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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2004

For the transition period from                          to                         

Commission File Number 1-7120

HARTE-HANKS, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number including area code—210/829-9000

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 registrant is an accelerated filer (as defined in 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 March 31, 2004: 87,169,841

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HARTE-HANKS, INC. AND SUBSIDIARIES

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FORM 10-Q REPORT

March 31, 2004

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Item 1. Interim Condensed Consolidated Financial Statements (Unaudited)

Harte-Hanks, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (in thousands, except share amounts)

See Notes to Unaudited Condensed Consolidated Financial Statements.

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Harte-Hanks, Inc. and Subsidiaries

Consolidated Statements of Operations (in thousands, except per share amounts)

(Unaudited)

See Notes to Unaudited Condensed Consolidated Financial Statements.

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Harte-Hanks, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (in thousands)

(Unaudited)

See Notes to Unaudited Condensed Consolidated Financial Statements.

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Harte-Hanks, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity and Comprehensive Income (in thousands)

(2004 Unaudited)

See Notes to Unaudited Condensed Consolidated Financial Statements.

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Harte-Hanks, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

Note A – Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of Harte-Hanks, Inc. and subsidiaries (the “Company”).

The statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004 or any future period. For further information, refer to the consolidated financial statements and footnotes included in the Company’s annual report on Form 10-K for the year ended December 31, 2003.

Certain prior period amounts have been reclassified for comparative purposes.

Note B – Recent Accounting Pronouncements

In December 2003, the Financial Accounting Standards Board revised SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits”. This revision retained the disclosure requirements contained in the original SFAS No. 132, but added additional disclosures about the types of plan assets, investment strategy, measurement dates, plan obligations, cash flows, and components of net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. This revision also required certain disclosures about pensions and other postretirement benefits in interim financial statements. The annual disclosure provisions of SFAS No. 132, as revised, are effective for fiscal years ending after December 15, 2003, and were included in the notes to the Company’s December 31, 2003 consolidated financial statements. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2003, and are included in Note G of these consolidated financial statements.

Note C – Income Taxes

The Company’s quarterly income tax provision of $12.3 million was calculated using an effective income tax rate of approximately 39.6%. The Company’s effective income tax rate is derived by estimating pretax income and income tax expense for the year ending December 31, 2004. The effective income tax rate calculated is higher than the federal statutory rate of 35% due to the addition of state taxes and to certain expenses recorded for financial reporting purposes which are not deductible for federal income tax purposes.

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Note D – Earnings Per Share

A reconciliation of basic and diluted earnings per share is as follows:

For the purpose of calculating the shares used in diluted EPS for the quarters ending March 31, 2004 and 2003, 28,000 and 778,000 anti-dilutive market price options have been excluded from the EPS calculations, respectively.

Note E – Business Segments

Harte-Hanks is a highly focused targeted media company with operations in two segments – Direct Marketing and Shoppers.

Information about the Company’s operations in its two industry segments follows:

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Note F – Stock-Based Compensation

The Company has adopted the disclosure-only provisions of SFAS No. 123. Accordingly, no compensation expense has been recognized for options granted where the exercise price is equal to the market price of the underlying stock at the date of grant. For options issued with an exercise price below the market price of the underlying stock on the date of grant, the Company recognizes compensation expense under the provisions of APB No. 25, as permitted under SFAS No. 123.

Had compensation expense for the Company’s options been determined based on the fair value at the grant date for awards since January 1, 1995, consistent with the provisions of SFAS No. 123, the Company’s net income and diluted earnings per share would have been reduced to the pro forma amounts indicated below:

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants during the three months ended March 31, 2004 and 2003:

Note G – Components of Net Periodic Pension Benefit Cost

Prior to January 1, 1999, the Company maintained a defined benefit pension plan for which most of its employees were eligible. In conjunction with significant enhancements to the Company’s 401(k) plan, the Company elected to freeze benefits under this defined benefit pension plan as of December 31, 1998.

In 1994, the Company adopted a non-qualified, supplemental pension plan covering certain employees, which provides for incremental pension payments so that total pension payments equal those amounts that would have been payable from the Company’s principal pension plan if it were not for limitations imposed by income tax regulation. The benefits under this supplemental pension plan will continue to accrue as if the principal pension plan had not been frozen.

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Net pension cost for both plans included the following components:

The Company presently does not expect to make a contribution to either of its pension plans in 2004.

Note H – Acquisition

In February 2004, the Company acquired Avellino Technologies Ltd., a leading provider of data profiling technology. The total cost of the transaction was approximately $15.5 million, which was paid in cash. Goodwill recognized in this transaction amounted to approximately $9.8 million, and was assigned to the Direct Marketing segment.

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

Overview

Harte-Hanks is a worldwide, direct and targeted marketing company that provides direct marketing services and shopper advertising opportunities to a wide range of local, regional, national and international consumer and business-to-business marketers. Harte-Hanks Direct Marketing improves the return on its clients’ marketing investment with a range of services organized around five solution points: Construct and update the database – Access the data – Analyze the data – Apply the knowledge – Execute the programs. Harte-Hanks Shoppers is North America’s largest owner, operator and distributor of shopper publications, with shoppers that are zoned into 890 separate editions reaching more than 10 million households in California and Florida each week.

Harte-Hanks derives its revenues from the sale of direct marketing services and shopper advertising services. As a worldwide business, direct marketing is affected by general national and international economic trends. Shoppers operate in local markets and are largely affected by the strength of the local economies. The Company’s principal expense items are payroll, postage and transportation.

Results of Operations

Operating results for the three months ended March 31, 2004 and 2003 were as follows:

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Consolidated revenues increased 9.2% to $236.3 million and operating income increased 13.4% to $31.6 million in the first quarter of 2004 when compared to the first quarter of 2003. Overall operating expenses compared to 2003 increased 8.6% to $204.7 million. See discussion below regarding results of the Company’s operating segments.

Net income increased 14.7% to $18.8 million and diluted earnings per share increased 16.7% to 21 cents per share. The net income increase was a result of the increase in operating income.

Direct Marketing

Direct Marketing operating results for the three months ended March 31, 2004 and 2003 were as follows:

Direct Marketing revenues increased $10.3 million, or 7.6%, in the first quarter of 2004 compared to 2003. These results reflect double-digit growth in the high-tech/telecom, financial services and pharmaceutical/healthcare vertical markets. Revenues from the retail vertical market continue to be sluggish and were down compared to 2003. Revenues from Direct Marketing’s select markets group were also down, driven by declines from the government/not-for-profit vertical market, partially offset by increased revenues from the manufacturing vertical market. Revenues from the Company’s vertical markets are impacted by the economic fundamentals of each industry as well as the financial condition of specific customers.

From a service offering perspective, Direct Marketing experienced increased revenues from technical support, account management, personalized direct mail, targeted mail, fulfillment and analytics and agency-related business. Partially offsetting these increases were declines in revenues from logistics, data sales and telesales.

Operating expenses increased $9.1 million, or 7.5%, in the first quarter of 2004 compared to 2003. Labor costs increased $5.4 million, or 9.0% in the first quarter of 2004 compared to 2003 as a result of higher payroll costs due to higher volumes, and higher unemployment taxes, which were partially offset by lower pension expense. Production and distribution costs increased $4.4 million, or 10.3%, due primarily to higher outsourcing costs, which were partially offset by decreased logistics related transportation costs. General and administrative expense was flat as increased insurance costs were offset by decreased business services and other costs. Depreciation expense decreased $0.8 million, or 12.0%, due to lower capital expenditures starting in 2001 and continuing into 2002 and assets becoming fully depreciated.

Direct Marketing’s largest cost components are labor, outsourced costs, and transportation. Each of these costs are variable and tend to fluctuate with revenues and the demand for the Company’s direct marketing services.

The acquisition of Avellino Technologies Ltd. at the end of February 2004 had a minimal impact on revenues and operating expenses for the first quarter of 2004, and is not expected to materially impact revenues or operating expenses for the full year 2004.

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Shoppers

Shopper operating results for the three months ended March 31, 2004 and 2003 were as follows:

Shopper revenues increased $9.7 million, or 11.8%, in the first quarter of 2004 compared to 2003. Revenue increases were the result of improved sales in established markets as well as year-over-year geographic expansions into new neighborhoods and household growth in California and Florida. Total Shoppers circulation increased by approximately 158,000 households during the first quarter of 2004 and at the end of the quarter Shopper circulation reached approximately 10.6 million households (including 239,000 households in South Orange County, California where Shoppers publish two editions each week). The Company believes that expansions provide increased revenue opportunities and plans to expand in each of the next few years in both California and Florida. Newer areas initially contribute less from a revenue-per-thousand perspective than existing areas, and in fact are typically expected to be less profitable or even unprofitable until the publications in those areas mature.

From a product-line perspective, Shoppers had growth in both run-of-press (ROP, or in-book) advertising, primarily core sales and real estate and employment-related advertising, and its distribution products.

Operating expenses increased $7.0 million, or 10.6%, in the first quarter of 2004 compared to 2003. Labor costs increased $2.6 million, or 10.6%, due to higher payroll costs as a result of higher volumes and expansions, and higher unemployment taxes, partially offset by lower pension expense. Production costs increased $3.1 million, or 9.4%, including increased postage of $1.8 million due to increased volumes, and increased paper costs due to increased volumes and rates. General and administrative costs increased $1.3 million, or 19.0%, due primarily to increased insurance expense, which was partially offset by lower promotion expense. Depreciation expense was flat in the first quarter of 2004 compared to 2003.

Shopper’s labor costs are variable and tend to fluctuate with volumes and revenues. Standard postage rates increased at the beginning of the third quarter of 2002 and it is unclear at this time when the next increase might occur. Increased postage rates would impact Shopper’s total production costs. Newsprint prices began to climb in the fourth quarter of 2003 and continued to increase in the first quarter of 2004. This increase impacted Shoppers first quarter production costs and are expected to impact Shopper’s production costs for the remainder of 2004.

Other Income and Expense

Other net expense primarily consists of currency losses, balance-based bank charges and stockholder expenses.

Interest Expense/Interest Income

Interest expense was down slightly in the first quarter of 2004 compared to the same period in 2003 due to lower outstanding debt levels under the Company’s revolving credit facility.

Interest income was up $0.2 million in the first quarter of 2004 compared to the same period in 2003 due to interest related to a tax refund the Company received in

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the first quarter of 2004.

Income Taxes

The Company’s income tax expense increased $1.6 million in the first quarter of 2004 compared to the first quarter of 2003. This increase was due primarily to the higher pre-tax income levels. The effective tax rate was approximately 39.6% for the first quarter of 2004 and approximately 39.5% for the first quarter of 2003.

Liquidity and Capital Resources

Cash provided by operating activities for the three months ended March 31, 2004 was $44.6 million, compared to $35.6 million for the first three months of 2003. Net cash outflows from investing activities were $24.8 million for the first three months of 2004, compared to $8.0 million for the first three months of 2003. The difference between net cash outflows in 2004 and 2003 is primarily the result of the acquisition of Avellino Technologies Ltd. in February 2004. The remaining net cash outflows in both years primarily relate to purchases of fixed assets. Net cash outflows from financing activities were $18.8 million in 2004 compared to $21.2 million in 2003. The difference between net cash outflows in 2004 and 2003 is attributable primarily to a lower amount spent for the repurchase of treasury stock and a higher amount of cash received from the exercise of stock options in 2004. Partially offsetting these amounts was higher net repayment of borrowings and higher dividend payments in 2004.

Capital resources are available from and provided through the Company’s unsecured credit facility. This credit facility, a three-year $125 million variable-rate, revolving loan commitment, was put in place on October 18, 2002. All borrowings under this credit agreement are to be repaid by October 17, 2005. As of March 31, 2004, the Company had no debt outstanding and had available to it the full $125 million of unused borrowing capacity under this credit facility. Management believes that its credit facility, together with cash provided from operating activities, will be sufficient to fund operations and anticipated acquisitions, capital expenditures, stock repurchases and dividends for the foreseeable future.

Factors That May Affect Future Results and Financial Condition

From time to time, in both written reports and oral statements by senior management, the Company may express its expectations regarding its future performance. These “forward-looking statements” are inherently uncertain, and investors should realize that events could turn out to be other than what senior management expected. Set forth below are some key factors which could affect the Company’s future performance, including its revenues, net income and earnings per share; however, the risks described below are not the only ones the Company faces. Additional risks and uncertainties that are not presently known, or that the Company currently considers immaterial, could also impair the Company’s business operations.

Legislation – There could be a material adverse impact on the Company’s Direct Marketing business due to the enactment of legislation or industry regulations, including the recent creation of do-not-call lists, arising from public concern over consumer privacy issues. Restrictions or prohibitions could be placed upon the collection and use of information that is currently legally available.

Data Suppliers – There could be a material adverse impact on the Company’s Direct Marketing business if owners of the data the Company uses were to withdraw the data. Data providers could withdraw their data if there is a competitive reason to do so or if legislation is passed restricting the use of the data.

Acquisitions – The Company continues to pursue acquisition opportunities, primarily in its Direct Marketing segment. Acquisition activities, even if not consummated,

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require substantial amounts of management time and can distract from normal operations. In addition, there can be no assurance that the synergies and other objectives sought in acquisitions will be achieved.

Competition – Direct marketing is a rapidly evolving business, subject to periodic technological advancements, high turnover of customer personnel who make buying decisions, and changing customer needs and preferences. Consequently, the Company’s Direct Marketing business faces competition in all of its offerings and within each of its vertical markets. The Company’s Shopper business competes for advertising, as well as for readers, with other print and electronic media. Competition comes from local and regional newspapers, magazines, radio, broadcast and cable television, shoppers, other communications media and other advertising printers that operate in the Company’s markets. The extent and nature of such competition are, in large part, determined by the location and demographics of the markets targeted by a particular advertiser, and the number of media alternatives in those markets. Failure to continually improve the Company’s current processes and to develop new products and services could result in the loss of the Company’s customers to current or future competitors. In addition, failure to gain market acceptance of new products and services could adversely affect the Company’s growth.

Qualified Personnel – The Company believes that its future prospects will depend in large part upon its ability to attract, train and retain highly skilled technical, client services and administrative personnel. While dependent on employment levels and general economic conditions, qualified personnel historically have been in great demand and from time to time and in the foreseeable future will likely remain a limited resource.

Postal Rates – The Company’s Shoppers and Direct Marketing services depend on the United States Postal Service to deliver products. The Company’s Shoppers are delivered by standard mail, and postage is the second largest expense, behind payroll, in the Company’s Shopper business. Standard postage rates increased at the beginning of the third quarter of 2002. Overall Shopper postage costs have grown moderately as a result of this increase and are expected to grow further as a result of anticipated increases in circulation and insert volumes. Postal rates also influence the demand for the Company’s Direct Marketing services even though the cost of mailings is borne by the Company’s customers and is not directly reflected in the Company’s revenues or expenses.

Paper Prices – Paper represents a substantial expense in the Company’s Shopper operations. In recent years newsprint prices have fluctuated widely, and such fluctuations can materially affect the results of the Company’s operations.

Economic Conditions – Changes in national economic conditions can affect levels of advertising expenditures generally, and such changes can affect each of the Company’s businesses. In addition, revenues from the Company’s Shopper business are dependent to a large extent on local advertising expenditures in the markets in which they operate. Such expenditures are substantially affected by the strength of the local economies in those markets. Direct Marketing revenues are dependent on national and international economics.

Interest Rates – Interest rate movements in Europe and the United States can affect the amount of interest the Company pays related to its debt and the amount it earns on cash equivalents. The Company’s primary interest rate exposure is to interest rate fluctuations in Europe, specifically EUROLIBOR rates due to their impact on interest related to the Company’s $125 million credit facility. The Company also has exposure to interest rate fluctuations in the United States, specifically money market, commercial paper and overnight time deposit rates as these affect the Company’s earnings on its excess cash.

War – War and/or terrorism or the threat of war and/or terrorism involving the United States could have a significant impact on the Company’s operations. War or

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the threat of war could substantially affect the levels of advertising expenditures by clients in each of the Company’s businesses. In addition each of the Company’s businesses could be affected by operation disruptions and a shortage of supplies and labor related to such a war or threat of war.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company’s earnings are affected by changes in short-term interest rates as a result of its revolving credit agreement, which bears interest at variable rates based on EUROLIBOR (which would have had an effective rate of 1.60% at March 31, 2004) and has a maturity date of October 17, 2005. At March 31, 2004, the Company did not have any debt outstanding under its revolving line of credit. The Company’s earnings are also affected by changes in short-term interest rates as a result of its deferred compensation agreement, which bears interest at variable rates based on Prime (effective rate of 4.0% at March 31, 2004) and has a balance of $6.2 million at March 31, 2004. Assuming the current level of borrowing and deferred compensation balance and assuming a one percentage point change in the quarter’s annual interest rates, it is estimated that the Company’s first quarter 2004 net income would have been approximately $13,000 lower. Due to the Company’s debt level and deferred compensation balance at March 31, 2004, anticipated cash flows from operations, and the various financial alternatives available to management should there be an adverse change in interest rates, the Company does not believe that it has significant exposure to market risks associated with changing interest rates as of March 31, 2004. The Company does not use derivative financial instruments in its operations.

The Company’s earnings are also affected by fluctuations in foreign exchange rates as a result of its operations in foreign countries. Due to the level of operations in foreign countries, the impact of fluctuations in foreign exchange rates is not significant to the Company’s overall earnings.

Item 4. Controls and Procedures

As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of the Company’s management, including its Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer concluded that the design and operation of these disclosure controls and procedures were effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings. No significant changes were made in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

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PART II. OTHER INFORMATION

Item 2. Issuer Purchases of Equity Securities

The following table contains information about the Company’s purchases of equity securities during the first quarter of 2004:

Item 6. Exhibits and Reports on Form 8-K

The Company filed a report on Form 8-K dated April 29, 2004. The report presented the reclassification of temporary labor and consulting costs for each of the quarters in 2003 and for the full year ended December 31, 2003. Under the report, the Company furnished (not filed) pursuant to Item 9 and Item 12, the table entitled “Reclass of certain 2003 operating expense amounts for comparative purposes”.

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Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

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Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

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Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

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*Filed herewith

+Indicates management contract or compensatory plan, contract or arrangement.

The agreements set forth above describe the contents of certain exhibits thereunto which are not included. However, such exhibits will be furnished to the Commission upon request.

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