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FORM 10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)

SECURITIES EXCHANGE ACT OF 1934

For Quarterly Period Ended September 30, 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

September 30, 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 unaudited consolidated financial statements have been prepared in accordance with instructions for Form 10-Q and the rules and regulations of the Securities and Exchange Commission (“SEC”). The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2003 annual report on Form 10-K.

The results of operations for the three and nine months ended September 30, 2004 are not necessarily indicative of the results to be expected for any other interim period or 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 (1,254,936 and 2,128,303 for the three months ended and 1,585,165 and 1,848,088 for the nine months ended September 30, 2004 and 2003, respectively) are shares assumed to be issued if outstanding stock options were exercised.

Options to purchase 6,767,425 and 1,889,300 shares of common stock were excluded from the calculation of diluted earnings per share for the three months ended September 30, 2004 and 2003, respectively, and 5,155,175 and 3,712,025 shares for the nine months ended September 30, 2004 and 2003, respectively, 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 FASB 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

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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 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. There were no stock option grants during the quarter ended June 30, 2004 and 2003 or during the quarter ended September 30, 2004 and 2003. The fair value of each stock option granted was estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions:

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On January 28, 2003, the Board of Directors passed a resolution 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 an additional 5,000 shares on January 31, 2005, subject to certain conditions. All shares awarded or to be rewarded 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 Statements of Income. The total charge was $164,100 and $206,400 in the first quarter of 2003 and 2004, respectively.

Note 4: Comprehensive Income

Comprehensive income includes net income and other comprehensive income (loss) which refers to those revenues, expenses, gains and losses which are excluded from net income. Other comprehensive income includes unrealized gains and losses on marketable securities classified as available-for-sale and the effects of foreign currency translation adjustments.

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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 September 30, 2004 and December 31, 2003, were as follows:

Maturities of debt securities classified as available-for-sale were as follows at September 30, 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 $10,038,228 and $27,111,488 in the nine months ended September 30, 2004 and 2003, respectively. Gross realized gains included in income in the nine months ended September 30, 2004 and 2003 were $17,205 and $144,343 respectively, and gross realized losses included in income in the nine months ended September 30, 2004 and 2003 were $18,478 and $18,221 respectively.

Note 6: Capital Stock

The net tax benefit derived from the exercise of stock options was $ 0.1 million for the nine months ended September 30, 2004 and 2003. Options exercised for the nine months ended September 30, 2004 and September 30, 2003, totaled 66,500 shares and 105,600, respectively, all of which were issued from treasury stock.

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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 nine months ended September 30, 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 nine months ended September 30, 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). See Note 10.

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 nine months ended September 30, 2004, are as follows:

The Company performs its annual impairment testing of goodwill at December 31 of each year. There was no impairment at December 31, 2003, and no indication of impairment since that date.

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

The aggregate amortization expense for intangible assets for the nine months ended September 30, 2004, and 2003, was approximately $4,056,000 and $3,155,000 respectively. The estimated intangible amortization expense for the fiscal years ending December 31, 2004 to December 31, 2008 is $5,394,000, $5,029,000, $4,299,000, $3,369,000 and $2,942,000, respectively.

Note 8: Commitments and Contingencies

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 stated 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). Management believes that the Company qualifies for relief under Section 530. To date, the Company has not received any further communication from the Internal Revenue Service and considers the matter closed.

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 and increased in the third quarter 2004. To date, the Company and its client have settled with two claimants and two additional claims are pending. 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.

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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.

In connection with an acquisition during the second quarter of 2003, the Company is obligated for payment of a portion of the purchase price amounting to $4.5 million, which is due as follows: $1.7 million in April 2005 and $2.8 million in July 2006. These amounts are included in other current liabilities and other long-term liabilities, respectively, on the consolidated balance sheet, at September 30, 2004, and are accruing interest at a weighted average rate of 5%.

Also, in conjunction with the acquisition of Allegiance Health, Inc. (Allegiance) in January 2004 and Michigan Evaluation Group (MEG) in May 2004, total additional consideration of up to $4.1 million and $0.3 million, respectively, could be payable in 2005 and 2006 if certain performance criteria are met.

Note 9: Acquisitions and Dispositions

During the nine months ended September 30, 2004, the Company acquired specific assets and liabilities of five companies, which upon acquisition, were included within the HIBU segment and two companies, which upon acquisition, were included within the DBU segment.

Within HIBU, in May 2004, the Company purchased specific assets and liabilities of Mid-American Agency Services, Inc. for $9.0 million. In the third quarter of 2004, Medicals Direct Group, the Company’s U.K. subsidiary, purchased two Companies engaged in the Medico-Legal business for $1.0 million.

Within the DBU, the Company purchased specific assets and liabilities of Allegiance Health, Inc. in January 2004, and Michigan Evaluation group in May 2004, for an aggregate purchase price of $14.7 million.

The following table provides the purchase price of these acquisitions during the nine months ended September 30, 2004.

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The allocations of the purchase prices for these acquisitions are set forth below:

On a pro forma basis, the effect of 2004 acquisitions on revenue, net income and earnings per share was not material. The 2004 acquisitions resulted in additional amortization expense of approximately $0.5 million during the nine months ended September 30, 2004.

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, Medicals Direct and Mid-America Agency Services. It provides a full range of paramedical and underwriting 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., Allegiance Health, Inc., and Michigan Evaluation Group 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 and nine month periods ended September 30, 2004 and 2003 is presented below (in thousands).

Note 11: Recently Issued Accounting Standards

In March 2004, the Financial Accounting Standards Board (FASB) issued the exposure draft, “Shared-Based Payment.” The proposed standard would require all equity-based awards to employees to be recognized in the consolidated statement of income based on their fair value for periods beginning after June 15, 2005. The new standard, if accepted in its present form, would apply to all awards granted, modified or settled after the effective date. We are in the process of analyzing the potential impact of this proposed standard on our consolidated results of operations and financial position.

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. The Company does not have any VIE’s that would require consolidation or any significant exposure to VIE’s that would require disclosure.

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Note 12: Long-Term Debt

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 September 30, 2004. There are no additional borrowings available under the original $65 million term loan due to previous borrowings which have been repaid. As of September 30, 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 1 ³/4%, depending on the ratio of our consolidated funded debt, as defined, to earnings before interest, taxes, depreciation and amortization, or “EBITDA.” As of September 30, 2004, interest was payable at an effective average annual interest rate of 2.46%. Either loan can be prepaid without penalty at any time. Commitment fees of up to 0.3% of the unused revolving loan are charged. The agreement contains the following financial covenants:

As of September 30, 2004, the Company is in compliance with all financial covenants.

Note 13: Other

As previously disclosed in the Company’s amendment to its Form 10-Q for the quarter ending June 30, 2004, the Audit Committee of the Company’s Board of Directors commenced an inquiry into certain reimbursements to the Company’s CEO for expenses and into certain other expenditures made by the Company, including charitable contributions, made by or at the direction of the CEO. The Company’s CFO had asserted that such contributions, expenditures and other actions violated the Company’s Code of Conduct and Ethics adopted March 1, 2004 and the fiduciary duty of the CEO. The Audit Committee retained independent counsel, Gibbons, Del Deo, Dolan, Griffinger & Vecchione of Newark, N.J., to assist it in this inquiry and they, in turn, engaged an independent auditing firm, BDO Seidman, to assist them (the “Investigation Team”).

The Audit Committee and the Investigation Team have reviewed some 10,000 documents for the years 2001 through the conclusion of the inquiry involving nearly $2 million in expenses, charitable contributions and other payments drawn into question by the allegations. Further, they conducted 42 interviews with 27 individuals both within and outside the Company. The investigation was expedited by the total cooperation of everyone involved. The CEO and all officers and employees of the Company cooperated fully with the investigation.

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The Audit Committee has completed its inquiry. Upon evaluation of all the facts and circumstances, the members of the Audit Committee unanimously concluded that they did not believe that the CEO engaged in any intentional wrongdoing or intentional breach of any fiduciary duty.

The Audit Committee and the Investigation Team found that information developed during the investigation did not support a number of the allegations by the CFO of improper conduct by the CEO. The Audit Committee also concluded that the investigation yielded information from which it cannot be determined whether or not the CEO caused the Company to make inappropriate charitable donations as alleged by the CFO and, additionally, the investigation yielded information supporting the allegations that the CEO approved certain invoices for payment by the Company which did not have a business purpose and submitted invoices for reimbursement by the Company which were personal in nature (collectively the “Improper Reimbursements”). The Audit Committee determined that such Improper Reimbursements aggregated $23,747.51, an amount not material to the financial condition of the Company.

The Audit Committee also noted that these Improper Reimbursements were a violation of the Company’s then existing expense reimbursement policies and that Improper Reimbursements made after March 1, 2004 violated the Company’s Code of Conduct and Ethics, but the Audit Committee concluded that these violations were not willful.

At the outset of the inquiry, the CEO had offered to make prompt repayment to the Company of any amounts found to constitute Improper Reimbursements, and the CEO has fully reimbursed the Company for these amounts.

The Audit Committee concluded that the CEO has been and continues to be an extremely valuable contributor to the Company, its past successes and its future prospects and continues to believe that he is a man of integrity. The Audit Committee concluded that the CEO should be retained in the positions of Chairman, President and Chief Executive Officer.

The Audit Committee also concluded that there were deficiencies in the design and operation of certain internal controls involving approval of the CEO’s expenses and charitable giving policies. Prior to the Audit Committee inquiry, the Company hired an independent consulting firm to review its existing internal controls and make recommendations to the Audit Committee regarding areas for improvement. As a result of the inquiry, and with the assistance of an independent consulting firm, the Audit Committee recommended, and the Board of Directors approved, the implementation of certain additional controls and safeguards. These included a revised policy on expense reimbursements for all employees and a policy on charitable contributions. Under the revised policy, the CEO’s expense reimbursement requests will be reviewed and approved by the Audit Committee or its designated member and, as in the past, each employee’s expense reimbursement request will be reviewed by his or her supervisor. Except for annual contributions of $3,000 or less individually (up to an annual aggregate of $50,000) which must be approved by both the CEO and the General Counsel, all charitable contributions must be approved by the Audit Committee or one of its members.

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Finally, the Audit Committee recommended, and the Board approved, the establishment of a lead director position and recommended that the Company’s search for two additional independent directors be expedited.

The Board of Directors has accepted and approved the recommendations of the Audit Committee.

The Company estimates that the cost of the inquiry will be approximately $1.6 million and will be recognized in the third and fourth quarter of 2004.

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

Overview:

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.

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 has focused on the need for a superior service at the lowest possible price since the insurance industry has evolved to one which is very price sensitive. Our business plan requires that costs must be controlled to insure favorable pricing to our customers and to maintain satisfactory margins.

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In our Health Information Business Unit (HIBU) segment, we service most of the major insurance companies in the U.S. and therefore our objective is to expand our share of their books of business, and hence our market share. We expect to successfully execute this plan by continuing to expand our service to the life insurance industry. This includes our most recently acquired capabilities in underwriting services for our clients. Major life insurers have been reducing costs as well, and the size and capacity of underwriting departments is noticeably reduced. Our U.K. subsidiary has been performing outsourced underwriting services for several years as has the recently acquired Mid-America Agency Service (MAAS). One goal for 2005 is to secure more U.S. based outsourced underwriting and use of our resources at MAAS will be the primary driver of this initiative. Combining this initiative with our existing Portamedic and Heritage Labs services should result in applications for life insurance policies being issued more promptly, thereby significantly benefiting our clients.

In our Diversified Business Unit (DBU) segment our strategy is to expand into key states to form a foundation of strong business units in both automobile no fault insurance markets and workers compensation markets. If successful, this will permit the Company to expand organically in the future. With respect to our DBU assets, our strategy is to build a unified national provider of outsourced independent medical examination services while retaining the strong local presence of our individual companies. Accordingly, we have adopted the approach where most, but not all, DBU functions will be centralized. Specifically, the immediate plan objectives are:

We have the resources in place to achieve these objectives and extensive capital spending is not required.

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The Company measures performance in several ways and ties incentive compensation to the successful achievement of these performance measures. Performance is measured against annual budgets prepared going into each year and the successful attainment of both budgeted revenue targets and branch contribution objectives.

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, Medicals Direct Group (MDG), our U.K. subsidiary and the May 2004 acquisition of Mid-America Agency Service, Inc. (MAAS). It provides paramedical, laboratory analysis, attending physician statement (APS), inspection reports and outsourced underwriting services used to underwrite life, health and disability insurance. The Diversified Business Unit (DBU) consists of D&D Associates, Medimax, Inc., Allegiance Health, Inc., and the May 2004 acquisition of Michigan Evaluation Group (MEG). The DBU provides outsourced claims management services to automobile and workers’ compensation insurance carriers.

In 2004, the DBU completed the acquisitions of Allegiance Health Inc., and Michigan Evaluation Group (MEG). The Allegiance acquisition demonstrates the Company’s commitment to develop and grow auto, liability and workers’ compensation, primarily in the state of New York. The acquisition of MEG, demonstrates the Company’s commitment to work towards becoming a national provider of outsourced claims management. Meg, combined with Allegiance, D&D Associates and Medimax, puts the Company on that path.

Within HIBU, the Company acquired Mid-America Agency Services (MAAS) in May 2004. MAAS provides HIBU with high quality outsourced underwriting capabilities and the ability to provide services on a national basis. MAAS, now reports to the Company’s UK subsidiary, Medicals Direct. The Company believes that joining these two providers together, will strengthen both businesses and increase the Company’s ability to make the most of opportunities in outsourced underwriting.

The following provides a summary of the results of our operations for the three months ended September 30, 2004 and 2003 and a detailed discussion regarding these results follows.

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The significant success in our Medicals Direct Group and the acquisition of MAAS has caused total revenues to increase in the HIBU segment. However, with Portamedic revenues declining and margins tightening further operating expense reductions would be required. These operating expenses support the field branch structure and that structure is defined by the volume of business we process. If revenues decline at a rate faster than that of our costs, our profitability will be negatively impacted. The revenue trend in the DBU has stabilized and our plan anticipates improved revenue outlook in future periods. Without this improvement, the DBU profitability picture is not expected to improve and could worsen.

Revenues:

Our total consolidated revenues for the three months ended September 30, 2004 totaled $82.4 million, an increase of $8.8 million (12.1%) compared to the corresponding period of 2003. For the nine months ended September 30, 2004, our consolidated revenues of $245.3 million were up 9.2% ($20.7 million) compared to the corresponding period of 2003. Each of the Company’s two business segments contributed to the increases and are discussed below.

HIBU Segment

For the three months ended September 30, 2004, the HIBU segment’s revenues were $70.9 million, an increase of $5.7 (8.9%) compared to the corresponding period of the prior year. For the nine months ended September 30, 2004, the HIBU’s segment’s revenues were $213.1 million, an increase of $14.2 million (7.1%) compared to the corresponding period of the prior year.

Revenues of the Portamedic business were down $3.9 million ($45.9 million vs. $49.8 million) and $13.4 million ($144.1 million vs. $157.5 million) in the three and nine months ended September 30, 2004 compared to the corresponding periods of the prior year. This revenue decline is the result of:

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The declines in revenues derived by our Portamedic business were partially offset by the increases in the revenues derived by our Infolink business of $1.5 million ($7.0 million vs. $5.5 million) and $5.0 million ($20.9 million vs. $15.9 million) in the three and nine month periods ended September 30, 2004, compared to the corresponding periods of the prior year. The increased Infolink revenues is primarily due to the increased number of Infolink reports (138,000 vs. 122,000 in the three months ended September 30, 2004 and 2003, respectively; 406,000 vs. 351,000 in the nine months ended September 30, 2004 and 2003, respectively). Management attributes the increase in Infolink reports primarily to the units produced from our center in Kansas City, which opened in July 2003, and the greater number of branch-generated Attending Physicians Statements (APSs), made possible by our Portamedic F.A.S.T, product, which provides clients with a quick turnaround time for APSs.

Revenues for our Medical Direct Group (MDG) were $10.5 million and $30.0 million for the three and nine month periods ended September 30, 2004, respectively, compared to $6.1 million and $14.4 million for the corresponding periods of the prior year, respectively. Management attributes the increases in MDG’s revenues to the acquisitions completed in 2003 and 2004, as well as organic growth, the result of continuing favorable trends in the U.K. life insurance and claims management market, particularly in the areas of screenings, the equivalent of our paramedical examination service, Medico-Legal, which provides independent medical reports for legal and corporate clients, and outsourced underwriting services. Medicals Direct is a leading provider of these services and has developed a reputation of providing service and IT solutions for its clients. These qualities, combines with the aggressive marketing efforts, has fueled Medicals Direct growth.

Revenues for Other Services, consisting of Heritage Labs and MAAS, were $7.5 million and $18.1 million for the three and nine month periods ended September 30, 2004, respectively, compared to $3.8 million and $11.1 million for the corresponding periods of the prior year, respectively. The principal factors contributing to the increases were:

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