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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

Commission File No. 0-25837

HEIDRICK & STRUGGLES INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in its Charter)

233 South Wacker Drive, Suite 4200, Chicago, Illinois 60606-6303

(Address of principal executive offices) (Zip Code)

(312) 496-1200

(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.  ¨

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

The aggregate market value of the Registrant’s Common Stock held by non-affiliates of the Registrant on June 30, 2004 was approximately $548,641,804 based upon the closing market price of $29.68 on that date of a share of Common Stock as reported on the Nasdaq National Market. As of February 25, 2005, there were 19,185,976 shares of the Company’s Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for its Annual Meeting of Stockholders to be held on May 17, 2005, are incorporated by reference into Part III of this Form 10-K.

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HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES

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PART I

ITEM 1. BUSINESS

Heidrick & Struggles International, Inc. (“Heidrick & Struggles”) is a premier provider of executive search and leadership consulting services. We help our clients build leadership teams by facilitating the recruitment, development and retention of personnel for their executive management and board director positions. Focusing on top-level services offers us several advantages, including access and influence with decision makers, increased potential for downstream work, higher fees per search, enhanced brand visibility, and added barriers to entry. Working at the top also allows us to attract and retain high-caliber consultants.

In addition to executive search, we provide other leadership services including executive assessment and professional development and—through an alliance—executive coaching. We market our leadership services to current and prospective clients as four offerings: talent management, board building, executive on-boarding, and M&A effectiveness.

Heidrick & Struggles and its predecessors have been in the executive search business for more than 50 years. We provide our services to a broad range of clients through the expertise of 297 consultants located in major cities around the world. For many of our clients, our global access to and knowledge of markets and candidates is an important characteristic of our business. We provide our executive search services on a retained basis, recruiting senior executives who often earn more than $200,000 annually. Our clients include the following:

The executive search industry is highly fragmented, consisting of several thousand executive search firms worldwide. Based on trade publication reports, we estimate that fewer than 10 executive search firms/alliances generated more than $100 million in worldwide revenue during 2004. Executive search firms are generally separated into two broad categories: retained search firms and contingency search firms. Retained executive search firms fulfill their clients’ senior leadership needs by identifying potentially qualified candidates and assisting clients in evaluating and assessing these candidates for positions typically with annual cash compensation of $150,000 and above. Retained executive search firms generally are compensated for their services whether or not the client employs a candidate identified by the search firm, and are generally retained on an exclusive basis. In contrast, contingency search firms usually focus primarily on positions with annual cash compensation of less than $150,000 and are compensated only upon successfully placing a recommended candidate. Executive search firms normally charge a fee for their services equal to approximately one-third of the first year’s total compensation for the position being filled.

We are a retained executive search firm. Our search process typically consists of the following steps:

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We have begun to expand our services beyond executive search. For several years, we have offered executive assessment services in Europe. In late 2000, we extended our executive assessment business to North America and other parts of the world. This service provides senior-level executives with assessments of the individuals and teams reporting to them. We formed an alliance in March 2002 with Lore International Institute, a global executive coaching and professional development firm.

We reduced our focus on mid-level management search, with the completion of the integration of this business into our executive search business in January 2002.

Available Information

We maintain an Internet website at http://www.heidrick.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports are available free of charge on this site as soon as reasonably practicable after the reports are filed with or furnished to the Securities and Exchange Commission. We also post quarterly press releases on our financial results, investor presentations and other documents containing additional information related to our company on this site. Our Internet website and the information contained in or connected to our website are for informational purposes only and are not incorporated into this annual report on Form 10-K.

Organization

Our structure, which is organized by geography and client services specialties, is designed to enable us to better understand our clients’ cultures, operations, business strategies and industries, thereby improving our ability to serve them.

Geographic Structure.    We provide executive-level search and leadership consulting to our clients worldwide through our offices in 26 countries. Major locations are managed by an Office Managing Partner, and staffed with consultants, associates, administrative assistants and other support staff. Administrative functions are centralized where possible, although certain support and research functions are situated regionally because of variations in local requirements.

We also have affiliates in six countries. We have no financial investment in these affiliates but receive licensing fees from them for the use of our name and our databases. Licensing fees were $476,000 and $122,000 for the years ended December 31, 2004 and 2003, respectively.

Client Services.    Our market-facing activities are primarily structured around four groups: Board Search & Services, Target Accounts, Industry Practices and Functional Practices. The needs of each client are often served by one or more of these groups, as a combination of specialized skills are sometimes required to effectively serve the client.

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Understanding the unique needs of each client—in terms of such factors as competitive landscape, business strategy and operations—is integral to providing quality service. Our internal practice structure reflects the needs of our clients and our enhanced focus on certain market sectors. Certain practices are organized as global entities, while others have a regional or local focus, as follows.

Our Global Industry Practices are: Business & Professional Services; Communications & Media; Consumer; Consumer Technology & Entertainment; Energy & Materials; Financial Services; Industrial; Life Sciences; Private Equity & Venture Capital; and Software, Hardware & Semiconductors.

Our Practices with a regional or local focus are: Diversity Services; Education/Nonprofit; Hospitals, Systems & Services; Interim Executives; Leadership Services; Managed Care; and Middle East.

Certain markets have a significant concentration of companies within particular industry sectors. For example, our Financial Services practice has its largest concentration of consultants in New York and London, two of the largest financial centers in the world. Each industry practice is coordinated by a Practice Managing Partner who facilitates the group’s marketing activities.

Our Global Functional Practices are: Board of Directors; Chief Information Officer; Finance; Human Resources; Legal; Real Estate; Research & Development; and Supply Chain.

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Executive search consultants from each of our Client Services groups may work from any one of our offices around the world. For example, an executive search for a chief financial officer of an industrial company located in the United Kingdom may involve a consultant in the United Kingdom with an existing relationship with the client, another executive search consultant in the United States with expertise in our Industrial practice and a third executive search consultant with expertise in chief financial officer recruiting. This same industrial client may also engage us to perform skill-based assessments on each of its senior managers, which could require the expertise of a professional trained in this service. If the client company is designated as a target account, all of our services will be coordinated by our account leader for that client.

Information by Geographic Segment

North America.    As of December 31, 2004, we had 140 executive search consultants in our North America segment, which includes the United States (except Miami, which we include in our Latin America geographic segment) and Canada. Our North America segment generated approximately 54% of our worldwide net revenue in 2004. The largest offices in this segment in terms of net revenue are located in New York, Chicago and Tysons Corner.

Latin America.    As of December 31, 2004, we had 20 executive search consultants in our Latin America segment, which includes Mexico and the rest of Latin America, as well as Miami, which serves as the gateway office to the region and is where much of the region’s business is managed. Approximately 3% of our worldwide net revenue in 2004 was generated in this segment.

Europe.    As of December 31, 2004, we had 100 executive search consultants in 13 European countries. Our Europe segment generated approximately 35% of our worldwide net revenue in 2004. The United Kingdom, Germany and France produced the highest levels of net revenue in this segment.

Asia Pacific.    As of December 31, 2004, we had 37 executive search consultants in the Asia Pacific segment. This segment generated approximately 8% of our worldwide net revenue in 2004.

For financial information relating to each geographic segment, see Note 18, Segment Information, in the Notes to Consolidated Financial Statements.

Seasonality

Historically, in years that were not affected by significant economic change, there has been some seasonality in our business. As a percentage of total annual net revenue, the first and fourth quarters of the year are typically the lowest. On average, the variance between the highest and lowest net revenue quarters is approximately three percentage points. In the last two years, as general economic conditions have improved, the fourth quarter has been the highest net revenue quarter of the year.

Clients and Marketing

Our consultants market the firm’s executive search services through two principal means: targeted client calling and industry networking with clients and referral sources. These efforts are supported by our databases, which provide all our consultants with information as to contacts made by their colleagues with particular referral sources, candidates and clients. In addition, we benefit from a significant number of referrals generated by our reputation for high quality service and successfully completed assignments.

Either by agreement with clients or for client relations purposes, executive search firms sometimes refrain from recruiting employees of a client, and possibly other entities affiliated with that client, for a specified period,

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generally not more than one year from the commencement of a search. We seek to mitigate the adverse effects of these blocking arrangements by strengthening our long-term relationships, thereby communicating our belief to prospective clients that we can conduct searches without these off-limit arrangements impeding the quality of our work.

No single client accounted for more than 3% of our net revenue in 2004, 2003 or 2002.

Information Management

We rely on technology to support our consultants and staff in the search process. Our technology infrastructure consists of internally developed databases containing candidate profiles and client records, coupled with online services and industry reference sources. We use technology to manage and share information on current and potential clients and candidates, to communicate to both internal and external constituencies and to support administrative functions. Over the past several years, we have invested in improving our systems. We intend to continue to invest in our own systems, focusing on our global search system and on our financial management and reporting systems.

Professional Staff and Employees

Our executive search professionals are categorized either as consultants or associates. Associates assist consultants by conducting research, making initial contact with candidates in some instances and performing other functions. As of December 31, 2004, we had 1,271 full-time equivalent employees, of whom 297 were executive search consultants, 327 were associates and 647 were other search, support and corporate staff.

In each of the past five years, no single consultant accounted for a material portion of our net revenues. We most frequently recruit our consultants from other executive search firms or, on occasion, from the industries represented by our practices. In the latter case, these are often seasoned executives who are entering the search profession as a second career, and who we train in our techniques and methodologies. We are not a party to any collective bargaining agreement, and we consider relations with our employees to be good.

Competition

The executive search industry is highly competitive. While we face competition to some degree from all firms in the industry, we believe our most direct competition comes from established global retained executive search firms that conduct searches primarily for the most senior-level positions within an organization. In particular, our competitors include Spencer Stuart & Associates, Egon Zehnder International, Russell Reynolds Associates, Inc. and Korn/Ferry International. To a lesser extent, we also face competition from smaller boutique or specialty firms that specialize in certain regional markets or industry segments. Each firm with which we compete is also a competitor in seeking to attract the most effective consultants.

The overall search industry has relatively few barriers to entry. Higher barriers exist, however, for firms like ours that focus primarily on conducting searches for executive-level positions. At this level, clients rely more heavily on a search firm’s reputation, global access and the experience level of its consultants. We believe that the segment of executive search in which we compete is more quality-sensitive than price-sensitive. As a result, we compete on the level of service we offer, reflected by our client services specialties and, ultimately, by the quality of our search results. We believe that our emphasis on senior-level executive search, the depth of experience of our search consultants and our global presence enable us to compete favorably with other executive search firms.

Competition in our other leadership consulting services, including executive assessment and coaching, is highly fragmented, with no universally recognized market leaders.

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EXECUTIVE OFFICERS

Our executive officers as of March 1, 2005 are as follows:

There are no family relationships 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 March 1, 2005:

Thomas J. Friel has been our Chairman and Chief Executive Officer since June 2003. Previously, Mr. Friel was Chairman of the Technology Practice, Chairman of the Leadership Services Group and a Vice Chairman of Heidrick & Struggles from October 2001 to June 2003. Prior to that, Mr. Friel was President of Heidrick & Struggles Ventures from 1999 to 2001. Mr. Friel also served on our Board of Directors subsequent to our initial public offering in 1999 until 2002 when the Board transitioned to a majority of independent directors. He joined us in 1979.

Fritz E. Freidinger has been our Chief Legal Officer and Corporate Secretary since January 2004. Previously, Mr. Freidinger had been our General Counsel and Corporate Secretary since joining us in December 2002. Prior to that, Mr. Freidinger was Vice President, Global General Counsel and Corporate Secretary of Jones Lang LaSalle Incorporated from 2001 to 2002. From 1997 to 2001, Mr. Freidinger was with Hagan & Associates, a law firm providing services to Jones Lang LaSalle and its clients. In February 2005, we announced that Mr. Freidinger has resigned effective March 31, 2005. The search for his successor is currently underway.

Bonnie W. Gwin has been our Regional Managing Partner, Americas since January 2005. Previously, Ms. Gwin was Regional Managing Partner, North America from January 2004 to January 2005; Managing Partner, Technology and Professional Services Practice from October 2002 to May 2004; Managing Partner, North American Operations from February 2003 to December 2003; Managing Partner, Chicago, Cleveland, and Toronto from October 2001 to October 2002; Office Managing Partner, Cleveland from January 2001 to October 2001; and Partner in Charge of our Software specialty practice from October 2000 to February 2001. She joined us in 1997.

Eileen A. Kamerick has been our Chief Financial Officer since joining us in June 2004. Previously, Ms. Kamerick was Chief Financial Officer and Executive Vice President of Bcom3 Group, Inc. from 2001 to 2003 and Chief Financial Officer and Executive Vice President at United Stationers, Inc. from 2000 to 2001.

L. Kevin Kelly has been our Regional Managing Partner, Asia Pacific since September 2002. Previously, Mr. Kelly was Office Managing Partner, Tokyo from February 2002 to September 2002. He joined us in 1997.

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Vincent C. Perro has been our Managing Partner, Leadership Services since joining us in July 2004. Previously, Mr. Perro was head of Sibson Consulting from 2001 to 2004. From 2000 to 2002, when Nextera Enterprises owned Sibson Consulting, he was head of Sibson Consulting, President of Sibson International, Chief Operating Officer of Sibson Consulting as a Nextera Enterprises officer, and a member of the Nextera Enterprises Board of Directors. From 1987 to 2000, Mr. Perro held various positions with Sibson & Company, including Chairman of the Board, President of Sibson International, and Financial Services Practice Leader.

Jeff R. Scherb has been our Chief Technology and Operations Officer since January 2004. Previously, Mr. Scherb had been our Chief Information Officer since joining us in September 2002. Prior to that, Mr. Scherb was Senior Vice President and Chief Technology Officer of Tribune Company from 1996 to 2002. Mr. Scherb also was President of Tribune Interactive at Tribune Company from 1999 to 2000.

Scott W. Sherwood has been our Chief Talent and Human Resources Officer since joining us in January 2004. Prior to that, Mr. Sherwood was President of Scott Sherwood & Associates, Inc. from 1997 to 2004.

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RISK FACTORS

In addition to other information in this Form 10-K, the following risk factors should be carefully considered in evaluating our business because such factors may have a significant impact on our business, operating results, cash flows and financial condition. As a result of the risks set forth below and elsewhere in this Form 10-K, and the risks discussed in our other Securities and Exchange Commission filings, actual results could differ materially from those projected in any forward-looking statements.

We depend on attracting and retaining qualified consultants.

Our success depends upon our ability to attract and retain consultants who possess the skills and experience necessary to fulfill our clients’ executive search needs. Our ability to hire and retain qualified consultants could be impaired by any diminution of our reputation, decrease in compensation levels relative to our competitors or restructuring of our compensation system or competitor hiring programs. If we cannot attract, hire and retain qualified consultants, our business, financial condition and results of operations may suffer.

We may not be able to prevent our consultants from taking our clients with them to another firm.

Our success depends upon our ability to develop and maintain strong, long-term relationships with our clients. Although we work on building these relationships between our firm and our clients, in many cases, one or two consultants have primary responsibility for a client relationship. When a consultant leaves one executive search firm and joins another, clients that have established relationships with the departing consultant may move their business to the consultant’s new employer. We may also lose clients if the departing consultant has widespread name recognition or a reputation as a specialist in executing searches in a specific industry or management function. Historically, we have not experienced significant revenue loss from this client portability. If we fail to limit departing consultants from moving business to another employer, our business, financial condition and results of operations may be adversely affected.

Our success depends on our ability to maintain our professional reputation and brand name.

We depend on our overall reputation and brand name recognition to secure new engagements and hire qualified consultants. Our success also depends on the individual reputations of our consultants. We obtain many of our new engagements from existing clients or from referrals by those clients. A client who is dissatisfied with our work can adversely affect our ability to secure new engagements. If any factor hurts our reputation, including poor performance, we may experience difficulties in competing successfully for both new engagements and qualified consultants. Failure to maintain our professional reputation and brand name could seriously harm our business, financial condition and results of operations.

Because our clients may restrict us from recruiting their employees we may be unable to fill existing executive search assignments.

Clients frequently require us to refrain from recruiting certain of their employees when conducting executive searches on behalf of other clients. These restrictions generally remain in effect for no more than one year following the commencement of an engagement. However, the specific duration and scope of the blocking arrangements depend on the length of the client relationship, the frequency with which the client engages us to perform searches, the number of assignments we have performed for the client and the potential for future business with the client.

If a prospective client believes that we are overly restricted by these blocking arrangements from recruiting the employees of our existing clients, these prospective clients may not engage us to perform their executive searches, and as a result, our business, financial condition and results of operations may suffer.

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We face aggressive competition.

The global executive search industry is extremely competitive and highly fragmented. We compete with other large global executive search firms and with smaller specialty firms. Specialty firms can focus on regional or functional markets or on particular industries. Some of our competitors possess greater resources, greater name recognition and longer operating histories than we do in particular markets or practice areas. There are limited barriers to entry into the search industry and new search firms continue to enter the market. Many executive search firms that have a smaller client base may be subject to fewer blocking arrangements. In addition, our clients or prospective clients may decide to perform executive searches using in-house personnel. Finally, competitors sometimes reduce their fees in order to attract clients and increase market share. Because we typically do not discount our fees, we may experience some loss of net revenue. We may not be able to continue to compete effectively with existing or potential competitors. Our inability to meet these competitive challenges could have an adverse impact on our business, financial condition and results of operations.

We rely heavily on information management systems.

Our success depends upon our ability to store, retrieve, process and manage substantial amounts of information. To achieve our goals, we must continue to improve and upgrade our information management systems. We may be unable to license, design and implement, in a cost-effective and timely manner, improved information systems that allow us to compete effectively. In addition, business process reengineering efforts may recommend a change in software platforms and programs. Such plans may result in an acceleration of depreciation expense over the shortened expected remaining life of the software. In addition, if we experience any interruptions or loss in our information processing capabilities, our business, financial condition and results of operations may suffer.

We face the risk of liability in the services we perform.

We are exposed to potential claims with respect to the executive search process. The growth and development of our other leadership consulting services brings with it the potential for new types of claims. A client could assert a claim for violations of blocking arrangements, breaches of confidentiality agreements or malpractice. In addition, candidates and client employees could assert claims against us. Possible claims include failure to maintain the confidentiality of the candidate’s employment search or for discrimination or other violations of the employment laws or malpractice. In various countries, we are subject to data protection laws impacting the handling of candidate resumes and other data. We maintain professional liability insurance in amounts and coverage that we believe are adequate. However, we cannot guarantee that our insurance will cover all claims and that the coverage will be available at reasonable rates. Significant uninsured liabilities could have a negative impact on our business, financial condition and results of operations.

Our multinational operations may be adversely affected by social, political, legal and economic risks.

We generate substantial revenue outside the United States. We offer our services through our offices in 26 countries around the world. We are exposed to the risk of changes in social, political, legal and economic conditions inherent in international operations which could have a significant impact on our business, financial condition and results of operations. In particular, we conduct business in countries where the legal systems and trade practices are evolving. Commercial laws in these countries are often vague, arbitrary and inconsistently applied. Under these circumstances, it is difficult for us to determine at all times the exact requirements of such local laws. If we fail to comply with local laws, our business, financial condition and results of operations could suffer. In addition, the global nature of our operations poses challenges to our management, and financial and accounting systems. Failure to meet these challenges could seriously harm our business, financial condition and results of operations.

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We may not be able to align our cost structure with net revenue.

Over the last several years, we took steps to reduce our workforce, consolidate and close offices and reduce other expenses. However, our cost structure, particularly in certain areas in Europe, continues to be high in relation to net revenue. Although we have not yet finalized our action plans, we expect to record restructuring charges of between $9 million and $15 million for severance and office closures and consolidations, primarily in Europe, beginning in the second quarter of 2005. If we do not reduce our costs in proportion to demand for our services in a timely manner or if we reduce our workforce so that we are unable to service increased demand, our business, financial condition and results of operations could be adversely affected.

Our net revenue may be affected by adverse economic conditions.

Although our net revenue increased 18% in 2004, coinciding with signs of an economic recovery, there can be no assurances that economic conditions will continue to improve or even remain stable. If economic conditions weaken, our business, financial condition and results of operations could suffer.

We may not be able to generate sufficient profits to realize our net deferred tax assets.

In 2001, 2002 and 2003, we reported net losses, primarily due to restructuring activities necessary to align our cost structure with expected net revenue levels. The timing and strength of an economic recovery in the United States, Europe and other areas of the world continues to be unclear. During the fourth quarter of 2003, we recorded a full valuation allowance for our deferred tax assets for the U.S. and foreign operations which comprise the U.S. income tax entity. While we were profitable in 2004 and expect to be profitable in 2005 and beyond, there is no assurance that future taxable income will be sufficient to realize the benefit of deferred tax assets. If after future assessments of the realizability of the deferred tax assets, we determine that a lesser allowance is required, we would record a reduction to the income tax expense and the valuation allowance in the period of such determination. If we are unable to generate taxable income in the long-term, our business, financial condition, results of operations and cash flow could suffer.

We may experience impairment of our goodwill and other intangible assets.

Periodically, we perform assessments of the carrying value of our goodwill and other intangible assets. Current valuation estimates indicate that there has been no impairment of our goodwill or other intangible assets. However, future events, including our financial performance and economic conditions, could cause these assets to become impaired in the future. Any resulting impairment loss could have an adverse impact on our business, financial condition and results of operations.

Our ability to sublease or assign unused office space could affect our earnings and cash flows.

In 2001 and 2002, we consolidated and closed offices in order to reduce costs. This left us with a significant amount of unused office space with respect to which we are still required to make lease payments. At the time of the office closings we accrued the estimated costs associated with these actions. During 2004 and 2003, we recorded restructuring expense of $0.6 million and $22.2 million, respectively, to increase accruals for unused office space, reflecting the expectation of longer vacancy periods due primarily to weakness in the real estate markets in which the leased properties are located. While we have made progress in securing subleases for the majority of properties, at December 31, 2004, there was approximately 77 thousand square feet of unused real estate. The total remaining commitment related to these properties, is $33 million of which $17 million has been accrued at December 31, 2004, net of estimated sublease income. Inherent in these accruals are estimates concerning vacancy periods and sublease income. If we are unable to sublease or assign this unused office space within the estimated time frame, if we sublease or assign this office space for amounts less than we had

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anticipated or if one of our tenants default on a sublease, our business, financial condition, results of operations and cash flow could suffer.

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

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

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

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ITEM 2. PROPERTIES

Our corporate office is located in Chicago, Illinois. We have offices in major metropolitan areas in 26 countries around the world. All of our offices are leased. We do not own any real estate. The aggregate square footage of office space under lease was approximately 791 thousand as of December 31, 2004. These office leases call for future minimum lease payments of $149.9 million and have terms that expire between 2005 and 2016, exclusive of renewal options that we can exercise. Approximately 148 thousand square feet of office space has been sublet to third parties. See Risk Factors included in Item 1 of this Form 10-K for further information concerning unused office space.

ITEM 3. LEGAL PROCEEDINGS

We have contingent liabilities from various pending claims and litigation matters arising in the course of our business, some of which involve claims for damages that are substantial in amount. Some of these matters are covered by insurance. Although our ultimate liability in these matters cannot be determined, based upon information currently available, we believe the ultimate resolution of such claims and litigation will not have a material adverse effect on our financial condition, results of operations or liquidity.

In December 2002, Mt. Sinai Medical Center of Miami filed suit against us regarding a search for a chief executive officer we performed in 1998 seeking damages, including between $59 million and $75 million based primarily upon the operating loss incurred by Mt. Sinai in 2001, the chief executive officer’s last year at the hospital. On June 30, 2004, the judge presiding over this case in the U.S. District Court for the Southern District of Florida granted summary judgment, dismissing all the claims made by Mt. Sinai. Mt Sinai has filed an appeal with respect to this decision. While there can be no assurance as to the outcome, we believe that the claims are without merit.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

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

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PART II

Market for Registrant’s Common Equity

Our common stock is listed on the Nasdaq National Market under the symbol “HSII.” The following table sets forth the high and low stock price per share of the common stock for the periods indicated, as reported on the Nasdaq National Market.

As of February 25, 2005, the last reported price on the Nasdaq National Market for our common stock was $35.15 per share and there were approximately 175 stockholders of record of the common stock.

We have never paid cash dividends on our common stock and do not presently anticipate paying any cash dividends on our common stock in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our Board of Directors and will be dependent upon our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors deemed relevant by the Board of Directors. Future indebtedness and loan facilities may also prohibit or restrict our ability to pay dividends and make distributions to our stockholders.

Issuer Purchases of Equity Securities

The following table provides information related to the Company’s purchase of common shares for the year ended December 2004. For further information of the Company’s share repurchase activity, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

a) On October 22, 2004, the Company’s Board of Directors authorized management to purchase shares of the Company’s common stock with an aggregate purchase price up to $30 million.

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ITEM 6. SELECTED FINANCIAL DATA

The selected financial data presented below have been derived from our audited consolidated financial statements. The data as of December 31, 2004 and 2003 and for the years ended December 31, 2004, 2003 and 2002 are derived from the audited historical consolidated financial statements which are included elsewhere in this Form 10-K. The data as of December 31, 2002, 2001 and 2000 and for the years ended December 31, 2001 and 2000 are derived from audited historical consolidated financial statements that are not included in this report. The data set forth are qualified in their entirety by, and should be read in conjunction with, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the audited consolidated financial statements, the notes thereto, and the other financial data and statistical information included in this Form 10-K.

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Notes to Selected Financial Data:

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations as well as other sections of this annual report on Form 10-K contain forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. The forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry in which we operate and management’s beliefs and assumptions. Forward-looking statements may be identified by the use of words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and similar expressions. Forward-looking statements are not guarantees of future performance and involve certain known and unknown risks, uncertainties and assumptions that are difficult to predict. Actual outcomes and results may differ materially from what is expressed, forecasted or implied in the forward-looking statements. Factors that may affect the outcome of the forward-looking statements include, among other things, our ability to attract and retain qualified executive search consultants; the condition of the economies in the United States, Europe, or elsewhere; social or political instability in markets where we operate; price competition; our ability to achieve the planned cost savings from our cost reduction initiatives; our ability to sublease or assign unused office space; our ability to realize our tax loss carryforwards; the mix of profit or loss by country: an impairment of our goodwill and other intangible assets; and delays in the development and/or implementation of new technology and systems. For more information on the factors that could affect the outcome of forward-looking statements, see Risk Factors in Item 1 of this Form 10-K. We caution the reader that the list of factors may not be exhaustive. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Executive Overview

Our Business

We are a premier provider of executive search and leadership consulting services. We help our clients build leadership teams by facilitating the recruitment, development and retention of personnel for their executive management and board positions. In addition to executive search, we provide other leadership services, including executive assessment and professional development and—through an alliance—executive coaching. We provide our services to a broad range of clients through the expertise of 297 consultants located in 26 countries throughout the world. Our executive search services are provided on a retained basis. Revenue before reimbursements of out-of-pocket expenses (“net revenue”) consists of retainers and indirect expenses billed to clients. Typically, we are paid a retainer for our executive search services equal to approximately one-third of the estimated first year compensation for the position to be filled. In addition, if the actual compensation of a placed candidate exceeds the estimated compensation, we often will be authorized to bill the client for one-third of the excess. Indirect expenses are calculated as a percentage of the retainer with certain dollar limits per search.

Our Compensation Model

Our compensation model closely aligns the interests of our consultants, our Company and our shareholders. Consultants are rewarded for individual performance based on a system which directly ties compensation to the amount of net revenue for which the consultant is responsible. Actual compensation is adjusted, up or down, based on the Company’s performance against profitability targets approved by the Compensation Committee of the Board of Directors. Each quarter, we evaluate the expected annual performance of both the consultants and the Company. As annualized performance estimates are revised each quarter, compensation accruals are adjusted in each region. As a result, the discretionary portion of compensation expense may fluctuate significantly from quarter to quarter.

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2004 Overview

In 2004, the global economy showed signs of recovery and favorably affected the demand for our services. The recovery in Europe was not as strong as in other regions of the world. Net revenue increased 18.1%, or $57.5 million in 2004, compared to 2003. Double-digit increases were reported across all regions. All of our industry practices experienced increases in net revenue with the exception of the Industrial and Higher Education/Nonprofit practices which had modest declines. Consultant productivity increased as executive search revenue per consultant increased 31%, to $1.2 million in 2004, compared to 2003.

As a percent of net revenue, salary and employee benefits expense decreased to 66.9% in 2004 from 70.3% in 2003. General and administrative expenses were 25.7% of net revenue in 2004 compared to 27.4% in 2003.

During the fourth quarter of 2004, we adjusted our restructuring accruals and recorded $0.6 million of restructuring charges to reflect changes in lease estimates primarily due to a tenant default on a sublease and the final determination and payment of certain severance-related accruals.

During the third quarter of 2004, we exercised warrants to purchase shares of common stock of Google Inc. (“Google”) which we received in 2001 in connection with recruitment fees, and subsequently sold all of the shares of common stock of Google that we held resulting in net proceeds of approximately $128.8 million. As a result of this warrant monetization, we recorded a realized gain of $56.8 million, net of the consultants’ share of the gain.

Historically, our policy with respect to warrants was that 55% of the net proceeds resulting from the monetizations of warrants was payable to the consultants involved in the search. For warrants received after February 16, 2005, the portion of the net proceeds payable to the consultants was reduced from 55% to 50% and is limited to $10.0 million per monetization. In addition, of the 50% of the net proceeds we retain, 20% (or 10% of the total net proceeds) will be reserved for distribution to the broader employee population.

The effective tax rate was 5.5% in 2004, which is significantly lower than the statutory rate, primarily as a result of the partial reduction of the previously recorded valuation allowance related to net deferred tax assets associated with tax deductions that will be available for carryback to recover taxes paid in the current year and the utilization of net operating loss and capital loss carryforwards.

We ended the year with a cash balance of $222.8 million, an increase of $103.5 million, compared to $119.3 million at December 31, 2003. This increase is primarily as a result of the net proceeds of $128.8 million from the sale of our shares of common stock of Google offset by the portion of the consultants’ share of the gain that was paid in 2004. Approximately $17 million of the consultants’ share of the gain will be paid in 2005.

2005 Outlook

As we look forward to 2005, we have numerous business and cost initiatives in place to help us improve revenue growth and operating margin. An essential component to continued operating margin expansion in 2005 is a focus on raising profitability in Europe. Although the European region reported operating income in 2004, compared to an operating loss in 2003, we have assembled a team of executives to focus on increasing profitability further in 2005. Although we have not yet finalized our action plans, we expect to record restructuring charges of between $9 million and $15 million for severance and office closures and consolidations beginning in the second quarter of 2005. The restructuring charges relate primarily to the European region where initiatives are underway to improve operating margin in order to meet our profitability objectives.

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Results of Operations

We operate our executive search and complementary leadership services in four geographic regions: North America, which includes the United States (except Miami) and Canada; Latin America, which includes Mexico and the rest of Latin America, as well as Miami, which serves as our gateway office to the region; Europe; and Asia Pacific.

For segment purposes, reimbursements of out-of-pocket expenses classified as revenue are reported separately and therefore are not included in the net revenue by geographic region. The Company believes that analyzing trends in revenue before reimbursements (net revenue) and analyzing operating expenses as a percentage of net revenue more appropriately reflects the Company’s core operations.

The following table summarizes the results of operations for the periods indicated (in thousands):

The following table sets forth, for the periods indicated, our selected statements of operations data as a percentage of revenue before reimbursements (net revenue):

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2004 Compared to 2003

Total revenue.    Consolidated total revenue increased $57.6 million, or 16.9%, to $398.2 million in 2004 from $340.6 million in 2003. The increase in total revenue was due primarily to the increase in revenue before reimbursements (net revenue).

Revenue before reimbursements (net revenue).    Consolidated net revenue increased $57.5 million, or 18.1%, to $375.4 million in 2004 from $317.9 million in 2003. Net revenue increased across all regions in 2004. All of our industry practices experienced increases in net revenue, with the exception of the Industrial and Higher Education/Nonprofit practices which had modest declines. In 2004, the number of confirmed executive searches increased 6% to 3,975 from 3,757 in 2003. We believe this increase reflects the impact of the continuing economic improvement in the global economy and our success in winning business. Excluding the $13.9 million positive impact of exchange rate fluctuations, which management believes provides a better comparison of operational performance, net revenue increased approximately 14%.

Net revenue in North America was $201.7 million in 2004, an increase of $29.7 million, or 17.3%, from $172.0 million in 2003. All of our industry practices experienced increases in net revenue, with the exception of the Higher Education/Nonprofit and Professional Services practices. In Latin America, net revenue was $12.7 million in 2004, an increase of $1.5 million, or 12.6%, from $11.2 million in 2003. Increases in the Financial Services, Health Care, Higher Education, Technology and Professional Services practices’ net revenue was partially offset by declines across the other practices. Excluding a positive impact of $0.1 million due to exchange rate fluctuations, Latin America’s net revenue increased by approximately 12% from 2003. Net revenue in Europe was $129.3 million in 2004, an increase of $16.3 million, or 14.4%, from $113.0 million in 2003. All of the industry practices experienced increases in net revenue, with the exception of Industrial and Technology practices which had modest declines. Excluding a positive impact of $12.0 million due to exchange rate fluctuations, Europe’s net revenue increased by approximately 4% from 2003. In Asia Pacific, net revenue was $31.7 million in 2004, an increase of $10.1 million, or 46.7%, from $21.6 million in 2003. Net revenue increased across all practices in 2004. Excluding a positive impact of $1.6 million due to exchange rate fluctuations, Asia Pacific’s net revenue increased approximately 39% compared to 2003.

Salaries and employee benefits.    Consolidated salaries and employee benefits expense increased $27.7 million, or 12.4%, to $251.2 million in 2004 from $223.5 million in 2003. Fixed salaries and employee benefits expense decreased $4.6 million in 2004 as the average number of consultants decreased from 328 in 2003 to 299 in 2004. Performance-related compensation increased $32.3 million as a result of higher net revenue.

The net expense related to our German pension plan increased $1.6 million in 2004. Salaries and employee benefits expense in 2003 includes $6.1 million of expense related to the separation agreements of the former Chief Executive Officer, the former President and Chief Operating Officer and the former Chief Financial Officer and a benefit of $1.3 million from the reversal of accruals recorded in 2002 for the Performance Share Program. Excluding these items, which we believe more appropriately reflects our core operations, consolidated salaries and employee benefits expense would have been $249.6 million in 2004, an increase of $30.9 million, or 14.1%, compared to $218.7 million in 2003.

As a percentage of net revenue, salaries and employee benefits expense decreased to 66.9% in 2004 from 70.3% in 2003. Excluding the $1.6 million of pension expense in 2004 and the $6.1 million of severance-related expenses and the $1.3 million of benefit resulting from the reversal of accruals related to the Performance Share Program in 2003, which we believe more appropriately reflects our core operations, salaries and employee benefits expense as a percentage of net revenue would have been 66.5% in 2004 compared to 68.8% in 2003. The decrease as a percentage of net revenue is primarily due to lower fixed salaries and employee benefits expense in relation to the net revenue levels, offset by a greater percentage of net revenue accrued for performance-based compensation.

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General and administrative expenses.    Consolidated general and administrative expenses increased $9.2 million, or 10.6%, to $96.5 million in 2004 from $87.3 million in 2003. This increase was primarily due to $1.6 million of professional fees related to compliance with the requirements imposed by the Sarbanes-Oxley Act, a $1.9 million increase in tax, legal and other professional services, a $4.6 million increase in operating expenses associated with higher net revenue levels and discretionary spending related to marketing and business development activities, $1.3 million of legal settlement costs and a $0.3 million increase in bad debt expense. These increases were offset by $0.5 million of lower infrastructure expenses.

As a percentage of net revenue, general and administrative expenses decreased to 25.7% in 2004 from 27.4% in 2003.

Reimbursed expenses.    We incur certain out-of-pocket expenses that are reimbursed by our clients. Historically, we have not established a receivable for reimbursable expenses incurred but not yet billed as the amount was determined to be immaterial. During the fourth quarter of 2004, we enhanced our estimation technique related to reimbursable expenses resulting in a non-recurring favorable impact to operating income of $1.5 million. We have accounted for this as a change in accounting estimate. This change in accounting estimate is not expected to have a significant impact on our results of operations in future periods.

Restructuring charges.    During the fourth quarter of 2004, we adjusted our restructuring accruals and recorded $0.6 million of restructuring charges to reflect changes in lease estimates primarily due to a tenant default on a sublease and the final determination and payment of certain severance-related restructuring accruals.

In 2003, the Company recorded restructuring charges of $29.4 million. The charges include severance and other employee-related costs of $3.9 million related to reductions in workforce, primarily in Europe, expense of $22.2 million to increase accruals for leased properties that had been identified as excess in previous office consolidation charges and $3.3 million of expense for goodwill and other intangible impairment, related primarily to a wholly-owned subsidiary in Finland which was converted to a licensee. The accruals for excess real estate were increased to reflect the expectation of longer vacancy periods due primarily to weakness in the real estate markets in which the leased properties are located. The restructuring charges by segment are as follows: North America $7.0 million, Europe $22.1 million, and Corporate $0.3 million. Of the $29.4 million of restructuring charges recorded in 2003, approximately $25.8 million represents cash charges.

Operating income (loss).    Our consolidated operating income was $28.7 million in 2004 compared to an operating loss of $22.3 million in 2003. The following table summarizes our consolidated operating income (loss) for the years ended December 31, 2004 and 2003, respectively:

The increase in the consolidated operating income was primarily due to lower restructuring charges and improved net revenue and profitability in the geographic regions.

In North America, operating income in 2004 increased $9.8 million to $45.8 million from $36.0 million in 2003. The increase of $29.7 million in North America’s net revenue, lower fixed salaries and employee benefits

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expense of $6.0 million and lower bad debt expense of $0.6 million was partially offset by increases of $25.6 million in performance-related compensation and $0.9 million in general and administrative expenses.

In Latin America, operating income was $1.1 million in 2004 compared to $0.9 million in 2003. The increase of $1.5 million in net revenue was offset by higher salaries and employee benefits expense.

In Europe, operating income was $3.6 million in 2004 compared to an operating loss of $3.8 million in 2003. The increase in net revenue of $16.3 million and lower facilities-related costs of $1.1 million was partially offset by increases of $5.8 million in fixed salaries and employee benefits expense, $1.8 million of performance-related compensation, $0.8 million of bad debt expense and $0.3 million of discretionary spending. In 2004, general and administrative expenses also include $1.3 million of legal settlement costs relating to a claim arising from certain professional services provided by one of our consultants to a client.

In Asia Pacific, operating income in 2004 was $6.3 million, an increase of $4.0 million, compared to $2.3 million in 2003. The increase in net revenue of $10.1 million was partially offset by increases of $5.4 million of salaries and employee benefits expense, $0.2 million of bad debt expense and $0.5 million of discretionary spending.

Corporate expenses decreased $0.6 million, or 2.0%, to $27.6 million in 2004 from $28.2 million in 2003. Corporate expenses in 2003 include $6.1 million of severance-related expenses for the separation agreements of three former executives. Excluding these severance expenses, which we believe more appropriately reflects our core operations, corporate expenses would have been $22.1 million in 2003. Excluding these severance expenses, corporate expenses increased $5.5 million, or 25.1%, in 2004. The increase in corporate expenses was primarily due to $1.6 million of professional fees related to compliance with the requirements imposed by the Sarbanes-Oxley Act, a $1.3 million increase in tax, legal and other professional services, a $0.4 million increase in systems-related spending and $2.2 million of additional discretionary spending.

Restructuring charges were $0.6 million in 2004. The restructuring charges are explained in the preceding section captioned, Restructuring charges.

Net non-operating income (expense).    The following table presents the components of our net non-operating income (expense) for 2004 and 2003, respectively:

Interest income in 2004 was approximately $2.6 million compared to $1.7 million in 2003. The increase is primarily due to higher cash balances and higher returns on the invested cash.

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We receive warrants for equity securities in client companies, in addition to the cash fee, for services rendered on some searches. Some of the warrants meet the definition of a derivative instrument under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and its subsequent amendments. SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. These derivative instruments are initially recorded at their fair value, using the Black Scholes model, in the Consolidated Balance Sheets, with a corresponding amount recorded as net revenue in the Consolidated Statements of Operations. Compensation expense related to this net revenue is also recorded. Subsequent changes in the fair value of these derivative instruments are recorded in the Consolidated Statements of Operations as unrealized gains (losses), net of the consultants’ share of the gains (losses).

Other warrants received and which do not meet the definition of a derivative instrument under SFAS No. 133 are initially recorded at their fair value, using the Black Scholes model, in the Consolidated Balance Sheets, with a corresponding amount recorded as net revenue in the Consolidated Statements of Operations. Compensation expense related to this net revenue is also recorded. These warrants are accounted for using the cost method, and subsequent changes in fair value are not recognized. However, these warrants are regularly reviewed for other-than-temporary declines in fair value. Any permanent declines in the fair value of these warrants are recorded in the Consolidated Statements of Operations as unrealized losses, net of the consultants’ share of the losses.

Upon a value event such as an initial public offering or an acquisition, any changes in the fair value of the warrants, both derivatives and non-derivatives, are recorded in the Consolidated Statements of Operations as unrealized gains (losses), net of the consultants’ share of the gains (losses).

Any equity securities arising from the exercise of a warrant are accounted for as available-for-sale investments in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Subsequent changes in the fair value of these available-for-sale investments are recorded as a component of accumulated other comprehensive income (loss). Upon the sale of these investments, the Company records a realized gain (loss), net of the consultants’ share of the gain (loss) and other costs.

In 2001, we received warrants to purchase 1,194,308 shares of Class B common stock of Google at a price of $0.30 per share issued in connection with recruitment fees. On August 19, 2004, we exercised the warrants pursuant to their cashless exercise feature and received 1,190,092 shares of Google common stock.

In multiple transactions on September 13, 2004 and September 14, 2004, we sold all the shares of common stock of Google that we held in ordinary brokerage transactions at an average price of $108.22 less expenses associated with the transaction resulting in aggregate net proceeds of approximately $128.8 million.

During 2004, we recognized realized gains of $57.0 million, net of the consultants’ share of the gain and other costs, including $56.8 million related to the monetization of our shares of common stock of Google. During 2003, we recognized $0.7 million of realized gains and less than $0.1 million of unrealized gains, net of the consultants’ share of the gains and other costs, related to our equity and warrant portfolio.

Net other non-operating expense was $1.0 million in 2004 compared to $1.7 million in 2003. Other non-operating expense consists primarily of foreign exchange gains and losses on intercompany balances which are denominated in currencies other than the functional currency and which are not considered permanent in nature.

Income taxes.    In 2003, we had a pre-tax loss of $21.8 million and recorded income tax expense of $58.8 million. The 2003 income tax provision includes a non-cash income tax expense of $57.9 million, recorded in the fourth quarter of 2003, to provide a full valuation allowance against the net deferred tax assets for the U.S. and foreign operations which comprise the U.S. income tax entity.

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Judgment is required in developing our income tax provision, including the determination of deferred tax assets and liabilities and any valuation allowances that might be required against the deferred tax assets. In assessing the need for a valuation allowance, we considered all positive and negative evidence, including scheduled reversals of deferred tax liabilities, tax-planning strategies, projected future taxable income and recent financial performance. In 2003, 2002 and 2001, we reported net losses, primarily due to restructuring activities necessary to align our cost structure with expected net revenue levels. SFAS No. 109, “Accounting for Income Taxes,” states that forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years. In considering how the loss was created, evidence indicating that the loss was unusual, infrequent, or an aberration, rather than a continuing condition is an example of positive evidence that might support a conclusion that a valuation allowance is not needed when there is negative evidence. Until the fourth quarter of 2003, we considered the fact that the cumulative losses were primarily the result of the restructuring charges along with other positive evidence to be sufficient to support a conclusion that a valuation allowance was not needed. However, when we recorded a restructuring charge totaling $22.5 million in the fourth quarter of 2003, management no longer felt it appropriate, for purposes of SFAS No. 109, to regard the restructuring charges as unusual, infrequent, or as an aberration, based on the number of restructuring charges recorded from 2001 through 2003 and the magnitude of the charge taken in the fourth quarter of 2003. As a result, the significant negative evidence of cumulative losses in recent years could not be overcome by other positive evidence, most of which was subjective in nature. Based upon the provisions of SFAS No. 109, we recorded, in the fourth quarter of 2003, a full valuation allowance against our net deferred tax assets.

The income tax expense recorded in 2003 also includes an expense of $4.3 million, recorded in the first half of 2003, to reduce certain deferred tax assets, representing the excess of expense for accounting purposes over the deduction for tax purposes, required to be recorded upon the vesting of restricted stock units. In prior years, a portion of executive search consultant and management compensation was granted in restricted stock units at the then-average market price of approximately $39 per share. This price served as the basis for the compensation expense and the related tax benefit and deferred tax asset. The restricted stock units vested in 2003 at an average market price of approximately $12 per share. As this share price serves as the basis for the current tax deduction, we will realize a smaller tax benefit than initially recorded. Accordingly, we adjusted the deferred tax asset to reflect the lower tax benefit.

At the time we recorded a full valuation allowance against the net deferred tax assets, we anticipated that we would generate a loss for U.S. income tax purposes in 2004, due primarily to the timing of tax deductions related to restructuring charges recorded in prior years, and therefore did not anticipate recording or paying any U.S. federal income tax in 2004. These tax estimates excluded the affects of any warrant monetizations due to the uncertainty of the amount and timing of such transactions.

As a result of a significant warrant monetization in the third quarter of 2004, we generated income in 2004 for U.S. income tax purposes. Accordingly, we determined that a lesser valuation allowance is required related to net deferred tax assets associated with tax deductions that will be available for carryback to recover taxes paid in the current year and recorded a $10.5 million reduction to the income tax expense and the valuation allowance.

In 2004, the effective tax rate was 5.5%, which is significantly lower than the statutory rate, primarily as a result of the partial reduction of the previously recorded valuation allowance relating to net deferred tax assets associated with tax deductions that will be available for carryback to recover taxes paid in the current year and the utilization of net operating loss and capital loss carryforwards.

We anticipate that the effective tax rate will continue to fluctuate in the future due to the mix of earnings and profits in the jurisdictions in which we operate. While the Company expects to be profitable in 2005 and beyond, there is no assurance that future taxable income will be sufficient to realize the benefit of the deferred tax assets. If after future assessments of the realizability of the deferred tax assets, we determine a lesser allowance is required, we would record a reduction to the income tax expense and the valuation allowance in the period of such determination.

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2003 Compared to 2002

Total revenue.    Consolidated total revenue decreased $36.2 million, or 9.6%, to $340.6 million in 2003 from $376.8 million in 2002. The decline in total revenue was due primarily to the decline in revenue before reimbursements (net revenue).

Revenue before reimbursements (net revenue).    Consolidated net revenue decreased $32.8 million, or 9.3%, to $317.9 million in 2003 from $350.7 million in 2002. Excluding the $17.9 million positive impact of exchange rate fluctuations, net revenue declined approximately 14%. We believe information regarding changes in net revenue excluding the impact of exchange rate fluctuations is helpful in providing an understanding of the volume of business activity. Most of our practices experienced declines in net revenue. In 2003, the number of confirmed executive searches decreased 5% to 3,757 from 3,973 in 2002. We believe this decrease reflects the impact of the continuing weak global economic conditions.

Net revenue in North America was $172.0 million in 2003, a decrease of $22.2 million, or 11.4%, from $194.2 million in 2002. Most of the practices experienced declines in net revenue with the most significant declines in the Technology and Financial Services practices. In Latin America, net revenue was $11.2 million in 2003, an increase of $0.2 million, or 2.0%, from $11.0 million in 2002, reflecting increases in the Financial Services and Professional Services practices, despite the loss of net revenue from operations that were converted to licensees in 2002. Net revenue in Europe was $113.0 million in 2003, a decrease of $11.4 million, or 9.1%, from $124.4 million in 2002. Excluding a positive impact of $16.5 million due to exchange rate fluctuations, Europe’s net revenue decreased by approximately 22% from 2002. The decline in net revenue is attributable to general economic weakness, particularly in the Financial Services and Industrial practices, and the loss of net revenue from unprofitable operations that were converted to licensees or shut down during 2002. In Asia Pacific, net revenue was $21.6 million in 2003, an increase of $0.5 million, or 2.6%, from $21.1 million in 2002. Excluding a positive impact of $1.3 million due to exchange rate fluctuations, Asia Pacific’s net revenue was $20.3 million, a decrease of approximately 3% compared to 2002. Increases in the Industrial and Consumer practices were more than offset by declines in the Technology and other practices.

Salaries and employee benefits.    Consolidated salaries and employee benefits expense decreased $18.8 million, or 7.8%, to $223.5 million in 2003 from $242.3 million in 2002. Salaries and employee benefits expense in 2003 includes $6.1 million of expense related to the separation agreements of the former Chief Executive Officer, the former President and Chief Operating Officer and the Chief Financial Officer, approximately $2.8 million of other severance-related expenses, primarily in Europe and North America, partially offset by a $0.9 million reduction in employee benefit expense accruals and a benefit of $1.3 million from the reversal of accruals recorded in 2002 for the Performance Share Program. Excluding these items, which we believe more appropriately reflects our core operations, consolidated salaries and employee benefits expense would have been $216.8 million in 2003, a decrease of $25.5 million, or 10.5%, compared to $242.3 million in 2002. The decrease was primarily attributable to $35.8 million of lower fixed costs as a result of the elimination of approximately 400 positions since March 2002, partially offset by $10.3 million of additional performance-related compensation expense for executive search consultants and support staff. The average number of executive search consultants in 2003 was 328, a decrease of 16%, compared to an average of 391 in 2002.

As a percentage of net revenue, salaries and employee benefits expense increased to 70.3% in 2003 from 69.1% in 2002. Excluding the $8.9 million of severance-related expenses, the $0.9 million reduction of employee benefit accruals and the $1.3 million of benefit resulting from the reversal of accruals related to the Performance Share Program, which we believe more appropriately reflects our core operations, salaries and employee benefits expense as a percentage of net revenue would have been 68.2% in 2003 compared to 69.1% in 2002. The decrease as a percentage of net revenue is primarily due to lower fixed salaries and employee benefits expense in relation to the net revenue levels, partially offset by a greater percentage of net revenue accrued for performance-based compensation.

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General and administrative expenses.    Consolidated general and administrative expenses decreased $19.6 million, or 18.4%, to $87.3 million in 2003 from $106.9 million in 2002. This decrease was due to $11.5 million of lower discretionary spending, a reduction in bad debt expense of $2.8 million and $5.3 million of cost savings in rent, depreciation and other infrastructure expenses, primarily related to the consolidation and closing of offices and lower systems-related spending.

As a percentage of net revenue, general and administrative expenses decreased to 27.4% in 2003 from 30.5% in 2002.

2003 and 2002 Restructuring charges.    In 2003, we recorded restructuring charges of $29.4 million. In 2002, we recorded restructuring charges of $48.5 million. The following table summarizes the workforce reductions as well as the restructuring charges recorded in each year:

The restructuring charges of $29.4 million recorded in 2003 include severance and other employee-related costs of $3.9 million related to reductions in our workforce, primarily in Europe, expense of $22.2 million to increase accruals for leased properties that had been identified as excess in previous office consolidation charges and $3.3 million of expense for impairment of goodwill and other intangible assets related primarily to a wholly-owned subsidiary in Finland which is expected to be converted to a licensee. The workforce reductions, which occurred during the fourth quarter of 2003, affected 32 people, primarily in Europe, and included 7 executive search consultants. The accruals for excess real estate were increased to reflect the expectation of longer vacancy periods due primarily to weakness in the real estate markets in which the leased properties are located. The restructuring charges by segment are as follows: North America $7.0 million; Europe $22.1 million; and Corporate $0.3 million. Of the $29.4 million of restructuring charges recorded in 2003, approximately $25.8 million represents cash charges.

In October 2001, we announced company-wide cost reduction initiatives to better align costs with the expected net revenue levels. During the first quarter of 2002, we recorded $23.2 million of restructuring charges related to these announced initiatives. The actions, which occurred during the first quarter of 2002, affected 166 people, including 51 executive search and management search consultants. The remainder was search and corporate support staff. Over two-thirds of the layoffs were in North America, 20% were in Europe, and the rest were in Latin America and Asia Pacific. The 2002 first quarter restructuring charges include severance and other employee-related costs of $10.4 million and costs related to the consolidation and closing of offices of $12.8 million. By segment, the restructuring charges recorded in the first quarter of 2002 are as follows: North America $13.3 million; Latin America $0.1 million; Europe $7.0 million; Asia Pacific $0.3 million; and Corporate $2.5 million. Of the $23.2 million of restructuring charges recorded in the 2002 first quarter, approximately $15.2 million represents cash charges. No restructuring charges were recorded in the second or third quarters of 2002.

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In October 2002, we announced additional reductions in our workforce and the consolidation and closing of offices, recording a charge of $25.4 million. The actions affected 236 employees, of which 156 were in Europe. Of the reductions, 61 were executive and management search consultants and the remainder was support staff. Of the $25.4 million restructuring charge, $12.2 million was for severance and related costs, $10.6 million was facilities-related and $2.6 million was for the write-off of goodwill, intangible assets and software. By segment, the restructuring charges recorded in the fourth quarter of 2002 are as follows: North America $6.4 million; Latin America $0.5 million; Europe $17.7 million; Asia Pacific $0.4 million; and Corporate $0.4 million. Of the $25.4 million of restructuring charges recorded in the 2002 fourth quarter, approximately $20.9 million represents cash charges.

Approximately $45.8 million of the 2003 and 2002 restructuring charges remained unpaid as of December 31, 2003. The majority of the amounts remaining to be paid relate to real estate leases. Cash disbursements lag the charges because charges related to disposing of leases are recorded currently, while the cash spending for each affected lease will continue until sub-leasing, or negotiations with the lessor to terminate the lease, are completed. Based on current estimates, approximately $18.1 million is expected to be paid in 2004, with the remaining $27.7 million payable in years subsequent to 2004.

Operating loss.    Our consolidated operating loss was $22.3 million in 2003, a decrease of $24.8 million compared to the operating loss of $47.1 million in 2002. The following table summarizes our consolidated operating loss for the years ended December 31, 2003 and 2002, respectively:

The decrease in the consolidated operating loss was primarily due to lower restructuring charges and improved profitability in the geographic regions.

In North America, operating income in 2003 increased $2.3 million to $36.0 million from $33.7 million in 2002. The decline of $22.2 million in North America’s net revenue was offset by $18.0 million of lower fixed salaries and employee benefits expense, including a benefit from the forfeiture of certain restricted stock units and a reduction of accruals for employee benefits expense, a benefit of $0.6 million related to the reversal of accruals for the Performance Share Program which were recorded in 2002 and $9.5 million of lower discretionary spending and lower facilities-related expenses. Most of the cost savings are attributable to the reductions in workforce, and the consolidation and closing of offices, that have occurred since the 2002 first quarter. The cost reductions were offset by a $3.6 million increase in performance-based compensation expense for executive search consultants and support staff.

In Latin America, operating income was $0.9 million in 2003 compared to an operating loss of $2.8 million in 2002. The operating loss in 2002 included $1.7 million of costs associated with converting certain wholly- owned subsidiaries to licensees and an adjustment for value-added taxes.

In Europe, the operating loss was $3.8 million in 2003, an increase of $0.6 million, compared to an operating loss of $3.2 million in 2002. The operating loss in 2003 includes approximately $2.0 million of severance-related expenses. Excluding these severance-related expenses, which we believe more appropriately

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reflects our core operations, Europe’s operating loss in 2003 would have been $1.9 million, a decrease of $1.3 million, compared to the $3.2 million operating loss in 2002. The decline in net revenue of $11.4 million was offset by $10.4 million of lower fixed salaries and employee benefits expense, a reduction in bad debt expense of $2.7 million, $2.8 million of lower discretionary spending and approximately $2.2 million of lower systems-related spending. These cost savings reflect the reductions in workforce and cost reduction initiatives which have occurred since the first quarter of 2002. These cost savings were partially offset by a $5.4 million increase in performance-based compensation expense for executive search consultants and support staff.

In Asia Pacific, operating income in 2003 was $2.3 million, an increase of $0.8 million, compared to operating income of $1.5 million in 2002. The increase was attributable to the increase in net revenue of $0.5 million and lower fixed salaries and employee benefits expense.

Unallocated corporate expenses increased $0.4 million, or 1.4%, to $28.2 million in 2003 from $27.8 million in 2002. Corporate expenses in 2003 include $6.1 million of severance-related expenses for the separation agreements of three executives. Excluding these severance expenses, which we believe more appropriately reflects our core operations, unallocated corporate expenses would have been $22.1 million, a decrease of $5.7 million, or 20.5%, compared to 2002. This decline in corporate expenses reflects $3.2 million of lower salaries and employee benefits expense and $3.8 million of lower systems-related spending and operating expenses, partially offset by $1.3 million of higher infrastructure-related costs.

Restructuring charges were $29.4 million in 2003 compared to $48.5 million in 2002. The restructuring charges are explained in the preceding section captioned, 2003 and 2002 Restructuring charges.

Net non-operating income (expense).    The following table presents the components of our net non-operating income (expense) for 2003 and 2002, respectively:

Interest income in 2003 was approximately $1.7 million compared to $2.0 million in 2002. The decline is primarily due to lower returns on invested cash balances.

We receive warrants for equity securities in our client companies, in addition to our cash fee, for services rendered on some searches. The warrants are recorded at fair value. Some of the warrants in our portfolio meet the definition of a derivative instrument under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and its subsequent amendments. In accordance with SFAS No. 133, subsequent changes in the fair value of these derivative instruments are recorded in the Consolidated Statements of Operations rather than as a component of accumulated other comprehensive income. Warrants which do not meet the definition of a derivative instrument are regularly reviewed for declines in value. Upon a value event such as an initial public

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offering or an acquisition, the equity securities arising from the exercise of the warrants are monetized, resulting in a realized gain, net of the consultants’ share of the gain and other costs.

During 2003, we recognized $0.7 million of realized gains and less than $0.1 million of unrealized losses, net of the consultants’ share of the gains (losses) and other costs, related to our equity and warrant portfolio. During 2002, we recognized $1.6 million of realized gains and $3.0 million of unrealized losses, net of the consultants’ share of the gains (losses) and other costs, related to our equity and warrant portfolio. With improvements in economic conditions, it is possible, although not certain, that we could realize gains which are significant to our reported earnings in the future.

The write-down of the long-term investment of $5.0 million in 2002 resulted from the write-down of the remainder of our investment in ETF Group. ETF Group is a Europe-based venture capital firm that helps emerging companies expand into international markets.

Net other non-operating expense was $1.7 million in 2003 compared to $0.1 million in 2002. Other non-operating expense consists primarily of exchange gains and losses on intercompany balances which are denominated in currencies other than the functional currency and which are not considered permanent in nature.

Income taxes.    In 2003, we had a pre-tax loss of $21.8 million and recorded income tax expense of $58.8 million. The 2003 income tax provision includes a non-cash income tax expense of $57.9 million, recorded in the fourth quarter of 2003, to provide a full valuation allowance against the net deferred tax assets for the U.S. and foreign operations which comprise the U.S. income tax entity.

Judgment is required in developing our income tax provision, including the determination of deferred tax assets and liabilities and any valuation allowances that might be required against the deferred tax assets. In assessing the need for a valuation allowance, we considered all positive and negative evidence, including scheduled reversals of deferred tax liabilities, tax-planning strategies, projected future taxable income and recent financial performance. In 2003, 2002 and 2001, we reported net losses, primarily due to restructuring activities necessary to align our cost structure with expected net revenue levels. SFAS No. 109, “Accounting for Income Taxes,” states that forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years. In considering how the loss was created, evidence indicating that the loss was unusual, infrequent, or an aberration, rather than a continuing condition is an example of positive evidence that might support a conclusion that a valuation allowance is not needed when there is negative evidence. Until the fourth quarter of 2003, we considered the fact that the cumulative losses were primarily the result of the restructuring charges along with other positive evidence to be sufficient to support a conclusion that a valuation allowance was not needed. However, when we recorded a restructuring charge totaling $22.5 million in the fourth quarter of 2003, management no longer felt it appropriate, for purposes of SFAS No. 109, to regard the restructuring charges as unusual, infrequent, or as an aberration, based on the number of restructuring charges recorded from 2001 through 2003 and the magnitude of the charge taken in the fourth quarter of 2003. As a result, the significant negative evidence of cumulative losses in recent years could not be overcome by other positive evidence, most of which was subjective in nature. Based upon the provisions of SFAS No. 109, we recorded, in the fourth quarter of 2003, a full valuation allowance against our net deferred tax assets.

The income tax expense recorded in 2003 also includes an expense of $4.3 million, recorded in the first half of 2003, to reduce certain deferred tax assets, representing the excess of expense for accounting purposes over the deduction for tax purposes, required to be recorded upon the vesting of restricted stock units. In prior years, a portion of executive search consultant and management compensation was granted in restricted stock units at the then-average market price of approximately $39 per share. This price served as the basis for the compensation expense and the related tax benefit and deferred tax asset. The restricted stock units vested in 2003 at an average market price of approximately $12 per share. As this share price serves as the basis for the current tax deduction, we will realize a smaller tax benefit than initially recorded. Accordingly, we adjusted the deferred tax asset to reflect the lower tax benefit.

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In 2002, we had a pre-tax loss of $51.7 million and an income tax benefit of $11.5 million. The effective tax benefit rate in 2002 was 22.2%, reflecting valuation allowances related to the recoverability of foreign tax credits, foreign net operating losses and other tax-related allowances. In addition, the income tax benefit in 2002 is reduced by approximately $0.8 million of additional provision for income taxes in certain Latin American subsidiaries. The income tax provision and related current and deferred tax balances are more fully described in Note 17, Income Taxes, in the Notes to Consolidated Financial Statements.

Liquidity and Capital Resources

General.    We continually evaluate our liquidity requirements, capital needs and availability of capital resources based on our operating needs. We believe that our existing cash balances together with the funds expected to be generated from operations and funds available under our committed line of credit will be sufficient to finance our operations for the foreseeable future, as well as to finance the cash payments associated with our restructuring charges. We historically have paid a portion of our bonuses in December and the remainder in March. Employee bonuses are accrued throughout the year and are based on our performance and the performance of the individual employee. Our ability to undertake acquisitions may depend, in part, on access to additional funds.

In 2001, we received warrants to purchase 1,194,308 shares of Google at a price of $0.30 per share issued in connection with recruitment fees. On August 19, 2004, we exercised the warrants pursuant to their cashless exercise feature and received 1,190,092 shares of Google common stock.

In multiple transactions on September 13, 2004 and September 14, 2004, we sold all the shares of common stock of Google that we held in ordinary brokerage transactions at an average price of $108.22 less expenses associated with the transaction resulting in aggregate net proceeds of approximately $128.8 million.

Pursuant to the terms of our compensation policy with respect to warrants, 55% of the net proceeds from these sales of shares of common stock of Google is payable to our consultants involved with the search in the month following the monetization. Our current Chief Executive Officer, Thomas J. Friel, was a member of this search team and will receive 25% of the consultants’ team share. Mr. Friel has elected to defer receipt of his share of the net proceeds until 2005 under an existing deferred compensation plan. The remaining 75% of the consultants’ team share of the net proceeds, approximately $53.1 million, was paid in October 2004.

We do not have material off-balance sheet arrangements, special purpose entities, trading activities of non-exchange traded contracts or transactions with related parties.

Some deferred compensation arrangements with certain employees, which were executed prior to July 30, 2002, are structured as forgivable loans. The forgivable loans are accounted for as deferred compensation, and are therefore amortized to compensation expense over the forgiveness period. At December 31, 2004, we had $0.3 million of deferred compensation structured as forgivable loans, none of which were with any executive officer of the Company.

Lines of credit.    In December 2003, the Company entered into a $60.0 million committed revolving credit facility the (“Facility”). The Facility replaced a $50.0 million committed revolving credit facility and a $5.0 million uncommitted credit facility. Under this Facility, the Company may borrow U.S. dollars, euros, sterling and other major traded currencies, as agreed by the banks. Borrowings under the Facility bear interest at the existing Alternate Base Rate or LIBOR plus a margin as determined by the Company’s compliance with certain tests of financial condition. The Facility has financial tests the Company must meet or exceed relating to:

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The Facility sets limits on the Company’s ability to make acquisitions without bank approval and to incur additional debt outside of the Facility. The Company must pay a facility fee whether or not the Facility is used during the year.

In March 2004, the Company amended the Facility to reduce the net worth covenant from $145.0 million to $110.0 million. This amendment was required as a result of the non-cash income tax expense of $57.9 million, recorded in the fourth quarter of 2003, which provided a full valuation allowance for the net deferred tax assets related to the U.S. and foreign operations which comprise the U.S. income tax entity. See Note 17, Income Taxes, in the Notes to Consolidated Financial Statements.

There were no borrowings outstanding under the lines of credit existing at December 31, 2004 or December 31, 2003, nor were there any borrowings during the years ended December 31, 2004 and 2003, respectively, under the then existing lines of credit. At December 31, 2004, the Company was in compliance with the financial covenants of the Facility, and no event of default existed.

Cash and cash equivalents.    Cash and cash equivalents at December 31, 2004 were $222.8 million, an increase of $103.5 million, compared to $119.3 million at December 31, 2003.

Cash from operating activities.    In 2004, cash provided by operating activities was $25.7 million, primarily as a result of our net income adjusted for non-cash items, offset by payments related to the restructuring charges.

In 2003, cash provided by operating activities was $10.4 million, reflecting our net loss, adjusted for non-cash items, a $12.9 million reduction of net income taxes recoverable, which includes the refund of approximately $15.0 million of U.S. income taxes paid in prior years arising from the carryback of net operating losses, partially offset by payments related to our restructuring charges and payments of bonuses in March and December 2003.

In 2002, cash provided by operating activities was $6.0 million, reflecting our net loss adjusted for non-cash items, a reduction of our trade receivables, and the $16.6 million reduction of net income taxes recoverable, which includes the refund of approximately $25.0 million of U.S. income taxes paid in prior years arising from the carryback of net operating losses to prior years and the recovery of estimated taxes paid in the first half of 2001, partially offset by the payments related to our restructuring charges and payment of bonuses in March 2002 and December 2002.

Cash from investing activities.    Cash provided by investing activities was $68.4 million in 2004 primarily as a result of the net proceeds of $128.8 million from the sale of our shares of common stock of Google offset by the portion of the consultants’ share of the gain which was paid in 2004. Cash used in investing activities was $4.7 million in 2003 and $3.9 million in 2002 primarily due to capital expenditures, partially offset by net proceeds from sales of equity securities.

Capital expenditures were $6.0 million, $5.8 million and $5.2 million in 2004, 2003 and 2002, respectively. Capital expenditures were primarily for computer equipment and software. We anticipate that our capital expenditures for 2005 will be approximately $6 million to $7 million.

During 2004, 2003 and 2002, the amount of cash received from the sale of equity securities related to our warrant program, net of the consultants’ share of the gain and other costs, was $74.3 million, $0.7 million and $1.5 million, respectively. A portion of the consultants’ share of the gain related to the sale of equity securities in 2004, approximately $17 million, will be paid in 2005.

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Cash from financing activities.    Cash from financing activities was $5.5 million in 2004. Cash used in financing activities was $2.0 million in 2003 and $1.8 million in 2002. The cash from financing activities in 2004 was primarily the result of proceeds from the exercise of stock options offset by repurchases of our common stock. The cash used in financing activities in 2003 and 2002 is primarily for repurchases of our common stock and payments on debt related to acquisitions of executive search firms.

The repurchases of our common stock in 2002 and 2003 were made in accordance with the March 6, 2001 Board of Directors’ authorization for management to repurchase up to an aggregate of 2 million shares of our common stock with an aggregate purchase price up to $100 million through March 5, 2003. From February 25, 2003 through March 5, 2003, we repurchased 288,000 shares of common stock for $3.2 million. During 2002, we purchased 4,032 shares of common stock for $0.1 million.

On May 22, 2003, our Board of Directors authorized management to repurchase up to an aggregate of 1 million shares of our common stock with an aggregate purchase price up to $20 million through May 21, 2005. No purchases of our common stock were made under this authorization.

On October 22, 2004, our Board of Directors authorized management to repurchase shares of our common stock with an aggregate purchase price up to $30 million. Also at this time, the previous authorization to purchase up to $20 million through May 21, 2005 was cancelled. We have purchased 85,000 shares of our common stock for $2.5 million under this authorization through December 31, 2004.

Contractual obligations.    The following table presents our known contractual obligations as of December 31, 2004 and the expected timing of cash payments related to these contractual obligations: