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FORM 10Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)

SECURITIES EXCHANGE ACT OF 1934

For Quarter Ended March 31, 2004

Commission File No. 1-9972

Hooper Holmes, Inc.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (908) 766-5000

None

(Former name, former address and former fiscal year, if changed since last report)

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

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HOOPER HOLMES, INC. AND SUBSIDIARIES

INDEX

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Hooper Holmes, Inc.

Consolidated Balance Sheets

(unaudited)

See accompanying notes to unaudited consolidated financial statements.

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Hooper Holmes, Inc.

Consolidated Statements Of Income

(unaudited)

See accompanying notes to unaudited consolidated financial statements.

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Hooper Holmes, Inc.

Consolidated Statements of Cash Flows

(unaudited)

See accompanying notes to unaudited consolidated financial statements.

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HOOPER HOLMES, INC.

Notes to Unaudited Consolidated Financial Statements

March 31, 2004

Note 1: Basis of Presentation

The financial information included herein is unaudited however, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods.

The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K.

The results of operations for the three months ended March 31, 2004 are not necessarily indicative of the results to be expected for the full year. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information.

Note 2: Earnings Per Share

“Basic” earnings per share equals net income divided by the weighted average common shares outstanding during the period. “Diluted” earnings per share equals net income divided by the sum of the weighted average common shares outstanding during the period plus dilutive common stock equivalents. Common stock equivalents (1,871,291 and 1,478,681 for the three months ended March 31, 2004 and 2003) are shares assumed to be issued if outstanding stock options were exercised.

Options to purchase 3,839,925 and 5,310,850 shares of common stock were excluded from the calculation of diluted earnings per share for the three months ended March 31, 2004 and 2003 because their exercise prices exceeded the average market price of outstanding common shares for the period and were therefore antidilutive.

Note 3: Stock-Based Compensation

The Company has stock-based employee compensation plans. In December 2002, the FSAB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure, and amendment of FASB Statement No. 123.” This statement amends FASB Statement No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. The Company continues to account for those plans under the recognition and measurement provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. SFAS No. 123, “Accounting for Stock-Based Compensation,” established accounting and disclosure requirements using a fair-value based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to adopt the disclosure requirements of SFAS No. 123 and SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure, and amendment of FASB Statement No. 123.” No stock-based compensation cost is reflected in net income for stock options, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of the

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grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) to stock-based employee compensation:

During the first quarter of 2004 and 2003, options were granted totaling 50,000 shares and 2,028,600 shares, respectively, with exercise prices equal to the fair market value at date of grant. The fair value of each stock option granted during the quarter ended March 31, 2004 and March 31, 2003 is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions.

On January 28, 2003, a Board resolution was passed to award non-employee directors of the Company up to a maximum of 15,000 shares of the Company’s common stock as compensation. Each director was awarded 5,000 shares on January 31, 2003 and 2004, which vested immediately, and will be awarded 5,000 shares on January 31, 2005, subject to certain conditions. All shares awarded will be restricted under SEC Rule 144, and may not be sold or transferred by the outside director until four years from the date of issue. During the first quarters of 2003 and 2004, the Company expensed the fair value of the 30,000 shares awarded both in January 2003 and 2004 and such amount is included in Selling, General and Administrative expenses in the consolidated Statement of Income. The total charge was $164,100 and $206,400 in the first quarter of 2003 and 2004, respectively.

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Note 4: Comprehensive Income

Comprehensive income consists of net income, unrealized gains and losses on marketable securities classified as available-for-sale, and foreign currency translation.

Note 5: Marketable Securities

The amortized cost, gross unrealized holding gains, gross unrealized holding losses and fair value of available-for sale securities by major security type and class of security at March 31, 2004 and December 31, 2003, were as follows:

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Maturities of debt securities classified as available-for-sale were as follows at March 31, 2004 (maturities of mortgage-backed securities and collateralized mortgage obligations have been presented based upon estimated cash flows, assuming no change in the current interest rate environment):

Proceeds from the sale of investment securities available-for-sale were $5,695,448 and $8,829,580 in the three months ended March 31, 2004 and 2003, respectively. Gross realized gains included in income in the three months ended March 31, 2004 and 2003 were $12,832 and $24,296 respectively, and gross realized losses included in income in the three months ended March 31, 2004 and 2003 were $14,931 and $0, respectively.

Note 6: Capital Stock

The net tax benefit derived from the exercise of stock options was $ 0.1 million for the three months ended March 31, 2004 and 2003. Options exercised for the three months ended March 31, 2004 and March 31, 2003, totaled 41,200 shares and 11,500, respectively, all of which were issued from Treasury Stock.

On May 30, 2000, the Board of Directors authorized the repurchase in any calendar year of up to 2.5 million shares of the Company’s common stock for an aggregate purchase price not to exceed $ 25 million. For the three months ended March 31, 2003, the Company purchased 89,800 shares at a total cost of approximately $0.4 million. The Company did not purchase any treasury shares during the first quarter of 2004.

Note 7: Goodwill and Intangible Assets

The Company has two reportable operating segments: the Health Information Business Unit (HIBU) and the Diversified Business Unit (DBU).

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HIBU includes our core health information operations: Portamedic, Infolink, Heritage Labs and Medicals Direct. It provides a full range of paramedical services to the life insurance industry in the U.S. and the United Kingdom. The DBU operating segment provides Independent Medical Examinations (IME) case-management services primarily for property and casualty insurers and claims reviewers.

The changes in the carrying amount of goodwill for the three months ended March 31, 2004, are as follows:

The aggregate amortization expense for intangible assets for the three months ended March 31, 2004, and 2003, was approximately $1,242,000 and $991,000, respectively. The estimated intangible amortization expense for the fiscal years ending December 31, 2004 to December 31, 2008 is $5,111,000, $4,450,000, $3,748,000, $2,953,000 and $2,614,000, respectively.

All intangible assets are being amortized over their estimated useful lives, as indicated below. Intangible assets consist of:

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Note 8: Commitments and Contingencies

On June 20, 2002, the Company, and subsequently its three principal competitors, were notified by the California Department of Health Services (DHS) that it was in violation of the California Business and Professions Code with respect to the drawing of blood by phlebotomists on a mobile basis. The Company disagreed with the Department’s interpretation of the law, retained legal counsel, and worked with the Department to develop a reasonable interpretation of the law and a plan that allowed the Company to continue using phlebotomists to draw blood. The paramedical industry, working with a lobbyist, was successful in persuading the legislature to enact a law exempting the paramedical industry from licensure by the DHS. The Governor signed the bill into law in February 2004. The Company continues to service it customers in the State of California without interruption.

On July 11, 2003, the Company received a determination from the Internal Revenue Service that one individual the Company contracted with as an independent contractor, should have been classified as an employee in 2002. This ruling also applies to any other individuals engaged by the Company under similar circumstances. The ruling also states that the Company may not be subject to adverse consequences as the Company may be entitled to relief under applicable tax laws (Section 530 of the Revenue Act of 1978). The Company and its advisors are continuing to review this determination. Management believes that the Company qualifies for relief under Section 530 and, based on this, expects the outcome of this matter will not have a material effect on the Company’s consolidated financial position, results of operations and liquidity.

The Company is aware of allegations that an independent examiner, who billed work through an independent contractor, which in turn billed work through the Company, assaulted certain insurance applicants whom were examined. The examiner did not work for the Company nor was the Company aware that the examiner was performing insurance examinations. The Company has agreed to reimburse one of its insurance company clients, which it billed for examinations performed by this examiner, for certain legal, consulting and other costs incurred by the client, as well as an apportionment of any liability that may stem from examinations performed by the independent examiner. The related costs and estimated liability were accrued in 2003. To date, the Company is not aware of any claims arising from the conduct of the independent examiner. The Company expects that the outcome of this matter will not have a material effect on the Company’s consolidated financial position, or liquidity. However, it could have an impact on the financial results of any one reporting period.

The Company is a party to a number of legal actions arising in the ordinary course of its business. In the opinion of management, the Company, has substantial legal defenses and/or insurance coverage with respect to all of its pending legal actions. Accordingly, none of these actions is expected to have a material adverse effect on the Company’s liquidity, its consolidated results of operations or its consolidated financial position.

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In connection with an acquisition during the second quarter of 2003, the Company deferred the payment of a portion of the purchase price and is required to make these payments of $1.7 million in April 2005, and $2.8 million in July 2006. These amounts are included within Other long-term liabilities on the consolidated balance sheet and are accruing interest at a weighted average rate of 5%.

Note 9: Acquisitions and Dispositions

During the first quarter of 2004, the Company acquired specific assets and liabilities of one health information service company (HIBU) and the stock of Allegiance Health, Inc. a Diversified Business Unit Company (DBU), a privately held provider of independent medical examinations, for an aggregate purchase price of $10.9 million, including acquisition costs. The Allegiance Health, Inc. acquisition also provides for potential contingent consideration of up to $3.0 million which could be payable in 2005 if certain performance criteria are met.

The allocation of the purchase price for the 2004 acquisitions is set forth below:

Note 10: Operating Segments

The Company has two reportable operating segments: the Health Information Business Unit (HIBU) and the Diversified Business Unit (DBU). HIBU includes our core health information operations: Portamedic, Infolink, Heritage Labs and Medicals Direct. It provides a full range of paramedical services to the life insurance industry in the U.S. and the United Kingdom. The DBU operating segment, which consists of D&D Associates, Medimax, Inc. and Allegiance Health, Inc., provides Independent Medical Examinations (IME) case-management services primarily for property and casualty insurers and claims reviewers.

The segments’ accounting policies are the same as those described in the summary of significant accounting policies discussed in the Company’s 2003 annual report on Form 10-K except that interest expense and non-operating income and expenses are not allocated to the individual operating segment when determining segment profit or loss.

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A summary of segment information as of and for the three month period ended March 31, 2004 and 2003 is presented below (in thousands).

Note 11: Recently Issued Accounting Standards

In December 2003, the FASB issued FASB Interpretation No. 46R (revised December 2003), “Consolidation of Variable Interest Entities (VIE’s),” which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. As of March 31, 2004, we have not identified any VIE’s that would require consolidation or any significant exposure to VIE’s that would require disclosure.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation

Results of Operation - Three months ended March 31, 2004 compared to three months ended March 31, 2003

Overview:

Hooper Holmes, Inc. is one of the nation’s leading providers of outsourced risk assessment services to the life and health insurance industry and medical evaluation and claims management services to the automobile insurance and workers’ compensation industries. Our services include arranging and providing mobile paramedical and medical examinations, independent medical examinations (IME), personal health interviews, record collection and laboratory testing which help life insurance companies evaluate the risks associated with underwriting insurance policies and property and casualty insurers evaluate physical injuries. We provide our risk assessment services nationwide through our network of registered and licensed practical nurses, physicians, phlebotomists and medical and EKG technicians. Our evaluation and claims management services are provided primarily in the states of New York, New Jersey and Pennsylvania but on occasion in other states in the U.S. through three regional offices. Our services are provided to most of the insurance companies in the United States and Puerto Rico as well as those in the United Kingdom.

In evaluating the Company’s operating performance and financial condition, management is focused on:

Management operates and views the business through two distinct business units. The Health Information Business Unit (HIBU) consists of the Company’s Portamedic, Infolink, Heritage Labs, and Medicals Direct Group (MDG), our U.K. subsidiary. It provides paramedical, laboratory, attending physician statement (APS), inspection report and underwriting services used to underwrite life, health and disability insurance. The Diversified Business Unit (DBU) consists of D&D Associates, Medimax, Inc., and Allegiance Health, Inc. (Allegiance). Allegiance was acquired in January of 2004. The DBU provides outsourced claims management services to automobile and workers’ compensation insurance carriers.

During the first quarter of 2004, the Company purchased one paramedical examination company in the (HIBU) segment and Allegiance, an independent medical exam company in the (DBU) segment for an aggregate purchase price of $10.9 million. The acquisition of Allegiance, based in Lake Success, NY, underscores the Company’s commitment to continue expanding our claims management business. We expect to continue to supplement organic growth with acquisitions in other states.

The following provides a summary of the results of our operations for the three months ended March 31, 2004 and 2003 and a detailed discussion regarding these results follows.

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Revenues:

Comparative Revenues are set forth below:

Total consolidated revenues for 2004 increased 6.9% to $80.0 million for the first quarter of 2004, compared to $74.8 million for the first quarter of 2003.

Revenues for the HIBU segment increased $4.2 million to $70.3 million for the first quarter of 2004, compared to $66.1 million for the first quarter of 2003. Within this segment, revenues of the Portamedic business decreased $4.4 million to $50.0 million for first quarter of 2004, compared to $54.4 million for the first quarter of 2003, and revenues of the Infolink business increased 34.5% to $6.6 million for first quarter of 2004, compared to $4.9 million for first quarter of 2003. Factors that contributed to the Portadedic revenue decline are:

Infolink revenue increased due to the number of Infolink reports increasing to 128,000 for the first quarter of 2004, from 108,000 for the first quarter of 2003. The increase is due to:

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Management believes the increase in the number of APS’s is due to the Company’s Portamedic F.A.S.T. product, which provides clients with a quicker turnaround time APS’s.

Also, within this segment, Heritage Labs revenues grew 20.5% for the first quarter of 2004 to $4.3 million, from $3.5 million for the first quarter of 2003. This result is due to:

Revenues for the first quarter of 2004 for Medicals Direct Group (MDG), the Company’s UK based subsidiary, were $9.4 million, and were $3.3 million for the first quarter of 2003. Approximately $2.0 million of the growth is attributed to the 2003 acquisitions completed by Medicals Direct. Additionally, Medicals Direct continues to grow organically as favorable trends in the U.K. insurance market continue.

The services offered by MDG are “Screenings,” the equivalent of Hooper Holmes’ paramedical examination service; “Underwriting,” which is underwriting life insurance policies on an outsourced basis; “General Medicals,” which provides independent medical reports for legal, corporate, and insurance industries; and “Clinics,” which offer physical examination screening services for public transportation and corporate agencies.

Our future revenue stream is dependent upon the stability and growth of the life and other segments of the insurance industry and the number of new policies being written which require medical underwriting information. Management is hopeful that insurance application activity will resume to more traditional levels throughout 2004. Pricing of our services has become a significant business factor but we remain confident that we will hold our market share and that our company-owned branch structure, and automation efficiencies, will allow us to continue to be successful in this challenging competitive environment.

Revenues for the Diversified Business Unit (DBU) segment totaled $9.7 million in the first quarter of 2004, and were $8.7 million in the first quarter of 2003.

Revenue from the October 2003 acquisition of Medimax, Inc., and the January 2004 acquisition of Allegiance Health, Inc. accounted for $2.9 million of this increase. This increase was offset by a decline in revenues experienced by D&D Associates during the first quarter of 2004 of approximately $1.9 million or 21.8% from the first quarter of 2003, and the decrease is primarily due to the following:

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The Company continues its efforts to counter this revenue decline by expanding its market share through:

Cost of Operations:

The following table summarizes Cost of Operations for the quarter ended March 31, 2004 compared to March 31, 2003.

The Company’s consolidated cost of operations for the first quarter of 2004 totaled $57.1 million compared to $52.1 million for the first quarter of 2003. As a percentage of revenues, cost of operations increased to 71.4% for the first quarter of 2004 compared to 69.6% for the first quarter of 2003.

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Cost of operations for the HIBU segment totaled $50.3 million for the first quarter of 2004, compared to $46.5 for the first quarter of 2003, an increase of $3.9 million, and as a percentage of revenues, totaled 71.7% for the first quarter of 2004, compared to 70.3% for the first quarter of 2003. Within the HIBU segment, cost of operations for the Portamedic and Infolink businesses totaled $40.7 million for the first quarter of 2004, compared to $42.0 million for the first quarter of 2003. As a percentage of Portamedic and Infolink revenues, cost of operations totaled 72.0% for the first quarter of 2004 and 70.8% for the first quarter of 2003. As a percentage of revenues, the increase is due to lower revenue levels for the first quarter of 2004, increased branch operating expenses, and an increase in Infolink revenues which has a lower gross margin compared to declining revenues in Portamedic, which has a higher gross margin.

Cost of operations for Heritage Labs increased to $2.5 million for the first quarter of 2004, compared to $2.3 million for the first quarter of 2003, and as a percentage of revenues totaled 59.6% for the first quarter of 2004, compared to 64.9% for the first quarter of 2003. The dollar increase is due to higher revenue levels for 2004. This decrease is primarily due to lower lab material costs and an increase in the average revenue per sample tested.

Cost of operations for Medicals Direct Group, our U.K. subsidiary, totaled $7.1 million for the first quarter of 2004 and $2.2 million for the first quarter of 2003. As a percentage of revenues, cost of sales totaled 74.9% for the first quarter of 2004 compared to 67.6% for the first quarter of 2003. The dollar increase in cost of sales is the result of:

Cost of operations for the DBU segment totaled $6.8 million for the first quarter of 2004, compared to $5.6 million for the first quarter of 2003. As a percentage of revenues, cost of sales totaled 69.8% for the first quarter of 2004, compared to 64.3% for the first quarter of 2003. The increase in cost of sales as a percentage of revenues is due to the acquisitions of Medimax, Inc. (acquired in October 2003) and Allegiance Health, Inc. (acquired in January 2004), which have higher operating expenses than D&D Associates.

Selling, General and Administrative Expenses:

Consolidated selling, general and administrative (SG&A) expenses totaled $17.8 million for the first quarter of 2004, compared to $14.9 million for the first quarter of 2003, and as a percentage of revenues totaled 22.2% compared to 20.0% respectively.

SG&A for the HIBU segment increased $1.8 million to $15.4 million for the first quarter of 2004, compared to $13.5 million for the first quarter of 2003. As a percentage of HIBU revenues, SG&A totaled 21.9% compared to 20.5% for the first quarter of 2004 and 2003, respectively. The dollar increase within the HIBU is due to:

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SG&A for the DBU, totaled $2.4 million for the first quarter of 2004, compared to $1.4 million for the first quarter of 2003. The increase is the result of SG&A costs associated with the acquisitions of Medimax, Inc. in October 2003, and the January 1, 2004 acquisition of Allegiance Health, Inc., a total increase of $0.9 million and increased employee benefit costs of $0.1 million, when converting to Hooper Holmes benefit plans.

Operating income:

As a result of the aforementioned, the Company’s consolidated operating income decreased 35.2% to $5.1 million for the first quarter of 2004, from $7.8 million for the first quarter of 2003, and as a percentage of revenues, decreased to 6.3% compared to 10.4%, respectively.

Operating income for the HIBU segment decreased to $4.6 million for the first quarter of 2004 from $6.1 million for the first quarter of 2003, and as a percentage of revenues, decreased to 6.5% compared to 9.2%, respectively.

Operating income for the DBU segment decreased $1.2 million to $0.5 million for the first quarter of 2004 compared to $1.7 million for the first quarter of 2003. As a percentage of revenues, operating income was 5.3% for the first quarter of 2004, compared to 19.6% for the first quarter of 2003.

Other:

Interest income for the first quarter of 2004 decreased to $0.1 million from $0.2 million for the first quarter of 2004 as compared to the first quarter of 2003 due to slightly lower interest rates and lower levels of invested funds. The reduced levels of invested funds is due to cash used to fund the 2004 acquisitions.

Interest expense increased to $0.15 million for the first quarter of 2004, compared to $0.06 million for the first quarter of 2003. This increase is due to interest accruing on the portion of the purchase price due in 2005 and 2006 for the Heritage Labs acquisition completed in the second quarter of 2003, and interest on the factoring of Medicals Direct accounts receivable of the companies acquired in mid 2003.

The effective tax rate was 37% and 39% for the first quarter of 2004 and 2003, respectively. The tax rate decreased for the first quarter of 2004 compared to 2003 due to lower levels of tax free interest income, offset by a lower tax rate relating to the profits of Medicals Direct Group, which operates in the United Kingdom.

Net income for the first quarter of 2004 was $3.1 million or $0.05 per diluted share versus $4.7 million or $0.07 per diluted share for the first quarter of 2003.

Inflation did not have a significant effect on the Company’s operations in 2004.

Liquidity and Financial Resources

The Company’s primary sources of cash are internally generated funds, cash equivalents, marketable securities and the Company’s $35 million credit facility. Our current ratio as of March 31, 2004 was 2.6 to 1, compared to 3.0 to 1 at December 31, 2003. As of March 31, 2004 and December 31, 2003, working capital was 45.4 million and 53.0 million, respectively.

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For the three months ended March 31, 2004, the net cash provided by operating activities was $0.3 million as compared to $3.3 million for the three months ended March 31, 2003. The significant sources were net income of $3.1 million, $1.9 million of depreciation and amortization, which were offset by an increase in accounts receivable of $4.8 million. Consolidated days sales outstanding, measured on a rolling 90 day basis, was 46.3 at March 31, 2004, compared to 42.3 days at December 31, 2003 and 38.0 days at March 31, 2003. The increase in accounts receivable at March 31, 2004 compared to December 31, 2003 is partially the result of typically strong collections in December 2003. Also, certain customers have indicated they will be paying within Hooper’s net 30 day terms, due to the consolidation of payment processing centers and the limitation of resources to process payments. Previously these customers paid in less than 30 days. Additionally, the Allegiance Health, Inc. acquisitions added $1.0 million to accounts receivable.

On January 28, 2003, a Board resolution was passed to award non-employee directors of the Company up to a maximum of 15,000 shares of the Company’s common stock as compensation. Each director was awarded 5,000 shares on January 31, 2003 and 2004, which vested immediately, and will be awarded 5,000 shares on January 31, 2005, subject to certain conditions. All shares awarded will be restricted under SEC Rule 144, and may not be sold or transferred by the outside director until four years from the date of issue. During the first quarters of 2003, and 2004, the Company expensed the fair value of the 30,000 shares awarded both on January 2003 and January 2004 and such amount is included in Selling, General and Administrative expenses in the consolidated Statement of Income. The total charge was $164,100 and $206,400 in the first quarter of 2003 and 2004, respectively.

On May 30, 2000, the Board of Directors authorized the repurchase in any calendar year of up to 2.5 million shares of the Company’s common stock for an aggregate purchase price not to exceed $25 million per year. For the three months ended March 31, 2003, the Company purchased 89,800 shares at a total cost of $0.4 million. The Company did not purchase any treasury shares during the first quarter of 2004.

On October 29, 1999, the Company entered into a $100 million Amended and Restated Revolving Credit and Term Loan Agreement with three banks. This senior credit facility consists of a $65 million six-year term loan and a $35 million three-year revolving loan, both unsecured. During 2001, the three-year revolving loan expiration date was extended for one year to October 31, 2003. During 2003, the revolving loan expiration date was extended for three years to October 31, 2006. There are no borrowings outstanding against the revolving loan at March 31, 2004. There are no additional borrowings available under the original $65 million term loan due to previous borrowings which have been repaid. As of March 31, 2004, $2.0 million is outstanding against the term loan. Principal payments of $1.0 million are due to be repaid on January 31, 2005 and 2006. The Company has not borrowed under the $35 million revolving loan.

Both the term loan and the revolving loan bear interest at either the prime rate minus  ¹/2% or LIBOR plus  ³/4% to 1¾%, depending on the ration of our consolidated funded debt, as defined, to earnings before interest, taxes, depreciation and amortization, or “EBITDA.” As of March 31, 2004, interest was payable at an effective average annual interest rate of 1.99%. Either loan can be prepaid without penalty at any time. Also, commitment fees of up to 0.3% of the unused revolving loan are charged, and the agreement contains certain financial covenants related to dividends, fixed charge coverage, funded debt to “EBITDA” ratio and stock re-purchases.

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Inflation has not had, nor is it expected to have, a material impact on our consolidated financial results. Quarterly dividends paid in February 2004 were $0.015 per share and totaled $1.0 million. At its April 27, 2004 Board Meeting, the Company declared a quarterly dividend of $0.015 per share.

We have no material commitments for capital expenditures.

Management believes that the combination of current cash, cash equivalents, marketable securities and available borrowings under our senior credit facility, along with anticipated cash flows from operations, will provide sufficient capital resources to satisfy both our short-term and foreseeable long-term needs.

On July 11, 2003, the Company received a determination from the Internal Revenue Service that one individual the Company contracted with as an independent contractor, should have been classified as an employee in 2002. This ruling also applies to any other individuals engaged by the Company under similar circumstances. The ruling also states that the Company may not be subject to adverse consequences as the Company may be entitled to relief under applicable tax laws (Section 530 of the Revenue Act of 1978). The Company and its advisors are continuing to review this determination. Management believes that the Company qualifies for relief under Section 530, and based on this, expects the outcome of this matter will not have a material effect on the Company’s consolidated financial position, results of operations and liquidity.

The Company is aware of allegations that an independent examiner, who billed work through an independent contractor, which in turn billed work through the Company, assaulted certain insurance applicants whom were examined. The examiner did not work for the Company nor was the Company aware that the examiner was performing insurance examinations. The Company has agreed to reimburse one of its insurance company clients, which it billed for examinations performed by this examiner, for certain legal, consulting and other costs incurred by the client, as well as an apportionment of any liability that may stem from examinations performed by the independent examiner. The related costs and estimated liability were accrued in 2003. To date, the Company is not aware of any claims arising from the conduct of the independent examiner. The Company expects that the outcome of this matter will not have a material effect on the Company’s consolidated financial position, or liquidity. However, it could have an impact on the financial results of any one reporting period.

In the past, some state agencies have claimed that the Company improperly classified its examiners as independent contractors for purposes of state unemployment tax laws and that the Company was therefore liable for taxes in arrears, or for penalties for failure to comply with its interpretation of the laws. The Company received an adverse determination in the State of California, and as a result, converted its independent contractors to employees. Other similar state claims are also pending. There are no assurances that the Company will prevail in these cases, or that the Company will not be subject to similar claims in other states in the future.

Critical Accounting Policies

There were no changes to the Company’s critical accounting policies during the three months ended March 31, 2004. Such policies are described in the Company’s 2003 Annual Report on Form 10-K.

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Recently Issued Accounting Standards

In December 2003, the FASB issued FASB Interpretation No. 46R (revised December 2003), “Consolidation of Variable Interest Entities (VIE’s),” which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. As of March 31, 2004, we have not identified any VIE’s that would require consolidation or any significant exposure to VIE’s that would require disclosure.

Forward Looking Statements

Certain written and oral statements made by our Company or with the approval of an authorized executive officer of our Company may constitute “forward-looking statements” as defined under the Private Securities Litigation Reform Act of 1995, including statements made in this report and other filings with the Securities and Exchange Commission. These statements generally are not historical in nature and can be identified by words such as “believe,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “will,” “may,” “should,” “could” and similar expressions. These statements involve risks and uncertainties that could cause actual results to differ materially from our Company’s historical experience and our present expectations or projections. These statements are not guarantees of future performance or results.

The following are some of the factors that could cause our Company’s actual results to differ materially from those described in forward-looking statements:

Trends and other developments affecting the life insurance industry - We currently derive nearly all of our revenues from life insurance companies. The demand for our services is largely dependent on the demand for life insurance policies, policy amounts, the type of health information services requested, general economic conditions, and other factors beyond our control. Any decreases in demand for health information services by life insurance companies could substantially harm our business.

Loss of customers - Our relationships with most insurance company customers are not covered by formal written agreements, and we have exclusive relationships with only a small number of customers. Our ability to retain these customers will depend on our continued ability to serve their needs and to distinguish us from our competitors. The loss of one or more customers could materially impact our business.

Changes in the health information services business environment - These include changes in the types of products demanded by insurance companies, competitive product and pricing pressures, including technological advancements by competitors, and our ability to gain or maintain market share notwithstanding the actions of our competitors. Factors such as these could adversely impact our earnings and growth.

Continued growth of alternative distribution channels - - Our continued growth will depend in part on increased use of the Internet and other alternative distribution channels by our customers to sell their life insurance products. Rapid growth in the use of these distribution channels may not continue. Reduction or replacement of these channels could limit any growth in the number of applications for life insurance policies, which could substantially harm our business.

Need to enhance and expand our technology and infrastructure - We need to continually adapt to the technological needs of our insurance company customers by enhancing and expanding our technology and network infrastructure to accommodate our customers’ changing needs. Our failure to do so could substantially harm our business.

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Loss of key management - Our continued success is materially dependent upon our key management team, including James M. McNamee, our Chairman, President and Chief Executive Officer, none of whom, except for Mr. McNamee, has an employment agreement. If we lose one or more of our executive officers, an inability to successfully recruit and retain additional highly skilled and experienced management, or to successfully train and promote existing personnel to serve in a managerial capacity, could substantially harm our business.

Acquisitions and other strategic investments - Our growth strategy has included acquiring other businesses and making strategic investments. There is no guarantee that these activities will be profitable, or that we will continue growing through these types of activities or otherwise.

Changes in laws and regulations, including changes in accounting standards, taxation requirements and environmental laws.

The effectiveness of our sales, advertising and marketing programs.

Our ability to achieve earnings forecasts, which are primarily based on projected numbers of examinations to be performed.

Economic and political conditions in the United States.

The uncertainties of litigation, as well as other risks and uncertainties detailed from time to time in our Securities and Exchange Commission filings.

Other factors not identified could also cause actual results to materially differ from those described in forward-looking statements. Caution should be taken not to place undue reliance on any forward-looking statements made in this report or otherwise since such statements speak only as of the date when made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company’s exposure to market risk for changes in interest rates relates primarily to the Company’s investment portfolio. The Company invests its securities with high quality issuers and, by policy, limits the amount of credit exposure to any one issuer. The Company does not invest in portfolio equity securities or commodities or use financial derivatives for trading purposes. The Company’s debt security portfolio represents funds held temporarily pending use in our business and operations. The Company mitigates this risk by investing in only high credit quality securities that it believes to be low risk and by positioning its portfolio to respond to a significant reduction in a credit rating of any investment issuer or guarantor. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity.

The table below presents the principal amounts and related weighted average interest rates by year of maturity for our investment portfolio as of March 31, 2004.

Item 4. Controls and Procedures

As of March 31, 2004, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company’s periodic SEC filings.

There have been no significant changes in the Company’s internal controls or in other factors which could significantly affect internal controls subsequent to the date the Company carried out its evaluation or that would likely materially affect the Company’s internal control over financial reporting.

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Part II – Other Information

Item 2 – Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

The following table provides information about purchases made by the Company during the quarter ended March 31, 2004.

Item 6 – Exhibits and Reports on Form 8-K

(a) Exhibits

(b) Reports on Form 8-K

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SIGNATURES

Pursuant to the requirements 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.

Hooper Holmes, Inc.

Dated: May 10, 2004

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