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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION



WASHINGTON, D.C. 20549



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FORM 10-Q



|(X) | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ---------------------------------------------------------------------------------------



For the quarterly period ended July 31, 2005 or



|(    ) | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|------ | -----------------------------------------------------------------------------------------



For the transition period from
 to



Commission File Number 001-14505



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KORN/FERRY INTERNATIONAL

(Exact name of registrant as specified in its charter)



|                                                              |  |                                       |  
|------------------------------------------------------------- |  | ------------------------------------- | -
|Delaware                                                      |  | 95-2623879                            |  
|(State of other jurisdictionof incorporation or organization) |  | (I.R.S. EmployerIdentification Number | )



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)



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, and (2) has been subject to such filing requirements for the past 90 days.



Yes (X) No (    )



Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).



Yes (X) No (    )



Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act.):



Yes
(    ) No (X)



The number of shares
outstanding of our common stock as of September 6, 2005 was 40,960,186.



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KORN/FERRY INTERNATIONAL AND SUBSIDIARIES



Table of Contents



|               |  |                                                                                                   |  |     
|-------------- |  | ------------------------------------------------------------------------------------------------- |  | ----
|PART I.        |  | FINANCIAL INFORMATION                                                                             |  | Page
|Item 1.        |  | Financial Statements                                                                              |  |     
|               |  | Consolidated Balance Sheets as of July 31, 2005 (unaudited) and April 30, 2005.                   |  | 3   
|               |  | Unaudited Consolidated Statements of Operations for the three months ended July 31, 2005 and 2004 |  | 4   
|               |  | Unaudited Consolidated Statements of Cash Flows for the three months ended July 31, 2005 and 2004 |  | 5   
|               |  | Notes to Unaudited Condensed Consolidated Financial Statements                                    |  | 6   
|Item 2.        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations             |  | 12  
|Item 3.        |  | Quantitative and Qualitative Disclosures About Market Risk                                        |  | 17  
|Item 4.        |  | Controls and Procedures                                                                           |  | 17  
|               |  |                                                                                                  
|PART II.       |  | OTHER INFORMATION                                                                                 |  |     
|Item 6.        |  | Exhibits                                                                                          |  | 18  
|               | 
|SIGNATURE      |  | 19                                                                                               
|               | 
|CERTIFICATIONS |  |                                                                                                  



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PART I.    FINANCIAL INFORMATION



Item 1.Financial Statements



KORN/FERRY INTERNATIONAL AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)



|                                                                                                                                   |  |                     |         |   |                      |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------- |  | ------------------- | ------- | - | -------------------- | - | ------- | -
|                                                                                                                                   |  | As of July 31, 2005 |         |   | As of April 30, 2005 |  
|                                                                                                                                   |  | (unaudited)         |         |   |                      |  
|ASSETS                                                                                                                             |  |                     |         |   |                      |   |         |  
|Cash and cash equivalents                                                                                                          |  | $                   | 146,015 |   |                      | $ | 199,133 |  
|Marketable securities                                                                                                              |  |                     | 16,039  |   |                      |   | 7,815   |  
|Receivables due from clients, net of allowance for doubtful accounts of $7,951 and $7,307                                          |  |                     | 82,341  |   |                      |   | 68,942  |  
|Income tax and other receivables                                                                                                   |  |                     | 6,507   |   |                      |   | 6,004   |  
|Deferred income taxes                                                                                                              |  |                     | 9,035   |   |                      |   | 8,864   |  
|Prepaid expenses                                                                                                                   |  |                     | 12,853  |   |                      |   | 13,710  |  
|                                                                                                                                   |  |                     |         |   |                      |   |         |  
|Total current assets                                                                                                               |  |                     | 272,790 |   |                      |   | 304,468 |  
|                                                                                                                                   |  |                    
|Property and equipment, net                                                                                                        |  |                     | 18,410  |   |                      |   | 18,287  |  
|Cash surrender value of company owned life insurance policies, net of loans                                                        |  |                     | 67,051  |   |                      |   | 65,047  |  
|Deferred income taxes                                                                                                              |  |                     | 33,857  |   |                      |   | 30,889  |  
|Goodwill                                                                                                                           |  |                     | 105,388 |   |                      |   | 107,014 |  
|Deferred financing costs, investments and other                                                                                    |  |                     | 8,364   |   |                      |   | 8,463   |  
|                                                                                                                                   |  |                     |         |   |                      |   |         |  
|Total assets                                                                                                                       |  | $                   | 505,860 |   |                      | $ | 534,168 |  
|                                                                                                                                   |  |                     |         |   |                      |   |         |  
|                                                                                                                                   |  |                    
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                               |  |                     |         |   |                      |   |         |  
|Accounts payable                                                                                                                   |  | $                   | 7,480   |   |                      | $ | 7,196   |  
|Income taxes payable                                                                                                               |  |                     | 20,047  |   |                      |   | 15,400  |  
|Compensation and benefits payable                                                                                                  |  |                     | 55,389  |   |                      |   | 107,009 |  
|Other accrued liabilities                                                                                                          |  |                     | 26,013  |   |                      |   | 28,792  |  
|                                                                                                                                   |  |                     |         |   |                      |   |         |  
|Total current liabilities                                                                                                          |  |                     | 108,929 |   |                      |   | 158,397 |  
|                                                                                                                                   |  |                     |         |   |                      |   |         |  
|Deferred compensation and other retirement plans                                                                                   |  |                     | 64,716  |   |                      |   | 59,134  |  
|Long-term debt                                                                                                                     |  |                     | 44,999  |   |                      |   | 44,949  |  
|Other                                                                                                                              |  |                     | 8,395   |   |                      |   | 7,991   |  
|7.5% Convertible mandatorily redeemable preferred stock, net of unamortized discount and issuance costs, redemption value
$11,387  |  |                     | 10,844  |   |                      |   | 10,795  |  
|                                                                                                                                   |  |                     |         |   |                      |   |         |  
|Total liabilities                                                                                                                  |  |                     | 237,883 |   |                      |   | 281,266 |  
|                                                                                                                                   |  |                     |         |   |                      |   |         |  
|Stockholders equity                                                                                                               |  |                     |         |   |                      |   |         |  
|Common stock: $0.01 par value, 150,000 shares authorized, 42,191 and 41,268 shares issued and 40,769 and 39,888 shares
outstanding |  |                     | 344,034 |   |                      |   | 330,745 |  
|Retained earnings deficit                                                                                                          |  |                     | (70,971 | ) |                      |   | (82,584 | )
|Unearned restricted stock compensation                                                                                             |  |                     | (10,613 | ) |                      |   | (4,355  | )
|Accumulated other comprehensive income                                                                                             |  |                     | 6,108   |   |                      |   | 9,679   |  
|                                                                                                                                   |  |                     |         |   |                      |   |         |  
|Stockholders equity                                                                                                               |  |                     | 268,558 |   |                      |   | 253,485 |  
|Less: Notes receivable from stockholders                                                                                           |  |                     | (581    | ) |                      |   | (583    | )
|                                                                                                                                   |  |                     |         |   |                      |   |         |  
|Total stockholders equity                                                                                                         |  |                     | 267,977 |   |                      |   | 252,902 |  
|                                                                                                                                   |  |                     |         |   |                      |   |         |  
|Total liabilities and stockholders equity                                                                                         |  | $                   | 505,860 |   |                      | $ | 534,168 |  
|                                                                                                                                   |  |                     |         |   |                      |   |         |  



The accompanying notes
are an integral part of these consolidated financial statements.



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KORN/FERRY INTERNATIONAL AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)



|                                                                                               |  |                             |         |   |      |   |         |  
|---------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                               |  | Three Months Ended July 31, |        
|                                                                                               |  | 2005                        |         |   | 2004 |  
|                                                                                               |  | (unaudited)                 |        
|Fee revenue                                                                                    |  | $                           | 122,201 |   |      | $ | 102,807 |  
|Reimbursed out-of-pocket engagement expenses                                                   |  |                             | 6,894   |   |      |   | 5,376   |  
|                                                                                               |  |                             |         |   |      |   |         |  
|Total revenue                                                                                  |  |                             | 129,095 |   |      |   | 108,183 |  
|                                                                                               |  |                            
|Compensation and benefits                                                                      |  |                             | 77,955  |   |      |   | 64,876  |  
|General and administrative expenses                                                            |  |                             | 22,717  |   |      |   | 20,844  |  
|Out-of-pocket engagement expenses                                                              |  |                             | 7,478   |   |      |   | 5,638   |  
|Depreciation and amortization                                                                  |  |                             | 2,201   |   |      |   | 2,242   |  
|                                                                                               |  |                             |         |   |      |   |         |  
|Total operating expenses                                                                       |  |                             | 110,351 |   |      |   | 93,600  |  
|                                                                                               |  |                             |         |   |      |   |         |  
|                                                                                               |  |                            
|Operating income                                                                               |  |                             | 18,744  |   |      |   | 14,583  |  
|                                                                                               |  |                            
|Interest and other income, net                                                                 |  |                             | 1,353   |   |      |   | 404     |  
|Interest expense                                                                               |  |                             | (2,479  | ) |      |   | (2,553  | )
|                                                                                               |  |                             |         |   |      |   |         |  
|Income before provision for income taxes and equity in earnings of unconsolidated subsidiaries |  |                             | 17,618  |   |      |   | 12,434  |  
|Provision for income taxes                                                                     |  |                             | 6,448   |   |      |   | 4,486   |  
|Equity in earnings of unconsolidated subsidiaries                                              |  |                             | 443     |   |      |   | 423     |  
|                                                                                               |  |                             |         |   |      |   |         |  
|Net income                                                                                     |  | $                           | 11,613  |   |      | $ | 8,371   |  
|                                                                                               |  |                             |         |   |      |   |         |  
|                                                                                               |  |                            
|Basic earnings per common share                                                                |  | $                           | 0.29    |   |      | $ | 0.22    |  
|                                                                                               |  |                             |         |   |      |   |         |  
|                                                                                               |  |                            
|Basic weighted average common shares outstanding                                               |  |                             | 39,384  |   |      |   | 37,801  |  
|                                                                                               |  |                             |         |   |      |   |         |  
|                                                                                               |  |                            
|Diluted earnings per common share                                                              |  | $                           | 0.27    |   |      | $ | 0.20    |  
|                                                                                               |  |                             |         |   |      |   |         |  
|                                                                                               |  |                            
|Diluted weighted average common shares outstanding                                             |  |                             | 46,686  |   |      |   | 45,861  |  
|                                                                                               |  |                             |         |   |      |   |         |  





The accompanying notes are an integral part of these consolidated financial statements.



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KORN/FERRY INTERNATIONAL AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                                                                      |  |                            |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                                                      |  | Three months EndedJuly 31, |        
|                                                                                                                                      |  | 2005                       |         |   | 2004 |  
|                                                                                                                                      |  | (unaudited)                |        
|Cash from operating activities:                                                                                                       |  |                            |         |   |      |   |         |  
|Net income                                                                                                                            |  | $                          | 11,613  |   |      | $ | 8,371   |  
|Adjustments to reconcile net income to net cash provided by operating activities:                                                     |  |                            |         |   |      |   |         |  
|Depreciation and amortization                                                                                                         |  |                            | 2,201   |   |      |   | 2,242   |  
|Interest paid in kind and amortization of discount on convertible securities                                                          |  |                            | 246     |   |      |   | 1,177   |  
|Loss (gain) on disposition of property and equipment                                                                                  |  |                            | 39      |   |      |   | (10     | )
|Provision for doubtful accounts                                                                                                       |  |                            | 1,819   |   |      |   | 2,062   |  
|Gain on cash surrender value of life insurance policies                                                                               |  |                            | (1,990  | ) |      |   | (1,000  | )
|Realized gains on marketable securities                                                                                               |  |                            | (358    | ) |      |   |        |  
|Deferred income taxes                                                                                                                 |  |                            | (3,139  | ) |      |   | (1,023  | )
|Tax benefit from exercise of stock options                                                                                            |  |                            | 1,292   |   |      |   | 1,566   |  
|Non-cash compensation arrangements                                                                                                    |  |                            | 1,532   |   |      |   | 581     |  
|Change in other assets and liabilities:                                                                                               |  |                            |         |   |      |   |         |  
|Deferred compensation                                                                                                                 |  |                            | 5,582   |   |      |   | (275    | )
|Receivables                                                                                                                           |  |                            | (15,721 | ) |      |   | (16,280 | )
|Prepaid expenses                                                                                                                      |  |                            | 857     |   |      |   | (1,054  | )
|Investment in unconsolidated subsidiaries                                                                                             |  |                            | (736    | ) |      |   | (452    | )
|Income taxes payable                                                                                                                  |  |                            | 4,515   |   |      |   | 899     |  
|Accounts payable and accrued liabilities                                                                                              |  |                            | (54,691 | ) |      |   | (19,059 | )
|Other                                                                                                                                 |  |                            | 309     |   |      |   | 630     |  
|                                                                                                                                      |  |                            |         |   |      |   |         |  
|Net cash used in operating activities                                                                                                 |  |                            | (46,630 | ) |      |   | (21,625 | )
|                                                                                                                                      |  |                            |         |   |      |   |         |  
|Cash from investing activities:                                                                                                       |  |                            |         |   |      |   |         |  
|Purchase of property and equipment                                                                                                    |  |                            | (2,847  | ) |      |   | (999    | )
|Purchase of marketable securities                                                                                                     |  |                            | (7,544  | ) |      |   | (7,266  | )
|Business acquisitions                                                                                                                 |  |                            | (1,011  | ) |      |   | (419    | )
|Premiums on life insurance policies                                                                                                   |  |                            | (429    | ) |      |   | (662    | )
|Proceeds from life insurance policy benefits                                                                                          |  |                            |        |   |      |   | 339     |  
|Proceeds from dividends on Mexico investment                                                                                          |  |                            | 878     |   |      |   | 66      |  
|                                                                                                                                      |  |                            |         |   |      |   |         |  
|Net cash used in investing activities                                                                                                 |  |                            | (10,953 | ) |      |   | (8,941  | )
|                                                                                                                                      |  |                            |         |   |      |   |         |  
|Cash from financing activities:                                                                                                       |  |                            |         |   |      |   |         |  
|Payments on life insurance policy loans                                                                                               |  |                            |        |   |      |   | (308    | )
|Borrowings under life insurance policies                                                                                              |  |                            | 416     |   |      |   | 1,514   |  
|Purchase of common stock                                                                                                              |  |                            | (748    | ) |      |   | (374    | )
|Proceeds from issuance of common stock upon exercise of employee stock options and in connection with an employee stock purchase
plan |  |                            | 5,502   |   |      |   | 7,378   |  
|Receipts on stockholders notes                                                                                                       |  |                            | 2       |   |      |   | 18      |  
|                                                                                                                                      |  |                            |         |   |      |   |         |  
|Net cash provided by financing activities                                                                                             |  |                            | 5,172   |   |      |   | 8,228   |  
|                                                                                                                                      |  |                            |         |   |      |   |         |  
|Effect of exchange rate changes on cash flows                                                                                         |  |                            | (707    | ) |      |   | 523     |  
|                                                                                                                                      |  |                            |         |   |      |   |         |  
|Net decrease in cash and cash equivalents                                                                                             |  |                            | (53,118 | ) |      |   | (21,815 | )
|Cash and cash equivalents at beginning of the period                                                                                  |  |                            | 199,133 |   |      |   | 108,102 |  
|                                                                                                                                      |  |                            |         |   |      |   |         |  
|Cash and cash equivalents at end of the period                                                                                        |  | $                          | 146,015 |   |      | $ | 86,287  |  
|                                                                                                                                      |  |                            |         |   |      |   |         |  



The accompanying notes
are an integral part of these consolidated financial statements.



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KORN/FERRY INTERNATIONAL AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share amounts)



1.    Summary of Significant Accounting Policies



Basis of Presentation



The consolidated financial statements for the three months ended July 31, 2005 and 2004 include the accounts of Korn/Ferry International and all of its
wholly and majority owned domestic and international subsidiaries (collectively, the Company). The consolidated financial statements are unaudited, but include all adjustments, consisting of normal recurring accruals and any other
adjustments that management considers necessary for a fair presentation of the results for these periods. These financial statements have been prepared consistently with the accounting policies described in the Companys Annual Report on Form
10-K for the fiscal year ended April 30, 2005 (Annual Report) and should be read together with the Annual Report.



Critical Accounting Policies and Use of Estimates



The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. As a
result, actual results could differ from these estimates. The most significant areas that require management judgment are revenue recognition, deferred compensation and the carrying values of goodwill and deferred income taxes.



Cash and Cash Equivalents



The Company considers cash equivalents to be only those investments which
are highly liquid, readily convertible and mature within three months from the date of purchase.



Available for Sale Securities



The Company considers its marketable securities as available-for-sale as defined in SFAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities. These investments are recorded at fair value and are classified as marketable securities in the accompanying consolidated balance sheet as of July 31, 2005 and April 30, 2005. The changes in fair values are recorded as
unrealized gains (losses) as a separate component of stockholders equity. Investments are made based on the Companys investment policy which restricts the types of investments that can be made.



Stock Based Compensation



On December 16, 2004, the Financial Accounting Standards Board
(FASB) issued FASB Statement No. 123 (revised 2004) (Statement 123(R) ), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation (Statement 123). Statement
123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees (APB Opinion No. 25), and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach
described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer
an alternative.



Statement 123(R) is required to be adopted in
fiscal years beginning after June 15, 2005. Early adoption is permitted. The Company expects to adopt Statement 123(R) on May 1, 2006. Statement 123(R) permits public companies to adopt its requirements using one of two methods: (1) A modified
prospective method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123(R) for all share-based payments granted after the effective date and (b) based on the
requirements of Statement 123 for all awards granted to employees prior to the effective date of Statement 123(R) that remain



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KORN/FERRY INTERNATIONAL AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

(in thousands, except per share amounts)



unvested on the effective date or (2) A modified retrospective method which includes the requirements of the modified prospective method
described above, but also permits entities to restate based on the amounts previously recognized under Statement 123 for purposes of pro forma disclosures in all prior periods presented. The Company plans to adopt Statement 123(R) using the modified
prospective method.



As permitted by Statement 123, the Company
currently accounts for share-based payments to employees using APB Opinion 25s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)s fair
value method will have a significant impact on the Companys results of operations, although it will have no impact on the Companys overall financial position. The impact of adoption of Statement 123(R) cannot be predicted at this time as
it depends on levels of share-based payments granted in the future. However, had the Company adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of Statement 123 as described in the disclosure of
pro forma net income and earnings per share in the table below. Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as
required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future as they depend on,
among other things, when employees exercise stock options, the amount of operating cash flows recognized for such tax deductions was $1,292 and $1,566 for the three months ended July 31, 2005 and 2004, respectively.



The following table illustrates the effect on net income and earnings per
share as if the Company had applied the fair value recognition provisions of Statement 123:



|                                                                                 |  |                            |        |   |      |   |        |  
|-------------------------------------------------------------------------------- |  | -------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                 |  | Three Months EndedJuly 31, |       
|                                                                                 |  | 2005                       |        |   | 2004 |  
|Net income, as reported                                                          |  | $                          | 11,613 |   |      | $ | 8,371  |  
|Stock-based employee compensation charges, net of related tax effects:           |  |                            |        |   |      |   |        |  
|Employee stock compensation expense included in net income, as reported          |  |                            | 968    |   |      |   | 341    |  
|Employee stock compensation expense determined under the fair-value based method |  |                            | (2,527 | ) |      |   | (2,160 | )
|                                                                                 |  |                            |        |   |      |   |        |  
|Net income, as adjusted                                                          |  | $                          | 10,054 |   |      | $ | 6,552  |  
|                                                                                 |  |                            |        |   |      |   |        |  
|Interest expense on convertible securities, net of related tax effects           |  |                            | 785    |   |      |   | 775    |  
|                                                                                 |  |                            |        |   |      |   |        |  
|Net income adjusted for computation of diluted EPS, as adjusted                  |  | $                          | 10,839 |   |      | $ | 7,327  |  
|                                                                                 |  |                            |        |   |      |   |        |  
|Basic EPS                                                                        |  |                            |        |   |      |   |        |  
|As reported                                                                      |  | $                          | 0.29   |   |      | $ | 0.22   |  
|Pro forma                                                                        |  | $                          | 0.26   |   |      | $ | 0.17   |  
|Diluted EPS                                                                      |  |                            |        |   |      |   |        |  
|As reported                                                                      |  | $                          | 0.27   |   |      | $ | 0.20   |  
|Pro forma                                                                        |  | $                          | 0.23   |   |      | $ | 0.16   |  



The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option-pricing model with a zero dividend rate. The following assumptions were used by the Company for options granted in the respective periods:



|                                |  |                       |   |  |      |  
|------------------------------- |  | --------------------- | - |  | ---- | -
|                                |  | Quarter Ended July 31 |  
|                                |  | 2005                  |   |  | 2004 |  
|Expected stock volatility       |  | 50.0                  | % |  | 63.1 | %
|Risk-free interest rate         |  | 3.83                  | % |  | 3.69 | %
|Expected option life (in years) |  | 4.50                  |   |  | 4.50 |  



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KORN/FERRY INTERNATIONAL AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

(in thousands, except per share amounts)



The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options. The
assumptions used in option valuation models are highly subjective, particularly the expected stock price volatility of the underlying stock. In managements opinion, existing valuation models do not provide a reliable, single measure of the
fair value of its employee stock options because changes in these subjective input assumptions can materially affect the fair value estimate. For purposes of pro forma disclosures, the estimated fair values of the options are amortized over the
options vesting periods.



Common Stock



The Company issued 425,000 and 604,000 common shares as a result of the
exercise of stock options and 106,000 and 98,000 common shares in conjunction with the Companys employee stock purchase plan in the three months ended July 31, 2005 and 2004, respectively.



Reclassifications



Certain prior year amounts have been reclassified to conform with the
current year presentation.



2.    Basic and
Diluted Earnings Per Share



Basic earnings per common
share (basic EPS) was computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per common share (diluted EPS) reflects the potential dilution that would occur if all
in-the-money outstanding options or other contracts to issue common stock were exercised or converted and was computed by dividing adjusted net income, after assumed conversion of subordinated notes and preferred stock, by the weighted average
number of common shares outstanding plus dilutive common equivalent shares. The following is a reconciliation of the numerator and denominator (shares in thousands) used in the computation of basic and diluted EPS:



|                                                                       |  |                            |        |      |   |       
|---------------------------------------------------------------------- |  | -------------------------- | ------ | ---- | - | ------
|                                                                       |  | Three Months EndedJuly 31,
|                                                                       |  | 2005                       |        | 2004
|Net income (Numerator):                                                |  |                            |        |      |   |       
|Net income for basic EPS                                               |  | $                          | 11,613 |      | $ | 8,371 
|Interest expense on convertible securities, net of related tax effects |  |                            | 785    |      |   | 775   
|                                                                       |  |                            |        |      |   |       
|Net income for diluted EPS                                             |  | $                          | 12,398 |      | $ | 9,146 
|                                                                       |  |                            |        |      |   |       
|Shares (Denominator):                                                  |  |                            |        |      |   |       
|Weighted average shares for basic EPS                                  |  |                            | 39,384 |      |   | 37,801
|                                                                       |  |                           
|Effect of:                                                             |  |                            |        |      |   |       
|Convertible subordinated notes                                         |  |                            | 4,470  |      |   | 4,509 
|Convertible preferred stock                                            |  |                            | 1,118  |      |   | 1,127 
|Warrants                                                               |  |                            | 83     |      |   | 274   
|Restricted stock                                                       |  |                            | 126    |      |   | 160   
|Stock options                                                          |  |                            | 1,501  |      |   | 1,988 
|Employee stock purchase plan                                           |  |                            | 4      |      |   | 2     
|                                                                       |  |                            |        |      |   |       
|Adjusted weighted average shares for diluted EPS                       |  |                            | 46,686 |      |   | 45,861
|                                                                       |  |                            |        |      |   |       
|Basic earnings per share                                               |  | $                          | 0.29   |      | $ | 0.22  
|                                                                       |  |                            |        |      |   |       
|Diluted earnings per share                                             |  | $                          | 0.27   |      | $ | 0.20  
|                                                                       |  |                            |        |      |   |       



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KORN/FERRY INTERNATIONAL AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

(in thousands, except per share amounts)



Assumed exercises or conversions have been excluded in computing the diluted earnings per share when their inclusion would
be anti-dilutive.



3.    Comprehensive Income



Comprehensive income is comprised of net income and all
changes to stockholders equity, except those changes resulting from investments by owners (changes in paid in capital) and distributions to owners (dividends).



Total comprehensive income is as follows:



|                                                       |  |                            |        |   |      |   |      
|------------------------------------------------------ |  | -------------------------- | ------ | - | ---- | - | -----
|                                                       |  | Three Months EndedJuly 31,
|                                                       |  | 2005                       |        |   | 2004
|Net income                                             |  | $                          | 11,613 |   |      | $ | 8,371
|Unrealized gain on marketable securities, net of taxes |  |                            | 188    |   |      |   |     
|Foreign currency translation adjustment                |  |                            | (3,759 | ) |      |   | 647  
|                                                       |  |                            |        |   |      |   |      
|Comprehensive income                                   |  | $                          | 8,042  |   |      | $ | 9,018
|                                                       |  |                            |        |   |      |   |      



The accumulated other
comprehensive income at July 31, 2005 is comprised of foreign currency translation adjustments and unrealized gains on marketable securities of $5,886 and $222, respectively.



4.    Deferred Compensation, Pension Plan and Executive Capital Accumulation Plan



The Company has a defined benefit pension plan, referred to as the Worldwide
Executive Benefit Plans (WEB plans), covering certain executives in the United States and foreign countries. The components of net periodic benefit cost are as follows:



|                               |  |                            |     |   |      |   |     |  
|------------------------------ |  | -------------------------- | --- | - | ---- | - | --- | -
|                               |  | Three Months EndedJuly 31, |    
|                               |  | 2005                       |     |   | 2004 |  
|Interest cost                  |  | $                          | 42  |   |      | $ | 50  |  
|Amortization of actuarial loss |  |                            | (36 | ) |      |   | (38 | )
|                               |  |                            |     |   |      |   |     |  
|Net periodic benefit cost      |  | $                          | 6   |   |      | $ | 12  |  
|                               |  |                            |     |   |      |   |     |  



The Company also
established several deferred compensation plans for vice-presidents that provide defined benefit payments to participants based on the deferral of current compensation subject to vesting and retirement or termination provisions. The components of
net periodic benefit cost are as follows:



|                               |  |                            |       |      |   |      
|------------------------------ |  | -------------------------- | ----- | ---- | - | -----
|                               |  | Three Months EndedJuly 31,
|                               |  | 2005                       |       | 2004
|Service cost                   |  | $                          | 419   |      | $ | 786  
|Interest cost                  |  |                            | 786   |      |   | 813  
|Amortization of actuarial gain |  |                            | 104   |      |   | 100  
|                               |  |                            |       |      |   |      
|Net periodic benefit cost      |  | $                          | 1,309 |      | $ | 1,699
|                               |  |                            |       |      |   |      



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KORN/FERRY INTERNATIONAL AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

(in thousands, except per share amounts)



In fiscal 2005, the Company implemented the Executive Capital Accumulation Plan (ECAP). ECAP is intended to
provide certain employees an opportunity to defer salary and/or bonus on a pre-tax basis, or make an after-tax contribution. The Company made a $7,880 ECAP contribution in the three months ended July 31, 2005 that vests over a 3 year period.



5.    Mandatorily Redeemable Convertible Securities



In June 2002, the Company issued 7.5% Convertible
Subordinated Notes in an aggregate principal amount of $40.0 million and 10,000 shares of 7.5% Convertible Series A Preferred Stock at an aggregate purchase price of $10.0 million. The notes and preferred stock have priority over common
stockholders. The notes and preferred stock are convertible into shares of the Companys common stock at $10.19 per share. The Company also issued warrants to purchase 274,207 shares of its common stock at an exercise price of $11.94. The
warrants expire in 2012. The warrants were recorded at fair value resulting in discounts on the notes and preferred stock (together the securities) of $1.2 million and $0.3 million, respectively, and are amortized over the life of the
securities.



The securities may be redeemed at the option of
the purchasers after June 13, 2008, the sixth anniversary of the closing date, at a price equal to 101% of the issuance price plus all accrued interest and dividends. The securities are mandatorily redeemable if still outstanding on June 13, 2010,
at a price equal to 101% of the issuance price plus accrued interest and dividends. From the third to the sixth year, the securities are subject to optional redemption by the Company at 200% to 250% of the then outstanding principal balance.



Interest and dividends are payable semi-annually in either
additional securities or cash at the option of the Company. The Company also incurred issuance costs of $4.3 million that have been deferred and are being amortized over the life of the securities as interest expense with respect to $3.4 million
allocated to the notes and $0.9 million allocated to the preferred stock.



6.    Business Segments



The Company operates in two global business segments in the retained recruitment industry, executive recruitment and Futurestep. These segments are distinguished primarily by the candidates level of compensation. The executive
recruitment business segment is managed by geographic regional leaders. Revenue from leadership development solutions and other consulting engagements is included in executive recruitment. Futuresteps worldwide operations are managed by the
Chief Executive Officer of Futurestep. The executive recruitment geographic regional leaders and the Chief Executive Officer of Futurestep report directly to the Chief Executive Officer of the Company.



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##### Table of Contents

KORN/FERRY INTERNATIONAL AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

(in thousands, except per share amounts)



A summary of the Companys results of operations by business segment are as follows:



|                            |  |                            |         |   |      |   |         |  
|--------------------------- |  | -------------------------- | ------- | - | ---- | - | ------- | -
|                            |  | Three Months EndedJuly 31, |        
|                            |  | 2005                       |         |   | 2004 |  
|Fee revenue:                |  |                            |         |   |      |   |         |  
|Executive recruitment:      |  |                            |         |   |      |   |         |  
|North America               |  | $                          | 61,727  |   |      | $ | 51,656  |  
|Europe                      |  |                            | 27,021  |   |      |   | 24,818  |  
|Asia Pacific                |  |                            | 13,319  |   |      |   | 12,502  |  
|South America               |  |                            | 3,371   |   |      |   | 2,106   |  
|                            |  |                            |         |   |      |   |         |  
|Total executive recruitment |  |                            | 105,438 |   |      |   | 91,082  |  
|Futurestep                  |  |                            | 16,763  |   |      |   | 11,725  |  
|                            |  |                            |         |   |      |   |         |  
|Total fee revenue           |  | $                          | 122,201 |   |      | $ | 102,807 |  
|                            |  |                            |         |   |      |   |         |  
|                            | 
|                            |  | Three Months EndedJuly 31, |        
|                            |  | 2005                       |         |   | 2004 |  
|Total revenue:              |  |                            |         |   |      |   |         |  
|North America               |  | $                          | 65,648  |   |      | $ | 54,945  |  
|Europe                      |  |                            | 27,988  |   |      |   | 25,597  |  
|Asia Pacific                |  |                            | 13,707  |   |      |   | 12,823  |  
|South America               |  |                            | 3,547   |   |      |   | 2,199   |  
|                            |  |                            |         |   |      |   |         |  
|Total executive recruitment |  |                            | 110,890 |   |      |   | 95,564  |  
|Futurestep                  |  |                            | 18,205  |   |      |   | 12,619  |  
|                            |  |                            |         |   |      |   |         |  
|Total revenue               |  | $                          | 129,095 |   |      | $ | 108,183 |  
|                            |  |                            |         |   |      |   |         |  
|                            | 
|                            |  | Three Months EndedJuly 31, |        
|                            |  | 2005                       |         |   | 2004 |  
|Operating income (loss):    |  |                            |         |   |      |   |         |  
|Executive recruitment:      |  |                            |         |   |      |   |         |  
|North America               |  | $                          | 14,313  |   |      | $ | 12,100  |  
|Europe                      |  |                            | 5,087   |   |      |   | 4,561   |  
|Asia Pacific                |  |                            | 2,691   |   |      |   | 2,198   |  
|South America               |  |                            | 666     |   |      |   | 280     |  
|                            |  |                            |         |   |      |   |         |  
|Total executive recruitment |  |                            | 22,757  |   |      |   | 19,139  |  
|Futurestep                  |  |                            | 1,931   |   |      |   | 1,910   |  
|Corporate                   |  |                            | (5,944  | ) |      |   | (6,466  | )
|                            |  |                            |         |   |      |   |         |  
|Total operating income      |  | $                          | 18,744  |   |      | $ | 14,583  |  
|                            |  |                            |         |   |      |   |         |  



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##### Table of Contents

Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations



Forward-looking Statements



This quarterly report on Form 10-Q 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,
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 Form 10-Q are made only as of the date of this 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 Form 10-Q.



Executive Summary



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



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



Fee revenue increased 19% in the first quarter of fiscal 2006
to $122.2 million with increases across all regions. The North American region experienced the largest dollar increase in fee revenue in both executive recruitment and Futurestep. In the first quarter of fiscal 2006, we earned an operating income of
$18.7 million with operating income from executive recruitment of $22.8 million and $1.9 million from Futurestep, partially offset by corporate expenses of $6.0 million.



Our total long-term debt at July 31, 2005 was $45.0 million. Our working capital increased $17.8 million to $163.9 million
at July 31, 2005 compared to April 30, 2005.



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##### Table of Contents

Critical Accounting Policies



The following discussion and analysis of our financial condition and operating results are based on our unaudited condensed
consolidated financial statements. Preparation of this Form 10-Q 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 periods. 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 Unaudited Condensed Consolidated Financial Statements. We consider the policies related to revenue recognition, deferred compensation and the carrying values of goodwill and
deferred income taxes 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 our
Fiscal 2005 Annual Report on Form 10-K.



Results of Operations



The following table summarizes the results of our
operations for the three months ended July 31, 2005 and 2004 as a percentage of fee revenue:



|                                             |  |                            |   |  |      |  
|-------------------------------------------- |  | -------------------------- | - |  | ---- | -
|                                             |  | Three Months EndedJuly 31, |  
|                                             |  | 2005                       |   |  | 2004 |  
|Fee revenue                                  |  | 100                        | % |  | 100  | %
|Reimbursed out-of-pocket engagement expenses |  | 6                          |   |  | 5    |  
|                                             |  |                            |   |  |      |  
|Total revenue                                |  | 106                        | % |  | 105  | %
|Compensation and benefits                    |  | 64                         |   |  | 63   |  
|General and administrative expenses          |  | 19                         |   |  | 20   |  
|Out-of-pocket engagement expenses            |  | 6                          |   |  | 6    |  
|Depreciation and amortization                |  | 2                          |   |  | 2    |  
|Restructuring charges                        |  | 0                          |   |  | 0    |  
|Operating income                             |  | 15                         |   |  | 14   |  
|Net income                                   |  | 9                          |   |  | 8    |  



The following tables
summarize the results of our operations by business segment. Operating income (loss) is calculated as a percentage of fee revenue.



|                                             |  |                             |         |   |      |   |         |   |         |  |     |  
|-------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | - | ------- |  | --- | -
|                                             |  | Three Months Ended July 31, |        
|                                             |  | 2005                        |         |   | 2004 |  
|Fee revenue                                  |  | Dollars                     |         | % |      |   | Dollars |   | %       | 
|Executive recruitment:                       |  |                             |         |   |      |   |         |   |         |  |     |  
|North America                                |  | $                           | 61,727  |   | 51   | % |         | $ | 51,656  |  | 50  | %
|Europe                                       |  |                             | 27,021  |   | 22   |   |         |   | 24,818  |  | 24  |  
|Asia Pacific                                 |  |                             | 13,319  |   | 11   |   |         |   | 12,502  |  | 12  |  
|South America                                |  |                             | 3,371   |   | 3    |   |         |   | 2,106   |  | 2   |  
|                                             |  |                             |         |   |      |   |         |   |         |  |     |  
|Total executive recruitment                  |  |                             | 105,438 |   | 87   |   |         |   | 91,082  |  | 88  |  
|Futurestep                                   |  |                             | 16,763  |   | 13   |   |         |   | 11,725  |  | 12  |  
|                                             |  |                             |         |   |      |   |         |   |         |  |     |  
|Total fee revenue                            |  | $                           | 122,201 |   | 100  | % |         |   | 102,807 |  | 100 | %
|Reimbursed out-of-pocket engagement expenses |  |                             | 6,894   |   |      |   |         |   | 5,376   |  |     |  
|                                             |  |                             |         |   |      |   |         |   |         |  |     |  
|Total revenue                                |  | $                           | 129,095 |   |      |   |         | $ | 108,183 |  |     |  
|                                             |  |                             |         |   |      |   |         |   |         |  |     |  



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|                            |  |                             |        |   |      |    |   |         |   |        |   |  |    |  
|--------------------------- |  | --------------------------- | ------ | - | ---- | -- | - | ------- | - | ------ | - |  | -- | -
|                            |  | Three Months Ended July 31, |       
|                            |  | 2005                        |        |   | 2004 |   
|Operating income (loss)     |  | Dollars                     |        |   | %    |    |   | Dollars |   |        | % | 
|Executive recruitment:      |  |                             |        |   |      |    |   |         |   |        |   |  |    |  
|North America               |  | $                           | 14,313 |   |      | 23 | % |         | $ | 12,100 |   |  | 23 | %
|Europe                      |  |                             | 5,087  |   |      | 19 |   |         |   | 4,561  |   |  | 18 |  
|Asia Pacific                |  |                             | 2,691  |   |      | 20 |   |         |   | 2,198  |   |  | 18 |  
|South America               |  |                             | 666    |   |      | 20 |   |         |   | 280    |   |  | 13 |  
|                            |  |                             |        |   |      |    |   |         |   |        |   |  |    |  
|Total executive recruitment |  |                             | 22,757 |   |      | 22 |   |         |   | 19,139 |   |  | 21 |  
|Futurestep                  |  |                             | 1,931  |   |      | 12 |   |         |   | 1,910  |   |  | 16 |  
|Corporate                   |  |                             | (5,944 | ) |      |    |   |         |   | (6,466 | ) |  |    |  
|                            |  |                             |        |   |      |    |   |         |   |        |   |  |    |  
|Total operating income      |  | $                           | 18,744 |   |      | 15 | % |         | $ | 14,583 |   |  | 14 | %
|                            |  |                             |        |   |      |    |   |         |   |        |   |  |    |  



Three Months Ended July 31, 2005
Compared to Three Months Ended July 31, 2004



Fee
Revenue.Fee revenue increased $19.4 million, or 19%, to $122.2 million in the three months ended July 31, 2005 compared to $102.8 million in the three months ended July 31, 2004. The improvement in fee revenue is attributable to an
increase in the number of engagements billed and average fees. Exchange rates favorably impacted fee revenues by $1.6 million in the current quarter.



Executive Recruitment  Executive Recruitment fee revenue increased $14.4 million, or 16%, due to an increase in both the number of
engagements billed and average fees. North America fee revenue increased $10.1 million, or 19%, in the current quarter primarily due to an increase in the number of engagements billed as well as increased average fees. Europe reported fee revenue of
$27.0 million, an increase of $2.2 million, or 9%, compared to last year due to increased average fees. Exchange rates favorably impacted European fee revenue by $0.5 million in the current quarter. Asia Pacific fee revenue increased $0.8 million,
or 7%, to $13.3 million compared to the same period last year due to an increase in the number of engagements billed. Exchange rates favorably impacted Asia Pacific fee revenue by $0.4 million in the current quarter. South America reported fee
revenue of $3.4 million, an increase of $1.3 million, or 60%, compared to last year due to an increase in both the number of new engagements opened and engagements billed. Exchange rates favorably impacted South American fee revenue by $0.4 million
in the current quarter.



Futurestep  Fee revenue
increased $5.1 million, or 43%, to $16.8 million in the three months ended July 31, 2005 compared to $11.7 million in the three months ended July 31, 2004. The improvement in fee revenue, reflected across all regions, is due to an increase in
the number of new engagements opened combined with our advancement in recruitment process outsourcing. Exchange rates favorably impacted Futurestep fee revenue by $0.3 million in the current quarter.



Compensation and Benefits.Compensation and benefits expense increased
$13.1 million, or 20%, to $78.0 million in the three months ended July 31, 2005 compared to $64.9 million in the three months ended July 31, 2004. The increase in compensation and benefits expense reflects the hiring of new consultants in addition
to increased profitability and retention awards. Exchange rates impacted compensation and benefits unfavorably by $1.0 million. Executive recruitment compensation and benefits costs of $64.3 million increased $10.5 million, or 20%, compared to last
year primarily due to 29 new consultants hired over the past year. Exchange rates impacted executive recruitment compensation and benefits expense unfavorably by $0.8 million in the current quarter. Executive recruitment compensation and benefits
expense, as a percentage of fee revenue increased slightly to 61% from 59% in the prior year. Futurestep compensation and benefits expense increased $3.4 million, or 48%, to $10.5 million from $7.1 million in the prior year due to significant
investments in our people which increased Futuresteps headcount by 97 over the past year. Futurestep compensation and benefits expense, as a percentage of fee revenue, increased slightly to 63% from 61% in the prior year. Corporate
compensation and benefits expense decreased $0.8 million, or 21%, to $3.2 million in the current quarter, reflecting better performance on investments related to our Company Owned Life Insurance (COLI) policies.



14



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##### Table of Contents

General and Administrative Expenses.General and administrative expenses increased $1.9 million,
or 9%, to $22.7 million in the three months ended July 31, 2005 compared to $20.8 million in the same period last year. Exchange rates impacted general and administrative expenses unfavorably by $0.3 million in the current quarter. In executive
recruitment, general and administrative expenses remained consistent at $16.6 million using constant exchange rates. Executive recruitment general and administrative expenses, as a percentage of fee revenue, improved to 16% from 18% in the prior
year. Futurestep general and administrative expense increased $1.2 million, or 57%, primarily due to increased premises and office expense, business development and travel costs and other professional fees. 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 $0.4 million, or 15%, over the prior year due to increased professional fees.



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. Out-of-pocket engagement expenses of $7.5 million increased $1.8 million, or 33%, over the prior year as a result of increased engagements in
the period. As a percentage of fee revenue, out-of-pocket engagement expense was 6% compared to 5% in the prior year.



Depreciation and Amortization Expenses.Depreciation and amortization expense was $2.2 million in the three months ended July 31, 2005 and 2004.



Operating Income (Loss.)Operating income increased
$4.2 million, or 29%, to $18.7 million in the current quarter compared to $14.6 million in the prior year. Operating income, as a percentage of fee revenue, improved to 15% from 14% in the prior year first quarter.



Executive recruitment operating income increased $3.6 million, or 19%, to
$22.8 million in the three months ended July 31, 2005 compared to $19.1 million in the three months ended July 31, 2004. The improvement in executive recruitment operating income is primarily a result of increased revenue offset by additional
compensation expense. Executive recruitment operating income, as a percentage of fee revenue, improved to 22% from 21% last year.



Futurestep operating income was $1.9 million in the three months ended July 31, 2005 and 2004. Futurestep operating income, as a percentage of fee
revenue, declined to 12% from 16% in the prior year.



Interest Income and Other Income, Net.Interest income and other income, net includes interest income of $1.0 and $0.3 million in the three months ended July 31, 2005 and 2004, respectively.



Interest Expense.Interest expense, primarily related to the
borrowings under our convertible securities and COLI policies, was $2.5 million in the current quarter, consistent with last year.



Provision for Income Taxes.The provision for income taxes was $6.4 million for the three months ended July 31, 2005 compared to $4.5 million last
year. The provision for income taxes reflects a 41.3% effective tax rate for the current year.



Equity in Earnings of Unconsolidated Subsidiaries.Equity in earnings of unconsolidated subsidiaries is comprised of our less than 50% shareholder interest in our Mexican subsidiaries. We report our interest in
earnings or loss of the Mexican subsidiaries on the equity basis as a one line adjustment to net income. Equity in earnings was $0.4 million in the three months ended July 31, 2005 and 2004.



Liquidity and Capital Resources



Cash used by operating activities was $46.6 million in the three month ended
July 31, 2005 compared to $21.6 million last year. The decrease in operating cash is primarily due to the payment of our annual bonuses, partially offset by the increase in deferred compensation liability and net income.



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##### Table of Contents

Cash used in investing activities was $11.0 million in the three months ended July 31, 2005, compared to
$8.9 million in the prior year. In the three months ended July 31, 2005 we invested $7.5 million in marketable securities in conjunction with our ECAP program. Capital expenditures for the three months ended July 31, 2005 totaled $2.8 million.
Capital expenditures primarily consist of systems hardware, software costs and leasehold improvements.



Cash provided by financing activities was $5.2 million in the three months ended July 31, 2005 compared to $8.2 million last year. In the current quarter
we issued common stock of $5.5 million as a result of exercises of employee stock options and in conjunction with our employee stock purchase plan.



Total outstanding borrowings under our COLI policies was $57.0 million and $58.8 million as of July 31, 2005 and 2004, respectively. Generally, we borrow
under our COLI policies to pay related premiums. Such borrowings do not require principal payments, bear interest at primarily variable rates and are secured by the cash surrender value of the life insurance policies of $124.1 million and $118.1
million as of July 31, 2005 and 2004, respectively.



As of July
31, 2005, we had approximately $45.0 million outstanding in aggregate principal amount of 7.5% Convertible Subordinated Notes due in June 2010 and 7.5% Convertible Series A Preferred Stock with an aggregate liquidation preference of $11.4 million.



We have a Senior Secured Revolving Credit Facility with a $50
million borrowing capacity and no borrowing base restrictions. The credit facility is secured by substantially all of our assets including certain accounts receivable balances and guarantees by and pledges a portion of the capital stock of our
significant subsidiaries. We are required to meet certain financial condition covenants on a quarterly basis. As of July 31, 2005, we had no outstanding borrowings on our credit facility.



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 further cut costs or obtain financing to meet our cash needs.



Off-Balance Sheet Arrangements



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



Recently
Issued Accounting Standards



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



As permitted by Statement 123, we currently account for share-based payments to employees using APB Opinion 25s intrinsic value method and, as
such, generally recognize no compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)s fair value method will have a significant impact on our results of operations, although it will have no impact on our
overall financial position. The impact of adoption of Statement 123(R) cannot be predicted at this time as it depends on levels of share-based payments granted in the



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future. However, had we adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of Statement 123 as
described in the disclosure of pro forma net income and earnings per share in Note 1 to our condensed consolidated financial statements. Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost be
reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption.



Item 3.Quantitative and Qualitative Disclosures About Market Risk



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



Foreign Currency Risk



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



Transactions denominated in a currency other than the reporting entitys functional currency may give rise to transaction gains and losses that
impact our results of operations. Historically, we have not realized significant foreign currency gains or losses on such transactions. In the three months ended July 31, 2005, there was no impact on foreign currency gains or losses, after the
effect of income taxes.



Our primary exposure to
exchange losses is based on outstanding inter-company loan balances denominated in U.S. dollars. If the U.S. dollar strengthened 15%, 25% and 35% against Pounds Sterling, the Euro, the Canadian dollar, the Australian dollar and the Yen, the Company
s exchange loss would have been $0.6 million, $1.0 million and $1.3 million, respectively, based on outstanding balances at July 31, 2005.



Interest Rate Risk



As of July 31, 2005, we had no outstanding balance on our credit facility. We have $57.0 million of borrowings against the cash surrender value of COLI
contracts as of July 31, 2005 bearing interest primarily at variable rates. The risk of fluctuations in these variable rates is minimized by the fact that we receive a corresponding adjustment to our borrowed funds crediting rate on the cash
surrender value on our COLI contracts.



In June 2002, we issued
$40.0 million of 7.5% Convertible Debt and $10.0 million of 7.5% Convertible Preferred Stock that is mandatorily redeemable by us if still outstanding on June 13, 2010.



Item 4.Controls and Procedures



(a) Evaluation of Disclosure Controls and Procedures.



Based on their evaluation of our disclosure controls and procedures conducted as of the end of the period covered by this
quarterly report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) are effective.



(b) Changes in Internal Control over
Financial Reporting.



There were no changes in our internal
control over financial reporting or that have materially affected or are reasonably likely to materially affect our internal control over financial reporting, including any corrective actions with regard to significant deficiencies and material
weaknesses.



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PART II.    OTHER INFORMATION



Item 6.    Exhibits



| |  |               |  |                                                                                                                                                                                              
| |  | ------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | ExhibitNumber |  | Description of Exhibit                                                                                                                                                                       
| |  |              
| |  | 3.1           |  | Certificate of Incorporation of the Company, filed as Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q, dated December 15, 1999, and incorporated herein by
reference.             
| |  |              
| |  | 3.2           |  | Certificate of Designations of 7.5% Convertible Preferred Stock, filed as Exhibit 3.1 to the Companys Current Report on Form 8-K, dated June 18, 2002, and incorporated herein by
reference.
| |  |              
| |  | 3.3           |  | Amended and Restated Bylaws of the Company, filed as Exhibit 3.3 to the Companys Annual Report on Form 10-K, dated July 29, 2002, and incorporated herein by reference.                     
| |  |              
| |  | 31.1          |  | Chief Executive Officer Certification pursuant to Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                               
| |  |              
| |  | 31.2          |  | Chief Financial Officer Certification pursuant to Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                               
| |  |              
| |  | 32.1          |  | Chief Executive Officer and Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350.                                                                                        



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SIGNATURE



Pursuant to the
requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                        |  |                          |  |                                                                     
|----------------------- |  | ------------------------ |  | --------------------------------------------------------------------
|                        |  | KORN/FERRY INTERNATIONAL
|                        |  |                         
|Date: September 8, 2005 |  | By:                      |  | /s/ GARY D. BURNISON                                                
|                        |  |                          |  | Gary D. Burnison Chief Operating Officer and Chief Financial Officer



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