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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(MARK ONE)

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

OR

FOR THE TRANSITION PERIOD FROM              TO             

COMMISSION FILE NUMBER 0-26058

KFORCE INC.

(Exact name of Registrant as specified in its charter)

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (813) 552-5000

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Common Stock, $0.01 par value

(Title of Class)

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 the 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 126-2).    Yes  x    No  ¨

The aggregate market value of Registrant’s voting and non-voting stock held by nonaffiliates of Registrant, as of June 30, 2003 was $148,515,224.

The number of shares outstanding of Registrant’s Common Stock as of March 10, 2004, was 30,656,588.

DOCUMENTS INCORPORATED BY REFERENCE:

Parts of the Registrant’s definitive proxy statement for the Annual Meeting of the Registrant’s Shareholders to be held on June 15, 2004, are incorporated by reference into Part III of this Form.

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PART I

ITEM 1. BUSINESS

References in this document to “ the Firm,” the Registrant,” “Kforce,” “we,” “our” or “us” refer to Kforce and its subsidiaries, except where the context otherwise requires.

This document contains forward-looking statements, particularly with respect to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MDA”). Additional written or oral forward-looking statements may be made by the Firm from time to time, in filings with the Securities and Exchange Commission (“SEC”) or otherwise. Such forward-looking statements are within the meaning of that term in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements may include, but may not be limited to, projections of revenue, income, losses, cash flows, capital expenditures, plans for future operations, effects of interest rate variations, financing needs or plans, plans relating to products or services of the Firm, estimates concerning the effects of litigation or other disputes, as well as assumptions to any of the foregoing. In addition, when used in this discussion, the words “believe”, “anticipate”, “estimate”, “expect”, “expectation”, “intend”, “plan”, and variations thereof and similar expressions are intended to identify forward-looking statements.

Forward-looking statements are inherently subject to risks and uncertainties, some of which can not be predicted. Future events and actual results could differ materially from those set forth in or underlying the forward-looking statements. Readers are cautioned not to place undue reliance on any forward-looking statements contained in this report, which speak only as of the date of this report. The Firm undertakes no obligation to publicly publish the results of any adjustments to these forward-looking statements that may be made to reflect events on or after the date of this report or to reflect the occurrence of unexpected events.

General

Headquartered in Tampa, Florida, Kforce was formed in August 1994 as a result of the combination of Romac & Associates, Inc. and three of its largest franchises. Following an Initial Public Offering in 1995, Kforce grew to 31 offices in 18 major markets. On April 20, 1998, Kforce consummated a merger whereby Source Services Corporation (“Source”), was merged into Kforce. The acquisition was accounted for using the pooling of interests method of accounting; accordingly, all historical results were restated to reflect the merger. Kforce now operates through 62 locations in 45 markets and serves clients from Fortune 1000 as well as local and regional small to mid-size companies, with our largest ten clients representing approximately 16% of revenue in 2003.

Proposed Merger with Hall, Kinion & Associates, Inc.

The Firm entered into an Agreement and Plan of Merger (the “Merger Agreement”) on December 2, 2003 with Hall, Kinion & Associates, Inc. (“Hall Kinion”). Hall Kinion specializes in providing information technology and finance and accounting related talent on a temporary and permanent basis to its customers primarily in the United States. Hall Kinion’s publicly announced revenues were $33.6 million in the fourth quarter of 2003, and $156.9 million for the full year.

Kforce has notified Hall Kinion that it believes certain conditions exist or will exist that have or will have a material adverse effect on Hall Kinion. Hall Kinion has informed Kforce that it disagrees with Kforce’s position, has suspended Kforce’s access to its personnel and has requested that Kforce’s board of directors confirm its intention to recommend the proposed transaction to the Kforce shareholders. At a March 10, 2004 special meeting of Kforce’s board of directors concerning the transaction, the board considered Hall Kinion’s request, but did not reconfirm its intention to recommend the proposed merger to Kforce shareholders. Accordingly, Kforce believes that there is a great deal of uncertainty relating to the proposed merger and that there can be no assurance that it will be consummated. If a merger does proceed, the terms may be substantially revised.

The closing of the transaction under the current terms of the Merger Agreement is also subject to finalizing the necessary regulatory approvals, obtaining approvals from both firms’ shareholders and compliance with all of the terms in the Merger Agreement. If the proposed merger is consummated, it would be accounted for using the purchase method.

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Kforce has incurred costs associated with this potential transaction that would be included in the purchase price if a merger were to occur. Capitalized costs amounted to approximately $1.5 million at December 31, 2003, and together with such costs incurred during the first quarter, may exceed $2.5 million. Costs that otherwise would have been includable in the purchase price, would be charged to expense in the quarter during which it is determined that a merger is not likely to proceed, if such determination is made. Additionally, as expected, integration planning expenses are being incurred in the first quarter that, together with the potential write-offs described above, could result in aggregate merger-related charges exceeding $3.5 million.

Details of the current terms of the proposed merger with Hall Kinion are included in a Registration Statement on Form S-4 that we filed on December 24, 2003, and amended on February 9, 2004, which should be read in conjunction with this Form 10-K. The Registration Statement on Form S-4 has not been declared effective by the SEC. Readers may obtain access to the Form S-4 and all future amendments through our website, at http://www.kforce.com. In addition, a discussion is included in the MDA herein of the effects of the proposed merger with Hall Kinion on the Firm’s liquidity and capital resources, and certain risk factors related to the proposed merger are included under Risk Factors. Otherwise, the effects of the proposed merger are not addressed in this Form 10-K. There are no assurances that such merger will be consummated.

Industry Overview

The temporary staffing industry has evolved over the past several decades as companies have utilized temporary employees to manage personnel costs, while meeting specialized or fluctuating staffing requirements. The National Association of Temporary and Staffing Services estimated that more than 80% of all U.S. businesses utilize temporary staffing services. Selected industry reports indicate the United States temporary staffing industry contracted from an estimated $80 billion in 2001 to $76 billion in 2002 and grew to $77 billion in 2003. Revenues have been significantly impacted by the economic slowdown. Flexible staffing demand in the information technology and finance and accounting sectors, as well as search placements, have been particularly affected. The health and life sciences sector also experienced slowed growth in 2003. Many competitors are entering the healthcare, pharmaceutical and scientific staffing sectors. Competition in nursing has become particularly intense and may further impact pricing and the ability to attract candidates. Nursing revenue for the Firm continued to erode throughout 2003. Increasing competition and pricing pressure may result in reduced gross margins and lower profitability.

There can be no assurance that customer demand for Kforce’s specialty staffing sectors will return to previous levels or that pricing will return to historical levels. There can be no assurance that the Kforce Health and Life Sciences business segment will be able to access a sufficient candidate pool to service client needs. In addition, a number of national staffing companies are attempting to introduce a lower-priced staffing preferred-vendor model. These factors may impact the future growth and profitability of the Health and Life Sciences division.

We believe, however, that demand for specialty staffing is highly correlated to economic conditions and expect demand to increase with an economic recovery. We also believe that the professional and technical temporary staffing industry offers more opportunity for higher profitability than the clerical and light industrial staffing segments, because of the value-added nature of professional and technical personnel.

Business Strategy

Kforce is a national provider of professional and technical specialty staffing services. Key elements of our business strategy include the following:

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Functional Service Lines

In January 2002, Kforce realigned the organizational structure in its financial and accounting and information technology business units by aligning them along major markets and emerging markets. Kforce believes this major/emerging market operational alignment will develop a more customer centric organization, leverage our best leaders, leverage client relationships across functional offerings and streamline the organization by placing senior management closer to the customer as well as achieve greater cost-efficiency. The Health and Life Sciences segment is organized and managed by specialty.

The functional areas are defined as:

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We have continued to divest non-core businesses and supplement our key business segments. In December 2001, Kforce sold its training business unit resulting in a loss of $4.6 million. Also in December 2001, we sold our legal staffing unit as part of the consideration in acquiring Scientific Staffing, Inc. The legal unit had revenues of $4.8 million in 2001. In the fourth quarter of 2002, we also exited our human resources business, whose operating results are included in the Information Technology business segment. The human resource business had $4.1 million and $12.8 million of revenue in 2002 and 2001, respectively. Kforce also acquired Emergency Response Staffing Inc., a healthcare nurse staffing company with locations in Phoenix, Arizona and San Diego, California, in December 2001. In realigning our operations and divesting the legal, education services and human resources units, we believe we have strengthened our focus on our core specialty staffing business.

Financial information regarding our functional service lines is included in Item 8 of Part II.

Staffing Services

Staffing services are provided to our clients based on an analysis of each client’s individual functional needs, including a determination of time duration of services required. The Firm offers staffing services in two categories: Flexible Staffing Services and Search Services. In 2003, flexible staffing and search services accounted for 93.9% and 6.1% of revenue, respectively.

Flexible Staffing

The Firm offers Flexible Staffing Services, providing personnel in the fields of information technology, finance and accounting, and health and life sciences. Flexible Staffing Services entail placing skilled workers in the client environment on a contractual basis. Assignments typically run from three months to one year in duration. We currently offer Flexible Staffing Services in most large metropolitan market areas.

Search Services

The Firm provides Search Services (permanent placement) for professional and technical personnel in the areas of information technology, finance and accounting, financial services, pharmaceutical research, health care and scientific.

The Firm primarily performs contingency searches. A contingency search results in revenue to the Firm only when personnel are actually hired by a client. Our strategy is to perform contingency searches primarily in our core businesses. Fees are typically structured as a percentage of the placed individual’s first-year annual compensation.

Client searches that are outside a core business area are typically restricted to management or executive level positions and require a targeted research and recruiting effort. The Firm typically performs these searches as retained searches where the client pays a part of the search fee in advance and the remainder upon completion of the search. Retained searches represent only a nominal portion of our search services.

An active database of candidates is maintained as the result of our continuous recruiting efforts and reputation in the industry. In addition, many candidates are located as a result of referrals from the Flexible Staffing Services activities.

The clients targeted for Search Services are typically the same as those targeted for Flexible Staffing Services. This common focus is intended to contribute to the Firm’s objective of providing an integrated solution for our clients’ personnel needs. Search Services have been severely impacted by the economic downturn and continued to deteriorate in 2003. There can be no assurance or expectation that Search Services revenues will return to prior levels.

Technology

Kforce’s nationwide computer, telephony and data communications infrastructure was upgraded in 2003 to take advantage of faster and lower cost devices and services. We believe that these projects improved internal communications and should reduce associated costs.

In 2002, we changed our outsourced data center host. Total costs incurred to change vendors were approximately $2.8 million, including a $2.3 million cancellation fee. The change is

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expected to save $4.3 million annually for each of the next three years. The Firm also implemented an enterprise-wide project management process that we believe has greatly enhanced our ability to plan, implement and align information technology initiatives.

While we believe our technology systems are adequate to meet our current needs, there can be no assurance that they will not be subject to system outages or data loss caused by natural or man-made disaster. In addition, the Firm depends on certain third party vendors whose reliability we can not guarantee going forward. One or more of such events could negatively impact our ability to conduct our normal course of business.

Trademarks

The Kforce trademark, which is registered with the United States Patent and Trademark Office, is important to our business.

Competition

The specialty staffing services industry is very competitive and fragmented. There are relatively few barriers to entry and new competitors frequently enter the market. A number of our competitors have substantially greater resources than those we possess. We face substantial competition from large national firms and local specialty staffing firms. The local firms are typically operator-owned, and each market generally has one or more significant competitors. We also face competition from national clerical and light industrial staffing firms and national and regional accounting firms that also offer certain specialty staffing services. Additionally, there are a number of Internet job boards that are offering traditional staffing services.

In the United States, approximately 100 national competitors operate; and more than 20,000 smaller organizations compete in varying degrees at local levels. Several similar companies – global, national, and local – compete in foreign markets. In 2003, Kforce’s largest competitors were Adecco, S.A., Manpower, Inc., MPS Group, Inc., Robert Half International Inc., Spherion Corporation and CDI Corporation.

The Firm believes that availability and quality of personnel, level of service, effective monitoring of job performance, scope of geographic service and price of service are the principal elements of competition in our industry. We believe that availability of quality personnel is especially important. In order to attract candidates, we place emphasis upon our ability to provide permanent placement opportunities, competitive compensation and benefits, quality and varied assignments and scheduling flexibility. Because personnel pursue other employment opportunities on a regular basis, it is important that we respond to market conditions affecting these individuals. Additionally, in certain markets and in response to economic softening, we have experienced significant pricing pressure from some of our competitors. Although we believe we compete favorably with respect to these factors, we expect competition and pricing pressure to continue, and there can be no assurance that we will remain competitive.

Insurance

The Firm maintains a number of insurance policies including general liability, automobile liability and employers’ liability (each with excess liability coverage). We also maintain workers compensation, fidelity, fiduciary, directors and officers, professional liability, and employment practices liability policies. These policies provide coverage subject to their terms, conditions, limits of liability, and deductibles, for certain liabilities that may arise from the Firm’s operations. There can be no assurance that any of the above coverage will be adequate for our needs, or that we will maintain all such policies in the future.

Financial Information About Foreign and Domestic Operations

Materially all of the Firm’s revenues are derived from domestic operations with customers located in the United States, for the years ended December 31, 2003 and 2002. In 2001, the Firm discontinued operations in its only foreign office, in Canada. Canadian operations contributed revenue of $471,000 for the year ended 2001 and finalized operational expenses in 2002.

Available Information

We make available, free of charge, through the Investor Relations page on our website, and by responding to requests addressed to our Vice President–Investor Relations, the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports. These reports are available as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Our website address is http://www.kforce.com. The information contained on our website, or on other websites linked to our website, is not part of this document.

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Operating Employees and Personnel

As of December 31, 2003, Kforce employed 1,209 operating employees and had approximately 6,450 consultants on assignment (“Flexible Consultants”) providing flexible staffing services to our clients. Flexible Consultants are primarily individuals who are employed directly by Kforce (“Flexible Employees”); the balance are individuals who are employed by other entities (“Independent Contractors”). As the employer, the Firm is responsible for the operating employees’ and Flexible Employees’ payrolls and the employer’s share of applicable social security taxes (FICA), federal and state unemployment taxes, workers compensation insurance, and other direct labor costs relating to our employees. We offer access to various health, life and disability insurance programs and other benefits for operating employees and Flexible Employees. We have no collective bargaining agreements covering any of our operating employees or Flexible Employees, have never experienced any material labor disruption, and are unaware of any current efforts or plans to organize any of our employees.

Risk Factors

The recent economic downturn has adversely affected the demand for the Firm’s services.

Historically, the general level of economic activity has significantly affected the demand for employment services. As economic activity slows, the use of temporary and contract personnel tends to be curtailed before permanent employees are laid off. The current economic downturn has adversely affected the demand for temporary and contract personnel, which in turn has had an adverse effect on our results of operation and financial condition. Additionally, the use of search firms for permanent hires has declined significantly. We expect that future economic downturns will continue to have similar effects. The recent economic downturn resulted in lessened demand for our services. There can be no assurance that demand will remain at current or return to prior levels, and demand may continue to deteriorate.

In 2002 and a substantial portion of 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. This has 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 and 2001, and limited profitability in 2003.

The Firm’s liquidity may be adversely impacted by covenants in our Credit Facility.

On November 3, 2000, the Firm entered into a $90 million Amended and Restated Credit Facility with a syndicate of banks led by Bank of America (“the Credit Facility”). On December 6, 2002, the Firm amended certain terms and conditions of the Credit Facility, and extended its term to November 3, 2005. The Credit Facility provides for a maximum revolving credit facility of $100 million. We believe that the new terms provide a substantial improvement in pricing and flexibility.

The terms of the Credit Facility include certain financial covenants to which the Firm is subject, including a requirement to maintain at least $10 million of borrowing availability. In addition, should the amount available to be borrowed be less than $15 million but greater than $10 million the Firm must attain certain EBITDA targets. As of December 31, 2003, approximately $22 million was outstanding under this Credit Facility with an additional $10.2 million of borrowing available, without triggering the financial covenants and $15.2 million in total availability. At no time during the existence of the Credit Facility have we ever triggered such covenants. If such financial covenants were triggered in the future and if we do not comply with them, such a breach of the Credit Facility could materially adversely affect our liquidity and financial condition. Such lack of compliance could result, among other things, in the acceleration of all amounts borrowed under the Credit Facility. See the Liquidity and Capital Resources section of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The Firm may not be able to recruit and retain qualified personnel.

The Firm depends upon the abilities of its staff to attract and retain personnel, particularly technical and professional personnel, who possess the skills and experience necessary to meet the staffing requirements of our clients. We must continually evaluate and upgrade our base of available qualified personnel to keep pace with changing client needs and emerging technologies. We expect competition for individuals with proven technical or

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professional skills for the foreseeable future. If qualified personnel are not available to us in sufficient numbers and upon economic terms acceptable to us, it could have a material detrimental effect on our business.

The Firm’s current market share may decrease as, a result of limited barriers to entry for new competitors and discontinuation of clients outsourcing of their staffing needs.

The Firm faces significant competition in the markets we serve, and there are limited barriers to entry for new competitors. The competition among staffing services firms is intense. The Firm competes for potential clients with providers of outsourcing services, systems integrators, computer systems consultants, temporary personnel agencies, search firms and other providers of staffing services. A number of our competitors possess substantially greater resources than we do. From time to time we experience significant pressure from our clients to reduce price levels. During these periods, we may face increased competitive pricing pressures and may not be able to recruit the personnel necessary to fill our clients’ needs. We also face the risk that certain of our current and prospective clients will decide to provide similar services internally. There can be no assurance that we will continue to successfully compete.

We do not provide an “offshore” outsourcing solution.

Many staffing customers are now seeking an “offshore” solution to support their technology and business process function and, as a result, a significant amount of technology and financial staffing may be replaced by “offshore” resources. We do not currently provide an “offshore” program and there can be no assurance that we will be able to compete successfully against the “offshore” solution providers or that we will not lose significant market share and revenue.

We rely on short-term contracts with most of our clients.

Because long-term contracts are not a significant part of our business, future results cannot be reliably predicted by considering past trends or extrapolating past results.

Decreases in patient occupancy at healthcare clients’ facilities may adversely affect the profitability of the Firm’s business.

Demand for temporary healthcare staffing services is significantly affected by the general level of patient occupancy at healthcare clients’ facilities. When a hospital’s occupancy increases, temporary employees are often added before full-time employees are hired. As occupancy decreases, clients may reduce their use of temporary employees before undertaking layoffs of their regular employees. The Firm may also experience more competitive pricing pressure during periods of occupancy downturn. This reduction in occupancy could adversely affect the demand for services and the Firm’s profitability. There has been a significantly lessened demand for our healthcare staffing services in recent years. There can be no assurance that such demand will remain at current or return to prior levels.

Competition for acquisition opportunities may restrict The Firm’s future growth by limiting our ability to make acquisitions at reasonable valuations.

The Firm’s business strategy includes increasing market share and presence in the staffing industry through strategic acquisitions of companies that complement or enhance our business. We have historically faced competition for acquisitions. In the future, this could limit our ability to grow through acquisitions or could raise the prices of acquisitions and make them less accretive or possibly non-accretive to us. In addition, the Firm may be limited by its ability to obtain financing to consummate desirable acquisitions.

The Firm may face difficulties integrating acquisitions into existing operations and acquisitions may be unsuccessful, involve significant cash expenditures or expose the Firm to unforeseen liabilities.

The Firm continually evaluates opportunities to acquire staffing companies that complement or enhance our business and frequently have preliminary acquisition discussions with some of these companies.

These acquisitions involve numerous risks, including:

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These acquisitions may also involve significant cash expenditures, debt incurrence, integration expenses and exposure to unforeseen liabilities that could have a material adverse effect on our financial condition and results of operations. Any acquisition may ultimately have a negative impact on our business and financial condition.

The Firm depends on the proper functioning of our information systems.

The Firm is dependent on the proper functioning of information systems in operating its business. Critical information systems are used in every aspect of the Firm’s daily operations, most significantly, in the identification and matching of staffing resources to client assignments and in the customer billing and consultant payment functions. The Firm’s information systems are protected through physical and software safeguards including the use of a third party data processing center. However, the Firm and its systems are still vulnerable to natural disasters, fire, terrorist acts, power loss, telecommunications failures, physical or software break-ins, computer viruses and similar events. If our critical information systems fail or are otherwise unavailable, we would have to accomplish these functions manually, which could temporarily impact our ability to identify business opportunities quickly, to maintain billing and clinical records reliably, and to bill for services efficiently. In addition, we depend on third party vendors for certain functions whose future performance and reliability we can not warranty.

The Firm’s success depends upon retaining the services of its management team.

The Firm is highly dependent on its management team and expects that continued success will depend largely upon their efforts and abilities. The loss of the services of any key executive for any reason could have a material adverse effect upon the Firm. Success also depends upon our ability to identify, develop, and retain qualified operating employees; particularly management, client servicing, and candidate recruiting employees. The Firm expends significant resources in the recruiting and training of its employees, as the pool of available applicants for these positions is limited. The loss of some of our key operating employees could have an adverse effect on our operations, including our ability to establish and maintain client and candidate, professional and technical relationships.

The Firm faces significant employment liability risk.

The Firm employs and places people in the workplaces of other businesses. An inherent risk of such activity includes possible claims of errors and omissions, misuse of client proprietary information, misappropriation of funds, discrimination and harassment, employment of illegal aliens, theft of client property, other criminal activity, torts or other claims. We have policies and guidelines in place to reduce our exposure to such risks. However, failure of any employee or personnel to follow these policies and guidelines may result in: negative publicity; injunctive relief; the payment by the Firm of monetary damages or fines: or other material adverse effects upon our business. Moreover, we could be held responsible for the actions at a workplace of persons not under our immediate control. To reduce our exposure, we maintain insurance covering general liability, workers compensation claims, errors and omissions, and employee theft. Due to the nature of our assignments, in particular, access to client information systems and confidential information, and the potential liability with respect thereto, we may not be able to obtain insurance coverage in amounts adequate to cover any such liability on acceptable terms. In addition, we face various employment-related risks not covered by insurance, such as wage and hour laws and employment tax responsibility.

Significant legal actions, particularly relating to our healthcare staffing services, could subject the Firm to substantial uninsured liabilities.

In recent years, healthcare providers have become subject to an increasing number of legal actions alleging malpractice, product liability or related legal theories. Many of these actions involve large claims and significant defense costs. In addition, we may be subject to claims related to torts or crimes committed by our employees or temporary staffing personnel. In some instances, we are required to indemnify clients against some or all of these risks. A failure of any of our employees or personnel to observe our policies and guidelines intended to reduce these risks, relevant client policies and guidelines or applicable federal, state or local laws, rules and regulations could result in negative publicity, payment of fines or other damages. To protect ourselves from the cost of these claims, we maintain professional malpractice liability insurance and general liability insurance coverage in amounts and with deductibles that we believe are appropriate for our operations. Our insurance coverage, however, may not cover all claims against us or continue to be available to us at a reasonable cost. If we are unable to maintain adequate insurance coverage, we may be exposed to substantial liabilities.

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Currently, the Firm is unable to recruit enough nurses to meet our clients’ demands for nurse staffing services, limiting the potential growth of our healthcare staffing business.

The Firm relies on its ability to attract, develop, and retain nurses and other healthcare personnel who possess the skills, experience and licensure necessary to meet the specified requirements of our healthcare staffing clients. We compete for healthcare staffing personnel with other temporary healthcare staffing companies, as well as actual and potential clients. Currently, there is a shortage of qualified nurses in most areas of the United States and competition for nursing personnel is increasing. At this time, we do not have enough nurses to meet our clients’ demands for our nurse staffing services. This shortage of nurses limits the Firm’s ability to grow our healthcare staffing business. Furthermore, we believe that the aging of the existing nurse population and declining enrollments in nursing schools will result in further competition for qualified nursing personnel.

If the Firm becomes subject to material liabilities under our self-insured programs, our financial results may be adversely affected.

The Firm provides workers compensation coverage through a program that is partially self-insured. In addition, we provide medical coverage to our employees through a partially self-insured preferred provider organization. If we become subject to substantial uninsured workers compensation or medical coverage liabilities, our financial results may be adversely affected.

The Firm may be adversely affected by government regulation of the staffing business.

Our business is subject to regulation and licensing in many states. While we have had no material difficulty complying with regulations in the past, there can be no assurance that we will be able to continue to obtain all necessary licenses or approvals or that the cost of compliance will not prove to be material. If we fail to comply, such failure could materially adversely affect the Firm’s financial results.

The Firm may be adversely affected by government regulation of the workplace.

Part of our business entails employing individuals on a temporary basis and placing such individuals in clients’ workplaces. Increased government regulation of the workplace or of the employer-employee relationship could have a material adverse affect on the Firm.

Adverse results in tax audits could result in significant cash expenditures or exposure to unforeseen liabilities.

The Firm is subject to periodic federal, state and local income tax audits for various tax years. Although the Firm attempts to comply with all taxing authority regulations, adverse findings or assessments made by the taxing authorities as the result of an audit could have a material adverse affect on the Firm.

Future changes in reimbursement trends could hamper our clients’ ability to pay the Firm.

Many of the Firm’s healthcare clients are reimbursed under the federal Medicare program and state Medicaid programs for the services they provide. In recent years, federal and state governments have made significant changes in these programs that have reduced government rates. In addition, insurance companies and managed care organizations seek to control costs by requiring that healthcare providers, such as hospitals, discount their services in exchange for exclusive or preferred participation in their benefit plans. Future federal and state legislation or evolving commercial reimbursement trends may further reduce, or change conditions for, our clients’ reimbursement. Limitations on reimbursement could reduce our clients’ cash flow, hampering their ability to pay us. This situation could have a significant impact on our cash flow.

The Firm’s stock price may be volatile.

The Firm’s common stock is traded on The NASDAQ Stock Market under the symbol “KFRC”. The market price of our stock has fluctuated substantially in the past and could fluctuate substantially in the future, based on a variety of factors, including our operating results, changes in general conditions in the economy, the financial markets, the employment services industry, or other developments affecting us, our clients, or our competitors, some of which may be unrelated to our performance. It is possible that the stock price may reach a level where we lose our eligibility to remain listed on NASDAQ.

In addition, the stock market in general, especially the NASDAQ National Market tier, along with market prices for staffing companies, has experienced volatility that has often been unrelated to the operating performance of these companies. These broad market and industry fluctuations may adversely affect the market price of our common stock, regardless of our operating results.

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Among other things, volatility in our stock price could mean that investors will not be able to sell their shares at or above the prices that they pay. The volatility also could impair our ability in the future to offer common stock as a source of additional capital or as consideration in the acquisition of other businesses.

Significant increases in payroll-related costs could adversely affect the Firm’s business.

The Firm is required to pay a number of federal, state, and local payroll and related costs, including unemployment taxes, workers compensation and insurance, FICA, and Medicare, among others, for our employees and personnel. Significant increases in the effective rates of any payroll-related costs likely would have a material adverse effect upon the Firm. Costs could also increase as a result of health care reforms or the possible imposition of additional requirements and restrictions related to the placement of personnel. Recent federal and state legislative proposals have included provisions extending health insurance benefits to personnel who currently do not receive such benefits. We may not be able to increase the fees charged to our clients in a timely manner and in a sufficient amount to cover increased costs, if any such proposals are adopted.

Provisions in the Firm’s articles and bylaws and under Florida law may have certain anti-takeover effects.

The Firm’s articles of incorporation and bylaws and Florida law contain provisions that may have the effect of inhibiting a non-negotiated merger or other business combination. In particular, our articles of incorporation provide for a staggered board of directors and permit the removal of directors only for cause. Additionally, management may issue up to 15 million shares of preferred stock, and fix the rights and preferences thereof, without a further vote of the shareholders. In addition, certain of our officers and managers have employment agreements containing certain provisions that call for substantial payments to be made to such employees in certain circumstances upon a change in control. Certain of these provisions may discourage a future acquisition of Kforce, including an acquisition in which shareholders might otherwise receive a premium for their shares. As a result, shareholders who might desire to participate in such a transaction may not have the opportunity to do so. Moreover, the existence of these provisions may have a depressive effect on the market price of our common stock.

Risks Relating to the Proposed Merger with Hall Kinion

If the proposed merger is consummated, the Firm may not achieve the benefits expected from the proposed merger with Hall Kinion, which may have a material adverse effect on the combined entity’s business, financial and operating results.

Kforce and Hall Kinion have entered into the merger agreement with the expectation that the proposed merger will result in benefits to the combined entity arising out of the combination of sales and marketing leadership, general and administration functions and facilities plus the elimination of costs relating to Hall Kinion’s status as a public reporting entity. To realize any benefits from the proposed merger, the combined entity will have to adequately respond to the following post-merger challenges:

If the combined entity is not successful in addressing these and other challenges, then the benefits of the proposed merger may not be realized and, as a result, the combined entity’s operating results and the market price of Kforce’s common stock may be adversely affected. These challenges, if not successfully met by the combined entity, could result in possible unanticipated costs, diversion of management attention and loss of personnel. The Firm cannot give assurance that the combined entity will successfully integrate Hall Kinion’s business with Kforce’s, or profitably manage the combined entity. Further, Kforce cannot assure that the growth rate of the combined entity after the proposed merger will equal the historical growth rates experienced by Kforce or Hall Kinion.

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If the costs associated with the proposed merger exceed the benefits, the combined entity may experience an adverse financial result.

Kforce and Hall Kinion have incurred significant transaction costs as a result of the proposed merger, including investment banking, legal and accounting fees, which may exceed current estimates. In addition, it is expected that the combined entity will continue to incur consolidation and integration expenses which they cannot accurately estimate at this time. Actual transaction costs may substantially exceed current estimates and may affect the combined entity’s financial condition and operating results negatively. If the benefits of the proposed merger do not exceed the costs associated with the proposed merger, including any dilution to Kforce’s shareholders resulting from the issuance of shares in connection with the proposed merger, the combined entity’s financial results could be adversely affected.

The market price of Kforce’s common stock may decline if the proposed merger is consummated.

The market price of Kforce’s common stock may decline as a result of the proposed merger for a number of reasons, including if:

Sales of substantial amounts of Kforce common stock in the public market after the proposed merger could materially adversely affect the market price of Kforce common stock.

Kforce expects to issue a significant number of shares of Kforce common stock to Hall Kinion stockholders in the proposed merger dependent on the Kforce stock market value at the time of closing of the proposed merger. The sale of substantial amounts of Kforce common stock may result in significant fluctuations in the price of Kforce common stock and could cause Kforce’s common stock price to fall. The sale of these shares could also impair the combined entity’s ability to raise capital through sales of additional common stock.

Kforce and Hall Kinion may not complete the proposed merger.

Kforce has notified Hall Kinion that it believes certain conditions exist or will exist that have or will have a material adverse effect on Hall Kinion. Hall Kinion has informed Kforce that it disagrees with Kforce’s position, has suspended Kforce’s access to its personnel and has requested that Kforce’s board of directors confirm its intention to recommend the proposed transaction to the Kforce shareholders. At a March 10, 2004 special meeting of Kforce’s board of directors concerning the transaction, the board considered Hall Kinion’s request, but did not reconfirm its intention to recommend the proposed merger to Kforce shareholders. Accordingly, Kforce believes that there is a great deal of uncertainty relating to the proposed merger and that there can be no assurance that it will be consummated. If a merger does proceed, the terms may be substantially revised.

The proposed merger may not be completed unless: (1) Kforce’s Registration Statement on Form S-4 is declared effective by the SEC; and (2) the stockholders of Kforce and Hall Kinion approve the Merger. There can be no assurance that these conditions will be met. Additionally, the Merger Agreement grants to Kforce and Hall Kinion certain rights and imposes obligations, including rights to terminate the Merger Agreement. If we fail to complete the Merger for any reason, we will have made significant expenditures and expended significant management time on an unsuccessful project. Depending upon the circumstances of the termination, we may not be entitled to any “breakup fee” to offset some of these expenditures and under certain circumstances, we might be obligated to pay Hall Kinion a $2.0 million breakup fee.

Uncertainty regarding the proposed merger and the effects of the proposed merger could cause each entity’s customers or strategic partners to delay or defer decisions.

Kforce’s and/or Hall Kinion’s customers and strategic partners, in response to the completion of the proposed merger, may delay or defer decisions regarding the use of the combined entity’s services, which could have a material adverse effect on the business of the combined entity.

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Risks Relating Primarily to the Business and Operations of Kforce following the proposed merger

The current economic downturn has adversely affected the demand for the services of the OnStaff unit of Hall Kinion.

In the real estate services industry served by the OnStaff unit of Hall Kinion, 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 or other economic factors could have a significant negative impact on our business in this field.

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.

The Firm’s 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 2003, we closed and consolidated offices to improve efficiency, and further closures or consolidation may occur depending on market and competitive conditions.

ITEM 2. PROPERTIES

We lease our corporate headquarters in Tampa, Florida, as well as space for our other locations. The aggregate area of office space under leases for locations is approximately 479,884 square feet. Field office leases generally run from month-to-month to five years. In September 2001, we relocated our corporate offices and local branches into a new headquarters in Tampa, Florida, which we have leased for 15 years. The aggregate annual rent expense in 2003 on all properties was approximately $11.6 million. We believe that our facilities will be adequate for our current needs. We own a parcel of vacant land adjacent to the site of our new corporate headquarters for which we have no current plans to develop.

ITEM 3. LEGAL PROCEEDINGS

In the ordinary course of its business, we are, from time to time, threatened with or named as a defendant in various lawsuits, including discrimination claims, restrictive covenant disputes, service related disputes and other claims. We maintain insurance in such amounts and with such coverages and deductibles as management believes are reasonable. The principal risks that we insure against are workers compensation, personal injury, property damage, professional malpractice, errors and omissions, employment practices liability and fidelity losses. We are not aware of any material pending legal proceedings, other then ordinary routine litigation incidental to our business.

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

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2003.

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PART II

ITEM 5. MARKET FOR KFORCE COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

Our common stock trades on the NASDAQ National Market tier of The NASDAQ Stock Market(SM), under the symbol “KFRC”. The following table sets forth, for the periods indicated, the range of high and low closing sale prices for our common stock, as reported on the NASDAQ National Market.

On March 9, 2004 there were approximately 195 holders of record of our common stock.

Dividends

Since our initial public offering, we have not paid any cash dividends on our common stock. We are currently prohibited from making such dividend distributions under the terms of our Credit Facility.

Equity Compensation Plan Information

The following table provides information about our common stock that may be issued upon the exercise of options, warrants, rights and restricted stock under all of our existing equity compensation plans as of December 31, 2003, including the Kforce Inc. Non-Employee Director Stock Option Plan, the Kforce Inc. Stock Incentive Plan, the Kforce Inc. Executive Investment Plan and the Kforce Inc. 1999 Employee Stock Purchase Plan.

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ITEM 6. SELECTED FINANCIAL DATA

The information set forth below is not necessarily indicative of the results of future operations and should be read in conjunction with the Firm’s Consolidated Financial Statements and the related notes thereto incorporated into Item 8 of this report.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (“MDA”)

This MDA should be read in connection with Item 6. Selected Financial Data and Item 8. Financial Statements and Supplemental Data, included in this Form 10-K and, including the Notes to the Consolidated Financial Statements, referred to herein as “Financial Statements.” Also, certain references to particular information in the Financial Statements are made to assist readers.

FORWARD-LOOKING STATEMENTS

This MDA contains forward-looking statements. Additional written or oral forward-looking statements may be made by the Firm from time to time, in filings with the SEC or otherwise. Such forward-looking statements are within the meaning of that term in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements may include, but may not be limited to, projections of revenue, income, losses, cash flows, capital expenditures, plans for future operations, the effects of interest rate variations, financing needs or plans, plans relating to products or services of the Firm, estimates concerning the effects of litigation or other disputes, as well as assumptions to any of the foregoing. In addition, when used in this discussion the words “anticipate”, “estimates”, “expects”, “intends”, “plans”, “believes” and variations thereof and similar expressions are intended to identify forward-looking statements.

Forward-looking statements are inherently subject to risks and uncertainties, some of which can not be predicted. Future events and actual results could differ materially from those set forth in or underlying the forward-looking statements. Readers are cautioned not to place undue reliance on any forward-looking statements contained in this report which speak only as of the date of this report. The Firm undertakes no obligation to publicly publish the results of any adjustments to these forward-looking statements that may be made to reflect events on or after the date of this report or to reflect the occurrence of unexpected events.

OVERVIEW

This overview is intended to assist readers in better understanding this MDA. Part 1, Item 1 of this Form 10-K includes additional information on the Firm’s business.

Who We Are

We are a national provider of professional and technical specialty staffing services. At December 31, 2003, we operated 62 field offices covering 45 markets in 24 states. We provide our clients staffing services through three business segments: Information Technology (“IT”), Finance and Accounting (“FA”), and Health and Life Sciences (“HLS”). Substantially all IT and FA services are sold and delivered through our field offices. The HLS segment includes our Pharmaceutical, Scientific, Healthcare-Nursing (“Nursing”) and Healthcare-Non Nursing (“Med Records”) specialties. The sales and delivery functions of substantial portions of HLS, particularly Pharmaceutical and Med Records, are concentrated in our headquarters, with services being provided for certain clients through our field offices. Our headquarters provides support services to our field offices in areas such as human resources, nationwide recruiting, training, marketing, and national sales initiatives, in addition to the traditional “back office” support services like payroll, billing, accounting, legal and tax, which are highly centralized.

Kforce is focused exclusively on the “staffing” business. Our staffing services include Flexible Staffing Services (“Flex”) and Search Services (“Search”).

Flex

Through Flex, we fulfill clients’ needs for qualified individuals (“consultants”) on a temporary basis with the appropriate skills and experience, which we call “the right match”. To be successful, our employees (“associates”) endeavor to (1) understand the clients’ needs, (2) determine and understand the capabilities of the consultants being recruited, and (3) deliver and manage the client-consultant relationship to the satisfaction of both the clients and the consultants. We deliver consultants who work with our clients. Typically, the better job Kforce and our consultants do, the longer the assignments last and the more often those clients turn to Kforce for additional needs.

The Flex business comprised almost 94% of our 2003 revenues. Flex revenues are driven by hours billed and billing rates. Flex gross profit is determined by deducting consultant pay, benefits and other related costs from Flex revenues. Flex associate commissions, related taxes and other compensation and benefits as well as field management compensation are included in SGA along with administrative and corporate compensation. The Flex business

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model involves attempting to maximize consultant hours and billing rates, while optimizing consultant pay rates and benefit costs and commissions and other compensation and benefits for associates, as well as minimizing the other operating costs necessary to effectively support such activities.

Search

The Search business is a smaller, yet important part of our business that involves locating permanent employees for our clients. We primarily perform searches on a contingency basis, with fees being earned only if personnel are hired by our clients. Fees are typically structured as a percentage of the placed individual’s first-year annual compensation. We recruit permanent employees from our Flex consultant population, from the job boards, and from candidates we identify who are currently employed and not actively seeking another position. Sometimes consultants initially work with clients on a Flex basis and then later are converted into permanent employees, for which we also receive Search fees. There can be no assurance or expectation that Search revenues will increase if economic conditions improve as has been the case in previous economic cycles. Clients and recruits are often targets for both Flex and Search services, and this common focus contributes to our objective of providing integrated solutions for all of our clients’ human capital needs.

Search revenues are driven by placements made and the rates billed, and all Search revenue becomes gross profit. Search associate commissions, compensation and benefits are also included in SGA, because there are no consultant payroll costs associated with the placement.

Our Industry

We serve Fortune 1000 companies, as well as small and mid-size local and regional companies, with our top ten clients representing approximately 16% of 2003 revenues. The specialty staffing industry is made up of thousands of companies, most of which are small local firms providing a limited service offering to a small local client base. We believe Kforce is one of the ten largest specialty staffing firms in the United States, that the ten firms combined have a market share of less than 30% of the applicable market and that no single firm has a larger than 5% market share. Competition in a particular market can come from many different companies, either large or small. We believe, however, that our geographic presence, diversified service offerings within our core businesses, and focus on consistent sales and delivery that is highly disciplined, provide a competitive advantage, particularly with larger clients that have operations in multiple markets.

Our revenues peaked in 2000 and have declined over the past three years. We believe the staffing and permanent placement industry in general, and IT in particular, has seen similar trends. During this period, we have focused on our core businesses, including new initiatives within HLS, because we believe these areas represent potentially some of the fastest growing and sustainable segments in the staffing industry. Also, we believe we have made substantial progress in streamlining operations, centralizing support functions, and disposing of non-core activities. The trends and discussions in this MDA and in the Financial Statements reflect these actions.

We believe 2003 may have been a bottoming-out year for the economy and for the staffing industry. After several false starts, positive signs of increased demand for staffing services began in the latter part of the year. Of course, no predictions can or should be made about the general economy, the staffing industry as a whole, or specialty staffing in particular. We do believe, however, that a sustained economic recovery will stimulate demand for substantial additional U.S. workers, that Flex demand generally increases before demand for permanent placements increases, that our three areas of focus, IT, FA and HLS, will be among the higher growth categories in both the short and long-term, and that, over the long-term, temporary staffing will become a higher percentage of total jobs, particularly in the professional and technical areas. Further, we believe, Kforce’s expense-cutting actions during the economic downturn of 2001-2003, and the recent positive trends in our operating results, demonstrate a strong positioning for success whether the market for our services remains at current levels or enters into a period of significant growth.

Future Growth

Kforce’s growth may be either organic or through acquisition of other entities that enhance or expand our existing businesses. We believe that we are positioned to acquire and integrate other businesses that are strategically beneficial.

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The Firm entered into an Agreement and Plan of Merger (the “Merger Agreement”) on December 2, 2003 with Hall, Kinion & Associates, Inc. (“Hall Kinion”). Hall Kinion specializes in providing information technology and finance and accounting related talent on a temporary and permanent basis to its customers primarily in the United States. Hall Kinion’s publicly announced revenues were $33.6 million in the fourth quarter of 2003, and $156.9 million for the full year.

Kforce has notified Hall Kinion that it believes certain conditions exist or will exist that have or will have a material adverse effect on Hall Kinion. Hall Kinion has informed Kforce that it disagrees with Kforce’s position, has suspended Kforce’s access to its personnel and has requested that Kforce’s board of directors confirm its intention to recommend the proposed transaction to the Kforce shareholders. At a March 10, 2004 special meeting of Kforce’s board of directors concerning the transaction, the board considered Hall Kinion’s request, but did not reconfirm its intention to recommend the proposed merger to Kforce shareholders. Accordingly, Kforce believes that there is a great deal of uncertainty relating to the proposed merger and that there can be no assurance that it will be consummated. If a merger does proceed, the terms may be substantially revised.

The closing of the transaction under the current terms of the Merger Agreement is also subject to finalizing the necessary regulatory approvals, obtaining approvals from both firms’ shareholders and compliance with all of the terms in the Merger Agreement. If the proposed merger is consummated, it would be accounted for using the purchase method.

Kforce has incurred costs associated with this potential transaction that would be included in the purchase price if a merger were to occur. Capitalized costs amounted to approximately $1.5 million at December 31, 2003, and together with such costs incurred during the first quarter, may exceed $2.5 million. Costs that otherwise would have been includable in the purchase price, would be charged to expense in the quarter during which it is determined that a merger is not likely to proceed, if such determination is made. Additionally, as expected, integration planning expenses are being incurred in the first quarter that, together with the potential write-offs described above, could result in aggregate merger-related charges exceeding $3.5 million.

Other than the effect of the proposed merger with Hall Kinion on our liquidity and capital resources, we do not address the effects of the proposed merger in this MDA. Details of the current terms of the proposed merger with Hall Kinion are included in a Registration Statement on Form S-4 that we filed on December 24, 2003, and amended on February 9, 2004, which should be read in conjunction with this Form 10-K. The Registration Statement on Form S-4 has not been declared effective by the SEC. Readers may obtain access to the Form S-4 and all future amendments through our website, at http://www.kforce.com. There are no assurances that such merger will be consummated.

Highlights

The sections that follow this overview discuss and refer to critical accounting estimates and recent pronouncements, the Firm’s results of operations and important aspects of its liquidity and capital resources. Set forth below are what we believe to be important highlights of our operating results and our positioning for the future. Such highlights should be considered in the context of all of the discussions herein and in conjunction with the Financial Statements. We believe such highlights are as follows:

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CRITICAL ACCOUNTING ESTIMATES AND RECENT PRONOUNCEMENTS

The SEC has indicated that “critical accounting estimates” may be material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and due to their material impact on financial condition or operating performance. Readers should also refer to the Summary of Significant Accounting Policies in Note 1 to the Financial Statements for additional information. The following discussion is intended to assist the readers’ understanding of the judgments, accounting estimates, and uncertainties inherent in the more significant of the Firm’s policies.

This section is not intended to be a comprehensive list of all accounting estimates and all accounting policies are not set forth in the Financial Statements. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States of America, with no need for management’s judgment in their application. There are also areas in which management’s estimates and its judgment in selecting any available alternative would not produce a materially different result.

Allowance for Doubtful Accounts and Fallouts

The Firm has established a reserve for estimated credit losses and fallouts on trade receivables based on our past experience and expectations of potential future write-offs, and performs an ongoing analysis of factors including write off trends, changes in economic conditions, and concentration of accounts receivable among clients. The allowance as a percentage of gross accounts receivable was 8.5% as of December 31, 2002 and 8.3% as of December 31, 2003. As of December 31, 2003, no single client has a receivable balance greater than 2.4% of total accounts receivable, and the largest ten clients represent approximately 13.0% of the total accounts receivable balance. The Firm incurred significant write offs of accounts receivable in certain prior years, including $8.1 million in 2001. In 2002, net write-offs were reduced to $1.4 million, and in 2003, there were net write-ons of $0.4 million. We cannot predict that such recent results can be sustained, particularly in a period of revenue growth. Also, it is possible that the write-off results could be materially impacted as the composition of accounts receivable changes over time. This is especially true if the economy deteriorates. We continually review and refine the estimation process to make it as responsive to these changes as possible.

Income Taxes

As described in Note 3 to the Financial Statements, the Firm incurred operating losses for each of the two years ending December, 31, 2002, and, as a result, has significant net operating loss carryforwards (NOLs) for both federal and state income tax purposes. For accounting purposes, the estimated tax effects of such NOLs, plus or net of timing differences, result in current and non-current deferred tax assets. However, a determination must be made that it is “more likely than not” that the NOLs will be utilized for tax purposes, or valuation allowances must be established to offset such assets. At December 31, 2002, a “more likely than not” conclusion could not be reached, and the deferred tax assets were fully reserved. The Firm had net income during 2003, and portions of the deferred tax assets were recognized by reducing such assets and the related valuation allowances by $2.2 million, instead of providing any 2003 income tax expense other than certain state tax expense for which corresponding state tax carryforwards are not available. The Firm does not believe that this one year of net income, in the context of substantial losses over the preceding two years and the corresponding uncertainty of future operating earnings, justifies changing the conclusion reached at December 31, 2002, which change would have the effect of immediately recognizing substantial income tax benefits. Therefore, provisions of income tax expense, that would otherwise be recorded on any income before taxes will continue to be substantially offset.

Goodwill

Kforce conducts an annual assessment of the carrying value of goodwill in accordance with accounting standards first applicable in 2002, when an impairment of $33.8 million was

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recorded and classified as the cumulative effect of a change in accounting principle. The current year assessment found that no impairment existed at December 31, 2003. The annual assessment requires estimates and judgments by management to determine valuations for each “reporting unit”, which for the Firm are IT, FA, and HLS. Although not required, we may use independent outside experts to assist in performing such valuations. An independent expert valuation was performed in 2002, and management followed a similar methodology to reach its conclusion in 2003. To the extent that economic conditions or the actual business activities and prospects of the Firm are materially worse in the future, the carrying value of goodwill assigned to any or all of its reporting units could require material write-downs. The Firm had goodwill of $61.8 million at December 31, 2003 and 2002.

Impairment of Long-Lived Assets

The Firm periodically reviews the carrying value of long-lived assets to determine if impairment has occurred. In the Firm’s case, this primarily relates to fixed assets, capitalized software, and identifiable intangible assets (not goodwill) from acquisitions, which are being depreciated or amortized as described in the Financial Statements and which had net book values at December 31, 2003 of $7.4 million, $0.6 million, and $0.8 million, respectively. Impairment losses, if any, are recorded in the period identified. Significant judgment is required to determine whether or not impairment has occurred. The determination is made by evaluating expected future undiscounted cash flows or the anticipated recoverability of costs incurred and, if necessary, determining the amount of the loss, if any, by evaluating the fair value of the assets. As further described in Note 4 to the Financial Statements, impairment write-offs were $1.6 million in 2002 and $1.3 million in 2001, related to certain internally developed and purchased software. No such write-offs were recorded in 2003. Evaluation of the impairment of long-lived assets requires the exercise of continuing judgment and estimates by management. However, the Firm leases its facilities and most of its equipment, and no internally developed software was capitalized during either 2003 or 2002. Therefore, the relative amounts of such assets subject to this periodic review and estimation process are not expected to increase significantly.

Self-Insurance

The Firm offers employee benefits programs, including workers compensation and health insurance, to eligible employees, for which the Firm is self-insured for a portion of the cost. The Firm retains liability up to $250,000 for each workers compensation claim and up to $150,000 annually for each health insurance claim for which it is not insured. These self-insurance costs are accrued using estimates to approximate the liability for reported claims and claims incurred but not reported. The Firm believes that its estimation processes are adequate and its estimates in these areas have consistently been similar to actual results. However, estimates in this area are highly judgmental and future results could be materially different.

Revenue Recognition

Net service revenues constitute the largest single item in our Financial Statements, though estimates in regard to revenue recognition are not material in nature. Net service revenues consist of Search fees and Flex billings inclusive of billable expenses, net of credits, discounts and fallouts. The Firm recognizes Flex billings based on the hours worked and reported, together with reimbursable expenses, by placed consultants. Search fees are recognized upon placement, net of an allowance for “fallouts”. Fallouts are Search placements that do not complete the applicable contingency period which vary on a contract by contract basis. Contingency periods are typically ninety days or less. The allowance for fallouts is estimated based upon historical activity of Search placements that do not complete the contingency period and expectations of future fallouts, and is included with the allowance for doubtful accounts as a reduction in receivables.

Accrued Commissions

Associates earn commissions as a percentage of actual revenue or gross profit pursuant to a calendar year basis commission plan. For each associate, the amount of commissions paid as a percentage of revenue or gross profit increases as revenue levels increase. For interim periods, the Firm accrues commissions for actual revenue at a percentage equal to the percentage of total expected commissions payable to total revenue for the entire year. In estimating the percentage of expected commissions payable, the Firm uses factors including anticipated write–offs and the revenue anticipated for each associate. To the extent that these estimates differ from the actual results, commissions accrued could be materially different than commissions paid. Because of the calendar year basis of the plans, this estimation process is more significant at interim quarter ends than it is at calendar year end.

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Effects of Recent Accounting Pronouncements

Note 1 to the Financial Statements includes disclosure of recent accounting pronouncements. The effects of SFAS 142 on accounting for goodwill and SFAS 144 on impairment of long-lived assets, both of which were adopted in 2002, are referred to above and in the Financial Statements.

RESULTS OF OPERATIONS

Kforce saw a return to profitability in 2003 despite continuous challenges in the macro-economic environment. As we look forward to 2004, we believe the expected stabilization of the economic outlook will allow for improving trends in the staffing industry and growth opportunities across our business lines in terms of both revenue and profitability. We believe this is particularly true in the Flex component of our revenues, which historically has shown growth during the early stages of an economic recovery. We do not yet foresee accelerated growth in our Search business, though demand appears to have stabilized across all business segments.

We believe that our 2003 results are a validation of the decisions made in 2001 to divest non-core operations and focus our resources on those areas offering the highest potential return. The Flex operations of both the IT and FA business segments showed year-over-year growth. Our HLS business segment had revenue declines, largely as a result of the decline in our Flex Nursing business, despite growth in the segment’s Pharmaceutical business, which is the fastest growing specialty unit in the Firm.

Key components to our success in 2003 were the initiatives undertaken during the last two years to restructure both our back office and field operations. The results of these efforts have increased operating efficiencies, thereby lowering our break-even level and enabling us to be more responsive to our clients. We believe our field operations model, which allows us to deliver our service offerings in a disciplined and consistent manner across all geographies and business lines, as well as our highly centralized back office operations, to be competitive advantages and keys to our future growth and profitability.

The following table sets forth, as a percentage of net service revenues, certain items in our consolidated statements of operations for the indicated years:

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The following table details net service revenues by service offering for each business segment and percentage changes from the prior year.

While quarterly comparisons are not fully discussed herein, certain quarterly revenue trends are referred to in discussing the annual comparisons. This quarterly information is presented only for this purpose.

IT revenue declined slightly in 2003 from 2002 but actually had slight sequential growth for the last two quarters of 2003. FA revenue was slightly improved in 2003, and like IT, had sequential growth in the last two quarters. Our HLS business segment declined in 2003 largely as a result of declines in Nursing and some decline in Med Records and Scientific specialities. We have taken steps to refocus this business on staffing a greater percentage of higher level assignments, such as registered nurses and nurses on longer term contracts, including developing our program for recruiting foreign nurses. We believe this refocus should provide higher margins and more stability in our Nursing business, which had historically been focused almost entirely on per-diem nursing. The decline in Nursing was partially offset by continued growth in our Pharmaceutical business, which grew 28.5% from 2002 to 2003. We continue to expect strong growth from this business, which had revenues of $52.4 million, $40.8 million and $26.5 million in 2003, 2002, and 2001, respectively.

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The sharp reductions in revenue from 2001 to 2002 in IT and FA were primarily the result of the economic recession and resulting decline in both Flex and Search placements made. The net increase in Flex billings for HLS in 2002 is partially attributable to the acquisitions of a Nursing business and a Scientific business in December 2001. These acquisitions contributed an approximate $18.3 million net increase in revenue for 2002.

Flexible Billings. The primary drivers of Flex are the number of hours billed, bill rate per hour and, to a limited degree, the amount of expenses incurred by the Firm that are billable to the client. Generally, a reduction in hours billed relates directly to a deterioration in economic conditions. Essentially, the number of hours billed is a depiction of the number of assignments available requiring temporary staffing personnel.

Changing market share, coupled with overall changes in opportunities as the result of an economic recovery are the main factors in changes in the number of hours billed. The Firm does not believe that reliable information is available to quantify the effects of these factors. Total hours billed decreased 2.9% to 10.6 million hours in 2003 from 10.9 million hours in 2002, although IT hours billed increased substantially and FA hours billed were essentially flat. We believe the significant decrease of 10.3% in 2002 from 2001 was primarily a result of the decline in economic conditions over that period. Flex hours billed, by segment, were as follows:

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Billable expenses increased 6.2% in 2003 to $11.8 million from $11.1 million in 2002 and decreased 10.3% in 2002 from $12.4 million in 2001. The increase in 2003 is attributable primarily to increases in FA and IT segments’ project work. As the economic environment improves, clients’ requests for consultants for longer assignments, which usually involve travel, typically increase. The decrease in 2002 is primarily attributable to a decrease in demand for project type work for the segments. Changes in HLS billed expenses have corresponded with the overall changes in Flex billings for the segment. Flex billable expenses included in revenue by segment were:

Search Fees. The decrease in Search fees is primarily attributable to the continued decrease in the number of placements. Total placements decreased 17.4% to 2,646 in 2003 and decreased 54.0% to 3,203 placements in 2002 from 6,962 in 2001. Decreases of 2.3% in 2003 and 7.5% in 2002 in the average placement fee also contributed to the results. We believe these results are primarily attributable to the generally prevailing unfavorable economic conditions. Search activity has continued to be weak. Search activity historically increases after economic conditions have shown sustained improvement and is strongest during the peak of an economic cycle, although there can be no assurance that this historical trend will be followed in the current cycle.

Gross Profit. Gross profit on Flex billings is determined by deducting the direct cost of services (primarily flexible personnel payroll wages, payroll taxes, payroll-related insurance, and subcontract costs) from net service revenues. Consistent with industry practices, gross profit dollars from search fees are equal to revenues, because there are generally no direct costs associated with such revenues. Gross profit decreased 8.3% to $154.0 million in 2003 and decreased 33.5% to $168.0 million in 2002 from $252.4 million in 2001. Gross profit as a percentage of net service revenues decreased to 31.1% in 2003 compared to 32.7% in 2002 and 38.3% in 2001.

The decreases in gross profit are attributable to both decreases in volume, evidenced by decreases in hours billed for Flex and the number of placements for Search, and margin, which is determined by the bill/pay rate differential for Flex and average placement fee for Search. The decrease in gross profit for Flex from 2002 to 2003 was $6.7 million, of which $3.7 million resulted from a decrease in volume and $3.0 million resulted from a decrease in margin. The decrease in Search gross profit from 2002 to 2003 was $7.3 million, comprised of a $6.4 million decrease in volume and a $900,000 decrease in rate. Flex gross profit declined by $33.6 million from 2001 to 2002 as the result of a $14.9 million decrease in volume and $18.7 million as the result of decreases in bill/pay rate differentials. Search gross profit declined by $50.9 million from 2001 to 2002 as the result of a $43.7 million decrease in volume and a $7.2 million decrease in average placement fee.

Changes in total gross profit percentage by segment are as follows:

Because Search revenue is accounted for as 100% gross profit, changes in the amount of search fees as a percent of total revenue can significantly impact the total gross profit percentage. The decrease in gross profit percentage in 2003 and 2002 as compared to 2001, was primarily the result of a decrease in search fees as a percent of total revenue.

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Gross profit percentage on Flex, most notably in the FA segment, is negatively impacted by customer pressure to reduce bill rates and our inability to lower consultant pay rates in response to customer pressures. Additionally, payroll taxes, specifically unemployment taxes, have risen in recent years and may continue to rise and negatively impact Flex gross profit. Below is a table detailing Flex gross profit percentage by segment.

Selling, General and Administrative Expenses. SGA expenses were $142.9 million, $168.2 million, and $244.8 million in 2003, 2002 and 2001, respectively, decreasing by 15.0% during 2003 and 31.3% during 2002. SGA expenses as a percentage of net service revenues decreased to 28.8% in 2003 and 32.8% in 2002 compared to 37.2% for 2001.

The Firm has substantially restructured both its field and back office operations over the past two years. We believe that these changes not only have had a significant impact on reductions in SGA expenses in 2003 and 2002, but also should allow us to maintain a relatively low level of SGA as a percentage of revenue, as revenues increase. Some of the activities completed over the past two years as a result of restructuring include: (1) the roll-out of a methodology in our field operations to ensure a consistent, disciplined process in the marketing, recruiting and delivery activities; (2) the centralization at headquarters of the primary processing activities such as billing, time entry, credit and collections; (3) the restructuring of compensation plans to more closely align with performance; and (4) the restructuring and consolidation of technology infrastructure, including a new data center host, at significantly more attractive terms. As a result of increased efficiencies achieved by these actions, we believe the back office and other support service costs will increase at a lower rate than our revenues and profit in a growing environment. Additional systems initiatives are being undertaken in 2004 to further automate and integrate processing and support activities, which are expected to make them more efficient to scale, while also enhancing exceptional customer service capabilities. For example, we are acquiring new front-end (“CRM”), time-entry and request for proposal (“RFP”) systems that should be implemented by the end of 2004.

Total commissions, compensation, payroll taxes, and benefits costs were $100.7 million, $105.9 million and $160.1 million in 2003, 2002 and 2001, respectively, which represented 70.4%, 63.0%, and 65.4% of total SGA in 2003, 2002, and 2001, respectively. The guiding principles related to employee compensation include competitive simplified compensation plans that clearly pay for performance and align with the Firm’s objectives. Commissions and related payroll taxes and benefit costs are variable costs driven by revenue and gross profit levels and associate productivity.

In addition to those activities undertaken to improve efficiencies, the Firm has managed its accounts receivable to minimize write-offs. The Firm’s ability to sustain minimum write-offs and maintain DSO at low levels has contributed to its reduction in SGA by reducing bad debt expense to ($394,000) in 2003, and $1.4 million in 2002 from $8.1 million in 2001, even as an appropriate reserve for doubtful accounts has been maintained.

In January 2002, the Firm issued 223,800 shares of restricted stock to certain members of senior management and other employees in exchange for voluntarily reducing their 2002 salary and cash bonus potential. These shares vested over a five year period with an acceleration clause if certain Kforce common stock price thresholds are met. During 2003 and 2002, $221,000 and $212,000, respectively, were charged to compensation expense for the straight-line amortization of vesting over the five year period. On January 5, 2004, Kforce common stock closed at a price level that fully satisfied the acceleration clause for the 2002 shares and all of such restricted stock thereby vested. Because the Firm had been amortizing the value of such restricted stock on a straight line basis over the five year period, and the stock price threshold was not met on or prior to December 31, 2003, the Firm is required to record the unamortized balance of $673,000 as compensation expense in the period when the stock price threshold is achieved, which will be in the first quarter of 2004.

Depreciation and Amortization. Depreciation and amortization expenses were $4.4 million, $9.6 million and $17.3 million in 2003, 2002 and 2001, respectively, representing 54.2% and 44.4% decreases during 2003 and 2002, respectively. Depreciation and amortization expense

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as a percentage of net service revenue decreased to 0.9% in 2003 from 1.9% for 2002 and 2.6% for 2001. Decreases by category of expense, by year, are as follows:

The decrease in expense in 2003 as compared to 2002 and 2001 is primarily due to reductions in software additions capitalized in recent years, the decrease in the amount of owned assets and reductions in debt related amortization. Capitalized software amortization expense has also decreased due to write-offs of obsolete software in 2002. The amount of owned assets has decreased as the result of headcount reductions and the leasing of almost all new technology equipment. Such leases are operating leases, which payments are included in SGA expenses on the statement of operations. The purchases and implementation of the new CRM, time-entry, and RFP software mentioned above, will lead to increases in software amortization in future years. We believe the implementation of this software will enhance efficiency and productivity.

An additional decrease in amortization expense in 2002, as compared to 2001, was due to the discontinuation of the amortization of goodwill in accordance with SFAS 142, which the Firm implemented as of January 1, 2002.

Other Expense. Other expense was $1.2 million in 2003, $3.2 million in 2002 and $4.5 million in 2001. The decrease in other expense from 2001 to 2002 is primarily from the reduction in interest expense to $2.2 million in 2002 from $3.6 million in 2001 due to the reduction in debt outstanding and reductions in the effective interest rate under our Credit Facility. The 2002 to 2003 reduction was primarily from an additional $0.5 million reduction in net interest expense, and a $1.0 million reduction in loss on disposal of assets related to the overall lower level of owned fixed assets and a decrease in disposals related to office consolidations. The interest rate reductions are derived primarily from the reduction in the one month LIBOR rate which is used as the base rate in the credit facility. The average LIBOR rates in 2003, 2002 and 2001 were 1.20%, 1.76% and 3.72%, respectively. Other expense is offset by miscellaneous income of $0.6 million in 2003 consisting primarily of legal and financial settlements and by miscellaneous income of $0.6 million in 2001 consisting of interest income on employee receivables.

Income (Loss) Before Income Taxes and Accounting Change. The income (loss) before income taxes and cumulative effect of change in accounting principle of $5.5 million in 2003, $(13.1) million in 2002 and $(14.2) million in 2001, is primarily the result of changes in net service revenues and gross margin and reduced SGA and other expenses discussed above.

Income Taxes. The income tax provision for 2003 and 2002 was $0.4 million and $0.1 million respectively, and the income tax benefit for 2001 was $2.1 million. The effective tax provision rate for 2003 and 2002 was 6.4% and 0.2%, respectively, and the effective tax benefit rate was 14.7% in 2001. The 2003 effective tax rate of 6.4% is due to the recording of state income tax expense for which no corresponding state tax carryforwards are available. The 2002 effective tax rate of 0.2% was the net result of establishing of a valuation allowance against the deferred tax benefit of 2002 federal and state net operating losses. The income tax benefit in 2001 was due to the net operating losses for those years.

Cumulative Effect of Change in Accounting Principle. The Firm adopted SFAS 142 as of January 1, 2002. SFAS 142 requires goodwill and intangible assets with indefinite useful lives to be tested for impairment on an annual basis. As a result of this impairment test, the Firm recorded an impairment of approximately $33.8 million, consisting of $11.1 million and $22.7 million for the Human Resources and IT units, respectively, which is classified as a cumulative effect of a change in accounting principle for the year ended December 31, 2002. Conditions contributing to the goodwill impairment were negative industry and economic trends which lowered profits and cash flows over the 18 months preceding the recognition of the impairments.

Net Income/Loss. Net income was $5.1 million in 2003 compared to net losses of $47.0 million in 2002 and $12.1 million for 2001, resulting from the net effects of those items discussed above.

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LIQUIDITY AND CAPITAL RESOURCES

Historically, we have financed our operations through cash generated by operating activities and available from revolving credit facilities. As highlighted in the Statements of Cash Flows, the Firm’s liquidity and available capital resources are impacted by four key components: existing cash and equivalents, operating activities, investing activities and financing activities.

Cash and Equivalents

Cash and equivalents totaled $13.7 million at the end of 2003, an increase of $12.6 million from the $1.1 million at year-end 2002 and $13.4 million more than the $0.3 million at year-end 2001. As further described below, during 2003, the Firm generated $13.0 million of cash from operating activities, used $1.0 million of cash in investing activities and generated $0.7 million in financing activities.

Operating Activities

During 2003, cash flow provided by operations was approximately $13.0 million, resulting primarily from net income and non-cash adjustments for depreciation and amortization.

The Firm’s gross accounts receivable were $67.9 million at the end of 2003, which was a $1.0 million decrease from $68.9 million at the end of 2002. If the Firm experiences growth in revenue in 2004, we expect to need to fund increases in accounts receivable. Currently, significant capacity exists for this purpose under the Credit Facility as described below.

At December 31, 2003, the Firm had $28.5 million in positive working capital in addition to its $13.7 million of cash and equivalents. Its current ratio (current assets divided by current liabilities) was 2.1 at the end of 2003 compared to 1.9 at the end of 2002.

Investing Activities

During 2003, cash flow used in investing activities was approximately $1.0 million, resulting primarily from approximately $(0.2) million in proceeds from sale of assets offset by $1.3 million in capital expenditures, consisting primarily of computer hardware and software. The Firm expects capital expenditures to increase in 2004, primarily as the result of plans to purchase and implement new CRM, time-entry, RFP and possibly other software. Anticipated capital expenditures in 2004 are currently expected to be in the $3 million to $4 million range and the Firm believes it has sufficient cash and borrowing capacity to fund these and such other capital expenditures necessary to operate the business.

Financing Activities

For the year 2003, cash flow provided by financing activities was approximately $0.7 million, resulting primarily from the exercise of stock options.

The Firm periodically issues restricted stock as part of compensation plans for certain members of corporate and field management. Details regarding these issuances can be found in Note 11 to the Financial Statements.

Credit Facility

Long-term debt outstanding under the $100 million Amended and Restated Credit Facility with a syndicate of four banks led by Bank of America (“the Credit Facility”) was $22.0 million at the end of 2003 and 2002.

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The Credit Facility, which was amended on December 6, 2002 and terminates November 3, 2005, provides for maximum revolving credit of $100 million (not to exceed 85% of our “Eligible Receivables” as such term is defined in the Credit Facility). Borrowings under the Credit Facility are secured by all of the assets of Kforce and its subsidiaries. Amounts borrowed under the Credit Facility bear interest at rates ranging from Prime to Prime plus 0.75% or LIBOR plus 1.75% to LIBOR plus 3.25%, pursuant to certain financial performance targets as set forth in the Credit Facility. Pricing was fixed for one year at LIBOR plus 2.25%, until December 6, 2003, after which pricing changes quarterly based on the previous four quarters’ performance. The terms of the Credit Facility also include certain financial covenants to which the Firm is subject, including a requirement to maintain at least $10 million of borrowing availability. In addition, should the amount available to be borrowed be less than $15 million but greater than $10 million, the Firm must attain certain EBITDA targets as follows:

Our borrowings as of March 9, 2004 and December 31, 2003 do not exceed the specified amounts at which these financial covenants apply and at no time during the history of the Credit Facility have we triggered such covenants, which increased during the prior periods and are shown to do so in future periods. In addition to the $22 million outstanding, the amounts available under the Credit Facility as of December 31, 2003, and March 9, 2004 were $15.2 million and $25.4 million, respectively. The amounts available without triggering the debt covenants as of December 31, 2003 and March 9, 2004 were approximately $10.2 million and $20.4 million, respectively.

The Credit Facility contains a provision that limits the amount of capital expenditures that Kforce may make in any fiscal year to $6 million. Under the terms of the Credit Facility, we are prohibited from making any dividend distributions.

Our board of directors has authorized the repurchase of up to $115 million of our common stock on the open market, from time to time, depending on market conditions. The Credit Facility contains a provision that allows Kforce to repurchase $25 million of common stock per year. As of December 31, 2003, we had repurchased approximately 19.2 million shares for $104.5 million; therefore, approximately $10.5 million was available under the current board authorization and $25.0 million was available under the current Credit Facility limitations, as of both December 31, 2003 and March 9, 2004. Additional stock repurchases could have a material impact on the cash flow requirements for the next twelve months.

In March, April and May of 2003, we entered into four fixed interest rate swap contracts for a total notional amount of $22 million expiring in March and May of 2005. The contracts, which have been classified as cash flow hedges pursuant to SFAS 133, as amended, effectively convert all of the $22 million of our outstanding debt under the Credit Facility to a fixed rate basis at an annual rate of LIBOR plus an average of 2.25%, thus reducing the impact of interest rate changes on future income.

Contractual Obligations and Commercial Commitments

Summarized below are the Firm’s obligations and commitments to make future payments under lease agreements and debt obligations as of December 31, 2003:

Long-term borrowings represent the amount outstanding on our Credit Facility and bear interest at a fixed rate of approximately 5.0% as the result of the hedges described above. At this level of $22 million of debt and this effective rate of 5.0%, for a period of one year, interest expense would be approximately $1.1 million.

The Firm provides letters of credit to certain vendors in lieu of cash deposits. The Firm currently has letters of credit totaling $3,157 outstanding for facility lease deposits, workers compensation and property insurance obligations.

The Firm committed to purchase CRM software totaling $900,000 as of December 31, 2003 and made a deposit of $525,000 on this software in January 2004.

The Firm has no material, unrecorded commitments, losses, contingencies or guarantees associated with any related parties or unconsolidated entities.

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We believe that existing cash and cash equivalents, cash flow from operations, and borrowings under the Credit Facility will be adequate to meet the capital expenditure and the working capital requirements of current operations for at least the next twelve months. However, deterioration in the business environment and market conditions could negatively impact operating results and liquidity. There is no assurance that, (i) if operations were to deteriorate and additional financing were to become necessary, we will be able to obtain financing in amounts sufficient to meet operating requirements or at terms which are satisfactory and which allow us to remain competitive, or (ii) we will be able to meet the financial covenants contained in the Credit Facility in order to obtain the additional $5 million of capacity. Our expectation that existing resources will fund capital expenditure and working capital requirements is a forward-looking statement that is subject to risks and uncertainties. Actual results could differ from those indicated as a result of a number of factors, including the use of currently available resources for possible acquisitions, including the acquisition of Hall Kinion, and possible additional stock repurchases.

Acquisitions and Divestitures

The Firm made several acquisitions and divestitures in 2001 and 2002 which are discussed in Note 6 to the Financial Statements. In addition, we have executed an Agreement and Plan of Merger with Hall Kinion as discussed below.

Although we expect increases in net service revenues as a result of each acquisition and expect such acquisitions to be accretive, we are unable to predict that there will be any pattern related to costs as a percentage of net service revenues.

Hall Kinion & Associates, Inc.

In the fourth quarter of 2003, the Firm executed the Merger Agreement with Hall Kinion. Under the terms of the agreement, the proposed merger would be accomplished through a stock-for-stock exchange. Under the current terms of the agreement, the Kforce stock to be issued in the proposed merger is estimated between $54.6 million and $74.5 million depending upon the average price of the Firm’s common stock for the 15 trading days ending on and including the third trading day prior to the closing date. As a result of a completion of the proposed merger, the Firm would have cash obligations due at the time of closing of approximately $10.5 million, plus the payoff of all obligations under Hall Kinion’s Credit Facility. The Firm’s borrowing capacity would be increased by eligible receivables acquired. The Firm would have more than sufficient available cash and borrowing capacity under its Credit Facility to complete this transaction.

Kforce has notified Hall Kinion that it believes certain conditions exist or will exist that have or will have a material adverse effect on Hall Kinion. Hall Kinion has informed Kforce that it disagrees with Kforce’s position, has suspended Kforce’s access to its personnel and has requested that Kforce’s board of directors confirm its intention to recommend the proposed transaction to the Kforce shareholders. At a March 10, 2004 special meeting of Kforce’s board of directors concerning the transaction, the board considered Hall Kinion’s request, but did not reconfirm its intention to recommend the proposed merger to Kforce shareholders. Accordingly, Kforce believes that there is a great deal of uncertainty relating to the proposed merger and that there can be no assurance that it will be consummated. If a merger does proceed, the terms may be substantially revised.

Kforce has incurred costs associated with this potential transaction that would be included in the purchase price if a merger were to occur. Capitalized costs amounted to approximately $1.5 million at December 31, 2003, and together with such costs incurred during the first quarter, may exceed $2.5 million. Costs that otherwise would have been includable in the purchase price, would be charged to expense in the quarter during which it is determined that a merger is not likely to proceed, if such determination is made. Additionally, as expected, integration planning expenses are being incurred in the first quarter that, together with the potential write-offs described above, could result in aggregate merger-related charges exceeding $3.5 million.

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Income Tax Audits

We were audited by the U.S. Internal Revenue Service in 2002 for our tax years ending December 31, 1999 and 1998. The audit was concluded with no adverse findings or assessments by the Internal Revenue Service.

We are also periodically subject to state and other local income tax audits for various tax years. During 2003, income tax audits for the states of New York and Connecticut were concluded with no material adverse assessments. At December 31, 2003, the only ongoing audit for which no final determination has been made was being conducted by Commonwealth of Massachusetts. As of March 9, 2003, we do not believe the resolution of the Massachusetts audit will have a material adverse impact on our operations or financial condition.

Registration Statement on Form S-3

On May 24, 2002, the Firm filed a Registration Statement on Form S-3 that allows the issuance of up to $250 million of common stock and other equity and financial instruments for the financing of various corporate activities to potentially include funding for acquisitions and other business expansion opportunities, as well as compensation arrangements. Such filings are referred to as “Shelf Registrations”. No issuance of securities has been made under this registration statement as of December 31, 2003. The Shelf Registration was not used for the shares to be issued in connection with the Hall Kinion merger because Shelf Registrations on Form S-3 are not available for the registration of securities issued in business combination transactions. There is no assurance that the existence of the Shelf Registration will assist the Firm in registering its securities in connection with future efforts to raise capital or for other purposes.

ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Firm is exposed to a variety of risks, including changes in interest rates on borrowings. As of March 9, 2004, the notional value of outstanding interest rate swap agreements of $22 million is equal to the amount outstanding under the Credit Facility. Therefore, changes in interest rates will currently not affect the Firm’s interest expense. The Firm does not engage in trading market risk sensitive instruments for speculative purposes. The Firm believes that effects on it of changes in interest rates are limited and would not have a material impact on its financial position or results of operations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our consolidated financial statements and notes thereto and the report of Deloitte & Touche LLP, our independent auditors, are set forth on the pages indicated in Item 15 and are incorporated into this item by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

ITEM 9a. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation required by Rules 13a-15 and 15d-15 under the Exchange Act (the “Evaluation”), under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15 and 15d-15 under the Exchange Act (“Disclosure Controls”). Based on the Evaluation, our CEO and CFO concluded that, our Disclosure Controls are effective in timely alerting them to material information required to be included in our periodic SEC reports.

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Changes in Internal Controls

There has not been any change in our internal control over financial reporting identified in connection with the Evaluation that occurred during the quarter ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect, those controls.

Limitations on the Effectiveness of Controls

Our management, including our CEO and CFO, does not expect that our Disclosure Controls and internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Firm have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

CEO and CFO Certifications

Exhibits 99.1 and 99.2 are the Certifications of the CEO and the CFO, respectively. The Certifications are required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the “Section 302 Certifications”). This Item of this report, which you are currently reading, is the information concerning the Evaluation referred to in the Section 302 Certifications and this information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF KFORCE

The information required by Item 10 relating to our executive officers and directors is incorporated herein by reference to our definitive proxy statement for the Annual Meeting of Shareholders.

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 relating to executive compensation is incorporated herein by reference to our definitive proxy statement for the Annual Meeting of Shareholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by Item 12 relating to security ownership of certain beneficial owners and management and related stockholders matters is incorporated herein by reference to our definitive proxy statement for the Annual Meeting of Shareholders.

Information regarding equity compensation plans required by this item is included in Item 5 of Part II of this report and is incorporated into this item by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 13 relating to certain relationships and related transactions is incorporated herein by reference to our definitive proxy statement for the Annual Meeting of Shareholders.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by Item 14 relating to executive compensation is incorporated herein by reference to our definitive proxy statement for the Annual Meeting of Shareholders.

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K

1. Financial Statements. The consolidated financial statements, and related notes thereto, of Kforce with the independent auditors’ report thereon are included in Part IV of this report on the pages indicated by the Index to Consolidated Financial Statements and Schedule as presented on page 34 of this report.

2. Consolidated Financial Statement Schedule. The consolidated financial statement schedule of Kforce is included in Part IV of this report on the page indicated by the Index to Consolidated Financial Statements and Schedule as presented on page 34 of this report. The independent auditors’ report as presented on page 35 of this report applies to the consolidated financial statement schedule. This financial statement schedule should be read in conjunction with the consolidated financial statements, and related notes thereto of Kforce.

Schedules not listed in the Index to Consolidated Financial Statements and Schedule have been omitted because they are not applicable, not required, or the information required to be set forth therein is included in the consolidated financial statements or notes thereto.

3. Exhibits. See Item 15(c) below.

On October 29, 2003 we filed a Current Report on Form 8-K in which we disclosed under Items 7 and 12 a press release announcing results for the third quarter of 2003 and the appointment of the Chief Financial Officer.

On December 3, 2003, we filed a Current Report on Form 8-K, in which we disclosed under Item 7 a press release announcing the agreement and plan of merger with Hall, Kinion & Associates, Inc. and a press release commenting on revenue and earnings per share for the fourth quarter of 2003.

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KFORCE INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE