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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

OR

COMMISSION FILE NUMBER 000-22869

HALL, KINION & ASSOCIATES, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (415) 895-2200

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) had been subject to such filing requirements for the past 90 days. Yes  x  No  ¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of May 5, 2003: 12,582,263 shares of common stock.

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HALL, KINION & ASSOCIATES, INC.

FORM 10-Q

INDEX

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HALL, KINION & ASSOCIATES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value amounts)

(Unaudited)

See notes to condensed consolidated financial statements.

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HALL, KINION & ASSOCIATES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

See notes to condensed consolidated financial statements.

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HALL, KINION & ASSOCIATES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

See notes to condensed consolidated financial statements.

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HALL, KINION & ASSOCIATES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation. The condensed consolidated financial statements have been prepared by Hall, Kinion & Associates, Inc. (the Company) pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been condensed or omitted pursuant to SEC rules or regulations; however, the Company believes that the disclosures made are adequate to make the information presented not misleading. You should review these financial statements in conjunction with the financial statements and notes thereto included in the Company’s 10-K for the fiscal year ended December 29, 2002.

The unaudited interim financial information as of March 30, 2003 and for the three months ended March 30, 2003 and March 31, 2002 have been prepared in conformity with GAAP. In the opinion of management, such unaudited information includes all adjustments (consisting of normal recurring accruals plus certain adjustments disclosed in note 5) necessary for a fair presentation of this information. Operating results for the three months ended March 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 28, 2003.

2. Stock Based Compensation. In December 2002, Statement of Financial Accounting Standards (“SFAS”) No. 148, Accounting for Stock-Based Compensation- Transition and Disclosure was issued. This statement amends the previous standard, APB Opinion No. 25, Accounting for Stock-Based Compensation, to provide alternative methods of transition for an entity that voluntarily changes to a fair value based method of accounting for stock-based employee compensation and amends disclosure provisions of that standard to require prominent disclosure about the effects on reported net income of an entity’s accounting policy decisions with respect to such compensation. The Company intends to continue to account for stock-based compensation in accordance with APB Opinion No. 25 and will provide the prominent disclosures required.

At March 30, 2003, the Company had three stock-based employee compensation plans, all of which it accounts for under APB Opinion No. 25 and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation (in thousands except per share amounts):

3. Cash Overdraft. The Company’s banking arrangement requires that all cash deposits received through its lockbox be applied to reduce the outstanding balance on the bank line of credit. The Company then draws against the available line of credit the estimated amount required for operations. As of March 30, 2003, the Company had $2,231,000 of outstanding checks in excess of cash on deposit at the bank on which the checks were drawn and had adequate cash and line of credit availability to cover the obligations. The cash overdraft of $2,231,000 is included in accounts payable at March 30, 2003. There was no cash overdraft as of December 29, 2002.

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4. Restricted Cash. Approximately $949,000 of cash restricted to cover outstanding letters of credit related to leases and self-insurance programs is reflected on the condensed consolidated balance sheet as of March 30, 2003 under deferred income taxes and other assets.

5. Restructuring Costs. During the quarter ended March 30, 2003, the Company closed 13 offices and terminated 69 employees and recorded a restructuring charge of $2,261,000.

In April 2003 the Company closed its London office and expects to record a charge of $300,000 to $700,000 for lease termination and severance costs in the second quarter of 2003. The remaining accrued restructuring costs are anticipated to be paid out during fiscal year 2003, except for the rental payments related to long-term facility leases that require settlement in 2004 and beyond and are reserved as non-current restructuring costs.

The total and remaining reserve for restructuring costs as of March 30, 2003 is as follows:

6. Net Loss per Share. Basic net loss per share is calculated using only the weighted average number of common shares outstanding. Diluted net loss per share also includes in the calculation the dilution that could occur if convertible securities and contracts to issue common stock were converted or exercised. In calculating the net loss per share for the three months ended March 30, 2003 and March 31, 2002, 42,000 and 136,000 options, respectively, were excluded because they are antidilutive.

A reconciliation of basic weighted average common shares to diluted weighted average common shares follows (in thousands):

7. Comprehensive Loss. SFAS No. 130, Reporting Comprehensive Income, requires reporting by major components and as a single total, the change in the Company’s net assets during the period from nonowner sources. For the three months ended March 30, 2003 and March 31, 2002, the change in net assets from nonowner sources was $0 and $1,000, respectively, for the change in the accumulated translation adjustment and other comprehensive loss, and the comprehensive loss was $4,058,000 and $2,379,000, respectively.

8. Acquisition of OnStaff. On August 9, 2002, the Company acquired certain net assets and assumed certain liabilities of OnStaff, a privately-held group of companies that provides temporary and full-time employees in the real estate, finance and healthcare industries. In addition to the purchase price of $22.1 million, the Company agreed to pay OnStaff up to $13.0 million over three years contingent upon the achievement of certain milestones.

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The following pro forma information is based upon the historical results of the Company and OnStaff as if the acquisition had occurred on January 1, 2002:

9. Business Segment Reporting. The Company’s operations are divided into two business segments, Contract Professional Staffing and Permanent Placement Services. The Contract Professional Staffing segment provides temporary staffing to clients on a contract basis. The cost of revenues for this segment is the salaries, employment taxes and other direct labor costs for the contracted employees. The Permanent Placement Services segment recruits and delivers professionals for direct hire by our clients. This segment has no cost of revenues; all expenses are included in operating costs. Management evaluates segment performance based primarily on segment revenues, cost of revenue, and gross profit. The Company does not segregate its assets by business segments. Results of operations by business segments are as follows:

10. Amendment to Bank Line of Credit. On March 24, 2003, the Company entered into an amended agreement with the bank that 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.

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Some of the statements under Management’s Discussion and Analysis of Financial Condition and Results of Operations 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. See Managements’ Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for information regarding critical accounting policies and estimates.

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.

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 primarily to information technology (IT) clients in IT and other industries and to the real estate and healthcare industries. As of March 30, 2003, we had 56 offices in 50 locations. Our Contract Services group provides specialized corporate professionals on a short-term contract basis and accounted for 97.1% of our net revenues for the three months ended March 30, 2003 and 94.5% for the three months ended March 31, 2002. Our Permanent Placement Services group provides specialized IT and other professionals on a permanent basis and accounted for 2.9% of our net revenues for the three months ended March 30, 2003 and 5.5% for the three months ended March 31, 2002.

Our net revenues are derived principally from the hourly billings of our corporate professionals on contract assignments and from fees received for permanent placements. Contract services assignments typically last four 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 quarter compared to our other fiscal quarters. We derive permanent placement revenues upon permanent placement of each corporate 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 corporate professional commences employment or, in the case of retained searches, upon completion of our contractual obligations. We have a broad client base and no single customer provided more than 5% of total revenue during the quarter ended March 30, 2003.

Primarily as a result of the acquisition of OnStaff in August 2002, we reported an increase in revenue and gross profit in the first quarter of 2003. Net revenues increased to $39.0 million for the three months ended March 30, 2003 from $24.5 million for the three months ended March 31, 2002, representing a 59.3% increase. OnStaff contributed $17.4 million of the revenue in the first quarter of 2003. The number of contract employees placed with our clients increased 214%, from 850 as of March 31, 2002 to 2,675 as of March 30, 2003. The latter included 1,883 placed through OnStaff. The higher revenue and increase in

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contract employees was obtained and serviced while reducing sales, sales support, and administrative staffing 6.8%. Our revenue producing sales and sales support personnel decreased 11.5% from 279 as of March 31, 2002 to 247 as of March 30, 2003, partially offset by an increase of 14.8% in administrative employees from 61 to 70 as of the same date.

Results of Operations for the Three Months Ended March 30, 2003 and March 31, 2002

Net Revenues

Net revenues increased 59.2% to $39.0 million for the three months ended March 30, 2003 from $24.5 million for the three months ended March 31, 2002. Net revenues from our Contract Services group increased 64.1% to $37.9 million for the three months ended March 30, 2003 from $23.1 million for the three months ended March 31, 2002. Net revenues from our Permanent Placement Services group were $1.1 million for the three months ended March 30, 2003 and $1.4 million for the three months ended March 31, 2002, representing a decrease of 21.4%. The increase in net revenues was due primarily to the acquisition of OnStaff in August 2002.

Gross Profit

Gross profit for our Contract Services group represents revenues less direct costs of services, which consist of direct payroll, payroll taxes, and insurance and benefit costs for IT and corporate professionals. Gross profit for our Permanent Placement Services group is essentially equal to revenues, since there are no direct costs associated with such revenues. Gross profit was $11.4 million or 29.2% of net revenue for the three months ended March 30, 2003 compared to $8.3 million or 34.0% for the three months ended March 31, 2002. The gross margin decreased as a result of the lower margins on the new OnStaff business, the lower percentage of business in high margin Permanent Placement Services, and lower margins for the continuing Contract Services business, with the latter two attributed primarily to the current economic conditions and their impact on business spending and the resulting competitive pressures in the staffing industry.

Operating Expenses

Operating expenses consist primarily of employee and facilities costs. Operating expenses were $15.3 million for the three months ended March 30, 2003 compared to $12.5 million for the three months ended March 31, 2002. Operating expenses increased $2.8 million or 22.5% over the same quarter last year primarily as a result of restructuring expenses of $2.3 million recorded this year (versus none in the same quarter last year) and the addition of OnStaff operating expenses of $3.2 million, partially offset by reductions this quarter compared to the same quarter last year of $2.0 million in staffing costs and $0.9 million in facility costs for operations excluding OnStaff. The 2003 restructuring charge related to the closure of 13 offices and termination of 69 employees. Operating expenses as a percentage of net revenues decreased to 39.3% for the three months ended March 30, 2003 from 51.1% for the three months ended March 31, 2002. Excluding the restructuring charge this quarter, operating expenses were 33.5% of net revenue.

Interest/Other Income/Expense, Net

Interest/other income/expense, net was a net expense of $118,000 for the three months ended March 30, 2003 compared to a net income of $167,000 for the three months ended March 31, 2002. Primarily as a result of cash and credit used to fund the purchase of OnStaff and its working capital, interest income this quarter was $143,000 less than the same quarter last year and interest expenses were $99,000 higher.

Income Taxes

No income tax benefit was recorded in the quarter ended March 30, 2003. The Company recorded a 100% valuation allowance against the income tax benefit due to the uncertainty of realizing such net operating loss carryforwards. Management currently expects to record no income tax benefit or provision for the fiscal year ending December 28, 2003. The effective tax rate for the three months ended March 31, 2002 was 40.7%.

Net Loss

The net loss increased to $4.1 million for the three months ended March 30, 2003 compared to $2.4 million for the three months ended March 31, 2002. We experienced a net loss this quarter primarily due to lower gross margins attributed to current economic conditions and the restructuring charge of $2.3 million this quarter.

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LIQUIDITY AND CAPITAL RESOURCES

Historically, we have funded 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 $8.2 million for the three months ended March 30, 2003 compared to providing $2.7 million for the three months ended March 31, 2002. The use of funds this quarter is primarily attributable to funding the net loss of $4.1 million and an increase in accounts receivable of $4.0 million primarily due to our OnStaff business. The decrease in operating cash flow compared to the three months ended March 31, 2002 is primarily due to that quarter including $5.7 million in tax refunds.

The principal use of cash by investing activities for the three months ended March 30, 2003 was $150,000 for software licenses and implementation services.

The principal source of cash provided by financing activities for the three months ended March 30, 2003 was $2.2 million in cash overdrafts that represents net checks outstanding at one bank. The Company’s banking arrangement requires that all cash deposits received through its lockbox be applied to reduce the outstanding balance on the bank line of credit. The Company then draws against the available line of credit the estimated amount required for operations. As of March 30, 2003, the Company had had adequate cash and line of credit availability to cover the outstanding checks. There was no cash overdraft as of March 31, 2002.

On March 24, 2003, we entered into an amended agreement with the bank that 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 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 March 30, 2002, cash and cash equivalents were $867,000, cash overdrafts were $2.3 million, and $8.8 million was outstanding on the line of credit. Currently, cash proceeds are paid into a lockbox and used to reduce outstanding borrowing. Assuming timely collection of receivables and continued compliance with covenants contained in the Company’s loan agreement, the Company expects to be able to fund current operations from cash flow from operations and its existing credit facility for the remainder of 2003. However, if the Company is unable to replace its current facility with a comparable arrangement, it could have a material adverse effect on the Company’s liquidity.

The Company implemented an involuntary decrease in base salary for certain members of its senior management during the quarter ended March 30, 2003, in order to reduce monthly cash outflows and compensation expense. The actual amount of reduction in annual salaries ranged from 5% to 25% and totaled $315,000. In lieu of the foregone cash compensation, the Company provided option grants, covering a total of 363,971 shares of common stock at $1.30 per share, the fair market value at the date of grant. Options shall ratably vest one-third on each successive anniversary of the grant date for a 3-year period; provided, however, vesting in the following amounts is accelerated to the date on which the Company’s common stock price trades for five consecutive trading days at or above the following prices:

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Notwithstanding anything to the contrary contained above, in the event of any transaction that may constitute a change-in-control of the Company, vesting of all such unvested options shall accelerate to the date of the consummation of such transaction.

Item 4. Controls and Procedures

Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14.

Disclosure controls are procedures designed with the objective of ensuring that information we are required to disclose in our periodic reports filed with the Securities and Exchange Commission (“SEC”) is recorded, processed, summarized and reported timely. Disclosure controls also are designed with the objective of insuring that such information is communicated to our management, as appropriate, to allow timely judgments concerning required disclosure. Internal controls are procedures designed with the objective of providing reasonable assurance that (i) transactions are properly authorized; (ii) assets are safeguarded against unauthorized or improper use and (iii) transactions are properly recorded and reported, in order to permit the preparation of our financial statements in accordance with generally accepted accounting principles.

The evaluation of our disclosure controls and internal controls included a review of the design and objectives and implementation throughout the Company. Our management seeks to identify errors, control problems or instances of fraud and to confirm that appropriate corrective action is implemented as appropriate. Our internal controls are also reviewed on an ongoing basis by senior management and our independent auditors, in connection with their audit and review activities.

In accordance with SEC requirements, the Chief Executive Officer and the Chief Financial Officer advised the Company that, since the date of their evaluation, there have been no significant changes in internal controls or other factors that could significantly affect the internal controls.

Based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls are effective to ensure that material information relating to the Company and its subsidiaries is communicated to management, and that the Company’s internal controls are effective to provide reasonable assurance that our financial statements are fairly presented in accordance with generally accepted accounting principles.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:

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(b) Reports on Form 8-K .

On January 15, 2003, we filed a Form 8-K announcing preliminary financial results for the year and quarter ended December 29, 2002.

On February 4, 2003 we filed a Form 8-K announcing the financial results for the year and quarter ended December 29, 2002.

On March 4, 2003 we filed a Form 8-K announcing the restructure of our Technology Division.

On April 1, 2003 we filed a Form 8-K announcing a revision to our financial results for the year and quarter ended December 29, 2002.

On April 29, 2003 we filed a Form 8-K announcing financial results for the first quarter ending March 30, 2003.

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SIGNATURES

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

Date: May 12, 2003

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CERTIFICATIONS

I, Brenda C. Rhodes, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Hall, Kinion & Associates;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 12, 2003

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I, Martin A. Kropelnicki, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Hall, Kinion & Associates;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 12, 2003

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