<PAGE>
 
================================================================================
 
                                 FORM 10-K/A
 
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
  [X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934
 
                  FOR THE FISCAL YEAR ENDED DECEMBER 28, 1997
 
                                      OR
 
  [_]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934
 
                               ----------------
 
                        COMMISSION FILE NUMBER 0-22869
 
                        HALL, KINION & ASSOCIATES, INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
<TABLE>
 <S>                                             <C>
                   DELAWARE                                        77-0337705
 (STATE OR OTHER JURISDICTION OF INCORPORATION        (I.R.S. EMPLOYER IDENTIFICATION NO.)
                OR ORGANIZATION)
</TABLE>
 
     19925 STEVENS CREEK BOULEVARD, SUITE 180, CUPERTINO, CALIFORNIA 95014
                   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
 
                                (408) 863-5720
             (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
 
  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) had 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. [_]
 
  As of March 16, 1998, there were outstanding 9,361,885 shares of the
registrant's Common Stock. The aggregate market value of the common stock held
by non-affiliates of the registrant, based on the closing price of the common
stock as reported on the Nasdaq Stock Market (National Market System) on March
16, 1998, was approximately $149,790,000.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
  None.

================================================================================


<PAGE>
 
                                    PART I
 
ITEM 1. BUSINESS
 
FORWARD LOOKING STATEMENTS
 
  The discussion in this Report contains forward looking statements that
involve risks and uncertainties. The statements contained in this release that
are not purely historical are forward looking statements within the meaning of
Section 21E of the Securities and Exchange Act of 1934, including statements
regarding the Company's "expectations," "beliefs," "hopes," "intentions" or
"strategies," or the like, regarding the future. All forward looking
statements included in this release are based upon information available to
the Company as of the date hereof, and the Company assumes no obligation to
update any such forward looking statement. Actual results could differ
materially from those indicated by the forward looking statements made herein
or presented elsewhere by the Company's management from time to time. Factors
that could cause or contribute to such differences include, but are not
limited to, the rate of hiring and productivity of revenue generating
personnel; the availability of qualified IT professionals; changes in the
relative mix between contract services and permanent placement services;
changes in the pricing of the Company's services; the timing and rate of
entrance into new regional markets and the addition of Practice Groups; the
structure and timing of acquisitions; changes in demand for IT professionals;
general economic factors; and other factors discussed under the caption "Risk
Factors," elsewhere in this Report, and in the Company's Securities and
Exchange Commission Filings.
 
INTRODUCTORY NOTE
 
  On January 13, 1998, the Company completed the acquisition of Group-IPEX,
Inc. ("Group-IPEX"). Based in Lafayette, California, Group-IPEX is an
international recruiting organization for IT research and development
professionals focusing on recruiting primarily from India, but also from
Russia and China. Notwithstanding the fact that the acquisition of Group-IPEX
occurred after the end of the Company's fiscal year, this Report describes
certain aspects of the business of Group-IPEX relevant to an understanding of
the business of the Company. The Consolidated Financial Statements for the
Company contained in Item 8 do not, however, reflect the result of operations
for Group-IPEX for any of the periods presented therein.
 
THE COMPANY
 
  Hall, Kinion & Associates, Inc. (the "Company" or "Hall Kinion") is a
leading provider of specialized information technology ("IT") professionals on
a contract and permanent basis, with more than 21 offices in 13 domestic
markets and London, England. To meet the specialized needs of its clients, the
Company provides its services through distinct technology practice groups
("Practice Groups") organized around specific technologies (such as Windows,
Unix or CAD) frequently used by its clients. The Company is organized into two
divisions: Contract Services and Permanent Placement. Contract Services
provides supplemental IT professionals to research and development ("R&D")
departments of high technology companies and to information systems ("IS")
departments of corporate clients. In 1997, 1996 and 1995, Contract Services
represented 86.5%, 83.6% and 87.3% of the Company's net revenues,
respectively. Permanent Placement places IT professionals in permanent
positions with high technology companies and other corporate clients. In 1997,
1996 and 1995, Permanent Placement represented 13.5%, 16.4% and 12.7% of the
Company's net revenues, respectively. The Company's customers include an
extensive group of global high technology companies, including Borland, Cisco
Systems, IBM, Microsoft, Motorola, Oracle and numerous emerging growth
technology companies, such as Magellan Communications, Inc., Net Frame
Systems, Exodus Communications, Inc., Resumix and Remedy Corporation. No
single client represented more than 5% of the Company's net revenues in 1997,
1996 or 1995. With the acquisition of Group-IPEX in January 1998, the Company
expanded its service offerings to include international recruiting for IT
research and development professionals, focusing primarily on individuals from
India, but also on individuals from Russia and China.
 
  The high technology industry continues to experience substantial growth and
rapid rates of innovation. These trends, combined with intense competition,
have placed pressure on high technology companies to shorten
 
                                       1
<PAGE>
 
product life cycles and the time-to-market of new products. The development of
next generation products, however, often requires significant and highly
specialized technical talent, which may not be available internally.
Furthermore, as new technologies and systems are introduced, businesses, which
rely on them for mission-critical functions, must implement these systems
within their already complex computing environments. Consequently, IS
departments are faced with the challenge of finding qualified IT professionals
to design, develop, deploy and maintain their systems. To address these
demands for contract and permanent IT professionals, both the R&D departments
of high technology companies and IS departments of large corporations turn to
IT professional service companies to augment their existing operations.

  The Company's objective is to provide efficient and high quality contract
and permanent IT professionals to R&D departments of high technology clients
and IS departments of corporate clients and to become the "agent of choice"
for IT professionals. To achieve this objective, the Company: (i) focuses on
technology-driven clients that typically require IT professionals with more
highly specialized skill sets than traditional supplemental IT personnel; (ii)
provides specialized IT services through distinct Practice Groups that are
focused on specific technologies and that operate relatively autonomously with
their own sales forces and recruiting personnel; (iii) pursues cross-selling
opportunities between permanent placement and contract services; (iv) seeks to
attract and retain qualified IT professionals; and (v) provides strong
corporate support to its 14 regional markets (including London.)
 
  The Company was incorporated in California in 1991. In 1994, the Stellar
Group, Inc. and Kinion Hall, affiliated companies under common ownership, were
merged with the Company and in December 1996 the Company acquired certain
assets of TeamAlliance Technology Partners, L.P. and certain of its affiliated
regional operating companies ("TeamAlliance" or the "TeamAlliance
Acquisition"). The Company was reincorporated in Delaware in July 1997 and
completed an initial public offering of shares of its Common Stock, $0.001 par
value, on August 4, 1997. In January 1998, the Company acquired all of the
outstanding capital stock of Group-IPEX, which is currently a wholly owned
subsidiary of the Company.
 
  The following table illustrates the Practice Groups currently located in
each of the Company's existing regional markets. Although the Company does not
expect to add every Practice Group to each regional market, the Company
believes that there are opportunities to add Practice Groups in each regional
market, particularly those that the Company has recently entered.
 
                      PRACTICE GROUPS BY REGIONAL MARKET
 
<TABLE>
<CAPTION>
                                              SALT                                                        NEW
            SILICON                           LAKE                                                        YORK
            VALLEY  SEATTLE PORTLAND PHOENIX  CITY  DENVER AUSTIN HOUSTON CHICAGO TAMPA  ORLANDO RALEIGH  CITY  LONDON
----------------------------------------------------------------------------------------------------------------------
<S>         <C>     <C>     <C>      <C>     <C>    <C>    <C>    <C>     <C>     <C>    <C>     <C>     <C>    <C>
Contract
Services
----------------------------------------------------------------------------------------------------------------------
Windows        .       .       .               .      .      .               .
----------------------------------------------------------------------------------------------------------------------
Unix           .
----------------------------------------------------------------------------------------------------------------------
QA             .
----------------------------------------------------------------------------------------------------------------------
CAD            .               .        .             .      .       .       .
----------------------------------------------------------------------------------------------------------------------
Writers        .       .
----------------------------------------------------------------------------------------------------------------------
Internet                                                                                                   .
----------------------------------------------------------------------------------------------------------------------
Tech. Sup.     .
----------------------------------------------------------------------------------------------------------------------
NET            .       .       .        .             .
----------------------------------------------------------------------------------------------------------------------
IS                                             .      .              .       .      .       .       .      .
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
Permanent
Placement
Services
----------------------------------------------------------------------------------------------------------------------
Software       .       .       .        .      .      .      .       .       .      .               .      .      .
----------------------------------------------------------------------------------------------------------------------
Hardware                       .        .
</TABLE>
 
 
                                       2
<PAGE>
 
STRATEGY
 
  In late 1994, the Company implemented a growth strategy intended to create a
network of offices in regional markets, each comprised of multiple Practice
Groups. Key elements of this growth strategy are to:
 
  Hire additional revenue-generating employees for existing Practice
Groups. The Company believes that there is a potential for revenue growth from
the addition of technical recruiting agents (TRAs) and Account Managers in
existing Practice Groups. The addition of these employees represents increased
opportunities to generate revenues by servicing a greater number of current
and prospective clients and IT professionals. The Company increased the number
of revenue-generating employees from 123 employees in 1995 to 273 employees in
1996 to 348 employees in 1997. In large part, this internal expansion has been
implemented according to a growth model based on the Company's experience
expanding in regional markets with substantially similar characteristics. By
using its growth model, the decisions to make additional investments such as
increasing headcount, advertising expense and the number and type of Practice
Groups, is determined based on objective performance criteria. The Company
believes that its growth model provides its managers an effective tool for
executing and monitoring an expansion strategy and schedule.
 
  Add Practice Groups to existing regional markets. The Company has 11
different types of Practice Groups and only three of the Company's 14 regional
markets (including London) have more than four types of Practice Groups. As a
result, the Company believes that there is a substantial opportunity to
increase the number of Practice Groups within its existing regional markets.
Historically, the Company has entered a new market with the Permanent
Placement Division and then added additional Practice Groups to leverage that
office's reputation and relationships and to take advantage of cross-selling
opportunities. The Company intends to implement a focused expansion of its
Practice Groups in existing regional markets in order to meet the needs of new
and existing clients.
 
  Open additional locations in new regional technology markets. A key element
of the Company's growth strategy is to continue to enter new regional markets
with a concentration of high technology companies. The Company currently has
Practice Groups in 13 domestic markets, including Silicon Valley, Seattle, the
Research Triangle, certain other high technology markets and in London.
 
  Acquire complementary businesses. The Company intends to explore the
potential acquisition of businesses that would provide it with: (i) new
technology practices; (ii) strategically complementary businesses; (iii) new
geographical presences; or (iv) international recruiting capabilities. For
example, as a result of the recently completed acquisition of Group-IPEX, the
Company's Practice Groups will utilize the new international IT research and
development professionals to fill existing and future job orders.
 
HALL KINION SERVICES
 
 CONTRACT SERVICES
 
  The Company's Contract Services Division provides supplemental IT
professionals. In a typical R&D contract, an IT professional is contracted to
a high technology client, usually in connection with a specific application or
project. In a typical IS contract, an IT professional is contracted to an IS
department for the implementation and maintenance of corporate computer
systems. The company's IT professionals usually work on assignments lasting
approximately three to nine months, with all work billed on an hourly basis
and performed at the direction of the client.
 
  The Company has organized its Contract Services Division into seven types of
Practice Groups focused on those technologies widely used by its high
technology clients in the development of their products (Windows, Unix, QA,
CAD, Writers, Internet, Tech. Sup., NET and IS.) In addition, through its
Technology Support Practice Group, the Company offers its high technology
clients access to IT professionals providing administrative support, data
entry, help desk and customer support. The Company expects this Practice Group
to represent a declining percentage of the Company's net revenues as the
Company focuses on more specialized,
 
                                       3
<PAGE>
 
higher margin Practice Groups. In conjunction with its TeamAlliance
Acquisition in December 1996, the Company has also added an IS Practice Group,
which provides IT professionals, programmers and analysts to corporate
clients' IS department.
 
 PERMANENT PLACEMENT SERVICES
 
  The Company provides IT professionals for permanent placement with its
corporate clients. The Company currently delivers such services in 13 of the
Company's 14 regional markets, including London, England. The Company
recognizes revenue when the IT professional commences employment. The Company
typically guarantees this placement for a period of 90 days. This placement
fee is usually structured as a percentage of the IT professional's first-year
annual compensation. While the Permanent Placement Division has historically
offered its services to R&D departments of high technology firms, the Company
has begun to leverage the client relationships from TeamAlliance to offer
permanent placement services to IS departments of corporate clients. The
Company plans to develop distinct hardware and software Practice Groups within
its Permanent Placement Division in certain regional markets.
 
 GROUP-IPEX
 
  Group-IPEX focuses on recruiting international IT research and development
professionals to work on short term R&D contracts at leading technology
vendors. In a typical R&D contract, international IT research and development
professionals are brokered to companies similar to Hall Kinion who then
contract them out to high technology clients. The majority of the work is
billed on an hourly basis.
 
HALL KINION'S OPERATING AND SALES APPROACH
 
 CONTRACT SERVICES DIVISION
 
  Technical Recruiting Agents
 
  TRAs are responsible for recruiting and assessing the Company's IT
professionals, understanding their preferences and capabilities and monitoring
their availability, progress and job satisfaction. The Company's goal is for
its TRAs to build long-term relationships with IT professionals in their
particular fields of specialization. Each experienced TRA is responsible for
up to approximately 20 IT professionals under contract at any time and
monitors the job status and availability of approximately 40 additional IT
professionals. TRAs operate only within a particular division or Practice
Group and are required to attend Company training programs to keep current on
the latest technologies within their particular specialization. As of December
28, 1997, the Company employed 100 TRAs located throughout its regional
markets.
 
  Account Managers
 
  Account Managers are responsible for relationships with the Company's
clients. The Company's Account Managers do not form exclusive relationships
with the Company's clients, but rather operate within a particular technical
specialization. If an Account Manager learns of an opportunity at one of the
Company's clients in a specialization outside his or her own, the Account
Manager refers the lead to an Account Manager in the appropriate technical
specialization. The Company believes that its organization based on
specialization rather than client accounts enables Account Managers to develop
relationships in different departments of clients and at different levels and
to transfer the job requisitions to Account Managers familiar with the
appropriate specialization, leading to quicker, more accurate placements. As
of December 28, 1997, the Company employed approximately 108 Account Managers
throughout its regional markets.
 
  IT Professionals
 
  A major challenge facing IT services companies is the identification and
retention of highly qualified software engineers, computer programmers,
technical writers and designers. The Company believes that it has
 
                                       4
<PAGE>
 
developed a reputation among IT professionals for efficient and high quality
placements by: (i) focusing on an IT professional's particular field of
technical specialization; (ii) identifying and delivering high quality
assignments involving leading-edge technologies; and (iii) providing access
for IT professionals to cash compensation levels comparable to or higher than
that of similarly skilled, full-time employees. The Company's goal is to
become the "agent of choice" for IT professionals and is developing programs
to increase the retention of IT professionals such as the Star Campaign and
the granting of stock options. The Star Campaign is designed to enable the
Company to attract and retain the highest quality IT professionals available
by providing these selected professionals with, among other things, advance
notice of state-of-the-art assignments and perquisites, including
participation in the Company's 401(k) plan, access to medical and dental
benefits and Company stock options under the IT Professional Plan.
 
 PERMANENT PLACEMENT DIVISION
 
  Recruiters
 
  Recruiters are primarily responsible for establishing relationships with
clients needing permanent IT professional services and matching the needs of
the Company's clients with the preferences and skills of the Company's
permanent placement job candidates. Recruiters frequently engage in other
activities to enhance their knowledge of the IT industry and issues that are
relevant to clients. Many Recruiters are members of industry trade
organizations and participate with clients in Company-sponsored seminars. In
addition, from time to time Recruiters will bring clients together to discuss
mutual technical issues or challenges. The Company believes these types of
activities strengthen client relationships and help to build alliances or
partnerships. The Company employed a total of approximately 140 Recruiters as
of December 28, 1997.
 
  Recruiters are paid primarily on a commission basis. The Company's
compensation for Recruiters encourages communication and cooperation among
Recruiters by sharing compensation among Recruiters involved in an individual
placement. The Company establishes performance standards based on revenue
generation and other factors, such as the number of sales calls completed by
Recruiters.
 
CORPORATE SUPPORT SERVICES
 
  In support of its Practice Groups, the Company provides centralized
training, information systems and financial and accounting services. Managers
from the corporate office regularly visit each regional market, monitor
results of each Practice Group and oversee the addition of new employees.
Performance is measured at the division and Practice Group level and not at
the office or regional market level. The Company believes that this management
structure fosters synergy among divisions and Practice Groups, as well as
cooperation and cross-referrals from regional market to regional market.
 
  In addition to administrative support functions, the Company makes
substantial annual investments in training for its Vice Presidents, Directors,
TRAs, Account Managers and Recruiters. The Company provides management and
sales training throughout the year at its corporate headquarters in Cupertino,
California and at its training facility in Park City, Utah.
 
  The Company has developed a business growth model and related best practices
training program. Developed from in-house historical data, the model consists
of a set of detailed guidelines for use by the Company's divisions and
Practice Groups to expand within the Company's regional markets. By using the
growth model, decisions to make additional investments, such as increasing
headcount, advertising expense and the number of Practice Groups, are
determined based on objective performance criteria. The Company believes that
the growth model provides its managers with an effective tool for executing
and monitoring an expansion strategy and schedule. The Company applied the
growth model to its entrance into the Austin, Denver and Phoenix regional
markets during 1996. The growth model was also used for all new Practice
Groups added during 1997.
 
 
                                       5
<PAGE>
 
COMPETITION
 
  The IT staffing industry is highly competitive and fragmented and has low
barriers to entry. The Company competes for potential clients with providers
of outsourcing services, systems integrators, computer systems consultants,
other providers of IT staffing services and temporary personnel agencies. Many
of the Company's current and potential competitors have longer operating
histories, significantly greater financial and marketing resources, greater
name recognition and a larger installed base of IT professionals and clients
than the Company. In addition, many of these competitors, including numerous
smaller privately held companies, may be able to respond more quickly to
customer requirements and devote greater resources to the marketing services
than the Company. Because there are relatively low barriers to entry, the
Company expects 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 the Company's
business, operating results and financial condition. Further, there can be no
assurance that the Company will be able to compete successfully against
current ad future competitors or that competitive pressures faced by the
Company will not have a material adverse effect on its business, operating
results and financial condition. The Company believes that the principal
factors relevant to competition in the IT staffing industry services industry
are the recruitment and retention of highly qualified IT professionals, rapid
and accurate response to client requirements and, to a lesser extent, price.
The Company believes that it competes favorably with respect to these factors.
 
EMPLOYEES
 
  As of December 28, 1997, approximately 1,040 IT professionals placed by the
Company were providing contract services to the Company's clients. The
Company's corporate staff at December 28, 1997, consisted of 425 full-time
employees, of whom 100 are TRAs, 108 are Account Managers, 140 are Recruiters,
and 77 serve in various administrative and accounting capabilities. The
Company is not a party to any collective bargaining agreements covering any of
its employees, has never experienced any material labor disruption and is
unaware of any current efforts or plans to organize its employees. The Company
considers its relationship with its employees to be good.
 
                                       6
<PAGE>
 
                                 RISK FACTORS
 
ABILITY TO ATTRACT AND RETAIN QUALIFIED IT PROFESSIONALS
 
  The Company's success depends on its ability to attract and retain qualified
IT professionals with the technical skills and experience necessary to meet
its clients' requirements for technical personnel. Competition for individuals
with proven technical skills, particularly in the Windows, Unix, CAD and other
technology environments for which the Company provides services, is intense,
and the Company expects that competition for IT professionals will increase in
the future. Furthermore, IT professionals typically provide services on an
assignment-by-assignment basis and can terminate an assignment with the
Company at any time. The Company competes for such individuals with other
providers of technical staffing services, system integrators, providers of
outsourcing services, computer consultants and temporary personnel agencies.
Many of the IT professionals who work with the Company also work with the
Company's competitors, and there can be no assurance that IT professionals
currently working on projects for the Company will not choose to work for
competitors on future assignments. There also can be no assurance that the
Company will be able to attract and retain qualified IT professionals in
sufficient numbers in the future. The Company's net revenues in any period are
related, among other factors, to the number of IT professionals it has on
staff and engaged on assignments. If the Company were unable to hire or retain
such personnel, the Company's business, operating results and financial
condition would be materially adversely affected.
 
RISKS INHERENT IN ADDITION OF PRACTICE GROUPS AND EXPANSION INTO NEW MARKETS
 
  The Company's growth depends on its ability to successfully expand existing
Practice Groups, add additional Practice Groups within its existing regional
markets and enter new regional markets. This expansion is dependent on a
number of factors, including the Company's ability to: attract, hire,
integrate and retain qualified revenue generating employees; develop, recruit
and maintain a base of qualified IT professionals within a regional market;
accurately assess the demand of a new market; and initiate, develop and
sustain corporate client relationships in each new regional market. There can
be no assurance that the addition of Practice Groups and entrance into new
regional markets will occur on a timely basis or achieve anticipated financial
results. For example, in 1997 the Company closed the Raleigh Windows Practice
Group because its revenue growth was lower than management's expectations. The
addition of new Practice Groups and entrance into new regional markets
typically results in increases in operating expenses, primarily due to
increased headcount. Expenses are incurred in advance of forecasted revenue,
and there is typically a delay before the Company's new recruiting personnel
and sales employees reach full productivity. If the Company is unable to add
Practice Groups or enter new regional markets in a cost-effective manner or if
those Practice Groups and regional markets do not achieve anticipated
financial results, the Company's business, operating results and financial
condition could be materially adversely affected.
 
FLUCTUATIONS IN QUARTERLY RESULTS, SEASONALITY
 
  The Company's quarterly operating results have in the past and may in the
future fluctuate significantly depending on a number or factors, including,
but not limited to: the rate of hiring and the productivity of revenue-
generating personnel; the availability of IT professionals; changes in the
relative mix between the Company's contract services and permanent placement
services; changes in the pricing of the Company's services; the timing and
rate of entrance into new regional markets and the addition of practice
groups; departures or temporary absences of key revenue-generating personnel;
the structure and timing of acquisitions; changes in the demand for IT
professionals; and general economic factors.
 
  In addition, because the Company provides services on an assignment-by-
assignment basis, which clients can terminate at any time, there can be no
assurance that existing clients will continue to use the Company's services at
historical levels. Although the impact of seasonal factors will vary, the
Company experiences a certain amount of seasonality in its first quarter due
primarily to the number of holidays and the number of internal training and
incentive programs in the first quarter, which may reduce the number of days
worked by IT
 
                                       7
<PAGE>
 
professionals and revenue-generating employees during such quarter. As a
result, the Company believes that period-to-period comparisons of its result
of operations are not necessarily meaningful and should not be relied upon as
any indication of future performance. In the event the Company's operations
should fall below the expectations of public market analysts and investors,
the price of the Company's Common Stock would likely be materially adversely
affected. Although the Company has experienced substantial revenue growth in
recent years, there can be no assurance that, in the future, the Company will
sustain revenue growth or profitability on a quarterly or annual basis at
historical levels.
 
  The market price of the shares of Common Stock may be volatile and could be
subject to wide fluctuations. The stock markets, and in particular the Nasdaq
National Market, have experienced extreme price and volume fluctuations that
often have been unrelated or disproportionate to the operating performance of
the companies whose shares are traded in such market. Accordingly, broad
market factors may adversely affect the market price of the Company's Common
Stock. These market fluctuations, as well as general economic, political and
market conditions such as recessions, interest rates or international currency
fluctuations, may adversely affect the market price of the Common Stock. In
the past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted
against such company. Such litigation, if instituted, could result in
substantial costs and a diversion of management's attention and resources,
which would have a material adverse effect on the Company's business, results
of operations and financial condition.
 
DEPENDENCE ON KEY PERSONNEL
 
  The Company's future business and operating results depend in significant
part upon the continued contributions of its key employees and senior
management personnel, many of whom would be difficult to replace. The loss or
temporary absence of any of the Company's senior management, significant
revenue generating employees, other key personnel and, in particular, Brenda
C. Hall, its Chief Executive Officer and Paul H. Bartlett, its President, or
the inability to attract and retain key employees or management personnel in
the future, could have a material adverse effect of the Company's business,
operating results and financial condition.
 
MANAGEMENT OF GROWTH
 
  The Company has recently experienced a period of rapid growth that has
placed and will continue to place significant demands upon its management and
other resources. The Company's net revenues increased 72% from $29.4 million
in 1995 to $50.6 million in 1996, and increased 83.6% from $50.6 million in
1996 to $92.8 million in 1997, while headcount increased from 141 employees in
1995 to 327 employees in 1996 and to 425 employees in 1997. In the same period
general and administrative expenses increased from 30.2% of net revenues in
1995 to 36.3% of net revenues in 1997. The Company's ability to effectively
manage future growth will require the Company to expand its operational,
financial and other internal systems. Implementing a new or expanded financial
and management information system can be time-consuming and expensive and
require significant management resources. There can be no assurance that the
Company's current personnel, systems, procedures and controls will be adequate
to support the Company's future operations or that any new system can be
implemented effectively. Any failure to manage growth effectively could have a
material adverse effect on the Company's business, operating results and
financial condition. In addition, the Company believes that its future success
will depend upon its ability to identify, attract, hire, train, motivate and
retain other revenue-generating personnel. Competition for such personnel is
intense. There can be no assurance that the Company will be successful in
attracting, assimilating or retaining the necessary personnel, and the failure
to do so could have a material adverse effect on the Company's business,
results of operations and financial condition.
 
RISKS OF ACQUISITION
 
  A component of the Company's growth strategy is the acquisition of
complementary businesses. The successful implementation of this strategy is
dependent upon the Company's ability to identify suitable acquisition
candidates, obtain requisite financing, acquire such companies on suitable
terms and integrate their
 
                                       8
<PAGE>
 
operations successfully with those of the Company. There can be no assurance
that the Company will be able to identify suitable acquisition candidates or
that the Company will be able to acquire such candidates on favorable terms.
Moreover, other providers of IT professional services are also competing for
acquisition candidates, which could result in an increase in the price of
acquisition targets and a diminished pool of companies available for
acquisition. Acquisitions also involve a number of other risks, including
adverse effects on the Company's reported operating results from increases in
goodwill amortization and interest expense, the diversion of management
attention and the subsequent integration of acquired businesses.
 
  To the extent the Company seeks to acquire complementary businesses for
cash, the Company may be required to obtain additional financing and there can
be no assurance such financing will be available on favorable terms, if at
all. Due to all of the foregoing, acquisitions may have a material adverse
effect on the Company's business operating results and financial condition. In
addition, if the Company issues stock to complete any future acquisitions,
existing stockholders will experience ownership dilution.
 
  For example, in December 1996, the Company acquired certain assets of
TeamAlliance, which was comprised of six affiliated but separate entities that
were located in five states. These management companies now operate as a
separate practice group within the Company's contract Services Division. The
integration of TeamAlliance, its clients, IT professionals and employees has
required a significant amount of management time and attention, and has
resulted in significant integration-related expenses, including expenses
associated with training TeamAlliance employees and relocating certain
TeamAlliance offices.
 
INDUSTRY AND GEOGRAPHIC CONCENTRATION
 
  The Company's business is dependent on the trends prevalent in, and the
continued growth and rate of change of, the high technology industry. In 1996
and 1997, substantially all of the Company's net revenues were derived by
providing services to clients in the high technology industry. In addition,
approximately 73% and 47% of the Company's net revenues in 1996 and 1997
respectively, were derived from services provided to clients in Silicon
Valley. Substantial deterioration in general economic conditions in Silicon
Valley or in the high technology industry as a whole would materially and
adversely affect the Company's business, financial condition and operating
results.
 
HIGHLY COMPETITIVE MARKET
 
  The IT staffing industry is highly competitive and fragmented and has low
barriers to entry. The Company competes for potential clients with providers
of outsourcing services, system integrators, computer systems consultants,
other providers of IT services and temporary personnel agencies. Many of the
Company's current and potential competitors have longer operating histories,
significantly greater financial and marketing resources, greater name
recognition and a larger installed base of IT professionals and clients than
the Company. In addition, many of these competitors, including numerous
smaller privately held companies, may be able to respond more quickly to
customer requirements and to devote greater resources to the marketing of
services than the Company. Because there are relatively low barriers to entry,
the Company expects 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 the Company's
business, operating results and financial condition. Further, there can be no
assurance that the Company will be able to compete successfully against
current and future competitors or that competitive pressures faced by the
Company will not have a material adverse effect on its business, operating
results and financial condition.
 
GOVERNMENTAL REGULATION OF IMMIGRATION
 
  Certain of the Company's IT professionals are foreign nationals working in
the United States under H-1B permits. Accordingly, both the Company and these
foreign nationals must comply with the United States immigration laws. The
inability of the Company to obtain H-1B permits for certain of its employees
in sufficient quantities or at a sufficient rate could have an adverse effect
on the Company's business, operating results and
 
                                       9
<PAGE>
 
financial condition. Furthermore, Congress and administrative agencies with
jurisdiction over immigration matters have periodically expressed concerns
over the levels of legal and illegal immigration into the U.S. These concerns
have often resulted in proposed legislation, rules and regulations aimed at
reducing the number of work permits that may be issued. For example, in 1997
the maximum number of permitted H-1B permits available for 1997 were issued by
the third quarter of 1997, resulting in an inability of applicants to obtain
additional permits for the balance of the year. Any changes in such laws
making it more difficult to hire foreign nationals or limiting the ability of
the Company to obtain foreign employees could require the Company to incur
additional unexpected labor costs and expense. Further, any such restrictions
or limitations on hiring practices could have an adverse effect on business,
operating results and financial condition.
 
CONCENTRATION OF OWNERSHIP BY PRINCIPAL STOCKHOLDERS
 
  The Company's principal stockholders, Brenda C. Hall, Todd J. Kinion and
entities affiliated with the Sprout Group beneficially owned approximately 63%
of the Company's outstanding shares of Common Stock at December 28, 1997. As a
result, these stockholders as a group will be able to exercise control over
almost all matters requiring a 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 the Company and may discourage third parties
from attempting to do so.
 
LIABILITY RISKS
 
  The Company is exposed to liability with respect to actions taken by its IT
professionals while on assignment, such as damages caused by errors of IT
professionals, misuse of client proprietary information or theft of client
property. The Company often indemnifies its clients from the foregoing.
Although the Company maintains insurance coverage, due to the nature of the
Company's assignments, and in particular the access by IT professionals to
client information systems and confidential information, and the potential
liability with respect thereto, there can be no assurance that such insurance
coverage will continue to be available on reasonable terms or that it will be
adequate to cover any such liability. The Company may be exposed to
discrimination and harassment claims or other similar claims as a result of
inappropriate actions allegedly taken against IT professionals by corporate
clients. As an employer, the Company is 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.
 
EFFECT OF CERTAIN CHARTER PROVISIONS; ANTI-TAKEOVER EFFECTS OR CERTIFICATE
INCORPORATION, BYLAWS, DELAWARE LAW
 
  The Company's Amended and Restated Certificate of Incorporation (the
"Certificate") and Bylaws and Delaware law contain provisions that could have
the effect of delaying, deferring or preventing an unsolicited change in
control of the Company, which may adversely 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. Such provisions also may have the effect of preventing
changes in the management of the Company. These provisions provide that all
stockholder action must be taken at an annual special meeting of stockholders,
that only the Board of Directors may call special meetings of the stockholders
and that the Board of Directors be divided into three classes to serve for
staggered three-year terms. In addition, the Certificate authorizes the Board
of Directors to issue up to 10,000,000 shares of preferred stock ("Preferred
Stock") without stockholder approval and on such terms as the Board of
Directors may determine. Although no shares of Preferred Stock are outstanding
as of December 28, 1997, and the Company has no plans to issue any shares of
Preferred Stock, the holders of Common Stock will be subject to, and may be
adversely affected by, the rights of any Preferred Stock that may be issued in
the future. In addition, the Company is 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 the Company.
 
 
                                      10
<PAGE>
 
IMPACT OF YEAR 2000 ISSUE
 
  The Year 2000 issue results from computer programs written using two digits
rather than four to define the applicable year. Any of the Company's computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
 
  The Company is in the process of conducting assessments of its computer
information systems and is beginning to take the necessary steps to determine
the nature and extent of the work required to make its systems Year 2000
compliant, where necessary. These steps will require the Company to modify,
upgrade or replace some of its internal financial and operational systems. The
Company continues to evaluate the estimated cost of bringing all internal
systems, equipment and operations into Year 2000 compliance, but has not
finished determining the total cost of these compliance efforts. While these
efforts may involve additional costs, the Company believes, based upon
currently available information, that these costs will not have a material
adverse effect on the business, financial condition or results of operations
of the Company. However, if these efforts are not completed on time, or if the
cost of updating or replacing the Company's information systems, if necessary,
exceeds the current estimates, the Year 2000 issue could have a material
adverse impact on the business, financial condition or results of operations
of the Company.
 
  The Company also intends to determine the extent to which the Company may be
vulnerable to any failures by its major partners and service providers to
remedy their own Year 2000 issues, and is in the process of initiating formal
communications with these parties. At this time the Company is unable to
estimate the nature or extent of any potential adverse impact resulting from
the failure of third parties to achieve Year 2000 compliance, however, there
can be no assurance that these third parties will not experience Year 2000
problems or that any problems would not have a material effect on the
Company's business, financial condition or results of operations.
 
ITEM 2. PROPERTIES
 
  The Company's principal executive offices are currently located in
Cupertino, California and occupy an aggregate of approximately 16,375 square
feet of office space pursuant to a sublease that expires in August 2000. The
Company also leases or subleases office space for its operations in Austin and
Houston, Texas; Capitola, Foster City, Fremont and Mountain View, California;
Chicago and Schaumburg, Illinois; Denver, Colorado; London, England; New York,
New York; Orlando and Tampa, Florida; Phoenix, Arizona; Portland, Oregon;
Raleigh, North Carolina; Salt Lake City, Utah; and Seattle, Washington. In
addition, the Company owns a training facility located in Park City, Utah.
 
ITEM 3. LEGAL PROCEEDINGS
 
  The Company is not a party to any material pending legal proceedings other
than routine litigation incidental to its business.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  No matter was submitted to a vote of the Company's security holders during
the fourth quarter of the fiscal year covered by this report.
 
                                      11
<PAGE>
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
  The Company's Common Stock is listed for trading on the NASDAQ under the
symbol "HAKI". On December 28, 1997, there were approximately 38 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 since the Company's initial
public offering on August 4, 1997. The Company's initial public offering price
was $15.00 per share.
 
<TABLE>
<CAPTION>
                                                                   SALES PRICE
                                                                  -------------
                FISCAL YEAR ENDED DECEMBER 28, 1997                HIGH   LOW
                -----------------------------------               ------ ------
   <S>                                                            <C>    <C>
   4th quarter ended December 28, 1997........................... $21.13 $15.00
   3rd quarter ended September 28, 1997(1)....................... $22.50 $17.87
</TABLE>
--------
(1)  Trading of the Company's Common Stock commenced on August 4, 1997.
 
  No cash dividends were paid in 1997 or 1996. The Company, as it deems
appropriate, may continue to retain all earnings for use in its business or
may consider paying a dividend in the future.
 
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 Conditions
and Results of Operations" and the Consolidated Financial Statements and
related notes thereto included elsewhere in this Form 10-K.
 
<TABLE>
<CAPTION>
                                                  FISCAL YEAR
                                     ------------------------------------------
                                      1997     1996     1995     1994     1993
                                     -------  -------  -------  -------  ------
CONSOLIDATED STATEMENT OF INCOME         (IN THOUSANDS, EXCEPT PER SHARE
DATA:                                               AMOUNTS)
<S>                                  <C>      <C>      <C>      <C>      <C>
Net revenues........................ $92,831  $50,571  $29,385  $15,968  $9,780
Cost of contract services...........  54,769   30,342   19,209   10,728   6,386
                                     -------  -------  -------  -------  ------
Gross profit........................  38,062   20,229   10,176    5,240   3,394
Selling, general and administrative
 expenses...........................  33,689   18,233    8,869    4,978   3,269
                                     -------  -------  -------  -------  ------
Income from operations..............   4,373    1,996    1,307      262     125
Other income (expense), net.........    (127)     369     (156)    (203)    (44)
                                     -------  -------  -------  -------  ------
Income before income taxes..........   4,246    2,365    1,151       59      81
Income taxes........................   1,737    1,004      469       26      53
                                     -------  -------  -------  -------  ------
Net income.......................... $ 2,509  $ 1,361  $   682  $    33  $   28
                                     =======  =======  =======  =======  ======
Net income per share:
  Basic............................. $  0.34  $  0.22  $  0.11  $  0.01  $ 0.00
                                     =======  =======  =======  =======  ======
  Diluted........................... $  0.25  $  0.16  $  0.11  $  0.01  $ 0.00
                                     =======  =======  =======  =======  ======
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit)........... $19,503  $   189  $  (114) $  (209) $  251
Total assets........................  42,440   22,994    5,680    2,572   1,700
Long-term debt......................   2,549    6,738       --       --     244
Redeemable convertible preferred
 stock..............................      --    9,900       --       --      --
Stockholders' equity (deficit)......  31,350   (2,748)     941      259     226
</TABLE>
 
 
                                      12
<PAGE>
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 
  The discussion in this Report contains forward looking statements that
involve risks and uncertainties. The statements contained in this release that
are not purely historical are forward looking statements within the meaning of
Section 21E of the Securities Act of 1934, including statements regarding the
Company's "expectations," "beliefs," "hopes," "intentions" or "strategies," or
the like, regarding the future. All forward looking statements included in
this release are based upon information available to the Company as of the
date hereof, and the Company assumes no obligation to update any such forward
looking statement. Actual results could differ materially from those indicated
by the forward looking statements made herein or presented elsewhere by the
Company's management from time to time. Factors that could cause or contribute
to such differences include, but are not limited to, the rate of hiring and
productivity of revenue generating personnel; the availability of qualified IT
professionals; changes in the relative mix between contract services and
permanent placement services; changes in the pricing of the Company's
services; the timing and rate of entrance into new regional markets and the
addition of Practice Groups; the structure and timing of acquisitions; changes
in demand for IT professionals; general economic factors; and other factors as
discussed under the caption "Risk Factors," elsewhere in this Report, and in
the Company's Securities and Exchange Commission Filings.
 
OVERVIEW
 
  Hall Kinion provides specialized IT professionals to corporate clients
through 21 offices located in 11 states and in London, England. The Company is
organized into two divisions: Contract Services, which has historically
provided supplemental IT professionals to R&D departments of high technology
companies, and Permanent Placement, which places IT professionals in permanent
positions. With the acquisition of TeamAlliance in December 1996, the Company
expanded its Contract Services Division to provide IT professionals to IS
departments of corporate clients.
 
  In 1997, 1996 and 1995, the Contract Services Division represented 86.5%,
83.6% and 87.3% of the Company's net revenues, respectively. For the same
periods, the Permanent Placement Division represented 13.5%, 16.4% and 12.7%
of the Company's net revenues, respectively. If the TeamAlliance Acquisition
had occurred in January 1996, net revenues on a pro forma basis for the
Contract Services Division and the Permanent Placement Division would have
accounted for 87.2% and 12.8% of the Company's 1996 revenues, respectively.
 
  The Company's net revenues are derived from hourly billings of IT
professionals performing contract assignments and from fees received for
permanent placements. For contract services, assignments generally last from
three to nine months and revenues are recognized as services are provided.
Because the Company only derives revenues when its consultants are actually
working, its operating results may be adversely affected when client
facilities are closed due to holidays or inclement weather. In particular, the
Company experiences a certain amount of seasonality in its first fiscal
quarter. For its Permanent Placement of IT professionals, the Company receives
a fee upon placement of the candidate. The fee is typically structured as a
percentage of the placed IT professional's first-year annual compensation.
Permanent Placement revenues from fees are recognized when the IT professional
commences employment.
 
  The Company has experienced growth by the additions of sales and recruiting
employees, developing new Practice Groups, acquisitions and entering into new
regional markets. As of December 1995, the Company had 141 employees and 17
Practice Groups in 5 regional markets. As of December 1996, the Company had
327 employees and 42 Practice Groups in 14 regional markets. As of December
1997, the Company had 425 employees and 59 Practice Groups in 14 regional
markets. During this period, net revenues increased from $29.4 million to
$92.8 million, or 215.9%. Overall headcount for the comparable period
increased from 141 to 425, or 201.4%. Although contributing to the increase in
net revenues, the addition of new Practice Groups and the entry into new
regional markets has resulted in substantial increases in operating expenses,
primarily due to increased headcount. These expenses are incurred in advance
of any recognized revenue and there is often a delay before the Company's new
personnel and sales employees reach full productivity.
 
                                      13
<PAGE>
 
RESULTS OF OPERATIONS
 
  The following table sets forth as a percentage of net revenues, except as
otherwise noted, the Company's results of operations for the periods shown:
 
<TABLE>
<CAPTION>
                                                               FISCAL YEAR
                                                            -------------------
                                                            1997   1996   1995
                                                            -----  -----  -----
<S>                                                         <C>    <C>    <C>
Net revenues:
  Contract services........................................  86.5%  83.6%  87.3%
  Permanent placement......................................  13.5   16.4   12.7
                                                            -----  -----  -----
    Total net revenues..................................... 100.0  100.0  100.0
Cost of contract services..................................  59.0   60.0   65.4
                                                            -----  -----  -----
Gross profit (1)...........................................  41.0   40.0   34.6
Selling, general administrative expenses...................  36.3   34.4   30.2
Other operating expenses...................................    --    1.6     --
                                                            -----  -----  -----
Income from operations.....................................   4.7    4.0    4.4
Other income (expenses), net...............................  (0.1)   0.7   (0.5)
                                                            -----  -----  -----
Income before taxes........................................   4.6%   4.7%   3.9%
                                                            =====  =====  =====
</TABLE>
--------
(1) Gross profit for Contract Services excluding Permanent Placement revenues
    (as a percentage of net Contract Service revenues) was 31.8%, 28.2% and
    25.1% for years 1997, 1996 and 1995, respectively. The Company's fiscal
    year ends on the last Sunday of December.
 
YEARS ENDED DECEMBER 28, 1997, DECEMBER 29, 1996 AND DECEMBER 30, 1995
 
  Net revenues. Net revenues were $92.8 million, $50.6 million, and $29.4
million for the years 1997, 1996 and 1995, respectively, increasing by 83.6%
during 1997 and 72.1% during 1996. The Company's net revenues from Contract
Services were $80.3 million, $42.3 million and $25.7 million for the years
1997, 1996 and 1995, respectively, increasing by 89.9% during 1997 and 64.7%
during 1996. The Company's net revenues from Permanent Placements were $12.6
million, $8.3 million and $3.7 million for the years 1997, 1996 and 1995,
respectively, increasing by 51.1% during 1997 and 123.3% during 1996. The
increase in net revenues in 1997 was primarily due to a full year of revenue
from the TeamAlliance operations, the opening of 20 new Practice Groups within
existing regional markets, as well as a full year of revenue from the Austin,
Phoenix, Raleigh and London offices and to a lesser extent increased bill
rates. In 1997 the Company's revenue producing headcount increased from 273 to
348 or 27.5%, with much of the increase occurring in the third and fourth
quarters. As a result, the increase in net revenue in 1997 was partially
offset due to the delay experienced by the Company before new employees reach
full productivity. The increase in net revenues in 1996 was primarily due to
growth in sales within existing regional markets, including a full year of
revenue from the Portland and Denver regional markets which the Company
entered in 1995. During 1996, the Company expanded into Austin (April),
Phoenix (July), Raleigh (September), and London (November). Due to the delay
typically experienced by the Company before new employees reach full
productivity, the Company did not recognize significant revenues from these
regional markets in 1996. As a result, the number of Company revenue producing
headcount increased from 123 to 273 or 122.0% in 1996, while net revenues
increased only by 72.1%. In addition, in December 1996, the Company entered
the New York City, Chicago, Houston, Orlando and Tampa regional markets as a
result of the TeamAlliance acquisition.
 
  Gross Profit. Gross profit from the Company's Contract Services represent
revenues less direct cost of services, which consists of direct payroll,
payroll taxes and insurance costs for contract employees. Gross profit dollars
from permanent placement services are equal to revenues, as there are no
direct costs associated with such revenues. Gross profit for the Company's
Contract Services were $25.5 million, $11.9 million, and $6.5 million for the
years 1997, 1996 and 1995, respectively, increasing by 114.0% and 84.7% in
1997 and 1996,
 
                                      14
<PAGE>
 
respectively. The Company believes these increases were due to increased
demand for the Company's services and to a lesser extent increased bill rates.
Gross profit for the Company's Permanent Placement division were $12.6
million, $8.3 million and $3.7 million for the years 1997, 1996 and 1995,
respectively, increasing by 51.1% and 123.3% in 1997 and 1996, respectively.
These increases were primarily due to increases in demand for the Company's
Permanent Placement services.
 
  Operating Expenses. Operating expenses were $33.7 million in 1997 compared
to $18.2 million in 1996 and $8.9 million in 1995. Operating expenses as a
percentage of net revenues were 36.3% in 1997 and 36.0% in 1996 and 30.2% in
1995. Selling, general and administrative expenses consist primarily of staff
compensation, occupancy, telephone, advertising and public company costs. The
increase in 1997 was primarily due to increased headcount and operating
expenses from new Practice Groups, the integration of TeamAlliance operations,
including training costs and office relocation costs incurred in the Houston,
Tampa and Chicago regional markets, and in connection with relocating the
Company headquarters to Cupertino, California. To a lesser extent, operating
expenses also increased due to the expenses incurred from the addition of
Permanent Placement Practice Groups in Houston, Austin, Chicago, Tampa,
Phoenix and San Mateo. The increase in 1996 was primarily due to the opening
of Practice Groups in four additional regional markets in 1996, and one month
of integration costs for the TeamAlliance operations.
 
  Other Income (Expense), Net. Interest income for the years 1997, 1996 and
1995 was $485,000, $434,000 and $0, respectively. Interest expense for the
years 1997, 1996 and 1995 was $581,000, $65,000 and $122,000 respectively. The
increase in interest income resulted from increased cash balances from the
Company's initial public offering on August 4, 1997. The increase in interest
expense primarily reflects indebtedness incurred in connection with the
TeamAlliance acquisition and expansion costs associated with new Practice
Groups.
 
  Income Taxes. The provision for income taxes was 40.9%, 42.5%, and 40.8% for
the years 1997, 1996 and 1995. The Company's income taxes as a percentage of
income before taxes varies somewhat from period to period due primarily to
changes in nondeductible expenses.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  In August 1997, the Company completed its initial public offering of its
common stock. Of the 2,892,250 shares of common stock offered, 1,666,667
shares were sold by the Company and 1,225,583 shares were sold by selling
stockholders. The Company received approximately $21.5 million of cash, net of
underwriting discounts and commissions, and other expenses. Approximately $7.0
million of the net proceeds were used to repay all outstanding indebtedness
under the Company's credit facility and approximately $1.0 million was used to
finance the addition of new Practice Groups during the fourth quarter. An
additional $1.3 million was used to pay a note outstanding to certain
shareholders affiliated with the TeamAlliance operations. The remaining net
proceeds were invested in short term securities. In connection with the
initial public offering, all of the Company's outstanding shares of preferred
stock were automatically converted into an equal number of shares of common
stock.
 
  During 1997, 1996 and 1995, the Company used cash in operations of
approximately $517,000, $1.6 million, and $193,000, respectively. The
principal use of cash during each of these periods was to support growth in
accounts receivable resulting from the Company's growth in net revenues and to
fund operating expenses associated with entering new markets and adding
Practice Groups. In 1997, the Company experienced an increase in accounts
receivable in part from TeamAlliance, which was purchased in December 1996. In
connection with this acquisition, the Company did not purchase the existing
accounts receivable balances. This growth in accounts receivable was primarily
financed by the initial public offering in August 1997. Historically, the
Company has utilized various sources of financing to fund its working capital
requirements, including cash flow from internal operations, bank credit lines
and the sale of its capital stock.
 
  The Company pays its IT professionals on a weekly basis, while corporate
clients are generally billed at the end of the applicable pay period.
Corporate clients typically remit payments 30 to 40 days after invoice date.
The Company's working capital requirements are somewhat mitigated by permanent
placement revenues, as the sales commissions associated with such revenues are
not paid until fees are collected from the Company's clients.
 
                                      15
<PAGE>
 
  During 1997, 1996 and 1995, the Company made capital expenditures of $1.9
million, $2.6 million and $634,000, respectively. In October 1996, the Company
purchased a corporate training facility in Park City, Utah. The purchase price
consisted of $1.0 million in cash plus a note payable to the seller in the
amount of $1.1 million. The note bears interest at 8.75% per annum, matures in
the year 2026 and requires installments of principal and interest totaling
$9,023 each month. The note is fully secured by a deed of trust against the
property.
 
  In December 1996, the Company completed the TeamAlliance Acquisition for a
cash payment of $4.3 million at the date of acquisition and the issuance of
52,000 shares of the Company's Common Stock. In addition, the Company agreed
to pay the principals an aggregate of an additional $4.2 million in three
installments in October 1997, 1998 and 1999. Pursuant to this obligation, the
Company made a payment of $1.25 million on October 31, 1997. In addition, the
Company made additional payments aggregating approximately $502,000 to certain
management companies associated with TeamAlliance and their shareholders
during 1997. The Company financed the initial cash portion of the purchase
price with available borrowings under the term loan facility. The subsequent
payments in 1997 were made from the net proceeds of the initial public
offering.
 
  In January 1996, entities affiliated with the Sprout Group ("Sprout")
purchased 1,600,000 shares of Series A Preferred Stock and warrants to
purchase and aggregate of up to 250,000 shares of Common Stock. In connection
with this transaction, Brenda C. Hall, the Company's Chief Executive Officer
and a director of the Company, and Todd J. Kinion, a former officer and a
current director of the Company, borrowed from the Company $3.0 million and
$2.0 million respectively, pursuant to secured promissory notes. Upon closing
of the initial public offering in August 1997, Ms. Hall and Mr. Kinion paid
their respective promissory notes by tendering to the Company 480,000 and
320,000 shares of Common Stock, respectively.
 
YEAR 2000 ISSUES
 
  The Company is in the process of conducting assessments of its computer
information systems and is beginning to take the necessary steps to determine
the nature and extent of the work required to make its systems Year 2000
compliant, where necessary. These steps will require the Company to modify,
upgrade or replace some of its internal financial and operational systems. The
Company continues to evaluate the estimated cost of bringing all internal
systems, equipment and operations into Year 2000 compliance, but has not
finished determining the total cost of these compliance efforts. While these
efforts may involve additional costs, the Company believes, based upon
currently available information, that these costs will not have a material
adverse effect on the business, financial condition or results of operations
of the Company. However, if these efforts are not completed on time, or if the
cost of updating or replacing the Company's information systems, if necessary,
exceeds the current estimates, the Year 2000 issue could have a material
adverse impact on the business, financial condition or results of operations
of the Company.
 
  The Company also intends to determine the extent to which it may be
vulnerable to any failures by its major partners and service providers to
remedy their own Year 2000 issues, and is in the process of initiating formal
communications with these parties. At this time the Company is unable to
estimate the nature or extent of any potential adverse impact resulting from
the failure of third parties to achieve Year 2000 compliance; however, there
can be no assurance that these third parties will not experience Year 2000
problems or that any problems would not have a material effect on the
Company's business, financial condition or results of operations.
 
SUBSEQUENT EVENTS
 
  In January 1998, the Company acquired Group-IPEX for $7,339,000 consisting
of a cash payment of $6,175,000, the issuance of 46,000 shares of Company
common stock valued at $914,000, and $250,000 of costs related to the
acquisition. Group-IPEX, based in Lafayette, California, is an international
recruiting organization for IT research and development professionals focusing
on recruiting primarily from India, but also from Russia and China.
 
                                      16
<PAGE>
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
                HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                       DECEMBER 28,  DECEMBER 29,
                                                           1997          1996
                                                       ------------  ------------
<S>                                                    <C>           <C>
ASSETS
Current Assets:
  Cash and equivalents...............................  $ 4,310,000   $    56,000
  Investments........................................    9,120,000            --
  Accounts receivable, net of allowance for doubtful
   accounts of $344,000 in 1997 and $403,000 in 1996.   12,774,000     7,621,000
  Prepaid expenses and other current assets..........      326,000       490,000
  Prepaid income taxes...............................      407,000       786,000
  Deferred income taxes..............................      612,000       340,000
                                                       -----------   -----------
   Total current assets..............................   27,549,000     9,293,000
Property and equipment, net..........................    5,404,000     4,431,000
Goodwill, net........................................    9,016,000     9,054,000
Other assets.........................................      471,000       216,000
                                                       -----------   -----------
Total assets.........................................  $42,440,000   $22,994,000
                                                       ===========   ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
  Cash overdraft.....................................  $        --   $ 1,229,000
  Line of credit.....................................    1,250,000       418,000
  Accounts payable...................................    1,835,000     1,516,000
  Accrued salaries, commissions and related payroll
   taxes.............................................    2,794,000     2,255,000
  Accrued liabilities................................    1,280,000     1,301,000
  Current portion of long term debt..................    1,000,000     2,385,000
                                                       -----------   -----------
   Total current liabilities.........................    8,159,000     9,104,000
Long term debt.......................................    2,549,000     6,738,000
Deferred income taxes................................      202,000            --
                                                       -----------   -----------
   Total liabilities.................................   10,910,000    15,842,000
                                                       -----------   -----------
Commitments and contingencies (see Notes 2, 6 and 10)
Redeemable convertible preferred stock (Note 7)......           --     9,900,000
                                                       -----------   -----------
Stockholders' Equity (Deficit):
  Common stock; $0.001 par value; 100,000,000 shares
   authorized:
    shares outstanding: 1997-9,025,000; 1996-
     6,339,000.......................................   32,312,000       357,000
  Stockholder notes receivable.......................       (6,000)   (5,323,000)
  Accumulated translation adjustment.................        2,000        (3,000)
  Retained earnings (deficit)........................     (778,000)    2,221,000
                                                       -----------   -----------
    Total stockholders' equity (deficit).............   31,530,000    (2,748,000)
                                                       -----------   -----------
Total liabilities and stockholders' equity (deficit).  $42,440,000   $22,994,000
                                                       ===========   ===========
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       17
<PAGE>
 
                HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
 
                       CONSOLIDATED STATEMENTS OF INCOME
 
<TABLE>
<CAPTION>
                                                     YEARS ENDED
                                         -------------------------------------
                                          DECEMBER     DECEMBER     DECEMBER
                                             28,          29,          30,
                                            1997         1996         1995
                                         -----------  -----------  -----------
<S>                                      <C>          <C>          <C>
Net revenues:
  Contract services..................... $80,260,000  $42,254,000  $25,660,000
  Permanent placement...................  12,571,000    8,317,000    3,725,000
                                         -----------  -----------  -----------
Total net revenues......................  92,831,000   50,571,000   29,385,000
Cost of contract services...............  54,769,000   30,342,000   19,209,000
                                         -----------  -----------  -----------
Gross profit............................  38,062,000   20,229,000   10,176,000
                                         -----------  -----------  -----------
Selling, general and administrative
 expenses...............................  33,689,000   17,412,000    8,869,000
Other operating expenses................          --      821,000           --
                                         -----------  -----------  -----------
    Total operating expenses............  33,689,000   18,233,000    8,869,000
                                         -----------  -----------  -----------
Income from operations..................   4,373,000    1,996,000    1,307,000
                                         -----------  -----------  -----------
Other income (expenses):
  Interest income.......................     485,000      434,000           --
  Interest expense......................    (581,000)     (65,000)    (122,000)
  Other expense, net....................     (31,000)          --      (34,000)
                                         -----------  -----------  -----------
    Total other income (expense), net...    (127,000)     369,000     (156,000)
                                         -----------  -----------  -----------
Income before income taxes..............   4,246,000    2,365,000    1,151,000
Income taxes............................   1,737,000    1,004,000      469,000
                                         -----------  -----------  -----------
Net income.............................. $ 2,509,000  $ 1,361,000  $   682,000
                                         ===========  ===========  ===========
Net income per share:
  Basic................................. $      0.34  $      0.22  $      0.11
  Diluted............................... $      0.25  $      0.16  $      0.11
</TABLE>
 
 
                See notes to consolidated financial statements.
 
                                       18
<PAGE>
 
                HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
 
           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
 
<TABLE>
<CAPTION>
                             COMMON STOCK        STOCKHOLDER  ACCUMULATED
                         ----------------------     NOTES     TRANSLATION  RETAINED
                          SHARES      AMOUNT     RECEIVABLE   ADJUSTMENT   EARNINGS       TOTAL
                         ---------  -----------  -----------  ----------- -----------  -----------
<S>                      <C>        <C>          <C>          <C>         <C>          <C>
BALANCES, January 1,
 1995................... 6,282,000  $    81,000  $        --    $    --   $   178,000  $   259,000
  Net income............        --           --           --         --       682,000      682,000
                         ---------  -----------  -----------    -------   -----------  -----------
BALANCES, December 30,
 1995................... 6,282,000       81,000           --         --       860,000      941,000
  Notes to stockholders
   secured by stock.....        --           --   (5,000,000)        --            --   (5,000,000)
  Interest on
   stockholders notes
   receivable...........        --           --     (317,000)        --            --     (317,000)
  Issuance of common
   stock in connection
   with acquisition.....    52,000      260,000           --         --            --      260,000
  Exercise of stock
   options..............     5,000        6,000       (6,000)        --            --           --
  Compensation charge
   for acceleration of
   the vesting of stock
   options..............        --       10,000           --         --            --       10,000
  Accumulated
   translation
   adjustment...........        --           --           --     (3,000)           --       (3,000)
  Net income............        --           --           --         --     1,361,000    1,361,000
                         ---------  -----------  -----------    -------   -----------  -----------
BALANCES, December 29,
 1996................... 6,339,000      357,000   (5,323,000)    (3,000)    2,221,000   (2,748,000)
  Issuance of common
   stock upon initial
   public offering, net
   of issuance costs of
   $1,767,000........... 1,667,000   21,458,000           --         --            --   21,458,000
  Conversion of
   redeemable
   convertible preferred
   stock to common
   stock................ 1,600,000    9,900,000           --         --            --    9,900,000
  Repayment of
   stockholder notes
   receivable...........  (800,000)     (10,000)   5,518,000         --    (5,508,000)          --
  Interest on
   stockholder notes
   receivable...........        --           --     (201,000)        --            --     (201,000)
  Exercise of stock
   options..............   204,000      457,000           --         --            --      457,000
  Issuance of common
   stock................    15,000      150,000           --         --            --      150,000
  Accumulated
   translation
   adjustment...........        --           --           --      5,000            --        5,000
  Net income............        --           --           --         --     2,509,000    2,509,000
                         ---------  -----------  -----------    -------   -----------  -----------
BALANCES, December 28,
 1997................... 9,025,000  $32,312,000  $    (6,000)   $ 2,000   $  (778,000) $31,530,000
                         =========  ===========  ===========    =======   ===========  ===========
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       19
<PAGE>
 
                HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                     YEARS ENDED
                                        ----------------------------------------
                                        DECEMBER 28,  DECEMBER 29,  DECEMBER 30,
                                            1997          1996          1995
                                        ------------  ------------  ------------
<S>                                     <C>           <C>           <C>
Cash flows from operating activities:
  Net income........................... $  2,509,000  $ 1,361,000   $   682,000
  Adjustments to reconcile net income
   to net cash used for operating
   activities:
    Depreciation and amortization......    1,289,000      448,000       208,000
    Deferred income taxes..............      (70,000)     (61,000)     (173,000)
    Compensation expense on stock
     options...........................           --       10,000            --
    Interest on stockholder notes
     receivable........................     (201,000)    (317,000)           --
    Loss on sale of fixed assets.......       10,000           --            --
    Changes in assets and liabilities:
      Accounts receivable..............   (5,153,000)  (3,352,000)   (2,410,000)
      Prepaid expenses and other
       assets..........................     (124,000)    (482,000)       25,000
      Prepaid income taxes.............      379,000     (786,000)           --
      Accounts payable and accrued
       expenses........................      844,000    1,754,000     1,411,000
      Income taxes payable.............           --     (145,000)       64,000
                                        ------------  -----------   -----------
        Net cash used for operating
         activities....................     (517,000)  (1,570,000)     (193,000)
                                        ------------  -----------   -----------
Cash flows from investing activities:
  Purchases of investments.............   (9,120,000)          --            --
  Purchase of property and equipment...   (1,936,000)  (2,581,000)     (634,000)
  Deposits for property and equipment..           --      122,000      (192,000)
  Cash paid for business acquisition...           --   (4,323,000)           --
                                        ------------  -----------   -----------
        Net cash used for investing
         activities....................  (11,056,000)  (6,782,000)     (826,000)
                                        ------------  -----------   -----------
Cash flows from financing activities:
  Cash overdraft, net..................   (1,229,000)     891,000       272,000
  Line of credit, net..................      832,000   (1,316,000)      801,000
  Note payable repayments..............   (5,691,000)          --      (122,000)
  Borrowing on debt....................           --    4,000,000            --
  Repayments of debt...................           --      (71,000)           --
  Proceeds from sale of common stock,
   net of issuance costs...............   21,458,000           --            --
  Proceeds from sale of preferred
   stock, net of issuance costs........           --    9,900,000            --
  Proceeds from exercise of options....      457,000           --            --
  Stockholder notes receivable.........           --   (5,000,000)           --
                                        ------------  -----------   -----------
        Net cash provided by financing
         activities....................   15,827,000    8,404,000       951,000
                                        ------------  -----------   -----------
Net increase (decrease) in cash and
 equivalents...........................    4,254,000       52,000       (68,000)
Cash and equivalents, beginning of
 period................................       56,000        4,000        72,000
                                        ------------  -----------   -----------
Cash and equivalents, end of period.... $  4,310,000  $    56,000   $     4,000
                                        ============  ===========   ===========
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       20
<PAGE>
 
               HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
    YEARS ENDED DECEMBER 28, 1997, DECEMBER 29, 1996 AND DECEMBER 30, 1995
 
NOTE 1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
 
  Business. Hall, Kinion & Associates, Inc. ("the Company") is an information
technology staffing company specializing in placing high technology personnel
on both a contract and permanent basis. In December 1996, the Company acquired
certain assets of TeamAlliance Technology Partners, L.P. (Note 2).
 
  Initial Public Offering. In August 1997, the Company completed its initial
public offering of its common stock. Of the 2,892,250 shares of common stock
offered, 1,666,667 shares were sold by the Company and 1,225,583 shares were
sold by selling shareholders. The Company received approximately $21.5 million
of cash, net of underwriting discounts and commissions, and other expenses.
Simultaneously, all outstanding shares of preferred stock were automatically
converted into an equal number of shares of common stock.
 
  Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
 
  Certain Significant Risks and Uncertainties. The preparation of financial
statements in conformity with generally accepted accounting principles
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 statement and the reported
amounts of revenues and expenses during the reporting period. Such management
estimates include the allowance for doubtful accounts receivable and certain
accruals. Actual results could differ from those estimates.
 
  The Company operates in a dynamic industry, and accordingly, can be affected
by a variety of factors. For example, management of the Company believes that
changes in any of the following areas could have a negative effect on the
Company in terms of its future financial position and results of operations:
ability to obtain additional financing, regulatory changes, uncertainty
relating to the performance of the U.S. economy, competition, demand for the
Company's services, litigation or other claims against the Company, and the
hiring, training and retention of key employees.
 
  The Company's financial instruments that are exposed to credit risk are
primarily cash and equivalents, investments and accounts receivable. The
Company places its cash with what it believes are high credit quality
financial institutions. In granting credit, the Company routinely evaluates
the financial strength of its customers.
 
  Cash and Equivalents. The Company considers all highly liquid investment
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.
 
  Investments. Investments consist of high quality money market instruments
with original maturities greater than 90 days, but less than one year, and are
stated at fair value. At December 28, 1997, the Company's investments are all
classified as available for sale. Unrealized gains and losses on securities
classified as available-for-sale were not significant.
 
  Property and Equipment. Property and equipment are stated at cost and
depreciated on a straight-line basis over the estimated useful lives of the
assets, generally three to twenty-five years. Leasehold improvements are
amortized over the shorter of the estimated life of the asset or the lease
term.
 
  Goodwill. Goodwill, representing the cost in excess of the fair value of net
assets acquired related to the acquisition of TeamAlliance (Note 2), is being
amortized on a straight-line basis over a thirty-year period. For the years
ended December 28, 1997 and December 29, 1996 amortization expense was
$304,000 and $25,000 respectively. The Company evaluates the recoverability of
goodwill on a quarterly basis based upon estimated future cash flows.
 
                                      21
<PAGE>
 
               HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Revenue Recognition. Revenue from contract placements is recognized as
services are performed. Revenue from permanent placements is recognized upon
commencement of employment.
 
  Other Operating Expenses. Other operating expenses include certain non-
recurring charges including litigation settlement and related costs and
severance costs.
 
  Income Taxes. The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, which requires an asset and liability approach of accounting for income
taxes.
 
  Stock-Based Compensation. The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
25).
 
  Net Income Per Share. In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 128, Earnings Per
Share (SFAS 128). The Company has adopted SFAS 128 in the fourth quarter of
fiscal 1997 and restated earnings per share (EPS) for prior periods to conform
with SFAS 128.
 
  SFAS 128 requires a dual presentation of basic and diluted EPS. Basic EPS
excludes dilution and is computed by dividing net income attributable to
common stockholders by the weighted average of common shares outstanding for
the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock.
 
  A reconciliation of basic weighted average common stock shares to diluted
weighted average common shares follows:
 
<TABLE>
<CAPTION>
                                                     YEARS ENDED
                                        --------------------------------------
                                        DECEMBER 28, DECEMBER 29, DECEMBER 30,
                                            1997         1996         1995
                                        ------------ ------------ ------------
     <S>                                <C>          <C>          <C>
     Basic weighted average common
      shares outstanding...............  7,339,000    6,282,000    6,282,000
     Preferred stock...................    958,000    1,469,000           --
     Warrants..........................    250,000      230,000           --
     Stock options.....................  1,360,000      369,000       29,000
                                         ---------    ---------    ---------
     Diluted weighted average shares
      outstanding......................  9,907,000    8,350,000    6,311,000
                                         =========    =========    =========
</TABLE>
 
  Fiscal Year. The Company's fiscal year ends on the Sunday closest to
December 31. Fiscal years 1997, 1996, and 1995 all consisted of 52 weeks.
 
  New Accounting Pronouncement. In June 1997, the Financial Accounting
Standards Board adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which establishes annual and interim
reporting standards for a company's business segments. It also establishes
standards for related disclosures about products, services, geographic areas
and major customers. Adoption of SFAS No. 131 will not impact the Company's
consolidated financial position, results of operations or cash flows. The
statement is effective for fiscal years beginning after December 15, 1997,
with earlier application permitted.
 
                                      22
<PAGE>
 
               HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
NOTE 2. ACQUISITIONS
 
  In January 1998, the Company completed the acquisition of Group-IPEX an
international recruiting organization for information technology (IT) research
and development professionals. Group IPEX focuses on recruiting international
IT professionals primarily from India but also from Russia and China. The
acquisition was accounted for as a purchase. Total consideration for this
purchase was $7,339,000 including approximately $250,000 of costs attributable
to the acquisition. Terms of the acquisition included a cash payment of
$6,175,000 at the date of acquisition and the issuance of 46,000 shares of
Company common stock valued at $914,000. In addition, if certain revenue
targets as defined, are achieved, the Company has agreed to pay the sellers an
aggregate of $3,375,000 in three future annual installments as follows:
January 31, 1999-$1,125,000; January 31, 2000-$1,125,000; and January 31,
2001-$1,125,000.
 
  Had the acquisition of Group IPEX been completed at the beginning of 1997,
the Company's unaudited pro forma revenues, net income and basic and diluted
earnings per share for 1997 would have been approximately $100,077,000,
$2,388,000, $0.32, and $0.24. Pro forma adjustments reflect interest on the
cash paid in the acquisition and the amortization of goodwill as well as the
dilution attributable to the shares issued.
 
  In December 1996, the Company completed the acquisition of certain assets of
TeamAlliance Technology Partners, L.P. and its related limited liability
companies ("TeamAlliance"), a provider of staffing services to IT companies.
The acquisition was accounted for as a purchase. The 1996 consolidated
financial statements of the Company include only the results of operations of
TeamAlliance for the month of December 1996. The total consideration for this
purchase was $9,424,000 including $949,000 of costs attributable to the
acquisition. Terms of the acquisition included a cash payment of $4,168,000 at
the date of acquisition and the issuance of 52,000 shares of Company common
stock valued at $260,000. In 1997, the Company paid the sellers $1,250,000 and
$502,000 for the limited liability companies. Additional payments to the
sellers total $2,950,000 due in two future annual installments as follows:
October 31, 1998-$1,250,000 and October 31, 1999-$1,700,000.
 
  Had the acquisition of TeamAlliance been completed at the beginning of 1996,
the Company's unaudited pro forma revenues, net income and basic and diluted
earnings per share for 1996 could have been approximately $65,091,000,
$475,000 and $0.08 and $0.06. Had the acquisition of TeamAlliance been
completed at the beginning of 1995, the Company's unaudited pro forma
revenues, net loss and basic and diluted net loss per share for 1995 would
have been approximately $39,574,000 $(95,000), $(0.02) and $(0.02). Pro forma
adjustments reflect the elimination of TeamAlliance revenues for offices not
acquired by the Company, the interest on the cash paid in the acquisition and
the amortization of goodwill as well as the dilution attributable to the
shares issued and stock options granted.
 
NOTE 3. PROPERTY AND EQUIPMENT
 
  Property and equipment consists of:
 
<TABLE>
<CAPTION>
                                                      DECEMBER 28,  DECEMBER 29,
                                                          1997          1996
                                                      ------------  ------------
     <S>                                              <C>           <C>
     Property and equipment.......................... $ 4,564,000    $3,071,000
     Land and building...............................   2,047,000     2,047,000
     Leasehold improvements..........................     516,000        99,000
                                                      -----------    ----------
                                                        7,127,000     5,217,000
     Accumulated depreciation and amortization.......  (1,723,000)     (786,000)
                                                      -----------    ----------
                                                      $ 5,404,000    $4,431,000
                                                      ===========    ==========
</TABLE>
 
 
                                      23
<PAGE>
 
               HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
NOTE 4. DEBT
 
  The Company has a revolving line of credit facility enabling the Company to
borrow a stated percentage of eligible accounts receivable up to a maximum of
$15,000,000. Borrowings under this facility bear interest at the bank's prime
rate (8.5% at December 28, 1997). Borrowing under this facility are
collaterized by substantially all of the assets of the Company. At December
28, 1997, the Company had $1,250,000 outstanding under the revolving line of
credit. The bank term note was paid in full during 1997.
 
  The facility contains certain covenants requiring the Company to maintain a
minimum level of profitability and net worth and to maintain specific ratios
of working capital and current portion of debt to operating cash flow. The
Company was in compliance with all of these covenants as of December 28, 1997.
 
  Debt consists of:
 
<TABLE>
<CAPTION>
                                                      DECEMBER 28,  DECEMBER 29,
                                                          1997          1996
                                                      ------------  ------------
     <S>                                              <C>           <C>
     Present value of installments due in connection
      with the acquisition of TeamAlliance
      (discounted at 8.3%) (Note 2).................. $ 2,414,000   $ 3,977,000
     Mortgage note payable...........................   1,137,000     1,146,000
     Bank term loan..................................          --     4,000,000
                                                      -----------   -----------
                                                        3,549,000     9,123,000
     Current portion of debt.........................  (1,000,000)   (2,385,000)
                                                      -----------   -----------
     Long term debt.................................. $ 2,549,000   $ 6,738,000
                                                      ===========   ===========
</TABLE>
 
  Future payment requirements in connection with debt are: 1998, $1,000,000;
1999, $1,430,000; 2000, $11,000; 2001, $12,000; 2002, $13,000; thereafter,
$1,083,000.
 
NOTE 5. EMPLOYEE BENEFIT PLANS
 
  The Company has a 401(k) profit-sharing plan covering substantially all
employees with at least 90 days of continuous service. Employees may
contribute up to 15% of their eligible compensation to a maximum amount as
provided by the Internal Revenue Code. At the discretion of the Board of
Directors, the Company may match employee contributions. The Company has not
contributed any matching contributions as of December 28, 1997. In February
1998, the Board of Directors approved a nonqualified deferred compensation
plan for officers and key employees.
 
NOTE 6. LEASE COMMITMENTS
 
  The Company leases its office facilities under various noncancellable
operating leases which expire through 2002. Rent expense include in operating
expenses for 1997, 1996 and 1995 was approximately $1,797,000, $802,000 and
$295,000 respectively. Future minimum payments under all operating leases are
as follows:
 
<TABLE>
<CAPTION>
     YEARS ENDING DECEMBER
     ---------------------
     <S>                                                              <C>
       1998.......................................................... $2,130,000
       1999..........................................................  2,117,000
       2000..........................................................  1,563,000
       2001..........................................................    715,000
       2002..........................................................    296,000
       Thereafter....................................................     20,000
                                                                      ----------
         Total....................................................... $6,841,000
                                                                      ==========
</TABLE>
 
                                      24
<PAGE>
 
               HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
NOTE 7. REDEEMABLE CONVERTIBLE PREFERRED STOCK
 
  In January 1996, the Company sold 1,600,000 shares of Series A redeemable
preferred stock for an aggregate price of $10,000,000 less costs of
approximately $100,000 associated with the issuance. In August 1997, all
Series A redeemable preferred stock was converted to 1,600,000 shares of
common stock.
 
NOTE 8. 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 1996, the Company loaned to its two
principal common stockholders an aggregate of $5,000,000 under nonrecourse
promissory notes collateralized by a total of 1,600,000 shares of the
Company's common stock. Each promissory note bore interest at 6.9% per annum.
In August 1997, in connection with the initial public offering, the two
principal common stockholders tendered an aggregate of 800,000 shares of
Common Stock as full payment of the principal and interest due on the
promissory notes.
 
  Stock Options--The Company's 1997 Stock Option Plan (the Plan), as amended,
authorizes the issuance of up to 2,492,000 shares of common stock for the
grant of incentive or nonqualified stock options to key employees,
nonemployees, directors and consultants who provide services to the Company.
Under the Plan, options are generally granted at fair market value at the date
of grants 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. In 1996, the Company issued 974,000 options outside of the Plan to
an employee of which 50% were vested at year ended December 29, 1996 and 50%
will vest ratably over 24 months commencing January 1998 with acceleration
clauses.
 
  The Company's IT Professional Stock Plan (the "IT Professional Plan") was
adopted by the Board of Directors in May 1997. The Company has reserved
350,000 shares of Common Stock for issuance under the IT Professional Plan,
plus 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 beginning
January 1, 1998. Under the IT professional Plan, independent consultants may,
at the discretion of the plan administrator, be granted options to purchase
shares of Common Stock at an exercise price no less than 85% of the fair
market value of such shares on the grant date. Options under the IT
Professional Plan are generally vested when granted and expire ten years from
grant date. During 1997, the Board of Directors granted 98,000 options to
purchase common stock to employees which vested upon commencement of their
next assignment and are priced at the fair market value of that date. At
December 28, 1997, 97,000 options remain outstanding and are not included in
the option activity until the employees commence their next assignment.
 
                                      25
<PAGE>
 
               HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Option activity under all plans is as follows:
 
<TABLE>
<CAPTION>
                                                                        WEIGHTED
                                                                        AVERAGE
                                                              NUMBER    EXERCISE
                                                             OF SHARES   PRICE
                                                             ---------  --------
   <S>                                                       <C>        <C>
   Balance, January 1, 1995.................................        --   $   --
   Granted (weighted average fair value of $26,000).........   454,000   $ 0.30
   Canceled.................................................   (13,000)  $ 0.30
                                                             ---------
   Balance, December 30, 1995 (none exercisable)............   441,000   $ 0.30
   Granted (weighted average fair value of $1,054,000)...... 1,828,000   $ 4.07
   Canceled.................................................   (63,000)  $ 3.00
   Exercised................................................    (5,000)  $ 1.26
                                                             ---------
   Balance, December 29, 1996............................... 2,201,000   $ 3.35
   Granted (weighted average fair value of $2,081,000)......   596,000   $12.42
   Canceled.................................................  (238,000)  $ 4.43
   Exercised................................................  (210,000)  $ 2.28
                                                             ---------
   Balance, December 28, 1997............................... 2,349,000   $ 5.63
                                                             =========
</TABLE>
 
  Additional information regarding options outstanding as of December 28, 1997
is as follows:
 
<TABLE>
<CAPTION>
                                     OPTIONS OUTSTANDING        OPTIONS EXERCISABLE
                              --------------------------------- --------------------
                                            WEIGHTED
                                            AVERAGE    WEIGHTED             WEIGHTED
                                           REMAINING   AVERAGE              AVERAGE
                                NUMBER    CONTRACTUAL  EXERCISE   NUMBER    EXERCISE
   RANGE OF EXERCISE PRICES   OUTSTANDING LIFE (YEARS)  PRICE   EXERCISABLE  PRICE
   ------------------------   ----------- ------------ -------- ----------- --------
   <S>                        <C>         <C>          <C>      <C>         <C>
   $ 0.30--$ 1.50..........      326,000      7.74      $ 0.61     208,000   $ 0.79
   $ 4.00..................    1,269,000      8.76      $ 4.00   1,269,000   $ 4.00
   $ 5.10--$10.00..........      518,000      9.07      $ 8.11     518,000   $ 8.11
   $10.50--$19.25..........      183,000      9.69      $14.13      97,000   $10.56
   $21.88..................       53,000      9.71      $21.88          --       --
                               ---------                         ---------   ------
   $ 0.30--$21.88..........    2,349,000      8.78      $ 5.63   2,092,000   $ 5.00
                               =========                         =========   ======
</TABLE>
 
  At December 28, 1997, 1,156,000 options were available for future grant.
 
  Additional Stock Plan Information--As discussed in Note 1, the Company
continues to account for its stock-based awards using the intrinsic value
method in accordance with APB 25, Accounting for Stock Issued to Employees and
its related interpretations. Accordingly, no compensation expense has been
recognized in the financial statements for employee stock arrangements.
 
  Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation, (SFAS 123) requires the disclosure of pro forma net income
and earnings per share had the Company adopted the fair value method as of the
beginning of fiscal 1995. Under SFAS 123, the fair value of stock-based awards
to employees is calculated through the use of option price models, even though
these 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.
 
                                      26
<PAGE>
 
               HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The Company's calculations were made using the Black-Scholes option pricing
model with the following average assumptions: expected life, 12 months
following vesting; volatility, 37.2% after the initial public offering on
August 4, 1997 and zero before that date; risk free interest rates, 6.2% in
1997 and 6.5% in 1996 and 1995; and no dividends during the expected term.
 
  The Company's calculations are based on a multiple option valuation approach
and forfeitures are recognized as they occur. If the computed fair values of
the 1997, 1996 and 1995 awards had been amortized to expense over the vesting
period of the awards, pro forma net income and pro forma diluted net income
per share would have been $1,764,000, $0.18 per share, $1,087,000, $0.12 per
share and $678,000, $0.09 per share, in 1997, 1996 and 1995, respectively.
 
  Common Stock Warrants--Common stock warrants have been issued in conjunction
with the issuance of preferred stock in January 1996. At December 28, 1997,
the Company had outstanding warrants to purchase 250,000 shares of common
stock at $0.01 per share. In January 1998, these warrants were converted to
250,000 shares of common stock.
 
NOTE 9. INCOME TAXES
 
  The provision for income taxes consists of the following:
 
<TABLE>
<CAPTION>
                                                       YEARS ENDED
                                          --------------------------------------
                                          DECEMBER 28, DECEMBER 29, DECEMBER 30,
                                              1997         1996         1995
                                          ------------ ------------ ------------
   <S>                                    <C>          <C>          <C>
   Current:
     Federal.............................  $1,391,000   $  808,000   $ 494,000
     State...............................     416,000      257,000     148,000
                                           ----------   ----------   ---------
                                            1,807,000    1,065,000     642,000
                                           ----------   ----------   ---------
   Deferred:
     Federal.............................     (94,000)     (41,000)   (134,000)
     State...............................      24,000      (20,000)    (39,000)
                                           ----------   ----------   ---------
                                              (70,000)     (61,000)   (173,000)
                                           ----------   ----------   ---------
                                           $1,737,000   $1,004,000   $ 469,000
                                           ==========   ==========   =========
</TABLE>
 
  The Company's effective tax rate differs from the federal statutory rate as
follows:
 
<TABLE>
<CAPTION>
                                                               1997  1996  1995
                                                               ----  ----  ----
   <S>                                                         <C>   <C>   <C>
   Income tax expense at statutory rate....................... 34.0% 34.0% 34.0%
   State income taxes, net of federal benefit.................  6.7   6.5   6.3
   Other items, net...........................................  0.2   2.0   0.4
                                                               ----  ----  ----
                                                               40.9% 42.5% 40.7%
                                                               ====  ====  ====
</TABLE>
 
                                      27
<PAGE>
 
               HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The components of deferred income taxes are as follows:
 
<TABLE>
<CAPTION>
                                                       DECEMBER 28, DECEMBER 29,
                                                           1997         1996
                                                       ------------ ------------
   <S>                                                 <C>          <C>
   Deferred tax assets:
     Allowance for doubtful accounts..................  $ 137,000     $161,000
     Accrued expenses.................................    475,000      179,000
                                                        ---------     --------
       Total deferred tax assets......................    612,000      340,000
                                                        =========     ========
   Deferred tax liabilities:
     Depreciation and amortization....................   (207,000)          --
     Goodwill and intangible assets...................    409,000           --
                                                        ---------     --------
       Total deferred tax liabilities.................    202,000
                                                        ---------
         Net deferred income taxes....................  $ 410,000     $340,000
                                                        =========     ========
</TABLE>
 
NOTE 10. CONTINGENCIES
 
  The Company is party to various legal actions in the normal course of
business. Although the ultimate outcome of these matters is not presently
determinable, management believes that the resolution of all such pending
matters will not have a material adverse effect on the Company's financial
position or results of operations.
 
NOTE 11. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 
  The following provides additional information concerning supplemental
disclosures of cash flow activities:
 
<TABLE>
<CAPTION>
                                                       YEARS ENDED
                                          --------------------------------------
                                          DECEMBER 28, DECEMBER 29, DECEMBER 30,
                                              1997         1996         1995
                                          ------------ ------------ ------------
   <S>                                    <C>          <C>          <C>
   Cash paid during the period for:
     Income taxes.......................   $1,531,000   $1,956,000  $   577,000
     Interest...........................      536,000       46,000      117,000
   Noncash investing and financing
    activities:
     Conversion of preferred stock to
      common stock......................    9,900,000           --           --
     Payment of stockholder loan by
      stock.............................    5,518,000           --           --
     Common stock issued in settlement
      agreement.........................      150,000           --           --
     Imputed interest on installment
      note..............................      116,000           --           --
     Purchase of land, building and
      furniture for a note payable......           --    1,147,000           --
     Exercise of stock options for a
      note receivable from stockholder..           --        6,000           --
   Effect of business acquisition:
     Intangible assets and equipment
      acquired..........................           --    9,424,000           --
     Installment obligations issued.....           --           --   (4,047,000)
     Common stock issued................           --     (260,000)          --
     Accrued expenses in connection with
      acquisition.......................           --     (794,000)          --
                                           ----------   ----------  -----------
       Cash paid for business
        acquisition.....................   $       --   $4,323,000  $        --
                                           ==========   ==========  ===========
</TABLE>
 
                                      28
<PAGE>
 
                HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
 
 
NOTE 12. QUARTERLY FINANCIAL DATA (UNAUDITED)
 
  The following tabulation shows certain quarterly financial data for 1997 and
1996:
 
<TABLE>
<CAPTION>
                                                    QUARTER
                                -----------------------------------------------
   1997                            FIRST      SECOND       THIRD      FOURTH
   ----                         ----------- ----------- ----------- -----------
   <S>                          <C>         <C>         <C>         <C>
   Total net revenues.......... $19,193,000 $23,498,000 $24,608,000 $25,532,000
   Gross profit................   7,173,000   9,585,000  10,121,000  11,183,000
   Income before income taxes..      73,000     892,000   1,489,000   1,792,000
   Net income..................      20,000     535,000     893,000   1,061,000
   Net income per share-Basic..          --        0.09        0.11        0.12
   Net income per share-
    Diluted....................          --        0.06        0.09        0.10
</TABLE>
 
<TABLE>
<CAPTION>
                                                    QUARTER
                                -----------------------------------------------
   1996                            FIRST      SECOND       THIRD      FOURTH
   ----                         ----------- ----------- ----------- -----------
   <S>                          <C>         <C>         <C>         <C>
   Total net revenues.......... $10,296,000 $12,444,000 $12,384,000 $15,447,000
   Gross profit................   4,083,000   5,018,000   4,985,000   6,143,000
   Income before income taxes..     694,000   1,021,000     166,000     484,000
   Net income..................     416,000     612,000     100,000     233,000
   Net income per share-Basic..        0.07        0.10        0.02        0.04
   Net income per share-
    Diluted....................        0.05        0.07        0.01        0.03
</TABLE>
 
                                       29
<PAGE>
 
                         INDEPENDENT AUDITORS' REPORT
 
To the Board of Directors and Stockholders of
Hall, Kinion & Associates, Inc. and Subsidiaries:
 
  We have audited the accompanying consolidated balance sheets of Hall, Kinion
& Associates, Inc. and Subsidiaries as of December 28, 1997 and December 29,
1996, and the related consolidated statements of income, stockholders' equity
(deficit) and cash flows for each of the three years in the period ended
December 28, 1997. These financial statements are the responsibility of
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. 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 out audits provide a reasonable basis
for our opinion.
 
  In our opinion, such financial statements present fairly, in all material
respects, the financial position of Hall, Kinion & Associates, Inc. and
Subsidiaries as of December 28, 1997 and December 29, 1996, and the results of
their operations and their cash flows for each of the three years in the
period ended December 28, 1997 in conformity with general accepted accounting
principles.
 
DELOITTE & TOUCHE LLP
 
San Jose, California
January 24, 1998
 
                                      30
<PAGE>
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE
 
  None
 
                                   PART III
 
                                   DIRECTORS
 
  The Company has a classified Board of Directors that currently consists of
two Class II directors (Paul H. Bartlett and Todd J. Kinion), and two Class
III directors (Brenda C. Hall and Jon H. Rowberry), who have been elected to
serve until the Annual Meetings of Stockholders to be held in 1999 and 2000,
respectively, and until their respective successors are duly elected and
qualified. At each Annual Meeting of Stockholders, directors are elected for a
full term of three years to succeed any directors whose terms expire on the
Annual Meeting of Stockholders date. 
 
  The table below sets forth, for the current directors, certain information
with respect to age and background.
 
<TABLE>
<CAPTION>
                                                                                                                            DIRECTOR
NAME                                                                                POSITION WITH THE COMPANY          AGE   SINCE
----                                                                                -------------------------          ---  --------
<S>                                                                                <C>                                 <C> <C>
Class II directors whose terms expire at the 1999 Annual Meeting of Stockholders:
Paul H. Bartlett..................................................................   President and Director             37    1996
Todd J. Kinion....................................................................   Director                           36    1991

Class III directors whose terms expire at the 2000 Annual Meeting of Stockholders:
Brenda C. Hall....................................................................   Chief Executive Officer            45    1991 
                                                                                     and Chairman of the Board 
Jon H. Rowberry...................................................................   Director                           51    1996
</TABLE>
 
  Brenda C. Hall co-founded the Company and has been a director since the
Company's incorporation in 1991. From December 1992 to the present, Ms. Hall
has served as Chief Executive Officer of the Company. Ms. Hall also served as
President and Assistant Secretary of the Company from December 1991 to October
1996 and from December 1991 to September 1996, respectively. From August 1981
to June 1987, Ms. Hall was general manager of a Snelling & Snelling franchise,
a personnel services company.
 
  Paul H. Bartlett has been a director of the Company since January 1996 and
joined the Company in October 1996 as President. Prior to joining the Company,
Mr. Bartlett was affiliated with the Sprout Group, a venture capital firm,
from February 1991 until October 1996, having served as a general partner
before joining the Company. Mr. Bartlett received an A.B. degree in economics
from Princeton University and an M.B.A. degree from the Stanford Graduate
School of Business.
 
  Todd J. Kinion co-founded the Company and has been a director of the Company
since the Company's incorporation in 1991. Since August 1996, Mr. Kinion has
been a private investor. Mr. Kinion served as Vice President, Recruitment
Services of the Company from December 1995 to August 1996. Prior to that time,
Mr. Kinion served as Chief Financial Officer and Treasurer of the Company from
December 1991 to December 1995. Mr. Kinion also served as Secretary from
December 1991 to February 1997. Mr. Kinion holds a B.A. degree in political
science from the University of California at Santa Barbara.
 
  Jon H. Rowberry has been a director of the Company since August 1996. Mr.
Rowberry currently serves as President and Chief Executive Officer of Franklin
Covey, a provider of time management products and training. Prior to assuming
his current positions, Mr. Rowberry was Chief Financial Officer of Franklin
Covey from August 1995 to August 1996. From 1985 to 1995, Mr. Rowberry was
employed in several executive positions with Adia S.A. and Adia Services,
Inc., providers of personnel services. Mr. Rowberry currently serves on the
board of directors of Franklin Covey. Mr. Rowberry holds a B.S. degree in
accounting from Brigham Young University.
 
 Meetings of the Board of Directors
 
  During the fiscal year ended December 28, 1997, the Board of Directors held
ten (10) meetings. No director serving on the Board during 1997 attended fewer
than 75% of the aggregate of such meetings of the Board and the Committees of
the Board on which he or she served.
 
                                      31
<PAGE>
 
  The Company does not have a standing Nominating Committee, but does have an
Audit Committee and a Compensation Committee.
 
  The Audit Committee's function is to review with the Company's independent
accountants and management the annual financial statements and independent
accountants' opinion, review the scope and results of the examination of the
Company's financial statements by the independent accountants, approve all
professional services and related fees performed by the independent
accountants, recommend the retention of the independent accountants to the
Board, subject to ratification by the stockholders, and periodically review
the Company's accounting policies and internal accounting and financial
controls. The members of the Audit Committee were Ms. Kathleen LaPorte, a
former director, and Mr. Rowberry. During the fiscal year ended December 28,
1997, the Audit Committee held two (2) meetings.
 
  The Compensation Committee's function is to review and approve salary levels
and stock option grants. The members of the Compensation Committee are Messrs.
Kinion and Rowberry. During the fiscal year ended December 28, 1997, the
Compensation Committee held four (4) meetings. For additional information
concerning the Compensation Committee, see "EXECUTIVE COMPENSATION AND OTHER
MATTERS--Compensation Committee Interlocks and Insider Participation in
Compensation Decisions" and "COMPENSATION COMMITTEE REPORT ON EXECUTIVE
COMPENSATION."
 
                                       32

<PAGE>
 
                                  MANAGEMENT
 
EXECUTIVE OFFICERS
 
  The executive officers of the Company as of March 31, 1998 are as follows:
 
<TABLE>
<CAPTION>
   NAME                                  POSITION WITH THE COMPANY          AGE
   ----                                  -------------------------          ---
   <S>                          <C>                                         <C>
   Brenda C. Hall.............. Chief Executive Officer and Chairman of the  45
                                Board
   Paul H. Bartlett............ President and Director                       37
   Martin A. Kropelnicki....... Vice President, Chief Financial Officer and  31
                                Secretary
   Rita S. Hazell.............. Senior Vice President, R&D Contract          31
                                Services
   Craig J. Silverman.......... Vice President, Permanent Placement          37
   Mordecai Levine............. Vice President, IS Contract Services         38
</TABLE>
 
  Brenda C. Hall co-founded the Company and has been a director since the
Company's incorporation in 1991. From December 1992 to the present, Ms. Hall
has served as Chief Executive Officer of the Company. Ms. Hall also served as
President and Assistant Secretary of the Company from December 1991 to October
1996 and from December 1991 to September 1996, respectively. From August 1981
to June 1987, Ms. Hall was general manager of a Snelling & Snelling franchise,
a personnel services company.
 
  Paul H. Bartlett has been a director of the Company since January 1996 and
joined the Company in October 1996 as President. Prior to joining the Company,
Mr. Bartlett was affiliated with the Sprout Group, a venture capital firm,
from February 1991 until October 1996, having served as a general partner
before joining the Company. Mr. Bartlett received an A.B. degree in economics
from Princeton University and an M.B.A. degree from the Stanford Graduate
School of Business.
 
  Martin A. Kropelnicki joined the Company in January 1997 as Vice President,
Chief Financial Officer and Secretary. Prior to joining the Company, Mr.
Kropelnicki was a Director at Deloitte & Touche Consulting Group-ICS, a
consulting firm, from February 1996 to February 1997. From June 1989 to
February 1996, Mr. Kropelnicki held various positions, most recently as a
Director in the financial organization at Pacific Gas & Electric Company, a
natural gas and electric utility. Mr. Kropelnicki holds a B.A. degree and an
M.A. degree in business economics from San Jose State University.
 
  Rita S. Hazell has served as Senior Vice President, R&D Contract Services
since April 1996. Prior to assuming her current position, Ms. Hazell served in
a variety of positions, including Director, R&D Contract Services and Manager,
R&D Contract Services, since joining the Company in September 1993. From
November 1987 to September 1993, Ms. Hazell served as a manager for Oxford &
Associates, Inc., a technical contract services firm.
 
  Craig J. Silverman joined the Company in April 1996 as Vice President,
Permanent Placement. Prior to joining the Company, Mr. Silverman served as
Vice President, Sales at Strategic Mapping, Inc., a software development
company, from September 1989 to February 1996.
 
  Mordecai Levine joined the Company in December 1996 as Vice President, IS
Contract Services. Since March 1994, Mr. Levine has served as Chief Operating
Officer of TeamAlliance. From January 1991 to February 1994, Mr. Levine served
as President of Berkeley Software, Inc., a software development company. Mr.
Levine received a B.A. degree in economics from Brandeis University and an
M.B.A. degree from the University of Chicago Graduate School of Business.
 
                                       33
<PAGE>
 
          STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
  The following table sets forth certain information, as of March 31, 1998
except where noted, with respect to the beneficial ownership of the Company's
Common Stock by (i) all persons known by the Company to be the beneficial
owners of more than 5% of the outstanding Common Stock of the Company, (ii)
each director and director-nominee of the Company, (iii) each person named in
the Summary Compensation Table, and (iv) all executive officers and directors
of the Company as a group.
 
<TABLE>
<CAPTION>
                   NAME AND ADDRESS OF                      NUMBER   PERCENTAGE
                   BENEFICIAL OWNERS(1)                    OF SHARES  OF CLASS
                   --------------------                    --------- ----------
<S>                                                        <C>       <C>
Brenda C. Hall (2)........................................ 2,681,295    28.5%
 Chief Executive Officer and Chairman of the Board
 19925 Stevens Creek Boulevard, Suite 180
 Cupertino, CA 95014
Todd J. Kinion............................................ 1,587,984    16.9
 36 Playa Boulevard
 La Selva Beach, CA 95076
Entities affiliated with the Sprout Group (3).............   551,004     5.9
 c/o Sprout Group
 3000 Sand Hill Road
 Bldg. 4, Suite 270
 Menlo Park, CA 94025-7114
Paul H. Bartlett (4)......................................   974,209    10.4
Martin A. Kropelnicki (5).................................   145,000     1.5
Mordecai Levine (6).......................................    92,000     1.3
Rita S. Hazell............................................    31,000     *
Jon H. Rowberry (7).......................................    25,000     *
 c/o Franklin Covey
 2200 West Parkway Blvd.
 Salt Lake City, UT 84119
Executive officers and directors as a group (8 persons)    6,165,992    65.6
 (8)......................................................
</TABLE>
--------
  * Less than 1%
(1) Percentage of beneficial ownership is calculated assuming 9,403,814 shares
    of Common Stock were outstanding on March 31, 1998. This percentage also
    includes Common Stock of which such individual or entity has the right to
    acquire beneficial ownership within 60 days of March 31, 1998, including
    but not limited to the exercise of an option; however, such Common Stock
    shall not be deemed outstanding for the purpose of computing the
    percentage owned by any other individual or entity. Except as indicated in
    the footnotes to this table, the Company believes that the persons named
    in the table have sole voting and investment power with respect to all
    shares of Common Stock shown as beneficially owned by them, subject to
    community property laws, where applicable.
(2) Includes 28,550 shares held by Ms. Hall's spouse, Virgil Hall, and 66,666
    shares held by her daughters.
(3) Includes 493,699, 50,469, 6,836 shares of Common Stock held by Sprout
    Growth II, L.P. ("Sprout II"), DLJ Capital Corporation ("DLJ") and Sprout
    CEO Fund, L.P. ("Sprout CEO"), respectively. DLJ is the general partner of
    Sprout CEO.
(4) Includes 974,000 shares subject to stock options that are currently
    exercisable or will become exercisable within 60 days of March 31, 1998.
(5) Represents shares subject to stock options that are currently exercisable
    or will become exercisable within 60 days of March 31, 1998.
(6) Includes 22,726 shares subject to stock options that are currently
    exercisable or will become exercisable within 60 days of March 31, 1998.
(7) Includes 25,000 shares subject to stock options that are currently
    exercisable or will become exercisable within 60 days of March 31, 1998.
(8) Includes 1,216,726 shares subject to stock options that are currently
    exercisable or will become exercisable within 60 days of March 31, 1998.
 
                                       34
<PAGE>
 
                   EXECUTIVE COMPENSATION AND OTHER MATTERS
 
  The following table sets forth information concerning the compensation of
the Chief Executive Officer of the Company and the four other most highly
compensated executive officers of the Company as of December 28, 1997 whose
total salary and bonus for the year ended December 28, 1997 exceeded $100,000,
in all cases for services rendered in all capacities to the Company during the
fiscal years ended 1997 and 1996:
 
                          SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                                                      LONG TERM
                                                                     COMPENSATION
                                     ANNUAL COMPENSATION (1)            AWARDS
                               ------------------------------------  ------------
                                                          OTHER
                                                          ANNUAL      SECURITIES
                                     SALARY            COMPENSATION   UNDERLYING
 NAME AND PRINCIPAL POSITION   YEAR  ($)(2)  BONUS ($)     ($)       OPTIONS (#)
 ---------------------------   ---- -------- --------- ------------  ------------
 <S>                           <C>  <C>      <C>       <C>           <C>
 Brenda C. Hall..............  1997 $269,459        0           0            0
  Chief Executive Officer and  1996  313,231 $ 60,000           0            0
   Chairman of the Board
 Paul H. Bartlett (3)........  1997  240,000   50,000           0            0
  President and Director       1996   51,846   26,000           0      974,000
 Martin A. Kropelnicki(4)....  1997  130,192   51,666           0      175,000
  Vice President, Chief        1996      --       --          --           --
   Financial Officer and
   Secretary
 Mordecai Levine (5).........  1997  125,000  114,702    $132,600(6)         0
  Vice President, IS Contract  1996   10,417        0           0       92,000
   Services
 Rita Hazell (7).............  1997  123,220  145,494           0       40,000
  Senior Vice President, R&D   1996   85,500  109,229           0            0
   Contract Services
</TABLE>
--------
(1) The aggregate amount of all other compensation in the form of perquisites
    and other personal benefits does not exceed the lesser of either $50,000
    or 10% of the total annual salary and bonus for each officer.
(2) Salary includes amounts deferred under the Company's 401(k) Plan.
(3) Mr. Bartlett joined the Company as President in October 1996.
(4) Mr. Kropelnicki joined the Company as Vice President, Chief Financial
    Officer and Secretary in February 1997.
(5) Mr. Levine joined the Company as Vice President, IS Contract Services in
    December 1996.
(6) Represents payment of the exercise price for Mr. Levine's exercise of an
    option for 26,000 shares of the Company's Common Stock, pursuant to the
    terms of Mr. Levine's employment agreement. See "Employment and Change in
    Control Arrangements."
(7) Ms. Hazell joined the Company in September 1993 and has served as Vice
    President, R&D Contract Services since April 1996.
 
                                       35
<PAGE>
 
  The following table provides the specified information concerning grants of
options to purchase the Company's Common Stock made during the fiscal year
ended December 28, 1997 to the persons named in the Summary Compensation
Table:
 
                       OPTION GRANTS IN LAST FISCAL YEAR
 
<TABLE>
<CAPTION>
                                        INDIVIDUAL GRANTS
                         -----------------------------------------------
                                         % OF TOTAL                      POTENTIAL REALIZABLE VALUE AT
                           NUMBER OF      OPTIONS                        ASSUMED ANNUAL RATES OF STOCK
                           SECURITIES    GRANTED TO                      PRICE APPRECIATION FOR OPTION
                           UNDERLYING   EMPLOYEES IN EXERCISE                      TERM (2)
                            OPTIONS        FISCAL     PRICE   EXPIRATION ------------------------------
          NAME           GRANTED (#)(1)     YEAR      ($/SH)     DATE        5% ($)        10% ($)
          ----           -------------- ------------ -------- ---------- -------------- ---------------
<S>                      <C>            <C>          <C>      <C>        <C>            <C>
Brenda C. Hall..........          0          --          --         --              --             --
Paul H. Bartlett........          0          --          --         --              --             --
Martin A. Kropelnicki...    175,000(3)      29.6%    $10.00    02/18/07  $    1,100,566 $    2,789,049
Mordecai Levine.........          0          --          --         --              --             --
Rita Hazell.............     40,000(4)       6.8      21.875   09/12/07         550,283      1,394,525
</TABLE>
--------
(1) All options were granted at an exercise price equal to the fair market
    value of the Common Stock on the date of grant. The exercise price may be
    paid in cash, in shares of Common Stock valued at fair market value on the
    exercise date or through a cashless exercise procedure involving a same-
    day sale of the purchased shares. The Company may also finance the option
    exercise by loaning the optionee sufficient funds to exercise the option
    and pay any withholding taxes incurred upon exercise.
(2) Potential gains are net of exercise price, but before taxes associated
    with the exercise. These amounts represent hypothetical gains assuming
    rates of appreciation specified by the Securities and Exchange Commission,
    and do not represent the Company's estimate or projection of future Common
    Stock prices. Actual gains, if any, on stock option exercises are
    dependent on the future performance of the Company, overall market
    conditions and the optionees' continued employment through the vesting
    period. The amounts reflected in this table may not be achieved.
(3) The options are exercisable for 135,000 option shares on December 28,
    1997, subject to certain repurchase rights of the Company. With respect to
    the first option for 50,000 option shares, Mr. Kropelnicki becomes vested
    in 10,000 of the option shares on February 18, 1998 and an additional
    833.33 option shares upon the completion of each of the next 48 months of
    service thereafter; and with respect to the second option for 125,000
    option shares, he becomes vested in 25,000 of the option shares on
    February 18, 1998 and an additional 2,083.33 option shares upon the
    completion of each of the next 48 months of service thereafter.
(4) Ms. Hazell becomes vested in 8,000 option shares on September 12, 1998,
    and 666.66 option shares upon the completion of each of the next 48 months
    of service thereafter.
 
                                       36
<PAGE>
 
  The following table provides the specified information concerning exercises
of options to purchase the Company's Common Stock during the fiscal year ended
December 28, 1997, and unexercised options held as of December 28, 1997, by
the persons named in the Summary Compensation Table:
 
                AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
                       AND FISCAL YEAR-END OPTION VALUES
 
<TABLE>
<CAPTION>
                                                        NUMBER OF SECURITIES       VALUE OF UNEXERCISED
                                                       UNDERLYING UNEXERCISED     IN-THE-MONEY OPTIONS AT
                            SHARES                     OPTIONS AT 12/28/97 (#)        12/28/97 ($)(1)
                         ACQUIRED ON       VALUE      -------------------------- -------------------------
          NAME           EXERCISE (#) REALIZED ($)(2) EXERCISABLE  UNEXERCISABLE EXERCISABLE UNEXERCISABLE
          ----           ------------ --------------- -----------  ------------- ----------- -------------
<S>                      <C>          <C>             <C>          <C>           <C>         <C>
Brenda C. Hall..........       --             --            --           --              --         --
Paul H. Bartlett........       --             --        974,000(3)         0     $14,975,250          0
Martin A. Kropelnicki...       --             --        135,000(4)    40,000       1,265,625   $375,000
Mordecai Levine.........    26,000       $296,400        34,000       32,000(5)      485,350    456,800
Rita Hazell.............    10,000        199,500        26,000       64,000         495,950    457,800
</TABLE>
--------
(1) Based on the closing price of $19.375 on the last trading day prior to the
    Sunday of December 28, 1997, less exercise price.
(2) Market price on date of exercise, less exercise price.
(3) The option is immediately exercisable, subject to certain repurchase
    rights of the Company. Mr. Bartlett is 50% vested in such option shares
    and will vest in the balance of the option shares in a series of 24
    monthly installments commencing January 1, 1998. See "Employment and
    Change in Control Arrangements."
(4) The options are exercisable for 135,000 option shares on December 28,
    1997, subject to certain repurchase rights of the Company. With respect to
    the first option for 50,000 option shares, Mr. Kropelnicki becomes vested
    in 10,000 of the option shares on February 18, 1998 and an additional
    833.33 option shares upon the completion of each of the next 48 months of
    service thereafter; and with respect to the second option for 125,000
    option shares, he becomes vested in 25,000 of the option shares on
    February 18, 1998 and an additional 2,083.33 option shares upon the
    completion of each of the next 48 months of service thereafter.
(5) The 32,000 option shares become vested in a series of 48 equal monthly
    installments upon the completion of each month of service from December 2,
    1997.
 
EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS
 
  In March 1997, the Company entered into an employment agreement with Brenda
C. Hall, which provides for a base salary of $260,000. Ms. Hall is also
eligible for an annual bonus subject to a maximum limitation of 75% of her
annual base salary. Either the Company or Ms. Hall may terminate Ms. Hall's
employment with the Company at any time by giving the other party 30 days
prior written notice. If Ms. Hall is terminated other than for cause or is
constructively discharged, and provided that she does not engage in certain
competitive activities, Ms. Hall will receive her base salary for an
additional 24 months from the date of termination, and the Company will pay
for her COBRA continuation coverage until the date that is the earlier of 12
months after her termination or the date on which her COBRA eligibility
ceases. The employment agreement is for an unspecified term and terminates
when all obligations of the parties thereto have been satisfied.
 
  In October 1996, the Company entered into an employment agreement with Paul
H. Bartlett. The employment agreement is for an unspecified term and
terminates when all obligations of the parties thereto have been satisfied.
Under the agreement, Mr. Bartlett will be employed as the Company's President,
reporting to its Chief Executive Officer. The agreement provides for an annual
base salary of $240,000. Mr. Bartlett is also eligible for an annual bonus,
subject to a maximum limitation of 75% of his annual base salary. In addition,
the Company granted to Mr. Bartlett an immediately exercisable stock option to
purchase 974,000 shares of Common Stock at an exercise price of $4.00 per
share, subject to certain repurchase rights of the Company. Mr. Bartlett is
50% vested in such shares and will vest in the balance of the shares in a
series of 24 monthly
 
                                       37
<PAGE>
 
installments commencing January 1, 1998. In addition, all unvested option
shares automatically vest upon the occurrence of certain events, including a
merger of the Company after which 50% or less of the surviving corporation's
voting securities are owned by the Company's stockholders, a sale by the
Company of all or substantially all of its assets, or a constructive discharge
of Mr. Bartlett. Either the Company or Mr. Bartlett may terminate Mr.
Bartlett's employment with the Company at any time by giving the other party
30 days prior written notice. If Mr. Bartlett is terminated other than for
cause or disability, or if Mr. Bartlett is constructively discharged, Mr.
Bartlett will receive his salary for an additional 12 months from the date of
termination, provided he does not engage in certain competitive activities.
Under the employment agreement, the Company will nominate Mr. Bartlett for
election as a member of its Board of Directors as long as he remains employed,
and Brenda C. Hall has agreed to cause her shares of the Company's stock to be
voted in favor of Mr. Bartlett's election.
 
  In December 1996, the Company entered into an employment agreement with
Mordecai Levine in connection with the Team Alliance Acquisition which
provides for a base salary of $125,000. For the period ending on the first,
second and third anniversary of Mr. Levine's employment with the Company, he
is eligible to receive a monthly bonus based upon gross margin dollars
generated by the IS Contract Services. In addition, the Company granted to Mr.
Levine stock options to purchase 92,000 shares of the Company's Common Stock
at an exercise price of $5.10 per share subject to certain repurchase rights
of the Company. Mr. Levine is currently vested in 52,000 of such shares, and
he will vest in an additional 8,000 shares on December 2, 1997, with the
balance of the shares vesting in a series of 48 equal monthly installments
commencing December 2, 1997. Upon Mr. Levine's exercise of such options, the
Company has agreed to pay to him an amount equal to the aggregate exercise
price of such options. Either the Company or Mr. Levine may terminate Mr.
Levine's employment with the Company at any time and for any reason by giving
the other party written notice. If Mr. Levine voluntarily terminates
employment with the Company for good cause or is terminated other than for
cause, he will receive his salary and bonus for an additional six months from
the date of termination. The employment agreement terminates upon the earlier
of the satisfaction of all of the obligations thereunder or December 2, 2000.
 
  The terms of the Company's 1997 Stock Option Plan (the "1997 Plan") provide
that in the event the Company is acquired by merger, consolidation or asset
sale, each option outstanding at the time under the 1997 Plan will terminate
to the extent not assumed by the acquiring entity. In addition, the plan
administrator generally has the discretion to accelerate the vesting of
options.
 
COMPENSATION OF DIRECTORS
 
  Under the automatic option grant program of the Company's 1997 Stock Option
Plan, each individual who first joins the Board of Directors of the Company as
a non-employee director after August 12, 1997 will receive at that time, an
automatic option grant for 20,000 shares of Common Stock. The optionee will
vest in the automatic option grant in a series of four annual installments
over the optionee's period of Board service, beginning one year from the grant
date. Each option will have an exercise price equal to the fair market value
of the Common Stock on the automatic option grant date and a maximum term of
ten years, subject to earlier termination following the optionee's cessation
of Board service.
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
 
  Messrs. Kinion and Rowberry served as members of the Board of Directors'
Compensation Committee during 1997. Mr. Rowberry was not at any time during
1997 or at any other time an officer or employee of the Company. Mr. Kinion
was a former officer of the Company, but was not an officer or employee during
1997. No executive officer of the Company served as a member of the board of
directors or compensation committee of any entity that had one or more
executive officers serving as a member of the Company's Board of Directors or
Compensation Committee.
 
                                      38
<PAGE>
 
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
  In August 1996, the Company granted to Rita S. Hazell, Senior Vice
President, R&D Contract Services, a loan in the principal amount of $100,000
plus interest at 6.74%. Such loan is secured by a deed of trust in favor of
the Company on the real property purchased partially with such borrowed funds.
The outstanding balance on the loan as of March 31, 1998 is $75,000. The
principal amount of the loan and any accrued interest thereon will be forgiven
by the Company ratably over four years so long as Ms. Hazell remains employed
by the Company. In August 1997, principal in the amount of $25,000 and
interest in the amount of $6,740 were forgiven.
 
  In October 1996, the Company entered into a settlement agreement and general
release with Todd J. Kinion, a former officer and a current director of the
Company, which obligates the Company to make monthly payments of $9,033 to him
until the earlier of February 29, 1998 or the occurrence of certain events. A
lump sum payment of $11,239, representing full payment of all unpaid bonus
obligations and business expense reimbursements, was made to Mr. Kinion in
connection with the settlement agreement.
 
  Maryanne Gaines, the sister of Brenda Hall, the Company's Chief Executive
Officer and a director, was employed by the Company during 1997 as Director of
Operations--Special Projects. In exchange for services rendered to the Company
in such capacity, Ms. Gaines received $66,951 in compensation, which was paid
to her pursuant to the standard payroll practices of the Company less
withholdings and applicable deductions.
 
  The Company has entered into indemnification agreements with each of its
officers and directors containing provisions that may require the Company,
among other things, to indemnify such officers and directors against certain
liabilities that may arise by reason of their status or service as officers or
directors (other than liabilities arising from willful misconduct of a
culpable nature), to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified and to obtain
directors' and officers' liability insurance if available on reasonable terms.
The Company maintains an insurance policy covering officers and directors
under which the insurer has agreed to pay the amount of any claim made against
the officers or directors of the Company for wrongful acts that such officers
or directors may otherwise be required to pay or for which the Company is
required to indemnify such officers and directors, subject to certain
exclusions.
 
  See "Employment and Change in Control Arrangements" for descriptions of
agreements regarding the employment of Ms. Hall, Mr. Bartlett and Mr. Levine.
 
                                      39
<PAGE>
 
            COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
 
  The Compensation Committee of the Board of Directors was comprised of two
members during 1997, Messrs. Kinion and Rowberry. Mr. Rowberry was not at any
time during 1997 or at any other time a current or former officer or employee
of the Company. Mr. Kinion was a former officer of the Company, but was not an
officer or employee during 1997. The Compensation Committee is responsible for
setting and administering policies governing compensation of the Company's
executive officers, including the Company's 1997 Stock Option Plan. In
addition, the Compensation Committee reviews compensation levels of other
management level employees, evaluates the performance of management and
reviews other compensation-related issues.
 
COMPENSATION PHILOSOPHY
 
  The Company applies a consistent compensation philosophy for all of its
employees, including its executive officers. The Company's compensation policy
is designed to enable the Company to attract, retain and reward executive
officers who are likely to contribute to the long-term success of the Company.
The Compensation Committee also believes that a strong correlation should
exist between executive compensation, business objectives and overall Company
performance.
 
  In preparing the performance graph for this Report, the Company has selected
the Standard & Poor's 500 Index ("S&P 500 Index"). The companies that the
Company uses for comparison of salary and compensation information are not
necessarily those included in the S&P 500 Index, because they were determined
not to be competitive with the Company for executive talent or because
compensation information was not available.
 
COMPONENTS OF COMPENSATION
 
  There are three components of the Company's executive compensation program
that support the goal of aligning compensation with the value created for the
Company's stockholders while providing incentives to further the Company's
strategic objectives.
 
 Salary
 
  The Compensation Committee strives to offer salaries to its executive
officers that are competitive with salaries offered by companies of similar
size and capitalization in a similar industry. Base salaries are reviewed on
an annual basis and are subject to adjustment based upon the individual's
contribution to the Company and changes in salary levels offered by comparable
companies. In determining executive officers' salaries, the Compensation
Committee considers information provided by the Company's Chief Executive
Officer with respect to individual officer responsibilities and performance,
as well as salary surveys and similar data available from independent sources.
 
 Bonuses
 
  For fiscal 1997, annual incentive bonuses for the Chief Executive Officer
and the other Named Executive Officers were based upon the following three
components: (i) the Company's targeted net income, (ii) earnings per share
estimates for fiscal 1997 and (iii) individual performance. The Compensation
Committee reviews performance goals and, based on the components described
above, each executive officer's employment arrangement sets forth certain
target thresholds. In addition, target thresholds are set on an annual basis.
The actual performances of the Company and the executive officer is evaluated
to determine the percentage used to calculate the bonus at the end of the
year, with the size of the bonus varying between 0% and 100% of the target
award. Target awards for each executive officer in fiscal 1997 were set in
relation to such officer's base salary.
 
 Equity Incentives
 
  The Compensation Committee believes that employee equity ownership is highly
motivating, provides a major incentive to employees in building stockholder
value and serves to align the interests of employees with
 
                                      40
<PAGE>
 
the interests of the Company's stockholders. In determining the amount of
equity compensation to be awarded to executive officers in any fiscal year,
the Compensation Committee considers the position of the officer, the current
stock ownership of the officer, the number of shares that continue to be
subject to vesting under outstanding options and the expected future
contribution of the officer to the Company's performance, giving primary
weight to the officer's position and his expected future contributions. In
addition, the Compensation Committee compares the stock ownership and options
held by each officer with the other officers' equity positions and the
officer's experience and value to the Company.
 
  Option grants during 1997 are described under the heading "EXECUTIVE
COMPENSATION AND OTHER MATTERS" in the table entitled "Option Grants in Last
Fiscal Year." In 1997, Ms. Hall, Mr. Bartlett and Mr. Levine were not granted
any options to purchase shares of the Company's Common Stock.
 
 CEO Compensation
 
  The annual base salary for Ms. Hall, the Company's Chief Executive Officer,
was established in March 1997 pursuant to an employment agreement with the
Company. Ms. Hall's base salary is intended to be competitive with that paid
to executives at comparable companies in the same industry and to reflect her
personal performance for the Company. The factors that the Compensation
Committee considered in setting her annual base salary were (i) corporate
performance including the Company's initial public offering of its Common
Stock, (ii) earnings per share and net income and (iii) individual
performance. In addition, the Compensation Committee believes that an
important portion of her compensation should be based on Company performance.
 
DEDUCTIBILITY OF EXECUTIVE COMPENSATION
 
  The Company has considered Section 162(m) of the Internal Revenue Code of
1986, as amended (the "Code"), and related regulations that restrict the
deductibility for federal income tax purposes of compensation paid to the
chief executive officer and each of the four other most highly compensated
executive officers at the end of any fiscal year to the extent such
compensation exceeds $1,000,000 for any of such officer in any year, other
than compensation that qualifies for an exception under the Code or
regulations. The Compensation Committee does not believe that other components
of the Company's compensation will be likely to exceed $1,000,000 annually for
any executive officer in the foreseeable future and, therefore, concluded that
no further action with respect to qualifying such compensation for federal
income tax deductibility was necessary at this time. In the future, the
Compensation Committee will continue to evaluate the advisability of
qualifying its executive compensation for such deductibility. The Compensation
Committee's policy is to qualify its executive compensation for deductibility
under applicable tax laws as practicable.
 
                                          COMPENSATION COMMITTEE
 
                                          Todd J. Kinion
                                          Jon H. Rowberry
 
                                      41
<PAGE>
 
                        COMPARISON OF STOCKHOLDER RETURN
   
  Set forth below is a line graph comparing the annual percentage change in the
cumulative total return on the Company's Common Stock with the cumulative total
return of a peer group comprised of comparable companies in the same industry
traded on the Nasdaq Stock Market ("Peer Group Index") and the Standard &
Poor's 500 Stock Index ("S&P 500 Index") for the period commencing on August 5,
1997 (1) and ending on December 28, 1997. With respect to companies in the Peer
Group, the returns of each such company have been weighted to reflect relative
stock market capitalization. The Companies included in the Peer Group Index in
addition to the Company were as follows: ACCUSTAFF INC, Adecco S A c/o Adecco
Services, Inc., Alternative Resources Corp., Analysts International
Corporation, ASI Solutions Incorporated, Butler International, Inc., CORESTAFF
INC, COTELLIGENT GROUP INC, Data Processing Resources Corporation, Employee
Solutions, Inc., Kelly Services, Inc. MANPOWER INC WIS, Metro Information
Services, Inc., NORRELL CORP, OLSTEN CORP, OnAssignment, Inc., RemedyTemp,
Inc., Renaissance Worldwide Inc., ROBERT HALF INTL INC, Romac International,
Inc., TEAM America Corporation, VOLT INFO SCIENCES INC, Western Staff Services,
Inc. and WINSTON RESOURCES INC. Stockholder returns over the indicated period
are based on historical data and the Company cautions that the stock price
performance shown in the graph is not indicative of, nor intended to forecast,
the potential future performance of the Company's Common Stock.     
 
COMPARISON OF CUMULATIVE TOTAL RETURN FROM AUGUST 5, 1997 THROUGH DECEMBER 28,
1997 (2):
 
      HALL, KINION & ASSOCIATES, INC., PEER GROUP INDEX AND S&P 500 INDEX
                                
                    [PERFORMANCE CHART APPEARS HERE]     
 
<TABLE>   
<CAPTION>
                                                              AUGUST 5, DEC. 28,
                                                                1997      1997
                                                              --------- --------
<S>                                                           <C>       <C>
Hall Kinion..................................................    100     145.83
Peer Group Index.............................................    100      87.74
S&P 500 Index................................................    100     102.43
</TABLE>    
--------
(1) The Company's initial public offering occurred on August 8, 1997. For
    purposes of this presentation, the Company has assumed that its initial
    offering price of $15.00 would have been the closing sales price on the day
    prior to commencement of trading.
(2) Assumes that $100.00 was invested on August 5, 1997 in the Company's Common
    Stock at the Company's initial offering price of $15.00 and at the closing
    sales price for each index on that date and that all cash dividends were
    reinvested. No cash dividends have been declared on the Company's Common
    Stock.
 
                                       42
<PAGE>

  Notwithstanding anything to the contrary set forth in any of the Company's
previous or future filings under the Securities Act of 1933, as amended or the
Securities Exchange Act of 1934, as amended, the Compensation Committee Report
and the Stock Performance Graph are not deemed filed with the Securities and
Exchange Commission and shall not be deemed incorporated by reference into any
of those prior filings or into any future filings made by the Company under
those statutes.
 
               COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
 
  The members of the Board of Directors, the executive officers of the Company
and persons who hold more than 10% of the Company's outstanding Common Stock
are subject to the reporting requirements of Section 16(a) of the Securities
Exchange Act of 1934, as amended, which require them to file reports with
respect to their ownership of the Company's Common Stock and their
transactions in such Common Stock. Based upon (i) the copies of Section 16(a)
reports that the Company received from such persons for the 1997 fiscal year
transactions in the Common Stock and their Common Stock holdings and (ii) the
written representations received from one or more of such persons that no
annual Form 5 reports were required to be filed by them for the 1997 fiscal
year, the Company believes that all reporting requirements under Section 16(a)
for such fiscal year were met in a timely manner by its executive officers,
Board members and greater than ten-percent stockholders, except for two late
filings for Ms. Hazell for two transactions.
 
                                       43
<PAGE>
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 
(a) (1) FINANCIAL STATEMENTS
 
     The following consolidated financial statements of the Company and
   its subsidiaries are included in Item 8 of this report:
 
<TABLE>
<CAPTION>
                                                                          PAGE
                                                                          ----
     <S>                                                                  <C>
     Consolidated balance sheets at December 28, 1997 and December 29,
      1996.                                                                17
     Consolidated statements of income for this years ended December 28,
      1997, December 29, 1996 and December 30, 1995.                       18
     Consolidated statements of stockholders' equity for the years ended
      December 28, 1997, December 29, 1996 and December 30, 1995.          19
     Consolidated statements of cash flows for the years ended December
      28, 1997, December 29, 1996 and December 30, 1995.                   20
     Notes to consolidated financial statements.                           21
     Report of independent public accountants.                             30
</TABLE>
 
(a) (2) FINANCIAL STATEMENT SCHEDULES
 
    Schedules have been omitted as they are not applicable.
 
(a) (3) EXHIBITS
 
<TABLE>
    <C> <C> <S>
    2.1 (1) Agreement and Plan of Merger dated July 9, 1997, for the merger
            of Hall, Kinion & Associates, Inc., a California corporation,
            into Hall, Kinion & Associates, Inc., a Delaware corporation
            (the "Registrant").
    2.2 (1) Asset Purchase Agreement dated November 26, 1996, among the
            Registrant and the other parties named therein.
    2.3 (2) Stock Purchase Agreement dated December 20, 1997 by and among
            the Registrant, Group-Ipex, Inc., and Lalit M. Kapoor and
            Satindra Kapoor.
    3.1 (1) Certificate of Incorporation of the Registrant.
    3.3 (1) Bylaws of the Registrant.
</TABLE>
 
                                      44
<PAGE>
 
<TABLE>
    <C>   <C> <S>
     3.4  (1) Amended and Restated Certificate of Incorporation of the
              Registrant filed August 8, 1997.
     4.1      Reference is made to Exhibits 3.1, 3.3 and 3.4.
     4.2  (1) Investors' Rights Agreement, dated January 26, 1996, among
              the Registrant, certain stockholders and investors named
              therein.
     4.4  (1) Specimen Common Stock certificate.
     9.2  (1) Kinion Voting Trust Agreement, dated January 17, 1996, among
              Todd Kinion and the stockholders of the Registrant named
              therein.
     9.3  (1) Amended and Restated Voting Trust Agreement, dated October
              29, 1996, among the Registrant, Brenda C. Hall and Todd J.
              Kinion.
    10.1  (1) Form of Indemnification Agreement entered into between the
              Registrant and each of its directors and certain officers.
    10.2  (1) The Registrant's 1997 Stock Option Plan.
    10.3  (1) The Registrant's Employee Stock Purchase Plan.
    10.11 (1) Form of Employment Agreement, dated October 18, 1996, among
              the Registrant, Paul Bartlett and Brenda C. Hall as amended.
    10.12 (1) Form of Stock Option Agreement, dated October 18, 1996,
              between the Registrant and Paul Bartlett as amended.
    10.13 (1) Settlement Agreement and General Release, dated October 29,
              1996 among the Registrant, Brenda Hall, as Voting Trustee of
              the Voting Trust, and Todd Kinion.
    10.14 (1) Employment Agreement, dated December 2, 1996, between the
              Registrant and Mordecai Levine.
    10.15 (1) Employment Agreement, dated December 2, 1996, between the
              Registrant and Richard Harmon.
    10.16 (1) Consulting and Settlement Agreement, dated February 28, 1997,
              between the Registrant and Keith Corbin.
    10.17 (1) Loan & Security Agreement (Accounts and Inventory), dated
              April 26, 1995, between the Registrant and Comerica Bank-
              California (the "Loan & Security Agreement"); Addendum to
              Loan & Security Agreement; Second Addendum to Loan & Security
              Agreement; Modification to Loan & Security Agreement, dated
              December 20, 1995; Second Modification to Loan & Security
              Agreement, dated October 21, 1996; Borrower's Authorization
              dated October 16, 1996; Borrowers Authorization dated October
              21, 1996; and Guaranty, dated April 26, 1995.
    10.18 (1) Assumption and Assignment of Sublease, dated December 2,
              1996, between the Registrant and TeamAlliance Technology
              Partners, L.P.
    10.19 (1) Standard Sublease, dated March 1, 1997, between the
              Registrant and Seagate Technology, Inc.
    10.20 (1) Employment Agreement, dated May 23, 1997, between the
              Registrant and Brenda C. Hall.
    10.21 (1) Agreement to Tender Shares dated May 23, 1997, between the
              Registrant and Brenda C. Hall.
    10.22 (1) Agreement to Tender Shares, dated May 23, 1997, between the
              Registrant and Todd J. Kinion.
    10.23 (1) Promissory Note Secured by Deed of Trust, dated August 5,
              1996, made by Rita S. Hazell and Quentin D. Hazell in favor
              of the Registrant.
</TABLE>
 
                                       45
<PAGE>
 
<TABLE>
    <C>   <C> <S>
    10.24 (1) Settlement Agreement with Mutual Release, dated May, 1997,
              between Richard E. Swanson and the Registrant, Brenda C. Hall
              and Todd J. Kinion.
    10.25 (1) The Registrant's IT Professional Plan.
    10.26     Reference is made to Exhibit 2.3.
    21.1      Subsidiaries of Registrant.
    23.1      Independent Auditors Consent.
    27.1      Financial Data Schedule.
</TABLE>
--------
(1) Incorporated by reference to the Registrant's Registration Statement on
    Form S-1, as amended, declared effective by the Securities and Exchange
    Commission on August 4, 1997 (File No. 333-28365).
(2) Incorporated by reference to the Registrant's Current Report on Form 8-K,
    filed January 13, 1998 (File No. 000-22869).
 
(b) REPORTS ON FORM 8-K
 
     No reports on Form 8-K were filed by the Registrant during the
   fourth quarter of the fiscal year ended December 28, 1997. The
   Registrant did file a report on Form 8-K on January 13, 1998,
   concerning the acquisition of all of the outstanding capital stock
   of Group-Ipex, Inc. ("Ipex") pursuant to that certain Stock Purchase
   Agreement dated December 20, 1997 by and among the Registrant, Ipex,
   and Lalit M. Kapoor and Satindra Kapoor.
 
(c) EXHIBITS
 
     See (a)(3) above.
 
                                       46
<PAGE>
 
                                  SIGNATURES
 
  Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
 
                                          HALL, KINION & ASSOCIATES, INC.
 
                                          By: /s/ Martin A. Kropelnicki
                                            -----------------------------------
                                            Martin A. Kropelnicki
                                            Vice President and Chief Financial
                                            Officer and Corporate Secretary
                                            (Principal Financial Officer)
 
 
 
                                      47
<PAGE>
 
                                  SCHEDULE II
 
                HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
 
                       VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                      ADDITIONS               DEDUCTIONS
                             --------------------------- ---------------------
                              BALANCE  CHARGED                         BALANCE
                                AT     TO COSTS CHARGED  WRITE-OFF OF  AT END
                             BEGINNING   AND    TO OTHER UNCOLLECTIBLE   OF
Allowance for Doubtful       OF PERIOD EXPENSES ACCOUNTS   ACCOUNTS    PERIOD
Accounts:                    --------- -------- -------- ------------- -------
<S>                          <C>       <C>      <C>      <C>           <C>
Year ended December 30,
 1995.......................   $121      $175     $--        $  --      $296
Year ended December 29,
 1996.......................    296       145      31          (69)      403
Year ended December 28,
 1997.......................    403       120      --         (179)      344
</TABLE>
 
                                      S-1
<PAGE>
 
                         INDEPENDENT AUDITORS' REPORT
 
To the Board of Directors and Stockholders of
Hall, Kinion & Associates, Inc.:
 
  We have audited the consolidated financial statements of Hall, Kinion &
Associates, Inc. and Subsidiaries as of December 28, 1997 and December 29,
1996, and for each of the three years in the period ended December 28, 1997,
and have issued our report thereon dated January 24, 1998 included elsewhere
in this Registration Statement. Our audits also included the financial
statement schedule of Hall, Kinion & Associates, Inc. listed in Item 14(a)(2)
of this Registration Statement. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects that information set
forth therein.
 
DELOITTE & TOUCHE LLP
 
San Jose, California
January 24, 1998
 
                                      S-2