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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

[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
   ACT OF 1934

                  for the fiscal year ended December 31, 2000

                                      OR

[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
   EXCHANGE ACT OF 1934

                        Commission file number 0-22869

                               ----------------

                        HALL, KINION & ASSOCIATES, INC.
            (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                <C>
            Delaware                                 77-0337705
  (State or other jurisdiction                    (I.R.S. Employer
of incorporation or organization)               Identification No.)
</TABLE>

  185 Berry Street, China Basin Landing, Suite 4600, San Francisco, CA 94107
                   (Address of principal executive offices)

                                (415) 371-8400
             (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]

   As of March 22, 2001, there were outstanding 13,198,501 shares of the
registrant's Common Stock. The aggregate market value of the Common Stock held
by non-affiliates of the registrant, based on the closing price of the Common
Stock as reported on the Nasdaq Stock Market (National Market System) on March
22, 2001, was approximately $78,779,213.

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<PAGE>

               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:

  . our business and growth strategies;

  . the markets we serve;

  . liquidity; and

  . our efforts to increase brand awareness.

   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 qualified IT professionals, 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 new geographic markets and
the addition of offices, the structure and timing of acquisitions, changes in
demand for IT professionals, general economic factors, 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.

                                    PART I

Item 1. Business

Overview of the Company

   Hall Kinion sources and delivers the most critical component of the
Internet economy--human capital. As a leading talent source for the growing
Internet economy, we provide specialized IT professionals on a short-term
contract and permanent basis primarily to vendors of Internet technologies
and, to a lesser extent, to users of technology. We believe we are well
qualified to identify, screen and deliver the specific IT talent demanded by
our clients because we have built thorough, long-term relationships with the
vendors of Internet technologies and because we are successful at recruiting
IT professionals with skills in leading edge technologies. Our clients include
industry leaders such as Motorola, IBM and AT&T Wireless.

   We believe that our key competitive advantage is our ability to
successfully recruit the best and brightest IT professionals. We have
developed this advantage by building client relationships with technology
industry leaders and communicating these relationships to the IT professional
community. Our clients offer our IT professionals what we believe is their
primary career objective; the opportunity to work on leading edge assignments
in the Internet world. We have leveraged our competitive advantage to expand
our business geographically. We began our company in Silicon Valley and have
expanded our offices to additional markets with high concentrations of
technology companies--the Silicon Valleys of the world.

                                       1
<PAGE>

   We have developed a scalable business model which helps us expand into new
geographic markets. 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 technology products and services to market ahead of their
competition. We build strong, direct relationships with our clients'
engineering managers in order to identify quickly their technology needs. We
then actively network with the IT professional community and thoroughly search
the Internet in order to identify the appropriate IT talent quickly.

Our Solution

   Our objective is to provide efficient, high quality contract and permanent
IT professional services to our target market and to become the agent of
choice for IT professionals. To meet this objective we:

  . Target market our services to the vendors of Internet technologies. We
    believe that we will stay at the forefront of technological change and
    that we can continue to build on our already established reputation as a
    provider of leading edge technology assignments by directing our efforts
    toward serving Internet technology providers and vendors of software and
    hardware for Internet applications. We recognize that providing leading
    edge technology talent is critical to serving our target market, and that
    our best means of attracting talented IT professionals is to offer
    assignments that use their state-of-the-art talents at leading technology
    companies. As a result, we focus our marketing efforts on clients that
    have the highest sensitivity to product lifecycle and use leading edge
    technologies, which provides us with the opportunity for the greatest
    gross profit margins.

  . Provide rapid fulfillment to our delivery-sensitive clients. We have
    designed our operating model to meet the time-sensitive needs of our
    clients. We develop strong relationships directly with engineering
    managers at our clients and build aggressive IT recruiting capabilities
    through the use of modern technologies such as Internet search,
    proprietary IT talent databases and cross-office intranet based
    communication. As a result, we believe we have developed an advantage in
    meeting the needs of our target market: clients that place importance on
    speed of response and quality of talent but who are not particularly
    price-sensitive.

  . Capitalize on our client base to attract and retain IT professionals. The
    shortage of available talent has made attracting and retaining qualified
    IT professionals critical to our success. We believe that the most
    important motivators of IT professionals are working on leading edge
    technology assignments, flexible lifestyles and compensation. We have
    developed advantages in addressing the motivations of our professionals.
    The most important motivator is the opportunity for rewarding and
    challenging assignments. We provide leading edge technology assignments
    that match our IT professionals' abilities, because we have focused on
    serving the vendors and users of Internet technologies. Conversely, we
    are able to meet the technology requirements of these companies, in great
    part, because we are able to attract the best and brightest IT talent. We
    also cater to the individual and family lifestyle demands of IT
    professionals by providing work assignments that may allow flexible
    working hours and telecommuting opportunities. We offer our IT
    professional employees an attractive compensation program that includes
    stock options and the opportunity to participate in benefit plans
    equivalent to those available to their full time counterparts.

  . Build brand recognition. We have implemented a strong brand recognition
    campaign as The Talent Source for the Internet economy(TM) with marketing
    promotions designed to convey an Internet image. This campaign is
    directed toward the Generation X market that includes a large segment of
    our IT professionals. Branding efforts have included a corporate logo
    that conveys an Internet theme and use of the slogan "The place where
    speed and talent come together on the Internet." Promotions have included
    live web casts and an auto racing sponsorship. We believe that our
    branding campaign gives us a competitive advantage in soliciting
    technology clients and recruiting IT talent and sales and sales support
    employees.


                                       2
<PAGE>

  . Create a corporate culture that attracts and retains sales and sales
    support employees. We spend a great deal of time, energy and money
    recruiting our sales and sales support employees. We have created a
    performance-based culture, with an attitude of "celebration" that our
    employees find appealing and energizing. Our culture is embodied in our
    ongoing performance-rewarding traditions as well as our annual business
    planning convention and national awards trip, the highlight of the sales
    year at Hall Kinion. We believe that our culture has played a significant
    role in our ability to recruit and retain sales and sales support
    employees.

  . Deliver solid corporate support to our offices. We deliver extensive
    training, detailed performance reporting and IT support to each of our
    offices in order to promote a high level of service and consistency among
    our offices. Our support reaches every sales and sales support
    professional and provides them with the tools they need to increase
    productivity by communicating with, and understanding and meeting the
    requirements of, both our clients and IT professionals.

Our Growth Strategy

   We have followed a growth strategy focused on strong internal growth,
including new office openings, supplemented by strategic acquisitions. Key
elements of our strategy include:

  . Hiring, training and developing additional sales and sales support
    employees. Our sales and sales support employees, who are our key
    contacts with our clients and IT professionals, directly impact our
    ability to generate revenues. We have been successful in recruiting and
    retaining sales and sales support personnel and have grown from 397 sales
    and sales support employees at the end of 1998 to 715 at the end of 2000.
    Sales and sales support professionals receive extensive sales training
    and targeted technology training during their initial orientation and
    throughout their careers with Hall Kinion. As our employees are promoted,
    they receive additional training in these areas, as well as in management
    and budgeting.

  . Opening additional offices in our current geographic markets. We believe
    that by growing our presence in current geographic markets we
    substantially increase our opportunities for successful pairing of our IT
    talent with our clients' technology needs. As a result, new offices in
    existing geographic markets typically reach profitability earlier than
    the initial office we build in new markets. We also believe that the
    addition of new offices enhances the growth of existing offices in the
    same geographic market. We believe that there are opportunities for
    additional growth in each of our existing geographic markets.

  . Opening additional offices in the Silicon Valleys of the world. Our
    geographic growth is focused on markets where there is a large
    concentration of high technology companies and skilled IT professionals.
    Over the last seven years, we have added approximately 40 offices in 24
    geographic markets, including Silicon Valley, Austin, Texas and Tyson's
    Corner, Virginia. We believe that by focusing our geographic growth on
    the Silicon Valleys of the world, we are able to rapidly build our new
    offices to the "critical mass" required to achieve profitability in a new
    market.

  . Expanding international recruiting capabilities. We have successfully
    placed a significant number of international recruits with our domestic
    clients and plan to continue expanding our international recruiting
    capabilities. In 1998, we acquired Group-IPEX and its expertise in using
    the H-1B visa system to bring foreign national IT professionals into the
    United States in order to meet our need for highly skilled IT
    professionals.

  . Acquiring complementary businesses. We also have grown our business
    through selected acquisitions of complementary businesses. We grew in
    size and gained a national presence with our acquisition of Team
    Alliance. We acquired Group-IPEX and TKO Personnel to provide us with an
    international presence for recruiting, to expand our permanent placement
    presence and to give us a foothold for future international expansion. We
    developed our executive retained search operations and strengthened our
    contract services offerings with the simultaneous acquisition of
    Huntington Group and ITC. Through TKI Consulting, we acquired project-
    based software development and integration capabilities. We continue to

                                       3
<PAGE>

   explore additional acquisition opportunities, particularly those that
   provide us with new technology practices, new geographic presences,
   additional international recruiting capabilities or executive retained
   search businesses.

Our Operating & Sales Model

   We provide IT talent to our clients through our Contract Services group,
which delivers IT professionals on a short-term contract basis, and through
our Permanent Placement Services group which sources, qualifies, and delivers
IT professionals for direct hire by our clients.

Contract Services Group

   Our Contract Services group employs two types of sales and sales support
employees that have complementary roles in the rapid and high quality delivery
of our contract services: account managers and technical recruiting agents. As
of December 31, 2000, we employed 349 sales and sales support employees,
including branch managers, sales directors, and sales vice presidents, in the
Contract Services group.

   Account Managers. Our account managers are responsible for marketing our
contract services. Account managers build and manage relationships with our
clients. We provide them with training in the latest technologies so that they
can understand our clients' rapidly changing technology needs and identify
opportunities for assignments that utilize the expertise of our IT
professionals. We believe that there are opportunities for additional growth
in all of our geographic markets, and anticipate continued hiring of qualified
account managers to target additional leading edge technology companies.

   Technical Recruiting Agents. Our technical recruiting agents are
responsible for sourcing, qualifying, and representing our IT professionals.
Our technical recruiting agents build relationships with our IT professionals
and understand their technical expertise. A technical recruiting agent's
success depends upon his or her ability to source qualified IT professionals
quickly as client assignments arise. By participating in technology user
groups, continually searching the Internet for qualified IT professionals, and
building a database of IT professionals, our technical recruiting agents can
match IT professionals to leading edge technology assignments for our clients.
By acting as the advocate for the IT professional, our technical recruiting
agents are continually assisting us in growing and maintaining a high quality
talent pool of technical candidates.

Permanent Placement Services Group

   Our Permanent Placement Services group employs sales and sales support
personnel whose primary role is the rapid and high quality delivery of
permanent placement IT professionals. As of December 31, 2000, we employed 366
sales and sales support employees, including branch managers, sales directors,
and sales vice presidents, in the Permanent Placement Services group.

   Recruiters. Our recruiters are responsible for marketing our permanent
placement services to our target market, and sourcing, qualifying and placing
IT professionals for direct hire by our clients. Our recruiters also build and
manage relationships with our clients and receive training to provide them
with the skills necessary to assess our clients' rapidly changing technology
needs. We task our recruiters with sourcing IT professionals and matching
their skills and career objectives with employment opportunities at leading
edge technology companies.

Branch Managers, Sales Directors, & Sales Vice Presidents

   We employ branch managers, sales directors, and sales vice presidents, in
both our Contract Services and Permanent Placement Services groups. Our branch
managers are responsible for managing daily production, coordinating the
account manager/technical recruiting agent partnerships and recruiter
relationships, as well as hiring and developing sales teams. Branch managers
are incentivized to meet revenue and gross profit objectives within pricing
guidelines determined at the executive level. Branch managers also solicit and
develop client

                                       4
<PAGE>

opportunities, such as pursuing regional and national accounts. We primarily
promote our branch managers from within the company, providing an established
career path for our sales and sales support employees.

   Our sales directors manage all branch managers in their geographic
territory. They implement and actively support our corporate culture of
performance, achievement and the celebration of individual and team successes.
Our sales vice presidents manage the sales directors in their respective
areas. Branch managers, sales directors, and sales vice presidents, rely on
sales budgets that are developed at the office level, and consolidated at the
director and vice president levels. Sales directors and sales vice presidents
are incentivized to provide year-over-year and sequential quarterly revenue
growth, and to perform to their budget at the revenue, gross profit and
earnings before interest and income taxes levels. Our budget provides
statistical metrics that help our branch managers, sales directors, and sales
vice presidents make decisions regarding the timing of expansion within their
existing geographic markets and into new geographic markets.

Our Corporate Support Services

   We provide sales training, accounting and financial services, and
information technology services at the corporate level to support our offices.

Corporate Training

   We provide regularly scheduled training courses to our sales and sales
support personnel and their manager to foster a strong sales environment and
to promote successful sales and management practices. Training includes
curricula in sales and marketing, management, evolving technologies and
budgeting and financial planning. In addition, periodic courses in best
practice theories are presented at each office.

Accounting and Financial Services

   Our financial operations are primarily supported by a PeopleSoft ERP
package implemented in 1999. We use various modules of PeopleSoft to track
weekly, monthly, and quarterly performance at every level of operations. Our
sales and sales support professionals, branch managers and directors use
information provided by PeopleSoft to assist in decisions on fine tuning
operations and adding employees and offices. We believe that our decentralized
business model coupled with these performance metrics provides a sound
framework for making daily operating decisions. We also regularly produce
market analyses highlighting trends in our performance and our market place to
help guide our company-wide strategic decision making.

Information Technology Services

   We provide the tools necessary for our employees to deliver our services
with the speed demanded by the Internet economy. 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
Monster.com and Dice.com, to better serve our clients. At the core of our
connectivity strategy is independent Internet access for all employees, a
corporate wide intranet and shared access to our proprietary database of IT
talent.

Clients

   In the fourth quarter of 2000, 67% of our overall assignments were with
technology companies working on Internet-related projects. Although our target
market is vendors of Internet technologies, a significant portion of our
assignments come from clients involved in high technology research and
development whose products are not directly Internet-related. In the fourth
quarter of 2000, these services accounted for 33% of our overall assignments
and remain an important component of our business.

   We focus on companies requiring IT professionals for leading edge
technology applications. Our assignments typically place an individual or a
small group of skilled professionals and, as a result, we have

                                       5
<PAGE>

minimal client concentration. In 2000, no client accounted for more than 5% of
our net revenues and our top ten clients accounted for less than 15% of our
net revenues. Our top ten clients in 2000 were:

<TABLE>
        <S>                                 <C>
        . Motorola                          .Computer Sciences Corporation
        . IBM Global Services               .Wells Fargo Bank
        . AT&T Wireless                     .Pro Unlimited
        . Razorfish                         .E*Trade
        . Compaq Corporation                .Siebel Systems
</TABLE>

Technologies Served

   We traditionally have supplied a significant percentage of our talent to
help our clients develop the next generation of technology services and
products. As a result, we have kept abreast of the latest technology trends
and have been able to evolve the skill set of our IT professionals to meet the
demands of our leading edge technology clients. The following technologies are
a representative sample of the e-commerce and software development skills that
our IT professionals currently use in client assignments:

<TABLE>
        <S>                                 <C>
        . Java                              .Broadvision
        . Cold Fusion                       .COM and DCOM
        . XML                               .EJB
        . Corba                             .ERWin
        . ASP                               .UML
</TABLE>

Employees

   As of December 31, 2000, 1,397 of our IT professionals were providing
contract services to our clients. This number included 1,088 employees and 309
subcontractors. Our corporate staff at December 31, 2000, consisted of 920
full-time employees, of whom 715 were sales and sales support personnel and
205 were administrative and accounting personnel. We are not a party to any
collective bargaining agreements covering any employees, have never
experienced any material labor disruption and are unaware of any current
efforts or plans to organize our employees. We consider our relationship with
our employees to be good.

Competition

   The IT staffing industry is highly competitive and fragmented and has low
barriers to entry. In our Contract Services group, 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. 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 IT professionals and clients
than our company. In addition, many of these competitors may have certain
distinct advantages. Our competitors that are smaller companies may be able to
respond more quickly to customer requirements. Our 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 our business, operating results and financial condition. We
believe that the principal factors relevant to competition in the IT staffing
services industry are the recruitment and retention of highly qualified IT
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 IT professionals is also highly competitive. We compete
for IT professionals with other providers of technical staffing services,
system integrators, providers of outsourcing services, computer

                                       6
<PAGE>

consultants, temporary personnel agencies and our clients. We may not be able
to recruit and retain sufficient numbers of IT professionals successfully.

Facilities

   Our principal executive offices are currently located in San Francisco,
California and occupy an aggregate of approximately 5,600 square feet of
office space pursuant to a lease that expires in December 2003. We also lease
or sublease office space for our operations in Austin, Dallas and Houston,
Texas; Capitola, Fremont, Irvine, Mountain View, San Mateo, Lafayette,
Larkspur, San Jose and Sacramento, California; Boston, Massachusetts; Chicago
and Schaumburg, Illinois; Denver and Boulder, Colorado; London, England; New
York, New York; Trumbull, Connecticut; Tampa and Orlando, Florida; Atlanta,
Georgia; Phoenix, Arizona; Portland, Oregon; Raleigh, North Carolina; Salt
Lake City, Utah; Iselin, New Jersey; McLean, Virginia; Minneapolis, Minnesota;
Bellevue, Bothell and Seattle, Washington; New Delhi, India; and Tokyo, Japan.
In addition, we own a training facility located in Park City, Utah.

Corporate History

   We were incorporated in California in 1991. During 1994, we began to expand
our West Coast presence, and in 1996, we developed a national presence by
acquiring Team Alliance, Inc. We reincorporated in Delaware in June 1997 and
completed the initial public offering of our common stock in August 1997. We
have grown from a single office in 1993 to 41 offices in 25 geographic
markets, as of December 31, 2000.

   In April 2000, we completed a secondary offering of 4,033,000 shares of our
common stock at a price of $21.00 per share. This offering consisted of
1,988,000 shares of newly issued common stock and 2,045,000 shares sold by
selling stockholders. After underwriting discounts, commissions, and other
issuance costs of $583,000, net proceeds to our company from that offering
were approximately $39.1 million.

                                       7
<PAGE>

                                 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."

An inability to hire and retain a sufficient number of IT professionals with
the extensive knowledge of Internet, computer and networking technologies
required by our clients would negatively impact our business, operating
results and financial condition.

   Our future success depends on our ability to attract and retain qualified
IT professionals with the technical skills and experience necessary to meet
our clients' requirements for technical personnel. Competition for individuals
with proven technical expertise, particularly in the Internet, computer and
networking and other technology environments for which we provide services, is
intense, and we expect that competition for IT professionals will increase in
the future. We may not be able to attract and retain qualified IT
professionals in sufficient numbers in the future. Furthermore, IT
professionals typically provide services on an assignment-by-assignment basis
and can terminate an assignment with us at any time. We compete for these
individuals with other providers of technical staffing services, system
integrators, providers of outsourcing services, computer consultants,
temporary personnel agencies and our clients. Many of the IT professionals who
work with us also work with our competitors from time to time. IT
professionals currently working on projects for us may choose to work for
competitors on future assignments. Our net revenues in any period are related,
among other factors, to the number of IT professionals we have on staff and
engaged on assignments. If we were unable to hire or retain a sufficient
number of such personnel, our business, operating results and financial
condition would be materially adversely affected.

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 involving the Internet,
computer and networking industries. These industries are experiencing rapid
rates of change and innovation which have resulted in an intense demand for
the IT professionals that we offer. Any slowdown in the rate of innovation in
these industries or any general reduction in demand for personnel with
expertise in leading Internet, computer or networking technologies could
reduce the demand for our services. Reduction in demand for our services could
have a material negative impact on our business, operating results and
financial condition. Our expenses for salaried IT professionals are relatively
fixed in the short term, and we generally cannot reduce expenses quickly in
response to decreased demand for our services.

   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 Services group could decline materially. A material
revenue decline in our Contract Services group would negatively impact our
business, operating results and financial condition.

   Persons with expertise in Internet, computer and networking technologies
that would otherwise use our services may increasingly contract directly with
technology companies. The proliferation of job sites on the Internet may allow
these 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.

                                       8
<PAGE>

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

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

  . develop, recruit and maintain a base of qualified IT professionals within
    a new geographic market;

  . initiate, develop and sustain corporate client relationships in each new
    geographic market;

  . attract, hire, integrate and retain qualified sales and sales support
    employees; and

  . accurately assess the demand of a new market.

   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 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 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.

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:

  . the availability of IT professionals;

  . changes in the demand for IT professionals;

  . the hiring rate and the productivity of our sales and sales support
    personnel;

  . departures or temporary absences of key sales and sales support
    personnel;

  . the availability of H-1B work permits for foreign national IT
    professionals who wish to work in the United States;

  . changes in the relative mix between our contract services revenues and
    our permanent placement services revenues;

  . changes in the prices we are able to charge for our services;

  . the timing and rate of entry into new geographic markets and the addition
    of offices in existing geographic markets;

  . the structure and timing of acquisitions of complementary businesses; and

  . general economic factors.

   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 quarter primarily due to the number of holidays
and inclement weather in that quarter, which may reduce the number of days
worked by IT 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.

                                       9
<PAGE>

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

   We have recently experienced a period of rapid growth that has placed and
will continue to place significant demands upon our management and other
resources. Our net revenues increased 45.6% from $124.1 million in 1998 to
$180.7 million in 1999 and 64.1% to $296.5 million in 2000 while headcount
increased 35.7% from 678 employees in 1999 to 920 employees in 2000. 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.
Furthermore, implementing a new or expanded financial and management
information system can be time-consuming and expensive and require significant
management resources. Our current personnel, systems, procedures and controls
may not be adequate to support our future operations and we may not be able to
implement any new system effectively. A failure to manage our growth
effectively could have a material negative effect on our business, operating
results and financial condition.

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

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

   A component of our growth strategy is the acquisition of complementary
businesses. In order to implement this strategy successfully, we have to:

  . identify suitable acquisition candidates;

  . obtain requisite financing;

  . acquire the candidates on suitable terms; and

  . integrate their operations successfully with ours.

   We may not be able to identify suitable acquisition candidates, and we may
not be able to acquire candidates on suitable terms. Moreover, other providers
of IT professional services are also competing for acquisition candidates,
which could result in an increase in the price of acquisition candidates and a
diminished pool of candidates available for acquisition. Acquisitions also
involve a number of other risks, including:

  . negative effects on our reported operating results from increases in
    goodwill amortization and interest and other acquisition-related
    expenses;

  . the diversion of management's attention;

  . the integration of any acquired business, which may result in significant
    integration-related expenses;

  . the departure of key personnel at the acquired business; and

  . uncertainty that an acquired business will achieve anticipated revenues
    and earnings.

   To the extent we seek to acquire complementary businesses for cash, we may
be required to obtain additional financing. However, required financing with
acceptable terms may not be available, which would prevent us from making cash
acquisitions. Due to all of the foregoing, acquisitions may have a material
negative

                                      10
<PAGE>

effect on our business, operating results and financial condition. In
addition, if we issue stock to complete any future acquisitions, existing
stockholders will experience ownership dilution.

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

   We generate our net revenues when our sales and sales support personnel
successfully match our IT professionals with our clients' needs. The qualified
sales and sales support personnel we require are in high demand and are likely
to remain a limited resource for the foreseeable future. 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 will need to hire additional, productive sales and sales support
personnel in order to maintain 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 IT staffing industry is highly competitive and fragmented and has low
barriers to entry. In our Contract Services group, 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. 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 IT 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 IT 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 may be unable to obtain a sufficient number of government permits to place
employees from foreign countries in the United States.

   Some of our IT professionals are foreign nationals working in the United
States under H-1B work permits. Accordingly, both we and these foreign
nationals must comply with the United States immigration laws. Our inability
to obtain H-1B permits for these employees in sufficient quantities or at a
sufficient rate could have a material negative effect on our business,
operating results and financial condition. Furthermore, Congress and
administrative agencies with jurisdiction over immigration matters have
periodically expressed concerns over the levels of immigration into the United
States. These concerns have often resulted in proposed legislation, rules and
regulations aimed at reducing the number of work permits that may be issued.
In recent years the maximum number of H-1B permits allocated for a given year
has been reached very soon after permits became available. Therefore, we
attempt to hire our anticipated annual requirement of foreign national IT
professionals whenever H-1Bs are available, in anticipation of a shortage of
H-1Bs permits later in the year. If we are not able to place these IT
professionals in a timely manner, we will have incurred costs and expenses
that we may not be able to offset with revenues. Any changes in laws making it
more difficult to hire foreign nationals or limiting our ability to obtain
foreign employees could require us to incur additional unexpected labor costs
and expense. Further, restrictions or limitations on hiring practices could
have a material adverse effect on our business, operating results and
financial condition.


                                      11
<PAGE>

   Recent changes in the law governing H-1B work permits has made it easier
for foreign nationals, employed in the United States, to move from one
employer to another. The easing of restrictions on the movement of these
employees could increase the competitive environment in hiring and retaining
foreign national IT professionals. Additionally, we bear significant up front
cost to recruit, hire and immigrate foreign national IT professionals. If the
employee has a reduced tenure we run the risk of not recovering these up front
costs. The higher cost of hiring and the inability to retain qualified foreign
national IT professionals could have a material adverse effect on our
business, operating results and financial condition.

We are dependent upon the services of our key personnel

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

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

   We are exposed to liability with respect to the services our IT
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 IT 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.

An unfavorable appeals ruling to our class action lawsuit judgment could
negatively impact our business, operating results and financial condition.

   In June 1999, we and certain of our directors and officers were named as
defendants in three putative class actions filed in the United States District
Court for the Northern District of California, alleging violations of Section
10(b) of the Securities and Exchange Act of 1934. Pursuant to court order,
those cases have been consolidated, and a consolidated amended complaint was
filed on January 24, 2000. The action arises out of our announcement of a
shortfall in earnings for the quarter ending June 1998, and purports to be
brought on behalf of all purchasers of our common stock between August 5,
1997, the date of our initial public offering,and June 18, 1998, when we pre-
announced the earnings shortfall. The complaint generally alleges that we
misstated our future prospects in various press releases and communications
with analysts, and failed to disclose alleged internal problems with the
integration of certain acquired businesses, while allegedly selling material
amounts of stock held by insiders.

   We successfully moved to dismiss all claims in the action, and the court
entered an order on April 25, 2000 dismissing the case with leave to amend. A
first amended complaint was filed on June 16, 2000. On October 27, 2000, the
court dismissed the lawsuit and entered judgment in our favor. Plaintiffs have
filed an appeal with the

                                      12
<PAGE>

Ninth Circuit Court of appeals, and a decision is not expected until sometime
in 2002. While we believe that the claims are without merit, and that our
directors and officers liability insurance will adequately cover the pending
claims, an unfavorable judgment in the matter could have a material negative
impact on our operating results and financial condition.

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

   Our principal stockholders, Brenda C. Rhodes and Todd J. Kinion,
beneficially owned a total of approximately 10.9% of our outstanding shares of
common stock at December 31, 2000. As a result, these stockholders as a group
will 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.

The current energy crisis in California could adversely affect our business.

   We rely on a continuous power supply to conduct our operations, and
California's current energy crisis could disrupt our operations and increase
our expenses. California is in the midst of an energy crisis that could
disrupt our operations and those of some of our clients and increase our
expenses. In the event of an acute power shortage, that is, when power
reserves for the State of California fall below 1.5%, California has on some
occasions implemented, and may in the future continue to implement, rolling
blackouts throughout California. We currently do not have backup generators or
alternate sources of power in the event of a blackout, and our current
insurance does not provide coverage for any damages we or our customers may
suffer as a result of any interruption in our supply. If blackouts interrupt
our power supply, we would be temporarily unable to continue operations at our
facilities. Any such interruption in our ability to continue operations at our
facilities could damage our reputation, harm our ability to retain existing
customers and to obtain new customers, and could result in lost revenue, any
of which could substantially harm our business and results of operations. Our
California clients may be subject to similar problems, which could affect
their demand for our services.

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 currently located in San Francisco,
California and occupy an aggregate of approximately 5,600 square feet of
office space pursuant to a lease that expires in December 2003. We also lease
or sublease office space for its operations in Austin, Dallas and Houston,
Texas; Capitola, Fremont, Irvine,

                                      13
<PAGE>

Mountain View, San Mateo, Lafayette, Larkspur, San Jose and Sacramento,
California; Boston, Massachusetts; Chicago and Schaumburg, Illinois; Denver
and Boulder, Colorado; London, England; New York, New York; Trumbull,
Connecticut; Tampa and Orlando, Florida; Atlanta, Georgia, Phoenix, Arizona;
Portland, Oregon; Raleigh, North Carolina; Salt Lake City, Utah; Iselin, New
Jersey; McLean, Virginia; Minneapolis, Minnesota; Bellevue, Bothell and
Seattle, Washington; New Delhi, India; and Tokyo, Japan. In addition, we own a
training facility located in Park City, Utah.

Item 3. Legal Proceedings

   In June 1999, we and certain of our directors and officers were named as
defendants in three putative class actions filed in the United States District
Court for the Northern District of California, alleging violations of Section
10(b) of the Securities and Exchange Act of 1934. Pursuant to court order,
those cases have been consolidated, and a consolidated amended complaint was
filed on January 24, 2000. The action arises out of our announcement of a
shortfall in earnings for the quarter ending June 1998, and purports to be
brought on behalf of all purchasers of our common stock between August 5,
1997, the date of our initial public offering,and June 18, 1998, when we pre-
announced the earnings shortfall. The complaint generally alleges that we
misstated our future prospects in various press releases and communications
with analysts, and failed to disclose alleged internal problems with the
integration of certain acquired businesses, while allegedly selling material
amounts of stock held by insiders.

   We successfully moved to dismiss all claims in the action, and the court
entered an order on April 25, 2000 dismissing the case with leave to amend. A
first amended complaint was filed on June 16, 2000. On October 27, 2000, the
court dismissed the lawsuit and entered judgment in our favor. Plaintiffs have
filed an appeal with the Ninth Circuit Court of appeals, and a decision is not
expected until sometime in 2002. While we believe that the claims are without
merit, and that our directors and officers liability insurance will adequately
cover the pending claims, an unfavorable judgment in the matter could have a
material negative impact on our operating results and financial condition.

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

   None.

                                      14
<PAGE>

                                    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 December 31, 2000, there were approximately
50 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 31, 2000 and December 26, 1999.

<TABLE>
<CAPTION>
                                                                   Sales Price
                                                                  -------------
     Fiscal year ended December 31, 2000                           High   Low
     -----------------------------------                          ------ ------
     <S>                                                          <C>    <C>
     4th quarter ended December 31, 2000......................... $29.88 $16.00
     3rd quarter ended September 24,2000......................... $45.88 $26.50
     2nd quarter ended June 25, 2000............................. $30.00 $20.19
     1st quarter ended March 26, 2000............................ $30.00 $16.88

<CAPTION>
     Fiscal year ended December 26, 1999                           High   Low
     -----------------------------------                          ------ ------
     <S>                                                          <C>    <C>
     4th quarter ended December 26, 1999......................... $19.50 $10.00
     3rd quarter ended September 26,1999......................... $11.50 $ 6.38
     2nd quarter ended June 27, 1999............................. $ 8.50 $ 5.38
     1st quarter ended March 28,1999............................. $10.00 $ 4.75
</TABLE>

   No cash dividends were paid in 2000, 1999, or 1998. We, as we deem
appropriate, may continue to retain all earnings for use in our business or
may consider paying a dividend in the future. We cannot currently issue
dividends without acquiring bank consent prior to issuance.

   You can obtain any of the documents incorporated by reference in this
document through us or from the SEC through the SEC's web site:
http://www.sec.gov. Documents incorporated by reference are available from us
without charge, excluding any exhibits to those documents unless the exhibit
is specifically incorporated by reference as an exhibit in this report. You
can obtain documents incorporated by reference in this report by requesting
them from us in writing or by telephone at the following address:

                        Hall, Kinion & Associates, Inc.
                              Investor Relations
               185 Berry Street, China Basin Landing, Suite 4600
                        San Francisco, California 94107
                           Telephone: (415) 371-8400

                                      15
<PAGE>

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 result of future operations and should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and
related notes thereto included elsewhere in this Form 10-K.

<TABLE>
<CAPTION>
                                               Fiscal Year
                                ---------------------------------------------
                                  2000     1999      1998     1997     1996
                                -------- --------  --------  -------  -------
                                 (in thousands, except per share amounts)
<S>                             <C>      <C>       <C>       <C>      <C>
Consolidated Statement of
 Income Data:
Net revenues................... $296,491 $180,749  $124,132  $92,831  $50,571
Cost of contract services......  147,539   96,502    69,066   54,769   30,342
                                -------- --------  --------  -------  -------
Gross profit...................  148,952   84,247    55,066   38,062   20,229
Selling, general and
 administrative expenses.......  125,493   70,732    47,284   33,689   18,233
                                -------- --------  --------  -------  -------
Income from operations.........   23,459   13,515     7,782    4,373    1,996
Other income (expense), net....    1,615     (477)      (51)    (127)     369
                                -------- --------  --------  -------  -------
Income before income taxes.....   25,074   13,038     7,731    4,246    2,365
Income taxes...................   10,464    5,382     3,325    1,737    1,004
                                -------- --------  --------  -------  -------
Net income..................... $ 14,610 $  7,656  $  4,406  $ 2,509  $ 1,361
                                ======== ========  ========  =======  =======
Income per share:
  Basic........................ $   1.18 $   0.75  $   0.47  $  0.34  $  0.22
                                ======== ========  ========  =======  =======
  Diluted...................... $   1.10 $   0.71  $   0.43  $  0.25  $  0.16
                                ======== ========  ========  =======  =======
Weighted Average Common Shares
 Outstanding:
  Basic........................   12,357   10,155     9,439    7,339    6,282
  Diluted......................   13,267   10,716    10,342    9,907    8,350


Consolidated Balance Sheet
 Data:
Working capital................ $ 64,819 $ 15,560  $  7,808  $19,390  $   189
Total assets...................  139,821   76,554    55,976   42,440   22,994
Long term debt.................      209   14,161     1,083    2,549    6,738
Redeemable convertible
 preferred stock...............       --       --        --       --    9,900
Stockholders' equity
 (deficit).....................  110,762   43,969    37,902   31,530   (2,748)
</TABLE>

                                      16
<PAGE>

Item 7. Management's Discussion and Analysis of Financial Condition 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 the Internet economy--
human capital. As a leading talent source for the growing Internet economy, we
provide specialized IT professionals on a short-term contract and permanent
basis primarily to vendors of Internet technologies and, to a lesser extent,
to users of intranets and extranets. We have 41 offices located in 25
geographic markets. Our Contract Services group provides specialized IT
professionals on a short-term contract basis and accounted for approximately
76.0% of our net revenues in 2000, 80.5% in 1999, and 85.5% in 1998. Our
Permanent Placement Services group provides specialized IT professionals on a
permanent basis and accounted for approximately 24.0% of our net revenues in
2000, 19.5% in 1999, and 14.5% in 1998.

   Our net revenues are derived principally from the hourly billings of our IT
professionals on contract assignments and from fees received for permanent
placements. Contract services assignments typically last four to six months,
and revenues are recognized as services are provided. We derive contract
services revenues when our consultants are working, and therefore our
operating results may be adversely affected when client facilities are closed
due to holidays or inclement weather. As a result, we typically experience
relatively lower net revenues in our first fiscal quarter compared to our
other fiscal quarters. We derive permanent placement revenues upon permanent
placement of each IT professional candidate. The fee is typically structured
as a percentage of the placed IT professional's first-year annual
compensation. Permanent placement revenues are recognized when an IT
professional commences employment or, in the case of retained searches, upon
completion of our contractual obligations.

   We have experienced growth by:

  . expanding our pool of IT professionals;

  . entering new geographic markets;

  . adding sales and recruiting employees;

  . opening new offices in existing geographic markets; and

  . acquiring complementary businesses.

   Net revenues increased to $296.5 million in 2000 from $180.7 million in
1999, representing a 64.1% increase. Over this same period, we increased our
number of sales, sales support and administrative employees to 920 individuals
in 25 geographic markets from 678 individuals in 21 geographic markets,
representing a 35.7% increase in headcount. The number of revenue producing
sales and sales support employees included in the overall headcount increased
to 715 in 2000 from 558 in 1999, a 28.1% increase. The addition of new
offices, and the entry into new geographic markets have resulted in
substantial increases in our operating expenses, primarily due to increased
headcount. These expenses are incurred in advance of expected revenues because
there is typically a delay before our sales and sales support personnel reach
full productivity. As a result, in periods when we significantly increase our
number of offices or acquisitions, our gross profit and net income may be
negatively impacted. As a result of recent unfavorable economic conditions,
sales in the United States may decline. If the economic conditions in the
United States worsen or if a wider or global economic slowdown occurs, we may
experience a material adverse impact on our business, operating results, and
financial condition.


                                      17
<PAGE>

Results of Operations

   The following table sets forth, the results of operations as a percentage
of net revenues for the periods shown:

<TABLE>
<CAPTION>
                                                               Fiscal Year
                                                                Ended(1)
                                                            -------------------
                                                            2000   1999   1998
                                                            -----  -----  -----
<S>                                                         <C>    <C>    <C>
Net revenues:
  Contract services........................................  76.0%  80.5%  85.5%
  Permanent placement services.............................  24.0   19.5   14.5
                                                            -----  -----  -----
    Total net revenues..................................... 100.0  100.0  100.0
Cost of contract services..................................  49.8   53.4   55.6
                                                            -----  -----  -----
Gross profit(2)............................................  50.2   46.6   44.4
Operating expenses.........................................  42.3   39.1   38.1
                                                            -----  -----  -----
Income from operations.....................................   7.9    7.5    6.3
Other income/(expenses)....................................   0.5   (0.3) ( 0.1)
                                                            -----  -----  -----
Income before taxes........................................   8.4    7.2    6.2
Income taxes...............................................   3.5    3.0    2.7
                                                            -----  -----  -----
Net income.................................................   4.9%   4.2%   3.5%
                                                            =====  =====  =====
</TABLE>
--------
(1) Our fiscal year ends on the last Sunday of December.
(2) Gross profit for contract services as a percentage of net contract service
    revenues was 34.5% in 2000, 33.6% in 1999, and 34.9% in 1998.

Fiscal Year Ended December 31, 2000 Compared to Fiscal Year Ended December 26,
1999

   Net Revenues. Net revenues increased 64.1% to $296.5 million in 2000 from
$180.7 million in 1999. Net revenues from our Contract Services group
increased 54.9% to $225.3 million in 2000 from $145.4 million in 1999. Net
revenues from our Permanent Placement Services group were $71.2 million in
2000 and $35.3 million in 1999, representing an increase of 101.5%. The
increase in net revenues in 2000 was due primarily to growth in existing
offices and the addition of new offices. Our revenue producing sales and sales
support employee headcount increased throughout the year reaching 715 as of
the end of 2000 from 558 as of the end of 1999, a 28.1% increase. Our IT
professional headcount decreased to 1,397 at the end of 2000 from 1,427 at the
end of 1999, a 2.1% decrease.

   Gross Profit. Gross profit for our Contract Services group represents
revenues less direct costs of services, which consist of direct payroll,
payroll taxes, and insurance and benefit costs for IT professionals. Gross
profit for our Permanent Placement Services group is essentially equal to
revenues as there are no direct costs associated with such revenues. Gross
profit increased by 76.8% to $149.0 million for 2000 from $84.2 million for
1999. This increase was primarily attributable to an increase in the number of
assignments, an increase in average billing rates, and an increase in demand
for services from our Permanent Placement Services group. The increase in
average billing rates was primarily attributable to an increase in higher rate
leading edge technology contract services assignments. Gross profit as a
percentage of net revenues increased to 50.2% for 2000 from 46.6% for 1999.
This increase was due primarily to an increase in the percentage of revenues
from our Permanent Placement Services group. Gross profit as a percentage of
net revenues from the Contract Services group, increased slightly to 34.5% for
2000 from 33.6% for 1999. This increase was primarily due to an aggressive
pricing strategy in our Contract Services group.

   Operating Expenses. Operating expenses consist primarily of employee costs,
recruiting expenses, marketing expenses and amortization of intangible assets
related to acquisitions. Operating expenses increased by 77.4% to $125.5
million for 2000 compared to $70.7 million for 1999. Operating expenses as a
percentage of net revenues increased to 42.3% for 2000, from 39.1% for 1999.
The increases resulted primarily from expenses

                                      18
<PAGE>

associated with increased sales, sales support and administrative employee
costs, opening new offices, facility costs, amortization and depreciation
expense.

   Other Expense. Interest income increased to $2.1 million for 2000 from
$263,000 for 1999. The increase in interest income resulted primarily from
interest on cash received from sale of common stock and to a lesser extent
from interest related to loans made to some executive officers in 2000.
Interest expense decreased to $361,000 for 2000 compared to $723,000 for 1999.
The decrease in interest expense reflected the repayment of debt.

   Income Taxes. Our effective income tax rate was 41.8% for 2000 compared to
41.3% for 1999. Our income tax rate varies from period to period due primarily
to changes in nondeductible expenses.

   Net Income. Net income increased 90.8% to $14.6 million for 2000 from $7.7
million for 1999. Net income as a percentage of net revenues was 4.9% for 2000
compared to 4.2% for 1999.

Fiscal Year Ended December 26, 1999 Compared to Fiscal Year Ended December 27,
1998

   Net Revenues. Net revenues increased 45.6% to $180.7 million in 1999 from
$124.1 million in 1998. Net revenues from our Contract Services group
increased 37.0% to $145.4 million in 1999 from $106.1 million in 1998. Net
revenues from our Permanent Placement Services group were $35.3 million in
1999 and $18.0 million in 1998, representing an increase of 96.2%. The
increase in net revenues in 1999 was due primarily to growth in existing
offices, addition of new offices and, to a lesser extent, acquisitions of
complementary businesses. Our revenue producing sales and sales support
employee headcount increased throughout the year reaching 558 as of the end of
1999 from 397 as of the end of 1998, a 40.6% increase. Our IT professional
headcount increased to 1,427 at the end of 1999 from 1,159 at the end of 1998,
an increase of 23.1%.

   Gross Profit. Gross profit for our Contract Services group represents
revenues less direct costs of services, which consist of direct payroll,
payroll taxes, and insurance and benefit costs for IT professionals. Gross
profit for our Permanent Placement Services group is essentially equal to
revenues as there are no direct costs associated with such revenues. Gross
profit increased by 53.0% to $84.2 million for 1999 from $55.1 million for
1998. This increase was primarily attributable to an increase in the number of
assignments, an increase in average billing rates, and an increase in demand
for services from our Permanent Placement Services group. The increase in
average billing rates was primarily attributable to an increase in higher rate
leading edge technology contract services assignments. Gross profit as a
percentage of net revenues increased to 46.6% for 1999 from 44.4% for 1998.
This increase was due primarily to an increase in the percentage of revenues
from our Permanent Placement Services group. Gross profit as a percentage of
net revenues from the Contract Services group, while within our historical
range, decreased slightly to 33.6% for 1999 from 34.9% for 1998. This decrease
was attributable primarily to our customers' Y2K concerns. During the latter
half of 1999, many companies chose not to make system changes due to Y2K
concerns. Therefore we experienced increased non-billable time in some of our
Contract Services group offices.

   Operating Expenses. Operating expenses consist primarily of employee costs,
recruiting expenses, marketing expenses and amortization of intangible assets
related to acquisitions. Operating expenses increased by 49.6% to $70.7
million for 1999 compared to $47.3 million for 1998. Operating expenses as a
percentage of net revenues increased to 39.1% for 1999 from 38.1% for 1998.
The increases resulted primarily from expenses associated with increased
sales, sales support and administrative employee costs, facility costs,
amortization and depreciation expense, and costs for a new marketing campaign.

   Other Expense. Interest income increased to $263,000 for 1999 from $215,000
for 1998. The increase in interest income resulted from interest related to
loans made to some executive officers in 1999. Interest expense increased to
$723,000 for 1999 compared to $255,000 for 1998. The increase in interest
expense primarily reflected debt incurred in connection with acquisitions and
an overall increase in interest rates.


                                      19
<PAGE>

   Income Taxes. Our effective income tax rate was 41.3% for 1999 compared to
43.0% for 1998. Our income tax rate varies from period to period due primarily
to changes in nondeductible expenses.

   Net Income. Net income increased 73.8% to $7.7 million for 1999 from $4.4
million for 1998. Net income as a percentage of net revenues was 4.2% for 1999
compared to 3.5% for 1998.

Liquidity and Capital Resources

   We generally fund our operations and working capital needs through cash
generated from operations, periodically supplemented by borrowings under our
revolving line of credit with a commercial bank. Our operating activities
generated cash of approximately $16.4 million in 2000 and $5.3 million in
1999. Cash provided from our operating activities for 2000 increased primarily
due to improved operating margins, and aggressive cash collection policies.

   The principal uses of cash for investing activities for 2000 were for the
purchase of property and equipment, and earn out payments relating to business
acquisitions. Purchases of property and equipment included upgrading our
network and other technology systems.

   We have a $30 million credit facility that is comprised of a $20 million
revolving credit facility and a $10 million term loan facility. As of December
31, 2000, there were no borrowings under the revolving credit, nor under the
term loan facility. The interest rate on both facilities is the lower of the
lender's prime rate or LIBOR. Both facilities terminate in July 2002.
Borrowings under both facilities are secured by substantially all of our
assets. The facilities contain covenants requiring us to maintain minimum
levels of profitability and net worth and specific ratios of working capital
and debt to operating cash flow. We are in compliance with all of these
covenants as of December 31, 2000.

   Net cash provided by financing activities for 2000 was $33.1 million, due
primarily to proceeds from sale of common stock associated with the secondary
offering in April 2000 and partially offset by repayment of debt.

   We believe that our cash flows from operations and amounts available under
our credit facility will be sufficient to meet our cash requirements for at
least twelve months.

Recently Issued Financial Accounting Standards

  . In June 1998, the Financial Accounting Standards Board adopted SFAS No.
    133, Accounting for Derivative Instruments and Hedging Activities, which
    establishes accounting and reporting standards for derivative
    instruments, including certain derivative instruments embedded in other
    contracts and for hedging activities. SFAS No. 133 requires that an
    entity recognize all derivatives as either assets or liabilities in the
    statement of financial position and measure those instruments at fair
    value. The statement is effective for our fiscal year ending in December
    2001, and will not be applied retroactively to the financial statements
    of prior periods. We have not engaged in any transactions requiring the
    use of SFAS No. 133, accordingly SFAS 133 has no effect on our financial
    statements.

  . In March 2000, the FASB issued Financial Accounting Standards Board
    Interpretation No. 44, "Accounting for Certain Transactions involving
    Stock Compensation--An Interpretation of APB No. 25." Interpretation No.
    44 is effective July 1, 2000. The Interpretation clarifies the
    application of Opinion 25 for various issues, specifically: the
    definition of an employee, the criteria for determining whether a plan
    qualifies as a non-compensatory plan, the accounting consequences of
    various modifications to the terms of a previously fixed stock option or
    award, and the accounting for an exchange of stock compensation awards in
    a business combination. Interpretation No. 44 did not have an impact on
    our financial statements.

  . Revenue Recognition--In December, 1999, the SEC issued Staff Accounting
    Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements,"
    which summarizes certain of the SEC staff's views in applying generally
    accepted accounting principles to revenue recognition in financial
    statements. The Company believes that its revenue recognition policy
    complies with the provisions of SAB No. 101.

                                      20
<PAGE>

Item 7.a. Quantitative and Qualificative 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 31, 2000, we had no fixed rate long-term
debt, or any borrowings against a $20 million revolving line of credit. If
short-term interest rates were to increase 10 percent, the increased interest
expense associated with these arrangements would not have a material impact on
our net income or cash flows. We also currently have $42.7 million in cash and
cash equivalents that are invested in the highest rated commercial paper and
money market funds. If short-term interest rates were to decrease 10 percent,
the decrease would not have a material impact on our net income or cash flows.
We do not hedge any interest rate exposures. Historically, borrowings and
repayments under our revolving line of credit facilities represented the most
significant components of cash provided by or used for financing activities.
Under an arrangement with a commercial bank, we may borrow an amount not to
exceed $30 million with interest at the bank's prime interest rate, or LIBOR,
whichever is lower. The borrowings under the line of credit facility are due
in full on July 15, 2002 or on demand if the terms of the agreement are not
met. The borrowings are collaterlized by substantially all of our assets.

   Foreign Currency Exchange Rate Risk. The United Kingdom pound is the
functional currency in our subsidiary in the United Kingdom. We do not
currently enter into foreign exchange forward contracts to hedge the balance
sheet exposures and intercompany balances against future movements in foreign
exchange rates. However, we do maintain cash balances denominated in the
United Kingdom pound. If foreign exchange rates were to weaken against the
U.S. dollar immediately and uniformly by 10 percent from the exchange rate at
December 31, 2000, the fair value of these foreign currency amounts would
decline by an immaterial amount.

                                      21
<PAGE>

Item 8. Financial Statements and Supplementary Data

                HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                      December 31, December 26,
                                                          2000         1999
                                                      ------------ ------------
<S>                                                   <C>          <C>
ASSETS
Current Assets:
  Cash and equivalents...............................   $ 42,692     $ 1,191
  Accounts receivable, net of allowance for doubtful
   accounts of $3,455 in 2000 and $1,500 in 1999.....     43,143      27,987
  Prepaid expenses and other current assets..........      2,653       1,437
  Deferred income taxes..............................      3,675       1,814
                                                        --------     -------
    Total current assets.............................     92,163      32,429
Property and equipment, net..........................     11,783       9,789
Goodwill, net........................................     35,096      33,917
Other assets.........................................        779         419
                                                        --------     -------
    Total assets.....................................   $139,821     $76,554
                                                        ========     =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Accounts payable...................................   $  7,314     $ 5,145
  Accrued salaries, commissions and related payroll
   taxes.............................................     11,428       7,322
  Accrued liabilities................................      5,584       1,714
  Income taxes payable...............................      3,018       2,688
                                                        --------     -------
    Total current liabilities........................     27,344      16,869
Long term debt and other obligations.................        209      14,161
Deferred income taxes................................      1,506       1,555
                                                        --------     -------
    Total liabilities................................     29,059      32,585
                                                        --------     -------
Stockholders' Equity:
  Common stock; $0.001 par value; 100,000 shares
   authorized; shares issued and outstanding: 2000--
   13,179; 1999--10,466..............................     87,207      38,183
  Stockholder notes receivable.......................     (2,267)     (5,499)
  Accumulated translation adjustment.................        (72)          1
  Retained earnings .................................     25,894      11,284
                                                        --------     -------
    Total stockholders' equity.......................    110,762      43,969
                                                        --------     -------
Total liabilities and stockholders' equity...........   $139,821     $76,554
                                                        ========     =======
</TABLE>

                See notes to consolidated financial statements.

                                       22
<PAGE>

                HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES

                       CONSOLIDATED STATEMENTS OF INCOME
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                       Years Ended
                                          --------------------------------------
                                          December 31, December 26, December 27,
                                              2000         1999         1998
                                          ------------ ------------ ------------
<S>                                       <C>          <C>          <C>
Net revenues:
  Contract services......................   $225,323     $145,425     $106,127
  Permanent placement....................     71,168       35,324       18,005
                                            --------     --------     --------
    Total net revenues...................    296,491      180,749      124,132
Cost of contract services................    147,539       96,502       69,066
                                            --------     --------     --------
Gross profit.............................    148,952       84,247       55,066
Operating expenses.......................    125,493       70,732       47,284
                                            --------     --------     --------
Income from operations...................     23,459       13,515        7,782
                                            --------     --------     --------
Other income (expense):
  Interest income........................      2,116          263          215
  Interest expense and other.............       (501)        (740)        (266)
                                            --------     --------     --------
    Total other income (expense), net....      1,615         (477)         (51)
                                            --------     --------     --------
Income before income taxes...............     25,074       13,038        7,731
Income taxes.............................     10,464        5,382        3,325
                                            --------     --------     --------
Net income...............................   $ 14,610     $  7,656     $  4,406
                                            ========     ========     ========
Net income per share:
  Basic..................................   $   1.18     $   0.75     $   0.47
  Diluted................................   $   1.10     $   0.71     $   0.43
</TABLE>

                CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                                 (in thousands)

<TABLE>
<CAPTION>
                                                     Years Ended
                                        --------------------------------------
                                        December 31, December 26, December 27,
                                            2000         1999         1998
                                        ------------ ------------ ------------
<S>                                     <C>          <C>          <C>
Net income.............................   $14,610       $7,656       $4,406
Change in accumulated translation
 adjustment............................       (73)          (4)           3
                                          -------       ------       ------
Net comprehensive income...............   $14,537       $7,652       $4,409
                                          =======       ======       ======
</TABLE>

                See notes to consolidated financial statements.

                                       23
<PAGE>

                HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (in thousands)

<TABLE>
<CAPTION>
                           Common Stock  Stockholder Accumulated
                          --------------    Notes    Translation Retained
                          Shares Amount  Receivable  Adjustment  Earnings   Total
                          ------ ------- ----------- ----------- --------  --------
<S>                       <C>    <C>     <C>         <C>         <C>       <C>
BALANCES as of December
 28, 1997...............   9,025 $32,312   $    (6)     $  2     $  (778)  $ 31,530
Net exercise of warrants
 into common stock......     250      --        --        --          --         --
Exercise of stock
 options................     215     639        --        --          --        639
Tax benefit related to
 stock options..........      --     404        --        --          --        404
Issuance of common
 stock..................      46     914        --        --          --        914
Repayment of stockholder
 note receivable........      --      --         6        --          --          6
Accumulated translation
 adjustment.............      --      --        --         3          --          3
Net income..............                                           4,406      4,406
                          ------ -------   -------      ----     -------   --------
BALANCES as of December
 27, 1998...............   9,536  34,269        --         5       3,628     37,902
Exercise of stock
 options................     930   3,457        --        --          --      3,457
Tax benefit related to
 stock options..........      --     457        --        --          --        457
Notes to stockholders...      --      --    (5,274)       --          --     (5,274)
Interest on stockholder
 notes receivable.......      --      --      (225)       --          --       (225)
Accumulated translation
 adjustment.............      --      --        --        (4)         --         (4)
Net income..............                                           7,656      7,656
                          ------ -------   -------      ----     -------   --------
BALANCES as of December
 26, 1999...............  10,466  38,183    (5,499)        1      11,284     43,969
Exercise of stock
 options................     725   4,724        --        --          --      4,724
Secondary stock
 offering...............   1,988  39,079        --        --          --     39,079
Tax benefit related to
 stock options..........      --   5,221        --        --          --      5,221
Repayments of notes from
 stockholders...........      --      --     3,446        --          --      3,446
Interest on stockholder
 notes receivable.......      --      --      (214)       --          --       (214)
Accumulated translation
 adjustment.............      --      --        --       (73)         --        (73)
Net income..............              --        --                14,610     14,610
                          ------ -------   -------      ----     -------   --------
Balances as of December
 31, 2000...............  13,179 $87,207   $(2,267)     $(72)    $25,894   $110,762
                          ====== =======   =======      ====     =======   ========
</TABLE>


                See notes to consolidated financial statements.

                                       24
<PAGE>

                HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                      Years Ended
                                         --------------------------------------
                                         December 31, December 26, December 27,
                                             2000         1999         1998
                                         ------------ ------------ ------------
<S>                                      <C>          <C>          <C>
Cash flows from operating activities:
 Net income.............................   $ 14,610     $  7,656     $  4,406
 Adjustments to reconcile net income to
  net cash provided by (used for)
  operating activities:
  Depreciation and amortization.........      4,588        2,905        1,945
  Deferred income taxes.................     (1,910)         262         (666)
  Interest on stockholder notes
   receivable...........................       (145)        (225)          --
  Loss on sale of fixed assets..........        255           42            5
  Discount on early repayment of debt...         --           --           13
  Changes in assets and liabilities:
   Accounts receivable..................    (15,156)      (9,425)      (3,113)
   Prepaid expenses and other assets....     (1,576)        (509)        (211)
   Prepaid income taxes.................         --           --          407
   Accounts payable and accrued
    expenses............................     10,120        2,133        1,863
   Income taxes payable.................      5,551        2,451          485
                                           --------     --------     --------
    Net cash provided by operating
     activities.........................     16,337        5,290        5,134
                                           --------     --------     --------
Cash flows from investing activities:
 Sales of investments...................         --           --        9,578
 Purchase of property and equipment.....     (5,757)      (5,641)      (1,705)
 Cash paid for business acquisitions....         --       (7,190)     (14,074)
 Earnout payments related to business
  acquisitions..........................     (2,259)        (753)          --
                                           --------     --------     --------
    Net cash used for investing
     activities.........................     (8,016)     (13,584)      (6,201)
                                           --------     --------     --------
Cash flows from financing activities:
 Line of credit, net....................         --       (1,000)        (810)
 Borrowing on debt......................     15,548       18,349        3,000
 Repayments of debt.....................    (29,548)      (9,129)      (2,996)
 Proceeds from sale of common stock, net
  of issuance costs.....................     39,079           --           --
 Proceeds from exercise of options......      4,724        3,457          639
 Stockholder notes receivable...........      3,377       (5,274)           6
                                           --------     --------     --------
    Net cash provided by (used for)
     financing activities...............     33,180        6,403         (161)
                                           --------     --------     --------
 Net increase (decrease) in cash and
  equivalents...........................     41,501       (1,891)      (1,228)
 Cash and equivalents, beginning of
  period................................      1,191        3,082        4,310
                                           --------     --------     --------
 Cash and equivalents, end of period....   $ 42,692     $  1,191     $  3,082
                                           ========     ========     ========
</TABLE>

                See notes to consolidated financial statements.

                                       25
<PAGE>

               HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

    YEARS ENDED DECEMBER 31, 2000, DECEMBER 26, 1999 AND DECEMBER 27, 1998

Note 1. Business and Significant Accounting Policies

   Business. Hall, Kinion & Associates, Inc. ("the Company") is an information
technology staffing company specializing in placing high technology personnel
on both a contract and permanent basis. In August 1999, the Company acquired
substantially all of the assets of TKI Consulting, Inc. ("TKI"). During 1998,
the Company acquired all of the outstanding capital stock of Group-IPEX, Inc.
and TKO Personnel, Inc. ("TKO"), and substantially all of the assets from
Alexander, Bohemer & Tomasco, dba, The Huntington Group, ("Huntington") and
Interactive Technology Consultants, LLC, ("ITC").

   Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.

   Certain Significant Risks and Uncertainties. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Such management estimates include the allowance for doubtful
accounts receivable and certain accruals. Actual results could differ from
those estimates.

   The Company operates in a dynamic industry, and accordingly, can be
affected by a variety of factors. For example, management of the Company
believes that changes in any of the following areas could have a negative
effect on the Company in terms of its future financial position and results of
operations: ability to obtain additional financing, regulatory changes,
uncertainty relating to the performance of the U.S. economy, competition,
demand for the Company's services, litigation or other claims against the
Company, and the hiring, training and retention of key employees.

   The Company's financial instruments that are exposed to credit risk are
primarily cash and equivalents and accounts receivable. The Company places its
cash with what it believes are high credit quality financial institutions. In
granting credit, the Company routinely evaluates the financial strength of its
customers.

   Cash and Equivalents. The Company considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents. Cash
equivalents, consisting primarily of money market funds and bank accounts, are
stated at a cost which approximates fair value.

   Property and Equipment. Property and equipment are stated at cost and
depreciated on a straight-line basis over the estimated useful lives of the
assets, generally three to twenty-five years. Leasehold improvements are
amortized over the shorter of the estimated life of the asset or the lease
term.

   Goodwill. Goodwill, representing the cost in excess of the fair value of
net assets acquired in acquisitions, is being amortized on a straight-line
basis over 30 to 40 years. For the years ended December 31, 2000, December 26,
1999 and December 27, 1998, amortization expense was $1,080,000, $930,000 and
$561,000, respectively. The Company evaluates the recoverability of goodwill
on a quarterly basis based upon estimated future cash flows.

   Revenue Recognition. Revenue from contract placements is recognized as
services are performed. Revenue from permanent placement contracts is
recognized either upon commencement of employment or upon completion of
services rendered based on contractual obligation.

   Income Taxes. The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, which requires an asset and liability approach of accounting for income
taxes.

                                      26
<PAGE>

               HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Stock-Based Compensation. The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to
Employees.

   Net Income Per Share. Basic net income per share excludes dilution and is
computed by dividing net income attributable to common stockholders by the
weighted average of common shares outstanding for the period. Diluted net
income per share reflects the potential dilution that could occur if
convertible securities and contracts to issue common stock were converted or
exercised into common stock.

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

<TABLE>
<CAPTION>
                                                    Years Ended
                                       --------------------------------------
                                       December 31, December 26, December 27,
                                           2000         1999         1998
                                       ------------ ------------ ------------
   <S>                                 <C>          <C>          <C>
   Basic weighted average common
    shares outstanding................    12,357       10,155        9,439
   Warrants...........................       --           --            10
   Stock options......................       910          561          893
                                          ------       ------       ------
   Diluted weighted average shares
    outstanding.......................    13,267       10,716       10,342
                                          ======       ======       ======
</TABLE>

   Fiscal Year. The Company's fiscal year ends on the Sunday closest to
December 31. Fiscal year 2000 consisted of 53 weeks. Fiscal years 1999 and
1998 consisted of 52 weeks.

 Recently Issued Financial Accounting Standards

   In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements," which summarizes certain of the
SEC staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. The Company believes that its
revenue recognition policy complies with the provisions of SAB No. 101.

   Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities, is effective for all fiscal
years beginning after June 15, 2000. SFAS 133, as amended, establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging
activities. Under SFAS 133, certain contracts that were not formerly
considered derivatives may now meet the definition of a derivative. The
Company will adopt SFAS 133 effective January 1, 2001. We have not engaged in
any transactions requiring the use of SFAS No. 133, accordingly SFAS 133 has
no effect on our financial statements.

   In March 2000, the FASB issued Financial Accounting Standards Board
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation--An Interpretation of APB No. 25." Interpretation No. 44 is
effective July 1, 2000. The Interpretation clarifies the application of
Opinion 25 for various issues, specifically: the definition of an employee,
the criteria for determining whether a plan qualifies as a non-compensatory
plan, the accounting consequences of various modifications to the terms of a
previously fixed stock option or award, and the accounting for an exchange of
stock compensation awards in a business combination. Adoption of
Interpretation No. 44 did not have an impact on our financial statements.

Note 2. Acquisitions

   In August 1999, the Company acquired substantially all of the assets of TKI
Consulting Inc. ("TKI") for $7.2 million in cash. The acquisition was
accounted for as a purchase. TKI is an IT consulting and training firm,

                                      27
<PAGE>

               HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

specializing in client/server, e-commerce and internet-based consulting
applications. TKI delivers full project consulting services that solve
business issues and saves companies time and money. TKI is based in
Minneapolis, Minnesota. The purchase price exceeded the fair value of the net
liabilities assumed by $8.1 million, which was recorded as goodwill and is
being amortized over 40 years. If certain revenue targets set forth in the
agreement providing for such acquisition are achieved, the Company has agreed
to pay the seller an aggregate of $2.5 million that will be recorded as
additional purchase price. The payments will be made in future installments of
$625,000 each over a four year period ending 2003, payable by March 15 of the
following year. No payment was made for 2000.

   In November 1998, the Company acquired substantially all of the assets of
Alexander, Boehmer, Tomasco, LLC, doing business as Huntington Group (HG) and
Interactive Technologies Consultants (ITC), for $8.1 million in cash. The
acquisitions were accounted for as a purchase. The Huntington Group is a
retained search firm, while ITC is a provider of IT professionals on a
contract basis. Both companies are located in Trumbull, Connecticut. The
purchase price exceeded the fair value of the net liabilities assumed by $8.9
million, which was recorded as goodwill and is being amortized over 30 to 40
years. If certain revenue and earnings targets as set forth in the agreement
providing for such acquisition are achieved, the Company has agreed to pay the
sellers an aggregate of $3.6 million which will be recorded as additional
purchase price. The payments will be made in future installments of $600,000,
$1,800,000 and $1,200,000, over a three year period ending 2002, payable by
January 31 of the following year. The 1999 targets were substantially met and
a $600,000 payment was made in January 2000. The 2000 targets were
substantially met and a $1,700,000 payment was made in January 2001.

   In August 1998, the Company purchased all of the outstanding capital stock
of TKO Personnel, Inc. for $228,000 in cash. The acquisition was accounted for
as a purchase. TKO Personnel, is based in San Jose, California, is an
international permanent placement recruiting organization for IT research and
development professionals focusing on recruiting primarily from Japan, but
also from China and Korea. The purchase price exceeded the fair value of the
net liabilities assumed by $912,000 which was recorded as goodwill and is
being amortized over 40 years. If certain revenue targets as set forth in the
agreement providing for such acquisition are achieved, the Company has agreed
to pay the sellers an aggregate of $350,000 that will be recorded as
additional purchase price. The payments will be made semi-annually in
installments of $58,833 over a three year period ending 2002. The first target
was substantially met and the corresponding payment of $53,000 was paid in
September 1999. The second and third targets were substantially met and
corresponding payments of $50,747 and $58,333 were made in February 2000 and
August 2000. The fourth target was also substantially met and a corresponding
payment of $58,333 was paid in February 2001.

   In January 1998, the Company purchased all of the outstanding capital stock
of Group-IPEX, Inc. (Group-IPEX). Group-IPEX is an international recruiting
organization for information technology IT research and development
professionals. Group IPEX focuses on recruiting international IT professionals
primarily from India but also from Russia and China. The acquisition was
accounted for as a purchase. Total consideration for this purchase was $7.3
million including approximately $250,000 of costs attributable to the
acquisition.

   The consideration was paid in the form of a cash payment of $6.2 million at
the date of acquisition and the issuance of 46,000 shares of the Company's
Common stock valued at $914,000. The purchase price exceeded the fair value of
the net liabilities assumed by $7.7 million, which was recorded as goodwill
and is being amortized over 40 years. In addition, if certain earnings targets
set forth in the agreement providing for such acquisitions are achieved, the
Company has agreed to pay the seller an aggregate up to $3,375,000 that will
be recorded as additional purchase price. The 1998 targets were substantially
met and the corresponding payment of $700,000 was paid in 1999. The 1999
targets were substantially met and the corresponding payment of $1,550,000 was
made on February 10, 2000. The 2000 targets have also been substantially met
and the corresponding payment of $1,125,000 was made in February 2001.

                                      28
<PAGE>

               HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The following summarized unaudited pro forma financial information assumes
that each acquisition disclosed above had occurred as of the first day of the
fiscal year of the acquisition and of the preceding fiscal year (in thousands,
except per share amounts):

<TABLE>
<CAPTION>
                                                                1999     1998
                                                              -------- --------
   <S>                                                        <C>      <C>
   Pro forma Information (unaudited):
   Total net revenues........................................ $185,188 $137,428
   Net income................................................    7,281    3,789
   Net income per share:
     Basic...................................................     0.72     0.40
     Diluted.................................................     0.68     0.37
</TABLE>

   The pro forma information is for informational purposes only and may not
necessarily reflect the results of operations of the Company had the acquired
businesses operated as a part of the Company for the fiscal years presented.
The pro forma adjustments consist primarily of goodwill amortization and
additional interest for debt incurred in connection with the acquisitions.

Note 3. Property and Equipment

   Property and equipment, net consists of (in thousands):

<TABLE>
<CAPTION>
                                                       December 31, December 26,
                                                           2000         1999
                                                       ------------ ------------
   <S>                                                 <C>          <C>
   Property and equipment.............................   $14,509      $11,716
   Land and building..................................     2,100        2,100
   Leasehold improvements.............................     1,916        1,121
                                                         -------      -------
                                                          18,525       14,937
   Accumulated depreciation and amortization..........    (6,742)      (5,148)
                                                         -------      -------
                                                         $11,783      $ 9,789
                                                         =======      =======
</TABLE>

Note 4. Debt

   The Company has a $30 million credit facility. The credit facility is
comprised of a $20 million long term revolving credit facility and a $10
million term loan facility. The interest rate on both facilities is the lower
of the lender's prime rate (9.5% at December 31, 2000), or LIBOR. Both these
facilities terminate July 15, 2002. Borrowings under both facilities are
secured by substantially all of the Company's assets. The facilities contain
covenants requiring the Company to maintain minimum levels of profitability
and net worth and specific ratios of working capital and debt to operating
cash flow. The Company is also required to obtain the bank's consent prior to
paying cash dividends. The Company was in compliance with all of those ratios
and had no drawings under the credit and loan facilities as of December 31,
2000.

   Long term debt and other obligations (in thousands):

<TABLE>
<CAPTION>
                                                       December 31, December 26,
                                                           2000         1999
                                                       ------------ ------------
   <S>                                                 <C>          <C>
   Bank term loan.....................................     $--        $14,000
   Deferred rent......................................      209           161
                                                           ----       -------
                                                           $209       $14,161
                                                           ====       =======
</TABLE>

                                      29
<PAGE>

               HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 5. Employee Benefit Plans

   The Company has a 401(k) profit-sharing plan covering substantially all
employees with at least 90 days of continuous service. Employees may
contribute up to 15% of their eligible compensation to the maximum amount
allowed by the Internal Revenue Code. At the discretion of the Board of
Directors, the Company may match employee contributions. In February 1998, the
Board of Directors approved a nonqualified deferred compensation plan for
officers and key employees. At the discretion of the Board of Directors, the
Company may match contributions. The Company did not make any matching
contributions in 2000, 1999 and 1998.

Note 6. Lease Commitments

   The Company leases its office facilities under various non-cancellable
operating leases, which expire through 2007. Rent expense included in
operating expenses for 2000, 1999 and 1998 was approximately $4,688,000,
$3,089,000 and $2,385,000, respectively. Future minimum payments under all
operating leases are as follows:

<TABLE>
   <S>                                                                  <C>
   Fiscal years ending (in thousands):
   2001................................................................ $ 5,311
   2002................................................................   4,873
   2003................................................................   4,001
   2004................................................................   2,819
   2005................................................................   1,028
   Thereafter..........................................................     618
                                                                        -------
                                                                        $18,650
                                                                        =======
</TABLE>

Note 7. Stockholders' Equity

   Capital Stock--The Company is authorized to issue 110,000,000 shares of
capital stock consisting of 100,000,000 shares of common stock and 10,000,000
shares of preferred stock.

   Stockholder Notes Receivable--In January 1999, the Company loaned Brenda C.
Rhodes, Chief Executive Officer, $2,000,000, which bears interest at the
Company's incremental rate of borrowing plus 1/8% per annum, compounded
monthly. This loan is secured by 1,000,000 shares of the Company's Common
Stock pledged by Ms. Rhodes. The principal balance of this note, together with
accrued interest is due and payable January 25, 2002. The rate of interest for
the fiscal year ended December 31, 2000 was 6.7%.

   On April 15, 1999, the Company made two loans for an aggregate of
$3,274,000 to Paul H. Bartlett, former President, to enable Mr. Bartlett to
pay the exercise price and income taxes associated with his exercise of an
option to purchase 750,000 shares of common stock at an exercise price of
$4.00 per share. The loans were repaid in June 2000.

   Stock Options--The Company's 1997 Stock Option Plan (the "Plan"), as
amended, authorizes the issuance of up to 3,363,000 shares of common stock
pursuant to incentive or nonqualified stock options granted under the Plan to
key employees, non-employees, directors and consultants who provide services
to the Company. The Plan also allows for an additional number of shares equal
to 3.0% of the number of shares of Common Stock outstanding on the first day
of each calendar year to be automatically added to this authorization each
year pursuant to the terms of the 1997 Stock Option Plan. Under the Plan,
options generally are granted at fair market value at the date of grant as
determined by the Board of Directors. Such options vest over periods ranging
from two to five years and expire up to ten years from the grant date.

                                      30
<PAGE>

               HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The Company's IT Professional Stock Plan (the "IT Professional Plan") was
adopted by the Board of Directors in May 1997. The Company has authorized
785,000 shares of Common Stock for issuance under the IT Professional Plan,
and an additional number of shares equal to 1.5% of the number of shares of
Common Stock outstanding on the first day of each calendar year is
automatically added to this authorization each year pursuant to the terms of
the IT Professional Plan. At December 31, 2000, 609,000 shares of Common Stock
were available for issuance under the IT Professional Plan. Under the IT
Professional Plan, independent consultants may, at the discretion of the plan
administrator, be granted options to purchase shares of Common Stock at an
exercise price no less than 85% of the fair market value of such shares on the
grant date. Options under the IT Professional Plan are generally vested based
upon the tenure of the IT Professional and expire ten years from grant date.

   The Company's Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in May 23, 1997. A total of 150,000 shares
of Common Stock have been reserved for issuance under the Purchase Plan.
Employees will be eligible to participate if they are employed by the Company
for more than 20 hours per week and have been employed for at least ninety
days. The Purchase Plan permits eligible employees to purchase Common Stock
through payroll deductions, which may not exceed 10% of an employee's cash
compensation, nor more than 1,000 shares per participant on any purchase date.
The purchase price of stock under the Purchase Plan will be 85% of the lower
of the fair market value of the Common Stock at the beginning of the six-month
offering period or on the purchase date. The Board may amend or terminate the
Purchase Plan immediately after the close of any purchase date. As of December
31, 2000, the Company has not implemented the Purchase Plan.

   The Company's 2000 Stock Option Plan (the "2000 Plan") adopted by the Board
of Directors, authorizes the issuance of up to 1,000,000 shares of Common
Stock pursuant to nonqualified stock options granted under the 2000 Plan to
key employees who provide services to the Company. Under the 2000 Plan,
options generally are granted at fair market value at the date of the grant as
determined by the Board of Directors. Such options vest over five years and
expire up to ten years from the grant date.

   Activity under all stock option plans is as follows:

<TABLE>
<CAPTION>
                                                                      Weighted
                                                                      Average
                                                           Number of  Exercise
                                                            Shares     Price
                                                           ---------  --------
   <S>                                                     <C>        <C>
   Balance, December 28, 1997............................. 2,349,000   $ 5.63
   Granted (weighted average fair value* of $1.92 per
    share)................................................   550,000   $10.50
   Canceled...............................................  (272,000)  $ 9.47
   Exercised..............................................  (209,000)  $ 2.95
                                                           ---------
   Balance, December 27, 1998............................. 2,418,000   $ 6.54
   Granted (weighted average fair value* of $4.22 per
    share)................................................   868,000   $ 8.21
   Canceled...............................................  (252,000)  $ 9.35
   Exercised..............................................  (930,000)  $ 3.71
                                                           ---------
   Balance, December 26, 1999............................. 2,104,000   $ 8.12
   Granted (weighted average fair value* of $1.92 per
    share)................................................ 1,828,000   $25.44
   Canceled...............................................  (320,000)  $12.92
   Exercised..............................................  (724,000)  $ 6.52
                                                           ---------
   Balance, December 31, 2000............................. 2,888,000   $18.95
                                                           =========
</TABLE>
--------
* As computed under SFAS No. 123

                                      31
<PAGE>

               HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Additional information regarding options outstanding as of December 31,
2000 is as follows:

<TABLE>
<CAPTION>
                       Options Outstanding        Options Exercisable
                     ----------------------- -----------------------------
                                  Weighted
                                   Average                        Weighted
                                  Remaining  Weighted             Average
                                 Contractual Average                Exer
       Range of        Number       Life     Exercise   Number      cise
   Exercise Prices   Outstanding   (Years)    Price   Exercisable  Price
   ----------------  ----------- ----------- -------- ----------- --------
   <S>               <C>         <C>         <C>      <C>         <C>
   $ 0.300--$ 6.563     327,000     6.67      $ 4.99    221,000    $ 4.35
   $ 6.688--$ 7.688     297,000     8.31      $ 7.28     70,000    $ 7.30
   $ 7.838--$11.000     322,000     7.53      $ 9.48    195,000    $ 9.83
   $13.125--$21.875     385,000     8.57      $18.40     84,000    $19.21
   $23.984--$23.984     980,000     9.32      $23.98      1,000    $23.98
   $24.063--$41.125     577,000     9.49      $29.94      1,000    $26.09
                      ---------                         -------
   $ 0.300--$41.125   2,888,000     8.65      $18.95    572,000    $ 8.83
                      =========                         =======
</TABLE>

   At December 31, 2000, 1,156,000 shares of common stock were available for
future option grants under all Plans. As of December 26, 1999 and December 27,
1998 the number of shares of common stock underlying exercisable options were
998,000 and 1,366,000, respectively with a weighted average exercise price of
$7.24 and $5.28 per share, respectively.

   Additional Stock Plan Information--As discussed in Note 1, the Company
continues to account for all its stock-based awards using the intrinsic value
method in accordance with APB 25, Accounting for Stock Issued to Employees and
its related interpretations. Accordingly, no compensation expense has been
recognized in the financial statements for employee stock arrangements, as the
options exercise price is not less than the fair market value of the
underlying common stock at date of grant.

   Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation, (SFAS 123) requires the disclosure of pro forma net income
and earnings per share had the Company adopted the fair value method as of the
beginning of fiscal 1995. Under SFAS 123, the fair value of stock-based awards
to employees is calculated through the use of option price models, even though
models were developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ
from the Company's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time to
exercise, which affect the calculated values.

   The Company's calculations were made using the Black-Scholes option pricing
model with the following weighted average assumptions: expected life following
vesting, 14 months in 2000, 16 months in 1999 and 12 months in 1998;
volatility, 78.0% in 2000, 61.9% in 1999, 37.2% in 1998; risk free interest
rates, 6.7% in 2000, 5.5% in 1999, and 6.5% in 1998; and no dividends during
the expected term.

   The Company's calculations are based on a multiple option valuation
approach and forfeitures are recognized as they occur. If the computed fair
value of the 2000, 1999, and 1998, awards had been amortized to expense over
the vesting period of the awards, pro forma net income and pro forma diluted
net income per share would have been $8,313,000, $0.63 per share, $3,278,000,
$0.32 per share and $1,764,000, $0.18 per share, in 2000, 1999, and 1998,
respectively.

                                      32
<PAGE>

               HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 8. Income Taxes

   The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
                                                       Years Ended
                                          --------------------------------------
                                          December 31, December 26, December 27,
                                              2000         1999         1998
                                          ------------ ------------ ------------
                                                      (in thousands)
     <S>                                  <C>          <C>          <C>
     Current:
     Federal.............................   $ 9,557       $4,230       $3,124
       State.............................     2,817          890          867
                                            -------       ------       ------
                                             12,374        5,120        3,991
                                            -------       ------       ------
     Deferred:
       Federal...........................   (1,477)          200         (533)
       State.............................      (433)          62         (133)
                                            -------       ------       ------
                                            (1,910)          262         (666)
                                            -------       ------       ------
                                            $10,464       $5,382       $3,325
                                            =======       ======       ======
</TABLE>

   The Company's effective tax rate differs from the federal statutory rate as
follows:

<TABLE>
<CAPTION>
                                                               2000  1999  1998
                                                               ----  ----  ----
     <S>                                                       <C>   <C>   <C>
     Income tax expense at statutory rate..................... 35.0% 35.0% 35.0%
     State income tax taxes, net of federal benefit...........  6.1   6.1   6.1
     Other items, net.........................................  0.7   0.2   1.9
                                                               ----  ----  ----
                                                               41.8% 41.3% 43.0%
                                                               ====  ====  ====
</TABLE>

   The components of deferred income taxes are as follows:

<TABLE>
<CAPTION>
                                                       December 31, December 26,
                                                           2000         1999
                                                       ------------ ------------
                                                            (in thousands)
     <S>                                               <C>          <C>
     Deferred tax assets:
       Allowance for doubtful accounts................    $1,356       $  664
       Accrued expenses...............................     2,319        1,150
                                                          ------       ------
         Total deferred tax assets....................     3,675        1,814
                                                          ------       ------
     Deferred tax liabilities:
       Depreciation and amortization..................       841          887
       Accrued acquisition liabilities................       665          668
                                                          ------       ------
         Total deferred tax liabilities...............     1,506        1,555
                                                          ------       ------
           Net deferred income taxes..................    $2,169       $  259
                                                          ======       ======
</TABLE>

Note 9. Contingencies

   The Company is party to various legal actions in the course of business.
Although the ultimate outcome of these matters is not presently determinable,
management believes that the resolution of all such pending matters will not
have a material adverse effect on the Company's financial position or results
of operations.

                                      33
<PAGE>

               HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 10. Supplemental Disclosure of Cash Flow Information

   The following provides additional information concerning supplemental
disclosures of cash flow activities:

<TABLE>
<CAPTION>
                                                     Years Ended
                                        --------------------------------------
                                        December 31, December 26, December 27,
                                            2000         1999         1998
                                        ------------ ------------ ------------
                                                    (in thousands)
     <S>                                <C>          <C>          <C>
     Cash paid during the period for:
       Income taxes....................    $6,759       $2,083       $3,097
       Interest........................       361          689          320
     Noncash investing and financing
      activities:
       Tax benefit related to stock
        options........................     5,221          457          404
       Accrual interest on debt........       --           723          --
</TABLE>

<TABLE>
<CAPTION>
                                                            Years Ended
                                                     -------------------------
                                                     December 26, December 27,
                                                         1999         1998
                                                     ------------ ------------
                                                          (in thousands)
     <S>                                             <C>          <C>
     Business acquisitions:
       Current assets acquired......................   $    690     $ 2,933
       Intangible assets and equipment acquired.....      8,361      17,700
       Liabilities acquired.........................    (1,647)      (5,045)
       Common stock issued..........................        --         (914)
       Accrued expenses in connection with
        acquisitions................................       (214)       (600)
                                                       --------     -------
         Cash paid for business acquisitions........   $  7,190     $14,074
                                                       ========     =======
</TABLE>

                                      34
<PAGE>

               HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 11. Business Segment Reporting

   The Company's operations were divided into two industry segments, Contract
Services and Permanent Placement Services. Operations in the Contract Services
segment provide supplemental IT professionals on a contract basis. In a
typical R&D contract, an IT professional is contracted to a high technology
client, usually in connection with a specific application or project. The
Permanent Placement segment provides professionals for permanent placement
with its corporate clients. The Company currently does not segregate the
operations of its business segments by assets.

   Management evaluates segment performance based primarily on segment
revenues, cost of revenues, and gross profit. Continuing operations by
business segment are as follows:

<TABLE>
<CAPTION>
                                                      Net    Cost of   Gross
                                                    Revenues Revenues  Profit
                                                    -------- -------- --------
                                                          (in thousands)
     <S>                                            <C>      <C>      <C>
     Year ended December 31, 2000
       Contract Services........................... $225,323 $147,539 $ 77,784
       Permanent Placement.........................   71,168      --    71,168
                                                    -------- -------- --------
         Total..................................... $296,491 $147,539 $148,952
                                                    ======== ======== ========
     Year ended December 26, 1999
       Contract Services........................... $145,425 $ 96,502 $ 48,923
       Permanent Placement.........................   35,324      --    35,324
                                                    -------- -------- --------
         Total..................................... $180,749 $ 96,502 $ 84,247
                                                    ======== ======== ========
     Year ended December 27, 1998
       Contract Services........................... $106,127 $ 69,066 $ 37,061
       Permanent Placement.........................   18,005      --    18,005
                                                    -------- -------- --------
         Total..................................... $124,132 $ 69,066 $ 55,066
                                                    ======== ======== ========
</TABLE>

   Net Revenues to unaffiliated customers by geographic area are as follows:

<TABLE>
<CAPTION>
                                                       Years Ended
                                          --------------------------------------
                                          December 31, December 26, December 27,
                                              2000         1999         1998
                                          ------------ ------------ ------------
                                                      (in thousands)
     <S>                                  <C>          <C>          <C>
     United States.......................   $293,045     $178,791     $122,953
     Europe..............................      3,446        1,958        1,179
                                            --------     --------     --------
       Total.............................   $296,491     $180,749     $124,132
                                            ========     ========     ========
</TABLE>

                                      35
<PAGE>

                HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 12. Quarterly Financial Data (Unaudited)

   The following tabulation shows certain quarterly financial data for 2000 and
1999:

<TABLE>
<CAPTION>
                                                            Quarter
                                                -------------------------------
     2000                                          1       2       3       4
     ----                                       ------- ------- ------- -------
                                                (in thousands, except per share
                                                           amounts)
     <S>                                        <C>     <C>     <C>     <C>
     Total net revenues........................ $61,580 $77,644 $79,263 $78,004
     Gross profit..............................  29,563  39,904  40,469  39,016
     Income before income taxes................   4,537   6,493   7,339   6,705
     Net income................................   2,654   3,791   4,271   3,894
     Net income per share-Basic................    0.25    0.30    0.33    0.30
     Net income per share-Diluted..............    0.23    0.28    0.30    0.29
</TABLE>

<TABLE>
<CAPTION>
                                                            Quarter
                                                -------------------------------
     1999                                          1       2       3       4
     ----                                       ------- ------- ------- -------
                                                (in thousands, except per share
                                                           amounts)
     <S>                                        <C>     <C>     <C>     <C>
     Total net revenues........................ $35,860 $42,884 $49,324 $52,681
     Gross profit..............................  15,393  20,129  23,647  25,078
     Income before income taxes................   2,232   2,915   3,629   4,262
     Net income................................   1,317   1,720   2,123   2,496
     Net income per share-Basic................    0.14    0.17    0.20    0.24
     Net income per share-Diluted..............    0.13    0.16    0.20    0.22
</TABLE>

                                       36
<PAGE>

                         INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders
of Hall, Kinion & Associates, Inc. and Subsidiaries
San Francisco, California

   We have audited the accompanying consolidated balance sheets of Hall,
Kinion & Associates, Inc. as of December 31, 2000 and December 26, 1999, and
the related consolidated statements of income, comprehensive income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2000. These financial statements are the responsibility of
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

   We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

   In our opinion, such financial statements present fairly, in all material
respects, the financial position of Hall, Kinion & Associates, Inc. as of
December 31, 2000 and December 26, 1999, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2000 in conformity with accounting principles generally accepted in the
United States of America.

DELOITTE & TOUCHE, LLP

San Jose, California
February 2, 2001

                                      37
<PAGE>

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

   Not applicable.

                                   PART III

   The information required by Items 10 through 13 of Part III is incorporated
by reference from the registrant's Proxy Statement, under the captions
"Nomination and Election of Directors," "Beneficial Stock Ownership,"
"Compensation of Directors," "Compensation of Executive Officers" and
"Compensation Committee Interlocks and Insider Participation of Insider
Participation and Certain Transactions," which Proxy Statement will be mailed
to stockholders in connection with the registrant's annual meeting of
stockholders which is scheduled to be held on May 10, 2001.

                                      38
<PAGE>

                                    PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a) 1. Financial Statements

   The following consolidated financial statements of the Company and its
subsidiaries are included in Item 8 of this report:

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
<S>                                                                        <C>
Consolidated balance sheets at December 31, 2000 and December 26, 1999...   22

Consolidated statements of income for the years ended December 31, 2000,
 December 26, 1999 and December 27, 1998.................................   23

Consolidated statements of comprehensive income for the years ended
 December 31, 2000, December 26, 1999 and December 27, 1998..............   23

Consolidated statements of stockholders' equity for the years ended
 December 31, 2000, December 26, 1999 and December 27, 1998..............   24

Consolidated statements of cash flows for the years ended December 31,
 2000, December 26, 1999 and December 27, 1998...........................   25

Notes to consolidated financial statements...............................   26

Selected quarterly financial data for the years ended December 31, 2000
 and December 26, 1999 are set forth in Note 12--Quarterly Financial Data
 (Unaudited) included in Item 8 of this report...........................   36

Independent Auditors' Report.............................................   37
</TABLE>

(b) 2. Financial Statement Schedules

  Independent Auditors' Report on Financial Statement Schedule

  Schedule II: Valuation and Qualifying Accounts

(c) 3. Exhibits

<TABLE>
 <C>     <S>
 2.1 (1)  Agreement and Plan Merger dated July 9, 1997, for the Merger of
          Hall, Kinion & Associates, Inc., a California corporation, into
          Hall, Kinion & Associates, Inc., a Delaware corporation ( the
          "Registrant").

 2.2 (1)  Asset Purchase Agreement dated November 26, 1996, among the
          Registrant and the other parties named therein.

 2.3 (1)  Stock Purchase Agreement dated December 20, 1997 by and among the
          Registrant, Group-Ipex, Inc., Lalit M. Kapoor and Satindra Kapoor.

 2.4 (3)  Huntington Asset Purchase Agreement between Hall, Kinion &
          Associates, Inc., Huntington Acquisition Corporation, Alexander
          Bohemer and Tomasco, LLC, Raymond Tomasco and Karen Vacheron
          Alexander, dated November 18, 1998.

 2.5 (3)  ITC Asset Purchase Agreement between Hall, Kinion & Associates,
          Inc., Interactive Acquisition Corporation, Interactive Technology
          Consultants, LLC, Raymond Tomasco,
          Karen Vacheron Alexander, and Gary Malbin, dated November 18, 1998.

 3.1 (1)  Amended and Restated Certificate of Incorporation of the Registrant
          filed August 8, 1997.

 4.1      Reference is made to Exhibit 3.1.

 4.2 (1)  Investors' Rights Agreement, dated January 26, 1996, among the
          Registrant, certain stockholders and investors named therein.

 4.3 (1)  Specimen Common Stock certificate.
</TABLE>


                                       39
<PAGE>

<TABLE>
 <C>       <S>
 9.1 (1)    Kinion Voting Trust Agreement, dated January 17, 1996, among Todd
            Kinion and the stockholders of the Registrant named therein.

 9.2 (1)    Amended and Restated Voting Trust Agreement, dated October 29,
            1996, among the Registrant, Brenda C. Hall (a.k.a. Brenda C.
            Rhodes) and Todd J. Kinion.

 10.1 (1)   Form of Indemnification Agreement entered into between the
            Registrant and each of its directors and certain officers.

 10.2 (1)   The Registrant's 1997 Stock Option Plan.

 10.3 (1)   The Registrant's Employee Stock Purchase Plan.

 10.4 (1)   Employment Agreement, dated October 18, 1996, among the
            Registrant, Brenda C. Hall (a.k.a. Brenda C. Rhodes) as amended.

 10.5 (1)   Settlement Agreement and General Release, dated October 29, 1996
            among the Registrant, Brenda C. Hall (a.k.a. Brenda C. Rhodes), as
            Voting Trustee of the Voting Trust, and Todd Kinion.

 10.6 (1)   Loan and Security Agreement (Accounts and Inventory), dated April
            26, 1995, between the Registrant and Comerica Bank-California (the
            "Loan & Security Agreement"); Addendum to Loan & Security
            Agreement; Second Addendum to Loan & Security Agreement;
            Modification to Loan & Security Agreement, dated December 20,
            1995; Second Modification to Loan & Security Agreement, dated
            October 21, 1996; Borrower's Authorization dated October 16, 1996,
            Borrowers Authorization dated October 21, 1996; and Guaranty,
            dated April 26, 1995.

 10.7 (1)   Assumption and Assignment to Sublease, dated December 2, 1996,
            between the Registrant and TeamAlliance Technology Partners, L.P.

 10.8 (1)   Standard Sublease, dated March 1, 1997, between the Registrant and
            Seagate Technology, Inc.

 10.9 (1)   Employment Agreement, dated May 23, 1997, between the Registrant
            and Brenda C. Hall (aka Brenda C. Rhodes).

 10.10 (1)  Agreement to Tender Shares dated May 23, 1997 between the
            Registrant and Brenda C. Hall (aka Brenda C. Rhodes).

 10.12 (1)  Agreement to Tender Shares dated, May 23, 1997, between the
            Registrant and Todd. J. Kinion.

 10.13 (1)  Promissory Note Secured by Deed of Trust, dated August 5, 1996,
            made by Rita S. Hazell and Quentin D. Hazell in favor of the
            Registrant.

 10.14 (1)  Settlement Agreement with Mutual Release, dated May, 1997, between
            Richard Swanson and the Registrant, Brenda C. Hall (aka Brenda C.
            Rhodes) and Todd J. Kinion.

 10.15 (1)  The Registrant's IT Professional Stock Plan.

 10.16 (1)  Reference is made to Exhibit 2.3.

 10.17 (1)  The Registrant's 2000 Stock Option Plan.

 10.18 (1)  Form of Stock Option Agreement under the 2000 Stock Option Plan.

 10.19 (1)  The Registrant's E2 Equity Edge Cash Equity Plan.

 21.1       Subsidiaries of Registrant.

 23.1       Independent Auditors' Consent.
</TABLE>
--------
(1) Incorporated by reference to the Registrant's Registration Statement on
    Form S-1, as amended, declared effective by the Securities and Exchange
    Commission on August 4, 1997(File No. 333-28365).

(2) Incorporated by Reference to the Registrant's Current Report on Form 8-K,
    filed January 13, 1998 (File No. 000-22869).

(3) Incorporated by Reference to the Registrant's Current Report on Form 8-K,
    filed December 2, 1998 (File No. 000-22869).

(b) Reports on Form 8-K.

   None.

                                      40
<PAGE>

                   INDEPENDENT AUDITORS' REPORT ON SCHEDULE

To the Board of Directors and Stockholders of
Hall, Kinion & Associates, Inc:

   We have audited the consolidated financial statements of Hall, Kinion &
Associates, Inc. and subsidiaries as of December 31, 2000 and December 26,
1999, and for each of the three years in the period ended December 31, 2000,
and have issued our report thereon dated February 2, 2001 included elsewhere
in this Annual Report on Form 10-K. Our audits also included the financial
statement schedule of Hall, Kinion & Associates, Inc. listed in Item 14(a)(2)
of this Annual Report on Form 10-K. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly, in all material respects the information set
forth therein.

DELOITTE & TOUCHE LLP

San Jose, California
February 2, 2001

                                      41
<PAGE>

                                                                     SCHEDULE II

                HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
                       VALUATION AND QUALIFYING ACCOUNTS
                                 (in thousands)

<TABLE>
<CAPTION>
                                    Additions                   Deductions
                         -------------------------------- -----------------------
                         Balance at   Charged    Charged  Write-off of   Balance
                         Beginning  to Costs and to Other Uncollectible at End of
                         of Period    Expenses   Accounts   Accounts     Period
                         ---------- ------------ -------- ------------- ---------
<S>                      <C>        <C>          <C>      <C>           <C>
Allowance for Doubtful
 Accounts:
Year ended December 27,
 1998...................   $  344      $1,012       --        $(273)     $1,083
Year ended December 26,
 1999...................    1,083       1,106       --         (689)      1,500
Year ended December 31,
 2000...................    1,500       2,725       --         (770)      3,455
</TABLE>

                                       42
<PAGE>

                                  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, therunto duly authorized.

                                          HALL, KINION & ASSOCIATES, INC.

                                          By: /s/ Martin A. Kropelnicki
                                            -----------------------------------
                                            Martin A. Kropelnicki
                                            Vice President and Chief Financial
                                            Officer and Corporate Secretary
                                            (Principal Financial Officer)

Date: March 22, 2001

   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.

   Date: March 22, 2001                   By: /s/ BRENDA C. RHODES
                                            -----------------------------------
                                            Chairman of the Board, Chief
                                            Executive Officer,And a Director
                                            (Principal Executive Officer)

   Date: March 22, 2001                   By: /s/ JON H. ROWBERRY
                                            -----------------------------------
                                            Director

                                          By: /s/ TODD J . KINION
   Date: March 22, 2001                     -----------------------------------
                                            Director

   Date: March 22, 2001                   By: /s/ JACK F. JENKINS-STARK
                                            -----------------------------------
                                            Director

   Date: March 22, 2001                   By: /s/ HERBERT I. FINKELMAN
                                            -----------------------------------
                                             Director

   Date: March 22, 2001                   By: /s/ MICHAEL C. STEIN
                                            -----------------------------------
                                             Director

   Date: March 22, 2001                   By: /s/ MARTIN A. KROPELNICKI
                                            -----------------------------------
                                            Vice President, Chief Financial
                                            Officer and Secretary(Principal
                                            Financial Officer)

                                      43