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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-K



FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTIONS 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934



(Mark One)

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



For the fiscal year ended December 29, 2002



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. ̈



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 6,760,776 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 most recently completed fiscal year, was approximately $39.1 million. The registrant has no non-voting common equity. As of March 21, 2003, the total number of outstanding shares was 12,582,263.



Portions of the registrants Proxy Statement for the
annual meeting of stockholders to be held on May 21, 2003 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; and
| | - |  | ---------------------



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



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.



On August 9, 2002, we acquired substantially all of the assets of OnStaff, a privately-held group of companies that provides short-term
contract and permanent employees in the real estate, finance and healthcare industries. This privately-held group of companies included OnStaff, Healthcare Staffing Resources, Inc., and Boardnetwork.com. With the acquisition of OnStaff, we expanded
our service offerings and added online recruiting and placement websites. The results of operations include the operations of OnStaff from August 2002.



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 identify quickly their needs. We then actively network with the professional community and thoroughly
search the Internet in order to identify the appropriate talent quickly.



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.



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 recent 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.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Diversifying into New Vertical Markets.    In 2002 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.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As the economy improves, or as conditions warrant, we may employ other growth strategies, including:



| |  |  | Opening Additional Offices in New Geographic Markets.    We believe that our reputation for quality service and our client base provide
opportunities to enter new geographic markets. Knowledge about and entry into those markets may also be facilitated by the cross-marketing activities discussed above.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Diversifying Into New Service Offerings.    We seek opportunities to offer contract professionals in new fields to existing clients and
new companies outside our traditional markets. We have no specific plans at this time, but consider this a possible area for future growth.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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Achieve
Maximum Operating Efficiency



At the end of
2002, we integrated OnStaff operations with the rest of the Company to improve combined operating efficiency and reduce overall operating costs. The OnStaff headquarters in Burbank, California were closed on February 15, 2003 and administrative and
accounting activities were transferred to the corporate headquarters in Novato, California. On March 3, 2003, we announced the restructuring of the Technology Division, resulting in the closure of 13 offices and elimination of 69 jobs. During 2001
and 2002, the Company restructured operations through reduction in staff and closing of offices to realign the operating offices and personnel with the current business sources and activities. We believe the full benefit of the changes from 2001 and
2002 will not be realized until 2003. 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 13 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 29, 2002, we had 2,305
contract professionals providing services for our clients and 270 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.



Business Divisions



Technology Professional DivisionHall Kinion &
Associates and IPEX primarily provide 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, including individuals from other countries placed through IPEX. Our IT professionals offer our clients leading edge technology skills and our clients offer our professionals the opportunity to work on
leading edge assignments.



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



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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.



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 2002, no client accounted for more than 5% of our net revenues and our top ten direct and indirect clients accounted for approximately 21% of our net revenues. Our
top ten clients to whom we directly provided services in 2002 were:



|       Hewlett Packard        AT&T Wireless        Wells Fargo Bank        Countrywide Financial        American Express |  |        IBM        Verizon        C3I, Inc.        Regence BlueShield        J D Edwards
|----------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------



Competition



The staffing
industry is highly competitive and fragmented and has low barriers to entry. In the market for contract IT professionals, we compete for potential clients with providers of IT staffing services and, to a lesser extent, computer systems consultants,
providers of outsourcing services, systems integrators and temporary personnel agencies. For corporate professionals, we compete for clients primarily with other staffing services and temporary employment personnel agencies. Many of our current and
potential competitors have longer operating 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 29,



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2002, we employed 41 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 in domestic and in European locations and as Hall Kinion Asia
Pacific for services primarily to companies located or doing business in Asia.



Clients



For the year ending December 29, 2002, approximately 67% of our placements were made to technology and related companies with the remainder to a diverse client mix.



Competition



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



Corporate Information Technology



We provide the tools necessary for employees to deliver
services with the speed demanded by our clients. WebPASsoftware, a proprietary application, is used to match
candidates to open customer job orders. WebPAS captures key information about a candidates skills and matches them precisely to the customer job requirements thereby improving the accuracy of matching while reducing the time it takes to place
a suitable candidate with the customer. In 2002, ICPlanet, a 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 Headhunter.com and 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 29, 2002, we had 2,305 professionals providing
contract services to clients. This number included 2,207 employees and 98 subcontractors. Sales, sales support, administrative and accounting staff at December 29, 2002, consisted of 384 full-time employees, of whom 311 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.



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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 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.



On July 12, 2002, the Company entered into an $18.0 million revolving credit facility which was due May 1, 2004. As of December 29,
2002, there was $10 million outstanding on our bank line of credit at an interest rate of 4.25%. The Company was not in compliance with the required financial covenants as of December 29, 2002. On February 3, 2003, the bank waived such financial
covenant violations. On March 24, 2003, we entered into an amended agreement with the bank which expires January 1, 2004. Significant terms and conditions of the amended agreement are as follows:



| |  |  | Borrowings available are $12,000,000; reduced to $10,000,000 beginning June 15, 2003; and reduced to $9,000,000 beginning September 15, 2003. Total borrowings are
limited to 75% of eligible accounts receivable, reduced to 70% beginning July 15, 2003.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Interest is at prime plus 1.5%; increased to prime plus 3.0% beginning June 15, 2003 (April 21, 2003 if the Company does not receive a financing proposal from
another acceptable financial lender); and increased to prime plus 5.0% beginning September 15, 2003.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The bank amended financial covenants related to profitability, tangible net worth and cash balances and specific ratios of working capital and debt to tangible net
worth. Management expects that the Company will be able to remain in compliance with the amended financial covenants through January 1, 2004.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Borrowings are collateralized by all of the Companys assets.
| | - |  | -------------------------------------------------------------



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



The Company has begun to meet and negotiate with other
financial lenders in order to secure replacement financing to replace the amended bank agreement. There can be no assurance that the Company will be able to secure replacement financing on substantially similar terms or at all.



We reported losses during the last two fiscal years. In
addition, during the third and fourth quarters of 2002, we significantly increased accounts receivable as a result of our acquisition of OnStaff, resulting in a reduction in our cash and cash equivalents. At February 28, 2003, we had cash and cash
equivalents of $2.6 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.



If we fail to meet the requirements for continued listing on the NASDAQ National Market, our stock may be delisted.



Our stock has recently traded at prices below $1.00 per share. Failure of the price of our stock to meet the
$1.00 per share minimum trading price required by the NASDAQ National Market for 90 days or a failure to



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meet other listed company requirements, such as aggregate market value of publicly held shares, could result in shares of our common stock no
longer being listed on the NASDAQ National Market. The loss of listing on the NASDAQ National Market could have a material adverse effect on the price and liquidity of our common stock.



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



We have recently 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 decreased 30.7%
from $173.8 million in 2001 to $120.4 million in 2002 while sales and administrative headcount decreased 13.9% from 446 employees at the end of 2001 to 384 employees at the end of 2002. Year-end headcount for 2002 reflects additions related to
the acquisition of OnStaff in August 2002. 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 2002 and to date in 2003 we experienced a
continuation of the economic slowdown in the IT industry that reflected a slowdown in the rate of innovation in this industry and a general reduction in demand for personnel with expertise in leading hardware, software or networking technologies. It
reduced the demand for our services. Reduction in demand for our services had a material negative impact on our business, operating results and financial condition in 2002.



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.



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.



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



Our growth depends in part on
our ability to enter new 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 March 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;
| | - |  | --------------------------------------------------------------------------



| |  |  | 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



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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 significantly in 2002 and can be expected to continue to fluctuate significantly in the future. We provide permanent placement services on an
assignment-by-assignment basis, which clients can terminate at any time, and existing clients may not continue to use our services at historical levels. A decline in our permanent placement business will result in a decrease in our net revenues.
More importantly, gross profit for our permanent placement services group is essentially equal to permanent placement net revenues, as there are no direct costs associated with such revenues. Therefore, a decline in our permanent placement business
would result in a decrease in our gross profit margins and net income.



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



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. During the fourth
quarter of 2002, the financial operations of OnStaff 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;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



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



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



| |  |  | the departure of key personnel at the acquired business; and
| | - |  | ------------------------------------------------------------



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



Due to all of the foregoing, acquisitions may have a material negative effect on our business, operating
results and financial condition.



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



We generate our net revenues when our sales and sales support personnel successfully match our professionals with our clients needs.
Sales and sales support personnel headcount decreased 12.9% from 357 employees at the end of 2001 to 311 employees at the end of 2002. 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.



12



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



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



We are dependent upon the services of our key personnel.



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



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 11.3% of our outstanding shares of common stock at December 29, 2002. As a result, these stockholders as a group may be able to exercise substantial control
over matters requiring



13



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stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership
could have the effect of making it difficult for a third party to acquire control of our company and may discourage third parties from attempting to do so.



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



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



|Item 2. |  | Properties
|------- |  | ----------



Our
principal executive offices are currently located in Novato, California and occupy an aggregate of approximately 17,500 square feet of office space as of December 29, 2002, expanded to approximately 20,900 square feet in February 2003 with the
consolidation of the OnStaff headquarters, pursuant to a lease that expires in September 2008. After considering the restructuring of March 2003, we also lease or sublease office space for 43 Contract Professional Staffing and 7 Permanent Placement
Services sales offices at 46 locations in the United States, London, and Tokyo. In addition, we own a training facility located in Park City, Utah.



|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.



14



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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 21, 2003, there were approximately 54 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 29, 2002 and December 30, 2001.



|                                     |  | Sales Price
|------------------------------------ |  | -----------
|                                     |  | High       
|Fiscal year ended December 29, 2002  |  |            
|4th quarter ended December 29, 2002  |  | $          
|3rd quarter ended September 29, 2002 |  | $          
|2nd quarter ended June 30, 2002      |  | $          
|1st quarter ended March 31, 2002     |  | $          
|                                    
|                                     |  | High       
|Fiscal year ended December 30, 2001  |  |            
|4th quarter ended December 30, 2001  |  | $          
|3rd quarter ended September 30, 2001 |  | $          
|2nd quarter ended July 1, 2001       |  | $          
|1st quarter ended April 1, 2001      |  | $          



The
closing sales price of our common stock on NASDAQ on March 26, 2003 was $1.79.



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.



No cash dividends were paid in 2002, 2001 or 2000. We, as we
deem appropriate, may continue to retain all earnings for use in our business or may consider paying a dividend in the future. We cannot currently issue dividends without acquiring prior bank consent.



15



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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 Form 10-K.



|                                             |  | Fiscal Year                              |        
|-------------------------------------------- |  | ---------------------------------------- | -------
|                                             |  | 2002(1)                                  |        
|                                             |  | (in thousands, except per share amounts) |        
|Consolidated Statement of Operations Data:   |  |                                          |        
|Net revenues                                 |  | $                                        | 120,428
|Cost of contract services                    |  |                                          | 80,744 
|                                             |  |                                          |        
|Gross profit                                 |  |                                          | 39,684 
|Operating Expenses:                          |  |                                          |        
|Selling, general and administrative expenses |  |                                          | 47,407 
|Impairment of goodwill                       |  |                                          | 15,478 
|Restructuring costs (income)                 |  |                                          | (6     
|                                             |  |                                          |        
|Income (loss) from operations                |  |                                          | (23,195
|Other income (expense), net                  |  |                                          | (323   
|                                             |  |                                          |        
|Income (loss) before income taxes            |  |                                          | (23,518
|Income taxes (benefit)                       |  |                                          | (2,870 
|                                             |  |                                          |        
|Net income (loss)                            |  | $                                        | (20,648
|                                             |  |                                          |        
|Income (loss) per share:                     |  |                                          |        
|Basic                                        |  | $                                        | (1.66  
|                                             |  |                                          |        
|Diluted                                      |  | $                                        | (1.66  
|                                             |  |                                          |        
|Weighted Average Common Shares Outstanding:  |  |                                          |        
|Basic                                        |  |                                          | 12,475 
|Diluted                                      |  |                                          | 12,475 
|                                            
|Consolidated Balance Sheet Data:             |  |                                          |        
|Working capital                              |  | $                                        | 6,916  
|Total assets                                 |  |                                          | 74,906 
|Long term liabilities                        |  |                                          | 6,201  
|Stockholders equity                         |  |                                          | 43,767 

---

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



16



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|Item 7. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- |  | -------------------------------------------------------------------------------------



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



Overview



We
source and deliver the most critical component of industryhuman capital. As a leading talent source, we provide specialized professionals on a short-term contract and permanent basis. We deliver IT professionals to vendors and users of leading
edge technologies, and to vertical markets including government services, banking and finance, medical technology and energy services.



On August 9, 2002, we acquired substantially all the assets of OnStaff, a privately-held group of companies that provides short-term
corporate contract and permanent employees in the real estate, finance and healthcare industries. With the acquisition of OnStaff, we expanded our service offerings, increased our offices, and added online recruiting and placement websites. The
results of operations for fiscal 2002 include the operations of OnStaff from the beginning of August 2002.



Our Contract Professional Staffing group provides specialized professionals on a short-term contract basis and accounted for 96.0% of our
net revenues in 2002, 86.0% in 2001, and 76.0% in 2000. Our Permanent Placement Services group provides specialized professionals on a permanent basis and accounted for 4.0% of our net revenues in 2002, 14.0% in 2001, and 24.0% in 2000.



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. Revenue from online recruiting and placement Web sites is
recognized over the term of membership. While no one customer represents greater than 5% of our total revenue during the year 2002, we do have a number of larger customers, some of which have issued earnings warnings and delayed a number of their
projects.



As a result of the continuing general
economic slowdown, we reported a decrease in revenue and gross profit in 2002 as compared to the prior year and recorded a $15.5 million charge for impairment of goodwill (see Note 5 to Consolidated Financial Statements). During 2001, we closed
several offices, reduced our workforce, and restructured the organizational management and operations. We continued to decrease, through restructuring or attrition, the number of sales, sales support and administrative employees in 2002 to 384
individuals as of December 29, 2002 from 446 individuals as of December 30, 2001, representing a 13.9% decrease in headcount. The number of revenue producing sales and sales support employees included in the overall headcount decreased to 311 as of
December 29, 2002 from 357 as of December 30, 2001, representing a 12.9% decrease. Our Contract Professional employee headcount increased to 2,305 at December 29, 2002 from 833 as of December 30, 2001, an increase of 176.7%, principally in the
Corporate Professional Division as a result of the acquisition of OnStaff, offset by a decrease in IT professionals. On March 3, 2003 we announced the restructuring of the Technology Professional Division, resulting in the closure of 13 offices and
elimination of 69 jobs. The number



17



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of sales, sales support and administrative employees after the terminations announced in March 2003 was expected to be 324, which is 15.6%
fewer than the number on December 29, 2002 and 27.4% fewer than December 30, 2001.



Operating costs in 2002 were lower than 2001 as a result of the restructuring of operations in 2002 and the impact of 2001 restructuring on 2002 operations. Selling, general and administrative expenses
were reduced 51% in 2002 over 2001. Although 2002 results include a charge of $15.5 million for impairment of goodwill, the 2001 results included impairment of goodwill and other intangible assets totaling $26.7 million. However, if the economic
conditions in the United States do not improve or if a wider or global economic slowdown occurs, we may continue to experience a material adverse impact on our business, operating results, and financial condition.



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. If the
financial condition of our customers were to deteriorate, resulting in their inability to make payments, additional allowances may be required. During 2002, we reported a direct accounts receivable write-off of $1.2 million resulting from
bankruptcies, company closures and delinquent accounts. As of December 29, 2002, accounts receivable were $17.8 million, net of allowances of $2.5 million.



Valuation of Net Deferred Tax AssetsAs of December 29, 2002, deferred tax assets, net, were $15.0 million, net of a
valuation allowance of $6.2 million. The net deferred tax asset consists primarily of net operating loss carryforwards of $8.3 million and temporary differences of $6.7 million. Realization of the loss carry forwards is dependent on generating
sufficient taxable income in certain tax jurisdictions prior to expiration of the loss carry forwards. Although realization is not assured, management believes it is more likely than not that such loss carry forwards will be realized. The amount of
the loss carryforwards that is considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.



Impairment of Goodwill and Other Identifiable Intangible AssetsAs of December 29, 2002, goodwill
was $11.8 million and other identifiable intangible assets were $10.9 million. The recoverability of goodwill and other identifiable intangible assets is based on assumptions regarding estimated future cash flows and other factors. If these
assumptions and estimates change in the future, additional expense may be recorded to reflect impairment of these assets.



Results of Operations



Fiscal Year Ended December 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 group 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 group 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 financing 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.





18



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Gross Profit.    Gross profit for our Contract Professional
Staffing group 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. 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 group. Revenues for this group, which has a 100% profit margin, decreased from 14% of total revenues in
2001 to 4% in 2002. The gross margin percentage for the remaining Contract Professional Staffing group 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 only 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 (Provision).    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 more likely than not 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 both permanent placement and contract services, lower profitability
of contract services and the goodwill impairment charge.



Fiscal Year Ended December 30, 2001 Compared to Fiscal Year Ended December 31, 2000



Net Revenues.    Net revenues decreased 41.4% to $173.8 million in 2001 from $296.5 million in 2000. Net
revenues from our Contract Professional Staffing group decreased 33.6% to $149.5 million in 2001 from $225.3 million in 2000. Net revenues from our Permanent Placement Services group were $24.3 million in 2001 and $71.2 million in 2000,
representing a decrease of 65.8%. The decrease in net revenues in 2001 was due primarily to an economic slowdown. Our revenue producing sales and sales support employee headcount decreased throughout the year to 357 as of the end of 2001 from 788 as
of the end of 2000, a 54.7% decrease. Our IT professional headcount decreased to 833 at the end of 2001 from 1,397 at the end of 2000, a 40.4% decrease.



19



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Gross
Profit.    Gross profit for our Contract Professional Staffing group represents revenues less direct costs of services, which consist of direct payroll, payroll taxes, and insurance and benefit costs for contract
professionals. Gross profit for our Permanent Placement Services group is essentially equal to revenues as no direct costs are associated with such revenues. Gross profit decreased by 51.0% to $73.0 million for 2001 from $149.0 million for 2000.
This decrease was primarily attributable to economic conditions that resulted in a decrease in demand for services, a decrease in the number of assignments, and a slight decrease in average billing rates. Gross profit, as a percentage of net
revenues, decreased to 42.0% for 2001 from 50.2% for 2000. This decrease was due primarily to a decline in the percentage of revenues from our Permanent Placement Services group. Gross profit as a percentage of net revenues from the Contract
Professional Staffing group decreased slightly to 32.6% for 2001 from 34.5% for 2000. This decrease was primarily due to the economic pressure on pricing in our Contract Professional Staffing group.



Operating Expenses.    Operating
expenses consist primarily of employee costs, office leases, depreciation and amortization, advertising and marketing expenses. In 2001, it also included impairment of goodwill and other assets related to acquisitions, restructuring costs, and
write-off of accounts receivable in excess of historical write-off levels. Operating expenses increased by 12.0% to $140.6 million for 2001 compared to $125.5 million for 2000. Operating expenses, as a percentage of net revenues, increased to 80.9%
for 2001, from 42.3% for 2000. The increases resulted principally from restructuring costs, write-off of impaired goodwill and other assets related to acquisitions, increased bad debt expense, offset by reductions in sales bonuses and commissions
and related payroll taxes.



Other
Expense.    Interest income decreased to $1.3 million for 2001 from $2.1 million for 2000. This decrease resulted primarily from a decline in cash and equivalents and short term investments utilized to fund operations and
lower interest rates. Interest expense decreased to $24,000 for 2001 compared to $361,000 for 2000. The decrease in interest expense reflected the repayment of debt.



Income Taxes.    Our effective income tax rate was 31.3% for 2001 compared to
41.8% for 2000. Our income tax rate varies from period to period due primarily to changes in nondeductible expenses.



Net Income (Loss).    The net loss for 2001 was $45.6 million compared to net income of $14.6 million for 2000.
Net income (loss) as a percentage of net revenues was (26.2)% for 2001 compared to 4.9% for 2000.



Liquidity and Capital Resources



We generally fund our operations and working capital needs through cash generated from operations, periodically supplemented by borrowings under our revolving line of credit with a commercial bank. Our
operating activities used cash of $3.7 million in 2002, and $3.4 million in 2001, and provided $16.3 million in 2000. The decrease in 2002 operating cash flow was primarily due to funding the working capital for OnStaff operations, partially offset
by the refund of income taxes.



Cash used by
investing activities in 2002, 2001, and 2000 was $13.4 million, $19.1 million, and $8.0 million, respectively. The principal investing activities for 2002 were the OnStaff acquisition ($19.8 million), the purchase of property and equipment
($1.8 million), partially offset by the maturity of investments ($8.2 million).



Net cash provided by (used in) financing activities in 2002 was $10.1 million in 2002, ($4.7) million in 2001 and $33.2 million in 2000.



On July 12, 2002, the Company entered into an $18.0 million revolving credit facility which was due
May 1, 2004. As of December 29, 2002, there was $10 million outstanding on our bank line of credit at an interest rate of 4.25%. The Company was not in compliance with the required financial covenants as of



20



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December 29, 2002. On February 3, 2003, the bank waived such financial covenant violations. On March 24, 2003, we entered into an amended
agreement with the bank which expires January 1, 2004. Significant terms and conditions of the amended agreement are as follows:



| |  |  | Borrowings available are $12,000,000; reduced to $10,000,000 beginning June 15, 2003; and reduced to $9,000,000 beginning September 15, 2003. Total borrowings are
limited to 75% of eligible accounts receivable, reduced to 70% beginning July 15, 2003.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Interest is at prime plus 1.5%; increased to prime plus 3.0% beginning June 15, 2003 (April 21, 2003 if the Company does not receive a financing proposal from
another acceptable financial lender); and increased to prime plus 5.0% beginning September 15, 2003.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The bank amended financial covenants related to profitability, tangible net worth and cash balances, and specific ratios of working capital and debt to tangible net
worth. Management expects that the Company will be able to remain in compliance with the amended financial covenants through January 1, 2004.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Borrowings are collateralized by all of the Companys assets.
| | - |  | -------------------------------------------------------------



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



The Company has begun to meet and negotiate with other
financial lenders in order to secure replacement financing to replace the amended bank agreement. There can be no assurance that the Company will be able to secure replacement financing on substantially similar terms or at all.



At December 29, 2002, cash and cash equivalents were $8.6
million. Management expects that the Company will be able to remain in compliance with the amended financial covenants, and therefore, we believe that our cash balances and available financing will be sufficient to fund our operations and working
capital needs and meet our financial obligations through January 1, 2004.



Summary Disclosure about Contractual Obligations and Commercial Commitments



The following table summarizes significant contractual obligations as of December 29, 2002:



|                               |  | Amount of Commitment By Expiration Period
|------------------------------ |  | -----------------------------------------
|                               |  | Total                                    
|                               |  | (Dollars in thousands)                   
|Contractual Obligations        |  |                                          
|Revolving line of credit (1)   |  | $                                        
|Operating lease commitments    |  |                                          
|Capital lease commitments      |  |                                          
|Accrued compensation           |  |                                          
|                               |  |                                          
|Total contractual obligation   |  | $                                        
|                               |  |                                          
|Other Commercial Commitments   |  |                                          
|OnStaff contingent earnout (2) |  | $                                        
|Standby letters of credit      |  |                                          
|                               |  |                                          
|Total commercial commitments   |  | $                                        
|                               |  |                                          

---

|(1) |  | See Note 3 to Consolidated Financial Statements.
|--- |  | ------------------------------------------------

|(2) |  | See Note 2 to Consolidated Financial Statements.
|--- |  | ------------------------------------------------



21



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Recently
Issued Financial Accounting Standards



In
June 2002, SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities was issued. SFAS No. 146 applies to costs associated with an exit activity that does not involve an entity newly acquired in a business combination or with a
disposal activity covered by SFAS No. 144. The Company is required to adopt the provisions of SFAS No. 146 for exit or disposal activities, if any, initiated after December 15, 2002. Accordingly, SFAS No. 146 may affect the timing of recognizing
future restructuring costs, if any, as well as amounts recognized.



|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 29, 2002, we had $10.0 million outstanding under the bank line of credit
at an interest rate of 4.25%. The credit facility was amended on March 24, 2003 to increase the interest to the lenders prime rate plus 1.5% (5.75% as of March 24, 2003); to increase to prime plus 3.0% beginning June 15, 2003; and to
increase to prime plus 5.0% beginning September 15, 2003. 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 United Kingdom pound is the functional currency of our subsidiary in the United Kingdom and 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 the United Kingdom pound and Japanese yen. If foreign
exchange rates were to weaken against the U.S. dollar immediately and uniformly by 10 percent from the exchange rates at December 29, 2002, the fair value of these foreign currency amounts would decline by an immaterial amount.



22



---

|Item 8. |  | Financial Statements and Supplementary Data
|------- |  | -------------------------------------------



HALL,
KINION & ASSOCIATES, INC. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)



|                                                                                                                                                      |  | December 29, 2002 |         |   | December 30, 2001 |  
|----------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ----------------- | -
|ASSETS                                                                                                                                                |  |                   |         |   |                   |  
|Current Assets:                                                                                                                                       |  |                   |         |   |                   |  
|Cash and cash equivalents                                                                                                                             |  | $                 | 8,571   |   |                   | $
|Short term investments                                                                                                                                |  |                   |         |   |                   |  
|Accounts receivable, net of allowance for doubtful accounts of $2,544 at
December 29, 2002 and $3,176 at December 30, 2001                            |  |                   | 17,804  |   |                   |  
|Prepaid expenses and other current assets                                                                                                             |  |                   | 1,554   |   |                   |  
|Income taxes receivable                                                                                                                               |  |                   |         |   |                   |  
|Deferred income taxes                                                                                                                                 |  |                   | 3,925   |   |                   |  
|                                                                                                                                                      |  |                   |         |   |                   |  
|Total current assets                                                                                                                                  |  |                   | 31,854  |   |                   |  
|Property and equipment, net                                                                                                                           |  |                   | 7,511   |   |                   |  
|Goodwill, net                                                                                                                                         |  |                   | 11,849  |   |                   |  
|Intangible assets, net                                                                                                                                |  |                   | 10,859  |   |                   |  
|Deferred income taxes and other assets                                                                                                                |  |                   | 12,833  |   |                   |  
|                                                                                                                                                      |  |                   |         |   |                   |  
|Total assets                                                                                                                                          |  | $                 | 74,906  |   |                   | $
|                                                                                                                                                      |  |                   |         |   |                   |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                  |  |                   |         |   |                   |  
|Current Liabilities:                                                                                                                                  |  |                   |         |   |                   |  
|Bank line of credit                                                                                                                                   |  | $                 | 10,000  |   |                   | $
|Accounts payable                                                                                                                                      |  |                   | 2,874   |   |                   |  
|Accrued salaries, commissions and related payroll taxes                                                                                               |  |                   | 4,487   |   |                   |  
|Accrued liabilities                                                                                                                                   |  |                   | 3,747   |   |                   |  
|Reserve for restructuring costs                                                                                                                       |  |                   | 3,014   |   |                   |  
|Income taxes payable                                                                                                                                  |  |                   | 816     |   |                   |  
|                                                                                                                                                      |  |                   |         |   |                   |  
|Total current liabilities                                                                                                                             |  |                   | 24,938  |   |                   |  
|Accrued compensation and deferred rent                                                                                                                |  |                   | 3,046   |   |                   |  
|Reserve for non-current restructuring costs                                                                                                           |  |                   | 3,155   |   |                   |  
|                                                                                                                                                      |  |                   |         |   |                   |  
|Total liabilities                                                                                                                                     |  |                   | 31,139  |   |                   |  
|                                                                                                                                                      |  |                   |         |   |                   |  
|                                                                                                                                                     
|Commitments and contingencies                                                                                                                         |  |                   |         |   |                   |  
|                                                                                                                                                     
|Stockholders Equity:                                                                                                                                 |  |                   |         |   |                   |  
|Common stock; $0.001 par value; 100,000 shares authorized; shares issued and
outstanding: 12,684 at December 29, 2002 and 12,952 at December 30, 2001 |  |                   | 85,036  |   |                   |  
|Stockholder notes receivable                                                                                                                          |  |                   | (800    | ) |                   |  
|Accumulated other comprehensive loss                                                                                                                  |  |                   | (103    | ) |                   |  
|Accumulated deficit                                                                                                                                   |  |                   | (40,366 | ) |                   |  
|                                                                                                                                                      |  |                   |         |   |                   |  
|Total stockholders equity                                                                                                                            |  |                   | 43,767  |   |                   |  
|                                                                                                                                                      |  |                   |         |   |                   |  
|Total liabilities and stockholders equity                                                                                                            |  | $                 | 74,906  |   |                   | $
|                                                                                                                                                      |  |                   |         |   |                   |  



See notes
to consolidated financial statements.



23



---

HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)



|                                             |  | Years Ended       |        
|-------------------------------------------- |  | ----------------- | -------
|                                             |  | December 29, 2002 |        
|Net Revenues:                                |  |                   |        
|Contract services                            |  | $                 | 115,644
|Permanent placement                          |  |                   | 4,784  
|                                             |  |                   |        
|Total net revenues                           |  |                   | 120,428
|Cost of contract services                    |  |                   | 80,744 
|                                             |  |                   |        
|Gross profit                                 |  |                   | 39,684 
|Operating Expenses:                          |  |                   |        
|Selling, general and administrative expenses |  |                   | 47,407 
|Impairment of goodwill                       |  |                   | 15,478 
|Restructuring costs (income)                 |  |                   | (6     
|                                             |  |                   |        
|Income (loss) from operations                |  |                   | (23,195
|Interest income                              |  |                   | 338    
|Interest expense and other                   |  |                   | (661   
|                                             |  |                   |        
|Income (loss) before income taxes            |  |                   | (23,518
|Income tax provision (benefit)               |  |                   | (2,870 
|                                             |  |                   |        
|Net income (loss)                            |  | $                 | (20,648
|                                             |  |                   |        
|Net income (loss) per share:                 |  |                   |        
|Basic                                        |  | $                 | (1.66  
|Diluted                                      |  | $                 | (1.66  
|Shares used in per share calculations:       |  |                   |        
|Basic                                        |  |                   | 12,475 
|Diluted                                      |  |                   | 12,475 



See notes
to consolidated financial statements.



24



---

HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(in thousands)



|                                           |  | Common Stock |   |  | Stockholder Notes Receivable |        |   | Accumulated Other Comprehensive Income (Loss) |   |        | Retained Earnings (Accumulated Deficit) |  |   | Total |   |  | Comprehensive Income (Loss) |        
|------------------------------------------ |  | ------------ | - |  | ---------------------------- | ------ | - | --------------------------------------------- | - | ------ | --------------------------------------- |  | - | ----- | - |  | --------------------------- | -------
|                                           |  | Shares       |   |  | Amount                       |        |   |                                               |   |        |                                        
|BALANCES as of December 26, 1999           |  | 10,466       |   |  | $                            | 38,183 |   |                                               | $ | (5,499 | )                                       |  | $ | 1     |   |  | $                           | 11,284 
|Exercise of stock options                  |  | 725          |   |  |                              | 4,724  |   |                                               |   |        |                                         |  |   |       |   |  |                             |        
|Secondary stock offering                   |  | 1,988        |   |  |                              | 39,079 |   |                                               |   |        |                                         |  |   |       |   |  |                             |        
|Tax benefit related to stock options       |  |              |   |  |                              | 5,221  |   |                                               |   |        |                                         |  |   |       |   |  |                             |        
|Repayments of notes from stockholders      |  |              |   |  |                              |        |   |                                               |   | 3,446  |                                         |  |   |       |   |  |                             |        
|Interest on stockholder notes receivable   |  |              |   |  |                              |        |   |                                               |   | (214   | )                                       |  |   |       |   |  |                             |        
|Net income                                 |  |              |   |  |                              |        |   |                                               |   |        |                                         |  |   |       |   |  |                             | 14,610 
|Accumulated translation adjustment         |  |              |   |  |                              |        |   |                                               |   |        |                                         |  |   | (73   | ) |  |                             |        
|                                           |  |              |   |  |                              |        |   |                                               |   |        |                                         |  |   |       |   |  |                             |        
|Comprehensive income                       |  |              |   |  |                              |        |   |                                               |   |        |                                         |  |   |       |   |  |                             |        
|                                           |  |              |   |  |                              |        |   |                                               |   |        |                                         |  |   |       |   |  |                             |        
|BALANCES as of December 31, 2000           |  | 13,179       |   |  |                              | 87,207 |   |                                               |   | (2,267 | )                                       |  |   | (72   | ) |  |                             | 25,894 
|Exercise of stock options                  |  | 73           |   |  |                              | 334    |   |                                               |   |        |                                         |  |   |       |   |  |                             |        
|Tax benefit related to stock options       |  |              |   |  |                              | 98     |   |                                               |   |        |                                         |  |   |       |   |  |                             |        
|Repurchase of common stock                 |  | (300         | ) |  |                              | (1,835 | ) |                                               |   |        |                                         |  |   |       |   |  |                             |        
|Forgiveness of stockholder note receivable |  |              |   |  |                              |        |   |                                               |   | 1,067  |                                         |  |   |       |   |  |                             |        
|Net loss                                   |  |              |   |  |                              |        |   |                                               |   |        |                                         |  |   |       |   |  |                             | (45,612
|Accumulated translation adjustment         |  |              |   |  |                              |        |   |                                               |   |        |                                         |  |   | (33   | ) |  |                             |        
|                                           |  |              |   |  |                              |        |   |                                               |   |        |                                         |  |   |       |   |  |                             |        
|Comprehensive loss                         |  |              |   |  |                              |        |   |                                               |   |        |                                         |  |   |       |   |  |                             |        
|                                           |  |              |   |  |                              |        |   |                                               |   |        |                                         |  |   |       |   |  |                             |        
|BALANCES as of December 30, 2001           |  | 12,952       |   |  |                              | 85,804 |   |                                               |   | (1,200 | )                                       |  |   | (105  | ) |  |                             | (19,718
|Exercise of stock options                  |  | 78           |   |  |                              | 420    |   |                                               |   |        |                                         |  |   |       |   |  |                             |        
|Tax benefit related to stock options       |  |              |   |  |                              | 103    |   |                                               |   |        |                                         |  |   |       |   |  |                             |        
|Stock issued related to acquisition        |  | 363          |   |  |                              | 2,240  |   |                                               |   |        |                                         |  |   |       |   |  |                             |        
|Repurchase of common stock                 |  | (709         | ) |  |                              | (3,531 | ) |                                               |   |        |                                         |  |   |       |   |  |                             |        
|Forgiveness of stockholder note receivable |  |              |   |  |                              |        |   |                                               |   | 400    |                                         |  |   |       |   |  |                             |        
|Net loss                                   |  |              |   |  |                              |        |   |                                               |   |        |                                         |  |   |       |   |  |                             | (20,648
|Accumulated translation adjustment         |  |              |   |  |                              |        |   |                                               |   |        |                                         |  |   | 2     |   |  |                             |        
|                                           |  |              |   |  |                              |        |   |                                               |   |        |                                         |  |   |       |   |  |                             |        
|Comprehensive loss                         |  |              |   |  |                              |        |   |                                               |   |        |                                         |  |   |       |   |  |                             |        
|                                           |  |              |   |  |                              |        |   |                                               |   |        |                                         |  |   |       |   |  |                             |        
|Balances as of December 29, 2002           |  | 12,684       |   |  | $                            | 85,036 |   |                                               | $ | (800   | )                                       |  | $ | (103  | ) |  | $                           | (40,366
|                                           |  |              |   |  |                              |        |   |                                               |   |        |                                         |  |   |       |   |  |                             |        



See notes
to consolidated financial statements.



25



---

HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                                    |  | Years Ended       |        
|--------------------------------------------------------------------------------------------------- |  | ----------------- | -------
|                                                                                                    |  | December 29, 2002 |        
|Cash flows from operating activities:                                                               |  |                   |        
|Net income (loss)                                                                                   |  | $                 | (20,648
|Adjustments to reconcile net income (loss) to net cash provided by (used for) operating
activities: |  |                   |        
|Depreciation and amortization                                                                       |  |                   | 3,702  
|Deferred income taxes                                                                               |  |                   | (424   
|Interest on stockholder notes receivable                                                            |  |                   |        
|Loss (gain) on sale of fixed assets                                                                 |  |                   |        
|Impairment of goodwill                                                                              |  |                   | 15,478 
|Non-cash restructuring costs                                                                        |  |                   | 158    
|Stockholder note receivable forgiveness                                                             |  |                   | 400    
|Changes in assets and liabilities:                                                                  |  |                   |        
|Accounts receivable                                                                                 |  |                   | (5,099 
|Prepaid expenses and other assets                                                                   |  |                   | (32    
|Accounts payable and accrued expenses                                                               |  |                   | (5,812 
|Income taxes payable (receivable)                                                                   |  |                   | 8,583  
|                                                                                                    |  |                   |        
|Net cash provided by (used in) operating activities                                                 |  |                   | (3,694 
|                                                                                                    |  |                   |        
|                                                                                                   
|Cash flows from investing activities:                                                               |  |                   |        
|Sale or maturity of investments                                                                     |  |                   | 8,200  
|Purchase of investments                                                                             |  |                   |        
|Purchase of property and equipment                                                                  |  |                   | (1,802 
|Cash paid for business acquisitions                                                                 |  |                   | (19,750
|Earnout payments related to business acquisitions                                                   |  |                   |        
|                                                                                                    |  |                   |        
|Net cash used in investing activities                                                               |  |                   | (13,352
|                                                                                                    |  |                   |        
|                                                                                                   
|Cash flows from financing activities:                                                               |  |                   |        
|Borrowing on bank line of credit                                                                    |  |                   | 10,000 
|Repayments of debt                                                                                  |  |                   |        
|Proceeds from sale of common stock, net                                                             |  |                   |        
|Proceeds from exercise of options                                                                   |  |                   | 420    
|Repurchase and cancellation of common stock                                                         |  |                   | (291   
|Repayment of stockholder notes receivable                                                           |  |                   |        
|                                                                                                    |  |                   |        
|Net cash provided by (used in) financing activities                                                 |  |                   | 10,129 
|                                                                                                    |  |                   |        
|Net increase (decrease) in cash and cash equivalents                                                |  |                   | (6,917 
|Cash and cash equivalents, beginning of year                                                        |  |                   | 15,488 
|                                                                                                    |  |                   |        
|Cash and cash equivalents, end of year                                                              |  | $                 | 8,571  
|                                                                                                    |  |                   |        
|                                                                                                   
|Supplemental Disclosure of Cash Flow Information:                                                   |  |                   |        
|Cash paid (refunded) during the year for:                                                           |  |                   |        
|Income taxes, net                                                                                   |  | $                 | (10,794
|Interest                                                                                            |  | $                 | 154    
|Noncash investing and financing activitiesBusiness acquisitions:                                   |  |                   |        
|Common stock issued                                                                                 |  | $                 | 2,240  
|Liabilities assumed and related goodwill                                                            |  |                   |        



See notes
to consolidated financial statements.



26



---

HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Years Ended December 29, 2002, December
30, 2001 and December 31, 2000



Note
1.    Business and Significant Accounting Policies



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.



Fiscal Year.    The Companys fiscal year ends on the Sunday closest to December 31. Fiscal years 2002 and 2001 consisted of 52 weeks. Fiscal year 2000 consisted of 53 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. Significant changes in the allowance are as follows:



|                            |  | Years Ended       |       
|--------------------------- |  | ----------------- | ------
|                            |  | December 29, 2002 |       
|                            |  | (in thousands)    |       
|Beginning balance           |  | $                 | 3,176 
|Charged to cost and expense |  |                   | 526   
|Written off                 |  |                   | (1,158
|                            |  |                   |       
|Ending balance              |  | $                 | 2,544 
|                            |  |                   |       



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.



27



---

HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Impairment of Long-Lived Assets.    Pursuant to Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for Impairment or Disposal of Long-Lived Assets the Company regularly
reviews the carrying value of its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable based on estimated undiscounted future cash flows.



Intangible Assets.    As of
December 29, 2002, the carrying amount of other identifiable intangibles was $10.9 million, including $4.1 million subject to amortization over a five year life and $6.8 million not subject to amortization. Amortization expense in 2002 was $365,000.



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.



Accrued Compensation.    The Company accrues for deferred compensation that it is contractually obligated to pay its Chief Executive Officer. Accrued compensation balances at
December 29, 2002 and December 30, 2001 were $1,619,000 and $1,050,000, respectively.



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.



28



---

HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Stock-Based Compensation.    The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion (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 and
earnings 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. The proforma amounts and the assumptions used to calculate them are shown below.



|                                                                                                                             |  | Years Ended       |        
|---------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------
|                                                                                                                             |  | December 29, 2002 |        
|Proforma amounts:                                                                                                            |  |                   |        
|Net income (loss):                                                                                                           |  |                   |        
|As reported                                                                                                                  |  | $                 | (20,648
|Stock-based employee compensation expense determined under fair value based method for
all awards, net of related tax effect |  |                   | (5,140 
|                                                                                                                             |  |                   |        
|Proforma                                                                                                                     |  | $                 | (25,788
|                                                                                                                             |  |                   |        
|Diluted income (loss) per share:                                                                                             |  |                   |        
|As reported                                                                                                                  |  | $                 | (1.66  
|Proforma                                                                                                                     |  | $                 | (2.07  
|Assumptions:                                                                                                                 |  |                   |        
|Expected dividend rate                                                                                                       |  |                   | None   
|Volatility                                                                                                                   |  |                   | 90.0   
|Risk-free interest rate                                                                                                      |  |                   | 2.2    
|Expected lives (years)                                                                                                       |  |                   | 2-5    



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.



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



Recently Issued Financial Accounting
Standards.    In June 2002 SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities was issued. SFAS No. 146 applies to costs associated with an exit activity that does not involve an entity newly
acquired in a business combination or with a disposal activity covered by SFAS No. 144. The Company is required to adopt the provisions of SFAS No. 146 for exit or disposal activities, if any, initiated after December 15, 2002. Accordingly, SFAS No.
146 may affect the timing of recognizing future restructuring costs, if any, as well as amounts recognized.



29



---

HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Note
2.    Acquisitions



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 $13.0 million over three years contingent
upon the achievement of certain milestones. OnStaff, a privately-held group of companies that provides 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.



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
|                               |  |                |       



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                                   |        
|                       |  | (in thousands except per share amounts) (unaudited) |        
|Net revenues           |  | $                                                   | 143,114
|Net loss               |  | $                                                   | (22,526
|Diluted loss per share |  | $                                                   | (1.81  



Note
3.    Amendment to Bank Line of Credit



On July 12, 2002, the Company entered into an $18.0 million revolving credit facility which was due May 1, 2004. As of December 29, 2002, there was $10 million outstanding on the bank line of credit at an interest rate of 4.25%.
The Company was not in compliance with the required financial covenants as of December 29, 2002. On February 3, 2003, the bank waived such financial covenant violations. On March 24, 2003, the Company entered into an amended agreement with the bank
which expires January 1, 2004. Significant terms and conditions of the amended agreement are as follows:



| |  |  | Borrowings available are $12,000,000; reduced to $10,000,000 beginning June 15, 2003; and reduced to $9,000,000 beginning September 15, 2003. Total borrowings are
limited to 75% of eligible accounts receivable, reduced to 70% beginning July 15, 2003.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



30



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HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





| |  |  | Interest is at prime plus 1.5%; increased to prime plus 3.0% beginning June 15, 2003 (April 21, 2003 if the Company does not receive a financing proposal from
another acceptable financial lender); and increased to prime plus 5.0% beginning September 15, 2003.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The bank amended financial covenants related to profitability, tangible net worth and cash balances, and specific ratios of working capital and debt to tangible net
worth. Management expects that the Company will be able to remain in compliance with the amended financial covenants through January 1, 2004.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Borrowings are collateralized by all of the Companys assets.
| | - |  | -------------------------------------------------------------



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



The Company has begun to meet and negotiate with other
financial lenders in order to secure replacement financing to replace the amended bank agreement. There can be no assurance that the Company will be able to secure replacement financing on substantially similar terms or at all.



Note 4.    Property and Equipment



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



|                                          |  | December 29, 2002 |         |   | December 30, 2001 |  
|----------------------------------------- |  | ----------------- | ------- | - | ----------------- | -
|Property and equipment                    |  | $                 | 14,748  |   |                   | $
|Land and building                         |  |                   | 2,100   |   |                   |  
|Leasehold improvements                    |  |                   | 1,916   |   |                   |  
|                                          |  |                   |         |   |                   |  
|                                          |  |                   | 18,764  |   |                   |  
|Accumulated depreciation and amortization |  |                   | (11,253 | ) |                   |  
|                                          |  |                   |         |   |                   |  
|Net property and equipment                |  | $                 | 7,511   |   |                   | $
|                                          |  |                   |         |   |                   |  



Note
5.    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 29, 2002, the Company performed its annual impairment test. 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.



In 2002 and early 2003, sales and profitability for the Technology Professional Division have declined and on
March 3, 2003, the Company announced a restructuring plan that included closure of 13 offices and termination of 69 employees. The restructuring charge, currently estimated to be between $2.4 million and



31



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HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



$3.0 million, will be recorded in the first quarter of fiscal 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 13).



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.



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



|                                                              |  | Years Ended                             
|------------------------------------------------------------- |  | ----------------------------------------
|                                                              |  | December 29, 2002                       
|                                                              |  | (in thousands, except per share amounts)
|Reported net income (loss)                                    |  | $                                       
|Add: Goodwill amortization, net of tax                        |  |                                         
|                                                              |  |                                         
|Adjusted net income (loss)                                    |  | $                                       
|                                                              |  |                                         
|Diluted income (loss) per share on reported net income (loss) |  | $                                       
|Add: Goodwill amortization, net of tax                        |  |                                         
|                                                              |  |                                         
|Adjusted net income (loss) per share                          |  | $                                       
|                                                              |  |                                         



32



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HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Note
6.    Restructuring Costs



During 2001, the Company decided to close several offices and reduced its workforce. The Company recorded $17,048,000 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 $876,000 of income for the favorable resolution of certain severance and sublease agreements, offset by $870,000 of costs resulting from higher than estimated lease termination
payments. The remaining accrued restructuring costs are anticipated to be paid out during fiscal year 2003, except for the rental payments related to long-term facility leases that require settlement after 2003 and are reserved as non-current
restructuring costs. Restructuring liability is as follows:



|                                     |  |                     |        | 2001 |   | 2002  
|------------------------------------ |  | ------------------- | ------ | ---- | - | ------
|                                     |  | Restructuring Costs |        | Paid |   |       
|                                     |  | (in thousands)     
|Severance                            |  | $                   | 3,614  |      | $ | (2,350
|Lease terminations and other costs   |  |                     | 9,461  |      |   | (1,414
|                                     |  |                     |        |      |   |       
|Total                                |  |                     | 13,075 |      | $ | (3,764
|                                     |  |                     |        |      |   |       
|Impairment of property and equipment |  |                     | 3,973  |      |   |       
|                                     |  |                     |        |      |   |       
|Total restructuring costs            |  | $                   | 17,048 |      |   |       
|                                     |  |                     |        |      |   |       



In 2003,
sales and profitability for the technology reporting unit have continued to decline and on March 3, 2003, the Company announced a restructuring plan that included closure of 13 offices and termination of 69 employees. A restructuring charge,
currently estimated to be between $2.4 million and $3.0 million, will be recorded in the first quarter of fiscal 2003.



Note 7.    Stockholders Equity



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



Stockholder Notes ReceivableIn January 1999, the Company loaned its Chief Executive Officer (CEO) $2,000,000, which bears interest at the Companys incremental rate of borrowing plus 1/8% per annum (4.4% at December 29, 2002), compounded monthly. This loan was secured by 1,000,000 shares of the
Companys Common Stock pledged by the CEO. In January 2001, in connection with a revision of the CEOs employment agreement, the note was amended to extend the term to January 1, 2005 and to provide, annually, beginning on January 1, 2001,
that 20% of the principal amount plus accrued interest shall be forgiven, so that on January 1, 2005, no amounts will be due or owing. The amended note is secured by 433,000 shares of the Companys Common Stock pledged by the CEO. As loan
forgiveness due January 1, 2003 was recorded in 2002, the remaining balance of the note as of December 29, 2002 is $800,000.



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 29, 2002, 142,000 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.



33



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HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





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 29, 2002, 990,000 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.



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



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 of Shares |   |  | Weighted Average Exercise Price
|-------------------------------------------------------- |  | ---------------- | - |  | -------------------------------
|Balance, December 26, 1999                               |  | 2,104,000        |   |  | $                              
|Granted (weighted average fair value of $4.22 per share) |  | 1,828,000        |   |  | $                              
|Canceled                                                 |  | (320,000         | ) |  | $                              
|Exercised                                                |  | (724,000         | ) |  | $                              
|                                                         |  |                  |   |  |                                
|Balance, December 31, 2000                               |  | 2,888,000        |   |  | $                              
|Granted (weighted average fair value of $6.46 per share) |  | 640,000          |   |  | $                              
|Canceled                                                 |  | (1,783,000       | ) |  | $                              
|Exercised                                                |  | (74,000          | ) |  | $                              
|                                                         |  |                  |   |  |                                
|Balance, December 30, 2001                               |  | 1,671,000        |   |  | $                              
|Granted (weighted average fair value of $3.36 per share) |  | 2,574,000        |   |  | $                              
|Canceled                                                 |  | (352,000         | ) |  | $                              
|Exercised                                                |  | (77,000          | ) |  | $                              
|                                                         |  |                  |   |  |                                
|Balance, December 29, 2002                               |  | 3,816,000        |   |  | $                              
|                                                         |  |                  |   |  |                                



34



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HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Additional
information regarding options outstanding as of December 29, 2002 is as follows:



|                         |  | Options Outstanding |  | Options Exercisable                                
|------------------------ |  | ------------------- |  | ---------------------------------------------------
|Range of Exercise Prices |  | Number Outstanding  |  | Weighted Average Remaining Contractual Life (Years)
|$0.30$  5.97            |  | 660,000             |  | 8.62                                               
|$6.00$  7.00            |  | 637,000             |  | 8.95                                               
|$7.04$  7.45            |  | 761,000             |  | 8.72                                               
|$7.50$  8.14            |  | 171,000             |  | 6.80                                               
|$8.21$  8.21            |  | 706,000             |  | 7.93                                               
|$8.29$41.13             |  | 881,000             |  | 7.22                                               
|                         |  |                     |  |                                                    
|$0.30$41.13             |  | 3,816,000           |  | 8.16                                               
|                         |  |                     |  |                                                    



At
December 29, 2002, 1,223,000 shares of common stock were available for future option grants. As of December 30, 2001 and December 31, 2000 the number of shares of common stock underlying exercisable options were 753,000 and 572,000 respectively,
with a weighted average exercise price of $13.21 and $8.83 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 29,
2002, the Company has not implemented the Purchase Plan.



Note
8.    Net Income (Loss) per Share



Basic net income (loss) per share is calculated using only the weighted average number of common shares outstanding. Diluted net income (loss) per share also includes in the calculation the dilution that could occur if convertible
securities and contracts to issue common stock were converted or exercised.



In calculating the net loss per share for the years ended December 29, 2002 and December 30, 2001, 123,000 and 212,000 options, respectively, were excluded because they are antidilutive. For the year
ended December 31, 2000, 88,000 options at prices exceeding market value were excluded from the determination of common stock equivalents for purposes of calculating diluted weighted average shares.



35



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HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





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



|                                                 |  | Years Ended      
|------------------------------------------------ |  | -----------------
|                                                 |  | December 29, 2002
|Basic weighted average common shares outstanding |  | 12,475           
|Stock options                                    |  |                 
|                                                 |  |                  
|Diluted weighted average shares outstanding      |  | 12,475           
|                                                 |  |                  



Note
9.    Income Taxes



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



|                          |  | Years Ended       |       
|------------------------- |  | ----------------- | ------
|                          |  | December 29, 2002 |       
|                          |  | (in thousands)    |       
|Current:                  |  |                   |       
|Federal                   |  | $                 | (1,895
|State                     |  |                   | (551  
|                          |  |                   |       
|                          |  |                   | (2,446
|                          |  |                   |       
|Deferred:                 |  |                   |       
|Federal                   |  |                   | (700  
|State                     |  |                   | 276   
|                          |  |                   |       
|                          |  |                   | (424  
|                          |  |                   |       
|Total provision (benefit) |  | $                 | (2,870
|                          |  |                   |       



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



|                                               |  | 2002  |   |  | 2001 |   |  | 2000 |  
|---------------------------------------------- |  | ----- | - |  | ---- | - |  | ---- | -
|Income tax expense at statutory rate           |  | 35.0  | % |  | 35.0 | % |  | 35.0 | %
|State income tax taxes, net of federal benefit |  | 0.7   |   |  | 2.6  |   |  | 6.1  |  
|Amortization of impaired goodwill              |  |      |   |  | (6.4 | ) |  |     |  
|Valuation allowance                            |  | (23.0 | ) |  |      |   |  |      |  
|Other items, net                               |  | (0.6  | ) |  | 0.1  |   |  | 0.7  |  
|                                               |  |       |   |  |      |   |  |      |  
|                                               |  | 12.1  | % |  | 31.3 | % |  | 41.8 | %
|                                               |  |       |   |  |      |   |  |      |  



36



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HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





The
components of deferred income taxes are as follows:



|                                                  |  | December 29, 2002 |        |   | December 30, 2001 |  
|------------------------------------------------- |  | ----------------- | ------ | - | ----------------- | -
|                                                  |  | (in thousands)    |       
|Deferred tax assets:                              |  |                   |        |   |                   |  
|Allowance for doubtful accounts                   |  | $                 | 1,020  |   |                   | $
|Accrued expenses                                  |  |                   | 2,959  |   |                   |  
|Net operating loss and other credit carryforwards |  |                   | 8,179  |   |                   |  
|Goodwill and purchased intangibles                |  |                   | 9,172  |   |                   |  
|Other                                             |  |                   | 73     |   |                   |  
|                                                  |  |                   |        |   |                   |  
|Total deferred tax assets                         |  |                   | 21,403 |   |                   |  
|                                                  |  |                   |        |   |                   |  
|Deferred tax liabilities:                         |  |                   |        |   |                   |  
|Depreciation and amortization                     |  |                   | (217   | ) |                   |  
|Valuation allowances                              |  |                   | (6,206 | ) |                   |  
|                                                  |  |                   |        |   |                   |  
|Net deferred income taxes                         |  | $                 | 14,980 |   |                   | $
|                                                  |  |                   |        |   |                   |  



At
December 29, 2002, the Company had gross net operating loss carryforwards of approximately $14.6 million and $33.2 million for federal income tax purposes and state income tax purposes, respectively, expiring at various dates through 2022.



A valuation allowance is required if management
concludes that it is more likely than not that a deferred tax asset will not be realized. In 2002, the Company recorded a valuation allowance of $6.2 million to reflect the amount of net deferred income taxes management believes is more likely than
not to be realized. In addition, realization of the loss carryforwards is dependent on generating sufficient taxable income in certain tax jurisdictions prior to expiration of the loss carryforwards. Although realization is not assured, management
believes it is more likely than not that the loss carryforwards will be realized. The amount of the loss carryforwards that is considered realizable, however, could be reduced in the near term if estimates of future taxable income during the
carryforward period are reduced.



37



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HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Note
10.    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 2002, 2001, and 2000 was approximately $4,425,000, $5,155,000, and $4,688,000, respectively. Future minimum payments under all capital and operating leases are as follows:



|                                            |  | Capital        |    | Operating
|------------------------------------------- |  | -------------- | -- | ---------
|                                            |  | (in thousands)
|Fiscal years ending:                        |  |                |    |          
|2003                                        |  | $              | 48 |          
|2004                                        |  |                | 39 |          
|2005                                        |  |                | 5  |          
|2006                                        |  |                |    |          
|2007                                        |  |                |    |          
|Thereafter                                  |  |                |    |          
|                                            |  |                |    |          
|                                            |  | $              | 92 |          
|                                            |  |                |    |          
|Less amount representing interest           |  |                | 5  |          
|                                            |  |                |    |          
|Present value of net minimum lease payments |  |                | 87 |          
|Less current portion                        |  |                | 44 |          
|                                            |  |                |    |          
|Long-term obligations under capital leases  |  | $              | 43 |          
|                                            |  |                |    |          



Future
minimum lease payments listed above include $5,970,000, net of expected sublease income of $977,00, that were considered in the reserve for restructuring costs as of December 29, 2002 (See Note 6).



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 financial statements taken as a whole.



Note
11.    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 2002, 2001 and 2000.



The Company has a nonqualified deferred compensation plan for
officers and other key employees. The plan is funded by employee contributions through payroll withholding and employees are fully vested from the start of their participation in the plan. The Company makes no matching contributions to the plan. The
long term deferred compensation liability was $1.1 million and $1.3 million at December 29, 2002 and December 30, 2001, respectively, and is included in accrued compensation and deferred rent in the accompanying consolidated balance sheets. Employee
contributions are invested through a rabbi trust whose assets (Company-owned life insurance policies) will be used to pay the benefits if the Company remains solvent, but can be reached by the Companys creditors if the Company
becomes insolvent. Such assets are carried at the cash surrender value of the related insurance policy, were $ 1.0 million at December 29, 2002 and $1.3 million at December 30, 2001, and were included in other assets in the accompanying consolidated
balance sheets.



38



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HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Note
12.    Related Party Transactions



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 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.



Note 13.    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 29, 2002 |         | December 30, 2001 |   | December 31, 2000
|------------------------------- |  | ----------------- | ------- | ----------------- | - | -----------------
|Contract Professional Staffing: |  |                   |         |                   |   |                  
|Net revenues                    |  | $                 | 115,644 |                   | $ | 149,515          
|Cost of revenues                |  |                   | 80,744  |                   |   | 100,834          
|                                |  |                   |         |                   |   |                  
|Gross Profit                    |  | $                 | 34,900  |                   | $ | 48,681           
|                                |  |                   |         |                   |   |                  
|Permanent Placement:            |  |                   |         |                   |   |                  
|Net revenues                    |  | $                 | 4,784   |                   | $ | 24,321           
|Cost of revenues                |  |                   |        |                   |   |                 
|                                |  |                   |         |                   |   |                  
|Gross Profit                    |  | $                 | 4,784   |                   | $ | 24,321           
|                                |  |                   |         |                   |   |                  



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



|              |  | Years Ended     
|------------- |  | ----------------
|              |  | December 29,2002
|              |  | (in thousands)  
|United States |  | $               
|Other         |  |                 
|              |  |                 
|Total         |  | $               
|              |  |                 



39



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HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Note
14.    Quarterly Financial Data (Unaudited)



The following table shows certain quarterly financial data for 2002 and 2001:



|                                    |  | Quarter                                  |        
|----------------------------------- |  | ---------------------------------------- | -------
|2002(1)                             |  | March 31                                 |        
|                                    |  | (in thousands, except per share amounts) |        
|Total net revenues                  |  | $                                        | 24,477 
|Gross profit                        |  |                                          | 8,320  
|Income (loss) before income taxes   |  |                                          | (4,013 
|Net income (loss)                   |  |                                          | (2,380 
|Net income (loss) per shareBasic   |  |                                          | (0.19  
|Net income (loss) per shareDiluted |  |                                          | (0.19  
|                                   
|                                    |  | Quarter                                  |        
|2001                                |  | April 1                                  |        
|                                    |  | (in thousands, except per share amounts) |        
|Total net revenues                  |  | $                                        | 60,911 
|Gross profit                        |  |                                          | 28,242 
|Loss before income taxes            |  |                                          | (36,777
|Net loss                            |  |                                          | (26,400
|Net loss per shareBasic            |  |                                          | (2.00  
|Net loss per shareDiluted          |  |                                          | (2.00  

---

|(1) |  | Includes results for the OnStaff acquisition from August 2002.
|--- |  | --------------------------------------------------------------

|(2) |  | Includes favorable adjustment to restructuring costs of $876,000.
|--- |  | -----------------------------------------------------------------

|(3) |  | Includes restructuring costs of $870,000 and write-off of goodwill of $15,478,000.
|--- |  | ----------------------------------------------------------------------------------

|(4) |  | Includes restructuring costs of $4,610,000 and write-off of goodwill of $26,736,000.
|--- |  | ------------------------------------------------------------------------------------

|(5) |  | Includes restructuring costs of $816,000.
|--- |  | -----------------------------------------

|(6) |  | Includes restructuring costs of $11,622,000.
|--- |  | --------------------------------------------



40



---

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 29, 2002 and December 30, 2001, and the related consolidated statements of operations, stockholders equity, and cash flows for each of the three
years in the period ended December 29, 2002. 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 29, 2002
and December 30, 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 29, 2002 in conformity with accounting principles generally accepted in the United States of America.



As discussed in Note 5 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.



DELOITTE & TOUCHE LLP



San Francisco, California

March 26, 2003



41



---

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



Not
applicable.



PART III



The information required by Items 10, 11, 12 (other than
information required by Section 201(d) of Regulation S-K) and 13 of Part III is incorporated by reference from the registrants Proxy Statement, under the captions Nomination and Election of Directors, Beneficial Stock Ownership, Compensation
of Directors, Compensation of Executive Officers and Compensation Committee Interlocks and Insider Participation of Insider Participation and Certain Transactions, which Proxy Statement will be mailed to stockholders in connection with the
registrants annual meeting of stockholders which is scheduled to be held on May 21, 2003.



|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management
|-------- |  | --------------------------------------------------------------



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 983,00 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 7 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.



The following table sets forth information as of December 29,
2002 with respect to the Companys stock option plans.



|                                                        |  | Number of Shares to be Issued Upon Exercise of Outstanding Options |  | Weighted Average Exercise Price of Outstanding Options |       | Number of Shares Remaining Available for Future Issuance Under Plans(1)
|------------------------------------------------------- |  | ------------------------------------------------------------------ |  | ------------------------------------------------------ | ----- | -----------------------------------------------------------------------
|Plans approved by stockholders (1997 Plans and IT Plan) |  | 2,913,000                                                          |  | $                                                      | 10.24 |                                                                        
|Plans not approved by stockholders (2000 Plan)          |  | 903,000                                                            |  | $                                                      | 7.82  |                                                                        

---

|(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 14. |  | Controls and Procedures
|-------- |  | -----------------------



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



42



---



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



A control system, even if well conceived and implemented can only provide reasonable assurance rather than absolute assurance that the
goals of the control system are met. There are inherent limitations in all control systems due to resource constraints and other factors, such as assumptions regarding the likelihood of future events and new business conditions, the fact that
judgments may, with the benefit of hindsight, prove to be incorrect, and the fact that breakdowns can occur because of simple error or mistake, as well as a result of fraudulent activity. As a result of these limitations, it is possible that
misstatements due to error or fraud may occur and not be detected.



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



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



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



43



---

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 29, 2002 and December 30, 2001                                                                                      |  | 23  
|                                                                                                                                                           
|Consolidated Statements of Operations for the years ended December 29, 2002, December
30, 2001 and December 31, 2000                                        |  | 24  
|                                                                                                                                                           
|Consolidated Statements of Stockholders Equity for the years ended December 29,
2002, December 30, 2001 and December 31, 2000                              |  | 25  
|                                                                                                                                                           
|Consolidated Statements of Cash Flows for the years ended December 29, 2002, December
30, 2001 and December 31, 2000                                        |  | 26  
|                                                                                                                                                           
|Notes to Consolidated Financial Statements                                                                                                                  |  | 27  
|                                                                                                                                                           
|Selected Quarterly Financial Data for the years ended December 29, 2002 and December 30,
2001 are set forth in Note 14Quarterly Financial Data (Unaudited) |  | 40  
|                                                                                                                                                           
|Independent Auditors Report                                                                                                                                |  | 41  



(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 exhibits 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 exhibits 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 exhibits 2.3 filed with the
Companys report on Form 8-K dated August 23, 2002.    



44



---

|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                                                                                                        
|     
|4.4   |  | Registration Rights Agreement incorporated by reference as exhibits 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  |  | Revolving Credit Note and Revolving Loan and Security Agreement between the
Registrant and Comerica Bank incorporated by reference as exhibit 10.4 to the Registrants Report on Form 10-Q, filed September 29, 2002.                                                                                                                
|     
|10.5  |  | 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
|     
|10.6  |  | 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.                                                                                                                                           
|     
|10.7  |  | 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.                                                                                                                                   
|     
|10.8  |  | 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.                                                                                                               
|     
|10.9  |  | The Registrants E2 Equity Edge Cash Equity Plan incorporated by reference as
exhibit 10.19 to the Registrants Report on Form 10-K filed March 27, 2001.                                                                                                                                                                            
|     
|10.10 |  | First Amendment to Revolving Loan and Security Agreement between the Registrant and
Comerica Bank dated August 9, 2002 incorporated by reference as exhibits 10.10 filed with the Companys report on Form 8-K dated August 23, 2002.                                                                                                
|     
|10.11 |  | Second Amendment to Revolving Loan and Security Agreement between Registrant and
Comerica Bank dated November 26, 2002.                                                                                                                                                                                                              
|     
|10.12 |  | Third Amendment to Revolving Loan and Security Agreement between Registrant and
Comerica Bank dated March 24, 2003.                                                                                                                                                                                                                  
|     
|10.13 |  | Employment and Non-Competition Agreement dated August 9, 2002 between Registrant and
Jeffrey A. Evans.                                                                                                                                                                                                                               
|     
|21.1  |  | Subsidiaries of Registrant.                                                                                                                                                                                                                                                                                                          
|     
|23.1  |  | Independent Auditors Consent                                                                                                                                                                                                                                                                                                        



45



---

|99.1 |  | Certification pursuant to 18 U. S. C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
|---- |  | ------------------------------------------------------------------------------------------------------------------------
|    
|99.2 |  | Certification 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 October 23, 2002, we filed a Form 8-K providing financial statements related to the acquisition of certain assets and the assumption of certain liabilities of OnStaff and related entities on August 9, 2002. The financial
statements included OnStaff Combined Financial Statements for the Seven Months Ended July 31, 2002 (Unaudited) and 2001 (Unaudited) and as of and for the year ended December 31, 2001, the Unaudited Pro Forma Balance Sheet as of June 30, 2002 and
Unaudited Pro Forma Statements of Operations for the six months ended June 30, 2002 and the year ended December 31, 2001. The acquisition was previously announced on a Form 8-K filed on August 23, 2002.



On October 29, 2002, we filed a Form 8-K announcing
preliminary third quarter financial results for the quarter ended September 29, 2002.



(c)  Exhibits.



See Item 15(a)(3) above.



46



---

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:    March 31, 2003



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



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



|Signature                                         |  | Title                                                                                       |  | Date          
|------------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | --------------
|                                                 
|/s/    BRENDA C.
RHODESBrenda C. Rhodes           |  | Chairman of the Board, Chief Executive Officer and a Director (Principal Executive
Officer) |  | March 31, 2003
|                                                 
|/s/    JON H.
ROWBERRYJon H. Rowberry             |  | Director                                                                                    |  | March 31, 2003
|                                                 
|/s/    TODD J.
KINIONTodd J. Kinion               |  | Director                                                                                    |  | March 31, 2003
|                                                 
|/s/    JACK F.
JENKINS-STARKJack F. Jenkins-Stark |  | Director                                                                                    |  | March 31, 2003
|                                                 
|/s/    HERBERT I.
FINKELMANHerbert I. Finkelman   |  | Director                                                                                    |  | March 31, 2003
|                                                 
|/s/    MICHAEL S.
STEINMichael S. Stein           |  | Director                                                                                    |  | March 31, 2003
|                                                 
|/s/    MARTIN A.
KROPELNICKIMartin A. Kropelnicki |  | Vice President, Chief Financial Officer and Secretary (Principal Financial
Officer)         |  | March 31, 2003



47



---

CERTIFICATIONS



I, Brenda C. Rhodes, certify that:



1.    I have reviewed this annual report on Form 10-K of Hall, Kinion
& Associates, Inc.;



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



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



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



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



b)  evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the Evaluation Date); and



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



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



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



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



6.    The registrants other certifying officers and I have indicated in this annual report
whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.



By:

/s/    BRENDA C.
RHODESBrenda C. Rhodes Chief Executive Officer




Date:    March 31, 2003



48



---

I, Martin A. Kropelnicki, certify that:



1.    I have reviewed
this annual report on Form 10-K of Hall, Kinion & Associates, Inc.;



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



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



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



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



b)  evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the Evaluation Date); and



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



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



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



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



6.    The registrants other certifying officers and I have indicated in this annual report
whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.



By:

/s/    MARTIN A.
KROPELNICKIMartin A. Kropelnicki Chief Financial Officer




Date:    March 31, 2003



49



---

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 exhibits 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 exhibits 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 exhibits 2.3 filed with the
Companys report on Form 8-K dated August 23, 2002.    
|        
|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                                                                                                                                                                                                                                                                                                                                                                                                                       
|        
|4.4      |  | Registration Rights Agreement incorporated by reference as exhibits 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     |  | Revolving Credit Note and Revolving Loan and Security Agreement between the
Registrant and Comerica Bank incorporated by reference as exhibit 10.4 to the Registrants Report on Form 10-Q, filed September 29, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                               



---

|Exhibits |  |                                                                                                                                                                                                                                                                                                                                      
|-------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        
|10.5     |  | 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
|        
|10.6     |  | 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.                                                                                                                                           
|        
|10.7     |  | 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.                                                                                                                                   
|        
|10.8     |  | 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.                                                                                                               
|        
|10.9     |  | The Registrants E2 Equity Edge Cash Equity Plan incorporated by reference as
exhibit 10.19 to the Registrants Report on Form 10-K filed March 27, 2001.                                                                                                                                                                            
|        
|10.10    |  | First Amendment to Revolving Loan and Security Agreement between the Registrant and
Comerica Bank dated August 9, 2002 incorporated by reference as exhibits 10.10 filed with the Companys report on Form 8-K dated August 23, 2002.                                                                                                
|        
|10.11    |  | Second Amendment to Revolving Loan and Security Agreement between Registrant and
Comerica Bank dated November 26, 2002.                                                                                                                                                                                                              
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|10.12    |  | Third Amendment to Revolving Loan and Security Agreement between Registrant and
Comerica Bank dated March 24, 2003.                                                                                                                                                                                                                  
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|10.13    |  | Employment and Non-Competition Agreement dated August 9, 2002 between Registrant and
Jeffrey A. Evans.                                                                                                                                                                                                                               
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|21.1     |  | Subsidiaries of Registrant.                                                                                                                                                                                                                                                                                                          
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|23.1     |  | Independent Auditors Consent                                                                                                                                                                                                                                                                                                        
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|99.1     |  | Certification pursuant to 18 U. S. C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                             
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|99.2     |  | Certification pursuant to 18 U. S. C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002