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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2004.

Commission file number: 1-9972

HOOPER HOLMES, INC.

(Exact name of Registrant as specified in its charter)

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

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

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 and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. ¨

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

The aggregate market value of the shares of our common stock held by non-affiliates of the Registrant (61,149,262 shares), based on the closing price of these shares on June 30, 2004 (the last business day of the registrant’s most recently completed second fiscal quarter) on the American Stock Exchange, was $350,996,764. For the purposes of the foregoing calculation only, all directors and executive officers of the Registrant have been deemed affiliates.

The number of shares outstanding of the Registrant’s Common Stock as of February 11, 2005 was 65,249,879.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s Proxy Statement for the Annual Meeting of Shareowners to be held on May 24, 2005, are incorporated by reference in Part III of this report.

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HOOPER HOLMES, INC.–FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2004

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FORM 10K

PART 1

Cautionary Statement Regarding Forward-Looking Statements

This annual report on Form 10-K (particularly Items 1 and 7) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. We intend that such forward-looking statements be subject to the safe harbors created by this legislation.

In some cases, you can identify forward-looking statements by our use of terms such as “anticipate,” “believe,” “continue,” “could,” “should,” “estimate,” “expect,” “forecast,” “intend,” “hope,” “goal,” “may,” “will,” “plan,” “seek” and variations of these words or similar expressions.

Forward-looking statements are based on management’s current assumptions, estimates and expectations of future events. We cannot guarantee that these assumptions are accurate or that the estimates and expectations will be realized. Thus, all of these forward-looking statements are subject to risks and uncertainties. Some of the factors that could cause our actual results to differ materially from those projected in any such forward-looking statements include, without limitation:

The section of this annual report under the caption “Risk Factors” addresses some of the important risk factors that are affecting or may affect our business, results of operations and financial condition. These risk factors are not necessarily all of the factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors not identified could also have material adverse effects on our future results.

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The forward-looking statements included in this annual report are made as of the date of this report. Other than as required by law, we expressly disclaim any intent or obligation to update any forward-looking statements to reflect events or circumstances that subsequently occur or of which we hereafter become aware. Unless otherwise indicated, all references to a year reflect our fiscal year that ends December 31.

Overview

Hooper Holmes, Inc. and its subsidiaries (Hooper Holmes or the Company) currently engage in two principal businesses, which are operated as distinct divisions:

In summary, our Health Information Division provides medical-related evaluative services at the “front” end of the insurance process (i.e., the underwriting of policies), while the Claims Evaluation Division provides such services at the “back” end of the process (i.e., the claims end).

Our Company history spans over 100 years, and over the last 35 years, our business focus has been the activity conducted by our Health Information Division. Over time, this business has established more than 160 company-owned branch facilities from which we recruit, monitor and manage the network of paramedic examiners that provide our primary risk assessment services. Our branch office geographic “footprint” is augmented by an additional 76 independent contract affiliate offices that perform many of the same functions as our branch offices. Through these facilities, we have the ability to provide an examination of any applicant for insurance in any location in the United States. These services are provided by a network of approximately 9,500 personnel, of which 3,000 are employees. In August 2002, we acquired the United Kingdom based Medicals Direct Group, expanding the geographic scope of our Health Information Division.

Our Claims Evaluation Division has been built through acquisitions, the first of which was completed in October 2002. Our decision to enter the business of providing medical claims services reflected the objective of leveraging the core strengths of our Health Information Division, including a thorough understanding of the services required by, and our relationships with, the insurance industry, the ability to conduct business in all major local markets in the United States, and our outsourcing capabilities developed through working with a network of approximately 9,500 field personnel.

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Today, our Health Information Division provides risk assessment services to over 700 life insurance carriers, including most of the top 100 carriers in the United States and virtually all of the roughly 50 life insurance carriers in the United Kingdom. Our Claims Evaluation Division, which has been focused in the geographic regions in which the four acquired businesses that comprise this division were originally active (i.e., New York, Pennsylvania, New Jersey and Michigan), provided services to over 650 different clients in 2004. Of those CED clients, the 21 largest accounted for 83% of the division’s revenues. A core part of the growth strategy for this business is to diversify by client, by developing a deeper national network of IME providers and a more robust operations and technology platform to support them.

Our principal executive offices are located at 170 Mt. Airy Road, Basking Ridge, New Jersey 07920. Our telephone number is (908) 766-5000. Our website address is www.hooperholmes.com. We have included our website address as an inactive textual reference only. The information on our website is not incorporated by reference into this annual report on Form 10-K. We make available through our website our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, Forms 3, 4 and 5 filings, and all amendments to these reports and filings as soon as reasonably practical after such material is electronically filed with the SEC.

Health Information Division

Services

Paramedical and Medical Examinations. Our Health Information Division performs paramedical and medical examinations of insurance policy applicants throughout the United States under the Portamedic trade name. The results of such examinations are provided to insurance carriers, their affiliated agents (that is, agents who exclusively or primarily sell insurance policies of one carrier), independent agents or brokers (who sell policies of multiple carriers), and non-traditional insurance marketers - primarily in connection with the processing of applications for life insurance. Through our wholly-owned subsidiary, Medicals Direct Group, we also provide paramedical examinations in the United Kingdom, referred to in the U.K. as “Screenings.” Underwriting decisions are based on statistical probabilities of mortality and morbidity, such that insurance companies generally require quantitative data reflecting an applicant’s general health. We provide that data.

Because almost all of our examiners are nurses or other medically trained professionals, we are able to provide our customers with a full range of paramedical and medical examinations. Insurance carriers have different guidelines for determining when an examination is required and the scope of such examination. The likelihood that an examination of an applicant will be required is influenced by the applicant’s age and the amount of insurance being sought. In general, insurance carriers insist upon more stringent underwriting requirements as the age of the applicant and amount of coverage increases. For example, a 35 year old applicant seeking insurance coverage of $100,000 may only be asked to submit to a paramedical examination, during which he or she will have blood and urine samples taken. In contrast, a 60 year old applicant seeking $500,000 in coverage is more likely to be asked to submit to a medical examination by a physician, provide blood and urine samples, have chest x-rays taken and undergo an EKG test.

Infolink Services Group - Personal Health Interviews and Medical Records Collection. Under the Infolink name, we offer personal health interviews and medical records collection services, including the obtaining of attending physician statements (APS), for our customers. Our centralized Infolink call center based in Kansas City, Kansas handles:

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Our carrier customers contract with us for use of the Infolink call center. Approximately 121 full-time employees prepare all of the Infolink reports ordered by these customers. These employees interview the individual applicants, their employers and business and personal associates. The Infolink reports generated are transmitted or mailed to insurance underwriters. Our information systems allow us to tailor each report for the particular carrier’s needs.

Heritage Labs. Our wholly-owned subsidiary, Heritage Labs, processes the specimens obtained in connection with a portion of our paramedical examinations, as well as the specimens provided by third-party health information service providers. Heritage Labs allows us to provide our life insurance customers with a one-stop source for their health information service needs.

Other Activities. In addition to the screenings performed by Medicals Direct Group, our U.K. based subsidiary, Medicals Direct provides a number of other services, including:

In addition, our U.S. based examiners perform a range of ancillary services, such as helping applicants understand and complete forms, and obtaining consent signatures. We have dedicated customer service employees located in Kansas City who help complete applications based on telephone interviews with applicants, and five additional customer service employees located in service centers in several cities who provide general customer service support.

Key Trends of Relevance to the Health Information Division

Decrease in Life Insurance Applications/Issuance of Life Insurance Policies

The most critical and indicative non-financial metric for our Health Information Division is the number of applications for life insurance. Our management monitors application levels through The Medical Information Bureau Group, Inc. (MIB), a clearinghouse of policy application information based in Westwood, Massachusetts that is owned by participants in the insurance industry. The MIB Life Index is the life insurance industry’s timeliest measure of application activity across the U.S. and Canada. The Index is based on the number of searches member company underwriters perform on the MIB database. Since the vast majority of individually underwritten life premium dollars in North America include a MIB search as a routine underwriting requirement, the MIB Life Index provides a reliable proxy for new business activity.

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For the past two years, the number of applications for life insurance recorded by MIB has declined, by 4.1% in 2003 and 2.3% in 2004. Our management attributes this to several factors:

The decline in the number of life insurance applications and individual life insurance policies is detrimental to the Health Information Division’s business and its operating results. In contrast, the Health Information Division’s business benefits when individual life insurance policies are underwritten for higher policy face amounts. Based on MIB data, currently a greater percentage of policies are being underwritten for people in the 60-65 age bracket, an age bracket in which people generally seek higher levels of insurance compared to younger people. As noted above, there is a greater level of medical examination requirements when policies are underwritten for higher amounts, raising the value of an order for paramedic exam services.

Cost Pressure from Life Insurance Carriers and the Competition

Following the decline in investment returns since the dot.com bubble burst in 2000, insurance companies have had to address cost items in a more rigorous manner in an attempt to maintain their profitability and level of return to their stakeholders. These carriers have placed increased cost pressure on outsourced service providers, as the carriers look to reduce costs in every aspect of their business.

Changes in the Channels through which Life Insurance is Sold

In view of the drop-off in the writing of life insurance policies (and applications for such policies), life insurance carriers have adopted a multi-channel strategy, then sought to optimize the productivity of each channel. Sales through local sales agents/brokers have declined dramatically. The alternative distribution channel - consisting of direct mail, the Internet and services that provide insurance pricing on line - now represents the fastest growing segment of the market. According to a LIMRA survey conducted in 2003, 40% of life insurance applicants had no face-to-face contact with an insurance agent or broker.

Shorter Life Insurance Application Processing Periods

According to A.M. Best, a leading insurance industry analyst, life insurance application processing times have been reduced from 90-120 days to 20-25 days as a result of electronic processing and other technological enhancements. It is critical to shorten the time between when a policy is sold and when it is issued because of the “buyer’s remorse” phenomenon: the longer the amount of time that passes from an

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applicant’s submission of an application to the time the policy is underwritten, the greater the likelihood of the applicant not pursuing the policy.

The Health Information Division’s Growth Strategy

The major components of the Health Information Division’s growth strategy reflect management’s efforts to address the key trends identified above.

Provide Faster, More Efficient Service as a Competitive Differentiator

Over the past few years, Portamedic has focused on providing faster and more efficient service. We strive to schedule an appointment for a paramedical examination within 24 hours of receiving a request and to complete the entire examination process in three to five days, subject to the applicant’s availability. Our examiners perform examinations at times and locations convenient to the applicant, generally at the applicant’s home or place of business. Beyond our operational breadth and flexibility, we have taken a number of steps of a logistical nature to further the objective of providing faster, more efficient service, including:

This online document management system allows for the indexing and imaging of medical underwriting documents for immediate retrieval on our secure website or through a secure encrypted file transfer protocol (FTP) site. Images delivered through F.A.S.T. are password protected, making them available only to authorized personnel designated by client carriers. Our imaging capabilities are expanding to cover all facets of our business. We can gather any paper or electronic document, bundle these documents and pass them on to the customer, thus shortening the “product to customer” cycle times.

E-Business Submission Services combines ancillary services performed to carrier specifications, and facilitates streamlined receipt and processing of all pieces of a new business package. A unit is a completed requirement that has been checked for completeness and includes identifying information that enables the insurance company to electronically receive, process and distribute such information within its system.

Our centralized Infolink call center is the result of consolidating five offices into one. The call center’s tele-interviewing capability enables us to gather much of the information needed in connection with the life insurance application process (e.g., financial, employment history, medical history and, where appropriate, attending physician statements) in a more time-efficient manner compared to the alternative of a paramedical examiner gathering such information while conducting an examination. For example, if in the course of conducting a Teledex interview we learn that an applicant has a health history problem, we can immediately order an attending physician statement, saving as much as 14 days in the application processing time. The consolidation of offices to establish the centralized Infolink call center has had the additional benefit of enabling us to move staff from one group to another as the work volumes change in each group, increasing the productivity of that operation.

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Teledex is an automated service providing applicant information to our insurance customers on an expedited basis. When an insurance customer transmits an order through Teledex, a staff member pulls up a customer-specific underwriting questionnaire (the system contains a number of customer-specific underwriting questions) on his or her computer terminal and then conducts a telephone interview with the applicant to get responses to the applicable questions. Once we have a contract with a customer and have programmed their forms, we can add brokers representing that customer instantly. This enables us to provide customized reports for each customer in a matter of hours. This process is of value to our customers because it allows them to begin the underwriting process upon receipt of the Teledex report, rather than waiting for an examiner to perform the examination, collect the data and then return the report and examination results. Additionally, Teledex receives and handles orders for attending physician statements.

The Health Information Division has developed an e-forms library of over 185 insurance companies’ electronic application forms, used by roughly 37% of its insurance carrier customers. These forms, which are carrier-specific and subject to changes in applicable state insurance laws and regulations, are kept current on a real-time basis.

In addition, we have been active in supporting the initiatives led by the Association for Cooperative Operation in Research and Development (ACORD), whose purpose is to establish electronic message standards for the life and health insurance industries. One of our employees is a co-chair of the ACORD working group subcommittee on underwriting requirements.

We recently announced that we entered into a strategic alliance with Agency Works, a leading provider of life management systems, to launch iRelay, a Web-based client solutions tool, custom-designed for our clients, that is expected to allow the electronic transport of insurance applications. We intend to continue to invest in technologies and participate in activities that we believe can further enhance our operating efficiencies, and provide more Internet-based services to our customers.

We believe all of these initiatives are being well received in our market place. To illustrate:

Expand the Business Generated by the Alternative Distribution Channel

The alternative distribution channel currently represents the fastest growing life insurance distribution segment, through which we estimate that approximately 32% of our sales are now generated. The common computer system of our extensive branch office network, and the system’s ability to allow the downloading of

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status information over the Internet or directly to a customer, served as strong selling points and contributed to our success in making inroads with the entities selling life insurance through this channel. We are developing electronic application submission programs that we believe will benefit this market segment through faster aggregation and delivery of underwriting requirements to the carrier customers.

Pursue Outsourced Underwriting

To address life insurance companies’ continued search for cost reductions and improved operating efficiency, our management has been seeking to develop or acquire the necessary capabilities to allow insurance companies to outsource the complete underwriting process (i.e., all of the steps involved in processing life insurance applications for purposes of making the underwriting decision).

Our U.K. based subsidiary, Medicals Direct Group (MDG), provides outsourced underwriting services in connection with approximately 25% of all life insurance policies being underwritten in the United Kingdom. This provided us with a platform on which to build. To further this component of our growth strategy, in May 2004 we acquired Mid-America Agency Services, Inc. (MAAS), a full-service insurance services organization based in Omaha, Nebraska with MIB approval capability that provides risk selection services to the insurance underwriting industry using medical professionals who are trained in medical, non-medical and the financial aspects of underwriting. MAAS completes all the U.S. based outsourced underwriting services for a large insurance company, currently generating in excess of 225,000 underwriting units per year. The MAAS acquisition expands and enhances our core competencies in insurance information services, moving us closer to our goal of providing a ‘one-stop’ source for outsourced life insurance services.

Our Network of Branch and Contract Affiliate Offices; Paramedical Examiners

We believe our network of branch and contract affiliate offices throughout the United States is the most extensive in our industry, enabling us to provide a timely examination of applicants located anywhere in the country.

Each of our 160 branch offices is automated with direct electronic connections to our home office in Basking Ridge, New Jersey. Orders are received from our customers either directly from agents or brokers by one of our branch offices or through the home office. The branch office is responsible for scheduling an examination and assigning a paramedical examiner. The status of the examination is entered into the branch office system, is then retrieved by the home office, and then made available to the customer. The examination results, once complete, are transmitted, faxed or mailed directly to the customer. The respective branch managers are responsible for the supervision of their local health information operations. A support staff coordinates examinations and reporting procedures and performs quality assurance functions. Our branch offices hire and contract with properly trained, experienced examiners. In addition, our Health Information Division has developed a database of nearly 500 credentialed physicians who are approved to perform medical examinations for our customers.

We have 76 independent contract affiliate offices. Contract affiliates perform many of the same functions as our branch offices, but are independently owned and operated. Our contract affiliates provide Portamedic services in assigned geographical areas throughout the United States and receive orders directly from our customers. Each contract affiliate is responsible for compensating, training, hiring and supervising all of its personnel and must meet the same quality assurance standards as our branches, including necessary credentialing of its examiners. Our contract affiliates use a version of our system software that allows them to process customer billing information and provide examination status reports.

The high costs of skilled labor and transportation (e.g., gasoline) have severely impacted our cost of doing business, forcing us to pursue innovative solutions to help our customers operate more efficiently. The success

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of Portamedic F.A.S.T.^™ has led to an array of electronic submission programs that dramatically reduce the cycle time from point-of-sale to policy issue. Our field staff of dedicated examiners continue to schedule visits to their best economic advantage and still conform to our time service requests. Examiner recruitment and retention are keys to our continued compliance with our internal time service standards and management is focused on this fact.

The HID conducts criminal background checks on all of our examiners, including those working for our contractor affiliates. We also conduct criminal background checks on all of the credentialed physicians we include in the HID database as approved to perform medical examinations for customers, in addition to verifying that they are licensed in good standing.

Sales and Marketing

In 2003, we formed a Corporate Marketing Group. Under the direction of our Chief Marketing Officer, the group is responsible for defining, pricing and implementing new products and services, identifying and pursuing strategic alliances, and managing corporate advertising. The direct supervision of our sales executives was reorganized to effect a renewed sales approach. Portamedic’s sales process for insurance companies entails, in essence, two sales: first, the sales process associated with getting on a carrier’s list of approved outside service providers; and, second, selling to the carrier’s local representatives, or to the community of independent brokers and agents. Our home office handles the former; the branch managers in our branch offices (and, in some cases, additional marketing personnel), the latter. In marketing to independent brokers and agents, our challenge is to ensure that we are on the approved list of providers of each of the carriers with whom the broker or agent is licensed. All of our marketing efforts highlight the quality of our examiners and the speed and accuracy of our services. Our local marketing efforts highlight the ability of the branch office to quickly ascertain the status of each service request through our automated branch management information system.

Pricing of Our Risk Assessment Services

The Health Information Division provides a one-source order and delivery system of services to fully underwrite an application for life, health and disability insurance–from point-of-sale to policy delivery. We believe that insurance company customers are better able to meet their cost containment and cycle time objectives by outsourcing their requirements to a single supplier like Hooper Holmes.

A growing number of carriers are contracting for services through corporate procurement departments. We believe that purchasing agents are more inclined to contract with full service companies like Hooper Holmes that provide complete underwriting products, including examinations, laboratory analysis, attending physician statements, personal history interviews and tele-underwriting. These services are often priced as bundled services, offering the customer cost efficiencies.

Pricing of services may be impacted by a number of factors, including the customer’s volume of business, the number of suppliers providing services, the customer’s distribution channels and the type of services ordered.

Competition

In the Health Information Division’s market, management believes that we are the largest of the four national firms that focus primarily on providing paramedical examinations, specimen analysis, interviews of applicants and medical records collection for the life insurance industry. The other three firms are LabOne, Inc., Examination Management Services, Inc. and American Para Professional Systems. A significant number of regional and local firms also compete in this industry. Although we have exclusive relationships with certain of our customers, companies generally use two or more health information service providers.

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Our ability to retain and expand our customer base will depend on our continued ability to serve their needs and differentiate ourselves from our competitors. In management’s view, the principal competitive factors in our market are price, the quality of service and examinations, the timeliness of the examination process and communication of results, the geographic scope of coverage and the level of automation and connectivity between health information providers and insurers.

Government Regulation

Certain aspects of our domestic Health Information Division’s business are regulated by the states in which we operate and, to a lesser extent, by the U.S. federal government. In addition to licensing and certification requirements for our examiners, we are subject to regulations governing various aspects of our services, including the drawing of blood, needle disposal and specimen handling. Certain aspects of our business may be subject to certain provisions of the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) relating to the privacy of protected health information. The Food and Drug Administration governs certain aspects of Heritage Labs’ business, including the manufacturing of specimen collection kits. Management is not aware of any pending federal or state environmental laws or regulations that would have a material adverse effect upon our the Health Information Division’s business or competitive position or that would require material capital expenditures on our part to effect compliance.

Claims Evaluation Division

Our Claims Evaluation Division’s business activities are conducted by the four companies we have acquired since October 2002. Those businesses are D&D Associates (acquired in October 2002), Medimax (acquired in October 2003), Allegiance Health (acquired in January 2004) and Michigan Evaluation Group (acquired in May 2004).

Services

Our Claims Evaluation Division provides medical claims evaluation services to insurance adjusters for use in processing personal injury accident claims, primarily on behalf of property and casualty insurance carriers. While we also serve disability insurance carriers, they are not significant consumers of such services. We provide our claims evaluation services primarily in connection with workers’ compensation claims and automobile (particularly no-fault) claims, with a small volume of services rendered in connection with general liability claims and, on the life and health insurance side of the insurance industry, private disability claims.

Our management estimates that the size of the overall outsourced medical claims management market at approximately $3 billion per annum. We consider the outsourced medical claims management business to consist of the following components: medical evaluative services, medical claims audit and medical management. Our focus is on providing medical evaluative services. Such services include:

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Management estimates that the medical evaluative services market is a $1.2 billion per year market in the United States, if one includes all major lines of property and casualty insurance, as well as private and social security disability insurance, and excludes other claims-related services on the life/health side of insurance and services used at the insurance underwriting stage.

The core of the Claims Evaluation Division’s business activity is the arranging of IMEs. This entails making the arrangements for an IME of a claimant after the claims handler has received the claim (usually including the medical bills and records). We administer a network of doctors in our service areas, from which we select the appropriate type of specialist to conduct the IME. After the doctor reviews the records and conducts the examination, the doctor’s report is then transmitted to us. Upon completion of a quality review process, we forward the doctor’s report to the carrier or claims adjuster. Speed is critical to this process because a timely assessment allows the claims handler to process claims more efficiently. In addition, under applicable state laws, insurers may have a limited number of days to pay, partially pay or deny a claim.

In addition to arranging IMEs, the doctors and other professionals we retain provide the other types of medical evaluative services described above: functional capacity evaluations, peer and file reviews and radiology reviews.

The Claims Evaluation Division’s business is a people-intensive service business involving the scheduling of IMEs at remote locations, the review of files and customer service work. This business requires an ability to communicate with the claims adjuster clients, to manage the doctor networks, to understand certain medical aspects of accidents and to possess skills in medical records review. The business is also data-intensive, and we believe that our automated systems and technology, with our planned upgrades, position us well as our industry becomes increasingly more automated.

Key Trends of Relevance to the Claims Evaluation Division

Contraction of the Outsourced Medical Claims Management Market in the United States

Management perceives that the outsourced medical claims management market in the United States, including the market for medical evaluative services, may be contracting. A number of factors may be contributing to this trend, including:

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There are, however, other factors that may contribute to growth in the medical claims management market (or at least offset the degree of contraction), including broader definitions of workplace injuries and illnesses covered by workers’ compensation insurance, an aging workforce and the shifting of costs from group health plans to workers’ compensation insurance. In addition, management believes that, because of the fragmented nature of the industry and the Claims Evaluation Division’s relatively low degree of penetration (the division’s 2004 revenues comprise less than 4% of the estimated $1.2 billion market), the division has significant room to grow even within a contracting overall market.

Heightened Compliance and Security Standards

Federal laws regarding financial controls and accountability (e.g., the Sarbanes-Oxley Act of 2002) and the security of medical records (HIPAA) have raised the bar in terms of the compliance standards that insurers, third party administrators and other claims handlers - and, as a consequence, their vendors - must meet. Vendors are being asked to complete lengthy questionnaires, to provide written representations as to the vendors’ compliance with such laws and to meet more rigorous standards regarding the quality of their services. Enhanced practitioner credentialing, including the undertaking of criminal background checks of such practitioners, is a particularly costly demand being made by certain claims handlers. In addition, customers are seeking confirmation that their vendors have sufficient financial resources to sustain legal challenges to their compliance with these laws.

Growing Price Sensitivity of Property and Casualty Claims Handler Customers

As the trend of outsourcing claims management services continues, property and casualty claims handlers are seeking lower prices from their vendors and/or asking that more services be provided at no additional cost.

The Claims Evaluation Division’s Growth Strategy

Deepen National Capabilities as a Provider of IME-Related Services

While the Claims Evaluation Division currently conducts business nationally, its activity has in the past been focused in the original service areas of the four acquired companies. We believe that we can continue growing our business by deepening our capabilities in all regions, and that we can do so without losing focus on maintaining our current business activity. To implement this strategy we will require a number of steps to be taken, including:

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Focus on Growth from the Workers’ Compensation Claims Industry

The workers’ compensation industry represents a large user of the types of services the Claims Evaluation Division provides. We estimate that the total workers’ compensation component of the medical evaluative services portion of the outsourced medical claims management market is approximately $500 million. In addition, management believes there is significant potential to grow our workers’ compensation business if we properly structure our approach to this market.

Our plan for growth with respect to our workers’ compensation business begins with continuing our platform building efforts in states with regulatory regimes that require IMEs and related services in their workers’ compensation systems. Specifically, we intend to expand and otherwise enhance our provider panels in such states. We then expect to direct our sales and marketing efforts towards both national and local potential clients with workers’ compensation claims exposure in those jurisdictions.

Our Network of Practitioners

Collectively, the Claims Evaluation Division’s practitioner panel includes practitioners of multiple specialties in 46 states. The majority of physicians on our panel are board certified. In some cases, we have written contracts with the members of our practitioner panel network. In other cases, we provide panel members with information regarding our procedures, our pricing and other essential information, and the other “terms” of our business relationships are largely a matter of course of dealing. The quality of any of such practitioner’s work tends to be influenced by his/her understanding of the medical-legal regulatory regime under which evaluations are to be conducted, his/her experience in conducting IMEs and his/her familiarity with us and our business processes.

Sales and Marketing

The Claims Evaluation Division markets its medical evaluation services to insurance claims handlers working generally in four distinct lines of insurance: automobile (including no-fault), workers’ compensation, disability and general liability. Our target clients include entities that handle such claims, including insurance companies, third party administrators, employers and other self-insureds, law firms and public sector entities. The sales process occurs at three levels: the national/regional contracting level, the claims processing center or branch level, and the individual adjuster level. In the last regard, the Claims Evaluation Division must offer its services on the individual level within the local claims office, where individual adjusters have historically had great discretion in choices of vendors.

The Claims Evaluation Division has a full-time sales staff dedicated to soliciting business from prospective customers and other account executives who attempt to increase the level of services being provided for

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existing customers. Their responsibilities include developing and maintaining customer contact, attending industry-related conventions and conferences and making face-to-face sales presentations to prospective and existing customers. Our sales executives and operations managers have developed many close relationships with industry professionals, which have led to referrals and additional business. In addition, we are a member of and/or participate in various industry associations and trade groups, as well as national, regional and local industry trade shows and conferences.

Pricing of Our Medical Evaluative Services

The fees for the services provided by the Claims Evaluation Division implicitly include a component to compensate the panel practitioner for his/her professional time and an administrative component covering the services provided by the division. We usually pay our panel practitioners in accordance with fee schedules, typically a flat fee for the particular service(s) performed, but in some cases on an hourly basis. In general, practitioner fees vary by specialty of the practitioner and geographic location. The overall fees charged by the division are also usually determined by a pre-agreed fee schedule with the customer requesting the service. These fees generally reflect the variations noted above.

Competition

The outsourced medical claims management services industry is relatively fragmented, with the nine largest participants in the industry accounting for less than one-half of the total medical evaluative services segment’s revenues, based on internal estimates. The New York State Workers’ Compensation Board, which is an industry regulator, lists over 100 registered “IME entities” in the New York workers’ compensation market alone, though many apparently provide services to only a few customers in a specific market segment. Management believes that the increasing demands of property and casualty insurance companies, third party administrators and other clients, and the resultant capital spending requirements on the part of vendors, is accelerating the trend to consolidate.

Management believes that the Claims Evaluation Division may be the leading provider of IMEs in New York, New Jersey and Pennsylvania. Our principal public competitors include Concentra Corporation, CorVel Corporation and Crawford & Company (all of whose activities extend beyond medical evaluative services).

Government Regulation

Certain aspects of our Claims Evaluation Division’s business are regulated or affected by the laws of the states in which we operate and, to a lesser extent, by the U.S. federal government. Some states require entities that provide some of the services we provide to be registered with or licensed by the state. In addition, because workers’ compensation claims, automobile insurance claims, and general liability claims are generally governed by state law, the demand for most of the Claims Evaluation Division’s services is affected by the insurance laws of the various states. These state regulatory regimes and other laws frequently change. These changes may create a greater or lesser demand for some or all of our services or require us to develop new or modified services in order to meet the needs of our customers and to compete effectively with other providers of our services. Our ability to respond to these changes in state laws promptly and efficiently affects our competitiveness in our industry.

An example of how changes in state laws can affect our business occurred in 2002-2003 when the Insurance Department of the State of New York modified its regulations that govern the notification of accident claims and the submission of medical bills under its no fault automobile law. Specifically, the regulations reduced the number of days that an accident victim has to notify his/her insurance carrier of an automobile accident. In addition, the Department reduced the number of days that a healthcare provider (acting as an assignee of

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medical benefits under such law) has to submit bills for treatments rendered to such victims. One of the results of such tightening of time frames has been the reduction of the size of medical bills that might require peer reviews. This, in turn, has reduced the demand for peer reviews in the State of New York.

Some aspects of our business may be indirectly subject to certain regulations promulgated pursuant to the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”). These regulations establish standards relating to the privacy and security of protected health information, which is individually identifiable health information, such as an individual’s medical records. These regulations are designed to protect the confidentiality, integrity and availability of health information through restrictions on uses and disclosures of the information and through required implementation of safeguards to secure electronically maintained protected health information. We believe that we comply with these privacy and security standards to the extent that we are required to do so by contract with our customers.

Management is not aware of any pending federal or state environmental laws or regulations that would have a material adverse effect upon the Claims Evaluation Division’s business or competitive position or that would require material capital expenditures on our part to effect compliance.

Employees

We employ approximately 2,800 persons in Health Information Division and 200 persons in the Claims Evaluation Division. Aside from 125 persons in the corporate home office, the Health Information Division employs a field staff including regional, zone and branch managers as well as branch coordinators that receive and process the business. In the Claims Evaluation Division, the employees are in the regional operations centers and perform scheduling, quality reviews and marketing related functions.

We own a five building complex located at 170 Mt. Airy Road, Basking Ridge, New Jersey approximately 45 miles southwest of New York City. Of approximately 53,000 total square feet of office space, we maintain our operations in approximately 43,000 square feet and the balance is leased or available for lease to several tenants. Management believes that this arrangement provides for our foreseeable expansion needs. Our corporate facility utilizes a proximity card access system to control access to entry points and internal secure areas. The facility includes an integrated smoke fire detection system tied to a central alarm system. The data center utilizes an independent fire suppression system. Key data processing systems are protected by UPS systems backed by a facility wide diesel generator to maintain continuous operation.

We lease our regional operations centers and field offices under a number of operating leases with varying terms and expirations, typically three years in duration. We lease 9,200 sq feet in Allentown, PA for a business continuity and operations center. The Allentown center is a newly constructed, advanced technology facility with a data center housed in a UL Class 4 fire rated vault. Security is controlled through a proximity card access system integrated with digital video recordings of all entrances and access points. Motion and glass break detectors are installed throughout the facility to detect unauthorized access. The facility has a building wide sprinkler system with separate FM200 Clean-Agent fire suppression. All security and fire systems are monitored 24 x 7 with central alarming. To ensure continuous operation, Allentown utilizes a facility-wide UPS power backup and conditioning system and a fast response diesel generator.

On January 25,2005, Sylvia Gayed, one of the Company’s examiners in California, filed a lawsuit against the Company in the Superior Court of California, Los Angeles County, alleging violations of California’s wage and

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hour laws. The complaint alleges that the Company failed to pay overtime wages, provide meal and rest periods and reimbursement for expenses incurred in performing examinations. The plaintiff is attempting to have the lawsuit certified as a class action on behalf of other examiners who perform similar work for the Company in California. We currently employ 441 examiners in California and have employed in excess of 1,200 examiners in California over the past 48 months. The Company believes that it has properly paid its California examiners for overtime worked and intends to provide a vigorous defense to this litigation. However, we cannot predict the outcome of this lawsuit.

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 reimbursed 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 a portion of any liability that may stem from past examinations performed by the independent examiner. The related costs and estimated liability are accrued at December 31, 2004 and 2003. To date, the Company and its client have settled with four claimants and no 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.

No matters were submitted to a vote of securities holders during the fourth quarter of the fiscal year covered by this report.

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PART II

Market Information

Our common stock is traded on the American Stock Exchange (AMEX) under the symbol “HH.” Options of our common stock are also traded on the AMEX.

Common Stock Price Range

The following table shows, for the periods indicated, the high and low sales prices per share of our common stock based on published financial sources: (dollars)

Holders

According to the records of our transfer agent, Registrar and Transfer Company, Cranford, NJ, as of February 11, 2005, there were 1,192 holders of record of our common stock.

Dividends

During 2003 and 2004, the Company paid quarterly dividends per share as follows: (dollars)

Recent Sales of Unregistered Securities

Stock Grants to Non-Employee Directors

By resolution, dated January 28, 2003, our Board of Directors authorized the issuance of shares of the Company’s common stock to the non-employee directors of the Company for future services. Such resolution

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provided for the issuance of 5,000 shares to each of these directors on each of January 31, 2003, 2004 and 2005. Accordingly, we have issued an aggregate of 90,000 shares of our common stock to the six non-employee directors who served on the Board during this time. All of these shares issued are “restricted securities” within the meaning of Rule 144 under the Securities Act of 1933 (the “Securities Act”). Each of the stock award agreements memorializing the share issuances to each of the non-employee directors provides that the shares may not be sold or transferred by the director until four years from the date of issue, and then only if covered by an effective registration statement or an exemption from registration under the Securities Act. These share issuances were exempt from registration pursuant to Section 4(2) of the Securities Act as “transactions not involving a public offering.” No underwriter participated in these transactions, nor was any commission paid.

Purchase of Equity Securities by the Issuer and Affiliated Purchaser

On May 30, 2000, the Board of Directors authorized the repurchase in any calendar year of up to 2,500,000 shares of the Company’s common stock for an aggregate purchase price not to exceed $25 million. The Company did not purchase any treasury shares during 2004.

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The following table of selected financial data should be read in conjunction with our consolidated financial statements and related notes, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and other financial information appearing elsewhere in this annual report. The Statement of Income Data set forth below for each of the years in the three year period ended December 31, 2004, and the Balance Sheet Data as of December 31, 2004 and 2003, have been derived from, and are qualified by reference to, our Consolidated Financial Statements appearing elsewhere in this annual report. The Statement of Income Data for the years ended December 31, 2001 and 2000, and the Balance Sheet Data as of December 31, 2002, 2001 and 2000, are derived from audited financial statements that are not included in this annual report.

Per share and share amounts are adjusted to reflect a two for one stock split effective April 12, 2000.

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You should read the following discussion and analysis together with the consolidated financial statements and related notes included in Item 8 of this annual report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those described under “Risk Factors” and elsewhere in this annual report.

Overview

Hooper Holmes, Inc. and its subsidiaries currently engage in two principal businesses, which are operated as distinct business divisions:

This collective information assists the insurance carriers in evaluating mortality and morbidity risks of the applicants they process.

Over the course of its 100+ year history, the Company has had diversified businesses, but since the sale of a segment in 1995, until the establishment of our Claims Evaluation Division in 2002, our sole business has been that conducted by the Health Information Division. In August 2002, we determined to expand that business geographically by acquiring Medicals Direct Group, a company based in the United Kingdom that provides paramedical examinations (referred to as “screenings” in the U.K.) and underwriting services to the life insurance industry, medical services through company-operated clinics, and medical reports to the legal profession. This acquisition afforded us the opportunity to enter the U.K. insurance market and potentially expand into insurance markets throughout Europe, though our preliminary research suggests that the life insurance markets in Europe are in a very early stage of formation relative to what such markets may need by way of medical underwriting services. In 2003, we enhanced our presence in the United Kingdom through Medicals Direct Group’s acquisition of three complementary companies, which increased its market share in

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the United Kingdom and enhanced its screenings and general medicals businesses. In 2004, Medicals Direct completed two additional acquisitions to expand its services being provided to the legal profession. The aggregate purchase price of these acquisitions, including acquisition costs, was $0.9 million.

The acquisition of Medicals Direct Group represented our first entry into the outsourced underwriting services business, a key component of our growth strategy. In May 2004, we took another step to implement this strategy by acquiring Mid-America Agency Services, Inc. (MAAS), a full-service insurance services organization based in Omaha, Nebraska, that provides risk selection services to the insurance underwriting industry. The purchase price associated with the MAAS acquisition, including acquisition costs, was $9.0 million.

Our Claims Evaluation Division is the result of our implementation of a plan, formulated in 2001 and 2002, to diversify into a second major segment of business, in part to address what our management anticipated would be a continued worsening of the market conditions affecting our Health Information Division. (See the discussion under “Key Trends Affecting Our Operating Results” below.) In October 2002, we made the first of four acquisitions in the automobile no-fault and workers’ compensation industries by acquiring D&D Associates. D&D is a New York based IME company which provides medical claims case management services primarily to property and casualty insurance companies in the New York City metropolitan area. The D&D acquisition represented our initial entry into the IME market, and furthered our strategy of acquiring businesses that complemented our existing health information business. In October 2003, we acquired Medimax, Inc., a provider of IMEs and functional capacity evaluations for workers’ compensation, disability and no-fault customers, primarily in Pennsylvania and New Jersey. In January 2004, we acquired Allegiance Health Inc., a provider of IMEs, peer reviews and closely related services to the automobile no-fault insurance market in New York, and IMEs in connection with workers’ compensation claims in New York. In May 2004, we acquired Michigan Evaluation Group, which provides IMEs in Michigan to workers’ compensation and no-fault auto claims handlers. The aggregate purchase price of these 2003 and 2004 acquisitions, including acquisition costs, was approximately $59.2 million.

In 2004, our Health Information Division generated 87% of our revenue and 80% of our operating profit. However, our Claims Evaluation Division has made an increased contribution to our revenues over the last three fiscal years, as reflected by the table below:

Key Trends Affecting Our Operating Results

The following represent the key trends affecting the operating results of our Health Information Division:

Decline in Life Insurance Applications

Life insurance application activity has declined over the past several years. Our Health Information Division has monitored this trend, primarily by tracking the reporting by The Medical Information Bureau Group, Inc. (MIB) of applicant activity on all types of policies of life insurance. For the past two years, the number of applications for life insurance recorded by MIB has declined by 4.1% in 2003 and 2.3% in 2004. Although the MIB data reflect applications for policies that, based on policy size and/or applicant age, may not involve a

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medical underwriting process (and, as a result, represent less than a perfect benchmark), our management is of the view that there is a strong correlation between the data and the operating results of our Health Information Division. Our management attributes the decline in life insurance application activity to a number of factors, including the drop-off in insurance agents selling life insurance, the lower percentage of Americans with individual life insurance policies, and product changes in the life insurance industry.

Cost Pressure from Life Insurance Carriers and Our Competition

In view of the general economic conditions and the modest investment returns achieved by insurance companies over the past several years, carriers have had to address cost items in a more rigorous manner in an attempt to maintain their profitability and level of return to their stakeholders. This has resulted in increased cost pressure on outsourced service providers.

In addition to the cost pressure from the insurance industry itself, some of the Health Information Division’s primary competitors have also contributed to the downward pressure on the prices of the division’s services, particularly its Portamedic paramedical examination services. The four major paramedical industry companies have created an extremely competitive environment, with price surpassing quality and timeliness of service as the primary reason why insurance carriers select a paramedical examination provider.

Changes in the Channels through which Life Insurance is Sold

In view of the drop-off in the writing of life insurance policies, insurance carriers have adopted a multi-channel strategy, then sought to optimize the productivity of each channel. Sales through local sales agents/brokers have declined dramatically. The alternative distribution channel–consisting of direct mail, the Internet and services that provide insurance pricing online–now represents the fastest growing segment of the market. We estimate that approximately 32% of our Health Information Division’s revenues in 2004 were generated from the alternative distribution channel.

The following represent the key trends affecting the operating results of our Claims Evaluation Division:

Contraction of the Outsourced Medical Claims Management Market in the United States

Management perceives that the outsourced medical claims management market in the United States, including the market for the Claims Evaluation Division’s medical evaluative services, may be contracting. A number of factors may be contributing to this trend, including the long-term decline in the number of people hurt in automobile accidents in the United States and the shifting of manufacturing activity to areas outside the nation’s borders (which may be reducing the number of workers’ compensation claims). Property and casualty insurance is largely regulated on a state, not federal level, with most of the demand for medical claims management services being affected by state insurance laws, which are subject to frequent change–change that can impact the Claims Evaluation Division’s business quickly. In the last few years, a number of states have adopted legislation encouraging the use of managed care techniques in handling workers’ compensation claims in an effort to control their workers’ compensation costs. Managed care laws generally provide employers an opportunity to channel injured employees into provider networks, and suggest treatment protocols and other constraints on the activity of such providers. These laws could result in a re-assessment of the usefulness of IMEs in the evaluation of the need for further medical treatment.

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Continued Importance of Physician Independence

The nature of the Claims Evaluation Division’s business - the core of which is the arranging of IMEs - is such that the “independence” of the independent medical examinations has been, and remains, of paramount importance. The companies that comprise the division must be ever-vigilant regarding the level of independence of the division’s physician panel, monitoring the amount of work directed to any particular physician. Further, the division’s quality reviewers must ensure that the IME reports we arrange on behalf of our customers are comprehensive and complete, and that the factual results support the conclusions drawn in such reports.

Heightened Compliance and Security Standards

Federal laws regarding financial controls and accountability (e.g., the Sarbanes-Oxley Act of 2002), the privacy and security of medical records (HIPAA) and consumer personal financial information (Gramm-Leach-Bliley) have resulted in stricter compliance standards that insurers, third party administrators of claims, and other claims handlers - and, as a consequence, their vendors - must meet. We are being asked to complete lengthy questionnaires, provide written representations as to our compliance with such laws, and meet more rigorous standards regarding the quality of our services. Enhanced physician credentialing, including the undertaking of criminal background checks of such physicians, is a particularly costly demand being made by certain claims handlers. In addition, our customers are seeking confirmation that we have sufficient financial resources to sustain legal challenges to our compliance with these laws.

Alternative methods of reducing medical over-treatment and fraud can impact the demand for our services

In New York state, one of our core markets, the state government within the last two years increased its prosecutions of automobile insurance fraud, including alleged fraud conducted in part by healthcare practitioners. Separately, New York insurance regulators also took steps to reduce the timeframes that injured parties had for submitting no fault automobile insurance claims and medical bills to the carriers.

As a result of these two actions, there has been a reduction in the number of excessive or fraudulent medical bills handled by our clients. This reduction has led to a reduction in the number of IME and peer review services that our clients order in New York.

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Results of Operations

Explanation of Statement of Income Line Items

The table below sets forth certain of our operating data expressed as a percentage of our revenues for the periods indicated:

Analysis of Comparative Operating Results

Revenues

Our consolidated revenues increased in each of the last two fiscal years. Consolidated revenues of $327.8 million in 2004 were 9.2% higher than in 2003. Consolidated revenues of $300.2 million in 2003 were 15.3% higher than in 2002. As explained in the discussion below with respect to each of our two divisions, acquisition activity over the last few years largely fueled the growth in our revenues.

Health Information Division. Our Health Information Division’s 2004 revenues amounted to $284.3 million, an increase of 6.6% over the 2003 revenues of $266.6 million. The Health Information Division’s 2003 revenues were up 4.5% over 2002 revenues of $255.2 million.

Portamedic. The increases in the Health Information Division’s revenues in 2004 and 2003 were achieved despite the decline in revenues from our core Portamedic business in each of these years, such decline reflecting the reduction in the number of life insurance applications initiated in the United States, based on data available through The Medical Information Bureau Group, Inc. (MIB). The number of paramedical examinations we performed in 2004 amounted to 2,613,000 units, compared to 2,749,000 units in 2003 and 2,921,000 in 2002. The figures reflect a decline of approximately 5.0% in 2004 compared to 2003, and 5.9% in 2003 compared to 2002. The year-over-year percentage drop-off in our paramedical examination units in each of 2004 and 2003, when compared to the 2.3% and 4.1% declines (based on the MIB data) in application activity in 2004 and 2003, respectively, are suggestive of our loss of market share. In that regard, the Health Information Division’s management is aware of the loss of two customers during 2004 (a decline in revenues of $1.4 million from

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2003 to 2004) as a matter of determining not to compete at the price points being offered by competitors. In 2003, we lost the approvals of several carrier clients, primarily due to price. These lost clients accounted for approximately half of the total paramedical examination unit change in 2003 compared to the prior year.

In addition to the decline in the number of paramedical examination units over each of the past two years, our average revenue per examination in 2004 of $77.37 reflects a decline of 1.3% compared to the prior year. The decrease is reflective of the greater discounting of prices in the division’s risk assessment services market in response to pressure from the insurance industry and competitive pressure. We believe that this reduction is reflective of the continuing trend in the paramedical industry, in which price has become the primary driver in insurance companies’ selection process.

Infolink. The declines in Portamedic revenues in each of the last two years were partially offset by increases in Infolink revenues, by 12.3% in 2004 compared to 2003 (i.e., $24.5 million in 2004 compared to $21.8 million in 2003), and by 10.9% in 2003 compared to 2002 (i.e., $21.8 million in 2003 compared to $19.7 million in 2002). The number of Infolink reports increased in each of the last two years, from 438,000 in 2002, to 474,000 in 2003, and 507,000 in 2004. Our average revenue per Infolink report went from $44.99 in 2002, to $46.08 in 2003, and $48.43 in 2004. Our management attributes the growth in Infolink revenues to the success of our centralized call center in Kansas City, Kansas, which we opened in mid-2003. During 2004, we were awarded several contracts to handle certain clients’ tele-interviews, and in early 2005 we have signed an additional two clients. Our management believes that by securing a carrier’s Infolink business we may be able to secure its paramedical and attending physician statement (APS) business, as well.

Our Internet driven business (units received via the Internet) remains an important part of our overall business and has grown for the year, 11% over 2003, despite the overall market softness. The Internet units were flat in the fourth quarter compared with the fourth quarter a year ago. This portion of our business is largely a sub-set of the Portamedic business reported above and therefore their metrics apply.

Medicals Direct Group. Medicals Direct Group realized significant revenue growth in each of 2004 and 2003. Its revenues in 2004 were $41.2 million, compared to $22.6 million in 2003 and $3.9 million in the four-month period it was part of our consolidated results in 2002. The increase in 2004 was attributable to a number of factors, including:

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Other Services. The “Other Services” component of our Health Information Division (which includes MAAS and Heritage Labs businesses) also experienced revenue growth in each of 2004 and 2003. Revenues in 2004 were $26.1 million, an increase of $11.0 million (approximately 73%) compared to the prior year. Revenues in 2003 of $15.1 million were $4.0 million higher than the prior year.

The primary reason for the increase in 2004 was the May 2004 acquisition of Mid-America Agency Services, Inc. (MAAS), which contributed revenues of $9.4 million in 2004. MAAS, like Medicals Direct Group, performs outsourced underwriting services to the life insurance industry. In 2005, we hope to leverage the industry expertise at MAAS to attract new customers and grow this business.

Heritage Labs also contributed to the revenue growth. Heritage Labs tested an increased number of specimens in 2004, 800,000 compared to 724,000 in 2003 and 490,000 in 2002. The average price per specimen tested increased in 2004 to $13.71, an increase of 5%, after a decline of 7% in the prior year. Management attributes the increase in specimens tested in 2004 to Heritage Lab’s strategy, initiated in 2003, to attract customers through offering attractive prices for short periods of time in order to attract new customers. The strategy proved successful in fueling Heritage Labs revenue growth in 2003. Despite the 7% decrease in the average revenue per specimen tested in 2003 from 2002, Heritage Labs maintained its gross margin by negotiating improved shipping rate discounts, obtaining volume discounts on material costs and by using contractor, rather than employee, labor.

Claims Evaluation Division. Our Claims Evaluation Division’s 2004 revenues were $43.4 million, an increase of 29.5% over the corresponding amount in 2003 of $33.6 million. The 2002 revenue figure was $5.1 million, reflective of the two-month period in 2002 during which D&D Associates (then the only business comprising this division) was included in our consolidated results in 2002.

The increase in the Claims Evaluation Division’s revenues in 2004 was primarily attributable to the revenue contributions ($15.1 million) of Allegiance Health and Michigan Evaluation Group, both of which were acquired in 2004, and the revenue contribution of Medimax (acquired in October 2003) for a full year in 2004.

Offsetting the increase in the Claims Evaluation Division’s growth in revenues attributable to these acquisitions, was a decline in 2004 revenues of D&D Associates compared to the prior year of $4.3 million. D&D Associates operates primarily in the State of New York. The decline in its revenues was attributable to several factors, including:

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Recognizing that the above factors have created structural changes in the New York market, the Claims Evaluation Division intends to take a number of steps to address those changes, including: more aggressively selling its services to claims handlers, with the focus being on the high quality of the services we provide; expanding organically into new service areas by leveraging the division’s infrastructure and experienced staff; utilizing the division’s updated web-based platform, which will allow for higher quality and more timely services; and considering acquisitions in new markets to further the division’s strategy for national growth.

In addition, the Claims Evaluation Division experienced a reduction in the amount of business from one customer in 2004 following the customer’s decision to lessen the concentration of its claims evaluation services being provided by the division.

Cost of Operations

Our total cost of operations amounted to $235.9 million in 2004, compared to $213.7 million in 2003 and $185.8 million in 2002. The table below shows cost of operations as a percentage of segment revenues during the last three years.

Health Information Division. Cost of operations for the Health Information Division was $206.0 million in 2004, an increase of $13.7 million (7.1%) compared to the 2003 figure of $192.3 million. The increase was primarily due to the increase in Medicals Direct Group’s revenues in 2004, as well as the May 2004 acquisition of MAAS. The decline in Portamedic’s activities and revenues served to partially offset the increase in cost of operations. In addition, the division was able to reduce its laboratory kit costs, increase the yields for certain tests by reformulating reagents used in the testing process, improve the efficiency of newly acquired testing equipment, and achieve more effective utilization of its employees as a result of improved scheduling of production runs. The relatively small increase in cost of operations as a percentage of revenues in 2004 compared to the prior year was primarily attributable to the higher relative amount of revenues contributed by Infolink (which has a lower gross margin than that of Portamedic), higher branch operating expenses, and the increased revenues of Medicals Direct Group (particularly from its Medico- Legal business, which historically has had higher direct and operating expenses).

Cost of operations for the Health Information Division in 2003 reflected an increase of $9.9 million (5.4%) compared to the prior year figure of $182.4 million. The increase was primarily due to increases in revenues

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of Medicals Direct Group and Heritage Labs in 2003, with attendant increases in these businesses’ cost of operations. Medicals Direct Group’s cost of operations in 2003 was $16.5 million, compared to $2.2 million in the four month period in 2002 during which Medicals Direct Group was included in the Company’s results of operations. Heritage Labs’ cost of operations in 2003 was $9.8 million, compared to $7.2 million in the prior year. Cost of operations for the Portamedic and Infolink businesses totaled $166.0 million in 2003, compared to $173.0 million in 2002. The decrease was due to lower revenue levels in 2003 compared to the prior year. Cost of operations as a percentage of these two businesses’ revenues increased slightly in 2003 due to the lower revenue levels, higher specimen collection kit prices and increased branch operating expenses.

Claims Evaluation Division. Cost of operations for the Claims Evaluation Division amounted to $29.9 million in 2004, an increase of $8.5 million (approximately 39.7%) over the prior year figure of $21.4 million. Cost of operations for the Claims Evaluation Division in 2002 was $3.4 million, reflecting the two-month period during which D&D Associates was part of our consolidated results. The increase in 2004 over the prior year was primarily attributable to the increase in revenues in 2004 resulting from the 2004 acquisitions of Allegiance Health, Inc. and Michigan Evaluation Group, Inc. The increase in cost of operations as a percentage of the division’s revenues in 2004 compared to the prior year reflected the higher operating costs of Medimax (acquired in 2003) and Allegiance Health compared to D&D Associates, which is able to leverage its operating expenses by virtue of its processing of a higher volume of IMEs.

Selling, General and Administrative Expenses

As reflected in the table below, total selling, general and administrative expenses (SG&A) in 2004 were $73.0 million, compared to $59.7 million in the prior year, an increase of $13.3 million (22.3%). The 2003 figure reflected an increase of $13.8 million (29.9%) over 2002 SG&A of $45.9 million. As a percentage of our revenues, SG&A amounted to 22.3% in 2004, compared to 19.9% in 2003 and 17.7% in 2002.

Health Information Division. The Health Information Division’s SG&A (which includes corporate overhead) in 2004 amounted to $63.3 million, an increase of $9.6 million (17.9%) compared to the prior year. The division’s SG&A in 2003 of $53.7 million reflected an increase of $8.5 million (18.6%) over the 2002 figure. As a percentage of the division’s revenues, SG&A represented 22.3% in 2004, compared to 20.1% in 2003 and 17.7% in 2002.

The increase in the Health Information Division’s SG&A expenses in 2004 compared to 2003 was primarily attributable to the following:

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The increase in the Health Information Division’s SG&A in 2003 compared to the prior year was primarily due to:

Claims Evaluation Division. The Claims Evaluation Division’s SG&A in 2004 amounted to $9.7 million, an increase of $3.7 million (61.5%) compared to the prior year. The division’s SG&A in 2002 was $0.7 million, reflective of the two-month period during which D&D Associates was part of our consolidated results. As a percentage of the division’s revenues, SG&A represented 22.3% in 2004, compared to 17.9% in 2003 and 13.5% in 2002.

The increase in the Claims Evaluation Division’s SG&A in 2004 compared to the prior year was primarily attributable to the acquisitions of Allegiance Health, Inc. in January 2004 and Michigan Evaluation Group, Inc. in May 2004, and the consolidation of Medimax acquired in October 2003 for a full year. During 2004, the Claims Evaluation Division initiated implementation of several project plans to streamline and work towards becoming a unified national provider of outsourced independent medical exams. Specifically, the plans contemplate:

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Operating Income

Our consolidated operating income in 2004 of $18.9 million reflected a decline of 29.6% compared to the prior year figure of $26.8 million. Our operating income in 2003 of $26.8 million reflected an increase of 22.5% compared to the 2002 figure of $21.9 million. As a percentage of our total consolidated revenues, total operating income represented 5.8% of such revenues in 2004, 8.9% in 2003, and 8.4% in 2002.

Health Information Division. The Health Information Division’s operating income in 2004 decreased to $15.0 million, a decline of $5.7 million (27.4%) compared to the prior year. The division’s 2003 operating income of $20.7 million reflected a slight decrease compared to the prior year figure of $20.8 million. As a percentage of the division’s revenues, the division’s operating income represented 5.3% of such revenues in 2004, compared to 7.8% in 2003 and 8.2% in 2002.

Claims Evaluation Division. The Claims Evaluation Division’s operating income in 2004 decreased to $3.9 million in 2004, a decline of $2.3 million (36.9%) compared to the prior year figure of $6.1 million. The division’s 2003 operating income of $6.1 million reflected an increase of $5.0 million over the prior year. As a percentage of the division’s revenues, the division’s operating income represented 8.9% in 2004, compared to 18.2% in 2003 and 21.1% in 2002.

Interest Income

Interest income in 2004 was $0.4 million, compared to $0.8 million in 2003 and $2.3 million in 2002. The reduced interest income in each of 2004 and 2003 was attributable to lower levels of invested funds, reflecting the cash used to fund acquisitions in each of those years and lower interest rates.

Interest Expense

Interest expense in 2004 increased to $0.7 million, compared to $0.4 million in 2003 and $0.1 million in 2002. The increases in each of 2004 and 2003 were due to interest accruing on the portion of the purchase price due in 2005 and 2006 for the Heritage Labs acquisition, which was completed in the second quarter of 2003, and interest on the factoring of Medicals Direct Group’s accounts receivable, which have increased both from organic growth and from acquisitions.

Income Taxes

The effective tax rate was 41.0% in 2004, compared to 39.7% in 2003 and 39.0% in 2002. The increase in the effective rate from 2003 to 2004 was due to higher state income tax rates and the impact of book/tax differences on lower taxable income. The increase from 2002 to 2003 was due to the lower levels of tax-free interest income, which was partially offset by a lower tax rate relating to the income of Medicals Direct Group.

Net Income

As a result of the foregoing, net income in 2004 was $10.7 million or $0.16 per diluted share, compared to $15.8 million or $0.24 per diluted share in 2003, and $14.3 million or $0.21 per diluted share in 2002.

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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. At December 31, 2004, 2003 and 2002, working capital was $38.3 million, $53.0 million and $56.2 million, respectively. Our current ratio as of December 31, 2004, 2003 and 2002 was 2.1 to 1, 3.0 to 1, and 3.3 to 1, respectively. The decrease in the current ratio in 2004 and 2003 was due largely to the 2004 and 2003 acquisitions. Management believes that the combination of cash, cash equivalents, marketable securities and available borrowings under our senior credit facility, along with anticipated cash flows from operations, should provide sufficient capital resources to satisfy both our short-term and foreseeable long-term needs.

Cash Flows Provided by Operating Activities. Net cash provided by operating activities was $23.3 million in 2004, compared to $23.1 million in 2003. The significant sources of cash flows provided by operating activities in 2004 were net income of $10.7 million, $8.8 million of depreciation and amortization, an increase in deferred tax expense of $3.1 million, and an increase in accounts payable and accrued expense of $1.9 million. These items were offset by an increase in accounts receivable of $1.8 million. Consolidated days sales outstanding, measured on a rolling 90-day basis, was 44.6 days at December 31, 2004, compared to 42.3 days at December 31, 2003.

Cash Flows Used in Investing Activities.

During 2004, the Company completed the acquisitions of Allegiance Health, Inc. for approximately $11.0 million, Michigan Evaluation Group, Inc. for approximately $4.8 million and Mid-America Agency Services, Inc. for approximately $9.0 million. The Company used its existing cash to fund the acquisitions.

Required payments of additional purchase price related to the 2002 acquisition of D&D Associates, the 2003 acquisitions of Heritage Labs and Medimax, Inc., and the 2004 acquisitions of Allegiance Health, Inc. and Michigan Evaluation Group, Inc., of $5.4 million and $3.5 million in 2005 and 2006, respectively, are expected to be funded from cash from operations. Relative to the Medimax, Inc. and Michigan Evaluation Group, Inc. acquisitions, if certain acquisition performance criteria are met, additional contingent consideration could be paid in 2005 totaling $1.0 million and in 2006 totaling $0.3 million. All payments are expected to be funded from cash from operations.

Cash Flows Used in Financing Activities.

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 December 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 December 31, 2004, $2.0 million is outstanding under 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 December 31, 2004, interest was payable

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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 December 31, 2004, the Company is in compliance with all financial covenants.

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 year ended December 31, 2003 and 2002, the Company purchased 89,800 shares and 1,346,000 shares, at a total cost of $0.4 million and $8.6 million, respectively. The Company did not purchase any treasury shares during 2004.

Quarterly dividends paid in 2004 were $0.015 per share and totaled $3.9 million.

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, 2004 and 2005, which vested immediately. 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 for the year-end of 2003 and 2004, respectively.

Contractual Obligations

Capital expenditures during 2005 are expected to parallel that of 2004 spending levels plus an additional amount of approximately $2.6 million for the upgrade of the Company’s financial software system, development of case management software and hardware and software for the CED IT systems development projects. All 2005 capital expenditures are expected to be funded by cash generated from operations.

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Future payments due under contractual obligations as of December 31, 2004 are as follows:

Litigation

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 a portion of any liability that may stem from examinations performed by the independent examiner. The related costs and estimated liability are accrued at December 31, 2004 and 2003. To date, the Company and its client have settled with four claimants and no 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.

On January 25, 2005, Sylvia Gayed, one of the Company’s examiners in California, filed a lawsuit against the Company in the Superior Court of California, Los Angeles County, alleging violations of California’s wage and hour laws. The complaint alleges that the Company failed to pay overtime wages, provide meal and rest periods and reimbursement for expenses incurred in performing examinations. The plaintiff is attempting to have the lawsuit certified as a class action on behalf of other examiners who perform similar work for the Company in California. We currently employ 441 examiners in California and have employed in excess of 1,200 examiners in California over the past 48 months. The Company believes that it has properly paid its California examiners for overtime worked and intends to provide a vigorous defense to this litigation. However, we cannot predict the outcome of this lawsuit.

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

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.

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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.

Inflation

Inflation has not had, nor is it expected to have, a material impact on our consolidated financial results.

Critical Accounting Policies

The SEC defines critical accounting policies as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

We have identified the accounting policies discussed below as critical to us. The discussion below is not intended to be a comprehensive list of our accounting policies. Our significant accounting policies are more fully described in Note 1 to the Consolidated Financial Statements. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States of America, with no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting an available alternative would not produce a materially different result.

Revenue Recognition

Our Health Information Division recognizes revenues for paramedical and medical examinations when the examination of the insurance policy applicant is completed. Revenues generated from medical record collection, laboratory testing and other services are recognized when the related service is completed. The Claims Evaluation Division recognizes revenue when the independent medical exam, peer review or similar services are completed.

Allowance for Doubtful Accounts

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Management continuously assesses the financial condition of our customers and the markets in which these customers participate and adjusts the allowance for doubtful accounts based on this periodic review. If the financial condition of our customers were to deteriorate, resulting in their inability to make payments, our ability to collect on accounts could be negatively impacted, in which case additional allowances may be required.

Valuation of Goodwill and Identifiable Intangible Assets

We assess the impairment of identifiable intangibles and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors which could trigger an impairment review include the following:

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When we determine that the carrying value of intangibles and related goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, impairments are recognized when the expected future undiscounted cash flows derived from such assets are less than their carrying value. We generally measure any impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model. Net identifiable intangible assets and goodwill amounted to $190.9 million as of December 31, 2004. Intangible assets are being amortized over the following weighted average useful lives: non-competition agreements - 4.4 years; customer base - 12.9 years; contractor network - 7.3 years; and trademarks and tradenames - 19.2 years.

Accounting for Income Taxes

As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we must establish a valuation allowance. If we were to establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the consolidated statement of income.

Recently Issued Accounting Standards

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which replaces SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), and supercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first interim or annual period after June 15, 2005, with early adoption encouraged. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. The Company is required to adopt SFAS 123R in the third quarter of fiscal 2005, beginning July 1, 2005. Under SFAS 123R, the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The transition methods include prospective and retroactive adoption options. Under the retroactive option, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS 123R, while the retroactive methods would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. The Company is evaluating the requirements of SFAS 123R and the expected effect on the Company including, among other items, reviewing compensation strategies related to stock-based awards, selecting an option pricing model and determining the transition method.

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In December 2004, the FASB issued FASB Staff Position 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (“FSP 109-2”), in response to the American Jobs Creation Act of 2004 which was signed into law in October 2004 and which provides for a special one-time tax deduction of 85% of certain foreign earnings that are repatriated (as defined). Based on the Company’s decision to reinvest rather than to repatriate current and prior year’s unremitted foreign earnings, the application of FSP 109-2 did not affect income tax expense in the period of enactment or any related disclosures.

In December 2003, the FASB issued FASB Interpretation No. 46R (revised December 2003), “Consolidation of Variable Interest Entities (VIEs),” 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 VIEs that would require disclosure.

Other Matters

On January 31, 2005, the Board of Directors of Hooper Holmes, Inc. (the “Company”) accelerated the vesting of all of the Company’s unvested stock options awarded to officers and employees under the 1992, 1994, 1997 and 1999 Stock Option Plans, all of which have an exercise price greater than $5.05, the closing price of the Company’s common stock on the American Stock Exchange on January 31, 2005. As a result of the acceleration, options to acquire approximately 1.6 million shares (with exercise prices ranging from $5.47 to $10.76), of the Company’s common stock which otherwise would have vested from time to time over the next 48 months, became immediately exercisable.

The Board’s decision to accelerate the vesting of these options was in response to a review of the Company’s long term incentive compensation programs in light of changes in market practices and recently issued changes in accounting rules resulting from the issuance by the Financial Accounting Standard Board of Statement of Financial Accounting Standard No. 123 (revised 2004) (“FASB No. 123R”), “Share Based Payment,” which the Company is required to adopt effective July 1, 2005. FASB No. 123R requires that all share-based payments to employees, including grants of employee stock options, be recognized in the financial statements based on their fair values beginning with the first interim or annual period after June 15, 2005. Management believes that accelerating the vesting of these options prior to the adoption of FASB No. 123R, will result in the Company not being required to recognize compensation expense in 2005 in the amount of $375,000 (after-tax) or in subsequent years through 2007 of $464,000 (after-tax).

RISK FACTORS

Risks Related to our Health Information Division

Our core business activity, our Portamedic business, has been characterized by declining revenues and margins for the past several years.

Over the past several years, our core Portamedic business has experienced a decline in revenues and margins. The most critical and indicative non-financial metric of relevance to this business is the number of applications for life insurance. For the past two years, data provided by The Medical Information Bureau Group, Inc. (MIB) indicate that the number of applications has declined - by 4.1% in 2003 and 2.3% in 2004. For an explanation of factors that our management believes underlie this decline, see Item 1. “Business - Health Information Division - Key Trends of Relevance to the Health Information Division - Decrease in Life Insurance Applications/ Issuance of Life Insurance Policies.” In addition, our average revenue per paramedical examination has also declined during this time, reflecting the cost pressures from both our insurance company customers and our competition. Although we have had some success with a number of steps taken to retain market share in this

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business, and to diversify our operations, if we are not able to reverse the decline in our operating results relating to our Portamedic business we will have increased difficulty growing our business, responding to the competitive forces in our industries and financing our further expansion plans.

If our Health Information Division is unable to lower its cost structure, our competitiveness and operating results may decline.

Our Health Information Division is facing increased cost pressure from its insurance company customers, the result of the more modest investment returns such carriers have achieved in recent years. In addition to the cost pressure from the insurance industry itself, some of the Health Information Division’s primary competitors have also contributed to the downward pressure on the prices of the division’s services, particularly our Portamedic paramedical examination services. The four major paramedical industry companies have created an extremely competitive environment, with price surpassing quality and timeliness of service as the primary reason why insurance carriers select a paramedical examination provider. Our strategic focus over the past few years has been to provide faster, more efficient service as a competitive differentiator. With price having become the primary basis of competition and with the increased use of the Internet and the electronic delivery of orders for our services, it may be that the Health Information Division’s extensive network of branch and contract affiliate offices results in our having a cost structure that is higher than some of our competitors. Our management is aware of the loss of two customers in 2004 as a matter of the division determining not to compete at the price points being offered by competitors. Further, in 2003 we lost the approvals of several carrier clients, primarily due to price. If we do not continue our initiatives to lower our costs to address the current market conditions (including the continuing decline in life insurance application activity), our competitiveness and, thus, our operating results may decline.

Heritage Labs’ failure to provide accurate laboratory test results may result in claims against us.

The Health Information Division Heritage Labs business processes the blood and urine specimens obtained in connection with a portion of our paramedical examinations, as well as the specimens provided by third-party health information service providers. Our insurance company clients and these third-party health information service providers rely on the accuracy of the test results and other data in connection with their insurance underwriting, treatment and other decisions. In addition, federal and state laws regulate the disclosure of specimen test results and other nonpublic medical-related personal information. If Heritage Labs does not provide accurate test results or does not protect the confidentiality of such results in accordance with such laws, we could face significant liability.

Our Health Information Division is exposed to possible litigation and legal liability relating to our classification of most of our paramedical examiners as independent contractors rather than employees.

We classify most of our paramedical examiners as independent contractors rather than employees, making such examiners personally responsible for their employment taxes and workers’ compensation. In the past, some state agencies have claimed that we improperly classified our examiners as independent contractors for purposes of state unemployment tax laws and that we were therefore liable for arrears of taxes or for penalties for failure to comply with these laws. In the State of California, we received an adverse determination as to the independent contractor status of our paramedical examiners, and, as a result, we now classify our examiners in California as employees. The uncertainty regarding how other jurisdictions in which we conduct operations may resolve the issue of whether our paramedical examiners are independent contractors or employees results in our exposure to potential litigation and liability, as well as the possibility of increased operating costs should any of such jurisdictions determine that our examiners are employees.

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Risks Related to Our Claims Evaluation Division

There are signs that the outsourced medical claims management market in the United States may be contracting, which may limit the potential growth of our Claims Evaluation Division’s business.

Our management perceives that the outsourced medical claims management market in the United States, including the market for our Claims Evaluation Division’s medical evaluative services, may be contracting. A number of factors may be contributing to this perceived trend, such as the decline in the number of people hurt in automobile accidents in the United States, the shifting of manufacturing activity to areas outside the nation’s borders, and changing laws and regulations affecting the property and casualty insurance industry. For more information, see Item 1. “Business - Claims Evaluation Division - Key Trends of Relevance to the Claims Evaluation Division - Contraction of the Outsourced Medical Claims Management Market in the United States.” If this trend continues, the growth potential of our Claims Evaluation Division’s business may be adversely affected. Further, the division may be at a competitive disadvantage in dealing with a contracting market as a result of the more narrow focus of its present business activities relative to competitors that are engaged in the other segments of the outsourced medical claims management market (i.e., medical claims audit and medical management services).

Our Claims Evaluation Division has a significant degree of customer concentration, such that the loss of any one of its larger customers would have a material effect on its operating results.

The business activities of our Claims Evaluation Division, which is comprised of the four companies within the division that have been acquired since October 2002, remains significantly focused in the geographic regions in which these companies were originally active (i.e., New York, Pennsylvania, New Jersey and Michigan), with the division’s 21 largest clients accounting for 83% of the division’s revenues in 2004. The loss of any of these customers would likely result in a drop-off in the Claims Evaluation Division’s revenues and profitability, and that drop-off may be material.

A primary component of our Claims Evaluation Division’s growth strategy is to increase its national capabilities as a provider of independent medical examination-related services, which entails a number of challenges and risks.

A primary component of our Claims Evaluation Division’s growth strategy is to deepen its national capabilities as a provider of IME-related services. To implement this strategy will require the division’s taking several steps, including substantially expanding its present panel of physicians, developing an enhanced, more robust shared information technology (IT) platform and improving the scalability of the present IT infrastructure, enhancing the division’s practitioner credentialing, creating regional operations centers, and enhancing the division’s sales and marketing capabilities. For more information, see Item 1. “Business - Claims Evaluation Division - The Claims Evaluation Division’s Growth Strategy - Deepen National Capabilities as a Provide of IME-Related Services.” In addition to the capital expenditures associated with moving ahead with this component of the division’s growth strategy, this initiative exposes us to a number of potential risks, including possible increases in costs and reduced profitability (particularly in the short term as the division moves into new geographic regions and businesses), as well as the risks attendant to managing what may be rapid growth (e.g., possibly alienating institutional clients as the division adapts to new state regulatory regimes and establishes relationships with new panel physicians).

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Our Claims Evaluation Division operates in a market that is characterized, and can be significantly affected, by changes in applicable state laws and regulations.

Property and casualty insurance is largely regulated on a state level, with most of the demand for medical claims management services being created by state insurance laws. These state regulatory regimes frequently change. These changes may create a lesser demand for some or all of the division’s services or require us to develop new or modified services in order to meet the needs of our customers and to compete effectively. For example, in 2002-2003, the Insurance Department of the State of New York modified its regulations that govern the notification of accident claims and the submission of medical bills under its no-fault automobile law in a manner that has reduced the demand for peer reviews, one of the division’s services, in the State of New York. For more information, see Item 1. Business - Claims Evaluation Division - Government Regulation.”

Our Claims Evaluation Division’s business is being affected by heightened federal laws and regulations that are increasing operating costs.

The Claims Evaluation Division’s business is being affected by heightened compliance and security standards being imposed at the federal level within the United States, such as the Sarbanes-Oxley Act of 2002, the Health Insurance Portability and Accountability Act of 1996 (HIPAA) and the Gramm-Leach-Bliley Act of 2001. As a vendor to the property and casualty insurance industry, the division is being asked to complete lengthy questionnaires, to provide written representations as to our compliance with such laws, and to meet more rigorous standards regarding the quality of our services. Enhanced physician practitioner credentialing, including the undertaking of criminal background checks of such practitioners, is a particularly costly demand being made by certain claims handlers. In addition, certain of the division’s customers are seeking confirmation that we have sufficient financial resources to sustain legal challenges to our compliance with these laws. Compliance with these demands will likely entail higher operating costs, which, combined with what our management perceives to be an increased price sensitivity on the part of the division’s clients, may mean reduced margins and profitability.

If any of the members of our physician panel were to be found to lack proper credentials or be determined to be less than “independent,” the damage to our reputation and business could be considerable.

The nature of the Claims Evaluation Division’s business is such that the proper credentialing and “independence” of each member of the division’s panel of physicians that perform IMEs has been, and remains, of paramount importance. Although the division is in the process of enhancing its background checks with respect to its roughly 9,000-strong panel physicians, there remains an exposure to liability resulting from improper conduct during an examination encounter even with the most rigorous of credentialing processes. The division must also be ever-vigilant in monitoring the amount of work directed to any particular physician, taking into consideration not just the absolute amount of the fees paid to that physician for his or her services but also how those fees compare with the physician’s income from other sources. Further, the division’s quality reviewers must ensure that the IME reports we arrange on behalf of our customers are comprehensive and complete, and that the factual results support the conclusions drawn in such reports. If any of the members of our physician panel were to be found to lack proper credentials, be determined to be less than independent and/or to engage in improper conduct during the course of an IME, we would be exposed to potential claims and liability. Further, as this is an industry-wide issue, we could also experience a significant drop-off in the demand for IME-related services even if the physician or physicians found to be lacking proper credentials or independence, or engaging in improper conduct, were not part of our physician panel.

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Risks Relating to Our Company Generally

Acquisitions or other investments present many risks, and we may not realize the anticipated financial and strategic goals of any of our acquisitions or other investments.

As part of our business strategy, we have pursued and expect to continue to pursue acquisitions and other strategic investments that will complement our existing services and leverage our existing capabilities. There is no guarantee that these activities will be profitable, or that we will continue to offset the decline in operating results of our Portamedic business through these types of activities. Any such acquisition or other investment involves a number of risks, including:

An ill-advised acquisition or other investment could hurt our business, results of operations and financial condition or cash flows, particularly in the case of a significant acquisition or multiple acquisitions in a short period of time. From time to time, we may enter into negotiations for acquisitions or other investments that are not ultimately consummated. Such negotiations could result in significant diversion of management’s time from our business as well as significant out-of-pocket costs.

The consideration that we pay in connection with an acquisition or other investment could affect our financial condition. If we were to proceed with one or more significant acquisitions or other investments in which the consideration included cash, we could be required to use a substantial portion of our available cash to consummate such acquisitions. To the extent we issue shares of stock or other rights to purchase stock, including options or other rights, our then-existing shareholders may experience dilution in their share ownership in our company and their earnings per share may decrease. In addition, acquisitions or other investments may result in the incurrence of debt, large one-time write-offs and restructuring charges. They may also result in goodwill and other intangible assets that are subject to impairment tests, which could result in future impairment charges. Any of these factors may decrease our operating results and weaken our financial condition.

Our pending change in our accounting treatment to expense stock options will negatively affect our operating results.

The Financial Accounting Standards Board has recently announced its decision to require companies to expense employee stock options in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share Based Payment,” effective during the quarter ending September 30, 2005. Such stock option expensing will require the Company to value its employee stock option grants pursuant to a binomial valuation formula, and then amortize that value against the Company’s reported earnings over the vesting period in effect for those options. The Company currently accounts for stock-based awards to employees in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and has adopted the disclosure requirements of SFAS 123. When the Company is required to expense employee stock options in the future, this change in accounting treatment will decrease the Company’s reported results of operations as the stock-based compensation expense will be charged directly against the Company’s reported earnings. For an illustration of the effect of such a change on the Company’s recent results of operations, see Note 1 of Notes to Consolidated Financial Statements contained in this report.

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Impairment of goodwill and other acquisition intangibles reflected on our balance sheet could depress our stock price.

As of December 31, 2004, approximately $191 million of our $275.7 million in total assets reflected on our balance sheet consisted of goodwill and intangible assets. Under the provisions of SFAS 142, which we adopted as of January 1, 2002, goodwill is no longer amortized but is, instead, reviewed for impairment at least annually and written down in the event it is determined that the recorded value of our businesses is greater than their fair value. If we were to determine in any future period that an impairment charge was appropriate, the magnitude of the non-cash charge to our earnings might be material. This could lead to a negative reaction on the part of investors and a decline in our share price.

The Company’s exposure to market risk for changes in interest rates relates primarily to the Company’s investment portfolio. The Company places its investments with high quality issuers and, by policy, limits the amount of credit exposure to any one issuer. The Company does not invest in 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 December 31, 2004.

The Company is also exposed to interest rate risk primarily through its borrowing activities, which are described in Note 10 to the Consolidated Financial Statements. The Company’s borrowings are under variable rate instruments. Future payments due under borrowings are $1,067,034 in 2005 and $1,000,000 in 2006, at an average interest rate of 1.96%.

We have foreign currency rate exposure to exchange rate fluctuations with respect to the British pound. We anticipate that such foreign currency exchange rate risk will remain a market risk exposure for the foreseeable future. We assess our market risk based on changes in foreign currency exchange rates by measuring the potential impact in earnings, fair values and cash flows based on a hypothetical 10% change (increase and decrease) in currency rates.

Based on the Company’s market risk sensitive instruments (including investments and variable rate debt) outstanding at December 31, 2004, the Company has determined that there was no material market risk exposure to the Company’s consolidated financial position, results of operations or cash flows as of such date.

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Financial Highlights (Unaudited)

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

Hooper Holmes, Inc.:

We have audited the accompanying consolidated balance sheets of Hooper Holmes, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2004. In connection with our audits of the consolidated financial statements, we also have audited the consolidated financial statement schedule, “Schedule II – Valuation and Qualifying Accounts.” These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hooper Holmes, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U. S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Hooper Holmes, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 30, 2005 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

/s/ KPMG LLP

Short Hills, New Jersey

March 30, 2005

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

Hooper Holmes, Inc.:

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Hooper Holmes, Inc. and subsidiaries maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Hooper Holmes, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Hooper Holmes, Inc. and subsidiaries maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Hooper Holmes, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Hooper Holmes, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, stockholders’ equity and cash flows for each

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of the years in the three-year period ended December 31, 2004, and our report dated March 30, 2005 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

Short Hills, New Jersey

March 30, 2005

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Hooper Holmes, Inc. and Subsidiaries

Consolidated Balance Sheets