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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-K/A



FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTIONS 13 OR 15(d)

OF
THE SECURITIES EXCHANGE ACT OF 1934



(Mark One)



|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------



For the fiscal year ended December 28, 2003



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from
 to



Commission file number 000-22869



HALL, KINION & ASSOCIATES, INC.

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 77-0337705                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



75 Rowland Way,
Suite 200, Novato, CA 94945

(Address of principal executive offices)



(415) 895-2200

(Registrants telephone number, including area code)



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



None



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



Common Stock, $0.001 par value per share



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



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



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



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



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



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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:



| |  | Business and growth strategies;
| | - | -------------------------------



| |  | Markets we serve;
| | - | -----------------



| |  | Liquidity; and
| | - | --------------



| |  | Outcome of the merger agreement with Kforce.
| | - | --------------------------------------------



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



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



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PART I



Item 1.    Business



Overview of the Company



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



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



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



Proposed Merger with Kforce.    On April 5, 2004, Kforce Inc. (Kforce) and the Company executed an Amended and
Restated Agreement and Plan of Merger. Under the terms of the amended merger agreement, Kforce will acquire all of the shares of Hall Kinion in exchange for shares of Kforce common stock under a similar structure as originally provided, with a
change in the exchange ratio, which remains dependent upon the average of the closing prices of Kforce common stock for the 15 consecutive trading days ending on and including the third trading day prior to the closing date (such average is
referenced herein as the Kforce stock market value). Kforce may elect to terminate the merger agreement if the Kforce average closing stock price remains below $7.00 for 15 consecutive trading days at any time prior to the closing. The
proposed transaction requires and is subject to the approval by the stockholders of the Company and other customary closing and regulatory conditions. In connection with the amended merger agreement, the parties have entered into a Management
Agreement pursuant to which Kforce will manage the day-to-day operations of Hall Kinion.



Details of the terms of the merger with Kforce are described in the Form 8-K filed by Hall Kinion on April 6, 2004. Additional details will be filed by Kforce in a registration statement on Form S-4. The Form S-4
will include a preliminary proxy statement of Hall Kinion related to the merger and amends Kforces Form S-4 filings dated December 24, 2003 and February 9, 2004. Access to the Form S-4 and any future amendments may be obtained through the
Kforce Web site (http://www.kforce.com) or through the public files of the Securities and Exchange Commission. Readers are encouraged to review the Form 8-K and Form S-4 in connection with a review of this Form 10-K/A because both the
consummation of the merger or a termination of the merger would have a significant effect on Hall Kinion. No assurance can be given that the merger will be completed.



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



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The Company entered into an agreement dated June 13, 2003 with CIT Business Credit for a new three-year
renewable credit facility of $16.0 million that replaced an existing credit facility of $12.0 million and is used primarily to fund operations. Significant terms and conditions of the agreement, as amended through April 2, 2004, are described under
Liquidity and Capital Resources. Hall Kinion was in compliance with its loan covenants and terms as of December 28, 2003; however, the Company was not in compliance with one of the financial covenants as of the end of January 2004 and
February 2004. On March 1, 2004, CIT Business Credit waived compliance with this covenant for January 2004 and February 2004 in a first amendment to the line of credit facility.



On March 25, 2004, Brenda C. Rhodes, the Chief Executive Officer and Chairman of the Board, and Todd Kinion, a director,
agreed to provide irrevocable letters of credit totaling $5.0 million to the lender and CIT Business Credit agreed to increase availability under the line by $5.0 million. On April 2, 2004, upon receipt of the executed letters of credit, the lender
executed a second amendment to the credit facility to increase the availability under the line, to replace the original loan covenants with a covenant requiring the Company to maintain a minimum balance of unrestricted cash and credit line
availability of not less than $2.0 million at all times and to require CIT Business Credits approval for payment of the OnStaff earnout obligation. As a result, management believes that the Company will remain in compliance with the terms and
covenant of its loan agreement, as revised, through at least December 31, 2004. If the Company fails to stay in compliance with the loan covenant and terms and if a waiver cannot be obtained, CIT Business Credit could terminate the line of credit
and demand immediate repayment of all outstanding borrowings.



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



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



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



Company Goals



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



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Growth Strategy



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



| |  | Cross-Marketing.    We continue to analyze ways to take advantage of the synergies presented by the 2002 acquisition of OnStaff and how the resources of
each business unit, including our offices, employees and client contacts, can be useful in the marketing efforts of the other. After we acquired OnStaff in August 2002, we placed OnStaff employees in a number of Hall Kinion offices to leverage our
established position in those locations with new growth in the real estate services and healthcare industries.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Internal Growth.    Our sales and sales support employees, who are the key contacts both with clients and with IT and corporate professionals, directly
impact our ability to generate revenues. We constantly monitor the productivity of our offices and sales employees, who are given incentives 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. We have been successful in recruiting and retaining sales and sales support personnel, by providing sales training and targeted industry training during their initial
orientation and throughout their careers.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Diversifying into New Vertical Markets.    In 2003 we continued a program to focus additional efforts on providing technology staffing to non-technology
companies where technology skills were in high demand, including government services, banking and finance, healthcare and energy services. We believe that we can continue to build on our already established reputation as a provider of leading edge
technology professionals by directing our efforts toward other vertical market sectors.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Quality Program



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



| |  | Provide Rapid Fulfillment to Delivery-Sensitive Client Assignments.    We designed our operating model to meet the time-sensitive needs of our clients. We
develop strong relationships directly with managers at client companies and build aggressive recruiting capabilities through the use of modern technologies such as Internet search, proprietary talent databases, and cross-office intranet based
communication. As a result, we believe that we have developed an advantage in meeting the needs of our target market: assignments that value speed of response and quality of talent more than price-sensitivity.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Capitalize on the Client Base to Attract and Retain Professionals.    Attracting and retaining qualified contract professionals is critical to success. We
believe that the most important motivators of professionals are working on interesting and challenging assignments, flexible lifestyles, and compensation. Hall Kinion has developed advantages in addressing the motivations of our professionals. For
example, in the IT environment, 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 technology. Conversely, Hall Kinion is able to meet the technology requirements of these companies, in great part, because we are able to attract the best and brightest IT talent.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Build Brand Recognition.    We have implemented a strong brand recognition campaign as The Talent Source®and adapted the campaign for various vertical markets with promotions designed to convey our image. Promotions have included
live web casts. We believe that our branding campaign gives us a competitive advantage in soliciting clients and recruiting talent and sales and sales support employees. With the addition of OnStaff, Hall Kinion acquired another registered tradename
and is working on a strategy to capitalize on the individual names while extending a corporate identity.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  | 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. Hall Kinion has created a performance-based culture, with an attitude of celebration that employees find appealing and energizing. The culture is embodied in our ongoing performance-rewarding traditions as well as
our annual business planning, convention and national awards trip, which is the highlight of the sales year at Hall Kinion.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Deliver Solid Corporate Support to Our Offices.    We deliver training, detailed performance reporting and IT support to each of our offices in order to
promote a high level of service and consistency among offices.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Achieve Maximum Operating Efficiency



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



Overview of Business Segments



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



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



Contract Professional Staffing



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



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



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



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Business Divisions



Technology Professional DivisionHall Kinion primarily provides IT professionals to our clients. We started Hall Kinion
in Silicon Valley and expanded to the Silicon Valleys of the world. We believe that our competitive advantage is our ability to successfully recruit and retain the best and brightest IT professionals. Our IT professionals offer our clients leading
edge technology skills and our clients offer our professionals the opportunity to work on leading edge assignments. In 2003 we experienced the continued softness in the IT industry that reflected a slowdown in the rate of innovation in this industry
and a general reduction in demand for personnel with expertise in leading hardware, software or networking technologies.



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



Clients



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



| |  | Countrywide Financial Corp.
| | - | ---------------------------



| |  | Wells Fargo Bank
| | - | ----------------



| |  | AT&T Wireless
| | - | -------------



| |  | Verizon
| | - | -------



| |  | IBM
| | - | ---



| |  | Compaq Corp.
| | - | ------------



| |  | RBC Mortgage
| | - | ------------



| |  | Bank of America
| | - | ---------------



| |  | North American Title
| | - | --------------------



| |  | Mitsubishi
| | - | ----------



Competition



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



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



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



Permanent Placement Services



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



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



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



Clients



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



Competition



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



Corporate Information Technology



We provide the tools necessary for employees to deliver services with the
speed demanded by our clients. WebPASsoftware, a proprietary application, is used to
match candidates to open customer job orders. WebPAS



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



Employees



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



Corporate History



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



Available Information



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



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



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RISK FACTORS



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



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



The Company entered into an agreement dated June 13, 2003 with CIT Business Credit for a new three-year renewable credit facility of $16.0 million that replaced an existing credit facility of $12.0 million and is used
primarily to fund operations. Significant terms and conditions of the agreement, as amended through April 2, 2004, are as follows:



| |  | Availability is determined by the lesser of (i) 85% of eligible accounts receivable, less reserves and certain receivable balances as defined in the agreement that totaled $2.3
million as of December 28, 2003, plus undrawn amounts under the $5.0 million irrevocable letters of credit, (ii) cash collected during the most recent 45-day period, or (iii) the full amount of the facility, less reserves, letters of credit and
certain payables as defined in the agreement that totaled $0.6 million as of December 28, 2003.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Interest is at prime plus 1.25% (approximately 5.0% at December 28, 2003) and starting June 27, 2004, the interest rate may be reduced to a rate that is as low as prime plus 0.5%,
contingent upon the Company meeting specified levels of profitability.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Financial covenants require maintaining a minimum balance of unrestricted cash and credit line availability of $2.0 million at all times.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------



| |  | Borrowings are collateralized by all of the Companys assets, and irrevocable letters of credit totaling $5.0 million provided by certain stockholders.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Company may not declare or pay any dividends or distribution of any kind nor acquire, redeem, or retire any of its own capital stock and may not make earnout payments to OnStaff
without the prior written consent of CIT Business Credit.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | A bank lockbox was established whereby all Company cash receipts are first applied to the line of credit.
| | - | ---------------------------------------------------------------------------------------------------------



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



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



On March 25, 2004, Brenda C. Rhodes, the Chief Executive Officer and Chairman of the Board, and Todd Kinion, a director, agreed to provide irrevocable
letters of credit totaling $5.0 million to the lender and CIT Business Credit agreed to increase availability under the line by $5.0 million. On April 2, 2004, upon receipt of the executed letters of credit, the lender executed a
second amendment to the credit facility to increase the availability under the line, to replace the original loan covenants with a covenant requiring the Company to maintain a minimum balance of unrestricted cash and credit line availability of not
less than $2.0 million at all times and to require CIT Business Credits approval for payment of the OnStaff earnout obligation. As a result, management believes that the Company will remain in compliance with the terms and covenants of
its loan agreement, as revised, through at least December 31, 2004. If the Company fails to stay in compliance with the loan covenant and terms and if a waiver cannot be obtained, CIT Business Credit could terminate the line of credit and demand
immediate repayment of all outstanding borrowings.



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



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



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



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



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



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



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



In 2003 we experienced the continued softness in the IT industry that reflected a slowdown in the rate of innovation in this
industry and a general reduction in demand for personnel with expertise in leading hardware, software or networking technologies. In the real estate services industry we serve, the demand for professional



11



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



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



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



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



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



| |  | develop, recruit and maintain a base of qualified professionals within a new geographic market;
| | - | -----------------------------------------------------------------------------------------------



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



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



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



| |  | the availability of qualified professionals;
| | - | --------------------------------------------



| |  | changes in the demand for 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;
| | - | --------------------------------------------------------------------------



12



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| |  | 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 vertical or geographic markets and the addition or closure of offices in existing geographic markets;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------



| |  | closure of offices by our clients due to holidays or inclement weather;
| | - | -----------------------------------------------------------------------



| |  | restructuring costs and charges;
| | - | --------------------------------



| |  | 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 and fourth fiscal quarters primarily due to the number of holidays and inclement weather in that quarter, which may reduce the number of days worked
by professionals and sales and sales support employees. As a result, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as an indication of future performance. In
the event our operations should fall below the expectations of public market analysts and investors, the price of our common stock would likely decline.



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



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



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



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



Acquisitions also involve a number of other
risks, including:



| |  | negative effects on our reported operating results from increases in interest and other acquisition-related expenses or impairment of goodwill;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  | negative effects on our reported cash flows and the Companys liquidity due to earnout obligations;
| | - | ---------------------------------------------------------------------------------------------------



| |  | the diversion of managements attention;
| | - | ----------------------------------------



13



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| |  | 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.
| | - | -------------------------------------------------------------------------------------



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



Management Agreement with Kforce



In connection with the amended merger agreement, Hall Kinion and Kforce
entered into a Management Agreement, pursuant to which Kforce will manage the day-to-day operations of Hall Kinion. If the merger is not consummated, any actions taken by Kforce, as manager, could have a material adverse effect on Hall Kinions
ability to retain employees and key personnel as well as a material adverse effect on Hall Kinions results of operations.



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



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



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



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



14



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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, and other key
personnel could have a material negative effect on our business, operating results and financial condition. In December 2003, in order to facilitate integration efforts for the Kforce merger, Ms. Rhodes removed herself from day-to-day operations.



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



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



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



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



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



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



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



15



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Item 2.    Properties



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



Item 3.    Legal Proceedings



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



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



None.



16



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PART II



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



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



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



|                                     |  |             |       |     |   |     
|------------------------------------ |  | ----------- | ----- | --- | - | ----
|                                     |  | Sales Price
|                                     |  | High        |       | Low
|Fiscal year ended December 28, 2003  |  |             |       |     |   |     
|4th quarter ended December 28, 2003  |  | $           | 4.98  |     | $ | 3.84
|3rd quarter ended September 28, 2003 |  | $           | 5.00  |     | $ | 2.74
|2nd quarter ended June 29, 2003      |  | $           | 3.00  |     | $ | 1.30
|1st quarter ended March 30, 2003     |  | $           | 5.79  |     | $ | 0.72
|                                     |  |            
|                                     |  | High        |       | Low
|Fiscal year ended December 29, 2002  |  |             |       |     |   |     
|4th quarter ended December 29, 2002  |  | $           | 7.08  |     | $ | 4.75
|3rd quarter ended September 29, 2002 |  | $           | 9.14  |     | $ | 4.80
|2nd quarter ended June 30, 2002      |  | $           | 12.00 |     | $ | 6.00
|1st quarter ended March 31, 2002     |  | $           | 9.95  |     | $ | 6.50



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



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



17



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Item 6.    Selected Financial Data



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



|                                             |  |                                          |         |   |         |   |         |      |  |   |         |   |      |   |         |  |   |         |  
|-------------------------------------------- |  | ---------------------------------------- | ------- | - | ------- | - | ------- | ---- |  | - | ------- | - | ---- | - | ------- |  | - | ------- | -
|                                             |  | Fiscal Year                              |        
|                                             |  | 2003                                     |         |   | 2002(1) |   |         | 2001 |  |   | 2000    |   | 1999 |  
|                                             |  | (in thousands, except per share amounts) |        
|Consolidated Statement of Operations Data:   |  |                                          |         |   |         |   |         |      |  |   |         |   |      |   |         |  |   |         |  
|Net revenues                                 |  | $                                        | 156,919 |   |         | $ | 120,428 |      |  | $ | 173,836 |   |      | $ | 296,491 |  | $ | 180,749 |  
|Cost of contract services                    |  |                                          | 111,616 |   |         |   | 80,744  |      |  |   | 100,834 |   |      |   | 147,539 |  |   | 96,502  |  
|                                             |  |                                          |         |   |         |   |         |      |  |   |         |   |      |   |         |  |   |         |  
|Gross profit                                 |  |                                          | 45,303  |   |         |   | 39,684  |      |  |   | 73,002  |   |      |   | 148,952 |  |   | 84,247  |  
|Operating Expenses:                          |  |                                          |         |   |         |   |         |      |  |   |         |   |      |   |         |  |   |         |  
|Selling, general and administrative expenses |  |                                          | 46,607  |   |         |   | 47,407  |      |  |   | 96,820  |   |      |   | 125,493 |  |   | 70,732  |  
|Impairment of goodwill                       |  |                                          |         |   |         |   | 15,478  |      |  |   | 26,736  |   |      |   |         |  |   |         |  
|Restructuring costs (income)                 |  |                                          | 2,792   |   |         |   | (6      | )    |  |   | 17,048  |   |      |   |         |  |   |         |  
|                                             |  |                                          |         |   |         |   |         |      |  |   |         |   |      |   |         |  |   |         |  
|Income (loss) from operations                |  |                                          | (4,096  | ) |         |   | (23,195 | )    |  |   | (67,602 | ) |      |   | 23,459  |  |   | 13,515  |  
|Other income (expense), net                  |  |                                          | (295    | ) |         |   | (323    | )    |  |   | 1,181   |   |      |   | 1,615   |  |   | (477    | )
|                                             |  |                                          |         |   |         |   |         |      |  |   |         |   |      |   |         |  |   |         |  
|Income (loss) before income taxes            |  |                                          | (4,391  | ) |         |   | (23,518 | )    |  |   | (66,421 | ) |      |   | 25,074  |  |   | 13,038  |  
|Income tax provision (benefit)               |  |                                          | 14,181  |   |         |   | (2,870  | )    |  |   | (20,809 | ) |      |   | 10,464  |  |   | 5,382   |  
|                                             |  |                                          |         |   |         |   |         |      |  |   |         |   |      |   |         |  |   |         |  
|Net income (loss)                            |  | $                                        | (18,572 | ) |         | $ | (20,648 | )    |  | $ | (45,612 | ) |      | $ | 14,610  |  | $ | 7,656   |  
|                                             |  |                                          |         |   |         |   |         |      |  |   |         |   |      |   |         |  |   |         |  
|Net income (loss) per share:                 |  |                                          |         |   |         |   |         |      |  |   |         |   |      |   |         |  |   |         |  
|Basic                                        |  | $                                        | (1.47   | ) |         | $ | (1.66   | )    |  | $ | (3.48   | ) |      | $ | 1.18    |  | $ | 0.75    |  
|                                             |  |                                          |         |   |         |   |         |      |  |   |         |   |      |   |         |  |   |         |  
|Diluted                                      |  | $                                        | (1.47   | ) |         | $ | (1.66   | )    |  | $ | (3.48   | ) |      | $ | 1.10    |  | $ | 0.71    |  
|                                             |  |                                          |         |   |         |   |         |      |  |   |         |   |      |   |         |  |   |         |  
|                                             |  |                                          |         |   |        
|Weighted Average Common Shares Outstanding:  |  |                                          |         |   |         |   |         |      |  |   |         |   |      |   |         |  |   |         |  
|Basic                                        |  |                                          | 12,592  |   |         |   | 12,475  |      |  |   | 13,121  |   |      |   | 12,357  |  |   | 10,155  |  
|Diluted                                      |  |                                          | 12,592  |   |         |   | 12,475  |      |  |   | 13,121  |   |      |   | 13,267  |  |   | 10,716  |  
|                                             |  |                                          |         |   |        
|Consolidated Balance Sheet Data:             |  |                                          |         |   |         |   |         |      |  |   |         |   |      |   |         |  |   |         |  
|Working capital (deficit)                    |  | $                                        | (972    | ) |         | $ | 6,916   |      |  | $ | 36,721  |   |      | $ | 64,819  |  | $ | 15,560  |  
|Total assets                                 |  |                                          | 55,043  |   |         |   | 74,906  |      |  |   | 89,459  |   |      |   | 139,821 |  |   | 76,554  |  
|Long term liabilities                        |  |                                          | 4,228   |   |         |   | 6,201   |      |  |   | 6,470   |   |      |   | 209     |  |   | 14,161  |  
|Stockholders equity                         |  |                                          | 25,293  |   |         |   | 43,767  |      |  |   | 64,781  |   |      |   | 110,762 |  |   | 43,969  |  

---

|(1) | OnStaff operations are included since its acquisition at the beginning of August 2002.
|--- | --------------------------------------------------------------------------------------



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



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



Overview



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



18



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



Proposed Merger with
Kforce.    On April 5, 2004, Kforce Inc. (Kforce) and the Company executed an Amended and Restated Agreement and Plan of Merger. Under the terms of the amended merger agreement, Kforce will acquire all of the
shares of Hall Kinion in exchange for shares of Kforce common stock under a similar structure as originally provided, with a change in the exchange ratio, which remains dependent upon the average of the closing prices of Kforce common stock for the
15 consecutive trading days ending on and including the third trading day prior to the closing date (such average is referenced herein as the Kforce stock market value). Kforce may elect to terminate the merger agreement if the Kforce
average closing stock price remains below $7.00 for 15 consecutive trading days at any time prior to the closing. The proposed transaction requires and is subject to the approval by the stockholders of the Company and other customary closing and
regulatory conditions. In connection with the amended merger agreement, the parties have entered into a Management Agreement pursuant to which Kforce will manage the day-to-day operations of Hall Kinion.



Details of the terms of the merger with Kforce are described in the Form 8-K
filed by Hall Kinion on April 6, 2004. Additional details will be filed by Kforce in a registration statement on Form S-4. The Form S-4 will include a preliminary proxy statement of Hall Kinion related to the merger and amends Kforces Form S-4
filings dated December 24, 2003 and February 9, 2004. Access to the Form S-4 and any future amendments may be obtained through the Kforce Web site (http://www.kforce.com) or through the public files of the Securities and Exchange Commission.
Readers are encouraged to review the Form 8-K and Form S-4 in connection with a review of this Form 10-K/A because both the consummation of the merger or a termination of the merger would have a significant effect on Hall Kinion. No assurance can be
given that the merger will be completed.



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



The Company entered into an agreement dated June 13, 2003 with CIT Business Credit for a new three-year renewable credit facility of $16.0 million that
replaced an existing credit facility of $12.0 million and is used primarily to fund operations. Significant terms and conditions of the agreement, as amended through April 2, 2004, are described under Liquidity and Capital Resources.
Hall Kinion was in compliance with its loan covenants and terms as of December 28, 2003; however, the Company was not in compliance with one of the financial covenants as of the end of January 2004 and February 2004. On March 1, 2004, CIT Business
Credit waived compliance with this covenant for January 2004 and February 2004 in a first amendment to the line of credit facility.



On March 25, 2004, Brenda C. Rhodes, the Chief Executive Officer and Chairman of the Board, and Todd Kinion, a director, agreed to provide irrevocable
letters of credit totaling $5.0 million to the lender and CIT Business Credit agreed to increase availability under the line by $5.0 million. On April 2, 2004, upon receipt of the executed letters of credit, the lender executed a second amendment to
the credit facility to increase the availability under the line, to replace the original loan covenants with a covenant requiring the Company to



19



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maintain a minimum balance of unrestricted cash and credit line availability of not less than $2.0 million at all times and to require CIT Business
Credits approval for payment of the OnStaff earnout obligation. As a result, management believes that the Company will remain in compliance with the terms and covenants of its loan agreement, as revised, through at least December 31, 2004. If
the Company fails to stay in compliance with the loan covenant and terms and if a waiver cannot be obtained, CIT Business Credit could terminate the line of credit and demand immediate repayment of all outstanding borrowings.



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



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



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



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



We reported an increase
in net revenues and gross profit in 2003 as OnStaffs Corporate Professional Services operations are included for the entire year ended December 28, 2003. Operating results of OnStaff in 2002 include only the five months from its August 2002
acquisition. Net revenues increased 30.3% to $156.9 million in 2003 from $120.4 million in 2002. Net revenues from our Contract Professional Staffing increased 32.2% to $152.8 million in 2003 from $115.6 million in 2002. OnStaffs
Corporate Professional Services contributed $71.4 million of the net revenues for the year ended December 28, 2003 compared to $25.4 million for the five months it was operating as part of Hall Kinion in 2002. Technology Professional Services
revenues in 2003 were $81.4 million as compared to 2002 revenues of $90.2 million. In the quarter ended December 28, 2003, there was a significant decline in demand for OnStaffs Corporate Professional Services in the mortgage and financing
industry, resulting in a decrease in our billable contract professional headcount to 1,777 at the end of 2003 from 2,305 at the end of 2002, a 22.9% decrease. The number of contractors on assignment has not increased significantly through February
2004.



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



20



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



Critical Accounting Policies



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



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



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



Self-Insured Workers Compensation and Medical BenefitsWe accrue estimated costs for employee workers compensation and medical benefits under plans that are funded by the Company. As of
December 28, 2003, the accrual was $900,000. If claims for workers on-the-job injuries or medical expenses exceed our estimates based on current levels of activity, additional amounts may be accrued.



Results of Operations



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



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



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



21



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



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



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



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



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



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



Gross Profit.    Gross profit for our Contract Professional Staffing represents revenues less
direct costs of services, which consist of direct payroll, payroll taxes, and insurance and benefit costs for professionals. As there are no direct costs associated with Permanent Placement Services, gross profit for these services is essentially
equal to revenues. Gross profit decreased to 33% or $39.7 million in 2002 from 42% or $73.0 million in 2001.



22



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The decrease in gross profit was primarily attributable to a decrease in demand for Permanent Placement Services, and to a lesser extent, a decrease in the
number and profitability of contract IT assignments, and the lower profitability of OnStaffs Contract Corporate Professional assignments as compared to gross margins earned on IT assignments. The decrease in the gross margin percentage is also
attributable to the decrease in revenues for the Permanent Placement Services, which has a 100% profit margin, from 14% of total revenues in 2001 to 4% in 2002. The gross margin percentage for the remaining Contract Professional Staffing declined
from 32.6% in 2001 to 30.2% in 2002, partially as a result in a decline in the Technology Professional Division gross profit to 31.0% in 2002 and the addition of OnStaff with a lower margin of 27.4% in 2002.



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



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



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



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



Liquidity and Capital
Resources



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



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



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



23



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The Company entered into an agreement dated June 13, 2003 with CIT Business Credit for a new three-year
renewable credit facility of $16.0 million that replaced an existing credit facility of $12.0 million and is used primarily to fund operations. Significant terms and conditions of the agreement, as amended through April 2, 2004, are as follows:



| |  | Availability is determined by the lesser of (i) 85% of eligible accounts receivable, less reserves and certain receivable balances as defined in the agreement that totaled $2.9
million as of December 28, 2003, plus undrawn amounts under the $5.0 million irrevocable letters of credit, (ii) cash collected during the most recent 45-day period, or (iii) the full amount of the facility, less letters of credit and certain
payables as defined in the agreement that totaled $0.6 million as of December 28, 2003.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Interest is at prime plus 1.25% (approximately 5.0% at December 28, 2003) and starting June 27, 2004, the interest rate may be reduced to a rate that is as low as prime plus 0.5%,
contingent upon the Company meeting specified levels of profitability.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Financial covenants require maintaining a minimum balance of cash and credit line availability of $2.0 million at all times.
| | - | ----------------------------------------------------------------------------------------------------------------------------



| |  | Borrowings are collateralized by all of the Companys assets and irrevocable letters of credit totaling $5.0 million provided by certain stockholders.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Company may not declare or pay any dividends or distribution of any kind nor acquire, redeem, or retire any of its own capital stock and may not make earnout payments to OnStaff
without the prior written consent of CIT Business Credit.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | A bank lockbox was established whereby all Company cash receipts are first applied to the line of credit.
| | - | ---------------------------------------------------------------------------------------------------------



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



On March 25, 2004, Brenda C. Rhodes, the Chief Executive Officer and Chairman of the Board, and Todd Kinion, a director,
agreed to provide irrevocable letters of credit totaling $5.0 million to the lender and CIT Business Credit agreed to increase availability under the line by $5.0 million. On April 2, 2004, upon receipt of the executed letters of credit, the lender
executed a second amendment to the credit facility to increase the availability under the line, to replace the original loan covenants with a covenant requiring the Company to maintain a minimum balance of unrestricted cash and credit line
availability of not less than $2.0 million at all times and to require CIT Business Credits approval for payment of the OnStaff earnout obligation. As a result, management believes that the Company will remain in compliance with the terms and
covenants of its loan agreement, as revised, through at least December 31, 2004. If the Company fails to stay in compliance with the loan covenant and terms and if a waiver cannot be obtained, CIT Business Credit could terminate the line of credit
and demand immediate repayment of all outstanding borrowings.



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



In November 2003, Hall Kinion negotiated a settlement with
OnStaffs former owners that included a deferral of the 2003 earnout payment of $4.1 million from its due date of February 15, 2004. Under 10% note agreements, beginning May 15, 2004, the principal will be payable in four equal quarterly
installments of $1.0 million and interest is due monthly (see Note 4 to the Consolidated Financial Statements). If the merger with Kforce is completed, the notes are due in full shortly after closing of the merger, or if the merger has not been
completed before May 15, 2004, the notes are due in installments as scheduled. If the merger is not completed by May 15, 2004 and if CIT Business Credit does not consent to the payment of the first installment, the former owners of OnStaff may
declare the entire amount due and payable and will be relieved of their non-solicitation



24



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and non-compete agreements. No assurance can be given as to the whether CIT Business Credit will permit the payment of the first installment of the earnout
payment on May 15, 2004, if the merger is not consummated by then.



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



Summary Disclosure about Contractual Obligations and Commercial
Commitments



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



|                                |  |                                           |        |                 |   |           |  |           |        |              |   |       |  |   | 
|------------------------------- |  | ----------------------------------------- | ------ | --------------- | - | --------- |  | --------- | ------ | ------------ | - | ----- |  | - | 
|                                |  | Amount of Commitment By Expiration Period
|                                |  | Total                                     |        | Less than1 Year |   | 2-3 Years |  | 4-5 Years |        | After5 Years
|                                |  | (Dollars in thousands)                   
|Contractual Obligations         |  |                                           |        |                 |   |           |  |           |        |              |   |       |  |   | 
|Line of credit (1)              |  | $                                         | 8,528  |                 | $ | 8,528     |  | $         |        |              | $ |       |  | $ | 
|Operating lease commitments (2) |  |                                           | 10,913 |                 |   | 5,136     |  |           | 4,301  |              |   | 1,476 |  |   | 
|Capital lease commitments (2)   |  |                                           | 43     |                 |   | 38        |  |           | 5      |              |   |       |  |   | 
|Accrued compensation (3)        |  |                                           | 1,050  |                 |   | 1,050     |  |           |        |              |   |       |  |   | 
|                                |  |                                           |        |                 |   |           |  |           |        |              |   |       |  |   | 
|Total contractual obligation    |  | $                                         | 20,534 |                 | $ | 14,752    |  | $         | 4,306  |              | $ | 1,476 |  | $ | 
|                                |  |                                           |        |                 |   |           |  |           |        |              |   |       |  |   | 
|Other Commercial Commitments    |  |                                           |        |                 |   |           |  |           |        |              |   |       |  |   | 
|OnStaff contingent earnout (4)  |  | $                                         | 12,750 |                 | $ | 3,062     |  | $         | 9,688  |              | $ |       |  | $ | 
|Standby letters of credit (5)   |  |                                           | 1,957  |                 |   | 525       |  |           | 1,432  |              |   |       |  |   | 
|Purchase commitments (6)        |  |                                           | 141    |                 |   | 141       |  |           |        |              |   |       |  |   | 
|                                |  |                                           |        |                 |   |           |  |           |        |              |   |       |  |   | 
|Total commercial commitments    |  | $                                         | 14,848 |                 | $ | 3,728     |  | $         | 11,120 |              | $ |       |  | $ | 
|                                |  |                                           |        |                 |   |           |  |           |        |              |   |       |  |   | 

---

|(1) | Represents the outstanding balance under the line of credit. See Note 5 to Consolidated Financial Statements.
|--- | -------------------------------------------------------------------------------------------------------------

|(2) | Represents the obligations under facilities and computer equipment leases. See Note 12 to Consolidated Financial Statements.
|--- | ----------------------------------------------------------------------------------------------------------------------------

|(3) | Represents obligations under an executive employment agreement. See Note 14 to Consolidated Financial Statements.
|--- | -----------------------------------------------------------------------------------------------------------------

|(4) | Represents the Companys obligation to pay OnStaff up to $4.3 million annually up to a total of $12,750, cumulatively. See Note 4 to Consolidated Financial Statements.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Represents letters of credit provided as security deposits for self-insured workers compensation plans and for a facilities lease.
|--- | -----------------------------------------------------------------------------------------------------------------------------------

|(6) | Represents one-year purchase commitments under telecommunications services contracts.
|--- | -------------------------------------------------------------------------------------



Item 7a.     Quantitative and Qualitative Disclosures about Market Risk



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



Interest Rate Risk.    As of December 28, 2003, we had $8.5 million outstanding under the bank line of credit at an interest rate of 5.0%. Under the credit facility dated June 13, 2003, the interest is at the
lenders prime rate plus 1.25%. Starting June 27, 2004, the interest rate may be decreased to a rate as low as prime plus 0.5%,



25



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contingent upon our specified levels of profitability. The interest rate will increase or decrease as economic conditions change. An immediate 10% change in
interest rates would be immaterial to our financial condition or results of operations.



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



26



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Item 8.    Financial Statements and Supplementary Data



HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)



|                                                                                                                                                      |  |                  |         |   |                   |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                                      |  | December 28,2003 |         |   | December 29, 2002 |  
|ASSETS                                                                                                                                                |  |                  |         |   |                   |   |         |  
|Current Assets:                                                                                                                                       |  |                  |         |   |                   |   |         |  
|Cash and cash equivalents                                                                                                                             |  | $                | 4,517   |   |                   | $ | 8,571   |  
|Accounts receivable, net of allowance for doubtful accounts of $1,608 at December 28, 2003 and $2,544 at December 29, 2002                            |  |                  | 15,787  |   |                   |   | 17,804  |  
|Prepaid expenses and other current assets                                                                                                             |  |                  | 2,653   |   |                   |   | 1,554   |  
|Property held for sale                                                                                                                                |  |                  | 1,593   |   |                   |   |         |  
|Deferred income taxes                                                                                                                                 |  |                  |         |   |                   |   | 3,925   |  
|                                                                                                                                                      |  |                  |         |   |                   |   |         |  
|Total current assets                                                                                                                                  |  |                  | 24,550  |   |                   |   | 31,854  |  
|Property and equipment, net                                                                                                                           |  |                  | 3,501   |   |                   |   | 7,511   |  
|Goodwill                                                                                                                                              |  |                  | 15,390  |   |                   |   | 11,849  |  
|Intangible assets, net                                                                                                                                |  |                  | 9,982   |   |                   |   | 10,859  |  
|Deferred income taxes and other assets                                                                                                                |  |                  | 1,620   |   |                   |   | 12,833  |  
|                                                                                                                                                      |  |                  |         |   |                   |   |         |  
|Total assets                                                                                                                                          |  | $                | 55,043  |   |                   | $ | 74,906  |  
|                                                                                                                                                      |  |                  |         |   |                   |   |         |  
|                                                                                                                                                      |  |                 
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                  |  |                  |         |   |                   |   |         |  
|Current Liabilities:                                                                                                                                  |  |                  |         |   |                   |   |         |  
|Line of credit                                                                                                                                        |  | $                | 8,528   |   |                   | $ | 10,000  |  
|Note payable related to OnStaff earnout                                                                                                               |  |                  | 3,062   |   |                   |   |         |  
|Accounts payable                                                                                                                                      |  |                  | 3,969   |   |                   |   | 2,874   |  
|Accrued salaries, commissions and related payroll taxes                                                                                               |  |                  | 5,157   |   |                   |   | 5,303   |  
|Accrued liabilities                                                                                                                                   |  |                  | 2,565   |   |                   |   | 3,645   |  
|Reserve for restructuring costs                                                                                                                       |  |                  | 2,091   |   |                   |   | 3,014   |  
|Income taxes payable                                                                                                                                  |  |                  | 150     |   |                   |   | 102     |  
|                                                                                                                                                      |  |                  |         |   |                   |   |         |  
|Total current liabilities                                                                                                                             |  |                  | 25,522  |   |                   |   | 24,938  |  
|Accrued compensation and deferred rent                                                                                                                |  |                  | 1,375   |   |                   |   | 3,046   |  
|Note payable related to OnStaff earnout                                                                                                               |  |                  | 1,021   |   |                   |   |         |  
|Reserve for non-current restructuring costs                                                                                                           |  |                  | 1,832   |   |                   |   | 3,155   |  
|                                                                                                                                                      |  |                  |         |   |                   |   |         |  
|Total liabilities                                                                                                                                     |  |                  | 29,750  |   |                   |   | 31,139  |  
|                                                                                                                                                      |  |                  |         |   |                   |   |         |  
|Commitments and contingencies                                                                                                                         |  |                  |         |   |                   |   |         |  
|Stockholders Equity:                                                                                                                                 |  |                  |         |   |                   |   |         |  
|Common stock; $0.001 par value; 100,000 shares authorized; shares issued and outstanding: 12,588 at December 28, 2003 and 12,684 at December
29, 2002 |  |                  | 84,716  |   |                   |   | 85,036  |  
|Stockholder notes receivable                                                                                                                          |  |                  | (400    | ) |                   |   | (800    | )
|Accumulated other comprehensive loss                                                                                                                  |  |                  | (85     | ) |                   |   | (103    | )
|Accumulated deficit                                                                                                                                   |  |                  | (58,938 | ) |                   |   | (40,366 | )
|                                                                                                                                                      |  |                  |         |   |                   |   |         |  
|Total stockholders equity                                                                                                                            |  |                  | 25,293  |   |                   |   | 43,767  |  
|                                                                                                                                                      |  |                  |         |   |                   |   |         |  
|Total liabilities and stockholders equity                                                                                                            |  | $                | 55,043  |   |                   | $ | 74,906  |  
|                                                                                                                                                      |  |                  |         |   |                   |   |         |  



See notes to
consolidated financial statements.



27



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HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)



|                                             |  |                   |         |   |                   |   |         |                   |  |   |         |  
|-------------------------------------------- |  | ----------------- | ------- | - | ----------------- | - | ------- | ----------------- |  | - | ------- | -
|                                             |  | Years Ended       |        
|                                             |  | December 28, 2003 |         |   | December 29, 2002 |   |         | December 30, 2001 | 
|Net Revenues:                                |  |                   |         |   |                   |   |         |                   |  |   |         |  
|Contract services                            |  | $                 | 152,840 |   |                   | $ | 115,644 |                   |  | $ | 149,515 |  
|Permanent placement                          |  |                   | 4,079   |   |                   |   | 4,784   |                   |  |   | 24,321  |  
|                                             |  |                   |         |   |                   |   |         |                   |  |   |         |  
|Total net revenues                           |  |                   | 156,919 |   |                   |   | 120,428 |                   |  |   | 173,836 |  
|Cost of contract services                    |  |                   | 111,616 |   |                   |   | 80,744  |                   |  |   | 100,834 |  
|                                             |  |                   |         |   |                   |   |         |                   |  |   |         |  
|Gross profit                                 |  |                   | 45,303  |   |                   |   | 39,684  |                   |  |   | 73,002  |  
|Operating Expenses:                          |  |                   |         |   |                   |   |         |                   |  |   |         |  
|Selling, general and administrative expenses |  |                   | 46,607  |   |                   |   | 47,407  |                   |  |   | 96,820  |  
|Impairment of goodwill                       |  |                   |         |   |                   |   | 15,478  |                   |  |   | 26,736  |  
|Restructuring costs (income)                 |  |                   | 2,792   |   |                   |   | (6      | )                 |  |   | 17,048  |  
|                                             |  |                   |         |   |                   |   |         |                   |  |   |         |  
|Loss from operations                         |  |                   | (4,096  | ) |                   |   | (23,195 | )                 |  |   | (67,602 | )
|Interest income                              |  |                   | 34      |   |                   |   | 338     |                   |  |   | 1,300   |  
|Interest expense                             |  |                   | (544    | ) |                   |   | (190    | )                 |  |   | (24     | )
|Other income (expense)                       |  |                   | 215     |   |                   |   | (471    | )                 |  |   | (95     | )
|                                             |  |                   |         |   |                   |   |         |                   |  |   |         |  
|Loss before income taxes                     |  |                   | (4,391  | ) |                   |   | (23,518 | )                 |  |   | (66,421 | )
|Income tax provision (benefit)               |  |                   | 14,181  |   |                   |   | (2,870  | )                 |  |   | (20,809 | )
|                                             |  |                   |         |   |                   |   |         |                   |  |   |         |  
|Net loss                                     |  | $                 | (18,572 | ) |                   | $ | (20,648 | )                 |  | $ | (45,612 | )
|                                             |  |                   |         |   |                   |   |         |                   |  |   |         |  
|Net loss per share:                          |  |                   |         |   |                   |   |         |                   |  |   |         |  
|Basic                                        |  | $                 | (1.47   | ) |                   | $ | (1.66   | )                 |  | $ | (3.48   | )
|Diluted                                      |  | $                 | (1.47   | ) |                   | $ | (1.66   | )                 |  | $ | (3.48   | )
|Shares used in per share calculations:       |  |                   |         |   |                   |   |         |                   |  |   |         |  
|Basic                                        |  |                   | 12,592  |   |                   |   | 12,475  |                   |  |   | 13,121  |  
|Diluted                                      |  |                   | 12,592  |   |                   |   | 12,475  |                   |  |   | 13,121  |  



See notes to
consolidated financial statements.



28



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HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(in thousands)



|                                           |  |              |   |  |                            |        |   |                                            |   |        |                                      |  |   |       |   |  |                            |         |   |  |   |         |   |  |   |         |  
|------------------------------------------ |  | ------------ | - |  | -------------------------- | ------ | - | ------------------------------------------ | - | ------ | ------------------------------------ |  | - | ----- | - |  | -------------------------- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                           |  | Common Stock |   |  | StockholderNotesReceivable |        |   | AccumulatedOtherComprehensiveIncome (Loss) |   |        | RetainedEarnings(AccumulatedDeficit) |  |   | Total |   |  | ComprehensiveIncome (Loss) |        
|                                           |  | Shares       |   |  | Amount                     |        |   |                                            |   |        |                                     
|BALANCES as of December 31, 2000           |  | 13,179       |   |  | $                          | 87,207 |   |                                            | $ | (2,267 | )                                    |  | $ | (72   | ) |  | $                          | 25,894  |   |  | $ | 110,762 |   |  |   |         |  
|Exercise of stock options                  |  | 73           |   |  |                            | 334    |   |                                            |   |        |                                      |  |   |       |   |  |                            |         |   |  |   | 334     |   |  |   |         |  
|Tax benefit related to stock options       |  |              |   |  |                            | 98     |   |                                            |   |        |                                      |  |   |       |   |  |                            |         |   |  |   | 98      |   |  |   |         |  
|Repurchase of common stock                 |  | (300         | ) |  |                            | (1,835 | ) |                                            |   |        |                                      |  |   |       |   |  |                            |         |   |  |   | (1,835  | ) |  |   |         |  
|Forgiveness of stockholder note receivable |  |              |   |  |                            |        |   |                                            |   | 1,067  |                                      |  |   |       |   |  |                            |         |   |  |   | 1,067   |   |  |   |         |  
|Net loss                                   |  |              |   |  |                            |        |   |                                            |   |        |                                      |  |   |       |   |  |                            | (45,612 | ) |  |   | (45,612 | ) |  | $ | (45,612 | )
|Accumulated translation adjustment         |  |              |   |  |                            |        |   |                                            |   |        |                                      |  |   | (33   | ) |  |                            |         |   |  |   | (33     | ) |  |   | (33     | )
|                                           |  |              |   |  |                            |        |   |                                            |   |        |                                      |  |   |       |   |  |                            |         |   |  |   |         |   |  |   |         |  
|Comprehensive loss                         |  |              |   |  |                            |        |   |                                            |   |        |                                      |  |   |       |   |  |                            |         |   |  |   |         |   |  | $ | (45,645 | )
|                                           |  |              |   |  |                            |        |   |                                            |   |        |                                      |  |   |       |   |  |                            |         |   |  |   |         |   |  |   |         |  
|BALANCES as of December 30, 2001           |  | 12,952       |   |  |                            | 85,804 |   |                                            |   | (1,200 | )                                    |  |   | (105  | ) |  |                            | (19,718 | ) |  |   | 64,781  |   |  |   |         |  
|Exercise of stock options                  |  | 78           |   |  |                            | 420    |   |                                            |   |        |                                      |  |   |       |   |  |                            |         |   |  |   | 420     |   |  |   |         |  
|Tax benefit related to stock options       |  |              |   |  |                            | 103    |   |                                            |   |        |                                      |  |   |       |   |  |                            |         |   |  |   | 103     |   |  |   |         |  
|Stock issued related to acquisition        |  | 363          |   |  |                            | 2,240  |   |                                            |   |        |                                      |  |   |       |   |  |                            |         |   |  |   | 2,240   |   |  |   |         |  
|Repurchase of common stock                 |  | (709         | ) |  |                            | (3,531 | ) |                                            |   |        |                                      |  |   |       |   |  |                            |         |   |  |   | (3,531  | ) |  |   |         |  
|Forgiveness of stockholder note receivable |  |              |   |  |                            |        |   |                                            |   | 400    |                                      |  |   |       |   |  |                            |         |   |  |   | 400     |   |  |   |         |  
|Net loss                                   |  |              |   |  |                            |        |   |                                            |   |        |                                      |  |   |       |   |  |                            | (20,648 | ) |  |   | (20,648 | ) |  | $ | (20,648 | )
|Accumulated translation adjustment         |  |              |   |  |                            |        |   |                                            |   |        |                                      |  |   | 2     |   |  |                            |         |   |  |   | 2       |   |  |   | 2       |  
|                                           |  |              |   |  |                            |        |   |                                            |   |        |                                      |  |   |       |   |  |                            |         |   |  |   |         |   |  |   |         |  
|Comprehensive loss                         |  |              |   |  |                            |        |   |                                            |   |        |                                      |  |   |       |   |  |                            |         |   |  |   |         |   |  | $ | (20,646 | )
|                                           |  |              |   |  |                            |        |   |                                            |   |        |                                      |  |   |       |   |  |                            |         |   |  |   |         |   |  |   |         |  
|BALANCES as of December 29, 2002           |  | 12,684       |   |  |                            | 85,036 |   |                                            |   | (800   | )                                    |  |   | (103  | ) |  |                            | (40,366 | ) |  |   | 43,767  |   |  |   |         |  
|Exercise of stock options and tax benefit  |  | 6            |   |  |                            | 3      |   |                                            |   |        |                                      |  |   |       |   |  |                            |         |   |  |   | 3       |   |  |   |         |  
|Repurchase of common stock                 |  | (102         | ) |  |                            | (323   | ) |                                            |   |        |                                      |  |   |       |   |  |                            |         |   |  |   | (323    | ) |  |   |         |  
|Forgiveness of stockholder note receivable |  |              |   |  |                            |        |   |                                            |   | 400    |                                      |  |   |       |   |  |                            |         |   |  |   | 400     |   |  |   |         |  
|Net loss                                   |  |              |   |  |                            |        |   |                                            |   |        |                                      |  |   |       |   |  |                            | (18,572 | ) |  |   | (18,572 | ) |  | $ | (18,572 | )
|Accumulated translation adjustment         |  |              |   |  |                            |        |   |                                            |   |        |                                      |  |   | 18    |   |  |                            |         |   |  |   | 18      |   |  |   | 18      |  
|                                           |  |              |   |  |                            |        |   |                                            |   |        |                                      |  |   |       |   |  |                            |         |   |  |   |         |   |  |   |         |  
|Comprehensive loss                         |  |              |   |  |                            |        |   |                                            |   |        |                                      |  |   |       |   |  |                            |         |   |  |   |         |   |  | $ | (18,554 | )
|                                           |  |              |   |  |                            |        |   |                                            |   |        |                                      |  |   |       |   |  |                            |         |   |  |   |         |   |  |   |         |  
|BALANCES as of December 28, 2003           |  | 12,588       |   |  | $                          | 84,716 |   |                                            | $ | (400   | )                                    |  | $ | (85   | ) |  | $                          | (58,938 | ) |  | $ | 25,293  |   |  |   |         |  
|                                           |  |              |   |  |                            |        |   |                                            |   |        |                                      |  |   |       |   |  |                            |         |   |  |   |         |   |  |   |         |  



See notes to
consolidated financial statements.



29



---

HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                             |  |                  |          |   |                  |   |         |                  |  |   |         |  
|---------------------------------------------------------------------------- |  | ---------------- | -------- | - | ---------------- | - | ------- | ---------------- |  | - | ------- | -
|                                                                             |  | Years Ended      |         
|                                                                             |  | December 28,2003 |          |   | December 29,2002 |   |         | December 30,2001 | 
|Cash flows from operating activities:                                        |  |                  |          |   |                  |   |         |                  |  |   |         |  
|Net loss                                                                     |  | $                | (18,572  | ) |                  | $ | (20,648 | )                |  | $ | (45,612 | )
|Adjustments to reconcile net loss to net cash used for operating activities: |  |                  |          |   |                  |   |         |                  |  |   |         |  
|Depreciation and amortization                                                |  |                  | 3,104    |   |                  |   | 3,702   |                  |  |   | 4,868   |  
|Deferred income taxes                                                        |  |                  | 14,030   |   |                  |   | (424    | )                |  |   | (12,387 | )
|Loss (gain) on disposition of property and equipment                         |  |                  | 237      |   |                  |   |         |                  |  |   | (8      | )
|Impairment of goodwill                                                       |  |                  |          |   |                  |   | 15,478  |                  |  |   | 26,736  |  
|Non-cash restructuring costs                                                 |  |                  | 2,792    |   |                  |   | 158     |                  |  |   | 3,973   |  
|Stockholder note receivable forgiveness                                      |  |                  | 400      |   |                  |   | 400     |                  |  |   | 1,067   |  
|Changes in assets and liabilities:                                           |  |                  |          |   |                  |   |         |                  |  |   |         |  
|Accounts receivable                                                          |  |                  | 2,017    |   |                  |   | (5,099  | )                |  |   | 30,438  |  
|Prepaid expenses and other assets                                            |  |                  | (662     | ) |                  |   | (32     | )                |  |   | (32     | )
|Accounts payable and accrued expenses                                        |  |                  | (6,747   | ) |                  |   | (5,812  | )                |  |   | (1,830  | )
|Income taxes payable (receivable)                                            |  |                  | 1,086    |   |                  |   | 8,583   |                  |  |   | (10,584 | )
|                                                                             |  |                  |          |   |                  |   |         |                  |  |   |         |  
|Net cash used for operating activities                                       |  |                  | (2,315   | ) |                  |   | (3,694  | )                |  |   | (3,371  | )
|                                                                             |  |                  |          |   |                  |   |         |                  |  |   |         |  
|Cash flows from investing activities:                                        |  |                  |          |   |                  |   |         |                  |  |   |         |  
|Sale or maturity of investments                                              |  |                  |          |   |                  |   | 8,200   |                  |  |   | 25,581  |  
|Purchase of investments                                                      |  |                  |          |   |                  |   |         |                  |  |   | (33,680 | )
|Purchase of property and equipment                                           |  |                  | (455     | ) |                  |   | (1,802  | )                |  |   | (5,078  | )
|Cash paid for business acquisitions                                          |  |                  |          |   |                  |   | (19,750 | )                |  |   | (3,032  | )
|Recoveries (earnout payments) related to business acquisitions               |  |                  | 505      |   |                  |   |         |                  |  |   | (2,883  | )
|                                                                             |  |                  |          |   |                  |   |         |                  |  |   |         |  
|Net cash provided by (used for) investing activities                         |  |                  | 50       |   |                  |   | (13,352 | )                |  |   | (19,092 | )
|                                                                             |  |                  |          |   |                  |   |         |                  |  |   |         |  
|Cash flows from financing activities:                                        |  |                  |          |   |                  |   |         |                  |  |   |         |  
|Borrowing on line of credit                                                  |  |                  | 113,935  |   |                  |   | 10,000  |                  |  |   |         |  
|Repayments on line of credit                                                 |  |                  | (115,407 | ) |                  |   |         |                  |  |   |         |  
|Proceeds from exercise of options                                            |  |                  | 7        |   |                  |   | 420     |                  |  |   | 334     |  
|Repurchase and cancellation of common stock                                  |  |                  | (324     | ) |                  |   | (291    | )                |  |   | (5,075  | )
|                                                                             |  |                  |          |   |                  |   |         |                  |  |   |         |  
|Net cash provided by (used for) financing activities                         |  |                  | (1,789   | ) |                  |   | 10,129  |                  |  |   | (4,741  | )
|                                                                             |  |                  |          |   |                  |   |         |                  |  |   |         |  
|Net decrease in cash and cash equivalents                                    |  |                  | (4,054   | ) |                  |   | (6,917  | )                |  |   | (27,204 | )
|Cash and cash equivalents, beginning of year                                 |  |                  | 8,571    |   |                  |   | 15,488  |                  |  |   | 42,692  |  
|                                                                             |  |                  |          |   |                  |   |         |                  |  |   |         |  
|Cash and cash equivalents, end of year                                       |  | $                | 4,517    |   |                  | $ | 8,571   |                  |  | $ | 15,488  |  
|                                                                             |  |                  |          |   |                  |   |         |                  |  |   |         |  
|Supplemental Disclosure of Cash Flow Information:                            |  |                  |          |   |                  |   |         |                  |  |   |         |  
|Cash paid (refunded) during the year for:                                    |  |                  |          |   |                  |   |         |                  |  |   |         |  
|Income taxes, net                                                            |  | $                | (929     | ) |                  | $ | (10,794 | )                |  | $ | 2,348   |  
|Interest                                                                     |  | $                | 438      |   |                  | $ | 154     |                  |  | $ | 24      |  
|Noncash investing and financing activitiesBusiness acquisitions:            |  |                  |          |   |                  |   |         |                  |  |   |         |  
|Note payable related to OnStaff earnout                                      |  | $                | 4,083    |   |                  |   |         |                  |  |   |         |  
|Common stock issued                                                          |  |                  |          |   |                  | $ | 2,240   |                  |  |   |         |  
|Liabilities assumed and related goodwill                                     |  |                  |          |   |                  |   |         |                  |  | $ | 2,000   |  



See notes to
consolidated financial statements.



30



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HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 28, 2003, December 29, 2002 and December 30, 2001



Note 1. Business and Proposed Merger with Kforce



Business. Hall, Kinion & Associates, Inc. (the Company) is a staffing company specializing in placing
high technology and corporate professional personnel on both a contract and permanent basis.



Proposed Merger with Kforce. On April 5, 2004, Kforce Inc. (Kforce) and the Company executed an Amended and Restated Agreement and Plan of Merger. Under the terms of the merger agreement, Kforce
will acquire all of the shares of the Company in exchange for shares of Kforce common stock. The definitive exchange ratio is dependent upon the average of the closing prices of Kforce common stock for the 15 trading days ending on and including the
third trading day prior to the closing date (such average is referenced herein as the Kforce stock market value). If the Kforce stock market value is equal to or greater than $7.09, but less than $9.60, then the exchange ratio will equal
0.45. If the Kforce stock market value is equal to or greater than $9.60, then the exchange ratio will be $4.32 divided by the Kforce stock market value. For purposes of calculating the Exchange Ratio, the Market Trading Price shall not exceed
$10.60; therefore, if the price calculated is equal to or greater than $10.60, the Exchange Ratio will be calculated by dividing $4.32 by $10.60 which equals 0.4075. If the Kforce stock market value is less than $7.09, then the exchange ratio will
be $3.19 divided by the Kforce stock market value. Kforce may elect to terminate the merger agreement if the Kforce average closing stock price remains below $7.00 for 15 consecutive trading days at any time prior to the closing.



The proposed transaction requires and is subject to the approval by the
stockholders of the Company and the effectiveness of a registration statement registering the common stock to be issued to stockholders of the Company and other customary closing conditions.



Note 2. Results of Operations in 2003 and Managements Plans for 2004



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



The Company entered into an agreement dated June 13, 2003 with CIT Business
Credit for a new three-year renewable credit facility of $16.0 million that replaced an existing credit facility of $12.0 million and is used primarily to fund operations. Significant terms and conditions of the agreement, as amended through April
2, 2004, are described under Note 5. Hall Kinion was in compliance with its loan covenants and terms as of December 28, 2003; however, the Company was not in compliance with one of the financial covenants as of the end of January 2004 and February
2004. On March 1, 2004, CIT Business Credit waived compliance with this covenant for January 2004 and February 2004 in a first amendment to the line of credit facility. On March 25, 2004, Brenda C. Rhodes, the Chief Executive Officer and Chairman of
the Board, and Todd Kinion, a director, agreed to provide irrevocable letters of credit totaling $5.0 million to the lender and CIT Business Credit agreed to increase availability under the line by $5.0 million. On April 2, 2004, upon
receipt of the executed letters of credit, the lender executed a second amendment to the credit facility to increase the availability under the line, to replace the original loan covenants with a covenant requiring the Company to maintain a minimum
balance of unrestricted cash and credit line availability of not less than $2 million at all times and to require CIT Business Credits approval for payment of the OnStaff earnout obligation. As a result, management believes that the
Company will remain in compliance with the terms and covenants of its loan agreement, as revised, through at least December 31, 2004.



In November 2003, Hall Kinion negotiated a settlement with OnStaffs former owners that included a deferral of the 2003 earnout payment of $4.1
million from its due date of February 15, 2004. Under 10% note



31



---

HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



agreements, beginning May 15, 2004, the principal will be payable in four equal quarterly installments of $1.0 million and interest is due monthly (see
Note 4). If the merger with Kforce is completed, the notes are due in full shortly after closing of the merger, or if the merger has not been completed before May 15, 2004, the notes are due in installments as scheduled. If the merger is not
completed by May 15, 2004 and if CIT Business Credit does not consent to the payment of the first installment, the former owners of OnStaff may declare the entire amount due and payable and will be relieved of their non-solicitation and non-compete
agreements. No assurance can be given as to the whether CIT Business Credit will permit the payment of the first installment of the earnout payment on May 15, 2004, if the merger is not consummated by then.



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



Note 3. Significant Accounting Policies



Fiscal Year. The Companys fiscal year ends on the Sunday closest to December 31. Fiscal years 2003, 2002 and 2001 consisted of 52 weeks.



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.



Use of Estimates. 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.



Fair
Value of Financial Instruments. The carrying values of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short term maturity of these instruments. The book value of the Companys debt
instrument is considered to approximate its fair value because the interest rate of this instrument approximates current rates offered to the Company.



Cash and Cash 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.



Concentration of Credit Risk and Allowance for Doubtful Accounts. The Companys financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade receivables. However, concentrations of risk are limited due to the large number of customers comprising the Companys customer base and their dispersion across different business and
geographic areas. Accounts receivable are carried at the amount estimated to be collectible. The Company maintains an allowance for potential losses based upon managements analysis of historical write-off levels, current economic trends,
assessment of its customers financial strength and other known factors affecting collectibility. The ultimate amount of accounts receivable that become uncollectible could differ from those estimated amounts.





32



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HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Significant changes in the allowance are as follows:



|                            |  |                  |        |   |                  |   |        |                   |  |   |         |  
|--------------------------- |  | ---------------- | ------ | - | ---------------- | - | ------ | ----------------- |  | - | ------- | -
|                            |  | Years Ended      |       
|                            |  | December 28,2003 |        |   | December 29,2002 |   |        | December 30, 2001 | 
|                            |  | (in thousands)   |       
|Beginning balance           |  | $                | 2,544  |   |                  | $ | 3,176  |                   |  | $ | 3,455   |  
|Charged to cost and expense |  |                  | 104    |   |                  |   | 526    |                   |  |   | 12,492  |  
|Written off                 |  |                  | (1,040 | ) |                  |   | (1,158 | )                 |  |   | (12,771 | )
|                            |  |                  |        |   |                  |   |        |                   |  |   |         |  
|Ending balance              |  | $                | 1,608  |   |                  | $ | 2,544  |                   |  | $ | 3,176   |  
|                            |  |                  |        |   |                  |   |        |                   |  |   |         |  



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 and
Other Identifiable Intangible Assets.As of December 28, 2003, goodwill was $15.4 million and the carrying amount of other identifiable intangibles was $10.0 million, including $3.1 million subject to amortization over three to five year lives
and $6.9 million not subject to amortization. Amortization expense in 2003 and 2002 was $877,000 and $365,000, respectively. The recoverability of goodwill and other identifiable intangible assets is based on assumptions regarding estimated future
cash flows and other factors. If these assumptions and estimates change in the future, additional expense may be recorded to reflect impairment of these assets.



Deferred Rent. The Company leases certain office facilities under operating leases that provide for increases in rent based on specified
amounts. Rent expense associated with these leases is recognized on a straight-line basis over the life of the lease and the difference between the amount charged to expense and the rent paid is recorded as deferred rent.



Revenue Recognition. Revenue from contract services 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. Revenue from online recruiting and placement Web sites
is recognized over the term of membership.



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



Stock-Based Compensation. The Company accounts for stock-based awards
to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and its related FASB Interpretation No. 44, Accounting for Certain Transactions involving
Stock Compensation. SFAS No. 123, Accounting for Stock-Based Compensation, requires the disclosure of proforma net income (loss) and earnings (loss) per share. Under SFAS No. 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.



33



---

HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The proforma amounts and the assumptions used to calculate them are shown below.



|                                                                                                                             |  |                  |         |   |                  |   |         |                  |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ---------------- | - | ------- | ---------------- |  | - | ------- | -
|                                                                                                                             |  | Years Ended      |        
|                                                                                                                             |  | December 28,2003 |         |   | December 29,2002 |   |         | December 30,2001 | 
|Proforma amounts (in thousands):                                                                                             |  |                  |         |   |                  |   |         |                  |  |   |         |  
|Net loss:                                                                                                                    |  |                  |         |   |                  |   |         |                  |  |   |         |  
|As reported                                                                                                                  |  | $                | (18,572 | ) |                  | $ | (20,648 | )                |  | $ | (45,612 | )
|Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effect |  |                  | (4,472  | ) |                  |   | (5,140  | )                |  |   | (13,833 | )
|                                                                                                                             |  |                  |         |   |                  |   |         |                  |  |   |         |  
|Proforma                                                                                                                     |  | $                | (23,044 | ) |                  | $ | (25,788 | )                |  | $ | (59,445 | )
|                                                                                                                             |  |                  |         |   |                  |   |         |                  |  |   |         |  
|Diluted loss per share:                                                                                                      |  |                  |         |   |                  |   |         |                  |  |   |         |  
|As reported                                                                                                                  |  | $                | (1.47   | ) |                  | $ | (1.66   | )                |  | $ | (3.48   | )
|Proforma                                                                                                                     |  | $                | (1.83   | ) |                  | $ | (2.07   | )                |  | $ | (4.53   | )
|Assumptions:                                                                                                                 |  |                  |         |   |                  |   |         |                  |  |   |         |  
|Expected dividend rate                                                                                                       |  |                  | None    |   |                  |   | None    |                  |  |   | None    |  
|Volatility                                                                                                                   |  |                  | 94.6    | % |                  |   | 90.0    | %                |  |   | 92.3    | %
|Risk-free interest rate                                                                                                      |  |                  | 3.9     | % |                  |   | 2.2     | %                |  |   | 3.8     | %
|Expected lives (years)                                                                                                       |  |                  | 3-6     |   |                  |   | 2-5     |                  |  |   | 3-6     |  



Net Income (Loss)
Per Share. Basic net income (loss) per share excludes dilution and is computed by dividing net income (loss) attributable to common stockholders by the weighted average of common shares outstanding for the period. Diluted net income (loss) 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. The number of incremental shares from the assumed issuance of stock options is
calculated by applying the treasury stock method. In calculating the net loss per share for the years ended December 28, 2003, December 29, 2002 and December 30, 2001, 3.7 million, 2.3 million and 1.6 million options, respectively, were excluded
because they are anti-dilutive.



Reclassifications.
Certain prior year amounts have been reclassified to conform to the current year presentation.



Note 4. Acquisition of OnStaff



On August 9, 2002, the Company acquired certain net assets and assumed certain liabilities of OnStaff in exchange for $18.1 million in cash and 363,057 shares of Hall Kinion common stock, valued at $2.2 million. The value of the common
stock issued was determined based upon the average market price of the Companys common stock over a 2-day period before and after the August 9, 2002 acquisition. In addition, the Company agreed to pay OnStaff up to $4.3 million in each of
2003, 2004 and 2005, contingent upon the achievement of specified annual financial performance metrics.



OnStaff, a privately-held group of companies that provided temporary and full-time employees in the real estate, finance and healthcare industries,
included: OnStaff, Inc., a California corporation (OSI), Healthcare Staffing Resources, Inc., a California corporation (HCSR), and Boardnetwork.com, Inc., a California corporation (BNI). The accompanying condensed
consolidated financial statements include the operations of OnStaff from August 2002.



34



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HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The transaction has been accounted for using the purchase method. The net purchase price, including
transaction costs, was allocated as follows:



|                               |  |                |        |  
|------------------------------ |  | -------------- | ------ | -
|                               |  | (in thousands) |       
|Net working capital deficiency |  | $              | (1,298 | )
|Property and equipment         |  |                | 261    |  
|Other assets                   |  |                | 56     |  
|Goodwill                       |  |                | 11,849 |  
|Tradename and trademarks       |  |                | 6,841  |  
|Customer relationships         |  |                | 4,050  |  
|Web-based job board software   |  |                | 333    |  
|                               |  |                |        |  
|Total purchase price           |  | $              | 22,092 |  
|                               |  |                |        |  



On November 21, 2003,
the Company reached settlement with the former owners of OnStaff, including two current Hall Kinion employees, regarding a tax indemnity agreement, certain escrowed funds and shares, the achievement of the first years financial goals and
payment of the 2003 earnout installment and other matters. As a result, the former OnStaff owners released their claim to a $0.5 million escrow fund and agreed to an offset of $0.2 million of the initial sale proceeds against the 2003 earnout
payment. The Company released to the sellers 81,688 shares of common stock representing 75% of the shares held in escrow and agreed that the 2003 earnout payment was fully earned. The earnout payment, originally due on February 15, 2004, was
deferred until the earlier of: (i) 14 days after the close of the transaction, in the case of a significant change of control due to sale, merger, consolidation or otherwise (See Note 1), or, (ii) February 15, 2005, under the terms of a note
agreement which requires monthly payments of interest at 10% per annum and quarterly payments of principal beginning May 15, 2004. As of December 28, 2003, goodwill and the note payable related to OnStaff earnout increased by $4.1 million ($4.3
million earnout less the $0.2 million disclosed above). The recovery of the $0.5 million escrow was recorded as a reduction of goodwill.



The following proforma information is based upon the historical results of the Company and OnStaff as if the acquisition had occurred on January 1, 2001:



|                       |  |                                                     |         |   |                  |   |         |  
|---------------------- |  | --------------------------------------------------- | ------- | - | ---------------- | - | ------- | -
|                       |  | Years Ended                                         |        
|                       |  | December 29, 2002                                   |         |   | December 30,2001 |  
|                       |  | (in thousands except per share amounts) (unaudited) |        
|Net revenues           |  | $                                                   | 143,114 |   |                  | $ | 208,901 |  
|Net loss               |  | $                                                   | (22,526 | ) |                  | $ | (46,029 | )
|Diluted loss per share |  | $                                                   | (1.81   | ) |                  | $ | (3.40   | )



Note 5. Line of Credit



The Company entered into an agreement dated June 13, 2003
with CIT Business Credit for a new three-year renewable credit facility of $16.0 million that replaced an existing credit facility of $12.0 million and is used primarily to fund operations. Significant terms and conditions of the agreement, as
amended through April 2, 2004, are as follows:



| |  | Availability is determined by the lesser of (i) 85% of eligible accounts receivable, less reserves and certain receivable balances as defined in the agreement that totaled $2.9
million as of December 28, 2003, plus undrawn amounts under the $5.0 million irrevocable letters of credit (ii) cash collected during the most recent 45-day period, or (iii) the full amount of the facility, less reserves, letters of credit and
certain payables as defined in the agreement that totaled $0.6 million as of December 28, 2003.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



35



---

HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



| |  | Interest is at prime plus 1.25% (approximately 5.0% at December 28, 2003) and starting June 27, 2004, the interest rate may be reduced to a rate that is as low as prime plus 0.5%,
contingent upon the Company meeting specified levels of profitability.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Financial covenants require maintaining a minimum balance of unrestricted cash and credit line availability of $2.0 million at all times.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------



| |  | Borrowings are collateralized by all of the Companys assets and irrevocable letters of credit totaling $5.0 million provided by certain stockholders.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Company may not declare or pay any dividends or distribution of any kind nor acquire, redeem, or retire any of its own capital stock and may not make earnout payments to OnStaff
without the prior written consent of CIT Business Credit.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | A bank lockbox was established whereby all Company cash receipts are first applied to the line of credit.
| | - | ---------------------------------------------------------------------------------------------------------



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



On March 25, 2004, Brenda C. Rhodes, the Chief Executive Officer and Chairman of the Board, and Todd Kinion, a director, agreed to provide irrevocable
letters of credit totaling $5.0 million to the lender and CIT Business Credit agreed to increase availability under the line by $5.0 million. On April 2, 2004, upon receipt of the executed letters of credit, the lender executed a second
amendment to the credit facility to increase the availability under the line, to replace the original loan covenants with a covenant requiring the Company to maintain a minimum balance of unrestricted cash and credit line availability of not less
than $2.0 million at all times and to require CIT Business Credits approval for payment of the OnStaff earnout obligation. As a result, management believes that the Company will remain in compliance with the terms and covenants of its loan
agreement, as revised, through at least December 31, 2004.



Note 6.
Restricted Cash



Restricted cash of $1.0 million, covering
outstanding letters of credit related to leases and self-insurance programs, is included on the consolidated balance sheet as of December 28, 2003 under deferred income taxes and other assets.



Note 7. Property and Equipment



Property and equipment, net consists of:



|                                          |  |                  |         |   |                  |   |         |  
|----------------------------------------- |  | ---------------- | ------- | - | ---------------- | - | ------- | -
|                                          |  | December 28,2003 |         |   | December 29,2002 |  
|                                          |  | (in thousands)   |        
|Property and equipment                    |  | $                | 12,858  |   |                  | $ | 14,748  |  
|Land and building                         |  |                  |         |   |                  |   | 2,100   |  
|Leasehold improvements                    |  |                  | 1,330   |   |                  |   | 1,916   |  
|                                          |  |                  |         |   |                  |   |         |  
|                                          |  |                  | 14,188  |   |                  |   | 18,764  |  
|Accumulated depreciation and amortization |  |                  | (10,687 | ) |                  |   | (11,253 | )
|                                          |  |                  |         |   |                  |   |         |  
|Net property and equipment                |  | $                | 3,501   |   |                  | $ | 7,511   |  
|                                          |  |                  |         |   |                  |   |         |  



36



---

HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Property held for sale. On February 2, 2004, the Company agreed to sell its training facility
in Park City, Utah for $1.7 million. The sale closed on February 27, 2004 and resulted in net cash proceeds of $1.6 million. At December 28, 2003, the Company recorded a write down of $0.2 million to reduce the recorded net book value of the
property to the expected net cash proceeds from the sale.



Note 8.
Impairment of Goodwill



In June 2001, the Financial
Accounting Standards Board issued SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and
other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will rather be
tested at least annually for impairment. The Company adopted SFAS No. 142 in fiscal year 2002 and, in accordance therewith, discontinued the amortization of goodwill effective December 31, 2001. The Company performed an initial impairment test as
required by SFAS No. 142 as of January 1, 2002 and determined that goodwill was not impaired.



As of December 28, 2003, the goodwill related to Contract Professional Staffing was $15.4 million and the Company performed its annual impairment test at such date. Significant estimates and assumptions were used in
determining the Companys estimated fair value of each reporting unit, including forecasted volume, revenue, level of operating expenses, number of offices and profitability. No impairment of goodwill was determined to exist as of December 28,
2003.



In 2002 and early 2003, sales and profitability for the
Technology Professional Division declined and on March 3, 2003, the Company announced a restructuring plan that included closure of 13 offices and termination of 69 employees and recorded a restructuring charge of $2.3 million in March 2003.
Additionally, the Companys market capitalization declined significantly beginning early in the first quarter of 2003. The closing trading price was $1.79 per share as of March 26, 2003. As a result, the Company determined, based upon such
estimates and assumptions and comparison to the Companys market capitalization in March 2003 that the estimated fair values of its reporting units were significantly less than the related carrying values as of December 29, 2002. Therefore,
following the methodology required under SFAS No. 142, goodwill totaling $15.5 million was written off as of December 29, 2002, resulting in a revised carrying amount of $11.8 million as of that date, all of which was included in the Contract
Professional Staffing segment (See Note 15).



During
the first quarter of 2001, the Company recorded an impairment charge pursuant to SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, of approximately $26.7 million to recognize the impairment
of goodwill and other intangible assets associated with the following acquisitions: TKI Acquisition Corporation, IC Planet Acquisition Corporation, Huntington Acquisition Corporation, TKO Personnel Inc., and Group-IPEX, Inc. These companies
experienced significant declines in demand for their services, revenues, cash flows, and expected future growth due to declining economic conditions.



37



---

HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Significant changes in the balance of goodwill follows:



|                       |  |                  |        |   |                  |   |         |  
|---------------------- |  | ---------------- | ------ | - | ---------------- | - | ------- | -
|                       |  | December 28,2003 |        |   | December 29,2002 |  
|                       |  | (in thousands)   |       
|Beginning balance      |  | $                | 11,849 |   |                  | $ | 15,478  |  
|Acquisition of OnStaff |  |                  |        |   |                  |   | 11,849  |  
|2003 OnStaff earnout   |  |                  | 4,083  |   |                  |   |         |  
|Impairment of goodwill |  |                  |        |   |                  |   | (15,478 | )
|Recovery of escrow     |  |                  | (500   | ) |                  |   |         |  
|Other                  |  |                  | (42    | ) |                  |   |         |  
|                       |  |                  |        |   |                  |   |         |  
|Ending balance         |  | $                | 15,390 |   |                  | $ | 11,849  |  
|                       |  |                  |        |   |                  |   |         |  



A reconciliation of
previously reported net loss and diluted loss per share to the amounts adjusted for the exclusion of goodwill amortization, net of related income tax effect, follows:



|                                            |  |                                          |         |   |                  |   |         |                  |  |   |         |  
|------------------------------------------- |  | ---------------------------------------- | ------- | - | ---------------- | - | ------- | ---------------- |  | - | ------- | -
|                                            |  | Years Ended                              |        
|                                            |  | December 28,2003                         |         |   | December 29,2002 |   |         | December 30,2001 | 
|                                            |  | (in thousands, except per share amounts) |        
|Reported net loss                           |  | $                                        | (18,572 | ) |                  | $ | (20,648 | )                |  | $ | (45,612 | )
|Add: Goodwill amortization, net of tax      |  |                                          |         |   |                  |   |         |                  |  |   | 508     |  
|                                            |  |                                          |         |   |                  |   |         |                  |  |   |         |  
|Adjusted net loss                           |  | $                                        | (18,572 | ) |                  | $ | (20,648 | )                |  | $ | (45,104 | )
|                                            |  |                                          |         |   |                  |   |         |                  |  |   |         |  
|Diluted loss per share on reported net loss |  | $                                        | (1.47   | ) |                  | $ | (1.66   | )                |  | $ | (3.48   | )
|Add: Goodwill amortization, net of tax      |  |                                          |         |   |                  |   |         |                  |  |   | 0.04    |  
|                                            |  |                                          |         |   |                  |   |         |                  |  |   |         |  
|Adjusted net loss per share                 |  | $                                        | (1.47   | ) |                  | $ | (1.66   | )                |  | $ | (3.44   | )
|                                            |  |                                          |         |   |                  |   |         |                  |  |   |         |  



Note 9. Restructuring Costs



During 2001, the Company decided to close several offices
and reduced its workforce. The Company recorded $17.0 million for severance, lease terminations, and other costs associated with the Companys decision to restructure operations. In 2002, restructuring income of $6,000 was comprised of income
for the favorable resolution of certain severance and sublease agreements, offset by costs resulting from higher than estimated lease termination payments.



During the quarter ended March 30, 2003, the Company closed 13 offices and terminated the employment of 69 employees, recording a charge of $2.3 million
that consisted of $1.6 million of lease termination costs, $0.5 million of severance and other costs, and $0.2 million for asset impairment. During the quarter ended June 29, 2003, the Company closed its London and Seattle offices and reduced
management positions, recording a charge of $0.8 million, which consisted of $0.2 million for lease termination costs, $0.5 million for severance and other costs, and $0.1 million for asset impairment. During the quarter ended September 28, 2003,
the Company recorded a charge of $0.3 million resulting primarily from lower than anticipated sublease income for sales office closures during the first and second quarters of 2003. The Company also recorded favorable adjustments of
$0.5 million and $0.1 million in the second and fourth quarters, respectively, of 2003 resulting from finalizing certain lease termination, severance, and other liabilities accrued in prior periods. The remaining restructuring costs are
anticipated to be paid out during the next twelve months, except for the rental payments related to long-term facility leases that require settlement in 2005 and beyond and are reserved as non-current restructuring costs.



38



---

HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Restructuring liability is as follows:



|                                 |  |                       |        |   |                 |   |        |       |  |   |        |  
|-------------------------------- |  | --------------------- | ------ | - | --------------- | - | ------ | ----- |  | - | ------ | -
|                                 |  | LeaseTerminationCosts |        |   | Severance Costs |   |        | Total | 
|                                 |  | (in thousands)        |       
|Balances as of December 30, 2001 |  | $                     | 8,047  |   |                 | $ | 1,264  |       |  | $ | 9,311  |  
|Paid                             |  |                       | (2,340 | ) |                 |   | (796   | )     |  |   | (3,136 | )
|Adjustments                      |  |                       | (212   | ) |                 |   | 206    |       |  |   | (6     | )
|                                 |  |                       |        |   |                 |   |        |       |  |   |        |  
|Balances as of December 29, 2002 |  | $                     | 5,495  |   |                 | $ | 674    |       |  | $ | 6,169  |  
|Additions                        |  |                       | 1,754  |   |                 |   | 1,038  |       |  |   | 2,792  |  
|Paid                             |  |                       | (3,590 | ) |                 |   | (1,146 | )     |  |   | (4,736 | )
|Adjustments                      |  |                       | 228    |   |                 |   | (530   | )     |  |   | (302   | )
|                                 |  |                       |        |   |                 |   |        |       |  |   |        |  
|Balance as of December 28, 2003  |  | $                     | 3,887  |   |                 | $ | 36     |       |  | $ | 3,923  |  
|                                 |  |                       |        |   |                 |   |        |       |  |   |        |  



Note 10. 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 its Chief Executive Officer (CEO) $2,000,000, which bears
interest at the Companys incremental rate of borrowing plus1/8% per annum (5.175% at December 28, 2003), compounded monthly. This loan, as amended in January 2001, provides that 20% of the principal amount plus
accrued interest be forgiven annually, beginning on January 1, 2001, so that on January 1, 2005, no amounts will be due or owing. The note is secured by 433,000 shares of the Companys Common Stock pledged by the CEO. As loan forgiveness due
January 1, 2004 was recorded in 2003, the remaining balance of the note as of December 28, 2003 is $400,000.



Stock OptionsThe Companys 1997 Stock Option Plan (the Plan), as amended, authorizes the issuance of up to 3,759,000 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 an automatic annual authorization 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. At December 28, 2003, 59,000 shares of Common Stock were available for issuance under the 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.



The Companys IT Professional Stock Option Plan (the IT
Professional Plan) was adopted by the Board of Directors in May 1997. The Company has authorized 983,000 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 28, 2003, 959,000 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, however, to date, none have been granted. Options under the IT Professional Plan are generally vested based upon the tenure of the IT Professional and expire ten years from grant date.



39



---

HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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. At December 28, 2003, 338,000 shares of Common
Stock were available for issuance under the plan. 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.



In July 2001 the Company completed a
Tender Offer to exchange outstanding options to purchase shares of common stock having an exercise price per share of $15.00 or more for new options at current market price. Employee options to purchase 993,000 shares of common stock at an average
price of $24.12 were cancelled as of July 19, 2001 and new option grants to purchase 768,000, equivalent to 95% of the shares represented by the continuing options tendered, were issued at $8.21 per share on January 22, 2002. None of the
Companys senior executive officers participated in the exchange.



Activity under all stock option plans is as follows:



|                                                         |  |                 |   |  |                                 |      
|-------------------------------------------------------- |  | --------------- | - |  | ------------------------------- | -----
|                                                         |  | Number ofShares |   |  | Weighted Average Exercise Price
|Balance, December 31, 2000                               |  | 2,888,000       |   |  | $                               | 18.95
|Granted (weighted average fair value of $6.46 per share) |  | 640,000         |   |  | $                               | 10.09
|Canceled                                                 |  | (1,783,000      | ) |  | $                               | 21.47
|Exercised                                                |  | (74,000         | ) |  | $                               | 4.60 
|                                                         |  |                 |   |  |                                 |      
|Balance, December 30, 2001                               |  | 1,671,000       |   |  | $                               | 13.48
|Granted (weighted average fair value of $3.36 per share) |  | 2,574,000       |   |  | $                               | 7.29 
|Canceled                                                 |  | (352,000        | ) |  | $                               | 11.25
|Exercised                                                |  | (77,000         | ) |  | $                               | 5.40 
|                                                         |  |                 |   |  |                                 |      
|Balance, December 29, 2002                               |  | 3,816,000       |   |  | $                               | 9.67 
|Granted (weighted average fair value of $2.45 per share) |  | 1,093,000       |   |  | $                               | 2.98 
|Canceled                                                 |  | (649,000        | ) |  | $                               | 7.16 
|Exercised                                                |  | (6,000          | ) |  | $                               | 1.09 
|                                                         |  |                 |   |  |                                 |      
|Balance, December 28, 2003                               |  | 4,254,000       |   |  | $                               | 8.35 
|                                                         |  |                 |   |  |                                 |      



Additional information
regarding options outstanding as of December 28, 2003 is as follows:



|                         |  |                     |  |                                                     |  |                                 |       |                    |           |                                 |   |      
|------------------------ |  | ------------------- |  | --------------------------------------------------- |  | ------------------------------- | ----- | ------------------ | --------- | ------------------------------- | - | -----
|                         |  | Options Outstanding |  | Options Exercisable                                
|Range of Exercise Prices |  | Number Outstanding  |  | Weighted Average Remaining Contractual Life (Years) |  | Weighted Average Exercise Price |       | Number Exercisable |           | Weighted Average Exercise Price
|$0.30    $1.30          |  | 378,000             |  | 8.93                                                |  | $                               | 1.26  |                    | 142,000   |                                 | $ | 1.19 
|$1.57    $5.46          |  | 936,000             |  | 8.86                                                |  | $                               | 4.64  |                    | 206,000   |                                 | $ | 4.69 
|$5.53    $8.14          |  | 1,670,000           |  | 7.65                                                |  | $                               | 7.04  |                    | 1,085,000 |                                 | $ | 7.15 
|$8.21    $8.21          |  | 502,000             |  | 7.14                                                |  | $                               | 8.21  |                    | 435,000   |                                 | $ | 8.21 
|$8.29    $41.13         |  | 768,000             |  | 6.12                                                |  | $                               | 19.26 |                    | 613,000   |                                 | $ | 20.09
|                         |  |                     |  |                                                     |  |                                 |       |                    |           |                                 |   |      
|$0.30    $41.13         |  | 4,254,000           |  | 7.69                                                |  | $                               | 8.35  |                    | 2,481,000 |                                 | $ | 9.99 
|                         |  |                     |  |                                                     |  |                                 |       |                    |           |                                 |   |      



40



---

HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



At December 28, 2003, 1,356,000 shares of common stock were available for future option grants. As of
December 29, 2002 and December 30, 2001 the number of shares of common stock underlying exercisable options was 1,715,000 and 753,000 respectively, with a weighted average exercise price of $11.07 and $13.21 per share, respectively.



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 are 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 28, 2003, the Company has not implemented the Purchase Plan.



Note 11. Income Taxes



The provision (benefit) for income taxes consists of the following:



|                          |  |                  |        |                  |   |        |                  |  |   |         |  
|------------------------- |  | ---------------- | ------ | ---------------- | - | ------ | ---------------- |  | - | ------- | -
|                          |  | Years Ended      |       
|                          |  | December 28,2003 |        | December 29,2002 |   |        | December 30,2001 | 
|                          |  | (in thousands)   |       
|Current:                  |  |                  |        |                  |   |        |                  |  |   |         |  
|Federal                   |  | $                |       |                  | $ | (1,895 | )                |  | $ | (8,182  | )
|State                     |  |                  | 150    |                  |   | (551   | )                |  |   | (240    | )
|                          |  |                  |        |                  |   |        |                  |  |   |         |  
|                          |  |                  | 150    |                  |   | (2,446 | )                |  |   | (8,422  | )
|                          |  |                  |        |                  |   |        |                  |  |   |         |  
|Deferred:                 |  |                  |        |                  |   |        |                  |  |   |         |  
|Federal                   |  |                  | 11,373 |                  |   | (700   | )                |  |   | (9,947  | )
|State                     |  |                  | 2,658  |                  |   | 276    |                  |  |   | (2,440  | )
|                          |  |                  |        |                  |   |        |                  |  |   |         |  
|                          |  |                  | 14,031 |                  |   | (424   | )                |  |   | (12,387 | )
|                          |  |                  |        |                  |   |        |                  |  |   |         |  
|Total provision (benefit) |  | $                | 14,181 |                  | $ | (2,870 | )                |  | $ | (20,809 | )
|                          |  |                  |        |                  |   |        |                  |  |   |         |  



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



|                                                                   |  |        |    |  |       |   |  |      |  
|------------------------------------------------------------------ |  | ------ | -- |  | ----- | - |  | ---- | -
|                                                                   |  | 2003   |    |  | 2002  |   |  | 2001 |  
|Income tax expense at statutory rate                               |  | 35.0   | %  |  | 35.0  | % |  | 35.0 | %
|State income tax taxes, net of federal benefit                     |  | (41.6  | )  |  | 0.7   |   |  | 2.6  |  
|Amortization of impaired goodwill                                  |  |       |    |  |      |   |  | (6.4 | )
|Valuation allowance                                                |  | (318.0 | )  |  | (23.0 | ) |  |     |  
|Other items, net                                                   |  | 1.6    |    |  | (0.6  | ) |  | 0.1  |  
|                                                                   |  |        |    |  |       |   |  |      |  
|Income tax benefit (provision) at the Companys effective tax rate |  | (323.0 | )% |  | 12.1  | % |  | 31.3 | %
|                                                                   |  |        |    |  |       |   |  |      |  



41



---

HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The components of deferred income taxes are as follows:



|                                                  |  |                  |         |   |                  |   |        |  
|------------------------------------------------- |  | ---------------- | ------- | - | ---------------- | - | ------ | -
|                                                  |  | December 28,2003 |         |   | December 30,2002 |  
|                                                  |  | (in thousands)   |        
|Deferred tax assets:                              |  |                  |         |   |                  |   |        |  
|Allowance for doubtful accounts                   |  | $                | 645     |   |                  | $ | 1,020  |  
|Accrued expenses                                  |  |                  | 2,996   |   |                  |   | 2,959  |  
|Net operating loss and other credit carryforwards |  |                  | 8,751   |   |                  |   | 8,179  |  
|Goodwill and purchased intangibles                |  |                  | 8,097   |   |                  |   | 9,172  |  
|Depreciation and amortization                     |  |                  | 278     |   |                  |   |       |  
|Other                                             |  |                  |        |   |                  |   | 73     |  
|                                                  |  |                  |         |   |                  |   |        |  
|Total deferred tax assets                         |  |                  | 20,767  |   |                  |   | 21,403 |  
|                                                  |  |                  |         |   |                  |   |        |  
|Deferred tax liabilities:                         |  |                  |         |   |                  |   |        |  
|Depreciation and amortization                     |  |                  |        |   |                  |   | (217   | )
|Valuation allowances                              |  |                  | (20,767 | ) |                  |   | (6,206 | )
|                                                  |  |                  |         |   |                  |   |        |  
|Net deferred income taxes                         |  | $                |        |   |                  | $ | 14,980 |  
|                                                  |  |                  |         |   |                  |   |        |  



At December 28, 2003,
the Company had gross net operating loss carryforwards of approximately $23.9 million and $42.0 million for federal income tax purposes and state income tax purposes, respectively, expiring at various dates through 2023. Current federal and state
tax laws include substantial restrictions on the utilization of net operating losses and tax credits in the event of an ownership change of a corporation. Accordingly, the Companys ability to utilize these tax benefits may be limited as a
result of an ownership change, as defined by tax law.



A
valuation allowance is required if management concludes that it is more likely than not that a deferred tax asset will not be realized. As of December 28, 2003, management has determined, based upon the liquidity issues and estimates of future
taxable income during the carryforward periods, that it was more likely than not that the loss carryforwards may not be realized. As a result, in the fourth quarter 2003, the Company recorded a valuation allowance of $14.0 million. As of December
28, 2003, the Company had a 100% valuation allowance of $20.8 million, reducing the net deferred assets to zero.



Note 12. Commitments and Contingencies



Lease CommitmentsThe Company leases its office facilities under various non-cancelable operating leases, which expire through 2008, and
certain computers under capital leases. Rent expense included in operating expenses for 2003, 2002, and 2001 was approximately $2.9 million, $4.4 million, and $5.2 million, respectively.



42



---

HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Future minimum payments under all capital and operating leases are as follows:



|                                            |  |                |    |           |   |       
|------------------------------------------- |  | -------------- | -- | --------- | - | ------
|                                            |  | Capital        |    | Operating
|                                            |  | (in thousands)
|Fiscal years ending:                        |  |                |    |           |   |       
|2004                                        |  | $              | 39 |           | $ | 5,136 
|2005                                        |  |                | 5  |           |   | 2,797 
|2006                                        |  |                |    |           |   | 1,504 
|2007                                        |  |                |    |           |   | 991   
|2008                                        |  |                |    |           |   | 485   
|                                            |  |                |    |           |   |       
|                                            |  |                | 44 |           | $ | 10,913
|                                            |  |                |    |           |   |       
|Less amount representing interest           |  |                | 1  |           |   |       
|                                            |  |                |    |           |   |       
|Present value of net minimum lease payments |  |                | 43 |           |   |       
|Less current portion                        |  |                | 38 |           |   |       
|                                            |  |                |    |           |   |       
|Long-term obligations under capital leases  |  | $              | 5  |           |   |       
|                                            |  |                |    |           |   |       



Future minimum lease
payments listed above include $3.3 million, net of expected sublease income of $1.0 million, that were considered in the reserve for restructuring costs as of December 28, 2003 (See 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 ultimate resolution of all such pending matters will not have a material adverse effect on the Companys
consolidated financial statements taken as a whole.



Note 13. 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. The Company did not make any matching contributions in 2003, 2002 or 2001.



The Company had a nonqualified deferred compensation plan for officers and other key employees which was terminated as of December 31, 2003. The plan was
funded by employee contributions through payroll withholding and employees were fully vested from the start of their participation in the plan. The Company made no matching contributions to the plan. Employee contributions were invested through a
rabbi trust in Company-owned life insurance policies.



At December 29, 2002, the long-term deferred compensation liability was $1.1 million and the related assets, carried at the cash surrender value of the related insurance policy, were $ 1.0 million. The liability is included in accrued
compensation and deferred rent and the related assets are included in other assets in the accompanying consolidated balance sheet as of December 29, 2002. As of December 28, 2003, the deferred compensation liability of $1.5 million and the related
assets of $ 1.3 million are included in current assets and current liabilities, respectively.



43



---

HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 14. Related Party Transactions



Change in Accounting Estimate Related to Employment Agreement.The Company has an employment agreement with its Chief
Executive Officer (CEO) entered into on January 1, 2001. Under the terms of the agreement, upon the CEO becoming Chairman Emeritus, she will receive a payment equal to three times her base salary and bonus paid for the immediately
preceding year. From 2001 through June 30, 2003, management had estimated such compensation accrual based upon its expectation that the maximum bonus allowable under the agreement would be paid. During the quarter ended September 28, 2003,
management changed its estimate to reflect its belief that no bonus would be paid or is payable to the CEO. As a result of this change in accounting estimate, the Company recognized income of $696,000 that is reflected as a reduction in selling,
general and administrative expenses in the year ended December 28, 2003. Accrued compensation balances at December 28, 2003 and December 29, 2002 were $1,050,000 and $1,619,000, respectively.



Other.During 2001 the Company entered into a sponsorship agreement
with BayPac Racing, Inc. an entity that owns three racing automobiles and is owned by the CEOs husband. The racing events were used by the Company as a marketing vehicle to entertain existing and potential clients. During 2002 and 2001, the
Company paid BayPac Racing, Inc. $250,000 and $560,000, respectively, for sponsorship agreements and an additional $4,000 in 2002 for related travel costs. There were no commitments or payments to BayPac in 2003. During 2003, the Company purchased
services totaling $171,000 from a company owned by an officers father. An officers sister received a severance payment of $132,000 in 2003 in accordance with the Companys severance practices. In August 2003, the Company hired the
CEOs sister at an annual salary of $48,000. At December 28, 2003, an officer owes the Company $73,000 under a 6.74% 48-month note which provides that $5,200 of the principal amount plus accrued interest be forgiven monthly, so that on February
1, 2005, no amounts will be due or owing.



Note 15. Business Segment
Reporting



Our operations are divided into two business
segments, Contract Professional Staffing and Permanent Placement Services. The Contract Professional Staffing segment provides temporary staffing to clients on a contract basis. The cost of revenues for this segment is the salaries, employment taxes
and other direct labor costs for the contracted employees. The Permanent Placement Services segment recruits and delivers professionals for direct hire by our clients. This segment has no cost of revenues; all expenses are included in operating
costs. Management evaluates segment performance based primarily on segment revenues, cost of revenue, and gross profit.



The Company does not segregate its business segments by assets. Results of operations by business segments are as follows:



|                                |  |                  |         |                  |   |                  |  |   |        
|------------------------------- |  | ---------------- | ------- | ---------------- | - | ---------------- |  | - | -------
|                                |  | December 28,2003 |         | December 29,2002 |   | December 30,2001
|                                |  | (in thousands)  
|Contract Professional Staffing: |  |                  |         |                  |   |                  |  |   |        
|Net revenues                    |  | $                | 152,840 |                  | $ | 115,644          |  | $ | 149,515
|Cost of revenues                |  |                  | 111,616 |                  |   | 80,744           |  |   | 100,834
|                                |  |                  |         |                  |   |                  |  |   |        
|Gross Profit                    |  | $                | 41,224  |                  | $ | 34,900           |  | $ | 48,681 
|                                |  |                  |         |                  |   |                  |  |   |        
|Permanent Placement:            |  |                  |         |                  |   |                  |  |   |        
|Net revenues                    |  | $                | 4,079   |                  | $ | 4,784            |  | $ | 24,321 
|Cost of revenues                |  |                  |        |                  |   |                 |  |   |       
|                                |  |                  |         |                  |   |                  |  |   |        
|Gross Profit                    |  | $                | 4,079   |                  | $ | 4,784            |  | $ | 24,321 
|                                |  |                  |         |                  |   |                  |  |   |        



44



---

HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



|              |  |                  |         |                  |   |                  |  |   |        
|------------- |  | ---------------- | ------- | ---------------- | - | ---------------- |  | - | -------
|              |  | Years Ended     
|              |  | December 28,2003 |         | December 29,2002 |   | December 30,2001
|              |  | (in thousands)  
|United States |  | $                | 156,270 |                  | $ | 118,679          |  | $ | 171,388
|Other         |  |                  | 649     |                  |   | 1,749            |  |   | 2,448  
|              |  |                  |         |                  |   |                  |  |   |        
|Total         |  | $                | 156,919 |                  | $ | 120,428          |  | $ | 173,836
|              |  |                  |         |                  |   |                  |  |   |        



Note 16. Quarterly Financial Data
(Unaudited)



The following table shows certain quarterly
financial data for 2003 and 2002:



|                                    |  |                                          |        |      |         |   |        |              |  |   |             |     |  |   |         |     
|----------------------------------- |  | ---------------------------------------- | ------ | ---- | ------- | - | ------ | ------------ |  | - | ----------- | --- |  | - | ------- | ----
|                                    |  | Quarter                                  |       
|2003                                |  | March 30                                 |        |      | June 29 |   |        | September 28 |  |   | December 28 |    
|                                    |  | (in thousands, except per share amounts) |       
|Total net revenues                  |  | $                                        | 38,980 |      |         | $ | 42,610 |              |  | $ | 41,708      |     |  | $ | 33,621  |     
|Gross profit                        |  |                                          | 11,376 |      |         |   | 12,608 |              |  |   | 12,102      |     |  |   | 9,217   |     
|Income (loss) before income taxes   |  |                                          | (4,058 | )(1) |         |   | 381    | (2)          |  |   | 228         |     |  |   | (942    | )   
|Net income (loss)                   |  |                                          | (4,058 | )    |         |   | 381    |              |  |   | 228         |     |  |   | (15,123 | )(3)
|Net income (loss) per shareBasic   |  |                                          | (0.32  | )    |         |   | 0.03   |              |  |   | 0.02        |     |  |   | (1.20   | )   
|Net income (loss) per shareDiluted |  |                                          | (0.32  | )    |         |   | 0.03   |              |  |   | 0.02        |     |  |   | (1.20   | )   
|                                    | 
|                                    |  | Quarter                                  |       
|2002(4)                             |  | March 31                                 |        |      | June 30 |   |        | September 29 |  |   | December 29 |    
|                                    |  | (in thousands, except per share amounts) |       
|Total net revenues                  |  | $                                        | 24,477 |      |         | $ | 24,851 |              |  | $ | 31,943      |     |  | $ | 39,157  |     
|Gross profit                        |  |                                          | 8,320  |      |         |   | 8,623  |              |  |   | 10,775      |     |  |   | 11,966  |     
|Income (loss) before income taxes   |  |                                          | (4,013 | )    |         |   | (1,449 | )            |  |   | 832         | (5) |  |   | (18,888 | )(6)
|Net income (loss)                   |  |                                          | (2,380 | )    |         |   | (859   | )            |  |   | 244         |     |  |   | (17,653 | )   
|Net income (loss) per shareBasic   |  |                                          | (0.19  | )    |         |   | (0.07  | )            |  |   | 0.02        |     |  |   | (1.39   | )   
|Net income (loss) per shareDiluted |  |                                          | (0.19  | )    |         |   | (0.07  | )            |  |   | 0.02        |     |  |   | (1.39   | )   

---

|(1) | Includes restructuring costs of $2,068,000.
|--- | -------------------------------------------

|(2) | Includes restructuring costs of $726,000.
|--- | -----------------------------------------

|(3) | Includes deferred tax asset valuation allowance of $14.0 million.
|--- | -----------------------------------------------------------------

|(4) | Includes results for the OnStaff acquisition from August 2002.
|--- | --------------------------------------------------------------

|(5) | Includes favorable adjustment to restructuring costs of $876,000.
|--- | -----------------------------------------------------------------

|(6) | Includes restructuring costs of $870,000 and write-off of goodwill of $15,478,000.
|--- | ----------------------------------------------------------------------------------



45



---

INDEPENDENT AUDITORS REPORT



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



We have audited the accompanying consolidated balance sheets of Hall, Kinion
& Associates, Inc. and subsidiaries as of December 28, 2003 and December 29, 2002, and the related consolidated statements of operations, stockholders equity, and cash flows for each of the three fiscal years in the period ended December
28, 2003. These financial statements are the responsibility of the 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 consolidated financial statements present fairly, in all material respects, the financial position of Hall, Kinion & Associates, Inc. and subsidiaries as of December 28, 2003 and December 29,
2002, and the results of their operations and their cash flows for each of the three fiscal years in the period ended December 28, 2003 in conformity with accounting principles generally accepted in the United States of America.



As discussed in Note 8 to the consolidated financial statements, in 2002 the
Company changed its method of accounting for goodwill and other intangible assets to conform to Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.



/s/    DELOITTE & TOUCHE LLP



San Francisco, California

April 5, 2004



46



---

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



Not applicable.



Item 9A.    Controls and Procedures



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



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



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



47



---

PART III



Item 10.    Directors and Executive Officers of the Registrant



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



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



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



Item 11.    Executive Compensation



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



Item 12.    Security Ownership of Certain Beneficial Owners and Management



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



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



48



---

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



|                                                        |  |                                                                   |  |                                                       |      |                                                                      |          
|------------------------------------------------------- |  | ----------------------------------------------------------------- |  | ----------------------------------------------------- | ---- | -------------------------------------------------------------------- | ---------
|                                                        |  | Number of Shares to be Issued Upon Exercise ofOutstanding Options |  | Weighted Average Exercise Price ofOutstanding Options |      | Number of Shares Remaining Available for FutureIssuanceUnderPlans(1)
|Plans approved by stockholders (1997 Plans and IT Plan) |  | 3,597,000                                                         |  | $                                                     | 8.62 |                                                                      | 1,018,000
|Plans not approved by stockholders (2000 Plan)          |  | 652,000                                                           |  | $                                                     | 6.85 |                                                                      | 338,000  

---

|(1) | Excludes shares included in first column. Also excludes shares which will be covered under the 1997 Plan and the ITP Plan pursuant to provisions for annual automatic increase
described above.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Item 13.    Certain
Relationships and Related Transactions



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



Item 14.    Principal Accountant Fees and Services



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



49



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PART IV



Item 15.    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:



|                                                                                                                                                            |  |     
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                                                            |  | Page
|Consolidated Balance Sheets at December 28, 2003 and December 29, 2002                                                                                      |  | 27  
|                                                                                                                                                            | 
|Consolidated Statements of Operations for the years ended December 28, 2003, December 29, 2002 and December 30, 2001                                        |  | 28  
|                                                                                                                                                            | 
|Consolidated Statements of Stockholders Equity for the years ended December 28, 2003, December 29, 2002 and December 30,
2001                              |  | 29  
|                                                                                                                                                            | 
|Consolidated Statements of Cash Flows for the years ended December 28, 2003, December 29, 2002 and December 30, 2001                                        |  | 30  
|                                                                                                                                                            | 
|Notes to Consolidated Financial Statements                                                                                                                  |  | 31  
|                                                                                                                                                            | 
|Selected Quarterly Financial Data for the years ended December 28, 2003 and December 29, 2002 are set forth in Note 16Quarterly
Financial Data (Unaudited) |  | 45  
|                                                                                                                                                            | 
|Independent Auditors Report                                                                                                                                |  | 46  



(a)  2.    Financial Statement Schedules



Not applicable



(a)  3.Exhibits



|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1 |  | OSI Asset Purchase Agreement by and among Hall, Kinion & Associates, Inc., and OnStaff Acquisition Corp., on the one hand, and OnStaff,
Jeffrey A. Evans, Matthew Johnston Grantor Retained Annuity Trust dated April 23, 2001, Diane Prince Johnston Grantor Retained Annuity Trust dated April 23, 2001, Matthew and Diane Johnston 2001 Irrevocable Gift Trust dated April 23, 2001, Johnston
Living Trust dated March 27, 2001 and Matthew Johnston, as Seller Representative, on the other hand, dated August 9, 2002 incorporated by reference as exhibit 2.1 filed with the Companys report on Form 8-K dated August 23,
2002.             
|    | 
|2.2 |  | HCSR Asset Purchase by and among Hall, Kinion & Associates, Inc., and OnStaff Acquisition Corp., on the one hand, and Healthcare
Staffing Resources, Jeffrey A. Evans, Matthew Johnston Grantor Retained Annuity Trust dated April 23, 2001, Diane Prince Johnston Grantor Retained Annuity Trust dated April 23, 2001, Matthew and Diane Johnston 2001 Irrevocable Gift Trust dated April
23, 2001, Johnston Living Trust dated March 27, 2001 and Matthew Johnston, as Seller Representative, on the other hand, dated August 9, 2002 incorporated by reference as exhibit 2.2 filed with the Companys report on Form 8-K dated August 23,
2002.
|    | 
|2.3 |  | BNI Asset Purchase Agreement by and among Hall, Kinion & Associates, Inc., and OnStaff Acquisition Corp., on the one hand, and
Boardnetwork.com, Jeffrey A. Evans, Matthew Johnston Grantor Retained Annuity Trust dated April 23, 2001, Diane Prince Johnston Grantor Retained Annuity Trust dated April 23, 2001, Matthew and Diane Johnston 2001 Irrevocable Gift Trust dated April
23, 2001, Johnston Living Trust dated March 27, 2001 and Matthew Johnston, as Seller Representative, on the other hand, dated August 9, 2002 incorporated by reference as exhibit 2.3 filed with the Companys report on Form 8-K dated August 23,
2002.    



50



---

|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|2.4  |  | Agreement by and among Hall Kinion & Associates, Inc. and OnStaff Acquisition Corp., on the one hand, and Madi, Inc. (formerly known as
OnStaff), Laje, Inc. (formerly known as Healthcare Staffing Resources, Inc.), Lssbe, Inc. (formerly known as Boardnetwork.com), (Madi, Laje and Lssbe, collectively, the Companies), and each of the undersigned shareholders of the
Companies (collectively, the Shareholders and individually a Shareholder) and Matthew Johnston, on the other hand, dated November 21, 2003 incorporated by reference as exhibit 2.4 filed with the Companys report on Form
10-K dated March 29, 2004.                       
|     | 
|2.5  |  | Amendment number 1 to Asset Purchase Agreement by and among Hall Kinion & Associates, Inc., and OnStaff Acquisition Corp., on the one
hand, and OnStaff, Jeffrey A. Evans, Matthew Johnston Grantor Retained Annuity Trust Dated April 23, 2001, Diane Prince Johnston Grantor Retained Annuity Trust Dated April 23, 2001, Matthew and Diane Johnston 2001 Irrevocable Gift Trust Dated April
23, 2001, Johnston Living Trust Dated March 27, 2001 and Matthew Johnston, as Seller Representative, on the other hand, dated as of November 28, 2003 incorporated by reference as exhibit 2.5 filed with the Companys report on Form 10-K dated
March 29, 2004.
|     | 
|2.6  |  | Earnout Promissory Note dated February 15, 2004 made by Hall Kinion & Associates, Inc. in favor of Madi, Inc. incorporated by reference
as exhibit 2.6 filed with the Companys report on Form 10-K dated March 29, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                       
|     | 
|2.7  |  | Earnout Promissory Note dated February 15, 2004 made by Hall Kinion & Associates, Inc. in favor of StaffQ incorporated by reference as
exhibit 2.7 filed with the Companys report on Form 10-K dated March 29, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                           
|     | 
|3.1  |  | Amended and Restated Certificate of Incorporation of the Registrant filed August 8, 1997 incorporated by reference as exhibit 3.2 to the
Registrants Registration Statement on Form S-1, as amended, declared effective by the Securities and Exchange Commission on August 4, 1997.                                                                                                                                                                                                                                                                                                                                                                           
|     | 
|4.1  |  | Investors Rights Agreement, dated January 26, 1996, among the Registrant, certain stockholders and investors named therein
incorporated by reference as exhibit 4.2 to the Registrants Registration Statement on Form S-1, as amended, declared effective by the Securities and Exchange Commission on August 4, 1997.                                                                                                                                                                                                                                                                                                                                        
|     | 
|4.2  |  | Specimen Common Stock certificate incorporated by reference as exhibit 4.4 to the Registrants Registration Statement on Form S-1, as
amended, declared effective by the Securities and Exchange Commission on August 4, 1997.                                                                                                                                                                                                                                                                                                                                                                                                                                  
|     | 
|4.3  |  | Registration Rights Agreement incorporated by reference as exhibit 4.4 filed with the Companys report on Form 8-K dated August 23,
2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|     | 
|10.1 |  | Form of Indemnification Agreement entered into between the Registrant and each of its directors and certain officers incorporated by
reference as exhibit 10.1 to the Registrants Registration Statement on Form S-1, as amended, declared effective by the Securities and Exchange Commission on August 4, 1997.                                                                                                                                                                                                                                                                                                                                              
|     | 
|10.2 |  | The Registrants 1997 Stock Option Plan incorporated by reference as exhibit 10.2 to the Registrants Registration Statement on
Form S-1, as amended, declared effective by the Securities and Exchange Commission on August 4, 1997.                                                                                                                                                                                                                                                                                                                                                                                                                           
|     | 
|10.3 |  | The Registrants Employee Stock Purchase Plan incorporated by reference as exhibit 10.3 to the Registrants Registration
Statement on Form S-1, as amended, declared effective by the Securities and Exchange Commission on August 4, 1997.                                                                                                                                                                                                                                                                                                                                                                                                                     
|     | 
|10.4 |  | 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
incorporated by reference as exhibit 10.23 to the Registrants Registration Statement on Form S-1, as amended, declared effective by the Securities and Exchange Commission on August 4, 1997.                                                                                                                                                                                                                                                                                                                          



51



---

|      |  |                                                                                                                                                                                                                                                   
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|10.5  |  | Employment Agreement dated January 1, 2001 between Registrant and Brenda Rhodes incorporated by reference as exhibit 10.14 to the
Registrants Report on Form 10-Q, filed August 15, 2001.                                                        
|      | 
|10.6  |  | Promissory Note dated January 25, 1999 made by Brenda Rhodes in favor of the registrant incorporated by reference as exhibit 10.15 to the
Registrants Report on Form 10-Q, filed August 15, 2001.                                                
|      | 
|10.7  |  | The Registrants 2000 Stock Option Plan incorporated by reference as exhibit 4.0 to the Registrants Registration Statement on
Form S-8, declared effective by the Securities and Exchange Commission on June 9, 2000.                            
|      | 
|10.8  |  | The Registrants E2 Equity Edge Cash Equity Plan, incorporated by reference to exhibit 10.19 to the Registrants Report on Form
10-K filed March 27, 2001.                                                                                        
|      | 
|10.9  |  | Employment and Non-Competition Agreement dated August 9, 2002 between the Registrant and Jeffrey A. Evans, incorporated by reference to
exhibit 10.13 filed with the Companys Report on Form 10-K filed March 31, 2003.                          
|      | 
|10.10 |  | Financing and Security Agreement between the Registrant and The CIT Group/Business Credit, Inc., incorporated by reference to exhibit 99.2
to the Registrants Report on Form 8-K, filed June 23, 2003.                                           
|      | 
|10.11 |  | First Amendment to Financing Agreement and Waiver between the Registrant and The CIT Group/Business Credit, Inc. dated March 1, 2004
incorporated by reference as exhibit 10.11 filed with the Companys report on Form 10-K dated March 29, 2004.
|      | 
|10.12 |  | Restated Offer Letter dated July 31, 2003 between the Registrant and Rita Hazell, incorporated by reference to exhibit 10.11 to the
Registrants Report on Form 10-Q, filed November 12, 2003.                                                    
|      | 
|10.13 |  | Restated Offer Letter dated July 31, 2003 between the Registrant and Martin A. Kropelnicki, incorporated by reference to exhibit 10.12 to
the Registrants Report on Form 10-Q, filed November 12, 2003.                                          
|      | 
|10.14 |  | Second Amendment to Financing Agreement between the Registrant and The CIT Group/Business Credit, Inc. dated April 2,
2004.                                                                                                                       
|      | 
|10.15 |  | Reimbursement Agreement dated as of the 25th day of March, 2003, by and among Hall, Kinion and Associates, Inc., and Brenda C. Rhodes and
Todd Kinion (Guarantors).                                                                             
|      | 
|21.1  |  | Subsidiaries of the Registrant, incorporated by reference to exhibit 21.1, filed with the Companys Report on Form 10-K filed March
31, 2003.                                                                                                     
|      | 
|23.1  |  | Independent Auditors Consent.                                                                                                                                                                                                                    
|      | 
|31.1  |  | Certification of Chief Executive Officer Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.                                                                                                                                            
|      | 
|31.2  |  | Certification of Chief Financial Officer Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.                                                                                                                                            
|      | 
|32    |  | Certification of Chief Executive and Chief Financial Officers pursuant to 18 U. S. C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.                                                                         



(b)  Reports on Form 8-K.



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



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



(c)  Exhibits.



See Item 15(a)(3)
above.



52



---

SIGNATURES



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



HALL, KINION & ASSOCIATES, INC.By:

/S/    MARTIN A. KROPELNICKIMartin A. Kropelnicki Vice President and Chief Financial Officer and Corporate Secretary (Principal Financial Officer)




Date: April 5, 2004



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



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



|                                                  |  |                                                                                             |  |              
|------------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | -------------
|Signature                                         |  | Title                                                                                       |  | Date         
|                                                  |  |                                                                                            
|/S/    BRENDA C.
RHODESBrenda C.
Rhodes           |  | Chairman of the Board, Chief Executive Officer and a Director (Principal Executive Officer) |  | April 5, 2004
|                                                  |  |                                                                                            
|/S/    JON H.
ROWBERRYJon H.
Rowberry             |  | Director                                                                                    |  | April 5, 2004
|                                                  |  |                                                                                            
|/S/    TODD J.
KINIONTodd J.
Kinion               |  | Director                                                                                    |  | April 5, 2004
|                                                  |  |                                                                                            
|/S/    JACK F.
JENKINS-STARKJack F.
Jenkins-Stark |  | Director                                                                                    |  | April 5, 2004
|                                                  |  |                                                                                            
|/S/    HERBERT I.
FINKELMANHerbert I.
Finkelman   |  | Director                                                                                    |  | April 5, 2004
|                                                  |  |                                                                                            
|/S/    MICHAEL S.
STEINMichael S.
Stein           |  | Director                                                                                    |  | April 5, 2004
|                                                  |  |                                                                                            
|/S/    MARTIN A.
KROPELNICKIMartin A.
Kropelnicki |  | Vice President, Chief Financial Officer and Secretary (Principal Financial Officer)         |  | April 5, 2004



53



---

EXHIBIT INDEX



|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibits |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|2.1      |  | OSI Asset Purchase Agreement by and among Hall, Kinion & Associates, Inc., and OnStaff Acquisition Corp., on the one hand, and OnStaff,
Jeffrey A. Evans, Matthew Johnston Grantor Retained Annuity Trust dated April 23, 2001, Diane Prince Johnston Grantor Retained Annuity Trust dated April 23, 2001, Matthew and Diane Johnston 2001 Irrevocable Gift Trust dated April 23, 2001,
Johnston Living Trust dated March 27, 2001 and Matthew Johnston, as Seller Representative, on the other hand, dated August 9, 2002 incorporated by reference as exhibit 2.1 filed with the Companys report on Form 8-K dated August 23,
2002.                          
|         | 
|2.2      |  | HCSR Asset Purchase by and among Hall, Kinion & Associates, Inc., and OnStaff Acquisition Corp., on the one hand, and Healthcare
Staffing Resources, Jeffrey A. Evans, Matthew Johnston Grantor Retained Annuity Trust dated April 23, 2001, Diane Prince Johnston Grantor Retained Annuity Trust dated April 23, 2001, Matthew and Diane Johnston 2001 Irrevocable Gift Trust dated April
23, 2001, Johnston Living Trust dated March 27, 2001 and Matthew Johnston, as Seller Representative, on the other hand, dated August 9, 2002 incorporated by reference as exhibit 2.2 filed with the Companys report on Form 8-K dated August 23,
2002.             
|         | 
|2.3      |  | BNI Asset Purchase Agreement by and among Hall, Kinion & Associates, Inc., and OnStaff Acquisition Corp., on the one hand, and
Boardnetwork.com, Jeffrey A. Evans, Matthew Johnston Grantor Retained Annuity Trust dated April 23, 2001, Diane Prince Johnston Grantor Retained Annuity Trust dated April 23, 2001, Matthew and Diane Johnston 2001 Irrevocable Gift Trust dated April
23, 2001, Johnston Living Trust dated March 27, 2001 and Matthew Johnston, as Seller Representative, on the other hand, dated August 9, 2002 incorporated by reference as exhibit 2.3 filed with the Companys report on Form 8-K dated August
23, 2002.                 
|         | 
|2.4      |  | Agreement by and among Hall Kinion & Associates, Inc. and OnStaff Acquisition Corp., on the one hand, and Madi, Inc. (formerly known as
OnStaff), Laje, Inc. (formerly known as Healthcare Staffing Resources, Inc.), Lssbe, Inc. (formerly known as Boardnetwork.com), (Madi, Laje and Lssbe, collectively, the Companies), and each of the undersigned shareholders of the
Companies (collectively, the Shareholders and individually a Shareholder) and Matthew Johnston, on the other hand, dated November 21, 2003 incorporated by reference as exhibit 2.4 filed with the Companys report on Form
10-K dated March 29, 2004.                       
|         | 
|2.5      |  | Amendment number 1 to Asset Purchase Agreement by and among Hall Kinion & Associates, Inc., and OnStaff Acquisition Corp., on the one
hand, and OnStaff, Jeffrey A. Evans, Matthew Johnston Grantor Retained Annuity Trust Dated April 23, 2001, Diane Prince Johnston Grantor Retained Annuity Trust Dated April 23, 2001, Matthew and Diane Johnston 2001 Irrevocable Gift Trust Dated April
23, 2001, Johnston Living Trust Dated March 27, 2001 and Matthew Johnston, as Seller Representative, on the other hand, dated as of November 28, 2003 incorporated by reference as exhibit 2.5 filed with the Companys report on Form 10-K dated
March 29, 2004.
|         | 
|2.6      |  | Earnout Promissory Note dated February 15, 2004 made by Hall Kinion & Associates, Inc. in favor of Madi, Inc. incorporated by reference
as exhibit 2.6 filed with the Companys report on Form 10-K dated March 29, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         | 
|2.7      |  | Earnout Promissory Note dated February 15, 2004 made by Hall Kinion & Associates, Inc. in favor of StaffQ incorporated by reference as
exhibit 2.7 filed with the Companys report on Form 10-K dated March 29, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         | 
|3.1      |  | Amended and Restated Certificate of Incorporation of the Registrant filed August 8, 1997 incorporated by reference as exhibit 3.2 to the
Registrants Registration Statement on Form S-1, as amended, declared effective by the Securities and Exchange Commission on August 4, 1997.                                                                                                                                                                                                                                                                                                                                                                           
|         | 
|4.1      |  | Investors Rights Agreement, dated January 26, 1996, among the Registrant, certain stockholders and investors named therein
incorporated by reference as exhibit 4.2 to the Registrants Registration Statement on Form S-1, as amended, declared effective by the Securities and Exchange Commission on August 4, 1997.                                                                                                                                                                                                                                                                                                                                        
|         | 
|4.2      |  | Specimen Common Stock certificate incorporated by reference as exhibit 4.4 to the Registrants Registration Statement on Form S-1, as
amended, declared effective by the Securities and Exchange Commission on August 4, 1997.                                                                                                                                                                                                                                                                                                                                                                                                                                  



1



---

|         |  |                                                                                                                                                                                                                                                                                                                                       
|-------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibits |  |                                                                                                                                                                                                                                                                                                                                       
|         | 
|4.3      |  | Registration Rights Agreement incorporated by reference as exhibit 4.4 filed with the Companys report on Form 8-K dated August 23,
2002.                                                                                                                                                                                             
|         | 
|10.1     |  | Form of Indemnification Agreement entered into between the Registrant and each of its directors and certain officers incorporated by
reference as exhibit 10.1 to the Registrants Registration Statement on Form S-1, as amended, declared effective by the Securities and Exchange Commission on August 4, 1997.                    
|         | 
|10.2     |  | The Registrants 1997 Stock Option Plan incorporated by reference as exhibit 10.2 to the Registrants Registration Statement on
Form S-1, as amended, declared effective by the Securities and Exchange Commission on August 4, 1997.                                                                                                 
|         | 
|10.3     |  | The Registrants Employee Stock Purchase Plan incorporated by reference as exhibit 10.3 to the Registrants Registration
Statement on Form S-1, as amended, declared effective by the Securities and Exchange Commission on August 4, 1997.                                                                                           
|         | 
|10.4     |  | 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
incorporated by reference as exhibit 10.23 to the Registrants Registration Statement on Form S-1, as amended, declared effective by the Securities and Exchange Commission on August 4, 1997.
|         | 
|10.5     |  | Employment Agreement dated January 1, 2001 between Registrant and Brenda Rhodes incorporated by reference as exhibit 10.14 to the
Registrants Report on Form 10-Q, filed August 15, 2001.                                                                                                                                            
|         | 
|10.6     |  | Promissory Note dated January 25, 1999 made by Brenda Rhodes in favor of the registrant incorporated by reference as exhibit 10.15 to the
Registrants Report on Form 10-Q, filed August 15, 2001.                                                                                                                                    
|         | 
|10.7     |  | The Registrants 2000 Stock Option Plan incorporated by reference as exhibit 4.0 to the Registrants Registration Statement on
Form S-8, declared effective by the Securities and Exchange Commission on June 9, 2000.                                                                                                                
|         | 
|10.8     |  | The Registrants E2 Equity Edge Cash Equity Plan, incorporated by reference to exhibit 10.19 to the Registrants Report on Form
10-K filed March 27, 2001.                                                                                                                                                                            
|         | 
|10.9     |  | Employment and Non-Competition Agreement dated August 9, 2002 between the Registrant and Jeffrey A. Evans, incorporated by reference to
exhibit 10.13 filed with the Company's Report on Form 10-K filed March 31, 2003.                                                                                                              
|         | 
|10.10    |  | Financing and Security Agreement between the Registrant and The CIT Group/Business Credit, Inc., incorporated by reference to exhibit 99.2
to the Registrant's Report on Form 8-K, filed June 23, 2003.                                                                                                                               
|         | 
|10.11    |  | First Amendment to Financing Agreement and Waiver between the Registrant and The CIT Group/Business Credit, Inc. dated March 1, 2004
incorporated by reference as exhibit 10.11 filed with the Companys report on Form 10-K dated March 29, 2004.                                                                                    
|         | 
|10.12    |  | Restated Offer Letter dated July 31, 2003 between the Registrant and Rita Hazell, incorporated by reference to exhibit 10.11 to the
Registrants Report on Form 10-Q, filed November 12, 2003.                                                                                                                                        
|         | 
|10.13    |  | Restated Offer Letter dated July 31, 2003 between the Registrant and Martin A. Kropelnicki, incorporated by reference to exhibit 10.12 to
the Registrants Report on Form 10-Q, filed November 12, 2003.                                                                                                                              
|         | 
|10.14    |  | Second Amendment to Financing Agreement between the Registrant and The CIT Group/Business Credit, Inc. dated April 2,
2004.                                                                                                                                                                                                           
|         | 
|10.15    |  | Reimbursement Agreement dated as of the 25th day of March, 2003, by and among Hall, Kinion and Associates, Inc., and Brenda C. Rhodes and
Todd Kinion (Guarantors).                                                                                                                                                                 
|         | 
|21.1     |  | Subsidiaries of the Registrant, incorporated by reference to exhibit 21.1 filed with the Company's Report on Form 10-K filed March 31,
2003.                                                                                                                                                                                          
|         | 
|23.1     |  | Independent Auditors Consent.                                                                                                                                                                                                                                                                                                        
|         | 
|31.1     |  | Certification of Chief Executive Officer Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                
|         | 
|31.2     |  | Certification of Chief Financial Officer Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                
|         | 
|32       |  | Certification of Chief Executive and Chief Financial Officers pursuant to 18 U. S. C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.                                                                                                                                                             



2