in any legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on our business, financial condition or results of operations.

Item 4.    Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the last quarter of fiscal 2004.

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Executive Officers of the Registrant

Our executive officers serve at the discretion of our Board of Directors. There is no family relationship between any executive officer or director. The following information sets forth the business experience for at least the past six years for each of our executive officers as of April 30, 2005.

Paul C. Reilly has been Chairman of the Board and Chief Executive Officer since June 2001. Prior to joining Korn/Ferry International, Mr. Reilly was at KPMG International, where he was Chief Executive Officer. Mr. Reilly joined KPMG LLP in 1987.

Gary D. Burnison has been Executive Vice President and Chief Financial Officer since March 2002 and was appointed Chief Operating Officer in November 2003. Prior to joining Korn/Ferry International, Mr. Burnison was Principal and Chief Financial Officer of Guidance Solutions, a privately held consulting firm, from 1999 to 2001. Prior to that, Mr. Burnison served as an Executive Officer and a member of the board of directors of Jefferies and Company, an investment bank and brokerage firm, from 1995 to 1999. Previously, Mr. Burnison was a partner at KPMG LLP.

Gary C. Hourihan has been Executive Vice President since January 1999 and was appointed President of Leadership Development Solutions for Korn/Ferry International, responsible for overseeing global operations and strategy for our Leadership Development Solutions business in November 2002. Prior to joining Korn/Ferry International, he was the co-founder, Chairman, and Chief Executive Officer of SCA Consulting, L.L.C., one of the leading executive compensation consulting firms in the United States, where he was employed from November 1984 until joining Korn/Ferry International.

Robert H. McNabb is an Executive Vice President of Korn/Ferry International and was appointed Chief Executive Officer for Korn/Ferry International Futurestep, Inc. in July 2002. Prior to becoming the Chief Executive Officer for Futurestep, he was President of the Futurestep Americas and Asia/Pacific regions since December 2001. Prior to joining Futurestep, he was the President and Chief Executive Officer of Corestaff from 1998 to 2001 and President and Chief Operating Officer at Republic Industries in 1997.

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PART II.

Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Common Stock

Our common stock is listed on the New York Stock Exchange under the symbol “KFY.” The following table sets forth the high and low sales price per share of the common stock for the periods indicated, as reported on the New York Stock Exchange:

On July 5, 2005 the last reported sales price on the New York Stock Exchange for the common stock was $18.14 per share and there were approximately 5,531 beneficial holders of the common stock.

Dividends

We have not paid any cash dividends on our common stock since April 30, 1996 and do not intend to pay any cash dividends on our common stock in the foreseeable future, but instead intend to retain future earnings to finance our operations and grow the business. Future dividend policy will depend on our earnings, capital requirements, financial condition and other factors considered relevant by our board of directors. Our credit facility and convertible securities also contain provisions that limit our ability to pay dividends.

Recent Sales of Unregistered Securities

We issued securities convertible into an aggregate of 0.2 million shares of common stock on June 13, 2004 to purchasers affiliated with Friedman, Fleischer & Lowe. The securities consisted of (i) $1.5 million in 7.5% Subordinated Convertible Notes Due 2010 (the “Notes”) and (ii) 39,000 in shares of 7.5% Convertible Series A Preferred Stock (the “Preferred Stock”). The Notes and Preferred Stock have priority over common stockholders. The Notes and Preferred Stock are convertible into shares of our common stock at $10.19 per share. These issuances were made pursuant to the terms of the Notes and the Certificate of Designations of the Preferred Stock. The Notes provided for the payment of interest due on the Notes in the form of additional notes with identical terms as the Notes and the Preferred Stock provided for the payment of dividends on the Preferred Stock in the form of additional shares of Preferred Stock. Interest and dividends are payable semi-annually in either additional securities or cash at our option. We determined that the aforementioned issuances together with the original issuances of the Notes and Preferred Stock to the holders were exempt pursuant to Regulation D under the Securities Act of 1933, as amended (the “Securities Act”). In arriving at this determination, we relied on, among other things, representations by the holders of the Notes that they were “accredited investors” as defined in Rule 501 under the Securities Act and that the offering was not a general solicitation.

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Issuer Purchases of Equity Securities

Item 6.    Selected Financial Data

The following selected financial data are qualified by reference to, and should be read together with, our “Audited Consolidated Financial Statements and Related Notes” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Form 10-K report. The selected statement of operations data set forth below for the fiscal years ended April 30, 2005, 2004 and 2003 and the selected balance sheet data as of April 30, 2005 and 2004 are derived from our consolidated financial statements, audited by Ernst & Young LLP. The selected balance sheet data as of April 30, 2003, 2002 and 2001 and the selected statement of operations data set forth below for the fiscal years ended April 30, 2002 and 2001 are derived from consolidated financial statements and notes thereto, audited by Ernst & Young LLP and Arthur Andersen LLP, respectively, which are not included in this Form 10-K report. However, data for the year ended April 30, 2001 have been restated to reflect the operating results of our Mexico subsidiaries under the equity method. Ernst & Young LLP has applied certain procedures to the restatement adjustments for fiscal 2001 as described in their report on the 2002 consolidated financial statements, which are not included in this Form 10-K report.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking Statements

This Annual Report on Form 10-K may contain certain statements that we believe are, or may be considered to be, “forward-looking” statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally can be identified by use of statements that include phrases such as “believe”, “expect”, “anticipate”, “intend”, “plan”, “foresee”, “may”, “will”, “estimates”, “potential”, “continue” or other similar words or phrases. Similarly, statements that describe our objectives, plans or goals also are forward-looking statements. All of these forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from those contemplated by the relevant forward-looking statement. The principal risk factors that could cause actual performance and future actions to differ materially from the forward-looking statements include, but are not limited to, those set forth above under the caption, “Risk Factors”, including dependence on attracting and retaining qualified and experienced consultants, portability of client relationships, local political or economic developments in or affecting countries where we have operations, ability to manage growth, restrictions imposed by off-limits agreements, competition, reliance on information processing systems, and employment liability risk. Readers are urged to consider these factors carefully in evaluating the forward-looking statements. The forward-looking statements included in this Annual Report are made only as of the date of this Annual Report and we undertake no obligation to publicly update these forward-looking statements to reflect subsequent events or circumstances.

The following presentation of management’s discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included in this annual report on Form 10-K.

Executive Summary

We are the leading provider of executive search, outsourced recruiting and leadership development solutions with the broadest global presence in the recruitment industry. Our services include executive recruitment, middle-management recruitment (through Futurestep), outsourced recruitment, leadership development solutions and executive coaching. Over half of the executive recruitment searches we performed in fiscal 2005 were for board level, chief executive and other senior executive and general management positions. Our 4,160 clients in fiscal 2005 included approximately 47% of the Fortune 500 companies. We have established strong client loyalty; more than 82% of the executive recruitment assignments we performed in fiscal 2005 were on behalf of clients for whom we had conducted assignments in the previous three fiscal years.

In an effort to achieve our long-term vision of being the leading provider of executive search, outsourced recruiting and leadership development solutions, our strategic focus for fiscal 2006 will center upon increasing market share and further increasing the cross-selling and utilization of our multi-product strategy. We will continue to explore new products and services, enhance our technology and processes and aggressively leverage our brand through thought leadership and intellectual capital projects as a means of delivering world-class service to our clients.

Fee revenue increased 38% in fiscal year 2005 to $452.2 million with increases in all regions. The North American region experienced the largest dollar increase in fee revenue in both executive recruitment and Futurestep. In fiscal 2005, we earned an operating profit of $65.8 million with operating income from executive recruitment of $84.1 million and $6.5 million from Futurestep, partially offset by corporate expenses of $24.8 million.

Our total long-term debt at April 30, 2005 was $44.9 million. Our working capital increased $57.6 million to $146.1 million at April 30, 2005. Cash provided by operating activities increased $57.8 million to $87.8 million in fiscal year 2005 as a result of improved operating results and increase in current liabilities.

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During fiscal year 2005, we issued $1.5 million of 7.5% Convertible Subordinated Notes in lieu of cash interest payments and $0.4 million of 7.5% Convertible Series A Preferred Stock in lieu of cash dividends.

Critical Accounting Policies

The following discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements. Preparation of this Annual Report on Form 10-K requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates and assumptions. In preparing our financial statements and accounting for the underlying transactions and balances, we apply our accounting policies as disclosed in our notes to consolidated financial statements. We consider the policies discussed below as critical to an understanding of our financial statements because their application places the most significant demands on management’s judgment. Specific risks for these critical accounting policies are described in the following paragraphs. Senior management has discussed the development and selection of the critical accounting estimates with the Audit Committee of the Board of Directors.

Revenue Recognition.    Management is required to establish policies and procedures to ensure that revenue is recorded over the performance period for valid engagements and related costs are matched against such revenue. We provide recruitment services on a retained basis and generally bill clients in three monthly installments. Since the fees are generally not contingent upon placement of a candidate, our assumptions primarily relate to establishing the period over which such service is performed. These assumptions determine the timing of revenue recognition and profitability for the reported period. If these assumptions do not accurately reflect the period over which revenue is earned, revenue and profit could differ. Any services that are provided on a contingent basis are recognized once the contingency is fulfilled.

Deferred Compensation.    Estimating deferred compensation requires assumptions regarding the timing and probability of payments of benefits to participants and the discount rate. Changes in these assumptions would significantly impact the liability and related cost on our balance sheet and statement of operations. Management engages an independent actuary to review these assumptions periodically in order to ensure that they reflect the population and economics of our deferred compensation plans in all material respects and to assist us in estimating our deferred compensation liability and the related cost. The actuarial assumptions we use may differ from actual results due to changing market conditions or changes in the participant population. These differences could have a significant impact on our deferred compensation liability and the related cost.

Carrying Values.    Valuations are required under U.S. generally accepted accounting principles to determine the carrying value of various assets. Our most significant assets for which management is required to prepare valuations are goodwill and deferred income taxes. Management must identify whether events have occurred that may impact the carrying value of these assets and make assumptions regarding future events, such as profitability. Differences between the assumptions used to prepare these valuations and actual results could materially impact the carrying amount of these assets and our operating results.

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Results of Operations

The following table summarizes the results of our operations as a percentage of fee revenue:

Excluding restructuring charges in fiscal 2004 and 2003, operating income as a percentage of fee revenue was 8% and 1%, respectively. On this same basis, net income (loss), as a percentage of fee revenue, was 5% and (2%) for the fiscal years ended April 30, 2004 and 2003, respectively.

The following tables summarize the results of our operations by business segment (dollars in thousands):

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Fiscal 2005 Compared to Fiscal 2004

Fee Revenue

Fee revenue increased $123.9 million, or 38%, to $452.2 million in fiscal 2005 compared to $328.3 million in fiscal 2004. The improvement in fee revenue is attributable to an increase in both the number of new engagements opened in addition to increases in average fees. Exchange rates favorably impacted fee revenues by $12.1 million in the current period.

Executive Recruitment—Executive recruitment fee revenue increased $104.2 million, or 35%, due to an increase in both the number of new engagements opened and average fees. North America fee revenue increased $55.2 million, or 32%, to $225.9 million due to a 21% increase in the number of new engagements opened as well as increased average fees. Europe reported fee revenue of $110.5 million, an increase of $32.2 million, or 41%, compared to last year driven by an increase of 8% in the number of new engagements opened as well as increased average fees. Exchange rates favorably impacted Europe fee revenue by $8.3 million in the current year. Asia Pacific fee revenue increased $14.4 million, or 39%, to $51.2 million, compared to last year due to an increase of 16% in the number of new engagements opened and increased average fees. Exchange rates favorably impacted Asia Pacific fee revenue by $1.5 million in the current year. South America reported fee revenue of $10.8 million, an increase of $2.5 million, or 29%, of which $0.2 million related to the favorable impact of exchange rates. South America also reflected an increase of 27% in the number of new engagements opened in the current year.

Futurestep—Fee revenue increased $19.6 million, or 57%, to $53.9 million in fiscal 2005 compared to $34.2 million in fiscal 2004. The improvement in fee revenue is due to an increase in the number of new engagements opened combined with our continued strategic emphasis on larger outsourced recruiting solutions. Of the total increase in fee revenue, North America experienced the largest increase in fee revenue of $9.8 million, or 82%, to $21.8 million reflecting the success of our large engagement strategy. Europe fee revenue increased $5.4 million, or 33%, to $21.5 million. Exchange rates favorably impacted Futurestep Europe fee revenue by $1.5 million. Asia Pacific fee revenue increased $4.5 million, or 73% to $10.6 million. Exchange rates favorably impacted Futurestep Asia Pacific fee revenue by $0.6 million.

Compensation and Benefits

Compensation and benefits expense increased $71.7 million, or 32%, to $292.9 million in fiscal 2005 from $221.2 million in fiscal 2004. Exchange rates impacted compensation and benefits expense unfavorably by $7.3 million in the current year.

Executive recruitment compensation and benefits costs of $244.5 million increased $57.9 million, or 31%, compared to $186.6 in the prior year due to increased profitability based rewards and new consultants joining the firm. Exchange rates impacted executive recruitment compensation and benefits expense unfavorably by $6.0 million. Executive recruitment compensation and benefits expense, as a percentage of fee revenue, declined to 61% from 63% in the prior year, as a result of increased productivity by our consultants.

Futurestep compensation and benefits expense increased $10.4 million, or 44%, to $34.1 million from $23.7 million in the prior year primarily due to additional consultants hired and increased variable compensation. Exchange rates impacted Futurestep compensation and benefits expense unfavorably by $1.3 million. Futurestep compensation and benefits expense, as a percentage of fee revenue, declined to 63% from 69% in the prior year.

Corporate compensation and benefits expense increased $3.3 million, or 31%, to $14.3 million, reflecting increased profitability based rewards and executive benefits.

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General and Administrative Expenses

General and administrative expenses increased $11.9 million, or 17%, to $83.5 million in fiscal 2005 compared to $71.6 million in 2004. Exchange rates unfavorably impacted general and administrative expenses by $2.1 million in the current year.

Executive recruitment general and administrative expenses of $63.4 million increased $8.3 million, or 15%, due to increased professional fees, provision for doubtful accounts and business development costs as a result of increased business activity. Exchange rates impacted general and administrative expense unfavorably by $1.7 million. Executive recruitment general and administrative expenses, as a percentage of fee revenue, declined to 16% from 19% in the prior year.

Futurestep general and administrative expenses increased $2.8 million, or 38%, to $10.1 million due to increased professional fees and premises and office expenses. Futurestep general and administrative expenses, as a percentage of fee revenue, declined to 19% from 21% in the prior year.

Corporate general and administrative expenses increased $0.8 million, or 8%, to $10.0 million primarily due to increased professional fees including compliance costs associated with Section 404 of the Sarbanes-Oxley Act.

Out-of-Pocket Engagement Expenses.    Out-of-pocket engagement expenses consist of expenses incurred by candidates and our consultants that are generally billed to clients. Out-of-pocket engagement expenses of $25.7 million increased $2.1 million, or 9%, over the prior year. As a percentage of fee revenue, out-of-pocket engagement expenses declined to 6% from 7% in the prior year.

Depreciation and Amortization Expenses.    Depreciation and amortization expense of $8.4 million in fiscal 2005 decreased $1.6 million, or 16%, from prior year as fixed assets became fully depreciated in fiscal 2004.

Operating Income (Loss)

Operating income increased $50.0 million to $65.8 million in the current year compared to $15.8 million in the prior year. Fiscal 2004 operating income included $8.5 million of restructuring charges.

Executive recruitment operating income increased $45.9 million to $84.1 million in fiscal 2005 compared to $38.2 million in fiscal 2004. Operating income includes a favorable restructuring adjustment of $1.3 million in fiscal 2005 and a restructuring charge of $5.4 million in fiscal 2004. The improvement in executive recruitment operating income is attributable to increased revenues offset by additional compensation and bonus expense, increased professional fees and bad debt expense. Executive recruitment operating income, as a percentage of fee revenue, improved significantly to 21% from 15% last year, excluding restructuring charges.

Futurestep operating income improved $8.1 million to $6.5 million in fiscal 2005 from an operating loss of $1.6 million in fiscal 2004. Operating income (loss) includes $1.3 million and $3.0 million of restructuring charges in fiscal 2005 and 2004, respectively. The improvement in Futurestep operating income is due to increased revenues offset by increased compensation and bonus expense, professional fees and premises and office expense. Futurestep operating income, as a percentage of fee revenue, improved significantly to 12% from 4% last year, excluding restructuring charges.

Interest Income and Other Income, Net.    Interest income and other income, net includes interest income of $1.8 and $1.2 million in fiscal 2005 and 2004, respectively. In addition, during fiscal 2005, the Company recognized $1.3 million in realized gains as a result of the sale of equity securities.

Interest Expense.    Interest expense, primarily related to convertible securities and borrowings under Company Owned Life Insurance Policies (“COLI”) policies, was $10.5 million, a slight increase of $0.6 million from prior year.

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Provision for Income Taxes.    The provision for income taxes was $20.3 million in fiscal 2005 compared to $3.2 million in fiscal 2004. The provision for income taxes in the current year reflects a 34.5% effective tax rate.

Equity in Earnings of Unconsolidated Subsidiaries.    Equity in earnings of unconsolidated subsidiaries is comprised of our less than 50% shareholder interest in our Mexican subsidiaries. We report our interest in earnings or loss of our Mexican subsidiaries on the equity basis as a one line adjustment to net income (loss). Equity in earnings was $0.2 million compared to $1.0 million last year. Fiscal 2005 equity in earnings included an adjustment of $0.9 million related to stock options issued to our Mexican subsidiaries’ employees.

Fiscal 2004 Compared to Fiscal 2003

Fee Revenue

Fee revenue increased $13.2 million, or 4%, to $328.3 million for fiscal 2004 from $315.1 million for fiscal 2003. This increase reflects an increase in fee revenue across all regions, with the exception of Europe, as well as the impact of favorable exchange rates.

Executive recruitment—All geographic regions reported an increase in the number of new engagements opened in fiscal 2004 compared to fiscal 2003. North America experienced the largest dollar increase in fee revenue of $8.4 million, or 5%, compared to fiscal 2003 due to an increase of 14% in the number of new engagements opened. Europe reported fee revenue of $78.2 million, a decline of $0.8 million. Exchange rates impacted Europe fee revenue favorably by $9.4 million compared to fiscal 2003. The decrease in fee revenue is a result of decreased average fees in the period. Although Europe experienced a decline in fee revenue, the number of new engagements opened in fiscal 2004 increased 21%. Asia Pacific fee revenue was $36.8 million, an increase of $3.3 million, or 10%, compared to the fiscal 2003 primarily due to the favorable impact of exchange rates of $2.7 million in fiscal 2004. Asia Pacific reflected an increase of 17% in the number of new engagements opened in the fiscal 2004. South America reported fee revenue of $8.4 million, an increase of $0.8 million, or 10%, of which $0.3 million related to the favorable impact of exchange rates. South America also reflected an increase of 3% in the number of new engagements opened in fiscal 2004.

Futurestep—Fee revenue increased $1.6 million, or 5%, to $34.2 million in fiscal 2004 from $32.7 million in fiscal 2003. The increase in Futurestep fee revenue is a result of our continued focus on larger recruiting projects. Of the total increase in fee revenue, North America experienced the largest increase in fee revenue of $4.3 million, or 57%, reflecting the success of our large engagement strategy. This increase was offset by a decline in Europe fee revenue of $3.7 million, or 19%. Exchange rates favorably impacted fee revenue by $2.0 million. The decrease of fee revenue in Europe reflects the closing of certain Futurestep Europe entities whose results were historically unprofitable. Asia Pacific fee revenue increased $0.9 million primarily as a result of exchange rates, which favorably impacted fee revenue by $1.0 million.

Compensation and Benefits

Compensation and benefits expense decreased $2.0 million to $221.2 million in fiscal 2004 from $223.2 million in fiscal 2003. The weakening U.S. dollar impacted compensation and benefits expense unfavorably by $10.0 million in fiscal 2004.

Executive recruitment compensation and benefits costs remained fairly constant in fiscal 2004 compared to fiscal 2003. Exchange rates unfavorably impacted executive recruitment compensation and benefits expense unfavorably by $8.0 million in fiscal 2004 compared to fiscal 2003. At constant exchange rates, executive recruitment compensation and benefits costs decreased in fiscal 2004 reflecting the 7% reduction in our workforce. This decrease was offset by an increase in bonus expense as a result of the increase in revenue and, to a lesser extent, additional salaries of new consultants. Executive recruitment compensation and benefits expense as a percentage of fee revenue decreased to 63% from 66% in fiscal 2003.

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Futurestep compensation and benefits expense declined $1.3 million, or 5%, to $23.7 million in fiscal 2004 from $25.0 million in fiscal 2003. Exchange rates unfavorably impacted Futurestep compensation and benefits expense unfavorably by $2.0 million in fiscal 2004 compared to fiscal 2003. The decrease in Futurestep compensation and benefits expense reflects a 12% reduction in our Futurestep workforce. As a percentage of fee revenue, Futurestep compensation and benefits expense declined to 69% from 77% in fiscal 2003.

Corporate compensation and benefits expense declined $0.9 million, or 7%, in fiscal 2004 compared to fiscal 2003. This decrease reflects the 16% reduction in our Corporate workforce offset by an increase in Corporate bonus expense.

General and Administrative Expenses

General and administrative expenses decreased $1.5 million, or 2%, to $71.6 million in fiscal 2004 from $73.1 million in fiscal 2003. At constant exchange rates, general and administrative expense decreased $4.6 million.

In executive recruitment, general and administrative expenses increased $1.1 million, or 2%, primarily due to exchange gains recognized in fiscal 2003, not repeated in fiscal 2004. These amounts were offset by a decrease in bad debt expense. Exchange rates impacted executive recruitment general and administrative expense unfavorably by $2.4 million in fiscal 2004 compared to fiscal 2003. As a percentage of fee revenue, executive recruitment general and administrative expenses remained constant at 19% in fiscal 2004 and fiscal 2003.

Futurestep general and administrative expenses decreased $2.2 million, or 23%, mainly due to reduced facility costs and professional and advertising expenses as a result of our ongoing cost reduction efforts. Exchange rates impacted Futurestep general and administrative expense unfavorably by $0.6 million in fiscal 2004 compared to fiscal 2003. As a percentage of fee revenue, Futurestep general and administrative expenses decreased to 21% from 29% in fiscal 2003.

Corporate general and administrative expenses remained fairly constant in fiscal 2004 compared to fiscal 2003.

Out-of-Pocket Engagement Expenses.    Out-of-pocket engagement expenses consist of expenses incurred by candidates and our consultants that are generally billed to clients. As a percentage of fee revenue, out-of-pocket engagement expenses remained constant at 7% in fiscal 2004 and 2003.

Depreciation and Amortization Expense.    Depreciation and amortization expense decreased $6.1 million, or 38%, compared to fiscal 2003 as a result of a significant amount of our property and equipment becoming fully depreciated in the latter half of fiscal 2003.

Operating Income (Loss)

In fiscal 2004, we achieved an operating income of $15.8 million compared to an operating loss of $13.3 million in fiscal 2003. Excluding restructuring charges of $8.5 million and $16.3 million in fiscal 2004 and 2003, respectively, operating income increased $21.3 million to $24.3 million in fiscal 2004 from $3.0 million in fiscal 2003.

Executive recruitment operating income increased $18.9 million to $38.2 million in fiscal 2004 from $19.3 million in fiscal 2003. Excluding restructuring charges of $5.4 million and $11.4 million in fiscal 2004 and 2003, respectively, executive recruitment operating income increased $12.9 million to $43.6 million in fiscal 2004 from $30.7 million in fiscal 2003. This increase was primarily due to the increase in revenue and a decrease in depreciation expense in fiscal 2004. As a percentage of fee revenue, executive recruitment operating margin increased to 15% from 11% in fiscal 2003, excluding restructuring charges. Operating margins in North America, Asia Pacific and South America increased while Europe operating margin decreased.

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Futurestep operating losses improved $9.2 million to $1.6 million in fiscal 2004 from $10.8 million in fiscal 2003. Excluding restructuring charges of $3.0 million and $5.4 million in fiscal 2004 and 2003, respectively, Futurestep achieved an operating profit of $1.4 million in fiscal 2004 compared to an operating loss of $5.4 million in fiscal 2003. The improvement reflects the increase in revenue coupled with decreased costs across all areas. Operating margin, excluding restructuring charges, improved to 4% in fiscal 2004 compared to (17%) in fiscal 2003.

Interest Income and Other Income, Net.    Interest income and other income, net includes interest income of $1.2 million and $1.5 million in fiscal 2004 and 2003, respectively. The increase in other income of $0.8 million in fiscal 2004 is due to dividend distributions received on investments.

Interest Expense.    Interest expense, primarily related to convertible securities and borrowings under COLI policies, decreased $0.6 million to $9.9 million in fiscal 2004 compared to $10.5 million in fiscal 2003. The $9.9 million of interest expense in fiscal 2004 includes the accretion on redeemable convertible preferred stock of $1.0 million, not included in interest expense in fiscal 2003. The decrease of $1.6 million of interest expense in fiscal 2004 is due to reduced loan amounts under our COLI policies as well as the final payment of acquisition notes in the beginning of fiscal 2004.

Provision for Income Taxes.    The provision for income taxes was $3.2 million in fiscal 2004 compared to $2.0 million in fiscal 2003. Although we reported a pretax loss in fiscal 2003, certain foreign subsidiaries reported pretax income resulting in foreign income tax expense. The effective tax rate was 42% for fiscal 2004.

Equity in Earnings of Unconsolidated Subsidiaries.    Equity in earnings of unconsolidated subsidiaries is comprised of our less than 50% stockholder interest in our Mexican subsidiaries. We report our interest in earnings or loss of our Mexican subsidiaries as a one-line adjustment to net income (loss). Equity in earnings was $1.0 million in fiscal 2004 and $1.8 million in fiscal 2003.

Liquidity and Capital Resources

We believe that cash on hand, borrowings available under our credit facility and funds from operations will be sufficient to meet our anticipated working capital, debt service requirements, capital expenditures and general corporate requirements. However, adverse changes in our revenue could require us to cut costs or obtain financing to meet our cash needs.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements and have not entered into any transactions involving unconsolidated, limited purpose entities.

Contractual Obligations

Contractual obligations represent future cash commitments and liabilities under agreements with third parties, and exclude contingent liabilities for which we cannot reasonably predict future payment. The following table represents our contractual obligations as of April 30, 2005 (in thousands):

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In addition to the contractual obligations above, we have liabilities related to certain employee benefit plans. These liabilities are recorded in our Consolidated Balance Sheet. The obligations related to these employee benefit plans are described in Note 7, Deferred Compensation and Retirement Plans, Pension Plan, Company Owned Life Insurance Policies and Executive Capital Accumulation Plan. As the timing of cash disbursements related to these employee benefit plans are uncertain, we have not included these obligations in the table above.

We also make interest payments on our COLI loans. These loans are described in Note 11, Long-Term Debt. As the timing of these loan repayments are uncertain, we have not included these obligations in the table above.

Lastly, we have contingent commitments under certain employment agreements that are payable upon termination of employment.

Liquidity

The following table presents selected financial information (in thousands):

The increase in our working capital of $57.6 million in fiscal 2005 compared to fiscal 2004 is due to the increase in current assets of $118.7 million related to the increase in cash of $91.0 million, marketable securities of $7.8 million, accounts receivable of $16.6 million and prepaid expenses of $3.6 million. The increase in current liabilities of $61.0 million related to an increase in accrued compensation and benefits payable of $46.1 million, income taxes payable of $12.4 million and other accrued liabilities of $4.0 million.

The increase in our working capital of $15.6 million in fiscal 2004 compared to fiscal 2003 is primarily due to an increase in current assets of $24.0 million as a result of an increase in cash of $25.4 million and accounts receivable of $5.6 million, offset by a decrease in other receivables of $6.9 million primarily related to income tax receivables. The increase in current liabilities of $8.4 million primarily relates to an increase in accrued compensation and benefits payable of $8.8 million and other accrued liabilities of $1.8 million, offset by a decrease in notes payable of $5.1 million.

Cash provided by operating activities was $87.8 million in the current year and $29.9 million in fiscal 2004 as a result of improved operating results coupled with the increase of compensation and benefits payable. In fiscal 2003, cash provided by operating activities was $22.3 million, as a result of improved operating results, timing of invoice payments and improved collection on receivables.

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Cash used in investing activities was $15.9 million for fiscal 2005, comprised primarily of $7.8 million in the purchase of marketable securities, $7.5 million of capital expenditures and $1.9 million in premiums paid on our COLI policies. Cash provided by investing activities of $6.4 million for fiscal 2004 was comprised of $12.8 million in proceeds received as a result of surrendering COLI policies offset by $4.9 million in premiums paid on our COLI policies and $1.9 million of capital expenditures. Cash used in investing activities of $9.4 million for fiscal 2003 was comprised primarily of $7.2 million used for premiums paid on our COLI policies and $3.5 million in capital expenditures.

Capital expenditures totaled $7.5 million, $1.9 million, and $3.5 million for fiscal 2005, 2004 and 2003, respectively. These expenditures primarily consisted of systems hardware and software costs, upgrades to information systems and leasehold improvements. The increase in fiscal 2005 of $5.6 million compared to fiscal 2004 is primarily due to leasehold improvements as a result of new leases entered into in the current year. The decrease of $1.6 million in fiscal 2004 over fiscal year 2003 reflected our reduced spending efforts.

Cash provided by financing activities was $17.1 million in fiscal 2005, comprised primarily of receipts of $18.2 million from stock option exercises and employee purchase plan issuances and $4.1 million in funds from borrowings under our COLI policies. In fiscal 2005, we made payments of $3.3 million on our COLI loans and $3.5 million in repurchases of our common stock. Cash used in financing activities was $11.5 million in fiscal 2004, comprised primarily of payments of $13.3 million on our COLI loans, $5.0 million on our stockholder acquisition notes and $2.0 million in repurchases of our common stock. In fiscal 2004, we received $3.8 million in funds from borrowings under our COLI policies and $3.6 million as a result of stock options exercised. Cash provided by financing activities was $6.8 million in fiscal 2003, consisting primarily of proceeds of $45.6 million from the issuance of convertible securities and payments on our outstanding borrowings of $39.0 million from our previous credit facility. In addition, in fiscal 2003, we made payments on stockholder acquisition notes of $9.4 million and received funds from borrowings under our COLI policies of $8.7 million.

Long Term Debt

Total outstanding borrowings under our COLI policies was $56.6 million, $57.6 million and $66.5 million as of April 30, 2005, 2004 and 2003, respectively. Generally, we borrow under our COLI policies to pay related premiums. Such borrowings do not require annual principal re-payments, bear interest primarily at variable rates and are secured by the cash surrender value of the life insurance policies of $121.7 million, $116.4 million and $119.7 million as of April 30, 2005, 2004 and 2003, respectively. At April 30, 2005, the net cash value of these policies was $65.0 million of which $58.2 million was held in a trust.

In the current year, we issued an additional $1.5 million of 7.5% Convertible Subordinated Notes in lieu of cash interest payments and $0.4 million of 7.5% Convertible Series A Preferred Stock in lieu of cash dividends. As of April 30, 2005, we had $44.9 million outstanding in aggregate principal amount of 7.5% Convertible Subordinated Notes due in June 2010 and 7.5% Convertible Series A Preferred Stock with an aggregate liquidation preference of $11.4 million.

We have a Senior Secured Revolving Credit Facility which we amended in February 2005 to a $50 million borrowing capacity with no borrowing base restrictions. The credit facility is secured by substantially all of our assets including certain accounts receivable balances and guarantees by and pledges of a portion of the capital stock of our significant subsidiaries. We are required to meet certain financial condition covenants on a quarterly basis. As of April 30, 2005, we had no outstanding borrowings on our credit facility.

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Quarterly Results

The following table sets forth certain unaudited statement of operations data for the quarters in fiscal 2005 and 2004. The unaudited quarterly information has been prepared on the same basis as the annual financial statements and, in management’s opinion, includes all adjustments necessary to present fairly the information for the quarters presented (dollars in thousands, except per share amounts).

Recently Issued Accounting Standards

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004) (Statement 123(R)), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation (Statement 123). Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. Statement 123(R) is required to be adopted in fiscal years beginning after June 15, 2005. We expect to adopt Statement 123(R) on May 1, 2006 using the modified-prospective method.

As permitted by Statement 123, we currently account for share-based payments to employees using APB Opinion 25’s intrinsic value method and, as such, generally recognize no compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)’s fair value method will have an impact on our results of operations, although it will have no impact on our overall financial position. The impact of adoption of Statement 123(R) cannot be predicted at this time as it depends on levels of share-based payments granted in the future. However, had we adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of Statement 123 as described in the disclosure of pro forma net income and earnings (loss) per share in Note 1 to our consolidated financial statements. Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption.

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

As a result of our global operating activities, we are exposed to certain market risks, including foreign currency exchange fluctuations and fluctuations in interest. We manage our exposure to these risks in the normal course of our business as described below. We have not utilized financial instruments for trading, hedging or other speculative purposes nor do we trade in derivative financial instruments.

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Foreign Currency Risk

Substantially all our foreign subsidiaries’ operations are measured in their local currencies. Assets and liabilities are translated into U.S. dollars at the rates of exchange in effect at the end of each reporting period and revenue and expenses are translated at average rates of exchange during the reporting period. Resulting translation adjustments are reported as a component of comprehensive income on our Statement of Stockholders’ Equity.

Transactions denominated in a currency other than the reporting entity’s functional currency may give rise to transaction gains and losses that impact our results of operations. Historically, we have not realized significant foreign currency gains or losses on such transactions. In the year ended April 30, 2005, we recognized foreign currency losses, after income taxes, of $0.4 million primarily related to our Europe operations.

Our primary exposure to exchange losses is based on outstanding inter-company loan balances denominated in U.S. dollars. If the U.S. dollar strengthened 15%, 25% and 35% against Pounds Sterling, the Euro, the Canadian dollar, the Australian dollar and the Yen, the Company’s exchange loss would have been $1.6 million, $2.6 million and $3.7 million, respectively, based on outstanding balances at April 30, 2005.

Interest Rate Risk

We primarily manage our exposure to fluctuations in interest rates through our regular financing activities, which generally are short term and provide for variable market rates. As of April 30, 2005, we had no outstanding balance on our credit facility. We have $56.6 million of borrowings against the cash surrender value of COLI contracts as of April 30, 2005 bearing interest primarily at variable rates. The risk of fluctuations in these variable rates is minimized by the fact that we receive a corresponding adjustment to our borrowed funds crediting rate on the cash surrender value on our COLI contracts.

In June 2002, we issued $40.0 million of 7.5% Convertible Debt and $10.0 million of 7.5% Convertible Preferred Stock that is mandatorily redeemable by us if still outstanding on June 13, 2010. The Convertible Debt and Preferred Stock approximates its fair value at April 30, 2005.

Item 8.    Financial Statements and Supplementary Data

See Consolidated Financial Statements beginning on page F-1 of this Annual Report on Form 10-K.

Supplemental Financial Information regarding quarterly results is contained in Item 7 under the heading “Quarterly Results.”

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.    Disclosure Controls and Procedures