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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTIONS 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

For the fiscal year ended December 29, 2002

OR

For the transition period from                      to                     

Commission file number 000-22869

HALL, KINION & ASSOCIATES, INC.

(Exact name of registrant as specified in its charter)

75 Rowland Way, Suite 200, Novato, CA 94945

(Address of principal executive offices)

(415) 895-2200

(Registrant’s telephone number, including area code)

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

None

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

Common Stock, $0.001 par value per share

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 Exchange Act Rule 12b-2).  Yes  ¨  No  x    

The aggregate market value of the 6,760,776 shares of voting Common Stock held by non-affiliates of the registrant, computed by reference to the closing price as reported on the NASDAQ National Market system, as of the last business day of the registrant’s most recently completed fiscal year, was approximately $39.1 million. The registrant has no non-voting common equity. As of March 21, 2003, the total number of outstanding shares was 12,582,263.

Portions of the registrant’s Proxy Statement for the annual meeting of stockholders to be held on May 21, 2003 are incorporated by reference in Part III.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements under “Business”, “Risk Factors”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Quantitative and Qualitative Disclosures about Market Risk” and elsewhere in this report constitute forward-looking statements that involve substantial uncertainties. These statements include, among others, statements concerning the following:

We have based these forward-looking statements on our current expectations and projections about future events. In some cases, you can identify forward-looking statements by terms such as “may”, “hope”, “will”, “should”, “expect”, “plan”, “anticipate”, “intend”, “believe”, “estimate”, “predict”, “potential” or “continue”, the negative of these terms or other comparable terminology. The forward-looking statements contained in this report involve known and unknown risks, uncertainties and other factors that may cause industry trends or our actual results, performance or achievements to be materially different from any future trends, results, performance or achievements expressed or implied by these statements. These factors include, among others, the rate of hiring and productivity of sales and sales support personnel, the availability of and changes in demand for qualified professionals for temporary or permanent placement, changes in the general economic conditions of the North American markets as well as the regional markets in which the Company operates, changes in the demand for mortgages which are affected by interest rates, housing prices and other economic conditions, changes in the relative mix between our contract services and permanent placement services, changes in the pricing of our services, the timing and rate of entrance into and exit from vertical and geographic markets, the addition or closing of offices, the structure and timing of acquisitions, and others listed under “Risk Factors”, elsewhere in this report, and in our other Securities and Exchange Commission filings.

We cannot guarantee future results, performance or achievements. We do not intend to update this report to conform any forward-looking statements to actual results. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this report.

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PART I

Overview of the Company

We source and deliver the most critical component of industry—human capital. As a leading talent source, we provide specialized professionals on a short-term contract and permanent basis. We deliver information technology (“IT”) professionals to vendors and users of leading edge technologies, and to certain vertical markets, including government services, banking and finance, healthcare and energy services.

On August 9, 2002, we acquired substantially all of the assets of OnStaff, a privately-held group of companies that provides short-term contract and permanent employees in the real estate, finance and healthcare industries. This privately-held group of companies included OnStaff, Healthcare Staffing Resources, Inc., and Boardnetwork.com. With the acquisition of OnStaff, we expanded our service offerings and added online recruiting and placement websites. The results of operations include the operations of OnStaff from August 2002.

We believe that our key competitive advantage is our ability to successfully recruit highly qualified professionals. We have developed this advantage by building client relationships with industry leaders and communicating these relationships to the professional community.

We have developed a scalable business model that helps us expand or contract in vertical or geographic markets, depending on our customers’ needs. The cornerstone of our model is the rapid delivery of talent to our clients. We recognize that our clients operate in a time-sensitive environment in which their success is directly tied to their ability to bring their products and services to market ahead of their competition. We build strong, direct relationships with our clients’ managers in order to identify quickly their needs. We then actively network with the professional community and thoroughly search the Internet in order to identify the appropriate talent quickly.

Company Goals

The Company has three major performance goals designed to enhance stockholder value: grow the business, provide high quality services to our clients, and achieve maximum operating efficiency. Our demonstrated ability to deliver quality professionals to our clients, to motivate and support our sales force, and to employ efficient business processes are the principal elements in achieving these goals.

Growth Strategy

Currently, the Hall Kinion growth strategy is focused on cross-marketing, internal growth, and diversifying into new vertical markets and service offerings. Key elements of the strategy include:

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As the economy improves, or as conditions warrant, we may employ other growth strategies, including:

Quality Program

Hall Kinion’s objective is to provide efficient, high quality contract professionals and recruitment services to our target markets and to become the agent of choice for our customers. To meet this objective we:

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Achieve Maximum Operating Efficiency

At the end of 2002, we integrated OnStaff operations with the rest of the Company to improve combined operating efficiency and reduce overall operating costs. The OnStaff headquarters in Burbank, California were closed on February 15, 2003 and administrative and accounting activities were transferred to the corporate headquarters in Novato, California. On March 3, 2003, we announced the restructuring of the Technology Division, resulting in the closure of 13 offices and elimination of 69 jobs. During 2001 and 2002, the Company restructured operations through reduction in staff and closing of offices to realign the operating offices and personnel with the current business sources and activities. We believe the full benefit of the changes from 2001 and 2002 will not be realized until 2003. We continue to pursue opportunities to streamline operations, automate processes using new technologies and other techniques to achieve maximum operating efficiency.

Overview of Business Segments

Hall Kinion has two business segments, Contract Professional Staffing and Permanent Placement Services. The Contract Professional Staffing segment provides skilled temporary personnel, and the Permanent Placement Services segment sources, qualifies, and delivers professionals for direct hire by our clients.

Information concerning revenues and segment profitability is included in Note 13 to Consolidated Financial Statements.

Contract Professional Staffing

We recognize that our clients operate in time-sensitive environments in which their success is directly tied to having their staffing needs, often with very specific professional skills, met promptly. We build strong, direct relationships with our clients’ managers in order to quickly identify their needs. Our company then actively networks with the professional community and thoroughly searches the Internet in order to identify the appropriate talent quickly. We developed a scalable business model that helps us expand or contract in vertical or geographic markets, depending on our customers’ needs. The cornerstone of the model is the rapid delivery of talent to our clients.

Our net revenues for this segment are generated principally from the hourly billings of our professionals on contract assignments. Contract services assignments typically last two to six months, and revenues are recognized as services are provided. We earn contract services revenues when our consultants are working, and therefore our operating results may be adversely affected when client facilities are closed due to holidays or inclement weather. As a result, we typically experience relatively lower net revenues in our first and fourth fiscal quarters.

As of December 29, 2002, we had 2,305 contract professionals providing services for our clients and 270 sales and sales support employees, including branch managers and sales vice presidents, whose primary role is the rapid delivery of highly qualified professionals to our clients.

Business Divisions

Technology Professional Division—Hall Kinion & Associates and IPEX primarily provide IT professionals to our clients. We started Hall Kinion in Silicon Valley and expanded to the Silicon Valleys of the world. We believe that our competitive advantage is our ability to successfully recruit and retain the best and brightest IT professionals, including individuals from other countries placed through IPEX. Our IT professionals offer our clients leading edge technology skills and our clients offer our professionals the opportunity to work on leading edge assignments.

Corporate Professional Division—OnStaff provides contract services primarily to the real estate and healthcare industries. In the real estate industry, it is a leading provider of staffing in the title, escrow, and

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mortgage lending fields. We focus on providing knowledgeable staff with first-hand experience in these industries. In the healthcare industry, we provide experienced professional staff to healthcare institutions for administrative and operational positions.

Clients

Our contract staffing business focuses on companies requiring the professional skills in the markets we target: IT, healthcare, real estate services, and finance and accounting. Our assignments typically place an individual or a small group of skilled professionals and, as a result, we have minimal client concentration. We provide our services directly to our customers or, indirectly as a subcontractor through other technical staffing service companies. In 2002, no client accounted for more than 5% of our net revenues and our top ten direct and indirect clients accounted for approximately 21% of our net revenues. Our top ten clients to whom we directly provided services in 2002 were:

Competition

The staffing industry is highly competitive and fragmented and has low barriers to entry. In the market for contract IT professionals, we compete for potential clients with providers of IT staffing services and, to a lesser extent, computer systems consultants, providers of outsourcing services, systems integrators and temporary personnel agencies. For corporate professionals, we compete for clients primarily with other staffing services and temporary employment personnel agencies. Many of our current and potential competitors have longer operating histories, significantly greater financial and marketing resources, greater name recognition and a larger installed base of professionals and clients than Hall Kinion. In addition, many of these competitors may have certain distinct advantages. Competitors that are smaller companies may be able to respond more quickly to customer requirements. Competitors that are larger companies may be able to devote greater resources to marketing their services. Because there are relatively low barriers to entry, we expect that competition will increase in the future. Increased competition could result in price reductions, reduced margins or loss of market share, any of which could materially and adversely affect our business, operating results and financial condition. We may not be able to compete successfully against current and future competitors, and competitive pressures that we face may have a material adverse effect on business, operating results and financial condition. We believe that the principal factors relevant to competition in the professional staffing services industry are the recruitment and retention of highly qualified professionals, rapid and accurate response to client requirements and, to a lesser extent, price. We believe that we compete favorably with respect to these factors.

The recruitment of qualified professionals is also competitive, although less than in past years, given current economic conditions. However, in response to the less competitive market, clients have become more selective about meeting required skill sets. We compete for professionals with other providers of technical and professional staffing services, system integrators, providers of outsourcing services, computer consultants, temporary personnel agencies and our clients. We may not be able to recruit and retain sufficient numbers of qualified professionals successfully.

Permanent Placement Services

The Permanent Placement Services segment employs sales and sales support personnel whose primary role is the rapid delivery of high quality IT professionals for permanent placement with clients. As of December 29,

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2002, we employed 41 sales and sales support employees, including branch managers, sales directors, and sales vice presidents, in Permanent Placement Services.

We derive permanent placement revenues upon permanent placement of each professional candidate. The fee is typically structured as a percentage of the placed professional’s first-year annual compensation. Permanent placement revenues are recognized when a professional commences employment or, in the case of retained searches, upon completion of our contractual obligations.

Business units in this segment operate as Hall Kinion & Associates in domestic and in European locations and as Hall Kinion Asia Pacific for services primarily to companies located or doing business in Asia.

Clients

For the year ending December 29, 2002, approximately 67% of our placements were made to technology and related companies with the remainder to a diverse client mix.

Competition

In the Permanent Placement or the recruitment services market, we compete primarily against local and regional recruiting companies. The permanent placement and recruiting industry is also highly competitive and fragmented and has low barriers to entry. As a result, the competitive issues discussed above under contract staffing apply to permanent placement services as well.

Corporate Information Technology

We provide the tools necessary for employees to deliver services with the speed demanded by our clients. WebPAS^™ software, a proprietary application, is used to match candidates to open customer job orders. WebPAS captures key information about a candidate’s skills and matches them precisely to the customer job requirements thereby improving the accuracy of matching while reducing the time it takes to place a suitable candidate with the customer. In 2002, ICPlanet, a subsidiary, developed software to extend the functionality of WebPAS to a public Internet site, permitting candidates to respond to job postings. IT talent sourcing and communication with clients and among offices via the Internet are critical to our business model. In addition, we utilize several other Internet-related tools and encourage employees to use the latest Internet applications such as Headhunter.com and Dice.com, to better serve our clients. At the core of Hall Kinion’s connectivity strategy is independent Internet access for all employees, a corporate wide intranet and shared access to the proprietary database of contract professional talent.

Employees

As of December 29, 2002, we had 2,305 professionals providing contract services to clients. This number included 2,207 employees and 98 subcontractors. Sales, sales support, administrative and accounting staff at December 29, 2002, consisted of 384 full-time employees, of whom 311 were sales and sales support personnel and 73 were administrative and accounting personnel. Hall Kinion is not a party to any collective bargaining agreements covering any employees, has never experienced any material labor disruption and is unaware of any current efforts or plans to organize our employees. We consider our relationship with employees to be good.

Corporate History

Hall Kinion was incorporated in California in 1991. We reincorporated in Delaware in June 1997 and completed the initial public offering of common stock in August 1997.

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Available Information

We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). These filings are available to the public over the Internet at the SEC’s Web site at http://www.sec.gov. You may also read and copy any document that we file at the SEC’s public reference room located at 450 Fifth Street, NW, Washington, DC 20549.

Our principal Internet address is www.hallkinion.com. Our annual, quarterly and current reports, and amendments to those reports, are available free of charge on that website as soon as reasonably practical after we electronically file such material with, or furnish it to, the SEC.

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RISK FACTORS

You should consider these risk factors when you read forward-looking statements elsewhere in this report and before you make an investment decision on our stock. You can identify forward-looking statements by terms such as “may”, “hope”, “will”, “should”, “expect”, “plan”, “anticipate”, “intend”, “believe”, “estimate”, “predict”, “potential” or “continue”, the negative of these terms or other comparable terminology. These forward-looking statements are only predictions. They are subject to a number of risks and uncertainties, including the risks described in this section and those described in “Special Note Regarding Forward-Looking Statements”.

We may need to raise additional capital in the future, and if we are unable to secure adequate funds on acceptable terms, we may be unable to execute our business plan.

On July 12, 2002, the Company entered into an $18.0 million revolving credit facility which was due May 1, 2004. As of December 29, 2002, there was $10 million outstanding on our bank line of credit at an interest rate of 4.25%. The Company was not in compliance with the required financial covenants as of December 29, 2002. On February 3, 2003, the bank waived such financial covenant violations. On March 24, 2003, we entered into an amended agreement with the bank which expires January 1, 2004. Significant terms and conditions of the amended agreement are as follows:

The Company has begun to meet and negotiate with other financial lenders in order to secure replacement financing to replace the amended bank agreement. There can be no assurance that the Company will be able to secure replacement financing on substantially similar terms or at all.

We reported losses during the last two fiscal years. In addition, during the third and fourth quarters of 2002, we significantly increased accounts receivable as a result of our acquisition of OnStaff, resulting in a reduction in our cash and cash equivalents. At February 28, 2003, we had cash and cash equivalents of $2.6 million. If we continue to suffer losses, we may require additional financing sooner than anticipated or in greater amounts. If our existing cash balances and cash flow expected from future operations are not sufficient to meet our liquidity needs, we will need to raise additional funds. If adequate funds are not available on acceptable terms, or at all, we may not be able to execute our business plan or otherwise respond to competitive pressures or unanticipated requirements and it may have a material adverse effect on our ability to continue to operate.

If we fail to meet the requirements for continued listing on the NASDAQ National Market, our stock may be delisted.

Our stock has recently traded at prices below $1.00 per share. Failure of the price of our stock to meet the $1.00 per share minimum trading price required by the NASDAQ National Market for 90 days or a failure to

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meet other listed company requirements, such as aggregate market value of publicly held shares, could result in shares of our common stock no longer being listed on the NASDAQ National Market. The loss of listing on the NASDAQ National Market could have a material adverse effect on the price and liquidity of our common stock.

Failure to manage our size properly could negatively affect our business and financial condition.

We have recently experienced a period of rapid decline in operations. We made corresponding reductions in headcount and offices to manage costs. The reductions in headcount have placed and will continue to place significant demands upon our management and other resources. Our net revenues decreased 30.7% from $173.8 million in 2001 to $120.4 million in 2002 while sales and administrative headcount decreased 13.9% from 446 employees at the end of 2001 to 384 employees at the end of 2002. Year-end headcount for 2002 reflects additions related to the acquisition of OnStaff in August 2002. Our ability to manage future growth effectively will require us to hire additional management personnel and expand our operational, financial and other internal systems. We may not be able to hire additional qualified management personnel. Our current personnel, systems, procedures and controls may not be adequate to support our future operations. A failure to manage our size effectively could have a material negative effect on our business, operating results and financial condition.

Any decrease in demand for our services would have a material negative impact on our business, operating results and financial condition.

We have derived most of our revenues from projects in several targeted industries including IT, real estate services, healthcare services, and finance and accounting. Economic conditions and other factors affecting the business, operating results and financial condition of these industries can have a significant impact on our business, operating results, and financial condition.

In 2002 and to date in 2003 we experienced a continuation of the economic slowdown in the IT industry that reflected a slowdown in the rate of innovation in this industry and a general reduction in demand for personnel with expertise in leading hardware, software or networking technologies. It reduced the demand for our services. Reduction in demand for our services had a material negative impact on our business, operating results and financial condition in 2002.

In the real estate services industry we serve, the demand for professional personnel is strongly influenced by the volume of mortgage financing, both for new units and re-financings. The volume is very sensitive to interest rates and other general economic conditions. Increases in interest rates could have a significant negative impact on our business in this field.

Our clients may also start to hire permanent employees rather than use our contract services if they believe that hiring permanent employees could be more effective than using our contract services. If that were to happen, revenues from our Contract Professional Staffing group could decline materially. A material revenue decline in our Contract Professional Staffing group would negatively impact our business, operating results and financial condition.

The Internet can have a significant impact on our services. The proliferation of job sites on the Internet may allow individuals to find employment opportunities without using our services. Demand for our services may not increase or remain at historical levels. Any decrease in demand for our services would have a material negative impact on our business, operating results and financial condition.

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Our business, operating results and financial condition could be negatively impacted if demand for our services in any new geographic markets we enter is less than we anticipate, if our new offices are not profitable in a timely manner or if we fail to hire qualified employees.

Our growth depends in part on our ability to enter new vertical or geographic markets successfully. This expansion is dependent on a number of factors, including our ability to:

The addition of offices and entry into new geographic markets may not occur on a timely basis or achieve anticipated financial results. The addition of new offices and entry into new vertical or geographic markets typically result in increases in operating expenses, primarily due to increased employee headcount. Expenses are incurred in advance of forecasted revenue, and there is typically a delay before our new employees reach full productivity. Additionally, demand for our services in new markets that we enter might also be less than we anticipate. If we are unable to enter new vertical or geographic markets in a cost-effective manner or if demand for our services in new markets does not meet or exceed our forecasts, our business, operating results and financial condition could be negatively impacted. In 2001, 2002 and March 2003, we closed and consolidated offices to improve efficiency, and further closures or consolidation may occur depending on market and competitive conditions.

Our quarterly operating results may fluctuate, which could cause the price of our stock to decline.

Our quarterly operating results have in the past and may in the future fluctuate significantly depending on a number of factors, including, but not limited to:

In addition, because we provide contract services on an assignment-by-assignment basis, which clients can terminate at any time, existing clients may not continue to use our services at historical levels. We also experience some seasonality in our first and fourth fiscal quarters primarily due to the number of holidays and inclement weather in that quarter, which may reduce the number of days worked by professionals and sales and sales support employees. As a result, we believe that period-to-period comparisons of our results of operations

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are not necessarily meaningful and should not be relied upon as an indication of future performance. In the event our operations should fall below the expectations of public market analysts and investors, the price of our common stock would likely decline.

Our permanent placement business is difficult to forecast and is highly sensitive to changes in the employment rate, and a decline in our permanent placement business would cause a decline in our revenue, gross profit and net income.

Our permanent placement business has declined significantly in 2002 and can be expected to continue to fluctuate significantly in the future. We provide permanent placement services on an assignment-by-assignment basis, which clients can terminate at any time, and existing clients may not continue to use our services at historical levels. A decline in our permanent placement business will result in a decrease in our net revenues. More importantly, gross profit for our permanent placement services group is essentially equal to permanent placement net revenues, as there are no direct costs associated with such revenues. Therefore, a decline in our permanent placement business would result in a decrease in our gross profit margins and net income.

Failure to manage and integrate acquisitions properly could adversely affect our business, operating results and financial condition.

In August 2002 we acquired substantially all the assets of the OnStaff group of companies which specializes in real estate, healthcare and finance corporate professional contract services. These industry and service specializations augment the IT professional services provided by Hall Kinion. We obtained significant bank financing to complete the OnStaff acquisition. During the fourth quarter of 2002, the financial operations of OnStaff were integrated into those of Hall Kinion. The success of the OnStaff acquisition strategy will be dependent on the continuing integration of operating activities, cross marketing of services, efficiency of the combined operations and effective management of the various service groups.

Acquisitions also involve a number of other risks, including:

Due to all of the foregoing, acquisitions may have a material negative effect on our business, operating results and financial condition.

We are dependent on our sales and sales support personnel to maintain revenue levels and increase our revenue growth.

We generate our net revenues when our sales and sales support personnel successfully match our professionals with our clients’ needs. Sales and sales support personnel headcount decreased 12.9% from 357 employees at the end of 2001 to 311 employees at the end of 2002. Experienced sales and sales support personnel have left our company in the past. In the future, we expect departures of experienced sales and sales support personnel from time to time. We may need to hire additional, productive sales and sales support personnel in order to maintain revenue levels and increase our revenue growth. We may not be able to attract or retain productive sales and sales support personnel. If we are unable to attract and retain productive sales and sales support personnel in a cost-effective manner, it could negatively impact our net revenues and profitability.

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We could lose market share or suffer declining profit margins due to intense competition.

The staffing industry is highly competitive and fragmented and has low barriers to entry. In our Contract Professional Staffing group, we compete for potential clients with providers of general and specialized staffing services and, to a lesser extent, computer systems consultants, providers of outsourcing services, and systems integrators. In our Permanent Placement Services group, we compete primarily against local and regional recruiting companies. Many of our current and potential competitors have longer operating histories, significantly greater financial and marketing resources, greater name recognition and a larger installed base of professionals and clients than our company. Our competitors that are smaller companies may be able to respond more quickly to customer requirements. Our competitors that are larger companies than us may be able to devote greater resources to marketing their services. In addition, recently a number of job sites have been established on the Internet. These sites allow professionals to find employment opportunities without using our services, and therefore, demand for our services may decrease. Because there are relatively low barriers to entry, we expect that competition will increase in the future. Increased competition could result in price reductions, reduced margins or loss of market share, any of which could materially and negatively affect our business, operating results and financial condition. We may not be able to compete successfully against current and future competitors, and competitive pressures that we face may have a material negative effect on our business, operating results and financial condition.

We are dependent upon the services of our key personnel.

Our future business and operating results depend in significant part upon the continued contributions of our key employees and senior management personnel, many of whom would be difficult to replace. The loss or temporary absence of any of our senior management, significant sales and sales support employees, other key personnel and, in particular, Brenda C. Rhodes, our Chief Executive Officer, could have a material negative effect on our business, operating results and financial condition.

We could become involved in litigation with our clients and contract professionals regarding intellectual property ownership or performance of our services.

We are exposed to liability with respect to the services our IT and corporate professionals perform while on assignment, such as damages caused by errors of IT professionals, misuse of client proprietary information or theft of client property. We agree to indemnify our clients from these damages. We have purchased insurance coverage to protect us from this liability. However, due to the nature of our assignments, and in particular the access by our IT professionals to client information systems and confidential information, our insurance coverage may not be adequate to cover our potential liability. Additionally, we may not be able to renew our existing insurance on reasonable terms or at adequate levels. We may be exposed to discrimination and harassment claims or other similar claims as a result of inappropriate actions allegedly taken against contract professionals by corporate clients. As an employer, we are also exposed to possible claims of wrongful discharge and violations of immigration laws. Employment related claims might result in negative publicity, litigation and liability for monetary damages and fines. Finally, we engage subcontractors in our business and are therefore exposed to potential claims by the Internal Revenue Service alleging that these subcontractors were our employees.

We generally assign intellectual property ownership to our clients. Issues relating to ownership of and rights to use intellectual property can be complicated. We may become involved in disputes where we could incur substantial costs and diversion of management resources.

A small number of our stockholders can exercise substantial influence over our company.

Our principal stockholders who are associated with the Company, Brenda C. Rhodes and Todd J. Kinion, beneficially owned a total of approximately 11.3% of our outstanding shares of common stock at December 29, 2002. As a result, these stockholders as a group may be able to exercise substantial control over matters requiring

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stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership could have the effect of making it difficult for a third party to acquire control of our company and may discourage third parties from attempting to do so.

Our charter and bylaws may delay or prevent a transaction that our stockholders would view as favorable.

Our charter and bylaws, and Delaware law, contain provisions that could have the effect of delaying, deferring or preventing an unsolicited change in control of our company, which may negatively affect the market price of the common stock or the ability of stockholders to participate in a transaction in which they might otherwise receive a premium for their shares over the then current market price. These provisions also may have the effect of preventing changes in our management. These provisions provide that all stockholder action must be taken at an annual meeting of stockholders, that only our board of directors may call special meetings of the stockholders and that our board of directors be divided into three classes to serve for staggered three-year terms. In addition, our charter authorizes our board of directors to issue up to 10,000,000 shares of preferred stock without stockholder approval on such terms as our board of directors may determine. Although no shares of our preferred stock are outstanding, and we have no plans to issue any shares of preferred stock, the holders of common stock will be subject to, and may be negatively affected by, the right of any preferred stock that may be issued in the future. In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which could have the effect of delaying or preventing a change of control of our company.

Our principal executive offices are currently located in Novato, California and occupy an aggregate of approximately 17,500 square feet of office space as of December 29, 2002, expanded to approximately 20,900 square feet in February 2003 with the consolidation of the OnStaff headquarters, pursuant to a lease that expires in September 2008. After considering the restructuring of March 2003, we also lease or sublease office space for 43 Contract Professional Staffing and 7 Permanent Placement Services sales offices at 46 locations in the United States, London, and Tokyo. In addition, we own a training facility located in Park City, Utah.

We are from time to time engaged in or threatened with litigation in the ordinary course of our business. We are not currently a party to any material litigation.

None.

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PART II

Our common stock is listed for trading on the NASDAQ, National Market System under the symbol HAKI. On March 21, 2003, there were approximately 54 holders of record of the Common Stock.

The table below sets forth the high and low sales prices per share as reported on the NASDAQ (National Market System) for the fiscal years ended December 29, 2002 and December 30, 2001.

The closing sales price of our common stock on NASDAQ on March 26, 2003 was $1.79.

On August 9, 2002, the Company acquired certain net assets and assumed certain liabilities of OnStaff in exchange for $18.1 million in cash and 363,057 shares of Hall Kinion common stock, valued at $2.2 million. The value of the common stock issued was determined based upon the average market price of the Company’s common stock over a 2-day period before and after the August 9, 2002 acquisition.

No cash dividends were paid in 2002, 2001 or 2000. We, as we deem appropriate, may continue to retain all earnings for use in our business or may consider paying a dividend in the future. We cannot currently issue dividends without acquiring prior bank consent.

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The following selected financial data has been derived from the audited Consolidated Financial Statements. The information set forth below is not necessarily indicative of results of future operations and should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and related notes thereto included elsewhere in this Form 10-K.

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The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this report. The discussion in this section contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements. Additional information relating to forward-looking statements is included in this report under the caption “Special Note Regarding Forward-Looking Statements.”

Overview

We source and deliver the most critical component of industry—human capital. As a leading talent source, we provide specialized professionals on a short-term contract and permanent basis. We deliver IT professionals to vendors and users of leading edge technologies, and to vertical markets including government services, banking and finance, medical technology and energy services.

On August 9, 2002, we acquired substantially all the assets of OnStaff, a privately-held group of companies that provides short-term corporate contract and permanent employees in the real estate, finance and healthcare industries. With the acquisition of OnStaff, we expanded our service offerings, increased our offices, and added online recruiting and placement websites. The results of operations for fiscal 2002 include the operations of OnStaff from the beginning of August 2002.

Our Contract Professional Staffing group provides specialized professionals on a short-term contract basis and accounted for 96.0% of our net revenues in 2002, 86.0% in 2001, and 76.0% in 2000. Our Permanent Placement Services group provides specialized professionals on a permanent basis and accounted for 4.0% of our net revenues in 2002, 14.0% in 2001, and 24.0% in 2000.

Our net revenues are derived principally from the hourly billings of our professionals on contract assignments and from fees received for permanent placements. Contract services assignments typically last two to six months, and revenues are recognized as services are provided. We derive contract services revenues when our consultants are working, and therefore our operating results may be adversely affected when client facilities are closed due to holidays or inclement weather. As a result, we typically experience relatively lower net revenues in our first and fourth fiscal quarters. We derive permanent placement revenues upon permanent placement of each professional candidate. The fee is typically structured as a percentage of the placed professional’s first-year annual compensation. Permanent placement revenues are recognized when a professional commences employment or, in the case of retained searches, upon completion of our contractual obligations. Revenue from online recruiting and placement Web sites is recognized over the term of membership. While no one customer represents greater than 5% of our total revenue during the year 2002, we do have a number of larger customers, some of which have issued earnings warnings and delayed a number of their projects.

As a result of the continuing general economic slowdown, we reported a decrease in revenue and gross profit in 2002 as compared to the prior year and recorded a $15.5 million charge for impairment of goodwill (see Note 5 to Consolidated Financial Statements). During 2001, we closed several offices, reduced our workforce, and restructured the organizational management and operations. We continued to decrease, through restructuring or attrition, the number of sales, sales support and administrative employees in 2002 to 384 individuals as of December 29, 2002 from 446 individuals as of December 30, 2001, representing a 13.9% decrease in headcount. The number of revenue producing sales and sales support employees included in the overall headcount decreased to 311 as of December 29, 2002 from 357 as of December 30, 2001, representing a 12.9% decrease. Our Contract Professional employee headcount increased to 2,305 at December 29, 2002 from 833 as of December 30, 2001, an increase of 176.7%, principally in the Corporate Professional Division as a result of the acquisition of OnStaff, offset by a decrease in IT professionals. On March 3, 2003 we announced the restructuring of the Technology Professional Division, resulting in the closure of 13 offices and elimination of 69 jobs. The number

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of sales, sales support and administrative employees after the terminations announced in March 2003 was expected to be 324, which is 15.6% fewer than the number on December 29, 2002 and 27.4% fewer than December 30, 2001.

Operating costs in 2002 were lower than 2001 as a result of the restructuring of operations in 2002 and the impact of 2001 restructuring on 2002 operations. Selling, general and administrative expenses were reduced 51% in 2002 over 2001. Although 2002 results include a charge of $15.5 million for impairment of goodwill, the 2001 results included impairment of goodwill and other intangible assets totaling $26.7 million. However, if the economic conditions in the United States do not improve or if a wider or global economic slowdown occurs, we may continue to experience a material adverse impact on our business, operating results, and financial condition.

Critical Accounting Policies

Allowances for Doubtful Accounts Receivable—We establish allowances for estimated losses resulting from the inability of customers to make required payments based on the aging of our accounts receivable, analysis of specific delinquent accounts, and our historical write-off experience. If the financial condition of our customers were to deteriorate, resulting in their inability to make payments, additional allowances may be required. During 2002, we reported a direct accounts receivable write-off of $1.2 million resulting from bankruptcies, company closures and delinquent accounts. As of December 29, 2002, accounts receivable were $17.8 million, net of allowances of $2.5 million.

Valuation of Net Deferred Tax Assets—As of December 29, 2002, deferred tax assets, net, were $15.0 million, net of a valuation allowance of $6.2 million. The net deferred tax asset consists primarily of net operating loss carryforwards of $8.3 million and temporary differences of $6.7 million. Realization of the loss carry forwards is dependent on generating sufficient taxable income in certain tax jurisdictions prior to expiration of the loss carry forwards. Although realization is not assured, management believes it is more likely than not that such loss carry forwards will be realized. The amount of the loss carryforwards that is considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.

Impairment of Goodwill and Other Identifiable Intangible Assets—As of December 29, 2002, goodwill was $11.8 million and other identifiable intangible assets were $10.9 million. The recoverability of goodwill and other identifiable intangible assets is based on assumptions regarding estimated future cash flows and other factors. If these assumptions and estimates change in the future, additional expense may be recorded to reflect impairment of these assets.

Results of Operations

Fiscal Year Ended December 29, 2002 Compared to Fiscal Year Ended December 30, 2001

Net Revenues.    Net revenues decreased 30.7% to $120.4 million in 2002 from $173.8 million in 2001. Net revenues from our Contract Professional Staffing group decreased 22.7% to $115.6 million in 2002 from $149.5 million in 2001. Contract Professional Staffing revenues in 2002 were comprised of $90.2 million from our Technology Professional Division and $25.4 million from our Corporate Professional Division since its acquisition in August 2002. Net revenues from our Permanent Placement Services group were $4.8 million in 2002 and $24.3 million for 2001, representing a decrease of 80.3%. The decrease in net revenues was due primarily to the continued softening of the technology sector of the economy and slack demand, which resulted in a significant decrease in the number of new IT assignments. Partially offsetting this decline was the acquisition of the OnStaff business, and the increase in real estate related assignments in the Corporate Professional Division fueled by low interest rates and the strong demand for mortgage financing and refinancings. Our revenue producing sales and sales support employee headcount decreased throughout the year to 311 as of the end of 2002 from 357 as of the end of 2001, a 12.9% decrease. Our contract professional headcount increased to 2,305 at the end of 2002 from 833 at the end of 2001, a 176% increase, primarily as a result of acquiring OnStaff.

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Gross Profit.    Gross profit for our Contract Professional Staffing group represents revenues less direct costs of services, which consist of direct payroll, payroll taxes, and insurance and benefit costs for professionals. As there are no direct costs associated with Permanent Placement Services, gross profit for these services is essentially equal to revenues. Gross profit decreased to 33% or $39.7 million in 2002 from 42% or $73.0 million in 2001. The decrease in gross profit was primarily attributable to a decrease in demand for Permanent Placement Services, and to a lesser extent, a decrease in the number and profitability of contract IT assignments, and the lower profitability of OnStaff’s Contract Corporate Professional assignments as compared to gross margins earned on IT assignments. The decrease in the gross margin percentage is also attributable to the decrease in revenues for the Permanent Placement Services group. Revenues for this group, which has a 100% profit margin, decreased from 14% of total revenues in 2001 to 4% in 2002. The gross margin percentage for the remaining Contract Professional Staffing group declined from 32.6% in 2001 to 30.2% in 2002, partially as a result in a decline in the Technology Professional Division gross profit to 31.0% in 2002 and the addition of OnStaff with a lower margin of 27.4% in 2002.

Operating Expenses.    Operating expenses consist of selling, general, and administrative expense (primarily sales, sales support and administrative employee and related facilities costs), impairment and restructuring expenses. Operating expenses decreased 55.3% to $62.9 million in 2002 compared to $140.6 million in 2001. Operating expenses, as a percentage of net revenues, decreased to 52.2% in 2002 from 80.9% in 2001. The lower costs in 2002 resulted primarily from a reduction of $49.4 million or 51.0% in selling, general, and administrative expenses. This decrease was a result of the restructuring of operations in 2001 and 2002, partially offset by the operating costs of OnStaff since its acquisition in August 2002 and the impairment of goodwill. Selling, general, and administrative expenses were reduced to only 39.4% of net revenue in 2002 compared to 55.7% in 2001 even though net revenues were 30.7% lower in 2002. This is in part due to the accounts receivable write-offs of $12.8 million in 2001, of which $10.7 million was considered to be in excess of our historical write-off levels. Impairment of goodwill was $26.7 million in 2001 and $15.5 million in 2002. See Note 5 to Consolidated Financial Statements.

Other Income and Expenses, Net.    In 2002 we reported a net expense of $0.3 million as compared to other income, net of $1.2 million in 2001. The decrease in interest income was due to a decline in investments, cash and cash equivalents that were utilized to fund operations and the decline in interest rates.

Income Tax Benefit (Provision).    In 2002, the effective tax rate was 12.1% as compared to 31.3% in 2001. The 2002 effective rate is lower than the 2001 rate primarily because a valuation allowance of $6.2 million was recorded to reflect the amount of deferred tax assets more likely than not to be realized.

Net Income (Loss).    The net loss for 2002 was $20.6 million compared to a net loss of $45.6 million for 2001. We experienced a net loss in 2002 primarily as a result of the continuing decline in revenues, in both permanent placement and contract services, lower profitability of contract services and the goodwill impairment charge.

Fiscal Year Ended December 30, 2001 Compared to Fiscal Year Ended December 31, 2000

Net Revenues.    Net revenues decreased 41.4% to $173.8 million in 2001 from $296.5 million in 2000. Net revenues from our Contract Professional Staffing group decreased 33.6% to $149.5 million in 2001 from $225.3 million in 2000. Net revenues from our Permanent Placement Services group were $24.3 million in 2001 and $71.2 million in 2000, representing a decrease of 65.8%. The decrease in net revenues in 2001 was due primarily to an economic slowdown. Our revenue producing sales and sales support employee headcount decreased throughout the year to 357 as of the end of 2001 from 788 as of the end of 2000, a 54.7% decrease. Our IT professional headcount decreased to 833 at the end of 2001 from 1,397 at the end of 2000, a 40.4% decrease.

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Gross Profit.    Gross profit for our Contract Professional Staffing group represents revenues less direct costs of services, which consist of direct payroll, payroll taxes, and insurance and benefit costs for contract professionals. Gross profit for our Permanent Placement Services group is essentially equal to revenues as no direct costs are associated with such revenues. Gross profit decreased by 51.0% to $73.0 million for 2001 from $149.0 million for 2000. This decrease was primarily attributable to economic conditions that resulted in a decrease in demand for services, a decrease in the number of assignments, and a slight decrease in average billing rates. Gross profit, as a percentage of net revenues, decreased to 42.0% for 2001 from 50.2% for 2000. This decrease was due primarily to a decline in the percentage of revenues from our Permanent Placement Services group. Gross profit as a percentage of net revenues from the Contract Professional Staffing group decreased slightly to 32.6% for 2001 from 34.5% for 2000. This decrease was primarily due to the economic pressure on pricing in our Contract Professional Staffing group.

Operating Expenses.    Operating expenses consist primarily of employee costs, office leases, depreciation and amortization, advertising and marketing expenses. In 2001, it also included impairment of goodwill and other assets related to acquisitions, restructuring costs, and write-off of accounts receivable in excess of historical write-off levels. Operating expenses increased by 12.0% to $140.6 million for 2001 compared to $125.5 million for 2000. Operating expenses, as a percentage of net revenues, increased to 80.9% for 2001, from 42.3% for 2000. The increases resulted principally from restructuring costs, write-off of impaired goodwill and other assets related to acquisitions, increased bad debt expense, offset by reductions in sales bonuses and commissions and related payroll taxes.

Other Expense.    Interest income decreased to $1.3 million for 2001 from $2.1 million for 2000. This decrease resulted primarily from a decline in cash and equivalents and short term investments utilized to fund operations and lower interest rates. Interest expense decreased to $24,000 for 2001 compared to $361,000 for 2000. The decrease in interest expense reflected the repayment of debt.

Income Taxes.    Our effective income tax rate was 31.3% for 2001 compared to 41.8% for 2000. Our income tax rate varies from period to period due primarily to changes in nondeductible expenses.

Net Income (Loss).    The net loss for 2001 was $45.6 million compared to net income of $14.6 million for 2000. Net income (loss) as a percentage of net revenues was (26.2)% for 2001 compared to 4.9% for 2000.

Liquidity and Capital Resources

We generally fund our operations and working capital needs through cash generated from operations, periodically supplemented by borrowings under our revolving line of credit with a commercial bank. Our operating activities used cash of $3.7 million in 2002, and $3.4 million in 2001, and provided $16.3 million in 2000. The decrease in 2002 operating cash flow was primarily due to funding the working capital for OnStaff operations, partially offset by the refund of income taxes.

Cash used by investing activities in 2002, 2001, and 2000 was $13.4 million, $19.1 million, and $8.0 million, respectively. The principal investing activities for 2002 were the OnStaff acquisition ($19.8 million), the purchase of property and equipment ($1.8 million), partially offset by the maturity of investments ($8.2 million).

Net cash provided by (used in) financing activities in 2002 was $10.1 million in 2002, ($4.7) million in 2001 and $33.2 million in 2000.

On July 12, 2002, the Company entered into an $18.0 million revolving credit facility which was due May 1, 2004. As of December 29, 2002, there was $10 million outstanding on our bank line of credit at an interest rate of 4.25%. The Company was not in compliance with the required financial covenants as of

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December 29, 2002. On February 3, 2003, the bank waived such financial covenant violations. On March 24, 2003, we entered into an amended agreement with the bank which expires January 1, 2004. Significant terms and conditions of the amended agreement are as follows:

The Company has begun to meet and negotiate with other financial lenders in order to secure replacement financing to replace the amended bank agreement. There can be no assurance that the Company will be able to secure replacement financing on substantially similar terms or at all.

At December 29, 2002, cash and cash equivalents were $8.6 million. Management expects that the Company will be able to remain in compliance with the amended financial covenants, and therefore, we believe that our cash balances and available financing will be sufficient to fund our operations and working capital needs and meet our financial obligations through January 1, 2004.

Summary Disclosure about Contractual Obligations and Commercial Commitments

The following table summarizes significant contractual obligations as of December 29, 2002:

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Recently Issued Financial Accounting Standards

In June 2002, SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities was issued. SFAS No. 146 applies to costs associated with an exit activity that does not involve an entity newly acquired in a business combination or with a disposal activity covered by SFAS No. 144. The Company is required to adopt the provisions of SFAS No. 146 for exit or disposal activities, if any, initiated after December 15, 2002. Accordingly, SFAS No. 146 may affect the timing of recognizing future restructuring costs, if any, as well as amounts recognized.

The following discussion about our market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. We are exposed to market risk related to changes in interest rates and foreign currency exchange rates. We do not use derivative financial instruments for speculative purposes.

Interest Rate Risk.    As of December 29, 2002, we had $10.0 million outstanding under the bank line of credit at an interest rate of 4.25%. The credit facility was amended on March 24, 2003 to increase the interest to the lender’s prime rate plus 1.5% (5.75% as of March 24, 2003); to increase to prime plus 3.0% beginning June 15, 2003; and to increase to prime plus 5.0% beginning September 15, 2003. The interest rate will increase or decrease as economic conditions change. An immediate 10% change in interest rates would be immaterial to our financial condition or results of operations.

Foreign Currency Exchange Rate Risk.    The United Kingdom pound is the functional currency of our subsidiary in the United Kingdom and the Japanese yen is the functional currency in our branch office in Japan. We do not currently enter into foreign exchange forward contracts to hedge the balance sheet exposures and intercompany balances against future movements in foreign exchange rates. However, we do maintain cash balances denominated in the United Kingdom pound and Japanese yen. If foreign exchange rates were to weaken against the U.S. dollar immediately and uniformly by 10 percent from the exchange rates at December 29, 2002, the fair value of these foreign currency amounts would decline by an immaterial amount.

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HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

See notes to consolidated financial statements.

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HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

See notes to consolidated financial statements.

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HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)