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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTIONS 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

For the fiscal year ended December 28, 2003

OR

For the transition period from                      to                     

Commission file number 000-22869

HALL, KINION & ASSOCIATES, INC.

(Exact name of registrant as specified in its charter)

75 Rowland Way, Suite 200, Novato, CA 94945

(Address of principal executive offices)

(415) 895-2200

(Registrant’s telephone number, including area code)

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

None

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

Common Stock, $0.001 par value per share

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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

The aggregate market value of the 6,654,172 shares of voting Common Stock held by non-affiliates of the registrant, computed by reference to the closing price as reported on the NASDAQ National Market system, as of the last business day of the registrant’s second quarter ended June 29, 2003, was approximately $17.4 million. The registrant has no non-voting common equity. As of March 24, 2004, the total number of outstanding shares was 12,590,733.

Portions of the registrant’s Proxy Statement for the annual meeting of stockholders to be held on May 26, 2004 are incorporated by reference in Part III.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

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

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PART I

Item 1.    Business

Overview of the Company

We source and deliver the most critical component of industry—human capital. As a leading talent source, we provide specialized professionals on a short-term contract and permanent basis. We deliver information technology (“IT”) professionals to vendors and users of leading edge technologies, and to certain vertical markets, including government services, banking and finance, healthcare and energy services. Through our subsidiary, OnStaff, we deliver specialty corporate professionals at all levels to the Title, Escrow, Mortgage, Financial Services and Healthcare industries.

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

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

Proposed Merger with Kforce.    On December 2, 2003, Kforce Inc. (“Kforce”) and the Company announced the execution of an Agreement and Plan of Merger. Under the terms of the merger agreement, Kforce will acquire all of the shares of the Company in exchange for shares of Kforce common stock. The definitive exchange ratio is dependent upon the average of the closing prices of Kforce common stock for the 15 consecutive trading days ending on and including the third trading day prior to the closing date (such average is referenced herein as the “Kforce stock market value”). Kforce may elect to terminate the merger agreement if the Kforce average closing stock price remains below $6.00 for 15 consecutive trading days at any time prior to the closing. The proposed transaction requires and is subject to the approval by both Kforce’s shareholders and the stockholders of the Company and other customary closing and regulatory conditions.

On March 11, 2004 Kforce released their annual report on Form 10-K which included statements that they believe certain conditions exist or will exist in the future that have or will have a material adverse effect on Hall Kinion, that Kforce Board of Directors is unwilling to reconfirm their parent recommendation for the proposed merger and that the outcome of the merger is uncertain. Hall Kinion issued a press release that day indicating that the Company believes that no conditions exist which would permit Kforce to terminate the merger, that discussions with Kforce were continuing, and that the Company would take all steps necessary to protect its rights under the merger agreement. As of the date of this filing, discussions with Kforce are continuing regarding the status of the merger.

Details of the terms of the merger with Kforce are described in a registration statement on Form S-4 filed by Kforce on December 24, 2003 and amended on February 9, 2004, which includes a preliminary proxy statement of Hall Kinion related to the merger. The registration statement has not been declared effective by the Securities and Exchange Commission and may not include current details relating to the merger. Access to the Form S-4 and any future amendments may be obtained through the Kforce Web Site (www.kforce.com) or through the public files of the Securities and Exchange Commission. Readers are encouraged to review the Form S-4 in connection with a review of this Form 10-K as both the consummation of the merger or a termination of the merger would have a significant financial effect on Hall Kinion. No assurance can be given that the merger will be completed on its original terms or at all.

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Results of Operations in 2003 and Management’s Plans for 2004.    During 2003, 2002 and 2001, the Company generated net losses of $18.6 million, $20.6 million and $45.6 million, respectively, as a result of the downturn in the economy and decreased demand for Technology Professional Services. In the fourth quarter of fiscal 2003, the Company also experienced a significant decline in demand for Corporate Professional Services provided by OnStaff in the mortgage and financing industry. The Company may continue to experience losses and negative cash flows from operations in 2004.

The Company entered into an agreement dated June 13, 2003 with CIT Business Credit for a new three-year renewable credit facility of $16.0 million that replaced an existing credit facility of $12.0 million and is used primarily to fund operations. Significant terms and conditions of the agreement, as amended, are described under “Liquidity and Capital Resources”. Hall Kinion was in compliance with its loan covenants and terms as of December 28, 2003; however, the Company was not in compliance with one of the financial covenants as of the end of January 2004 and February 2004. On March 1, 2004, CIT Business Credit waived compliance with this covenant for January 2004 and February 2004.

On March 25, 2004, Brenda C. Rhodes, the Chief Executive Officer and Chairman of the Board, and Todd Kinion, a director, agreed to provide irrevocable letters of credit totaling $5 million to the lender and CIT Business Credit agreed to increase availability under the line by $5 million. The lender has agreed to execute an amendment to the credit facility to increase the availability under the line, to replace the original loan covenants with a covenant requiring the Company to maintain certain reserves plus unrestricted cash of not less than $2 million at all times and to require CIT Business Credit’s approval for payment of the OnStaff earnout obligation. As a result, management believes that the Company will remain in compliance with the terms and covenants of its loan agreement, as revised, through at least December 31, 2004. If the Company fails to stay in compliance with the loan covenant and terms and if a waiver cannot be obtained, CIT Business Credit could terminate the line of credit and demand immediate repayment of all outstanding borrowings.

Hall Kinion agreed to pay to Ms. Rhodes and Mr. Kinion an aggregate fee of $200,000 for providing the letters of credit, plus reimbursement of any costs incurred and reimbursement of any amounts drawn under the letters of credit.

In November 2003, Hall Kinion negotiated a settlement with OnStaff’s former owners that included a deferral of the 2003 earnout payment of $4.1 million from its due date of February 15, 2004. Under 10% note agreements, beginning May 15, 2004, the principal will be payable in four equal quarterly installments of $1.0 million and interest is due monthly (see Note 4 to the Consolidated Financial Statements). If the merger with Kforce is completed, the notes are due in full shortly after closing of the merger, or if the merger has not been completed before May 15, 2004, the notes are due in installments as scheduled. If the merger is not completed by May 15, 2004 and if CIT Business Credit does not consent to the payment of the first installment, the former owners of OnStaff may declare the entire amount due and payable and will be relieved of their non-solicitation and non-compete agreements. No assurance can be given as to the whether CIT Business Credit will permit the payment of the first installment of the earnout payment on May 15, 2004, if the merger is not consummated by then.

In response to these liquidity issues, the Company instituted and continues to pursue initiatives intended to increase revenues, decrease operating costs, improve liquidity, enhance margins and better position it to compete under current market conditions. Management believes that the Company’s cash, cash flow from operations and borrowing availability will be sufficient to enable it to meet its financial obligations and sustain its operations through at least December 31, 2004.

Company Goals

The Company has three major performance goals designed to enhance stockholder value: grow the business, provide high quality services to our clients, and achieve maximum operating efficiency. Our demonstrated ability

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to deliver quality professionals to our clients, to motivate and support our sales force, and to employ efficient business processes are the principal elements in achieving these goals.

Growth Strategy

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

Quality Program

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

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Achieve Maximum Operating Efficiency

In 2003, we integrated OnStaff’s Corporate Professional Services operations and continued to focus on cost reductions. The OnStaff headquarters in Burbank, California were closed on February 15, 2003 and administrative and accounting activities were transferred to Hall Kinion’s corporate headquarters in Novato, California. During the year, we announced the restructuring of the Technology Division, the reduction in sales, sales support, and administrative staffing, management positions and the closure of unprofitable offices. We believe the benefit of the integration and restructurings will be realized in 2004 and beyond. We continue to pursue opportunities to streamline operations, automate processes using new technologies and other techniques to achieve maximum operating efficiency.

Overview of Business Segments

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

Information concerning revenues and segment profitability is included in Note 15 to Consolidated Financial Statements.

Contract Professional Staffing

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

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

As of December 28, 2003, we had 1,777 contract professionals providing services for our clients and 154 sales and sales support employees, including branch managers and sales vice presidents, whose primary role is the rapid delivery of highly qualified professionals to our clients.

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Business Divisions

Technology Professional Division—Hall Kinion primarily provides IT professionals to our clients. We started Hall Kinion in Silicon Valley and expanded to the Silicon Valleys of the world. We believe that our competitive advantage is our ability to successfully recruit and retain the best and brightest IT professionals. Our IT professionals offer our clients leading edge technology skills and our clients offer our professionals the opportunity to work on leading edge assignments. In 2003 we experienced the continued softness 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.

Corporate Professional Division—OnStaff provides contract services primarily to the real estate and healthcare industries. In the real estate industry, it is a leading provider of staffing in the title, escrow, and mortgage lending fields. We focus on providing knowledgeable staff with first-hand experience in these industries. In the healthcare industry, we provide experienced professional staff to healthcare institutions for administrative and operational positions. In the real estate services industry we serve, the demand for professional personnel is strongly influenced by the volume of mortgage financing, both for new units and re-financings. The volume is very sensitive to interest rates and other general economic conditions. Increases in interest rates could have a significant negative impact on our business in this field. In the fourth quarter of 2003, there was a significant decline in demand for Corporate Professional Services in the mortgage and financing industry provided by OnStaff.

Clients

Our contract staffing business focuses on companies requiring the professional skills in the markets we target: IT, healthcare, real estate services, and finance and accounting. Our assignments typically place an individual or a small group of skilled professionals and, as a result, we have minimal client concentration. We provide our services directly to our customers or, indirectly as a subcontractor through other technical staffing service companies. In 2003, our top client accounted for 6% of revenue and our top ten direct and indirect clients accounted for approximately 29% of our net revenues. Our top ten clients to whom we directly provided services in 2003 were:

Competition

The staffing industry is highly competitive and fragmented and has low barriers to entry. In the market for contract IT professionals, we compete for potential clients with providers of IT staffing services and, to a lesser extent, computer systems consultants, providers of outsourcing services, systems integrators and temporary personnel agencies. For corporate professionals, we compete for clients primarily with other staffing services and temporary employment personnel agencies. Many of our current and potential competitors have longer operating

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

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

Permanent Placement Services

The Permanent Placement Services segment employs sales and sales support personnel whose primary role is the rapid delivery of high quality IT professionals for permanent placement with clients. As of December 28, 2003, we employed 11 sales and sales support employees, including branch managers, sales directors, and sales vice presidents, in Permanent Placement Services.

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

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

Clients

For the year ending December 28, 2003, approximately 38% of our placements were made to technology and related companies with the remainder to a diverse client mix.

Competition

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

Corporate Information Technology

We provide the tools necessary for employees to deliver services with the speed demanded by our clients. WebPAS^™ software, a proprietary application, is used to match candidates to open customer job orders. WebPAS captures key information about a candidate’s skills and matches them precisely to the customer job requirements

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thereby improving the accuracy of matching while reducing the time it takes to place a suitable candidate with the customer. In 2002, ICPlanet, a Hall Kinion subsidiary, developed software to extend the functionality of WebPAS to a public Internet site, permitting candidates to respond to job postings. IT talent sourcing and communication with clients and among offices via the Internet are critical to our business model. In addition, we utilize several other Internet-related tools and encourage employees to use the latest Internet applications such as Dice.com, to better serve our clients. At the core of Hall Kinion’s connectivity strategy is independent Internet access for all employees, a corporate wide intranet and shared access to the proprietary database of contract professional talent.

Employees

As of December 28, 2003, we had 1,777 professionals providing contract services to clients. This number included 1,690 employees and 87 subcontractors. Sales, sales support, administrative and accounting staff at December 28, 2003 consisted of 238 full-time employees, of whom 165 were sales and sales support personnel and 73 were administrative and accounting personnel. Hall Kinion is not a party to any collective bargaining agreements covering any employees, has never experienced any material labor disruption and is unaware of any current efforts or plans to organize our employees. We consider our relationship with employees to be good.

Corporate History

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

Available Information

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

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

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RISK FACTORS

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

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

The Company entered into an agreement dated June 13, 2003 with CIT Business Credit for a new three-year renewable credit facility of $16.0 million that replaced an existing credit facility of $12.0 million and is used primarily to fund operations. Significant terms and conditions of the agreement, as amended, are as follows:

As of December 28, 2003, outstanding borrowings under the line of credit were $8.5 million and additional available borrowings were $2.0 million.

Hall Kinion was in compliance with its loan covenants and terms as of December 28, 2003; however, the Company was not in compliance with one of the financial covenants as of January 2004 and February 2004. On March 1, 2004, CIT Business Credit waived compliance with this covenant for January 2004 and February 2004.

On March 25, 2004, Brenda C. Rhodes, the Chief Executive Officer and Chairman of the Board, and Todd Kinion, a director, agreed to provide irrevocable letters of credit totaling $5 million to the lender and CIT Business Credit agreed to increase availability under the line by $5 million. The lender has agreed to execute an amendment to the credit facility to increase the availability under the line, to replace the original loan covenants with a covenant requiring the Company to maintain certain reserves plus unrestricted cash of not less than $2 million at all times and to require CIT Business Credit’s approval for payment of the OnStaff earnout obligation. As a result, management believes that the Company will remain in compliance with the terms and covenants of its loan agreement, as revised, through at least December 31, 2004. If the Company fails to stay in compliance with the loan covenant and terms and if a waiver cannot be obtained, CIT Business Credit could terminate the line of credit and demand immediate repayment of all outstanding borrowings.

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Hall Kinion agreed to pay to Ms. Rhodes and Mr. Kinion an aggregate fee of $200,000 for providing the letters of credit, plus reimbursement of any costs incurred and reimbursement of any amounts drawn under the letters of credit.

In November 2003, Hall Kinion negotiated a settlement with OnStaff’s former owners that included a deferral of the 2003 earnout payment of $4.1 million from its due date of February 15, 2004. Under 10% note agreements, beginning May 15, 2004, the principal will be payable in four equal quarterly installments of $1.0 million and interest is due monthly (see Note 4 to the Consolidated Financial Statements). If the merger with Kforce is completed, the notes are due in full shortly after closing of the merger, or if the merger has not been completed before May 15, 2004, the notes are due in installments as scheduled. If the merger is not completed by May 15, 2004 and if CIT Business Credit does not consent to the payment of the first installment, the former owners of OnStaff may declare the entire amount due and payable and will be relieved of their non-solicitation and non-compete agreements. No assurance can be given as to the whether CIT Business Credit will permit the payment of the first installment of the earnout payment on May 15, 2004, if the merger is not consummated by then.

We reported losses during the last three fiscal years and the Company may continue to experience losses and negative cash flows from operations in 2004. In addition, during the fourth quarter of 2003, there was a significant decrease in eligible accounts receivable as a result of the decline in revenues of OnStaff, resulting in a reduction in availability under the line. At February 29, 2004, we had cash and cash equivalents of $1.2 million. If we continue to suffer losses, we may require additional financing sooner than anticipated or in greater amounts. If our existing cash balances and cash flow expected from future operations are not sufficient to meet our liquidity needs, we will need to raise additional funds. If adequate funds are not available on acceptable terms, or at all, we may not be able to execute our business plan or otherwise respond to competitive pressures or unanticipated requirements and it may have a material adverse effect on our ability to continue to operate.

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

We have experienced a period of rapid decline in operations. We made corresponding reductions in headcount and offices to manage costs. The reductions in headcount have placed and will continue to place significant demands upon our management and other resources. Our net revenues increased 30.3% from $120.4 million in 2002 to $156.9 million in 2003 while sales and administrative headcount decreased 38.0% from 384 employees at the end of 2002 to 238 employees at the end of 2003. Year-end headcount for 2003 reflects decreases in staff due to restructuring and attrition. Our ability to manage future growth effectively will require us to hire additional management personnel and expand our operational, financial and other internal systems. We may not be able to hire additional qualified management personnel. Our current personnel, systems, procedures and controls may not be adequate to support our future operations. A failure to manage our size effectively could have a material negative effect on our business, operating results and financial condition.

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

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

In 2003 we experienced the continued softness 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. In the real estate services industry we serve, the demand for professional

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personnel is strongly influenced by the volume of mortgage financing, both for new units and re-financings. The volume is very sensitive to interest rates and other general economic conditions. Increases in interest rates could have a significant negative impact on our business in this field. In the fourth quarter of 2003, there was a significant decline in demand for Corporate Professional Services in the mortgage and financing industry provided by OnStaff. Reduction in demand for our services had a material negative impact on our business, operating results and financial condition in 2003.

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

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

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

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

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

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

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

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In addition, because we provide contract services on an assignment-by-assignment basis, which clients can terminate at any time, existing clients may not continue to use our services at historical levels. We also experience some seasonality in our first and fourth fiscal quarters primarily due to the number of holidays and inclement weather in that quarter, which may reduce the number of days worked by professionals and sales and sales support employees. As a result, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as an indication of future performance. In the event our operations should fall below the expectations of public market analysts and investors, the price of our common stock would likely decline.

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

Our permanent placement business has declined 14.7% in 2003 and can be expected to continue to fluctuate significantly in the future. We provide permanent placement services on an assignment-by-assignment basis, which clients can terminate at any time, and existing clients may not continue to use our services at historical levels. A decline in our permanent placement business will result in a decrease in our net revenues. More importantly, gross profit for our permanent placement services group is essentially equal to permanent placement net revenues, as there are no direct costs associated with such revenues. Therefore, a decline in our permanent placement revenue would result in a decrease in our gross profit margins and net income.

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

In August 2002 we acquired substantially all the assets of the OnStaff group of companies which specializes in real estate, healthcare and finance corporate professional contract services. These industry and service specializations augment the IT professional services provided by Hall Kinion. We obtained significant bank financing to complete the OnStaff acquisition. In 2003, OnStaff’s Corporate Professional Services operations were integrated into those of Hall Kinion. The success of the OnStaff acquisition strategy will be dependent on the continuing integration of operating activities, cross marketing of services, efficiency of the combined operations and effective management of the various service groups.

Acquisitions also involve a number of other risks, including:

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In the quarter ended December 28, 2003, there was a significant decline in demand for OnStaff’s Corporate Professional Services in the mortgage and financing industry, due to uncertainty about interest rates and the lower demand for mortgage financings and refinancings. In November 2003, Hall Kinion negotiated a settlement with OnStaff’s former owners that included a deferral of the 2003 earnout payment of $4.1 million from its due date of February 15, 2004. Due to all of the foregoing, acquisitions may have a material negative effect on our business, operating results and financial condition.

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

We generate our net revenues when our sales and sales support personnel successfully match our professionals with our clients’ needs. Sales and sales support personnel headcount decreased 47% from 311 employees at the end of 2002 to 165 employees at the end of 2003. Experienced sales and sales support personnel have left our company in the past. In the future, we expect departures of experienced sales and sales support personnel from time to time. We may need to hire additional, productive sales and sales support personnel in order to maintain revenue levels and increase our revenue growth. We may not be able to attract or retain productive sales and sales support personnel. If we are unable to attract and retain productive sales and sales support personnel in a cost-effective manner, it could negatively impact our net revenues and profitability.

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

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

We are dependent upon the services of our key personnel.

Our future business and operating results depend in significant part upon the continued contributions of our key employees and senior management personnel, many of whom would be difficult to replace. The loss or temporary absence of any of our senior management, significant sales and sales support employees, other key personnel and, in particular, Brenda C. Rhodes, our Chief Executive Officer, could have a material negative effect on our business, operating results and financial condition. In December 2003, in order to facilitate integration efforts for the Kforce merger, Ms. Rhodes removed herself from day-to-day operations.

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

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

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

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

Our principal stockholders who are associated with the Company, Brenda C. Rhodes and Todd J. Kinion, beneficially owned a total of approximately 26.4% of our outstanding shares of common stock at December 28, 2003. As a result, these stockholders as a group may be able to exercise substantial control over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership could have the effect of making it difficult for a third party to acquire control of our company and may discourage third parties from attempting to do so.

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

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

Item 2.    Properties

Our principal executive offices are located in Novato, California and occupy an aggregate of approximately 20,900 square feet of office space as of December 28, 2003, pursuant to a lease that expires in September 2008. We also lease or sublease office space for 45 Contract Professional Staffing and 5 Permanent Placement Services sales offices at 41 locations in the United States and a Permanent Placement Services sales office in Tokyo, Japan. In addition, we owned a training facility located in Park City, Utah that was sold on February 27, 2004.

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Item 3.    Legal Proceedings

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

Item 4.    Submission of Matters to a Vote of Security Holders

None.

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PART II

Item 5.    Market for Registrant’s Common Equity and Related Stockholder Matters

Our common stock is listed for trading on the NASDAQ, National Market System under the symbol HAKI. On March 24, 2004, there were approximately 61 holders of record of the Common Stock.

The table below sets forth the high and low sales prices per share as reported on the NASDAQ (National Market System) for the fiscal years ended December 28, 2003 and December 29, 2002.

The closing sales price of our common stock on NASDAQ on March 24, 2004 was $2.86.

No cash dividends were paid in 2003, 2002 or 2001. We, as we deem appropriate, may continue to retain all earnings for use in our business or may consider paying a dividend in the future. We cannot currently issue dividends without prior bank consent.

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Item 6.    Selected Financial Data

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

Item 7.    Management’s Discussion and Analysis of Financial Conditions and Results of Operations

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

Overview

We source and deliver the most critical component of industry—human capital. As a leading talent source, we provide specialized professionals on a short-term contract and permanent basis. We deliver contract professionals to vendors and users of leading edge technologies, and to vertical markets including government services, banking and finance, medical technology and energy services. Through our subsidiary, OnStaff, we deliver specialty corporate professionals at all levels to the Title, Escrow, Mortgage, Financial Services and Healthcare industries.

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Our net revenues are derived principally from the hourly billings of our professionals on contract assignments and from fees received for permanent placements. Contract services assignments typically last two to six months, and revenues are recognized as services are provided. We derive contract services revenues when our consultants are working, and therefore our operating results may be adversely affected when client facilities are closed due to holidays or inclement weather. As a result, we typically experience relatively lower net revenues in our first and fourth fiscal quarters. We derive permanent placement revenues upon permanent placement of each professional candidate. The fee is typically structured as a percentage of the placed professional’s first-year annual compensation. Permanent placement revenues are recognized when a professional commences employment or, in the case of retained searches, upon completion of our contractual obligations. We have a broad client base and no single customer provided more than 6% of our total net revenues during the year ended December 28, 2003.

Proposed Merger with Kforce.    On December 2, 2003, Kforce Inc. (“Kforce”) and the Company announced the execution of an Agreement and Plan of Merger. Under the terms of the merger agreement, Kforce will acquire all of the shares of the Company in exchange for shares of Kforce common stock. The definitive exchange ratio is dependent upon the average of the closing prices of Kforce common stock for the 15 consecutive trading days ending on and including the third trading day prior to the closing date (such average is referenced herein as the “Kforce stock market value”). Kforce may elect to terminate the merger agreement if the Kforce average closing stock price remains below $6.00 for 15 consecutive trading days at any time prior to the closing. The proposed transaction requires and is subject to the approval by both Kforce shareholders and the stockholders of the Company and other customary closing and regulatory conditions.

On March 11, 2004 Kforce released their annual report on Form 10-K which included statements that they believe certain conditions exist or will exist in the future that have or will have a material adverse effect on Hall Kinion, that Kforce Board of Directors is unwilling to reconfirm their parent recommendation for the proposed merger and that the outcome of the merger is uncertain. Hall Kinion issued a press release that day indicating that the Company believes that no conditions exist which would permit Kforce to terminate the merger, that discussions with Kforce were continuing, and that the Company would take all steps necessary to protect its rights under the merger agreement. As of the date of this filing, discussions with Kforce are continuing regarding the status of the merger.

Details of the terms of the merger with Kforce are described in a registration statement on Form S-4 filed by Kforce on December 24, 2003 and amended on February 9, 2004, which includes a preliminary proxy statement of Hall Kinion related to the merger. The registration statement has not been declared effective by the Securities and Exchange Commission and may not include current details relating to the merger. Access to the Form S-4 and any future amendments may be obtained through the Kforce Web Site (www.kforce.com) or through the public files of the Securities and Exchange Commission. Readers are encouraged to review the Form S-4 in connection with a review of this Form 10-K as both the consummation of the merger or a termination of the merger would have a significant financial effect on Hall Kinion. No assurance can be given that the merger will be completed on its original terms or at all.

Results of Operations in 2003 and Management’s Plans for 2004.    During 2003, 2002 and 2001, the Company generated net losses of $18.6 million, $20.6 million and $45.6 million, respectively, as a result of the downturn in the economy and decreased demand for Technology Professional Services. In the fourth quarter of fiscal 2003, the Company also experienced a significant decline in demand for Corporate Professional Services provided by OnStaff in the mortgage and financing industry. The Company may continue to experience losses and negative cash flows from operations in 2004.

The Company entered into an agreement dated June 13, 2003 with CIT Business Credit for a new three-year renewable credit facility of $16.0 million that replaced an existing credit facility of $12.0 million and is used primarily to fund operations. Significant terms and conditions of the agreement, as amended, are described under “Liquidity and Capital Resources”. Hall Kinion was in compliance with its loan covenants and terms as of

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December 28, 2003; however, the Company was not in compliance with one of the financial covenants as of the end of January 2004 and February 2004. On March 1, 2004, CIT Business Credit waived compliance with this covenant for January 2004 and February 2004.

On March 25, 2004, Brenda C. Rhodes, the Chief Executive Officer and Chairman of the Board, and Todd Kinion, a director, agreed to provide irrevocable letters of credit totaling $5 million to the lender and CIT Business Credit agreed to increase availability under the line by $5 million. The lender has agreed to execute an amendment to the credit facility to increase the availability under the line, to replace the original loan covenants with a covenant requiring the Company to maintain certain reserves plus unrestricted cash of not less than $2 million at all times and to require CIT Business Credit’s approval for payment of the OnStaff earnout obligation. As a result, management believes that the Company will remain in compliance with the terms and covenants of its loan agreement, as revised, through at least December 31, 2004. If the Company fails to stay in compliance with the loan covenant and terms and if a waiver cannot be obtained, CIT Business Credit could terminate the line of credit and demand immediate repayment of all outstanding borrowings.

Hall Kinion agreed to pay to Ms. Rhodes and Mr. Kinion an aggregate fee of $200,000 for providing the letters of credit, plus reimbursement of any costs incurred and reimbursement of any amounts drawn under the letters of credit.

In November 2003, Hall Kinion negotiated a settlement with OnStaff’s former owners that included a deferral of the 2003 earnout payment of $4.1 million from its due date of February 15, 2004. Under 10% note agreements, beginning May 15, 2004, the principal will be payable in four equal quarterly installments of $1.0 million and interest is due monthly (see Note 4 to the Consolidated Financial Statements). If the merger with Kforce is completed, the notes are due in full shortly after closing of the merger, or if the merger has not been completed before May 15, 2004, the notes are due in installments as scheduled. If the merger is not completed by May 15, 2004 and if CIT Business Credit does not consent to the payment of the first installment, the former owners of OnStaff may declare the entire amount due and payable and will be relieved of their non-solicitation and non-compete agreements. No assurance can be given as to the whether CIT Business Credit will permit the payment of the first installment of the earnout payment on May 15, 2004, if the merger is not consummated by then.

In response to these liquidity issues, the Company instituted and continues to pursue initiatives intended to increase revenues, decrease operating costs, improve liquidity, enhance margins and better position it to compete under current market conditions. Management believes that the Company’s cash, cash flow from operations and borrowing availability will be sufficient to enable it to meet its financial obligations and sustain its operations through at least December 31, 2004.

Operating Results.    Our Contract Professional Staffing provides specialized professionals on a short-term contract basis and accounted for 97.4% of our net revenues in 2003, 96.0% in 2002, and 86.0% in 2001. Our Permanent Placement Services provides specialized professionals on a permanent basis and accounted for 2.6% of our net revenues in 2003, 4.0% in 2002, and 14.0% in 2001.

We reported an increase in net revenues and gross profit in 2003 as OnStaff’s Corporate Professional Services operations are included for the entire year ended December 28, 2003. Operating results of OnStaff in 2002 include only the five months from its August 2002 acquisition. Net revenues increased 30.3% to $156.9 million in 2003 from $120.4 million in 2002. Net revenues from our Contract Professional Staffing increased 32.2% to $152.8 million in 2003 from $115.6 million in 2002. OnStaff’s Corporate Professional Services contributed $71.4 million of the net revenues for the year ended December 28, 2003 compared to $25.4 million for the five months it was operating as part of Hall Kinion in 2002. Technology Professional Services revenues in 2003 were $81.4 million as compared to 2002 revenues of $90.2 million. In the quarter ended December 28, 2003, there was a significant decline in demand for OnStaff’s Corporate Professional Services in the mortgage and financing industry, resulting in a decrease in our billable contract professional

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headcount to 1,777 at the end of 2003 from 2,305 at the end of 2002, a 22.9% decrease. The number of contractors on assignment has not increased significantly through February 2004.

Operating costs in 2003 included a charge of $2.8 million for restructuring costs. During 2003, Hall Kinion integrated OnStaff’s Corporate Professional Services operations while it continued to focus on cost reductions. Through restructuring and attrition, sales, sales support, and administrative staffing decreased 38.0% to 238 as of December 28, 2003 as compared to 384 as of December 29, 2002. The operating costs were lower in 2003 than 2002 principally because the 2002 results include a charge of $15.5 million for impairment of goodwill.

We reported a loss from operations of $4.1 million in 2003 due to lower profitability of our assignments, despite an increase in net revenues and gross profit and a decrease in operating expenses. The net loss of $18.6 million was due principally to a $14.0 million valuation allowance recorded against net deferred tax assets (see Note 11 to Consolidated Financial Statements) as the realization of the deferred tax assets was not assured.

Critical Accounting Policies

Allowances for Doubtful Accounts Receivable—We establish allowances for estimated losses resulting from the inability of customers to make required payments based on the aging of our accounts receivable, analysis of specific delinquent accounts, and our historical write-off experience. As of December 28, 2003, accounts receivable were $15.8 million, net of allowances of $1.6 million. If the financial condition of our customers were to deteriorate, resulting in their inability to make payments, additional allowances may be required.

Valuation of Net Deferred Tax Assets—As of December 28, 2003, deferred tax assets totaling $20.8 million were stated at a net value of zero as management determined it is more likely than not that such loss carryforwards and other tax benefits will be not be realized. The gross deferred tax asset consists primarily of net operating loss and credit carryforwards of $8.8 million and temporary differences of $12.0 million. Realization of the loss carryforwards is dependent on generating sufficient taxable income in certain tax jurisdictions prior to expiration of the loss carryforwards.

Impairment of Goodwill and Other Identifiable Intangible Assets—As of December 28, 2003, goodwill was $15.4 million and other identifiable intangible assets were $10.0 million. The recoverability of goodwill and other identifiable intangible assets is based on assumptions regarding estimated future cash flows and other factors. If these assumptions and estimates change in the future, additional expense may be recorded to reflect impairment of these assets.

Results of Operations

Fiscal Year Ended December 28, 2003 Compared to Fiscal Year Ended December 29, 2002

Net Revenues.    Net revenues increased 30.3% to $156.9 million in 2003 from $120.4 million in 2002 as OnStaff’s Corporate Professional Services operations are included for the entire year ended December 28, 2003 as compared to only five months in 2002. Net revenues from our Permanent Placement Services decreased 14.6%, to $4.1 million in 2003 from $4.8 million in 2002 due to the continued softness of the economy. Net revenues from our Contract Professional Staffing increased 32.2% to $152.8 million in 2003 from $115.6 million in 2002. OnStaff’s Corporate Professional Services contributed $71.4 million of the net revenues in 2003 compared to $25.4 million for the five months in 2002. Technology Professional Services revenues in 2003 were $81.4 million as compared to 2002 revenues of $90.2 million. We experienced a decline in the Contract Professional Staffing billing rates due to the greater volume of OnStaff business at lower average billing rates. In the quarter ended December 28, 2003, there was a significant decline in demand for OnStaff’s Corporate Professional Services in the mortgage and financing industry, resulting in a decrease in our OnStaff’s Corporate Professional Services headcount to 1,130 at the end of 2003 from 1,708 at the end of 2002, a 33.8% decrease. The decline of real estate related assignments in the OnStaff’s Corporate Professional Division are due to uncertainty about interest rates and the lower demand for mortgage financings and refinancings.

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Gross Profit.    Gross profit for our Contract Professional Staffing represents revenues less direct costs of services, which consist of direct payroll, payroll taxes, and insurance and benefit costs for professionals. As there are no direct costs associated with Permanent Placement Services, gross profit for these services is essentially equal to revenues. While gross profit increased to $45.3 million in 2003 from $39.7 million in 2002, gross margin percentages decreased to 28.9% in 2003 from 33.0% in 2002. The gross profit of Technology Professional Services assignments was 28.4% in 2003 and 32.7% in 2002. Gross margins for OnStaff’s Corporate Professional Services were 25.4% in 2003 as compared to 27.4% in the prior year. Permanent Placement Services revenues, which have a 100% profit margin, were 2.6% of total revenues in 2003 compared to 4.0% in 2002. Gross margin percentages decreased for both periods due principally to the higher volume of OnStaff’s Corporate Professional Services with lower gross margin rates, and to a lesser extent, a decline in Permanent Placement Services, lower margins on Technology Professional Services, and increased worker’s compensation costs due to higher California insurance rates.

Operating Expenses.    Operating expenses consist of selling, general, and administrative expense (primarily sales, sales support and administrative employee and related facilities costs), impairment and restructuring expenses. Operating expenses decreased 21.5% to $49.4 million in 2003 compared to $62.9 million in 2002. Operating expenses, as a percentage of net revenues, decreased to 31.5% in 2003 from 52.2% in 2002. In 2002 there was a charge of $15.5 million for the impairment of goodwill. In 2003 there was a net charge for restructuring of operations of $2.8 million as compared to a $6,000 net reduction of restructuring reserves in 2002. The selling, general, and administrative expenses in 2003 were reduced to $46.6 million or 29.7% of revenue from $47.4 million or 39.4% of revenue in 2002. Our revenue producing sales and sales support employee headcount decreased to 165 as of the end of 2003 from 311 as of the end of 2002, a 46.9% decrease. The decrease in selling, general, and administrative expenses was a result of the benefits of restructuring of operations in 2003, 2002 and 2001, partially offset by the additional operating costs of OnStaff since its acquisition in August 2002.

Income Tax Provision.    At December 28, 2003 a valuation allowance of $14.0 million was recorded to reflect the amount of deferred tax assets which management determined were not likely to be realized. In both 2003 and 2002, Hall Kinion paid income taxes to certain state and local jurisdictions of $0.1 million.

Net Income (Loss).    The net loss for 2003 was $18.6 million compared to a net loss of $20.6 million for 2002. We experienced a net loss in 2003 primarily as a result of the decline in profitability of contract and permanent services and a valuation allowance of $14.0 million for deferred tax assets.

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

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

Gross Profit.    Gross profit for our Contract Professional Staffing represents revenues less direct costs of services, which consist of direct payroll, payroll taxes, and insurance and benefit costs for professionals. As there

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

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

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

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

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

Liquidity and Capital Resources

We generally fund our operations and working capital needs through borrowings under our revolving line of credit and cash generated from operations. Our operating activities used cash of $2.3 million in 2003, $3.7 million in 2002, and $3.4 million in 2001. The 2003 operating cash flow deficiency was primarily due to funding restructuring costs of $4.8 million, partially offset by a $1.0 million refund of income taxes.

Cash provided by (used for) investing activities in 2003, 2002 and 2001 was $0.05 million, ($13.4) million, and ($19.1) million, respectively. The principal investing activities for 2003 included the purchase of software licenses and leasehold improvements of $0.45 million, offset by the recovery of $0.50 million escrow related to the OnStaff acquisition.

Net cash provided by (used for) financing activities was ($1.8) million in 2003, $10.1 million in 2002 and ($4.7) million in 2001. In 2003, Hall Kinion made net repayments of $1.5 million on the credit line. Hall Kinion’s banking arrangement requires that all cash deposits received be applied to reduce the outstanding balance on the bank line of credit. The Company then draws against the available line of credit the estimated amount required for operations.

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The Company entered into an agreement dated June 13, 2003 with CIT Business Credit for a new three-year renewable credit facility of $16.0 million that replaced an existing credit facility of $12.0 million and is used primarily to fund operations. Significant terms and conditions of the agreement, as amended, are as follows:

As of December 28, 2003, outstanding borrowings under the line of credit were $8.5 million, additional available borrowings were $2.0 million and cash and cash equivalents were $4.5 million. Hall Kinion was in compliance with its loan covenants and terms as of December 28, 2003; however, the Company was not in compliance with one of the financial covenants as of January 2004 and February 2004. On March 1, 2004, CIT Business Credit waived compliance with this covenant for January 2004 and February 2004.

On March 25, 2004, Brenda C. Rhodes, the Chief Executive Officer and Chairman of the Board, and Todd Kinion, a director, agreed to provide irrevocable letters of credit totaling $5 million to the lender and CIT Business Credit agreed to increase availability under the line by $5 million. The lender has agreed to execute an amendment to the credit facility to increase the availability under the line, to replace the original loan covenants with a covenant requiring the Company to maintain certain reserves plus unrestricted cash of not less than $2 million at all times and to require CIT Business Credit’s approval for payment of the OnStaff earnout obligation. As a result, management believes that the Company will remain in compliance with the terms and covenants of its loan agreement, as revised, through at least December 31, 2004. If the Company fails to stay in compliance with the loan covenant and terms and if a waiver cannot be obtained, CIT Business Credit could terminate the line of credit and demand immediate repayment of all outstanding borrowings.

Hall Kinion agreed to pay to Ms. Rhodes and Mr. Kinion an aggregate fee of $200,000 for providing the letters of credit, plus reimbursement of any costs incurred and reimbursement of any amounts drawn under the letters of credit.

In November 2003, Hall Kinion negotiated a settlement with OnStaff’s former owners that included a deferral of the 2003 earnout payment of $4.1 million from its due date of February 15, 2004. Under 10% note agreements, beginning May 15, 2004, the principal will be payable in four equal quarterly installments of $1.0 million and interest is due monthly (see Note 4 to the Consolidated Financial Statements). If the merger with Kforce is completed, the notes are due in full shortly after closing of the merger, or if the merger has not been completed before May 15, 2004, the notes are due in installments as scheduled. If the merger is not completed by May 15, 2004 and if CIT Business Credit does not consent to the payment of the first installment, the former owners of OnStaff may declare the entire amount due and payable and will be relieved of their non-solicitation and non-compete agreements. No assurance can be given as to the whether CIT Business Credit will permit the payment of the first installment of the earnout payment on May 15, 2004, if the merger is not consummated by then.

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In response to these liquidity issues, the Company instituted and continues to pursue initiatives intended to increase revenues, decrease operating costs, improve liquidity, enhance margins and better position it to compete under current market conditions. Management believes that the Company’s cash, cash flow from operations and borrowing availability will be sufficient to enable it to meet its financial obligations and sustain its operations through at least December 31, 2004.

Summary Disclosure about Contractual Obligations and Commercial Commitments

The following table summarizes significant contractual obligations as of December 28, 2003:

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Item 7a.     Quantitative and Qualitative Disclosures about Market Risk

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

Interest Rate Risk.    As of December 28, 2003, we had $8.5 million outstanding under the bank line of credit at an interest rate of 5.0%. Under the credit facility dated June 13, 2003, the interest is at the lender’s prime rate plus 1.25%. Starting June 27, 2004, the interest rate may be decreased to a rate as low as prime plus 0.5%, contingent upon our specified levels of profitability. The interest rate will increase or decrease as economic conditions change. An immediate 10% change in interest rates would be immaterial to our financial condition or results of operations.

Foreign Currency Exchange Rate Risk.    The Japanese yen is the functional currency in our branch office in Japan. We do not currently enter into foreign exchange forward contracts to hedge the balance sheet exposures and intercompany balances against future movements in foreign exchange rates. However, we do maintain cash balances denominated in Japanese yen. If foreign exchange rates were to weaken against the U.S. dollar immediately and uniformly by 10% from the exchange rates at December 28, 2003, the fair value of these foreign currency balances would decline by an immaterial amount.

Item 8.    Financial Statements and Supplementary Data

        [to be filed by amendment]

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Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A.    Controls and Procedures

Our principal executive and financial officers have evaluated our disclosure controls and procedures (as defined in Rules 130a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of December 28, 2003. They have determined that such disclosure controls and procedures are effective to ensure information required to be disclosed in our filings under the Securities Exchange Act of 1934 with respect to the Company and its consolidated subsidiaries is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.

We regularly evaluate our internal controls and discuss these matters with our independent accountants and Audit Committee. Based on these evaluations and discussions, we consider what revisions, improvements or corrections are necessary in order to ensure that our internal controls are and remain effective.

There have been no significant changes in internal controls, or other factors that could significantly affect internal controls, including any corrective actions with regard to material weaknesses or significant deficiencies. We intend to continue to proactively refine our internal controls on an ongoing basis as appropriate. It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objective of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential conditions, regardless of how remote.

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PART III

Item 10.    Directors and Executive Officers of the Registrant

The nominees for directors of the Company are presented in registrant’s definitive proxy statement and is incorporated herein by this reference.

The information required by this Item concerning the Company’s executive officers is presented, under the caption “Executive Officers” in the proxy statement and is incorporated herein by this reference. The information required by this Item concerning compliance with Section 16(a) of the Exchange Act is presented under the caption “Certain Relationships and Related Transactions” in the proxy statement and is incorporated herein by this reference.

The information required by this item as to Hall Kinion’s code of ethics is set forth under the caption “Corporate Governance—Code of Business Conduct” in the proxy statement and is incorporated herein by this reference.

Item 11.    Executive Compensation

Information required by this Item concerning compensation of the Company’s executive officers for the year ended December 28, 2003 is presented under the caption “Executive Compensation and Other Matters” in the proxy statement and is incorporated herein by this reference.

Item 12.    Security Ownership of Certain Beneficial Owners and Management

Information required by this Item concerning the security ownership of certain beneficial owners, directors and executive officers is set forth under the caption “Stock Ownership of Certain Beneficial Owners and Management” in the proxy statement and is incorporated herein by this reference.

The Company has three stock option plans. The Company’s 1997 Stock Option Plan (the “1997 Plan”) authorizes the issuances of options covering up to 3,759,000 shares of common stock. The 1997 Plan provides for an automatic annual increase in the number of number of shares covered by the 1997 Plan equal to 3.0% of the number of shares of common stock outstanding on the first day of each calendar year. The IT Professional Stock Option Plan (the “IT Plan”) authorizes the issuance of options covering up to 983,000 shares of common stock and provides for an automatic annual increase in the number of shares covered by the IT Plan equal to 1.5% of the number of shares of common stock outstanding on the first day of each calendar year. The Company’s 2000 Stock Option Plan (the “2000 Plan”) authorizes the issuance of options covering up to 1,000,000 shares of common stock. The 2000 Plan does not contain any provisions for automatic increases in the number of shares covered by the 2000 Plan. See Note 10 to consolidated financial statements for information regarding other terms of the plans. The IT Plan was established while the Company was still privately held and did not require stockholder approval. The 1997 Plan was approved by the stockholders. The 2000 Plan does not require stockholder approval. The Company also has an Employee Stock Purchase Plan, which was approved by stockholders, but has never been implemented.

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The following table sets forth information as of December 28, 2003 with respect to the Company’s stock option plans.

Item 13.    Certain Relationships and Related Transactions

Information required by this item concerning certain relationships and related transactions during 2003 is set forth under the caption “Certain Relationships and Other Transactions” in the proxy statement and is incorporated herein by this reference.

Item 14.    Principal Accountant Fees and Services

Information required by this Item concerning the principal accountant fees and services during 2003 is set forth under the caption “Fees Paid to Independent Accountants” in the proxy statement and is incorporated herein by this reference.

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PART IV

Item 15.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)  1.    Financial Statements

[To be filed by amendment]

(a)  2.    Financial Statement Schedules

Not applicable

(a)  3.    Exhibits

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31

(b)  Reports on Form 8-K.

On February 3, 2004, we filed a Form 8-K announcing preliminary financial results for the year and quarter ended December 28, 2003.

On March 11, 2004, we filed a Form 8-K expressing strong disappointment in Kforce’s announcement and releasing unaudited financial results for the year and quarter ended December 28, 2003

(c)  Exhibits.

See Item 15(a)(3) above.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: March 29, 2004

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Brenda C. Rhodes and Martin A. Kropelnicki, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or any of them or their or his substitutes or substituted, may lawfully do or cause to be done by virtue hereof. This Form 10-K may be executed in multiple counterparts, each of which shall be an original, but which shall together constitute but one agreement.

Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacity and on the dates indicated.

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EXHIBIT INDEX

1

2