KORN FERRY - Annual Report: 2006 (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, 2006

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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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 check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.     Yes  ¨    No  x

The number of shares outstanding of our common stock as of July 7, 2006 was 42,910,574 shares. The aggregate market value of the registrant’s voting and non-voting common stock held by non-affiliates of the registrant on October 31, 2005, the last business day of the registrant’s most recently completed second fiscal quarter, (assuming that the registrant’s only affiliates are its officers, directors and 10% or greater stockholders) was approximately $609,440,000 based upon the closing market price of $17.22 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 2006 Annual Meeting of Stockholders scheduled to be held on September 19, 2006 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, 2006

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PART I.

Item 1.    Business

Business Overview

Korn/Ferry International (referred herein as the “Company,” “Korn/Ferry,” or in the first person notations “we,” “our,” and “us”) is a premier global provider of executive search, outsourced recruiting and leadership development solutions, with a broad global presence in the recruitment industry. Since 1969, when we opened our first office in Los Angeles, we have expanded to 72 cities in 37 countries. In 1998, we extended our market reach into the middle-market with the introduction of Futurestep, our outsourced recruiting subsidiary. As of April 30, 2006, we have approximately 1,841 employees, including 440 executive recruitment and 89 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 government and not-for-profit organizations. We have built strong client loyalty; more than 83% of the executive recruitment assignments we performed in fiscal 2006 were on behalf of clients for whom we had conducted previous assignments during 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 in introducing our complementary service offerings to clients.

Middle-Management Recruitment:    Futurestep, our outsourced recruiting subsidiary, draws from Korn/Ferry’s nearly 37 years of industry experience to create customized recruitment solutions based on clients’ individual workforce needs. In addition to being a pioneer in recruitment process outsourcing (“RPO”), the Company’s multi-tiered portfolio of services includes mid-level search, project recruitment and interim solutions.

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

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 (the “Exchange Act”). You may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1 800 732 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.

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We also make available, free of charge on our 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.

Our Corporate Governance Guidelines, Code of Business Conduct and Ethics and the charters of the Audit Committee, Compensation and Personnel Committee, and Nominating and Corporate Governance Committee of our Board of Directors are also posted on our 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, such as Korn/Ferry, 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 also provide leadership development solutions, which include strategic management assessment, executive coaching and development, and a Web-based talent management platform, Executive Center.

Middle-Management Recruitment:    The middle-management recruitment market focuses on searches for middle-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, will continue to fuel job growth and hiring. We also believe that the following current market trends will contribute to the long-term growth of the 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 offer a full suite of human capital solutions are becoming increasingly attractive. Clients increasingly seek trusted advisors who understand their business and unique organizational culture in order to 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. 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 limited, making it more difficult for

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employers to secure qualified executives. We believe that this trend will have a positive impact on our business, as employers increasingly seek service providers who can provide solutions for 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 this global economy. The rapidly changing competitive environment challenges multinational and local companies to identify and recruit 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 provide efficient, 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.

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 2006, we continued such investments through the deployment of enhanced tools and information sharing for competitive advantage. We rolled out the first release of K/F One, an innovative new platform designed to integrate Microsoft Outlook, Searcher, our proprietary candidate and customer database, and the Internet. In the current year, we enhanced K/F One, as well as made significant upgrades to Searcher to further safeguard client and executive data confidentiality.

As Futurestep continued its growth through Recruitment Process Outsourcing, Project Recruitment, Interim Solutions and Mid-Level Search, information technology helped fuel all four of these lines of business. Fiscal 2006 saw the successful conversion from Futurestep’s legacy tracking system to Futuresearch, the Searcher platform transformed to support Futurestep’s distinct branding and operational requirements.

Leadership Development Solutions (“LDS”) also received significant upgrades to its Management Assessment technology and its Talent Management Platform, Executive Center. Usage of Search Assessment, an assessment technology process for our core search business, increased from 22% to 34% of

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all 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.

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.

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 a premier global 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 56 new consultants globally during fiscal 2006. These consultants originate from diverse 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 outsourced recruiting, mid-level search, project recruitment, interim solutions, strategic management assessment, and executive coaching and development through Futurestep and Leadership Development Solutions. We will continue to develop and add new products and services that our clients demand and that 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 increasingly will turn to strategic partners who 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, provide training and software support to manage such accounts, and develop guidelines and protocols to support and increase the rate of cross-border assignments for these clients.

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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 2006, we continued such investments through the deployment of enhanced tools and information sharing for competitive advantage. We rolled out major upgrades of 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 Futurestep’s technology, introducing workflow and reporting enhancements in support of Futurestep’s outsourced recruiting offering. Leadership Development Solutions also received significant upgrades to its strategic management assessment technology and its talent management platform, Executive Center. Another unique differentiator is Search Assessment, a proprietary matching tool that uses an online assessment methodology to match candidates against statistically validated best-in-class profiles. 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 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. 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, while also allowing 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 a search, we assemble a team comprised of consultants with appropriate geographic, industry and functional expertise. Our search consultants serve as management advisors who work closely with the client in identifying, assessing and placing qualified candidates. In fiscal 2006, we performed more than 6,200 executive recruitment assignments.

We utilize a search methodology that has been developed through nearly 37 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 in related industries facing similar issues and 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 3.1 million executives to assist in identifying individuals

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with the right backgrounds and 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, at times 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 2006 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 help clients assemble an effective, knowledgeable and cohesive board of directors to meet the growing demands of accountability and facilitate 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 by which we identify and recruit qualified directors. We have significant expertise in this area and have built a proprietary database with the names and backgrounds of every FORTUNE 1000 director, 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 2006 Assignments by Functional Expertise

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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 2006, the region generated fee revenue of $259.1 million from more than 2,600 assignments, with an average of 215 consultants.

Europe—We opened our first European office in London in 1972, and currently have 20 offices in 18 countries throughout the region. In fiscal 2006, fee revenue was $120.1 million from more than 1,700 assignments, with an average of 119 consultants.

Asia Pacific—We opened our first Asia Pacific office in Tokyo in 1973, and currently have 15 offices in 10 countries throughout the region. In fiscal 2006, fee revenue was $57.9 million from more than 1,100 assignments, with an average of 64 consultants.

Latin America—We opened our first Latin American office in Brazil in 1974. We expanded our practice to Mexico through the 1977 acquisition of a less than 50% interest in a Mexico City company, and currently conduct operations in Mexico through subsidiaries in which we hold a minority interest. As of April 30, 2006, we operate a network of seven offices in six countries covering the entire South American region and two offices in Mexico. The region, excluding operations in Mexico, generated fee revenue of $15.7 million in fiscal 2006. We handled more than 700 assignments in fiscal 2006 in this region, with an average of 21 consultants. Our share of the operating income from our Mexico subsidiaries is $2.0 million and $0.2 million for the years ended April 20, 2006 and 2005, respectively, and is included in equity in earnings of unconsolidated subsidiaries on the consolidated statements of income.

Client Base.    Our 4,373 clients include many of the world’s largest and most prestigious public and private companies, including 44% of the FORTUNE 500 companies in the current fiscal year. In fiscal 2006, no single client represented more than 2.0% of fee revenue. We have established strong client loyalty. More than 83% of the executive recruitment assignments we performed in fiscal 2006 were on behalf of clients for whom we had conducted previous assignments during the last three fiscal years.

Competition.    We are a premier global provider of executive search, outsourced recruiting and leadership development services. Other multinational executive recruitment firms include Egon Zehnder International, Heidrick & Struggles International, Inc., Russell Reynolds Associates and Spencer Stuart. 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 attracting and retaining our key consultants.

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Leadership Development Solutions.    In 2004, we consolidated our strategic management assessment and executive coaching and development services under the name Leadership Development Solutions, with services in Europe, North and South America, Australia and Japan. This comprehensive blend of leadership services helps corporate leaders to evaluate the individual and collective performance of their teams. These solutions further extend the range of human 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 alignment with their company’s strategic goals and internal values.

Our strategic management assessment offering was 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, 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 of our Leadership Development Solutions is executive coaching and development. Our global network of highly-skilled coaches is certified at developing future leaders through individual and team-based coaching. Additionally, we offer clients a Web-based, highly customizable talent management platform. Called Executive Center, it 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 recruitment solutions, including recruitment process outsourcing (“RPO”), mid-level search, project recruitment and interim solutions. Each Futurestep service benefits from the in-depth industry and functional expertise of our global consultant network, ensuring that clients work with professionals who understand their business and have the relevant knowledge to qualify candidates effectively.

Futurestep combines traditional search expertise with a multi-tiered portfolio of recruitment solutions. Futurestep consultants, based in 16 countries, have instant access to one of the world’s largest databases of pre-screened 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.

A fully integrated, single-source RPO solution leverages Futurestep’s recruitment capabilities, innovative technology and international brand to reduce clients’ recruitment costs while improving quality and attracting the best talent. Futurestep manages all of the client’s human capital requirements, delivered with real-time metrics to ensure speed and success.

Futurestep’s mid-level search uses multiple sourcing channels, validated cultural assessments and a global database of more than one million pre-screened 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 hiring projects, Futurestep consultants utilize proprietary Enterprise Recruitment Methodology to deliver seamless, workflow driven talent-acquisition strategies to organizations. Prior to deployment, Futurestep diagnoses the client’s internal HR capabilities to develop a “co-sourcing” platform emphasizing

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shared ownership of the recruitment process. Once engaged, the project team adheres to a tightly integrated timeline and metrics to deliver high-volume, concurrent hiring without sacrificing quality.

For clients needing professionals on a short-term 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 pre-screened, mid-level 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. As of April 30, 2006, we had Futurestep operations in 15 cities in North America, 11 in Europe and 11 in Asia Pacific.

Competition.    Futurestep primarily competes for assignments with contingency staffing firms, temporary staffing firms and recruitment process outsourcers who do not operate at the middle management level or offer Futurestep’s full suite of solutions.

To a lesser extent, Futurestep competes with firms such as Monster Worldwide in the technology-based middle-management recruitment industry. Although technology-oriented companies may be drawn to the recruitment business by the opportunity to leverage their existing technology, lack of a recognized brand name, global footprint or experienced consultants present significant barriers to entry.

Organization

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

Professional Staff and Employees

As of April 30, 2006, we had approximately 1,401 executive recruitment employees consisting of 440 consultants and 961 associates, researchers, administrative and support staff. In addition, we had 15 consultants in our two unconsolidated Mexico offices. Futurestep had 394 employees as of April 30, 2006, consisting of 89 consultants and 305 administrative and support staff. Corporate had 46 professionals at April 30, 2006. We have not been a party to a collective bargaining agreement and consider our relations with our employees to be good. Korn/Ferry 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 assignments. 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 and the ability to develop and help build effective teams. In addition, we have a program for recruiting experienced professionals into our firm.

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The following table provides information relating to each of our business segments for fiscal 2006:

The following table provides information on fee revenues for each of the last three fiscal years attributable to the United States and other geographical regions in which the Company operates for fiscal:

Item 1A.    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 Egon Zehnder International, Heidrick & Struggles International, Inc., Russell Reynolds Associates and Spencer Stuart. 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.

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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. In addition, in fiscal 2006, our total assignments included 15% related to the technology industry and 18% related to the financial services 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.

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 coverage 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

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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 37 countries and, as of April 30, 2006, generate nearly half our fee revenue from operations outside of North America. There are certain risks inherent in transacting business worldwide, such as:

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 ensure that

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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 under Delaware law 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 1B.    Unresolved Staff Comments.

Not applicable.

Item 2.    Properties

Our corporate office is located in Los Angeles, California. We lease all 72 of our executive recruitment and Futurestep offices located in North America, Europe, Asia/Pacific and South America. As of 2006, we leased an aggregate of approximately 566,000 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.

I tem 4.    Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2006.

Executive Officers of the Registrant

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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 five years for each of our executive officers as of April 30, 2006.

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 with KPMG International, where he most recently served as 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, he 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. Earlier, Mr. Burnison was a partner at KPMG Peat Marwick.

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, one of the world’s leading executive compensation consulting firms, where he was employed from 1984 until joining Korn/Ferry International.

Robert H. McNabb has been Executive Vice President of Korn/Ferry International since November 2003 and was appointed Chief Executive Officer for Futurestep in July 2002. Prior to becoming the Chief Executive Officer for Futurestep, he was President of the Futurestep Americas and Asia Pacific regions. Prior to joining Futurestep in December 2001, 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 7, 2006 the last reported sales price on the New York Stock Exchange for the common stock was $19.03 per share and there were approximately 5,813 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 currently intend to pay any cash dividends on our common stock in the foreseeable future. The Board of Directors has authorized the Company to repurchase up to $75 million of the Company’s outstanding shares of common stock pursuant to issuer repurchase programs. Future dividend policy as well as decisions to execute our currently outstanding issuer repurchase programs 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 do not restrict our ability to pay dividends.

Recent Sales of Unregistered Securities

On June 13, 2005, Friedman, Fleischer & Lowe (“FFL”) entered into a forward sale contract with Credit Suisse First Boston LLC (“CSFB”) to sell FFL’s remaining portion of the Company’s convertible securities. The forward sale contract requires that FFL deliver the convertible securities to CSFB in June 2007.

Issuer Purchases of Equity Securities

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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 Annual Report on Form 10-K. The selected statement of operations data set forth below for the fiscal years ended April 30, 2006, 2005 and 2004 and the selected balance sheet data as of April 30, 2006 and 2005 are derived from our consolidated financial statements, audited by Ernst & Young LLP appearing elsewhere in this Form 10-K. The selected balance sheet data as of April 30, 2004, 2003 and 2002 and the selected statement of operations data set forth below for the fiscal years April 30, 2003 and 2002 are derived from consolidated financial statements and notes thereto which are not included in this Form 10-K report and were audited by Ernst & Young LLP.

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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 largest 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 2006 were for board level, chief executive and other senior executive and general management positions. Our 4,373 clients in fiscal 2006 included approximately 44% of the FORTUNE 500 companies. We have established strong client loyalty; more than 83% of the executive recruitment assignments we performed in fiscal 2006 were on behalf of clients for whom we had conducted assignments in the previous three fiscal years.

In an effort to maintain our long-term vision of being the leading provider of executive search, outsourced recruiting and leadership development solutions, our strategic focus for fiscal 2007 will center upon increasing market share and further enhancing the cross-selling of our multi-product strategy. We will continue to address areas of increasing client demand, including RPO and LDS. We will 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 16% in fiscal year 2006 to $522.9 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 2006, we earned an operating profit of $76.2 million with operating income from executive recruitment of $100.7 million and $3.4 million from Futurestep, offset by corporate expenses of $27.9 million. This represents an increase of 16% over the prior fiscal year’s operating income of $65.8 million.

Our total long-term debt at April 30, 2006 was $45.1 million. Our working capital increased $72.1 million to $218.2 million at April 30, 2006.

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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 periodically review these assumptions 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:

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

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Fiscal 2006 Compared to Fiscal 2005

Fee Revenue

Fee revenue increased $70.7 million, or 16%, to $522.9 million in fiscal 2006 compared to $452.2 million in fiscal 2005. The improvement in fee revenue is attributable mainly to a 29% increase in the number of engagements billed. Contributing factors to increased revenue during the current fiscal year include the opening of new offices in Europe and Asia, strong performances in the North America and Asia Pacific regions, as well as the continued growth of our Futurestep subsidiary. Exchange rates unfavorably impacted fee revenues by $4.9 million in the current period, mainly related to European revenues.

Executive Recruitment—Executive recruitment fee revenue increased $54.4 million, or 14%, due to a 15% increase in the number of engagements billed as well as average fee increases in certain regions. Emergent economies, newly established offices, as well as expanding industries in various regions also factored in the overall growth in fee revenue.

North America fee revenue increased $33.2 million, or 15%, to $259.1 million due to an 11% increase in the number of engagements billed as well as a 3% increase in average fees as compared to last year. Increased revenue obtained in the industrial sector contributed significantly to the region’s revenue, along with growth in the financial services and in the consumer goods markets over the prior fiscal year.

Europe reported fee revenue of $120.1 million, an increase of $9.6 million, or 9%, compared to $110.5 million last year, which was driven by an 11% increase in the number of engagements billed. Business in the European market expanded in 2006 due to strong performances from consultants in the United Kingdom and France, and growth in newer offices established in recent years, such as in the Middle East, Czech Republic, and an affiliate relationship in Russia. Exchange rates unfavorably impacted Europe fee revenue by $5.4 million in the current year.

Asia Pacific fee revenue increased $6.7 million, or 13%, to $57.9 million, compared to last year due to a 20% increase in the number of engagements billed as well as strong performance in our China offices in Beijing and Shanghai. The growing economy in China has significantly contributed to the improved business experienced by the region in the current year, attributing to almost half of the total increase in Asia fee revenues over last year.

South America reported fee revenue of $15.7 million, an increase of $4.9 million, or 45%, of which $1.6 million related to the favorable impact of exchange rates. Revenue increased $2.5 million in Brazil, a 54% increase over the prior year, primarily due to an 81% increase in the number of engagements billed in the current year. Overall in the entire region, engagements billed increased by 26% since prior year while average fees increased by 15%.

Futurestep—Fee revenue increased $16.3 million, or 30%, to $70.2 million in fiscal 2006 compared to $53.9 million in fiscal 2005. The improvement in fee revenue is due to an increase in the number of engagements billed 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 $6.6 million, or 30%, to $28.3 million reflecting increased revenue from areas including RPO and Interim Solutions. Europe fee revenue increased $5.8 million, or 27%, to $27.3 million, arising from increased business in the United Kingdom and Belgium, again attributable to a migration to larger engagements. Exchange rates unfavorably impacted Futurestep Europe fee revenue by $1.1 million. Asia Pacific fee revenue increased $3.9 million, or 37% to $14.6 million, where increased revenues were derived from Australia and New Zealand. Revenue resulting from the opening of an office in India in the current fiscal year also contributed to growth.

Compensation and Benefits

Compensation and benefits expense increased $48.3 million, or 17%, to $341.2 million in fiscal 2006 from $292.9 million in fiscal 2005. Increased headcount along with increased profitability and internal promotions

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have contributed to the overall increase in expense in the current year. Total headcount increased globally by 266, or 17% over last year as the Company continues to expand its operations across industries and regions worldwide. Exchange rates impacted compensation and benefits expense favorably by $3.4 million in the current year, due to changes in exchange rates between the US dollar and the Euro and Pound Sterling.

Executive recruitment compensation and benefits costs of $276.5 million increased $32.0 million, or 13%, compared to $244.5 million in the prior year due to increased profitability based rewards and new consultants joining the firm. In the current year, the number of consultants increased by 42 or 11% as compared to last year. Exchange rates impacted executive recruitment compensation and benefits expense favorably by $2.8 million. Executive recruitment compensation and benefits expense, as a percentage of fee revenue, remained stable at 61%.

Futurestep compensation and benefits expense increased $14.5 million, or 43%, to $48.6 million from $34.1 million in the prior year primarily due to increased variable compensation as well as increased external contractors’ expense arising from increased business, especially in North America. Additionally, average headcount increased by 34%, which significantly contributed to the overall increase in compensation and benefits since the prior year. Exchange rates impacted Futurestep compensation and benefits expense favorably by $0.6 million. Futurestep compensation and benefits expense, as a percentage of fee revenue, increased to 69% from 63% in the prior year.

Corporate compensation and benefits expense increased $1.7 million, or 12%, to $16.0 million, reflecting increased profitability-based rewards and executive benefits. Increases also reflect additional expense derived from current year restricted stock grants as well as from added amortization arising from the Company’s prior year contribution to deferred compensation plans.

General and Administrative Expenses

General and administrative expenses increased $10.0 million, or 12%, to $93.5 million in fiscal 2006 compared to $83.5 million in 2005. Increases to general and administrative expenses related to increased premise and office expense of $4.3 million, business development expense of $2.1 million, bad debt expense of $1.0 million, and other types of general expenses of $2.6 million including administrative meeting and travel expense along with certain legal expenses. Exchange rates favorably impacted general and administrative expenses by $0.5 million in the current year.

Executive recruitment general and administrative expenses of $67.3 million increased $3.9 million, or 6%, due to premise and office expense of $2.5 million, business development costs of $1.4 million, and bad debt expense of $0.4 million These were offset by a decrease to other general expenses of $0.4 million versus the prior year.

Premise and office expense increased $3.1 million in our North and South American regions, resulting from additional space leased as well as rent increases from renewed contracts or office relocations. This was offset by a decrease in Asia of $0.6 million, resulting from a decrease in the allocation of premise and office expense between shared offices in Australia.

Increased business development costs in the North American and European Search practices were most significant. In North America, increases were $0.9 million while in Europe, these increases amounted to $0.3 million. In Asia and South America, business development expense increased by $0.1 million in each region. Business development expenses generally fluctuate in conjunction with revenue and overall business activity.

North America experienced the largest increase in bad debt expense of $0.6 million, with Europe having a total increase of $0.5 million. Both increases are consistent with the increase in revenue in both regions, as opposed to deterioration in collection activity. These amounts were offset by a decrease in Asia of $0.5 million.

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Lower bad debt expense for this region in the current year is due to improved collections activity prior to year end. Executive recruitment general and administrative expenses, as a percentage of fee revenue, declined to 15% from 16% in the prior year.

Futurestep general and administrative expenses increased $4.4 million, or 44%, to $14.5 million due to a $1.8 million increase in premise and office expense and a $1.6 million increase in other general expenses, which included increased meeting and travel expense of $0.7 million and legal expense $0.5 million, along with a $0.4 million increase across the regions in general office expenses, such as regional marketing expenses. The increase in premise and office expense was noted throughout all regions, which all increased since the prior year at $0.6 million per region. In Europe and Asia, additional rental expense incurred in the current year in relation to new offices opened in Spain and India, respectively, contributed to their overall increase since last year. Business development expense increased by $0.5 million, relating mainly to Futurestep’s North American and Asian regions. Business development expenses generally fluctuate in conjunction with revenue and overall business activity. The remaining increase of $0.5 million related to bad debt expense and write offs of accounts receivable in the North American region. Futurestep general and administrative expenses, as a percentage of fee revenue, increased to 21% from 19% in the prior year.

Corporate general and administrative expenses increased $1.6 million, or 16%, to $11.6 million primarily due to increased professional fees.

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 $31.9 million increased $6.2 million, or 24%, over the prior year. As a percentage of fee revenue, out-of-pocket engagement expenses remained stable at 6% in both years.

Depreciation and Amortization Expenses.    Depreciation and amortization expense of $9.0 million in fiscal 2006 increased $0.6 million, or 7%, from prior year. The primary source of the overall increase since the prior year is the $0.5 million increase in the European Search region, due to replacements of software and hardware in the region in the current year as well as office relocations in the Middle East and Germany, which caused larger depreciation expense related to leasehold improvements and furniture and fixtures. North America Search, Futurestep and South America Search depreciation expense increases mainly related to computer software and hardware additions were offset by decreases in Corporate and Asia Search, which experienced decreased expense due to fully depreciated computer equipment by prior year-end.

Operating Income

Operating income increased $10.4 million, or 16%, to $76.2 million in the current year compared to $65.8 million in the prior year, resulting from increased revenue of $75.4 million offset by a $65.0 million increase to operating expenses, primarily compensation and benefits and general and administrative expenses.

Executive recruitment operating income increased $16.6 million, or 20%, to $100.7 million in fiscal 2006 compared to $84.1 million in fiscal 2005. The improvement in executive recruitment operating income is attributable to increased revenues offset by additional compensation expense relating to increased headcount and variable payouts as discussed previously, as well as increased professional fees, premise and other general administrative expense. Executive recruitment operating income, as a percentage of fee revenue, as a result, increased to 22% from 21%, resulting from revenue growth.

Futurestep operating income decreased by $3.1 million to $3.4 million in fiscal 2006 as compared to operating income of $6.5 million in fiscal 2005. The decrease in Futurestep operating income is due to increased compensation and benefits costs arising from increased headcount, significant investment in internal technology to better serve the Futurestep clients and business, as well as one-time write offs of receivables in the current fiscal year. Futurestep operating income, as a percentage of fee revenue, declined to 5% from 12% last year.

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Interest Income and Other Income, Net.    Interest income and other income, net includes interest income of $11.1 million and $3.4 million in fiscal 2006 and 2005, respectively. During the current fiscal year, the Company continued to transfer cash to higher interest rate investments due to the Company’s improved cash position, resulting in an increase to interest income of $2.5 million. Additionally, the Company recovered $4.6 on an investment that had been previously impaired in 2002. In addition, during fiscal 2006, the Company recognized $1.0 million in realized gains as a result of the sale of equity securities and $0.2 million of the increase is associated with interest and dividends, both arising from our ECAP investments.

Interest Expense.    Interest expense, primarily related to convertible securities and borrowings under Company Owned Life Insurance Policies (“COLI”) policies, was $10.2 million, a decrease of $0.3 million from $10.5 million in the prior year due to declining rates.

Provision for Income Taxes.    The provision for income taxes was $19.6 million in fiscal 2006 compared to $20.3 million in fiscal 2005. The provision for income taxes in the current year reflects a 25.4% effective tax rate. In the third quarter of the current fiscal year, the Company recovered $4.6 million on a previously impaired investment, which management considers a non-recurring event. When the investment was originally impaired in fiscal year 2002, a deferred tax asset was booked with a 100% valuation allowance due to the uncertainty regarding the Company’s ability to realize a capital loss deduction after the sale of the investment. As a result, there was no tax expense booked on the loss recovery during the current fiscal year as there is no taxable income associated with the recovery. In the fourth quarter of the current fiscal year, the Company recorded a tax benefit of $8.6 million resulting from the conclusion, on February 16, 2006, of an audit of the Company’s U.S. Federal Income Tax returns for the years ended April 30, 1997 through April 30, 2003. The Company also recorded $2.1 million in tax expense for the expected tax consequences of repatriating certain funds that had previously been considered as permanently reinvested abroad. Excluding these events, the effective tax rate for the year would have been 36.0%.

Equity in Earnings of Unconsolidated Subsidiaries.    Equity in earnings of unconsolidated subsidiaries is comprised of our less than 50% 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. Equity in earnings was $2.0 million compared to $0.2 million last year, resulting from increased profitability in both subsidiaries. Dividends received from the Company’s unconsolidated subsidiaries equaled $2.7 million in the current year, and is reflected as a reduction in the carrying value of our investment. Fiscal 2005 equity in earnings included an adjustment of $0.9 million related to stock options issued to our Mexican subsidiaries’ employees.

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 engagements billed in addition to increases in average fees. Exchange rates favorably impacted fee revenues by $12.1 million in 2005.

Executive Recruitment—Executive recruitment fee revenue increased $104.2 million, or 35%, due to an increase in both the number of new engagements billed and average fees. North America fee revenue increased $55.2 million, or 32%, to $225.9 million due to a 25% increase in the number of engagements billed as well as a 6% increase in 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 9% in the number of engagements billed as well a 30% increase in average fees. Strong performances in the financial services sector along with individual countries such as the United Kingdom, the Netherlands, and France contributed to the overall increase in the region’s revenue as compared to fiscal 2004. 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

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year due to a 16% increase in the number of engagements billed and a 20% increase in 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 a 19% increase in the number of engagements billed as well as an 8% increase in average fees in fiscal 2005.

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 engagements billed 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. Increased headcount as well as increased profitability awards contributed significantly to the overall increase in expense since 2004. Exchange rates impacted compensation and benefits expense unfavorably by $7.3 million in fiscal 2005.

Executive recruitment compensation and benefits costs of $244.5 million increased $57.9 million, or 31%, compared to $186.6 million in the prior year due to increased profitability-based rewards as well as increased consultant headcount, which increased by 5% over the prior year. Overall headcount in executive recruitment also increased by 93 or 8% since 2004, which factored in the increase in expense over the prior year. 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. The average number of consultants increased by 29 or 62%, as the Company continued to invest in key personnel integral to the continued growth in the Futurestep business. Total headcount increased by 68 employees or 32% since fiscal 2004. 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 2004.

Corporate compensation and benefits expense increased $3.3 million, or 31%, to $14.3 million, reflecting increased profitability based rewards and executive benefits. Additionally, a $2.1 million increase was noted in increased amortization in relation to deferred compensation plans, resulting from additional employer contributions, as well as market gains.

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. The increase was noted mainly in a $7.8 million increase in general expenses, which included increased premise and office, audit and meetings expense, especially in the North America Search region. Increased bad debt expense of $2.4 million and business development expense of $1.7 million, which reflected increased business activity also contributed to the overall variance since fiscal 2004. Exchange rates unfavorably impacted general and administrative expenses by $2.1 million in the fiscal 2005.

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

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increased business activity. Additionally, partner meetings held worldwide contributed to the overall increase since 2004. 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 2004.

Futurestep general and administrative expenses increased $2.8 million, or 38%, to $10.1 million due to an increase of $1.6 million in general expenses, $0.7 million in premise and office expense, $0.4 million in business development expense, and $0.1 million in bad debt expense. General expense increases related mainly to increased meetings expense in the North American and Asian regions, as well as increased audit expenses in North America arising from increased global fees in 2005. Futurestep general and administrative expenses, as a percentage of fee revenue, declined to 19% from 21% in 2004.

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 certain fixed assets became fully depreciated in fiscal 2004.

Operating Income (Loss)

Operating income increased $50.0 million to $65.8 million in fiscal 2005 compared to $15.8 million in fiscal 2004, resulting from increased profitability. 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 $3.4 and $1.8 million in fiscal 2005 and 2004, respectively. In addition, during fiscal 2005, the Company recognized $1.0 million in relation to the sale of an investment as well as $0.3 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% 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 in fiscal 2005 compared to $1.0 million in fiscal 2004. Fiscal 2005 equity in earnings included an adjustment of $0.9 million related to stock options issued to our Mexican subsidiaries’ employees.

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. There are no trends or demands or commitments that would materially affect liquidity or those that relate to the Company’s resources.

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, 2006 (in thousands):

In addition to the contractual obligations above, we have liabilities related to certain employee benefit plans. These liabilities are recorded in our Consolidated Balance Sheets. 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.

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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 $72.1 million in fiscal 2006 compared to fiscal 2005 is due to the increase in current assets of $90.0 million offset by the current liability increase of $17.9 million.

The current asset increase of $90.0 million is related to the increase in cash of $58.4 million, marketable securities of $12.8 million, accounts receivable of $18.5 million and prepaid expenses of $0.3 million. Increases in cash are reflective of collections on billed receivables arising from increased revenue in the current year as well as cash received from stock option exercises, income from our investment accounts and the sale of an impaired investment, offset by stock repurchases in relation to the Company’s common stock repurchase program approved by the Board on December 7, 2005. The increase in marketable securities is reflective of additional employee and employer contributions as well as current year market gains in the Company’s Executive Capital Accumulation Plan (“ECAP”).

Current liabilities increased by $17.9 million, relating to an increase in accrued compensation and benefits payable of $14.9 million, accounts payable of $2.5 million and income taxes payable of $1.7 million, offset by a decrease in other accrued liabilities of $1.2 million. The increase in accrued compensation and benefits is a direct result of increased global headcount as well as increased profitability based compensation accruals. The larger volume of business activity contributed to increases in accounts payable. The decrease in other accrued liabilities reflects a decrease in the Company’s restructuring liability of $2.0 million offset by an increase of $0.8 million globally in miscellaneous other accruals, primarily vacation and other legal expenses, arising from increased headcount and increased expenses incurred in relation to engagements and the establishment of new offices, respectively.

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. Cash increases reflected increased profitability and collection in 2005 versus 2004. 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. Increased revenues contributed to an increase in compensation expenses and related accruals, including salary and bonus, as well as income tax in 2005.

Cash provided by operating activities was $80.5 million in the current year, a decrease of $7.3 million, from $87.8 million in fiscal 2005. The decrease in cash provided by operating activities is primarily due to the timing

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of payments and accruals of the Company’s fiscal bonuses. In the twelve months ended April 30, 2005, the difference between the accrual of the fiscal 2005 bonus and the payment of the fiscal 2004 bonus in July 2004 was significant due to a substantial increase in revenue and profitability in 2005 over 2004. In the twelve months ended April 30, 2006, the difference between the accrual of fiscal 2006 bonus and the payment of fiscal 2005 bonus in July 2005, or the first quarter of fiscal 2006, was not as significant. The decrease was also due to the $4.6 million loss recovery on a previously impaired investment in the current year. These items were offset by increases in net income, larger stock option tax benefits due to increased stock option exercises and higher stock prices in the current year and greater deferred compensation expense. The Company’s deferred compensation liability increased by $8.1 million to $12.7 million compared to $4.6 million in the prior year period, as the Company has moved from stock option grants to restricted stock grants and ECAP contributions.

Cash used in investing activities was $21.7 million for fiscal 2006, compared to $14.4 million used in the prior year. In the twelve months ended April 30, 2006, the Company invested $10.2 million in marketable securities in conjunction with our ECAP program, an increase of $2.4 million over the prior year. Comparing 2005 to 2004, this increased by $7.8 million, as the Company continues to trend towards investing in ECAP as an employee incentive over stock option grants.

Capital expenditures totaled $11.3 million, $7.5 million, and $1.9 million for fiscal 2006, 2005 and 2004, respectively. The increase in fiscal 2006 of $3.8 million as compared to the prior year primarily related to increased systems hardware and software costs. These expenditures primarily related to the rollout of SAP in 16 countries in Europe and Asia in the current fiscal year. Internally-developed software projects, including KF-One as well as the continued implementation of financial reporting software, also contributed to the overall increase in capital expenditures. The increase of $5.6 million between 2005 and 2004 related mainly to increased leasehold improvements and computer software additions in North America, Europe and Asia Search in 2005.

COLI premiums on life insurance policies have decreased since 2004, with both 2006 and 2005 balances of $1.9 million, a $3.0 million decrease since 2004 as the Company redeemed certain policies and elected not to pay premiums on others.

Cash provided by financing activities was $1.2 million in fiscal 2006, a $14.5 million decrease from 2005. In the current fiscal year, the Company repurchased $20.7 million of stock, $18.6 million of which related to the previously announced stock buyback program in December 2005, as we continue to reinvest in the business. These repurchases were offset by proceeds received from the exercise of stock options of $20.0 million in the current fiscal year, as employees exercised options, including certain options granted in fiscal 1999 that expired in the current fiscal year. As compared to prior years, proceeds received in relation to stock option exercises have increased due to the increasing stock price as well as the continued growth and popularity of our Employee Stock Purchase Program (“ESPP”), under which the number of shares purchased has increased by 20% since the prior year and 55% since its introduction in fiscal year 2004. Due to the Company’s growing cash position in recent years as well as the timing and amounts of life insurance premiums due, we have trended towards decreasing loans taken against our life insurance policies. In addition, in fiscal 2004, we made payments on stockholder acquisition notes of $5.0 million and received funds from borrowings under our COLI policies of $3.8 million.

Long Term Debt