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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549



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FORM 10-Q



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QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE

SECURITIES EXCHANGE ACT OF 1934



For Quarterly Period Ended June 30, 2005



Commission File No. 1-9972



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Hooper Holmes, Inc.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|New York                                                       |  | 22-1659359                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)
|                                                               | 
|170 Mt. Airy Rd., Basking Ridge, NJ                            |  | 07920                                  
|(Address of principal executive office)                        |  | (Zip Code)                             



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



None

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



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



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



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



|                             |  |                             
|---------------------------- |  | ----------------------------
|Class                        |  | Outstanding at July 31, 2005
|Common stock, $.04 par value |  | 65,482,379                  



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##### Table of Contents

HOOPER HOLMES, INC. AND SUBSIDIARIES



INDEX



|                                           |  |                                                                                                |  |         
|------------------------------------------ |  | ---------------------------------------------------------------------------------------------- |  | --------
|                                           |  |                                                                                                |  | Page No.
|PART I - Financial Information (unaudited) |  |                                                                                               
|                                           |  |                                                                                               
|                                           |  | ITEM 1 - Financial Statements                                                                  |  |         
|                                           |  |                                                                                               
|                                           |  | Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004                          |  | 1       
|                                           |  |                                                                                               
|                                           |  | Consolidated Statements of Income for the Three and Six Months Ended June 30, 2005 and 2004    |  | 2       
|                                           |  |                                                                                               
|                                           |  | Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005 and 2004          |  | 3       
|                                           |  |                                                                                               
|                                           |  | Notes to Unaudited Consolidated Financial Statements                                           |  | 4-15    
|                                           |  |                                                                                               
|                                           |  | ITEM 2 -
Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 16-33   
|                                           |  |                                                                                               
|                                           |  | ITEM 3 
Quantitative and Qualitative Disclosures About Market Risk                            |  | 33      
|                                           |  |                                                                                               
|                                           |  | ITEM 4 
Controls and Procedures                                                               |  | 34      
|                                           | 
|PART II 
Other Information                |  |                                                                                               
|                                           |  |                                                                                               
|                                           |  | ITEM 1 
Legal Proceedings                                                                     |  | 35      
|                                           |  |                                                                                               
|                                           |  | ITEM 2 
Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 35-36   
|                                           |  |                                                                                               
|                                           |  | ITEM 3 -
Defaults upon Senior Securities                                                       |  | 36      
|                                           |  |                                                                                               
|                                           |  | ITEM 4 
Submission of Matters to a Vote of Security Holders                                   |  | 36      
|                                           |  |                                                                                               
|                                           |  | ITEM 5 
Other Information                                                                     |  | 37      
|                                           |  |                                                                                               
|                                           |  | ITEM 6 -
Exhibits                                                                              |  | 37      
|                                           |  |                                                                                               
|                                           |  | Signatures                                                                                     |  | 38      



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##### Table of Contents

Hooper Holmes, Inc.

Consolidated Balance Sheets

(unaudited; dollars in thousands except per share amounts)



|                                                                                                           |  |               |         |                   |   |        
|---------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | ----------------- | - | -------
|                                                                                                           |  | June 30, 2005 |         | December 31, 2004
|ASSETS                                                                                                     |  |               |         |                   |   |        
|Current Assets:                                                                                            |  |               |         |                   |   |        
|Cash and cash equivalents                                                                                  |  | $             | 13,645  |                   | $ | 16,973 
|Marketable securities                                                                                      |  |               | 2,079   |                   |   | 6,886  
|Accounts receivable, net                                                                                   |  |               | 47,370  |                   |   | 42,001 
|Other current assets                                                                                       |  |               | 8,502   |                   |   | 7,242  
|                                                                                                           |  |               |         |                   |   |        
|Total current assets                                                                                       |  |               | 71,596  |                   |   | 73,102 
|Property, plant and equipment:                                                                             |  |               |         |                   |   |        
|Land and land improvements                                                                                 |  |               | 628     |                   |   | 628    
|Building                                                                                                   |  |               | 4,988   |                   |   | 4,988  
|Furniture, fixtures and equipment                                                                          |  |               | 30,498  |                   |   | 29,381 
|Leasehold improvements                                                                                     |  |               | 1,751   |                   |   | 1,743  
|                                                                                                           |  |               |         |                   |   |        
|Total property, plant and equipment                                                                        |  |               | 37,865  |                   |   | 36,740 
|Less: Accumulated depreciation and amortization                                                            |  |               | 26,149  |                   |   | 25,540 
|                                                                                                           |  |               |         |                   |   |        
|Property, plant and equipment, net                                                                         |  |               | 11,716  |                   |   | 11,200 
|                                                                                                           |  |              
|Goodwill                                                                                                   |  |               | 155,899 |                   |   | 155,502
|Intangible assets, net                                                                                     |  |               | 32,721  |                   |   | 35,380 
|Other assets                                                                                               |  |               | 481     |                   |   | 521    
|                                                                                                           |  |               |         |                   |   |        
|Total assets                                                                                               |  | $             | 272,413 |                   | $ | 275,705
|                                                                                                           |  |               |         |                   |   |        
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                       |  |               |         |                   |   |        
|Current liabilities:                                                                                       |  |               |         |                   |   |        
|Current maturities of long-term debt                                                                       |  | $             | 1,057   |                   | $ | 1,067  
|Accounts payable                                                                                           |  |               | 13,460  |                   |   | 14,701 
|Accrued expenses:                                                                                          |  |               |         |                   |   |        
|Salaries, wages and fees                                                                                   |  |               | 1,237   |                   |   | 1,105  
|Income taxes payable                                                                                       |  |               | 2,740   |                   |   | 2,512  
|Other                                                                                                      |  |               | 14,322  |                   |   | 15,453 
|                                                                                                           |  |               |         |                   |   |        
|Total current liabilities                                                                                  |  |               | 32,816  |                   |   | 34,838 
|                                                                                                           |  |              
|Long term debt, less current maturities                                                                    |  |               | 0       |                   |   | 1,000  
|Other long term liabilities                                                                                |  |               | 706     |                   |   | 3,881  
|Deferred income taxes                                                                                      |  |               | 7,041   |                   |   | 7,475  
|Minority interest                                                                                          |  |               | 305     |                   |   | 254    
|                                                                                                           |  |              
|Commitments and contingencies                                                                              |  |               |         |                   |   |        
|                                                                                                           |  |              
|Stockholders equity:                                                                                      |  |               |         |                   |   |        
|Common stock, par value $.04 per share; authorized 240,000,000 shares, issued 67,499,074 in 2005 and 2004. |  |               | 2,700   |                   |   | 2,700  
|Additional paid-in capital                                                                                 |  |               | 124,708 |                   |   | 126,086
|Accumulated other comprehensive income                                                                     |  |               | 768     |                   |   | 1,466  
|Retained earnings                                                                                          |  |               | 118,717 |                   |   | 115,424
|                                                                                                           |  |               |         |                   |   |        
|                                                                                                           |  |               | 246,893 |                   |   | 245,676
|Less: Treasury stock at cost (2,035,795 shares in 2005 and 2,297,995 shares in 2004)                       |  |               | 15,348  |                   |   | 17,419 
|                                                                                                           |  |               |         |                   |   |        
|Total stockholders equity                                                                                 |  |               | 231,545 |                   |   | 228,257
|                                                                                                           |  |               |         |                   |   |        
|Total liabilities and stockholders equity                                                                 |  | $             | 272,413 |                   | $ | 275,705
|                                                                                                           |  |               |         |                   |   |        



See
accompanying notes to unaudited consolidated financial statements.



1



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##### Table of Contents

Hooper Holmes, Inc.

Consolidated Statements of Income

(unaudited; dollars in thousands, except per share amounts)



|                                             |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|-------------------------------------------- |  | --------------------------- | ---------- | - | ------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                             |  | Three months ended June 30, |            |   | Six months ended June 30, |  
|                                             |  | 2005                        |            |   | 2004                      |   |            | 2005 |  |   | 2004       |  
|Revenues                                     |  | $                           | 83,968     |   |                           | $ | 82,842     |      |  | $ | 166,471    |   |  | $ | 162,835    |  
|Cost of operations                           |  |                             | 60,664     |   |                           |   | 59,770     |      |  |   | 119,508    |   |  |   | 116,918    |  
|                                             |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Gross profit                                 |  |                             | 23,304     |   |                           |   | 23,072     |      |  |   | 46,963     |   |  |   | 45,917     |  
|Selling, general and administrative expenses |  |                             | 18,390     |   |                           |   | 17,353     |      |  |   | 37,850     |   |  |   | 35,145     |  
|                                             |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Operating income                             |  |                             | 4,914      |   |                           |   | 5,719      |      |  |   | 9,113      |   |  |   | 10,772     |  
|Other income (expense):                      |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Interest expense                             |  |                             | (166       | ) |                           |   | (196       | )    |  |   | (346       | ) |  |   | (344       | )
|Interest income                              |  |                             | 130        |   |                           |   | 51         |      |  |   | 177        |   |  |   | 156        |  
|Other expense, net                           |  |                             | (131       | ) |                           |   | (76        | )    |  |   | (227       | ) |  |   | (200       | )
|                                             |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|                                             |  |                             | (167       | ) |                           |   | (221       | )    |  |   | (396       | ) |  |   | (388       | )
|                                             |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Income before income taxes                   |  |                             | 4,747      |   |                           |   | 5,498      |      |  |   | 8,717      |   |  |   | 10,384     |  
|Income taxes                                 |  |                             | 1,872      |   |                           |   | 2,129      |      |  |   | 3,467      |   |  |   | 3,934      |  
|                                             |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Net income                                   |  | $                           | 2,875      |   |                           | $ | 3,369      |      |  | $ | 5,250      |   |  | $ | 6,450      |  
|                                             |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Earnings per share:                          |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Basic                                        |  | $                           | 0.04       |   |                           | $ | 0.05       |      |  | $ | 0.08       |   |  | $ | 0.10       |  
|Diluted                                      |  | $                           | 0.04       |   |                           | $ | 0.05       |      |  | $ | 0.08       |   |  | $ | 0.10       |  
|                                             |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|                                             |  |                             |            |  
|Weighted average number of shares:           |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Basic                                        |  |                             | 65,283,711 |   |                           |   | 64,987,776 |      |  |   | 65,261,409 |   |  |   | 64,931,903 |  
|Diluted                                      |  |                             | 66,255,343 |   |                           |   | 66,615,086 |      |  |   | 66,358,120 |   |  |   | 66,684,779 |  
|                                             |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  



See accompanying notes to unaudited
consolidated financial statements.



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Hooper Holmes, Inc.

Consolidated Statements of Cash Flows

(unaudited; in thousands)

|                                                                                            |  |                           |        |   |      |   |         |  
|------------------------------------------------------------------------------------------- |  | ------------------------- | ------ | - | ---- | - | ------- | -
|                                                                                            |  | Six months ended June 30, |       
|                                                                                            |  | 2005                      |        |   | 2004 |  
|Cash flows from operating activities:                                                       |  |                           |        |   |      |   |         |  
|Net income                                                                                  |  | $                         | 5,250  |   |      | $ | 6,450   |  
|Adjustments to reconcile net income to net cash (used in) provided by operating activities: |  |                           |        |   |      |   |         |  
|Depreciation and amortization                                                               |  |                           | 4,225  |   |      |   | 4,178   |  
|Deferred tax benefit                                                                        |  |                           | (440   | ) |      |   | (150    | )
|Net realized loss on marketable securities available for sale                               |  |                           | 10     |   |      |   | 1       |  
|Issuance of stock awards                                                                    |  |                           | 152    |   |      |   | 206     |  
|Loss on sale of fixed assets                                                                |  |                           | 79     |   |      |   | 0       |  
|Change in assets and liabilities:                                                           |  |                           |        |   |      |   |         |  
|Accounts receivable                                                                         |  |                           | (5,914 | ) |      |   | 863     |  
|Other current assets                                                                        |  |                           | (1,247 | ) |      |   | 24      |  
|Accounts payable and accrued expenses                                                       |  |                           | (4,324 | ) |      |   | (1,930  | )
|                                                                                            |  |                           |        |   |      |   |         |  
|Net cash (used in) provided by operating activities                                         |  |                           | (2,209 | ) |      |   | 9,642   |  
|                                                                                            |  |                           |        |   |      |   |         |  
|Cash flows from investing activities:                                                       |  |                           |        |   |      |   |         |  
|Purchases of marketable securities                                                          |  |                           | (1,204 | ) |      |   | (1,698  | )
|Redemptions of marketable securities                                                        |  |                           | 6,009  |   |      |   | 9,987   |  
|Business acquisition, net of cash acquired                                                  |  |                           | (814   | ) |      |   | (24,727 | )
|Capital expenditures                                                                        |  |                           | (2,275 | ) |      |   | (2,304  | )
|                                                                                            |  |                           |        |   |      |   |         |  
|Net cash provided by (used in) investing activities                                         |  |                           | 1,716  |   |      |   | (18,742 | )
|                                                                                            |  |                           |        |   |      |   |         |  
|Cash flows from financing activities:                                                       |  |                           |        |   |      |   |         |  
|Principal payments on long term debt                                                        |  |                           | (973   | ) |      |   | (1,519  | )
|Proceeds from employee stock purchase plan                                                  |  |                           | 0      |   |      |   | 458     |  
|Proceeds related to the exercise of stock options                                           |  |                           | 336    |   |      |   | 104     |  
|Treasury stock acquired                                                                     |  |                           | (80    | ) |      |   | 0       |  
|Dividends paid                                                                              |  |                           | (1,957 | ) |      |   | (1,949  | )
|                                                                                            |  |                           |        |   |      |   |         |  
|Net cash used in financing activities                                                       |  |                           | (2,674 | ) |      |   | (2,906  | )
|                                                                                            |  |                           |        |   |      |   |         |  
|Effect of exchange rate changes on cash                                                     |  |                           | (161   | ) |      |   | (77     | )
|                                                                                            |  |                           |        |   |      |   |         |  
|Net decrease in cash and cash equivalents                                                   |  |                           | (3,328 | ) |      |   | (12,083 | )
|Cash and cash equivalents at beginning of year                                              |  |                           | 16,973 |   |      |   | 28,291  |  
|                                                                                            |  |                           |        |   |      |   |         |  
|Cash and cash equivalents at end of period                                                  |  | $                         | 13,645 |   |      | $ | 16,208  |  
|                                                                                            |  |                           |        |   |      |   |         |  
|Supplemental disclosure of non-cash investing activity                                      |  |                           |        |   |      |   |         |  
|Change in net unrealized gain on marketable secutiries available for sale                   |  | $                         | 10     |   |      | $ | (32     | )
|                                                                                            |  |                          
|Supplemental disclosure of cash flow information                                            |  |                           |        |   |      |   |         |  
|Cash paid during the year for:                                                              |  |                           |        |   |      |   |         |  
|Interest                                                                                    |  | $                         | 138    |   |      | $ | 122     |  
|Income taxes                                                                                |  | $                         | 2,674  |   |      | $ | 2,635   |  



See accompanying notes to unaudited
consolidated financial statements.



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HOOPER HOLMES, INC.



Notes to Unaudited Consolidated Financial Statements

June 30, 2005



Note 1: Basis of Presentation



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



The unaudited interim consolidated financial statements have been prepared in accordance with
instructions for Form 10-Q and the rules and regulations of the Securities and Exchange Commission (SEC). The unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Companys 2004 annual report on Form 10-K.



The results of operations for the three and six months ended June 30, 2005 are not necessarily indicative of the results to be expected for any other interim period or the full year. See Managements
Discussion and Analysis of Financial Condition and Results of Operations for additional information.



Certain amounts in the six months ending June 30, 2004 consolidated financial statements have been reclassified to conform with the 2005 financial statement presentation. The Company has reclassified certain auction
rate securities for which interest rates reset in less than 90 days, but for which the maturity date is longer than 90 days. The Company previously followed the common practice of classifying its investment in auction rate securities as cash and
cash equivalents on the Companys consolidated balance sheet. It was determined that these instruments are marketable securities and therefore, the Company has made a reclassification to its consolidated Statements of Cash Flows in order to
conform to the current years presentation. The reclassification resulted in a net increase of approximately $.07 million in cash used in investing activities. Net cash used in investing activities resulted from an increase in purchases of
marketable securities.



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Note 2: Earnings Per Share



Basic earnings per share equals net income divided by the weighted average common shares outstanding during the period.
Diluted earnings per share equals net income divided by the sum of the weighted average common shares outstanding during the period plus dilutive common stock equivalents. Common stock equivalents related to the assumed exercise of stock
options of 971,632 and 1,627,310 shares for the three months ended June 30, 2005 and 2004, respectively, and 1,096,711 and 1,752,876 shares for the six months ended June 30, 2005 and 2004, respectively, are included in diluted shares outstanding.



Options to purchase 6,664,150 and 4,858,175 shares of the Companys
common stock were excluded from the calculation of diluted earnings per share for the three months ended June 30, 2005 and 2004, respectively, and 6,657,238 and 4,349,050 shares for the six months ended June 30, 2005 and 2004, respectively, because
their exercise prices exceeded the average market price of outstanding common shares for the period and were, therefore, antidilutive.



Note 3: Stock-Based Compensation



The Company has stock-based employee compensation plans. The Company applies the intrinsic value based method of accounting for stock options prescribed by Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. SFAS No. 123, Accounting for Stock-Based Compensation, (SFAS No. 123) established
accounting and disclosure requirements using a fair-value based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to adopt the disclosure requirements of SFAS No. 123 and SFAS No.
148, Accounting for Stock-Based Compensation  Transition and Disclosure. No stock-based compensation cost is reflected in net income for stock options, as all options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of the grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee
compensation:



|                                                                                                                                            |  |                            |       |                          |   |       |  |      |       |  |   |      
|------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ----- | ------------------------ | - | ----- |  | ---- | ----- |  | - | -----
|                                                                                                                                            |  | Three Months EndedJune 30, |       | Six Months EndedJune 30,
|(thousands of dollars, except per share data)                                                                                               |  | 2005                       |       | 2004                     |   | 2005  |  | 2004
|Net income, as reported                                                                                                                     |  | $                          | 2,875 |                          | $ | 3,369 |  |      | 5,250 |  | $ | 6,450
|Add: Stock based employee compensation expense included in reported net income, net of related tax effect                                   |  |                            |      |                          |   |      |  |      | 91    |  |   | 124  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  | $                          | 182   |                          |   | 574   |  |      | 1,604 |  |   | 1,287
|                                                                                                                                            |  |                            |       |                          |   |       |  |      |       |  |   |      
|Pro forma net income                                                                                                                        |  | $                          | 2,693 |                          | $ | 2,795 |  | $    | 3,737 |  | $ | 5,287
|                                                                                                                                            |  |                            |       |                          |   |       |  |      |       |  |   |      
|Earnings per share:                                                                                                                         |  |                            |       |                          |   |       |  |      |       |  |   |      
|Basic, as reported                                                                                                                          |  | $                          | .04   |                          | $ | .05   |  | $    | .08   |  | $ | .10  
|Basic, pro forma                                                                                                                            |  | $                          | .04   |                          | $ | .04   |  | $    | .06   |  | $ | .08  
|Diluted, as reported                                                                                                                        |  | $                          | .04   |                          | $ | .05   |  | $    | .08   |  | $ | .10  
|Diluted, pro forma                                                                                                                          |  | $                          | .04   |                          | $ | .04   |  | $    | .06   |  | $ | .08  



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The Company granted options during the first quarter of 2005 and 2004 exercisable for a total of 50,000 shares and 50,000
shares, respectively. During the second quarter of 2005, the Company granted options exercisable for a total of 255,000 shares. There were no options granted during the second quarter of 2004. The option exercise prices equaled the fair market value
of the underlying shares at the date of grant. The fair value of each stock option granted was estimated at the date of grant using the Black  Scholes option pricing model with the following assumptions:



|                            |  |                    |       |   |                |   |       |               |  |   |       |  
|--------------------------- |  | ------------------ | ----- | - | -------------- | - | ----- | ------------- |  | - | ----- | -
|                            |  | Three Months Ended |      
|                            |  | March 31, 2004     |       |   | March 31, 2005 |   |       | June 30, 2005 | 
|Expected Life (in years)    |  |                    | 7.0   |   |                |   | 9.99  |               |  |   | 9.46  |  
|Expected Volatility         |  |                    | 51.35 | % |                |   | 52.11 | %             |  |   | 51.71 | %
|Expected Dividend Yield     |  |                    | 0.82  | % |                |   | 1.31  | %             |  |   | 1.42  | %
|Risk-free Interest Rate     |  |                    | 3.25  | % |                |   | 4.0   | %             |  |   | 4.1   | %
|Weighted Average Fair Value |  | $                  | 3.71  |   |                | $ | 2.19  |               |  | $ | 1.90  |  



As previously reported in the
Companys annual report on Form 10-K, on January 31, 2005, the Board of Directors of the Company accelerated the vesting of all of the Companys unvested stock options awarded to officers and employees under its 1992, 1994, 1997 and 1999
Stock Option Plans, all of which had 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.



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##### Table of Contents

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 implement effective at the beginning of its first quarter in 2006. 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 annual period beginning 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 2006 in the amount of $362 thousand (after-tax) or in subsequent years through 2008 of $102 thousand, (after
tax).



On January 28, 2003, the Board of Directors passed a resolution to award
each non-employee director of the Company up to a maximum of 15,000 shares of the Companys common stock as compensation. Each non-employee director was awarded 5,000 shares on January 31, 2003, 2004 and 2005, which vested immediately. All
shares awarded are restricted securities within the meaning of Rule 144 promulgated under the Securities Act of 1933, and may not be sold or transferred by the non-employee director until four years from the date of issue. During the first quarter
of 2003, 2004 and 2005 the Company expensed the fair value of the 30,000 shares awarded to its non-employee directors on January 2003, 2004 and 2005 and such amount is included in Selling, General and Administrative expense in the consolidated
Statements of Income. The total charges were $164, $206, and $152 thousand, respectively.



Note 4: Comprehensive Income



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



|                                                                            |  |                          |       |   |               |   |       |               |  |   |       |  
|--------------------------------------------------------------------------- |  | ------------------------ | ----- | - | ------------- | - | ----- | ------------- |  | - | ----- | -
|                                                                            |  | Three Month Period Ended |      
|(in thousands)                                                              |  | June 30, 2005            |       |   | June 30, 2004 |   |       | June 30, 2003 | 
|Net income                                                                  |  | $                        | 2,875 |   |               | $ | 3,369 |               |  | $ | 5,095 |  
|Other comprehensive income:                                                 |  |                          |       |   |               |   |       |               |  |   |       |  
|Unrealized holding gains (losses) arising during period                     |  |                          |      |   |               |   | (21   | )             |  |   | 11    |  
|Less: reclassification adjustment for (gains) losses included in net income |  |                          |      |   |               |   |      |               |  |   | (67   | )
|                                                                            |  |                          |       |   |               |   |       |               |  |   |       |  
|Net unrealized gain (loss) on securities, net of tax                        |  |                          |      |   |               |   | (21   | )             |  |   | (56   | )
|                                                                            |  |                          |       |   |               |   |       |               |  |   |       |  
|Foreign currency translation                                                |  |                          | (539  | ) |               |   | (223  | )             |  |   | 92    |  
|                                                                            |  |                          |       |   |               |   |       |               |  |   |       |  
|Total comprehensive income                                                  |  | $                        | 2,336 |   |               | $ | 3,125 |               |  | $ | 5,131 |  
|                                                                            |  |                          |       |   |               |   |       |               |  |   |       |  



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|                                                                            |  |                        |       |   |              |   |       |               |  |   |       |  
|--------------------------------------------------------------------------- |  | ---------------------- | ----- | - | ------------ | - | ----- | ------------- |  | - | ----- | -
|                                                                            |  | Six Month Period Ended |      
|(in thousands)                                                              |  | June 30,2005           |       |   | June 30,2004 |   |       | June 30, 2003 | 
|Net income                                                                  |  | $                      | 5,250 |   |              | $ | 6,450 |               |  | $ | 9,753 |  
|Other comprehensive income:                                                 |  |                        |       |   |              |   |       |               |  |   |       |  
|Unrealized holding gains (losses) arising during period                     |  |                        | 1     |   |              |   | (11   | )             |  |   | 9     |  
|Less: reclassification adjustment for (gains) losses included in net income |  |                        | 5     |   |              |   | 1     |               |  |   | (82   | )
|                                                                            |  |                        |       |   |              |   |       |               |  |   |       |  
|Net unrealized gain (loss) on securities, net of tax                        |  |                        | 6     |   |              |   | (10   | )             |  |   | (73   | )
|Foreign currency translation                                                |  |                        | (704  | ) |              |   | (22   | )             |  |   | 61    |  
|                                                                            |  |                        |       |   |              |   |       |               |  |   |       |  
|Total comprehensive income                                                  |  | $                      | 4,552 |   |              | $ | 6,418 |               |  | $ | 9,741 |  
|                                                                            |  |                        |       |   |              |   |       |               |  |   |       |  



Note 5: Marketable
Securities



The amortized cost, gross unrealized holding gains,
gross unrealized holding losses and fair value of available-for-sale securities by major security type and class of security at June 30, 2005 and December 31, 2004, were as follows:



|                             |  |               |       |                             |   |                              |  |   |           |   |  |   |      
|---------------------------- |  | ------------- | ----- | --------------------------- | - | ---------------------------- |  | - | --------- | - |  | - | -----
|(in thousands)               |  | AmortizedCost |       | GrossUnrealizedHoldingGains |   | GrossUnrealizedHoldingLosses |  |   | FairValue
|At June 30, 2005             |  |               |       |                             |   |                              |  |   |           |   |  |   |      
|                             |  |               |       |                            
|Bank certificates of deposit |  | $             | 390   |                             | $ | 0                            |  | $ | (1        | ) |  | $ | 389  
|Government bonds & notes     |  |               | 1,690 |                             |   | 0                            |  |   | 0         |   |  |   | 1,690
|Corporate debt securities    |  |               | 0     |                             |   | 0                            |  |   | 0         |   |  |   | 0    
|                             |  |               |       |                             |   |                              |  |   |           |   |  |   |      
|Total                        |  | $             | 2,080 |                             | $ | 0                            |  | $ | (1        | ) |  | $ | 2,079
|                             |  |               |       |                             |   |                              |  |   |           |   |  |   |      
|                             |  |               |       |                            
|At December 31, 2004         |  |               |       |                             |   |                              |  |   |           |   |  |   |      
|                             |  |               |       |                            
|Bank certificates of deposit |  | $             | 394   |                             | $ | 0                            |  | $ | (2        | ) |  | $ | 392  
|Government bonds & notes     |  |               | 5,191 |                             |   | 0                            |  |   | (8        | ) |  |   | 5,183
|Corporate debt securities    |  |               | 1,313 |                             |   | 0                            |  |   | (2        | ) |  |   | 1,311
|                             |  |               |       |                             |   |                              |  |   |           |   |  |   |      
|Total                        |  | $             | 6,898 |                             | $ | 0                            |  | $ | (12       | ) |  | $ | 6,886
|                             |  |               |       |                             |   |                              |  |   |           |   |  |   |      



8



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##### Table of Contents

Maturities of debt securities classified as available-for-sale were as follows at June 30, 2005 (maturities of
mortgage-backed securities and collateralized mortgage obligations have been presented based upon estimated cash flows, assuming no change in the current interest rate environment):



|                    |  |               |       |           |   |      
|------------------- |  | ------------- | ----- | --------- | - | -----
|                    |  | AmortizedCost |       | FairValue
|Due within one year |  | $             | 390   |           | $ | 389  
|Due after ten years |  |               | 1,690 |           |   | 1,690
|                    |  |               |       |           |   |      
|                    |  | $             | 2,080 |           | $ | 2,079
|                    |  |               |       |           |   |      



Proceeds from the sale of investment
securities available-for-sale were $6.0 million, $10.0 million and $20.7 in the six months ended June 30, 2005, 2004 and 2003, respectively. Gross realized gains included in income for the six months ended June 30, 2005, 2004 and 2003 were $0, $17
and $135 thousand, respectively, and gross realized losses included in income for the six months ended June 30, 2005, 2004 and 2003 were $9, $18 and $1 thousand, respectively.



Note 6: Capital Stock



The net tax benefit derived from the exercise of stock options was $ 0.3 million and $0.1 million for the six months ended June 30, 2005 and 2004, respectively. Options
exercised for the six months ended June 30, 2005 and 2004 totaled 257,000 shares and 65,700 shares, respectively, all of which were issued from treasury stock.



On May 30, 2000, the Board of Directors adopted a resolution authorizing 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. The Boards resolution was superseded on April 27, 2005 when the Board of Directors authorized the repurchase of between 1.0 and 1.5 million shares of the Companys common stock in
any calendar year. Shares may be repurchased in open market purchases or through privately negotiated transactions. All share repurchases will be made in compliance with applicable rules and regulations and may be discontinued at any time. During
the six month period ending June 30, 2005, the Company purchased 24,800 shares. During the six month period ending June 30, 2004, the Company did not purchase any shares.



9



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Note 7: Goodwill and Intangible Assets



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



|                           |  |                              |  |                       |        |                          |   |         |     |  |   |       
|-------------------------- |  | ---------------------------- |  | --------------------- | ------ | ------------------------ | - | ------- | --- |  | - | ------
|Balance                    |  | Weighted Useful Life (years) |  | Gross Carrying Amount |        | Accumulated Amortization |   |         | Net
|(in thousands)             |  |                              |  |                      
|At June 30, 2005           |  |                              |  |                       |        |                          |   |         |     |  |   |       
|Non-Competition agreements |  | 4.4                          |  | $                     | 11,006 |                          | $ | (9,190  | )   |  | $ | 1,816 
|Referral base              |  | 12.9                         |  |                       | 37,353 |                          |   | (11,417 | )   |  |   | 25,936
|Contractor Network         |  | 7.3                          |  |                       | 6,382  |                          |   | (5,240  | )   |  |   | 1,142 
|Trademarks and tradenames  |  | 19.2                         |  |                       | 4,440  |                          |   | (613    | )   |  |   | 3,827 
|                           |  |                              |  |                       |        |                          |   |         |     |  |   |       
|                           |  |                              |  | $                     | 59,181 |                          | $ | (26,460 | )   |  | $ | 32,721
|                           |  |                              |  |                       |        |                          |   |         |     |  |   |       
|At December 31, 2004       |  |                              |  |                       |        |                          |   |         |     |  |   |       
|Non-Competition agreements |  | 4.4                          |  |                       | 11,006 |                          |   | (8,512  | )   |  |   | 2,494 
|Referral base              |  | 12.9                         |  |                       | 37,353 |                          |   | (9,816  | )   |  |   | 27,537
|Contractor Network         |  | 7.3                          |  |                       | 6,382  |                          |   | (4,978  | )   |  |   | 1,404 
|Trademarks and tradenames  |  | 19.2                         |  |                       | 4,440  |                          |   | (495    | )   |  |   | 3,945 
|                           |  |                              |  |                       |        |                          |   |         |     |  |   |       
|                           |  |                              |  | $                     | 59,181 |                          | $ | (23,801 | )   |  | $ | 35,380
|                           |  |                              |  |                       |        |                          |   |         |     |  |   |       



The changes in the carrying amount of
goodwill for the six months ended June 30, 2005, including a breakdown by the Companys two segments, the Health Information Division (HID) and the Claims Evaluation Division (CED), are reflected below:



|                                        |  |     |         |   |     |   |        |  |   |         |  
|--------------------------------------- |  | --- | ------- | - | --- | - | ------ |  | - | ------- | -
|(in thousands)                          |  | HID |         |   | CED |   | Total  | 
|Balance as of December 31, 2004         |  | $   | 123,589 |   |     | $ | 31,913 |  | $ | 155,502 |  
|Acquisitions                            |  |     | 5       |   |     |   | 777    |  |   | 782     |  
|Foreign currency translation adjustment |  |     | (385    | ) |     |   |       |  |   | (385    | )
|                                        |  |     |         |   |     |   |        |  |   |         |  
|Balance as of June 30, 2005             |  | $   | 123,209 |   |     | $ | 32,690 |  | $ | 155,899 |  
|                                        |  |     |         |   |     |   |        |  |   |         |  



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The aggregate amortization expense for intangible assets for the six months ended June 30, 2005 and 2004, was
approximately $2,582 and $2,603 respectively. The estimated intangible amortization expense for the fiscal years ending December 31, 2005 to December 31, 2009 is $5,155, $4,325, $3,382, $2,955 and $2,450 respectively.



Note 8: Commitments and Contingencies



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, to 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 the litigation. However, we cannot predict the outcome of the lawsuit.



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.



Effective May 23, 2003, the Company entered into an employment agreement with James M.
McNamee, the Companys President and Chief Executive Officer. The employment agreement was filed as Exhibit 10.1 to the Companys quarterly report on Form 10-Q for the quarter ended June 30, 2003.



On July 16, 2005, the Company entered into a Confidential Severance and Release Agreement
with its Chief Financial Officer. Effective September 15, 2005, Mr. Lash will be an inactive employee of the Company for a 24-month period. In consideration, Mr. Lash will receive salary and benefits for 24 months and will receive outplacement
services and legal fees incurred related to execution of this agreement. Mr. Lash has agreed not to be employed by a company that provides the same services as the Company. The charge relative to this agreement will be made in the third quarter of
2005.



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The Company has employment retention contracts with certain executive officers of the Company for a two-year period from
the date a change in control occurs as further defined in the contracts.



Note 9: Operating Segments



The Company has two
reportable operating segments: the Health Information Division (HID) and the Claims Evaluation Division (CED). The HID segment provides a full range of paramedical and underwriting services to the life insurance industry in the U.S. and the United
Kingdom. The CED segment provides independent medical examinations (IME) and case-management services primarily for property and casualty insurers and claims reviewers.



The segments accounting policies are the same as those described in the summary of significant accounting policies contained in the
Companys 2004 annual report on Form 10-K except that interest expense and non-operating income and expenses are not allocated to the individual operating segment when determining segment profit or loss.



Each of the Companys subsidiaries operates in only one of our two operating segments.
The total assets of each segment are comprised of the assets of the subsidiaries operating in that segment. Corporate related assets are included in the Health Information Division.



A summary of segment information as of and for the three and six month periods ended June 30, 2005 and 2004 is presented below (in
thousands).



|                          |  |                                                    |         |                                                  |   |        |  |     |         |     |   |         |  |   |        |  |   |        
|------------------------- |  | -------------------------------------------------- | ------- | ------------------------------------------------ | - | ------ |  | --- | ------- | --- | - | ------- |  | - | ------ |  | - | -------
|                          |  | As of and for the three months ended June 30, 2005 |         | As of and for the six months ended June 30, 2005
|                          |  | HID                                                |         | CED                                              |   | Total  |  | HID |         | CED |   | Total  
|Revenue                   |  | $                                                  | 73,761  |                                                  | $ | 10,207 |  | $   | 83,968  |     | $ | 145,685 |  | $ | 20,786 |  | $ | 166,471
|Operating Income          |  | $                                                  | 4,184   |                                                  | $ | 730    |  | $   | 4,914   |     | $ | 7,653   |  | $ | 1,460  |  | $ | 9,113  
|Total Assets              |  | $                                                  | 224,747 |                                                  | $ | 47,666 |  | $   | 272,413 |     | $ | 224,747 |  | $ | 47,666 |  | $ | 272,413
|Depreciation/Amortization |  | $                                                  | 1,422   |                                                  | $ | 625    |  | $   | 2,047   |     | $ | 2,946   |  | $ | 1,279  |  | $ | 4,225  
|                          |  | As of and for the three months ended June 30, 2004 |         | As of and for the six months ended June 30,
2004
|                          |  | HID                                                |         | CED                                              |   | Total  |  | HID |         | CED |   | Total  
|Revenue                   |  | $                                                  | 71,806  |                                                  | $ | 11,036 |  | $   | 82,842  |     | $ | 142,079 |  | $ | 20,756 |  | $ | 162,835
|Operating Income          |  | $                                                  | 4,833   |                                                  | $ | 886    |  | $   | 5,719   |     | $ | 9,374   |  | $ | 1,398  |  | $ | 10,772 
|Total Assets              |  | $                                                  | 232,185 |                                                  | $ | 29,200 |  | $   | 261,385 |     | $ | 232,185 |  | $ | 29,200 |  | $ | 261,385
|Depreciation/Amortization |  | $                                                  | 1,552   |                                                  | $ | 561    |  | $   | 2,113   |     | $ | 3,127   |  | $ | 1,051  |  | $ | 4,178  



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Note 10: Acquisitions and Dispositions



During the first quarter of 2005, the Companys Heritage Labs subsidiary purchased specific inventory, fixed assets and a lab process
specific to hemoglobin testing from Matria Womens and Childrens Healthcare Inc. The total purchase price of this transaction was $32 thousand. The purchase price was allocated to inventory and fixed assets.



During the second quarter of 2005, the Company made an additional purchase price payment and
an additional performance related payment relative to the Allegiance Health Inc. and Michigan Evaluations Group Inc. acquisitions. The payments made totaled $0.8 million and were recorded as an increase to goodwill.



Note 11: Recently Issued Accounting Standards



In March 2005, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 47, Accounting for Conditional Asset Retirement Obligations (FIN 47). This interpretation states that the term conditional asset retirement obligation, as used in paragraph A23 of SFAS No 143 refers to
a legal obligation to perform an asset retirement in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement obligation is
unconditional even though uncertainty exists about the timing and/or method of settlement. The effective date for adopting this interpretation is no later than the end of fiscal years ending after December 15, 2005. The Company is currently in the
process of determining the impact of FIN 47, if any, on its financial condition, results of operations and cash flows.



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##### Table of Contents

In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No.
123R), which replaces SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 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. The pro forma disclosures previously permitted under SFAS No. 123 no longer will be an
alternative to financial statement recognition. As a result of a rule amendment adopted by the SEC in April 2005, the Company is required to implement SFAS No. 123R at the beginning of its 2006 fiscal year. Under SFAS No. 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 No. 123R, while the retroactive method 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 No. 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.



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 repatriate the unremitted
foreign earnings of the current year and prior years, the application of FSP 109-2 did not affect income tax expense in the period of enactment or any related disclosures.



Note 12: Long-Term Debt



On October 29, 1999, the Company entered into a $100 million Amended and Restated Revolving Credit and Term Loan Agreement with three banks. This senior credit facility
consists of a $65 million six-year term loan and a $35 million three-year revolving loan, both unsecured. During 2001, the three-year revolving loan expiration date was extended for one year to October 31, 2003. During 2003, the revolving loan
expiration date was extended for three years to October 31, 2006. There are no borrowings outstanding against the revolving loan at June 30, 2005. There are no additional borrowings available under the original $65 million term loan due to previous
borrowings which have been repaid. As of June 30, 2005, $1.0 million is outstanding against the term loan. A principal payment of $1.0 million is due to be repaid on January 31, 2006. The Company has not borrowed under the $35 million revolving
loan.



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##### Table of Contents

Both the term loan and the revolving loan bear interest at either the prime rate minus 1/2% or LIBOR plus 3/4% to 13/4%, depending on the ratio of our consolidated funded
debt, as defined, to earnings before interest, taxes, depreciation and amortization, or EBITDA. As of June 30, 2005, interest was payable at an effective average annual interest rate of 4.29%. 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:



| |  |  | dividends are limited to 50% of the Companys average quarterly net income;
| | - |  | ---------------------------------------------------------------------------



| |  |  | the Companys Consolidated Fixed Charge Coverage Ratio, as defined, must be no less than 1.50 to 1.00, measured on a trailing four quarter basis;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the Companys Consolidated Funded Debt to EBITDA Ratio, as defined, must not at any time exceed 2.75 to 1.00 measured on a trailing four quarter basis; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the Company is not permitted to purchase treasury stock for an aggregate purchase in excess of $25 million for the period from October 30, 2003 to October 31, 2006.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



As of June 30, 2005, the Company was in compliance with all
financial covenants.



Note 13: Other Charges



During the first quarter of 2005, the Company recorded a pretax restructuring charge of
approximately $1.0 million ($0.6 million after tax). During the six months ended June 30, the Company paid $0.8 million in connection with this charge. The charge related to certain employee terminations and branch office closures that occurred in
the first quarter of 2005. The Company may incur additional charges of this type in subsequent quarters in 2005. There were no additions to the restructure reserve in the second quarter of 2005.



Subsequent to our second quarter 2005 earnings release on July 28, 2005, the Company
determined that its outsourced underwriting subsidiary, MAAS, (acquired in May 2004) had, through a repetitive clerical error, overbilled its principal customer for postage expenses since September 2003. The Company has recorded an adjustment to
reduce revenue ($.9 million) in the second quarter of 2005, which represents approximately 1.1% of consolidated revenues for the quarter. The impact on net income was $0.2 million relating to the current quarter and $0.3 million related to previous
reporting periods.



Note 14: Related Party Transaction



During the, six months ended June 30, 2005, we paid approximately $80
thousand to Douglas Consulting, a United Kingdom-based IT company 100% owned by John L. Spenser, an Executive Vice President of the Company, for information technology (IT) consulting services provided to our U.K. subsidiary, Medicals Direct Group.
This arrangement was terminated in April 2005.



15



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##### Table of Contents

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



Cautionary Statement Regarding Forward-Looking Statements



This quarterly report on Form 10-Q 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 loss of one or more of our customers and our ability to obtain new customers or additional business from existing customers;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | our susceptibility to trends and other developments affecting the life and other segments of the insurance industry, including changes in the types of services demanded by life
insurance carriers in connection with their underwriting of individual life insurance policies, and by property and casualty insurance carriers in connection with their processing of medical claims;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the intense competition in the industries in which we operate, including the impact of pricing pressures;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | our ability to anticipate, conform and/or modify our business operations to comply with complex state regulations that are subject to frequent changes;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to enhance and expand our technology and network infrastructure;
| | - |  | ----------------------------------------------------------------------------



| |  |  | the continued success of our acquisitions and other strategic investments;
| | - |  | --------------------------------------------------------------------------



| |  |  | the effectiveness of our sales, advertising and marketing programs;
| | - |  | -------------------------------------------------------------------



| |  |  | our ability to hire and retain key management personnel, and manage our paramedical examiners, physicians and other key personnel; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | general industry, economic and political conditions.
| | - |  | ----------------------------------------------------



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Our annual report or Form 10-K for the year ended December 31, 2004, should be read in conjunction with this quarterly
report on Form 10-Q. The Risk Factors section of the 10-K 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.



The forward-looking statements included in this quarterly 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.



Overview:



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



| |  |  | Our Health Information Division, which we formerly referred to as the Health Information Business Unit or HIBU, is one of the leading providers of
outsourced risk assessment services to the life and health insurance industry. The risk assessment services that we provide include:
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our Portamedic business, which involves the arranging of paramedical and medical examinations (including blood and urine specimen collection), primarily in connection with
insurance carriers processing and evaluation of the risks associated with underwriting insurance policies (mainly life insurance policies);
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | under the Infolink name, tele-underwriting, telephone personal health interviews and medical records retrieval;
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | through our wholly-owned subsidiary, Heritage Labs, the processing of specimens obtained in connection with our paramedical examinations, as well as the specimens provided by
third-party health information service providers; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | outsourced underwriting services provided by Mid-America Agency Services, Inc. (MAAS), acquired in May 2004.
| | - |  | ------------------------------------------------------------------------------------------------------------



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



| |  |  | Our Claims Evaluation Division, which we formerly referred to as the Diversified Business Unit, provides medical claims services to insurance adjusters
for use in processing accident claims, primarily on behalf of property and casualty insurance carriers. The core activity of the businesses comprising the Claims Evaluation Division consists of arranging for independent medical exams (IMEs) for the
purpose of determining the nature, source and extent of injury.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Over the course of its 100+ year history, the Company has had diversified businesses, but since the sale of a segment in
1995 our sole business had 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 research to date 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 complimentary companies, which increased its market
share in the United Kingdom and enhanced its screenings and general medicals businesses. In 2004, Medicals Direct Group completed two additional acquisitions to expand its services being provided to the legal profession.



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.



In early 2005, the Company launched the Portamedic Direct initiative intended to aggressively pursue a portion of the market for paramedical examination services which is largely performed by contractor affiliate
operations complementary to our company owned branches.



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. In October 2002, we completed 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 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 workers
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. Together, D&D, Medimax, Allegiance Health and Michigan
Evaluation Group constitute our Claims Evaluation Division. The Medimax operation was merged into the remaining CED operations in the second quarter of 2005.



18



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##### Table of Contents

Our management, in evaluating the Companys operating performance and financial condition, focuses on:



| |  |  | our development of value added services;
| | - |  | ----------------------------------------



| |  |  | our ability to retain and expand the share of a clients business we enjoy;
| | - |  | ---------------------------------------------------------------------------



| |  |  | our success in securing additional clients;
| | - |  | -------------------------------------------



| |  |  | our ability to deliver a superior service to our customers, at the lowest price;
| | - |  | --------------------------------------------------------------------------------



| |  |  | certain performance criteria, which includes actual performance to budget;
| | - |  | --------------------------------------------------------------------------



| |  |  | maintaining proper expense levels relative to business volume.
| | - |  | --------------------------------------------------------------



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



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



In our Claims Evaluation Division Unit (CED) segment, our strategy is to expand into key states to form a foundation of strong business units in both automobile no-fault
insurance and workers compensation markets. If successful, this will permit the Company to expand organically in the future and achieve greater diversification in the state regulatory environments away from New York State, where we have been
experiencing regulatory changes adverse to our CED business. With respect to our CED assets, our strategy is to become a unified national provider of outsourced independent medical examination services while retaining the strong local presence of
our individual companies. Accordingly, we have adopted the approach where most, but not all, CED functions will be centralized. Specifically, the immediate plan objectives are to:



| |  |  | substantially expand our present panel of doctors so as to be able to provide a more extensive selection of IME providers to our clients in all major markets. We intend to leverage
Hooper Holmes resources by creating a centrally managed doctor recruitment function.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | complete and take delivery of our enhanced CED IT system. The system is designed in four component pieces, which will be delivered in phases, through most of 2005. This system will
centralize the divisions financial functions and provide a unified operational platform.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| |  |  | utilize our reorganized sales teams at our CED companies so that we can best accommodate national, as well as local and regional, sales initiatives. We have
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | appointed a national sales manager for the division and identified certain individuals with division-wide sales responsibilities and have hired an experienced salesperson.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | utilize our recently centralized medical provider credentialing function at the CED division level. By centralizing such function, we are benefiting from the economies of scale of
providing such services to all CED companies in conjunction with providing similar services to the HID.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We have the resources in place to achieve these objectives and we have committed capital spending to accelerate the process.



Results of Operations



Three and six months ended June 30, 2005 compared to three months and six months ended
June 30, 2004.



The table below sets forth certain consolidated
operating data for the periods indicated.



|                                             |  |                             |        |   |                           |       |   |      |   |        |      |  |       |   |  |   |         |   |  |       |   |  |   |         |   |  |       |  
|-------------------------------------------- |  | --------------------------- | ------ | - | ------------------------- | ----- | - | ---- | - | ------ | ---- |  | ----- | - |  | - | ------- | - |  | ----- | - |  | - | ------- | - |  | ----- | -
|                                             |  | Three Months ended June 30, |        |   | Six Months ended June 30, |      
|(in thousands)                               |  | 2005                        |        |   | 2004                      |       |   | 2005 |   |        | 2004 | 
|Revenues                                     |  | $                           | 83,969 |   |                           | 100.0 | % |      | $ | 82,842 |      |  | 100.0 | % |  | $ | 166,471 |   |  | 100.0 | % |  | $ | 162,835 |   |  | 100.0 | %
|Cost of operations                           |  |                             | 60,665 |   |                           | 72.2  | % |      |   | 59,770 |      |  | 72.1  | % |  |   | 119,508 |   |  | 71.8  | % |  |   | 116,918 |   |  | 71.8  | %
|                                             |  |                             |        |   |                           |       |   |      |   |        |      |  |       |   |  |   |         |   |  |       |   |  |   |         |   |  |       |  
|Gross profit                                 |  |                             | 23,304 |   |                           | 27.8  | % |      |   | 23,072 |      |  | 27.9  | % |  |   | 46,963  |   |  | 28.2  | % |  |   | 45,917  |   |  | 28.2  | %
|Selling, general and administrative expenses |  |                             | 18,390 |   |                           | 21.9  | % |      |   | 17,353 |      |  | 21.0  | % |  |   | 37,850  |   |  | 22.7  | % |  |   | 35,145  |   |  | 21.6  | %
|                                             |  |                             |        |   |                           |       |   |      |   |        |      |  |       |   |  |   |         |   |  |       |   |  |   |         |   |  |       |  
|Operating income                             |  |                             | 4,914  |   |                           | 5.9   | % |      |   | 5,719  |      |  | 6.9   | % |  |   | 9,113   |   |  | 5.5   | % |  |   | 10,772  |   |  | 6.6   | %
|                                             |  |                             |        |   |                           |       |   |      |   |        |      |  |       |   |  |   |         |   |  |       |   |  |   |         |   |  |       |  
|Other income (expense):                      |  |                             |        |   |                           |       |   |      |   |        |      |  |       |   |  |   |         |   |  |       |   |  |   |         |   |  |       |  
|Interest expense                             |  |                             | (166   | ) |                           | -0.2  | % |      |   | (196   | )    |  | -0.3  | % |  |   | (346    | ) |  | -0.2  | % |  |   | (344    | ) |  | -0.2  | %
|Interest income                              |  |                             | 130    |   |                           | 0.1   | % |      |   | 51     |      |  | 0.1   | % |  |   | 177     |   |  | 0.1   | % |  |   | 156     |   |  | 0.1   | %
|Other expense, net                           |  |                             | (131   | ) |                           | -0.2  | % |      |   | (76    | )    |  | -0.1  | % |  |   | (227    | ) |  | -0.1  | % |  |   | (200    | ) |  | -0.1  | %
|                                             |  |                             |        |   |                           |       |   |      |   |        |      |  |       |   |  |   |         |   |  |       |   |  |   |         |   |  |       |  
|                                             |  |                             | (167   | ) |                           | -0.3  | % |      |   | (221   | )    |  | -0.3  | % |  |   | (396    | ) |  | -0.2  | % |  |   | (388    | ) |  | -0.2  | %
|                                             |  |                             |        |   |                           |       |   |      |   |        |      |  |       |   |  |   |         |   |  |       |   |  |   |         |   |  |       |  
|Income before income taxes                   |  |                             | 4,747  |   |                           | 5.6   | % |      |   | 5,498  |      |  | 6.6   | % |  |   | 8,717   |   |  | 5.3   | % |  |   | 10,384  |   |  | 6.4   | %
|                                             |  |                             |        |   |                           |       |   |     
|Income taxes                                 |  |                             | 1,872  |   |                           | 2.2   | % |      |   | 2,129  |      |  | 2.5   | % |  |   | 3,467   |   |  | 2.1   | % |  |   | 3,934   |   |  | 2.4   | %
|                                             |  |                             |        |   |                           |       |   |      |   |        |      |  |       |   |  |   |         |   |  |       |   |  |   |         |   |  |       |  
|Net income                                   |  | $                           | 2,875  |   |                           | 3.4   | % |      | $ | 3,369  |      |  | 4.1   | % |  | $ | 5,250   |   |  | 3.2   | % |  | $ | 6,450   |   |  | 4.0   | %
|                                             |  |                             |        |   |                           |       |   |      |   |        |      |  |       |   |  |   |         |   |  |       |   |  |   |         |   |  |       |  



Analysis of Comparative
Operating Results



Revenues



Our consolidated revenues for the three months ended June 30, 2005 totaled $83.9



20



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million, an increase of $1.1 million or 1.4% compared to the corresponding period of 2004. For the six months ended June
30, 2005, our consolidated revenues were $166.5 million compared to $162.8 million in the prior period of 2004, and increase of $3.6 million or 2.2%. The following provides a summary of the revenues derived from the main components of our business
during the three and six months ended June 30, 2005 and 2004.



| |  |  | Medicals Direct, our UK subsidiary, increased its revenues by 11% to $11.1 million and $21.7 million for the three and six months ended June 30, 2005, as a result of aggressive
expansion efforts and select small acquisitions made in 2004;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Heritage Labs, generated revenue growth of 29% to $5.3 million and 21% to $10.1 million for the three and six months ended June 30, 2005.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Infolink generated revenue growth of 11% to approximately $8.1 million and 9% to $15.1 million for the three and six months ended June 30, 2005.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Mid-America Agency Services (MAAS), our outsourced underwriting business (acquired on May 1, 2004) generated $4.2 million and $8.7 million in revenues for the three and six months
ended June 30, 2005.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Portamedic revenues decreased to $45.0 million, compared to $48.2 million for the three months ended June 30, 2005 and decreased to $90.0 million from $98.2 million for the six
months ended June 30, 2005.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Revenues for the Claims Evaluation Division (CED) decreased 8% to $10.2 million for the three months ended June 30, 2005, and was $20.8 million for the six months ended June 30,
2005 and 2004.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Subsequent to our second quarter 2005
earnings release on July 28, 2005, the Company determined that its outsourced underwriting subsidiary, MAAS, (acquired in May 2004) had, through a repetitive clerical error, overbilled its principal customer for postage expenses since September
2003. The Company has recorded an adjustment to reduce revenue ($.9 million) in the second quarter of 2005, which represents approximately 1.1% of consolidated revenues for the quarter. The impact on net income was $0.2 million relating to the
second quarter billing error and $0.3 million related to previous reporting periods.



Health Information Division.For the three months ended June 30, 2005, the HID segments revenues were $73.8 million, an increase of $2.0 million (2.7%) compared to the corresponding period of the prior
year. For the six months ended June 30, 2005, the HIDs segments revenues were $145.7 million, an increase of $3.6 million (2.5%) compared to the corresponding period of the prior year.



Revenues of the Portamedic business were down $3.2 million ($45.0 million vs. $48.2 million)
and $8.2 million ($90.0 million vs. $98.2 million) in the three and six months ended June 30, 2004 compared to the corresponding periods of the prior year. The decline was the result of:



| |  |  | decreases in the number of paramedical examinations performed (643,000 vs. 649,000 in the three months ended June 30, 2005 and 2004, respectively; 1,283,000 vs. 1,315,000 in the six
months ended June 30, 2005 and 2004, respectively);
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| |  |  | reduced life insurance application activity, down 4.4% and 3.4% in the three and six month periods ended June 30, 2005 compared to the corresponding periods of the prior year, as
reported by The Medical Information Bureau Group, Inc., a provider of information and database management services; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | decreases in the average revenue per examination, down 5.8% in each of the three month ($73.62 vs. $78.14) and six month ($73.64 vs. $78.19) periods ended June 30, 2005 compared to
the corresponding periods of the prior year), reflecting price having become the main driver in insurance companies selection of paramedical service vendors.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the decline of business from a major customer throughout the first half of 2005 and the subsequent loss of that customer which provided 1.5% of our consolidated revenues in the six
months ending June 30, 2005 and 1.9% in 2004.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Infolink.The declines in revenues derived by our Portamedic business were partially offset by the increases in the revenues derived by our Infolink business of $.8 million ($8.1 million vs. $7.3 million) and $1.2 million ($15.1 million vs. $13.9 million)
in the three and six month periods ended June 30, 2005, compared to the corresponding periods of the prior year. The increased Infolink revenue was primarily due to the increased number of Infolink reports (177,000 vs. 143,000 in the three months
ended June 30, 2005 and 2004, respectively; 332,000 vs. 273,000 in the six months ended June 30, 2005 and 2004, respectively). The average revenue per Infolink unit decreased 11.6% ($45.70 vs. $51.68) and 11.1% ($45.45 vs. $51.11) in the three and
six month periods ended June 30, 2005, compared to the corresponding periods of the prior year. The growth in Infolink is attributable to the continued success of its centralized call center located in Kansas City, KS.



During 2004, we were awarded several contracts to handle certain clients
tele-interviews, and in the first quarter of 2005 we entered into agreements for Infolink services with additional 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.



Revenues for our
Medicals Direct Group (MDG) were $11.1 million and $21.7 million for the three and six month periods ended June 30, 2005, respectively, compared to $10.0 million and $19.5 million for the corresponding periods of the prior year, respectively.
Management attributes the increases in MDGs revenues to organic growth fueled by aggressive expansion efforts, to select small acquisitions completed in 2004 and the addition of new insurance company clients for underwriting services. Medicals
Direct is a leading provider of screenings and outsourced underwriting services in the U.K.



Revenues for Other Services, consisting of Heritage Labs and MAAS, were $9.5 million and $18.9 million for the three and six month periods ended June 30, 2005, respectively, compared to $6.2 million and $10.5 million
for the corresponding periods of the prior year, respectively. The principal factors contributing to the increases were:



| |  |  | increases in the number of samples tested (238,000 vs. 196,000 in the three months ended June 30, 2005 and 2004, respectively; 459,000 vs. 402,000 in the six months ended June 30,
2005 and 2004, respectively);
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| |  |  | increases in the average price per sample tested (.82% and 3.0% in the three and six month periods ended June 30, 2005, respectively, compared to the corresponding periods of the
prior year);
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | increased production of contract manufactured specimen kits and growth in reflexive testing.
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | Inclusion of revenue for the full period in 2005 from the May 2004 acquisition of MAAS and growth in the business from MAASs principal insurance underwriting client.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



Claims Evaluation Division. Revenues for
the CED segment totaled $10.2 million in the three months ended June 30, 2005 compared to $11.0 million in the three months ended June 30, 2004, and decrease of 7.5%. For each of the six months ended June 30, 2005 and 2004, revenues for the CED
segment were $20.8 million.



The decrease in the CED segments revenue for the
three and six months ended June 30, 2005 compared to the corresponding periods of the prior year is due to a combined reduction in revenue of D&D Associates, Medimax Inc. and Allegiance Health Inc. of 13.6% and 9.5% respectively, offset by a 54%
increase in revenues of Michigan Evaluation Group, acquired in May 2004. The decline in revenues was attributable to several factors, including:



| |  |  | a decline in automobile claims activity in New York (the primary markets of D&D Associates and Allegiance Health Inc.), which management believes is attributable to more
conservative automobile insurance underwriting standards;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the continuing effects of regulatory changes requiring claimants and medical practitioners to notify insurers of potential no-fault auto claims on a more timely basis, which has
resulted in a decline in the number of claims that may be considered for an IME or peer review;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | increased enforcement of insurance fraud laws by the New York State Insurance Fraud Bureau and special investigative units of insurance companies, which reduces such companies
need for additional claims evaluation services; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | increased competition from other service providers, which has apparently led insurers to more evenly distribute claims among vendors.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



We continue our efforts to counter this decline in revenues by seeking to expand market share
through, among other things, continuing to focus on the higher quality of service standards we believe we provide over our competitors, aggressively marketing our services to other no-fault automobile insurance providers, continuing to expand into
workers compensation markets and becoming a national provider of IMEs.



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##### Table of Contents

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; expansion into additional states as well as expanding our
existing contractual relationships to national relationships.



Cost of
Operations



|                     |  |                             |      |                           |      |      |   |                     |  |      |  |                     |       |      |      |                     |   |       |  |     
|-------------------- |  | --------------------------- | ---- | ------------------------- | ---- | ---- | - | ------------------- |  | ---- |  | ------------------- | ----- | ---- | ---- | ------------------- | - | ----- |  | ----
|                     |  | Three Months Ended June 30, |      | Six Months Ended June 30,
|(in millions)        |  | 2005                        |      | % ofSegmentRevenues       |      | 2004 |   | % ofSegmentRevenues |  | 2005 |  | % ofSegmentRevenues |       | 2004 |      | % ofSegmentRevenues
|HID                  |  |                             |      |                           |      |      |   |                     |  |      |  |                     |       |      |      |                     |   |       |  |     
|Portamedic/ Infolink |  | $                           | 39.6 |                           | 74.6 |      | $ | 40.7                |  | 73.4 |  | $                   | 77.8  |      | 74.0 |                     | $ | 81.4  |  | 72.7
|Medicals Direct      |  |                             | 8.3  |                           | 75.0 |      |   | 7.3                 |  | 72.5 |  |                     | 16.3  |      | 75.3 |                     |   | 14.4  |  | 73.7
|Other Services       |  |                             | 5.6  |                           | 58.6 |      |   | 4.0                 |  | 63.4 |  |                     | 10.9  |      | 57.8 |                     |   | 6.5   |  | 61.8
|                     |  |                             |      |                           |      |      |   |                     |  |      |  |                     |       |      |      |                     |   |       |  |     
|Total HID segment    |  | $                           | 53.5 |                           | 72.6 |      | $ | 52.0                |  | 72.4 |  |                     | 105.0 |      | 72.1 |                     |   | 102.3 |  | 72.0
|CED Segment          |  |                             | 7.1  |                           | 69.8 |      |   | 7.8                 |  | 70.7 |  |                     | 14.5  |      | 69.8 |                     |   | 14.6  |  | 70.3
|                     |  |                             |      |                           |      |      |   |                     |  |      |  |                     |       |      |      |                     |   |       |  |     
|Total                |  | $                           | 60.7 |                           | 72.3 |      | $ | 59.8                |  | 72.1 |  | $                   | 119.5 |      | 71.8 |                     | $ | 116.9 |  | 71.8
|                     |  |                             |      |                           |      |      |   |                     |  |      |  |                     |       |      |      |                     |   |       |  |     



Our total consolidated cost of
operations for the three months ended June 30, 2005 was $60.7 million, compared to $59.8 million for the three months ended June 30, 2004, an increase of 1.5%. As a percentage of revenues, our cost of operations increased slightly to 72.3% for the
three months ended June 30, 2005 compared to 72.1% for the three months ended June 30, 2004.



Total consolidated cost of operations for the six months ended June 30, 2005 was $119.5 million, compared to $116.9 million for the corresponding period of the prior year, an increase of 2.2%. As a percentage of
revenues, cost of operations was 71.8% for the six months ended June 30, 2005 and 2004.



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Health Information Division.Cost of operations for the Health Information Division was $53.5
million for the three months ended June 30, 2005, compared to $52.0 for the three months ended June 30, 2004, an increase of $1.5 million (3.0%). As a percentage of the HID segments revenues, its cost of operations increased to 72.6% for the
three months ended June 30, 2005, compared to 72.4% for the period ending June 30, 2004.



Cost of operations for the HID segment was $105.0 million for the six months ended June 30, 2005, compared to $102.3 million in the corresponding period of the prior year, an increase of $2.7 million (2.6%). As a
percentage of the HIDs revenues, its cost of operations totaled 72.1% for the six months ended June 30, 2005, compared to 72.0% for the six months ended June 30, 2004.



Cost of operations for the Portamedic and Infolink businesses totaled $39.6 million and $77.8 million for the three and six month periods
ended June 30, 2005, respectively, compared to $40.7 million and $81.4 million for the three and six month periods ended June 30, 2004, respectively. As a percentage of revenues, cost of operations was 74.6% and 74.0% for the three and six months
ended June 30, 2005 compared to 73.4% and 72.7% for the corresponding period of the prior year. The decrease in cost of operations for the three and six months ended June 30, 2005, compared to the corresponding period of the prior year is due to
reduced levels of revenue for the Portamedic business, offset by higher revenue levels of Infolink, which has a lower gross margin than that of Portamedic.



Cost of operations for the Medicals Direct Group totaled $8.3 million and $16.3 million for the three and six month periods ended June 30, 2005, respectively, compared to
$7.3 million and $14.4 million for the three and six month periods ended June 30, 2004, respectively. The increases in cost of operations was due to higher revenue levels of underwriting services and screenings, and higher physician costs associated
with the Screenings business. Medicals Direct cost of operations represented 75.0% and 75.3% of its revenues for the three and six month periods ended June 30, 2005, respectively, compared to 72.5% and 73.7% for the three and six month periods ended
June 30, 2004, respectively.



Cost of operations for Other Services
totaled $5.6 million and $10.9 million for the three and six month periods ended June 30, 2005, respectively, compared to $4.0 million and $6.5 million for the three and six month periods ended June 30, 2004, respectively. The dollar increase in
cost of operations reflected the higher revenue levels for Heritage Labs and MAAS, acquired in May 2004. Other Services cost of operations represented 58.6% and 57.8% of its revenues for the three and six month periods ended June 30, 2005,
compared to 63.4 % and 61.8% for the three and six month periods ended June 30, 2004. The decreased cost of operations as a percentage of revenues was due to:



| |  |  | reduced laboratory and kit labor costs  more effective utilization of employee labor versus contract labor due to improved scheduling of production runs.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | reduced material costs  increased yields for certain tests by reformulating reagents used in the testing process and improved efficiency of newly acquired testing equipment.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | MAASs ability to leverage its existing underwriting cost structure.
| | - |  | --------------------------------------------------------------------



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##### Table of Contents

Claims Evaluation Division. Cost of operations for the Claims Evaluation Division totaled $7.1
million in the three months ended June 30, 2005, a decrease of $.7 million compared to the corresponding period of the prior year. For the six months ended June 30, 2005, the CED segments cost of operations was $14.5 million, compared to $14.6
million in the corresponding period of the prior year.



As a percentage of the
CED segments revenues, its cost of operations represented 69.8% for the three and six month periods ended June 30, 2005, compared to 70.7% and 70.3% in the three and six month periods ended June 30, 2004, respectively. The decrease in the CED
segments cost of operations was due to lower revenue levels of D&D Associates, Medimax Inc. and Allegiance Health Inc., offset by increased costs of Michigan Evaluation Group, which experienced revenue growth.



Selling, General and Administrative Expenses:



As reflected in the table below, consolidated selling, general and administrative (SG&A)
expenses for the three months ended June 30, 2005 totaled $18.4 million, compared to $17.4 million for the three months ended June 30, 2004, an increase of 6.0%. SG&A expenses for the three months ended June 30, 2005 represented 21.9% of
consolidated revenues, compared to 21.0% in the corresponding period of the prior year.



Consolidated SG&A expenses for the six months ended June 30, 2005 totaled $37.8 million, compared to $35.1 million for six months ended June 30, 2004, an increase of 7.7%. SG&A expenses for the six months ended June 30, 2005
represented 22.7% of consolidated revenues, compared to 21.6% in the corresponding period of the prior year.



|              |  |                                    |      |                                  |   |                     |  |      |     |      |   |                     |  |   |      |  |   |    
|------------- |  | ---------------------------------- | ---- | -------------------------------- | - | ------------------- |  | ---- | --- | ---- | - | ------------------- |  | - | ---- |  | - | ---
|              |  | For the Three Months ended June 30 |      | For the Six Months ended June 30
|(in millions) |  | 2005                               |      | 2004                             |   | Change2005 vs. 2004 |  | 2005 |     | 2004 |   | Change2005 vs. 2004
|HID           |  | $                                  | 16.0 |                                  | $ | 15.0                |  | $    | 1.0 |      | $ | 33.0                |  | $ | 30.3 |  | $ | 2.7
|CED           |  |                                    | 2.4  |                                  |   | 2.4                 |  |      |    |      |   | 4.8                 |  |   | 4.8  |  |   |   
|              |  |                                    |      |                                  |   |                     |  |      |     |      |   |                     |  |   |      |  |   |    
|Total         |  | $                                  | 18.4 |                                  | $ | 17.4                |  | $    | 1.0 |      | $ | 37.8                |  | $ | 35.1 |  | $ | 2.7
|              |  |                                    |      |                                  |   |                     |  |      |     |      |   |                     |  |   |      |  |   |    



Health Information
Division. SG&A for the HID Segment includes this segments SG&A plus SG&A for all Corporate overhead departments. SG&A expenses for the HID segment increased $1.0 million to $16.0 million for the three months ended June 30,
2005, compared to $15.0 million for the three months ended June 30, 2004, an increase of 6.9%. For the six months ended June 30, 2005, SG&A expenses increased $2.7 million to $33.0 million, compared to $30.4 million for the corresponding period
of the prior year, an increase of 8.8%. The increases were principally the result of:



| |  |  | Increased costs of the Medicals Direct Group for additional staff required to support the revenue growth, particularly in the areas of underwriting and screenings, ($.4 million and
$.8 million in the three and six months ended June 30, 2005, respectively)
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | costs associated with additional staff required in the Information Technology department to better serve clients needs and support operations ($.2 million and $.4 million in
the three and six months ended June 30, 2005, respectively)
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | costs associated with the opening and operations of the Companys primary data center in Allentown, PA. ($.2 million and $.3 million in the three and six months ended June 30,
2005, respectively.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| |  |  | costs associated with the acquisition of MAAS in the second quarter of 2004 ($0.2 million and $.9 million for the three and six month periods ended June, 2005).
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



The HID segments SG&A expenses represented 21.7% and
22.7% of its revenues for the three and six month periods ended June 30, 2005, respectively, compared to 20.9% and 21.4% for the three and six month periods ended June 30, 2004, respectively.



Claims Evaluation Division. The CED segments SG&A expenses
totaled $2.4 million for the three months ended June 30, 2005 and 2004. The CED segments SG&A expenses totaled $4.8 million for the six months ended June 30, 2005 and 2004. SG&A expenses reflect the acquisition of Michigan Evaluation
Group in May 2004 and additional CED management positions added to expand this segment, offset by SG&A expense reductions associated with the decline in revenues of D&D Associates, Medimax Inc. and Allegiance Health Inc. during the three and
six months ended June 30, 2005, compared to the comparable period of the prior year.



Operating Income:



Consolidated
operating income for the three months ended June 30, 2005 decreased to $4.9 million, from $5.7 million for the three months ended June 30, 2004. Consolidated operating income as a percentage of consolidated revenues in the three month periods ended
June 30, 2005 and 2004 was 5.9% compared to 6.9% in the prior period.



Consolidated operating income for the six months ended June 30, 2005 decreased 15.4% to $9.1 million, from $10.8 million for the six months ended June 30, 2004. Consolidated operating income decreased to 5.5% of consolidated revenues in the
six months ended June 30, 2005.



Health Information
Division.As a result of the factors discussed above, operating income for the HID segment decreased to $4.2 million for the three months ended June 30, 2005 from $4.8 million for the three months ended June 30, 2004. The HID segments
operating income decreased to 5.7% of its revenues in the three months ended June 30, 2005, compared to 6.7 % in the corresponding period of the prior year.



Operating income for the HID segment decreased to $7.7 million for the six months ended June 30, 2005 from $9.4 million for the six months ended June 30, 2004. The HID
segments operating income decreased to 5.3% of its revenues in the six months ended June 30, 2005, compared to 6.6% in the corresponding period of the prior year.



Claims Evaluation Division.Operating income for the CED segment decreased $0.2 million to $0.7 million for the three
months ended June 30, 2005, compared to $0.9 million for the three months ended June 30, 2004. The CED segments operating income was 7.2% of its revenues for the three months ended June 30, 2005, compared to 8.0% for the three months ended
June 30, 2004.



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##### Table of Contents

For the six months ended June 30, 2005, the CED segments operating income increased $0.1 million to $1.5 million,
compared to $1.4 million for the six months ended June 30, 2004. The CED segments operating income was 7.0% of its revenues for the six months ended June 30, 2005, compared to 6.7% for the corresponding period of the prior year.



Interest Income:



Interest income for the three months ended June 30, 2005 and 2004 was $0.1 million. For the six months ended June 30, 2005,
interest income was $0.2 million.



Interest Expense:



Interest expense for the three months ended June 30, 2005 and 2004 was $0.2 million. For
each of the six months ended June 30, 2005 and 2004 interest expense was $0.3 million.



Income Taxes:



The effective tax rate was 39.4% and
38.7% for the three months ended June 30, 2005 and 2004, respectively.



The
effective tax rate was 39.8% and 37.9% for the six months ended June 30, 2005 and 2004 respectively. The increase in the effective rate was due to the impact of book to tax differences which resulted in lower taxable income.



Net Income:



Net income for each of the three months ended June 30, 2005 was $2.9 million or $0.04 per
diluted share compared to $3.4 million or $.05 per diluted share for the three months ended June 30, 2004.



Net income for the six months ended June 30, 2005 was $5.3 million or $0.08 per diluted share, versus $6.4 million or $0.10 per diluted share for the six months ended June 30, 2004.



Inflation did not have a significant effect on the Companys operations in the three or
six month periods ended June 30, 2005.



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##### Table of Contents

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 revolving credit facility. At June 30, 2005 and December 31, 2004, working capital was $38.8 million and $38.3 million, respectively. Our current ratio as of June 30, 2005 and December 31, 2004 was 2.2 to 1, and 2.1 to 1,
respectively. Management believes that the combination of cash, cash equivalents, marketable securities and available borrowings under our revolving 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 Used In Operating Activities.



For the six months ended June 30, 2005, net cash used in operating activities was $2.2 million. The significant sources were net income of $5.3 million adjusted for the non-cash expenses of $4.2 million for depreciation and
amortization. These items were offset by an increase in accounts receivable of $5.9 million, a decrease in accounts payable and accrued expenses of $4.4 million, and an increase in other assets of $1.2 million. Consolidated days sales outstanding,
measured on a rolling 90-day basis, was 50.8 days at June 30, 2005, 53.1 days at March 31, 2005 and 46.6 days at December 31, 2004.



The increase in accounts receivable at June 30, 2005 compared to December 31, 2004, was the result of:



| |  |  | increased revenue in June 2005 over December 2004 in Portamedic and Infolink, Heritage Labs Inc. and Medicals Direct Group Inc., which has an immediate impact on the accounts
receivable balance at June 30, 2005.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | new contract terms with certain clients that allow for payment terms beyond the Company standard of net 30 days.
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | temporary delays from certain customers in processing second quarter 2005 payments.
| | - |  | -----------------------------------------------------------------------------------



Cash Flows Used in Investing Activities.



During the six months ending June 30, 2005, the Company made required performance related payments relative to the 2002
acquisition of D&D Associates, the 2003 acquisition of Medimax Inc. and the 2004 acquisitions of Allegiance Health Inc. and Michigan Evaluation Group, Inc., totaling $3.8 million. Relative to the Medimax Inc. and Michigan Evaluation Group Inc.
acquisitions, if certain performance criteria are met, additional contingent considerations could be paid in 2006 totaling $0.9 million and will be funded from cash from operations.



Also in the six months ending June 30, 2005 the Company made required payments of additional purchase price related to the
2003 Heritage Lab acquisition and the 2004 acquisitions of Allegiance Health Inc. and Michigan Evaluation Group Inc., totaling $2.6 million. In 2006, an additional payment of $3.3 million will be made relative to the 2003 Heritage Lab acquisition.
All payments are expected to be funded from cash from operations.



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##### Table of Contents

During the six months ended June 30, capital expenditures totaled approximately $2.3 million and were
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 were no borrowings outstanding against the revolving loan at June
30, 2005. There are no additional borrowings available under the original $65 million term loan due to previous borrowings, which have been repaid. As of June 30, 2005, $1.0 million is outstanding under the term loan. A principal payment of $1.0
million is due to be repaid on January 31, 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 13/4%, depending on the ratio of our consolidated funded debt, as defined, to earnings
before interest, taxes, depreciation and amortization, or EBITDA. As of June 30, 2005 interest was payable at an effective average annual interest rate of 4.29%. 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:



| |  |  | dividends are limited to 50% of the Companys average quarterly net income;
| | - |  | ---------------------------------------------------------------------------



| |  |  | the Companys Consolidated Fixed Charge Coverage Ratio, as defined, must be no less than 1.50 to 1.00, measured on a trailing four quarter basis;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the Companys Consolidated Funded Debt to EBITDA Ratio, as defined, must not at any time exceed 2.75 to 1.00, measured on a trailing four quarter basis;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the Company is not permitted to purchase shares of its stock for an aggregate purchase price in excess of $25 million for the period October 30, 2003 to October 31, 2006.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As of June 30, 2005, the Company is in
compliance with all financial covenants.



Our debt agreement
with three banks expires in October 2006. We have initiated discussions with our banks to replace this agreement with a larger revolving credit arrangement with a layer of permanent debt if required. These discussions are very preliminary and it is
anticipated that we will be completed in 2005.



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##### Table of Contents

On May 30, 2000, the Board of Directors adopted a resolution authorizing 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. The Boards resolution was superseded on April 27, 2005 when the Board of Directors authorized the repurchase of between
1.0 and 1.5 million shares of the Companys common stock in any calendar year. Shares may be repurchased in open market purchases or through privately negotiated transactions. All share repurchases will be made in compliance with applicable
rules and regulations and may be discontinued at any time. During the six months ending June 30, 2005, the Company purchased 24,800 shares at a total cost of $0.1 million. The Company did not purchase any shares during the six months ended June 30,
2004.



Quarterly dividends paid in February and May of 2005
were $0.015 per share and totaled $2.0 million.



On January 28,
2003, the Board of Directors passed a resolution to award each non-employee director of the Company up to a maximum of 15,000 shares of the Companys common stock as compensation. Each non-employee director was awarded 5,000 shares on January
31, 2003 and 2004 and 2005, which vested immediately. All shares awarded are restricted securities within the meaning of Rule 144 promulgated under the Securities Act of 1933, and may not be sold or transferred by the non-employee director until
four years from the date of issue. During the first quarters of 2003, 2004 and 2005 the Company expensed the fair value of the 30,000 shares awarded to its non-employee directors on January 2003, 2004 and 2005 and such amount is included in Selling,
General and Administrative expenses in the consolidated Statements of Income. The total charges were $164, $206, and $152 thousand, respectively.



Contractual Obligations



Capital expenditures during 2005 are expected to increase by approximately $2.6 million over 2004 ($4.3 million) for the upgrade of the Companys
financial software system, development of case management software and branch operating software and hardware and software for the CEDs IT systems development projects. All 2005 capital expenditures are expected to be funded by cash generated
from operations.



Inflation has not had, nor is it expected to
have, a material impact on our consolidated financial results. Quarterly dividends paid in February and May were $0.015 per share and totaled $2.0 million. At its July 27, 2005 Board Meeting, the Company declared a third quarter dividend of $0.015
per share.



Critical Accounting Policies:



There were no changes to the Companys critical accounting policies
during the three and six months ended June 30, 2005. Such policies are described in the Companys 2004 annual report on Form 10-K.



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##### Table of Contents

Recently Issued Accounting Standards:



In March 2005, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 47, Accounting for
Conditional Asset Retirement Obligations (FIN 47). This interpretation states that the term conditional asset retirement obligation as used in paragraph A23 of SFAS No. 143 refers to a legal obligation to perform an
asset retirement in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement obligation is unconditional even though
uncertainty exists about the timing and/or method of settlement. The effective date for adopting this interpretation is no later than the end of fiscal years ending after December 15, 2005. The Company is currently in the process of determining the
impact of FIN 47, if any, on its financial condition, results of operations and cash flows.



In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No. 123R), which replaces SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123), and supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 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. The pro forma disclosures previously permitted under SFAS No. 123 no longer will be an alternative to financial statement recognition. As a result of a rule amendment
adopted by the SEC in April 2005, the Company is required to implement SFAS No. 123R at the beginning of its 2006 fiscal year. Under SFAS No. 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 No. 123R, while the retroactive method 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 No. 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.



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 repatriate the unremitted foreign earnings of the current year and prior
years, the application of FSP 109-2 did not affect income tax expense in the period of enactment or any related disclosures.



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##### Table of Contents

Item 3. Quantitative and Qualitative Disclosures About Market Risk



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



The table below presents the principal amounts and related weighted average interest rates by year of maturity for our investment portfolio
as of June 30, 2005.



|                       |  |      |      |   |      |   |      |      |  |      |   |                  |   |   |       |   |       |                     |  |   |       |   |  |   |      
|---------------------- |  | ---- | ---- | - | ---- | - | ---- | ---- |  | ---- | - | ---------------- | - | - | ----- | - | ----- | ------------------- |  | - | ----- | - |  | - | -----
|(in thousands)         |  | 2005 |      |   | 2006 |   |      | 2007 |  | 2008 |   | 2010 &Thereafter |   |   | Total |   |       | EstimatedFair Value
|Fixed Rate Investments |  | $    | 197  |   |      | $ | 193  |      |  | $    | 0 |                  | $ | 0 |       | $ | 1,690 |                     |  | $ | 2,080 |   |  | $ | 2,079
|Average Interest Rates |  |      | 2.33 | % |      |   | 3.27 | %    |  |      |   |                  |   |   |       |   | 2.49  | %                   |  |   | 2.55  | % |  |   |      



The Company is also exposed to
interest rate risk primarily through its borrowing activities, which are described in Note 12 to the unaudited interim consolidated financial statements included in this quarterly report on Form 10-Q. The Companys borrowings are under variable
rate instruments. Future payments due under borrowings are $57 thousand in 2005 and $1.0 million in 2006, at an average interest rate of 4.29%.



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 June 30, 2005, 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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##### Table of Contents

Item 4. Controls and Procedures



Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we evaluated our disclosure controls and procedures as of June 30, 2005, the end of the period
covered by this quarterly report. Disclosure controls and procedures are defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, amended (the Exchange Act) to mean controls and procedures that are
designed to ensure that information required to be disclosed by an SEC-reporting company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the
SECs rules and forms. Based on this evaluation, our principal executive officer and principal financial officer have concluded that, our disclosure controls and procedures were effective as of June 30, 2005.



Changes in Internal Control Over Financial Reporting



Our management, including our principal executive
officer and principal financial officer, is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) and is required to evaluate any change in our internal
control over financial reporting that occurred during each of our fiscal quarters that has materially affected, or is reasonably likely to material affect, our internal control over financial reporting. There were no changes in internal control over
financial reporting that occurred during the quarter ended June 30, 2005. However, in August 2005, the Company instituted new controls and procedures related to the subsidiary overbilling matter as described in the Management Discussion and Analysis
and in Note 13 to the unaudited consolidated financials statements.



34



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##### Table of Contents

Part II  Other Information



Item 1  Legal Proceedings



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 the litigation. However, we cannot predict the outcome of the lawsuit.



Item 2  Unregistered Sales of Equity Securities and Use of Proceeds



Non-Employee Directors Restricted Stock Grant



On January 31, 2005, the Company issued an aggregate of 30,000 shares of its common stock to the non-employee directors serving on its Board as additional
compensation for service on the Board, in accordance with a resolution of the Board dated January 28, 2003. The issuance of these shares was in connection with transactions deemed to be exempt from registration under Section 4(2) of the Securities
Act of 1933, as amended, as transactions by an issuer not involving any public offering.



Purchases of Equity Securities by the Issuer and Affiliated Purchasers



The following table provides information about purchases made by the Company during the three and six months ended June 30, 2005.



|                           |  |                                 |  |                       |  |                                                                              |  |                                                                               
|-------------------------- |  | ------------------------------- |  | --------------------- |  | ---------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------
|Period                     |  | Total number ofshares purchased |  | Averageprice pershare |  | Total number ofshares purchased aspart of publiclyannounced plans ofprograms |  | Maximum number ofshares that may yetbe purchased underthe plans orprograms (a)
|January 1  March 31, 2005 |  |                                |  |                      |  |                                                                             |  |                                                                               
|                           |  |                                 |  |                       |  |                                                                              |  |                                                                               
|April 1  June 30, 2005    |  | 24,800                          |  | 3.95                  |  | 24,800                                                                       |  |                                                                               
|                           |  |                                 |  |                       |  |                                                                              |  |                                                                               
|Total                      |  | 24,800                          |  | 3.95                  |  | 24,800                                                                       |  | 1,475,200                                                                     
|                           |  |                                 |  |                       |  |                                                                              |  |                                                                               



On May 30, 2000, the Board of
Directors adopted a resolution authorizing 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. The Boards resolution was superseded on April
27, 2005 when the Board of Directors authorized the repurchase of between 1.0 and 1.5 million shares of the Companys common stock in any calendar year. Shares may be repurchased in open market purchases or through privately negotiated
transactions. All share repurchases will be made in compliance with applicable rules and regulations and may be discontinued at any time. During the six month period ending June 30, 2005, the Company purchased 24,800 shares. During the six month
period ending June 30, 2004, the Company did not purchase any shares.



35



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##### Table of Contents

Item 3  Defaults Upon Senior Securities



None



Item 4  Submission of Matters to a Vote of Security Holders



At the Companys Annual Meeting of Shareholders on May 24, 2005, the shareholders elected Benjamin A. Currier, Elaine L. Rigolosi and Leslie Hudson to serve as directors until the 2008 Annual Meeting and ratified
the selection of KPMG LLP to serve as the Companys independent registered public accounting firm for 2005.



The chart below names each director nominated for election by the shareholders at the 2005 Annual Meeting, the number of votes cast for, against or withheld and the
number of broker non-votes with respect to each such person:



|                    |  |            |  |                    |  |           |  |                 |  |          
|------------------- |  | ---------- |  | ------------------ |  | --------- |  | --------------- |  | ---------
|Nominee             |  | For        |  | Votes Cast Against |  | Withheld  |  | BrokerNon-votes |  | Abstained
|Benjamin A. Currier |  | 56,603,549 |  |                   |  | 993,643   |  | 0               |  | 0        
|Elaine L. Rigolosi  |  | 55,286,107 |  |                   |  | 2,311,085 |  | 0               |  | 0        
|Leslie Hudson       |  | 56,797,912 |  |                   |  | 799,773   |  | 0               |  | 0        



The name of each director whose term
of office as a director continued after the annual meeting is as follows:



Quentin J. Kennedy

James M. McNamee

Kenneth R.
Rossano

G. Earle Wight

Roy E. Lowrance



With respect to the ratification of KPMG LLP as independent registered public accounting
firm, the number of votes cast was 55,158,997 For, 2,408,195 Against, 30,000 Abstained and 0 Broker Non-votes.



Item 5  Other Information



None



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##### Table of Contents

Item 6  Exhibits



|            |  |                                                                                                                                          
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                   
|31.1        |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.                           
|            | 
|31.2        |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.                           
|            | 
|32.1        |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
|            | 
|32.2        |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.



37



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##### Table of Contents

SIGNATURES



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



Hooper Holmes, Inc.



Dated: August 9, 2005



BY:

/s/ James M. McNameeJames M. McNameeChairman, President andChief Executive OfficerBY:

/s/ Fred LashFred LashSenior Vice PresidentChief Financial Officer &Treasurer




38