UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For the fiscal year ended April 30, 2004

Commission File Number 001-14505

KORN/FERRY INTERNATIONAL

(Exact Name of Registrant as Specified in its Charter)

1800 Century Park East, Suite 900

Los Angeles, California 90067

(Address of principal executive offices) (Zip code)

(310) 552-1834

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

None

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

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

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

The number of shares outstanding of our common stock as of July 12, 2004 was 38,723,739 shares. The aggregate market value of the Registrant’s common stock held by non-affiliates of the Registrant on October 31, 2003, (assuming that the Registrant’s only affiliates are its officers, directors and 10% or greater stockholders) was approximately $88,578,974, based upon the closing market price of $8.74 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 2004 Annual Meeting of Stockholders scheduled to be held on September 14, 2004 are incorporated by reference into Part III of this Form 10-K.

KORN/FERRY INTERNATIONAL

Index to Annual Report on Form 10-K for the Fiscal Year Ended April 30, 2004

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PART I.

Item 1.    Business

Business Overview

Korn/Ferry International, is a leading provider of recruitment and leadership development services with the broadest global presence in the recruitment industry. Since 1969, when we opened our first office in Los Angeles, we have expanded to 67 cities in 35 countries. In 1998, we extended our market reach into the middle-market with the introduction of Futurestep, our middle-management recruitment service. As of April 30, 2004, we have approximately 1,414 employees, including 379 executive recruitment and 47 Futurestep consultants who are primarily responsible for client services. Our clients include many of the world’s largest and most prestigious public and private companies, middle-market and emerging growth companies, as well as governmental and not-for-profit organizations. We have established strong client loyalty; more than 79% of the executive recruitment assignments we performed in fiscal 2004 were on behalf of clients for whom we had conducted previous assignments over the last three fiscal years.

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

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

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

Our Corporate Governance Guidelines, Code of Business Conduct and Ethics and the charters of the Audit Committee, Compensation and Personnel Committee and Nominating Committee and Corporate Governance Committee of our Board of Directors are also posted on our Internet website at www.kornferry.com. Stockholders may request copies of these documents by writing to our Corporate Secretary at the address above.

We provide the following recruitment services:

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

Leadership Development Solutions—Through our Leadership Development Solutions business, we assist clients in understanding the expertise, behaviors and values critical to their strategy and how their management team aligns with these important characteristics. We provide clients with the resources to address existing misalignment through focused coaching and development as well as a state-of-the-art framework for monitoring performance against key success factors.

Middle-Management Recruitment:     Futurestep, our middle-management recruitment business, draws from Korn/Ferry’s more than 30 years of industry experience to create customized recruitment strategies based on clients’ individual workforce needs. In addition to middle-management search, Futurestep offers project

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recruitment, managed services and interim solutions. Futurestep combines solution-oriented service with customized technologies to deliver strong candidates and fast cycle times. At April 30, 2004, the Futurestep database contained over one million recruitment candidates.

Financial information regarding our business segments is contained in the Notes to our Consolidated Financial Statements.

Industry Overview

Executive Recruitment:     The executive recruitment market concentrates on searches for positions with annual compensation of $150,000 or more, which generally involve board level, chief executive and other senior executive positions. The industry is comprised of retained and contingency search firms. Retained firms typically charge a fee for their services equal to approximately one-third of the annual cash compensation for the position being filled and bill for their services in three installments, 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 includes management assessment and executive coaching 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. Firms in this market usually operate on a contingency basis. 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. 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, employing advanced assessment software, and reducing placement times.

Industry Trends

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

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

Increased Use of Advanced Technology—Emphasis in the recruitment business is shifting from candidate identification to candidate assessment and placement. The emphasis on assessment and placement 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.

Increased Outsourcing of Recruitment Functions—Recent economic factors are requiring companies to focus on core competencies and to outsource recruitment functions to providers who can efficiently provide high quality recruitment 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:

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Globalization of Business—As the world’s individual markets continue to integrate into one global economy, more companies are required to supplement internal talent with experienced senior executives who can operate effectively in a global economy. The rapidly changing competitive environment challenges multinational and local companies to identify qualified executives with the right combination of skills, experience and cultural compatibility. Today, clients are turning to those firms that combine proven expertise with specialized knowledge of key industries and local markets, enabling them to address their mounting global recruitment needs.

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

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

Growth Strategy

Our objective is to expand our position as a leading provider of recruitment and leadership development services. The principal elements of our strategy include:

Recruiting and Retaining Key Consultants

In an ongoing strategic effort to promote the firm as a premier career destination, we successfully recruited 46 new consultants globally in the current year. The new additions originate from a diverse range of backgrounds and areas of expertise and were recruited based on their track records as top performers in the human capital industry. The number of new consultants in the current year was offset as attrition and restructuring activities took place. While we experienced a net decrease in the number of consultants year over year, we believe we have significantly upgraded our professional staff in the current year. We believe 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 a leading provider of executive recruitment, we also offer clients middle-management recruitment, project recruitment, managed services and interim solutions through Futurestep and leadership development solutions. We will continue to develop and add new products and services that our clients demand and that we feel are consistent with our brand positioning.

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Global Account Management

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

Expanding our Market Reach and Presence through Technology and Assessment Solutions

An advanced technology infrastructure has become a critical element of the recruitment business. In the executive recruitment market, 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 is our executive search Internet tool that allows executive candidates to submit relevant employment information to us. In fiscal 2003, we introduced our proprietary tool, Search Assessment^SM, which represents a powerful method to assess executive candidates. Search Assessment^SM has been integrated into our standard search process, thus further enhancing our capabilities. We will continue to refine our technology, including our exclusive candidate assessment tools, in order to strengthen our relationships with our existing clients, attract new clients, expand into new markets and position ourselves to gain a competitive advantage in marketing complementary services.

Leveraging our Leadership and Brand Name in Executive Recruitment

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

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 members of boards of directors, chief executive officers, chief financial officers, chief operating officers, chief information officers and other senior executive officers. Once we are retained by a client to conduct an assignment, we assemble a team comprised of consultants with geographic, industry and functional expertise. Our search consultants serve as management advisors and work closely with the client in identifying, assessing and placing a qualified candidate. In fiscal 2004, we performed over 5,400 executive recruitment assignments.

We use a search methodology that has been developed through many 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

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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 high quality candidates.

Once the position is defined, the research team identifies, through the use of our proprietary databases and other information resources, companies that are in related industries facing similar challenges and issues with operating characteristics similar to those of the client. In addition, the team consults with its established network of resources, and our databases that contain profiles of over 2.7 million executives, including those obtained through e-Korn/Ferry, to help identify individuals with the right backgrounds and personal abilities. These sources are a critical element in assessing the marketplace. The original list of candidates is carefully screened through phone interviews, video conferences or in-person meetings. The client is then presented final qualified candidates to interview. We conduct thorough due diligence and background verification of the candidate throughout the process, sometimes with the assistance of an independent third party.

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

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

Percentage of Fiscal 2004 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 directors, chief executive officers and other senior executive and financial 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 for accountability and more effective board performance. The shortage of experienced directors, the tightening of governance policies and the desire on the part of companies to broaden the expertise of their board are raising the standards required to identify and recruit directors with the needed skills. We have established significant expertise in this area and have built a proprietary database with the names and backgrounds of all the Fortune 1000 directors, plus a significant number of middle-market and high-growth company board members, to help support board searches. Members of functional groups are located throughout our regions and across our specialty practice groups.

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Percentage of Fiscal 2004 Assignments by Functional Expertise

Organization

North America—We opened our first office in Los Angeles in 1969, and currently have 23 offices throughout the United States and Canada. In fiscal 2004, the region generated fee revenue of $170.7 million from over 2,100 assignments in this region, with an average of 195 consultants.

Europe—We opened our first European office in London in 1972, and currently have 18 offices throughout 16 countries in the region. In fiscal 2004, fee revenue was $78.2 million from over 1,700 assignments in this region, with an average of 107 consultants.

Asia/Pacific—We opened our first Asia/Pacific office in Tokyo in 1973, and have built a 15 office network throughout ten countries in the region. In fiscal 2004, fee revenue was $36.8 million from over 900 assignments in this region, with an average of 60 consultants.

South America—We opened our first South American office in Brazil in 1974. We expanded our practice to Mexico through the 1977 acquisition of a less than 50% interest in a company in Mexico City and currently conduct operations in Mexico through subsidiaries in which we hold a minority interest. As of April 30, 2004, we operate a network of seven offices in six countries covering the entire South America region and two offices in Mexico. The region, excluding Mexico, our unconsolidated subsidiary, generated fee revenue of $8.4 million in fiscal 2004. We handled nearly 500 assignments in fiscal 2004 in this region, with an average of 17 consultants. Our share of the operating results for our Mexico subsidiaries are included in equity in earnings of unconsolidated subsidiaries on the consolidated statements of operations.

Client Base.    Our clients are many of the world’s largest and most prestigious public and private companies, including 42% of the Fortune 500 companies in the current year. In fiscal 2004, no single client represented more than 2% of fee revenue. We have established strong client loyalty; more than 79% of the executive recruitment assignments we performed in fiscal 2004 were on behalf of clients for whom we had conducted previous assignments over the last three fiscal years.

Competition.    We are a leading provider of recruitment and leadership development services. Other multinational executive recruitment firms include Heidrick & Struggles International, Inc., Spencer Stuart & Associates, Egon Zehnder International and Russell Reynolds Associates, Inc. Although these firms are our primary competitors, we also compete with smaller boutique firms that specialize in specific regional, industry or functional searches. We believe our brand name, global network, prestigious client list, strong specialty practices and quality of service are recognized worldwide. We also believe that our equity-based compensation arrangements distinguish us from most of our competitors and are important for retaining consultants.

Leadership Development Solutions.    In 2004, we consolidated our strategic management assessment and executive coaching services under the name, Leadership Development Solutions, with services in Europe, North and South America, Australia and Japan. This service focuses on helping corporate leadership evaluate the individual and collective performance of their management team. This service, which further extends the range of leadership capital solutions we offer to our clients, is a valuable tool for the chief executive, board of directors and other senior officers in pursuing organizational transformation and the alignment of senior management with

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the company’s strategic goals and internal values. This service responds to our clients’ needs 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. The assessment process is performed by consultants with extensive experience in interviewing and evaluating senior executives and who understand local cultural differences and the relevant business and industry challenges. The assessment process is backed by a statistically validated and proprietary assessment instrument that was developed for us by leading assessment experts and is supported by a proprietary systems platform.

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

Middle-Management Recruitment Services

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

Futurestep combines traditional search expertise with a multi-tiered portfolio of recruitment solutions. Futurestep consultants, based in 12 countries, have instant access to one of the world’s largest databases of prescreened middle-management professionals. The global candidate pool complements our international presence and multi-channel sourcing strategy to ensure speed, efficiency and quality of service for clients worldwide.

Futurestep’s middle-management search uses multiple sourcing channels, validated cultural assessments and a global database of more then one million prescreened professionals to offer a low overhead approach that accelerates the recruitment process and provides a diverse set of candidates matched with specific cultural and strategic requirements.

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

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

Organization.    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. Over the last three years, we consolidated Futurestep’s back office functions with executive recruitment and co-located Futurestep with executive recruitment offices in North America and Europe to streamline the business. At April 30, 2004, we had Futurestep operations in 13 cities in North America, eight in Europe and seven in Asia/Pacific.

Competition.    Futurestep competes for assignments:

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

Additional information regarding fee revenue is contained in Item 7 under the headings “Fiscal 2004 Compared to Fiscal 2003” and “Fiscal 2003 Compared to Fiscal 2002.”

Organization

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

Professional Staff and Employees

As of April 30, 2004, we had approximately 1,163 executive recruitment employees consisting of 379 consultants and 784 associates, researchers, administrative and support staff. In addition, we had 11 consultants in our two unconsolidated Mexico offices. Futurestep had 212 employees at April 30, 2004 consisting of 47 consultants and 165 administrative and support staff. Corporate had 39 professionals at April 30, 2004. We have not been a party to a collective bargaining agreement and consider our relations with our employees to be good. Korn/Ferry International is an equal opportunity employer.

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

The following table provides information relating to each of our business segments for fiscal 2004:

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Risk Factors

The risks described below are the material risks facing our company. Additional risks not presently known to us or that we currently deem immaterial may also impair our business operation. 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 our service, 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 Heidrick & Struggles, Inc., Spencer Stuart & Associates, Egon Zehnder International and Russell Reynolds Associates, Inc. In each of our markets, our competitors may possess greater resources, greater name recognition and longer operating histories than we do, which may give them an advantage in obtaining future clients and attracting qualified professionals in these markets. There are no extensive barriers to entry into the executive search industry, and new recruiting firms continue to enter the market. We believe the continuing development and increased availability of information technology will continue to attract new competitors. Increased competition may lead to pricing pressures that could negatively impact our business.

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

We compete with other executive search firms for qualified consultants. Attracting and retaining consultants in our industry is particularly important because, generally, a small number of consultants have primary responsibility for a client relationship. Because client responsibility is so concentrated, the loss of key consultants might lead to the loss of client relationships. This risk is heightened due to the general portability of a consultant’s business. In addition, because many of our consultants hold shares of our common stock that became freely tradable in February 2003 without additional vesting restrictions, such consultants may not be as likely to remain with us as other consultants who remain under vesting restrictions. Any decrease in the quality of our reputation, reduction in our compensation levels or restructuring of our compensation system, whether as a result of insufficient revenue, a decline in the market price of our common stock or for any other reason, could impair our ability to retain existing or attract additional qualified consultants with the requisite experience, skills or established client relationships. Our failure to retain our most productive consultants or maintain the quality of service to which our clients are accustomed, and the ability of a departing consultant to move business to his or her new employer could result in a loss of clients and harm our business.

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

Demand for our services is significantly affected by the general level of economic activity in the geographic regions and industries in which we operate. When economic activity slows, many companies hire fewer permanent employees. Continued uncertainty with respect to the recovery of the capital markets may cause prospective employers to defer employment decisions, thereby impacting our revenue. In addition, in fiscal 2004, our total assignments included 18% related to the technology industry and 15% related to the financial services/investments industry, both of which have experienced volatility recently. Any significant economic downturn, on a global basis, in North America, or in other regions or industries where our operations are heavily concentrated, could harm our business, results of operations and financial condition.

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

We operate in 35 countries and, as of the year ended April 30, 2004, generate nearly half our fee revenue from operations outside of North America. There are certain risks inherent in transacting business worldwide, such as:

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

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

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

Our financial results would suffer if Futurestep does not remain profitable.

While Futurestep achieved profitability for the first time in the second quarter of fiscal 2004, and remained profitable in the third and fourth quarters of fiscal 2004, Futurestep incurred operating losses of $111.6 million from inception through April 30, 2004. We cannot assure you that Futurestep’s operating losses will not continue in the future. If Futurestep does not continue to be profitable, our financial results may suffer. If our executive recruitment consultants do not actively promote our services such as Futurestep to our clients, the fee revenue growth and profitability of these services could be harmed.

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.

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

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the development, either internally or through independent consultants, of new proprietary software. 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 any interruption or loss of our information processing capabilities, for any reason, could harm our business, results of operations and financial condition.

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 work 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 brand name could seriously harm our business.

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

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

Our stock price could fluctuate significantly.

The market price of our common stock has fluctuated significantly in the past and could continue to fluctuate in the future. Significant fluctuation in the market price of our common stock can occur for a number of reasons, including:

In addition, the securities markets have experienced significant price and volume fluctuations that are independent of the operating performance of individual companies. These market fluctuations could also materially and adversely affect the market price of our common stock. Past stock price performance is not an indication of future performance.

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

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

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

Item 2.    Properties

Our corporate office is located in Los Angeles, California. We lease all 67 of our executive recruitment and Futurestep offices located in North America, Europe, Asia/Pacific and South America. As of April 30, 2004, we leased an aggregate of approximately 625,000 square feet of office space. The leases generally are for terms of one to twelve years and contain customary terms and conditions. We believe that our facilities are adequate for our current needs and we do not anticipate any difficulty replacing such facilities or locating additional facilities to accommodate any future growth.

Item 3.    Legal Proceedings

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

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

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

Executive Officers of the Registrant

Our executive officers serve at the discretion of our Board of Directors. There is no family relationship between any executive officer or director. The following information sets forth the business experience for at least the past five years for each of our executive officers as of April 30, 2004.

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

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

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Gary C. Hourihan is a Corporate 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. Mr. Hourihan was our Executive Vice President—Organizational Development from January 1999 to December 2001. Prior to joining Korn/Ferry International, he was the co-founder, Chairman, and Chief Executive Officer of SCA Consulting, L.L.C., one of the leading executive compensation consulting firms in the United States, where he was employed from November 1984 until joining Korn/Ferry International.

Robert H. McNabb is an Executive Vice President and was elected 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 since December 2001. Prior to joining Futurestep, he was the President and Chief Executive Officer of Corestaff from 1998 to 2001 and President and Chief Operating Officer at Republic Industries in 1997.

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PART II.

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

Common Stock

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

On July 12, 2004 the last reported sales price on the New York Stock Exchange for the common stock was $18.85 per share and there were approximately 3,300 beneficial holders of the common stock.

Dividends

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

Recent Sales of Unregistered Securities

We issued securities convertible into an aggregate of 0.3 million shares of common stock on June 13, 2003 and December 13, 2003 to purchasers affiliated with Friedman, Fleischer & Lowe. The securities consisted of (i) $2.8 million in 7.5% Subordinated Convertible Notes Due 2010 (the “Notes”) and (ii) 68,000 shares of 7.5% Convertible Series A Preferred Stock (the “Preferred Stock”). These issuances were made pursuant to the terms of the Notes and the Certificate of Designations of the Preferred Stock. The Notes provide for the payment of interest due on the Notes by in the form of additional notes with identical terms as the Notes and the Certificate of Designations of the Preferred Stock provides for the payment of dividends on the Preferred Stock in the form of additional shares of Preferred Stock. We determined that the aforementioned issuances together with the original issuances of the Notes and Preferred Stock to the holders were exempt pursuant to Regulation D under the Securities Act of 1933, as amended (the “Securities Act”). In arriving at this determination, we relied on, among other things, representations by the holders of the Notes that they were “accredited investors” as defined in Rule 501 under the Securities Act and that the offering was not a general solicitation.

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We issued 10,072 shares of common stock in June 2003 to four individuals in Australia in connection with the acquisition of the Australian business of Amrop International, which closed in fiscal 2000. We determined these issuances were exempt pursuant to Regulation S under the Securities Act. In arriving at this determination, we relied on, among other things, that the sale was made in an “offshare transaction” without any “directed selling efforts” made in the United States, as each of those terms is defined in Rule 901 under the Securities Act.

Issuer Purchases of Equity Securities

Item 6.    Selected Financial Data

The following selected financial data are qualified by reference to, and should be read together with, our “Audited Consolidated Financial Statements and Related Notes” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Form 10-K report. The selected statement of operations data set forth below for the fiscal years ended April 30, 2004, 2003 and 2002 and the selected balance sheet data as of April 30, 2004 and 2003 are derived from our consolidated financial statements, audited by Ernst & Young LLP. The selected statement of operations data set forth below for the fiscal years ended April 30, 2001 and 2000 are derived from consolidated financial statements and notes thereto, audited by Arthur Andersen LLP, which are not included in this Form 10-K report. However, data for the years ended April 30, 2001 and 2000 have been restated to reflect the operating results of our Mexico subsidiaries under the equity method. Ernst & Young LLP has applied certain procedures to the restatement adjustments for fiscal 2001 and 2000 as described in their report on the 2002 consolidated financial statements, which are not included in this Form 10-K report.

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

Forward-looking Statements

This Annual Report on Form 10-K may contain certain statements that we believe are, or may be considered to be, “forward-looking” statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally can be identified by use of statements that include phrases such as “believe”, “expect”, “anticipate”, “intend”, “plan”, “foresee”, “may”, “will”, “estimates”, “potential”, “continue” or other similar words or phrases. Similarly, statements that describe our objectives, plans or goals also are forward-looking statements. All of these forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from those contemplated by the relevant forward-looking statement. The principal risk factors that could cause actual performance and future actions to differ materially from the forward-looking statements include, but are not limited to, those set forth above under the caption, “Risk Factors”, including dependence on attracting and retaining qualified and experienced consultants, portability of client relationships, local political or economic developments in or affecting countries where we have operations, ability to manage growth, restrictions imposed by off-limits agreements, competition, risks related to the growth and results of Futurestep, 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 included in this annual report on Form 10-K.

Executive Summary

We are a leading provider of recruitment and leadership development services with the broadest global presence in the recruitment industry. Our services include executive recruitment, middle-management recruitment (through Futurestep), leadership development solutions and executive coaching. Over half of the executive recruitment searches we performed in our 2004 fiscal year were for board level, chief executive and other senior executive positions and our 3,608 clients included approximately 42% of the Fortune 500 companies. We have established strong client loyalty; more than 79% of the executive recruitment assignments we performed in our 2004 fiscal were on behalf of clients for whom we had conducted previous assignments over the last three fiscal years.

To reach our objective of expanding our position as a leading provider of recruitment and leadership development services, our strategic objectives for the 2004 fiscal year and beyond include broadening our product and service offering, better coordination in global recruiting and increased operational efficiencies, expanding our market reach and presence through technology and assessment solutions and leveraging our leadership and brand name in executive recruitment. We will continue to develop new products and services, refine our technology and aggressively market our proven global recruitment expertise.

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Our fee revenue increased 4% in our 2004 fiscal year to $328.3 million with increases in all regions, with the exception of Europe. The North America region experienced the largest increase in fee revenue in both executive recruitment and Futurestep. In our 2004 fiscal year, we also experienced an operating profit of $15.8 million with an increase in operating income from executive recruiting of $18.9 million and improved operating losses from Futurestep.

Our total long-term debt at April 30, 2004 was approximately $44.4 million, and our working capital increased $15.5 million to approximately $88.3 million at April 30, 2004 from $72.7 million at April 30, 2003. Cash provided by operating activities increased in our 2004 fiscal year to $31.0 million as a result of improved operating results. Capital expenditure decreased in the 2004 fiscal year to $1.9 million as a result of reduced spending efforts.

In our 2004 fiscal year we issued an additional $2.8 million of 7.5% Convertible Subordinated Notes in lieu of interest paid in cash and $0.7 million of 7.5% Convertible Series A Preferred Stock in lieu of cash dividends.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”, effective at the beginning of the first interim period after June 15, 2003. This Statement required mandatorily redeemable instruments be classified as liabilities. We adopted this Statement in the first quarter of fiscal 2004 and classified our convertible mandatorily redeemable preferred stock as a liability. The prior year balance sheet has been reclassified to conform to this Statement. We reported our accretion on redeemable preferred stock as interest expense in the current year.

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 resolved.

Deferred Compensation.    Estimating deferred compensation requires assumptions regarding the timing and probability of payments of benefits to participants and the discount rate. Changes in these assumptions would significantly impact the liability and related cost on our balance sheet and statement of operations. Management engages an independent actuary to review these assumptions periodically in order to ensure that they reflect the population and economics of our deferred compensation plans in all material respects and to assist us in estimating our liability for deferred compensation 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.

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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 or obtain 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.

Results of Operations

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

Excluding asset impairment and restructuring charges in fiscal 2004, 2003 and 2002, operating income (loss) as a percentage of fee revenue was 8%, 1% and (3%), respectively. On this same basis, net income (loss) as a percentage of fee revenue was 5%, (2%) and (1%) for the fiscal years ended April 30, 2004, 2003, and 2002, respectively.

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

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Fiscal 2004 Compared to Fiscal 2003

Fee revenue

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

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

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

Compensation and Benefits

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

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

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

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

General and Administrative Expenses

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

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

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

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

Out-of-Pocket Engagement Expenses

Out-of-pocket engagement expenses are comprised of expenses incurred by candidates and our consultants that are generally billed to clients. As a percentage of fee revenue, out-of-pocket engagement expenses remained constant at 7%.

Depreciation and Amortization Expense

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

Operating income (loss)

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

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

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

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Interest Income and Other Income, Net

Interest income and other income, net includes interest income of $1.2 million and $1.5 million in fiscal 2004 and 2003, respectively. The decrease in interest income is due to lower interest rates compared to prior year. The increase in other income of $0.8 million in the current year is due to dividend distributions received on investments.

Interest Expense

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

Provision for (Benefit From) Income Taxes

The provision for income taxes was $3.2 million in fiscal 2004 compared to $2.0 million in fiscal 2003. Although we reported a pretax loss in the prior year, certain foreign subsidiaries reported pretax income resulting in foreign income tax expense. The effective tax rate was 42% for fiscal 2004 and (9%) for fiscal 2003.

Equity in Earnings of Unconsolidated Subsidiaries

Equity in earnings of unconsolidated subsidiaries is comprised of our less than 50% stockholder interest in our Mexican subsidiaries. We report our interest in the earnings of the Mexican subsidiaries as a one-line adjustment to net income (loss). Equity in earnings was $1.0 million in fiscal 2004 and $1.8 million in fiscal 2003. The decrease in equity in earnings is a result of the Mexican subsidiaries, decrease in operating income.

Fiscal 2003 Compared to Fiscal 2002

Fee revenue decreased $62.3 million, or 17%, to $315.1 million for fiscal 2003 from $377.4 million for fiscal 2002. The decrease in fee revenue was primarily a result of a decrease in demand reflecting weakness in the global economy throughout fiscal 2003.

Executive recruitment—All geographic regions reported lower fee revenue in fiscal 2003 compared to fiscal 2002. North America experienced the largest decline in fee revenue of $33.2 million, or 17%, compared to fiscal 2002 due to a 10% decrease in the number of engagements and a slight decrease in average fees. Europe reported fee revenue of $79.0 million, a decline of $13.1 million, or 14%, compared to fiscal 2002 driven by a 19% decrease in the number of engagements while average fees remained constant.

Futurestep—Fee revenue decreased $7.4 million, or 18%, to $32.7 million in fiscal 2003 from $40.1 million in fiscal 2002 as we changed the focus of this business to be multiple recruiting project oriented. Of the total decrease in fee revenue, Europe declined $5.2 million, or 21%, while North America declined $2.3 million, or 23%. Fee revenue in Asia/Pacific remained fairly constant at $5.2 million in fiscal 2003.

JobDirect—In the third quarter of fiscal 2002, we decided to exit the college recruitment market and wind down JobDirect operations. JobDirect reported fee revenue of $1.4 million through December 31, 2001, the close of business. In fiscal 2002, we recognized impairment charges of $30.3 million and a restructuring charge of $2.0 million.

Compensation and Benefits

Compensation and benefits expense decreased $50.8 million, or 19%, to $223.2 million in fiscal 2003 from $274.0 million in fiscal 2002.

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Executive recruitment compensation and benefits costs decreased $34.0 million, or 15%, in fiscal 2003 compared to fiscal 2002. This decrease reflects the 13% reduction in our workforce in fiscal 2003 as well as a 18% decrease in executive recruitment bonus expense primarily as a result of the decline in fee revenue. Executive recruitment compensation and benefits expense as a percentage of fee revenue remained constant at 66% in fiscal 2003 and 2002.

Futurestep compensation and benefits expense declined $10.2 million, or 29%, to $25.0 million in fiscal 2003 from $35.3 million in fiscal 2002 reflecting a 21% decrease in Futurestep employees in fiscal 2003. As a percentage of fee revenue, Futurestep compensation and benefits expense declined to 77% in fiscal 2003 from 88% in fiscal 2002.

Corporate compensation and benefits expense declined $3.3 million, or 22%, in fiscal 2003 compared to fiscal 2002. This decrease reflects a 24% reduction in our workforce in the latter half of fiscal 2003 as well as gains recognized in fiscal year 2003 related to our COLI policies.

General and Administrative Expenses

General and administrative expenses decreased $28.8 million, or 28%, to $73.1 million in fiscal 2003 from $101.9 million in fiscal 2002.

In executive recruitment, general and administrative expenses decreased $15.0 million, or 22%, primarily due to reduced facility costs as well as reduced bad debt expenses. As a percentage of fee revenue, general and administrative expenses slightly decreased to 19% in fiscal 2003 from 21% in fiscal 2002.

Futurestep general and administrative expenses decreased $8.4 million, or 47%, mainly due to reduced office costs and professional and advertising expenses related to our restructuring and ongoing cost reduction efforts. As a percentage of fee revenue, Futurestep general and administrative expenses decreased to 29% in fiscal year 2003 from 45% in fiscal 2002.

Corporate general and administrative expenses decreased $1.9 million, or 17%, mainly due to the reduction of professional costs.

Out-of-Pocket Engagement Expenses

Out-of-pocket engagement expenses are comprised of expenses incurred by candidates and our consultants that are generally billed to clients. As a percentage of fee revenue, out-of-pocket engagement expenses remained constant at 7%.