Hooper Holmes (HH)

ITEM 1A Risk Factors

Readers should carefully consider, in connection with the other information in this Form 10-Q, the risk factors disclosed in Item 1A. “Risk Factors” in our 2005 annual report on Form 10-K. Certain of those risk factors are updated below.

Risks Related to the Company Generally

If we are unable to implement the plans outlined in our September 2006 strategic review, we may not realize the anticipated financial improvements.

In September 2006, we completed a strategic review which resulted in detailed plans to implement expense management initiatives, along with related incremental revenue opportunities. The implementation period for these plans is expected to cover eight quarters. These plans, when fully implemented, are expected to result in approximately $17.5 million of additional operating income on an annual basis.

If we are unable to complete some, or all, of the strategic review detailed plans, we may not realize the additional operating income expected as a result of their implementation.

Our management has determined that there are material weaknesses in our system of internal control over financial reporting, such that we have determined that such internal control was not effective as of December 31, 2005. If we are unable to address these weaknesses in our internal controls, we may not be able to report our future operating results and financial condition in an accurate and timely manner.

As disclosed in our 2005 annual report on Form 10-K, our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2005. This assessment identified material weaknesses in our internal control over financial reporting as of that date. Accordingly, our management determined that our internal control over financial reporting was not effective as of December 31, 2005. Item 4 of Part II of this Form 10-Q describes the steps we have taken, and plan to take, to remediate the identified material weaknesses in our internal control over financial reporting and otherwise improve the overall design and operation of the Company’s control environment. Determining whether these steps are efficacious will require continuing review and testing. Further, these steps may not address other material weaknesses in our internal control over financial reporting that may exist but have not yet been identified. Any failure to maintain adequate internal control over financial reporting could prevent us from reporting our financial results in a complete, accurate, and timely manner. If we are not able to report our future operating results and financial condition in such a manner, we could face litigation or regulatory action. Any of such consequences could adversely affect our business and result in a decline in the market price of our common stock.

Risks Related to Our Health Information Division

We may experience unintended negative consequences as a result of the elimination of geographic overlaps among some of our Portamedic branch offices.

During the fourth quarter of 2006 and continuing into 2007, we will eliminate the geographic overlap that exists among some of our branch offices. The restructuring of Portamedic’s branch structure was motivated by the objective of lowering the division’s operating costs and improving efficiencies. However, the elimination of certain offices could have unintended negative consequences, including a loss of locally generated business and/or loss of employees. Further, we may not realize the anticipated levels of cost improvements, greater efficiencies and improved synergies from this restructuring.

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Improper actions by our paramedical examiners or our physician practitioners could cause us to lose business and result in claims against us or our incurring expenses to indemnify our life insurance carrier customers.

In the first quarter of 2006, a life insurance company client informed us that, after investigation, the client has determined that it issued certain life insurance policies that were procured by fraudulent means employed by insurance applicants, the client’s agents, the Company’s sub-contracted examiners and others. As of the date of filing this Form 10-Q, no claim has been asserted against the Company by the client, nor has the client produced any evidence pertaining to the matter. The service agreement between the Company and the client contains certain indemnification provisions which may be applicable. While the Company believes it is probable that the client will assert a claim against the Company for partial indemnification, it also believes that the Company has meritorious defenses to any such claim. However, the risk exists in this situation (and in other instances where allegations of wrongdoing are made regarding our paramedical examiners or physician practitioners) that the client relationship may be damaged, such that we experience a drop-off in the volume of business from the client or the loss of the client’s business.

Risks Related to Our Claims Evaluation Division

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

As we disclosed in the 2005 annual report on Form 10-K, our management perceives that the outsourced medical claims management market in the United States, including the market for our claims evaluation services (e.g., independent medical exams and peer reviews), may be contracting. Property and casualty insurance is largely regulated on a state level. Most of the demand for our claims evaluation services is a function of insurers’ efforts to evaluate claims and properly manage claims cost. Several states, including New York (where a significant portion of the CED’s revenues have been derived since the Company entered this business in 2002), have proposed or adopted reforms intended to more effectively combat fraud. While the Company is uncertain of the effect such reforms have had in combating fraud and lowering claims costs, our Claims Evaluation Division has observed a decline in the number of claims for which its customers are seeking the Division’s services. The CED has also experienced a drop-off in the number of IMEs and peer reviews being performed per claim. We believe that the decreased use of IMEs and peer reviews may be attributable to insurers’ greater cost consciousness and their perception of the limited value of peer reviews based on unfavorable experiences in litigating insurance claims. In view of these developments, it appears that the growth potential of the CED’s business may be limited. Further, the division may be at a competitive disadvantage in dealing with a contracting market as a result of the more narrow focus of its present business activities relative to certain of its larger competitors that are engaged in other segments of the outsourced medical claims management market.

We may experience unintended negative consequences as a result of the realignment of the CED constituent companies into Hooper Evaluations, Inc.

Effective February 2006, we merged the four companies (i.e., D&D Associates, Medimax, Allegiance Health Inc. and Michigan Evaluation Group) into Hooper Evaluations, Inc. The restructuring of the CED’s businesses was motivated by the objective of lowering the Division’s operating costs. However, the restructuring could have unintended negative consequences, including a loss of customers, business disruptions and/or loss of employees. Further, we may not realize the anticipated levels of cost improvements, greater efficiencies and improved synergies from this restructuring.

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ITEM 1A Risk Factors

Readers should carefully consider, in connection with the other information in this Form 10-Q, the risk factors disclosed in Item 1A. “Risk Factors” in our 2005 annual report on Form 10-K. Certain of those risk factors are updated below.

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Risks Related to the Company Generally

The Company is not in compliance with its financial covenants under the recently amended credit agreement governing its revolving credit facility and, as a result, has only a limited ability to borrow under such facility.

Under the terms of the Company’s Amended and Restated Credit Agreement, as amended on April 25, 2006, the Company’s consolidated monthly pre-tax income cannot be less than $0.6 million for April and May 2006, and $0.8 million for June and July 2006, and $0.9 million in the months thereafter. For the three months ended June 30, 2006, the Company was not in compliance with the monthly consolidated pre-tax income requirement. Additionally, the Company was not in compliance with the consolidated fixed charge coverage ratio as of June 30, 2006. Accordingly, the Company sought a waiver from its lenders of such violations and anticipated future violations of certain financial covenants. This resulted in the Company’s agreeing to the terms of a Notice of Default, Reservation of Rights and Amendatory Letter (Amended and Restated) provided by Wachovia Bank, National Association, as agent and lender under the credit agreement. Under the terms of the letter, the Company and the lenders have agreed to the following:

The Company is currently reviewing alternative long-term financing options to replace its existing revolving credit facility. If alternative financing options can be arranged, such financing may entail a lower amount of permitted borrowings, higher interest rates or more restrictive covenants than under the terms of our existing credit agreement. In the event that the Company is unable to obtain long-term financing, our ability to finance our operations may be constrained by our operating cash flows and existing holding of cash and cash equivalents. A continuation of the decline in our operating results may contribute to a decline in our operating cash flows, further limiting our ability to finance our operations and meet our contractual commitments.

Our management has determined that there are material weaknesses in our system of internal control over financial reporting, such that we have determined that such internal control was not effective as of December 31, 2005. If we are unable to address these weaknesses in our internal controls, we may not be able to report our future operating results and financial condition in an accurate and timely manner.

As disclosed in our 2005 annual report on Form 10-K, our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2005. This

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assessment identified material weaknesses in our internal control over financial reporting as of that date. Accordingly, our management determined that our internal control over financial reporting was not effective as of December 31, 2005. Item 4 of Part II of this Form 10-Q describes the steps we have taken, and plan to take, to remediate the identified material weaknesses in our internal control over financial reporting and otherwise improve the overall design and operation of the Company’s control environment. Determining whether these steps are efficacious will require continuing review and testing. Further, these steps may not address other material weaknesses in our internal control over financial reporting that may exist but have not yet been identified. Any failure to maintain adequate internal control over financial reporting could prevent us from reporting our financial results in a complete and accurate, and timely, manner. If we are not able to report our future operating results and financial condition in such a manner, we could face litigation or regulatory action. Any of such consequences could adversely affect our business and result in a decline in the market price of our common stock.

Risks Related to Our Health Information Division

Improper actions by our paramedical examiners or our physician practitioners could cause us to lose business and result in claims against us or our incurring expenses to indemnify our life insurance carrier customers.

In the first quarter of 2006, a life insurance company client informed us that, after investigation, the client has determined that it issued certain life insurance policies that were procured by fraudulent means employed by insurance applicants, the client’s agents, the Company’s sub-contracted examiners and others. As of the date of filing this Form 10-Q, no claim has been asserted against the Company by the client, nor has the client produced any evidence pertaining to the matter. The service agreement between the Company and the client contains certain indemnification provisions which may be applicable. While the Company believes it is probable that the client will assert a claim against the Company for partial indemnification, it also believes that the Company has meritorious defenses to any such claim. However, the risk exists in this situation (and in other instances where allegations of wrongdoing are made regarding our paramedical examiners or physician practitioners) that the client relationship may be damaged, such that we experience a drop-off in the volume of business from a client or the loss of a client’s business.

Risks Related to Our Claims Evaluation Division

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

As we disclosed in the 2005 annual report on Form 10-K, our management perceives that the outsourced medical claims management market in the United States, including the market for our claims evaluation services (e.g., independent medical exams and peer reviews), may be contracting. Property and casualty insurance is largely regulated on a state level. Most of the demand for our claims evaluation services is a function of insurers’ efforts to evaluate claims and properly manage claims cost. Several states, including New York (where a significant portion of the CED’s revenues have been derived since the Company entered this business in 2002), have proposed or adopted reforms intended to more effectively combat fraud. While the Company is uncertain of the effect such reforms have had in combating fraud and lowering claims costs, our Claims Evaluation Division has observed a decline in the number of claims for which its customers are seeking the division’s services. The CED has also experienced a drop-off in the number of IMEs and peer reviews being performed per claim. We believe that the decreased use of IMEs and peer reviews may be attributable to insurers’ greater cost consciousness and their perception of the limited value

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of peer reviews based on unfavorable experiences in litigating insurance claims. In view of these developments, it appears that the growth potential of the CED’s business may be limited. Further, the division may be at a competitive disadvantage in dealing with a contracting market as a result of the more narrow focus of its present business activities relative to certain of its larger competitors that are engaged in other segments of the outsourced medical claims management market.

We may experience unintended negative consequences as a result of the realignment of the CED constituent companies into Hooper Evaluations, Inc.

Effective February 2006, we merged the four companies (i.e., D&D Associates, Medimax, Allegiance Health Inc. and Michigan Evaluation Group) into Hooper Evaluations, Inc. The restructuring of the CED’s businesses was motivated by the objective of lowering the division’s operating costs. However, the restructuring could have unintended negative consequences, including a loss of customers, business disruptions and/or loss of employees. Further, we may not realize the anticipated levels of cost improvements, greater efficiencies and improved synergies from this restructuring.

ITEM 1A Risk Factors

Readers should carefully consider, in connection with the other information in this Form 10-Q, the risk factors disclosed in Item 1A. “Risk Factors” in our 2005 annual report on Form 10-K. Certain of those risk factors are updated below.

Risks Related to the Company Generally

The Company is not in compliance with its financial covenants under the recently amended credit agreement governing its revolving credit facility and, as a result, does not currently have the ability to borrow under such facility.

Under the terms of the Company’s Amended and Restated Credit Agreement, as amended on April 25, 2006, the Company’s consolidated monthly pre-tax income cannot be less than $0.6 million for April and May 2006, $0.8 million for June and July 2006, and $0.9 million in the months thereafter. For the month ended April 30, 2006, the Company was not in compliance with the monthly consolidated pre-tax income requirement. Further, the Company expects that it will not be able to meet the monthly consolidated pre-tax income requirement for May or June 2006. As a result of its non-compliance with this financial covenant, the Company currently does not have the ability to borrow under its revolving credit facility.

The Company is also in the process of seeking to negotiate with its existing lenders a further amendment of the agreement, and is exploring alternative financing options which will replace its existing credit facility. If external financing can be arranged, such financing may entail a lower amount of permitted borrowings, higher interest rates and/or more restrictive financial covenants than under the terms of our existing revolving credit facility. If we are unable to enter into a new or amended credit facility, or other external financing arrangements, our ability to finance our

operations may be constrained by our operating cash flows and existing holdings of cash and cash equivalents. A continuation of the decline in our operating results may contribute to a decline in our operating cash flows, further limiting our ability to finance our operations and meet our contractual commitments.

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Our management has determined that there are material weaknesses in our system of internal control over financial reporting, such that we have determined that such internal control was not effective as of December 31, 2005. If we are unable to address these weaknesses in our internal controls, we may not be able to report our future operating results and financial condition in an accurate and timely manner.

As disclosed in our 2005 annual report on Form 10-K, our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2005. This assessment identified material weaknesses in our internal control over financial reporting as of that date. Accordingly, our management determined that our internal control over financial reporting was not effective as of December 31, 2005. Item 4 of Part II of this Form 10-Q describes the steps we have taken, and plan to take, to remediate the identified material weaknesses in our internal control over financial reporting and otherwise improve the overall design and operation of the Company’s control environment. Determining whether these steps are efficacious will require continuing review and testing. Further, these steps may not address other material weaknesses in our internal control over financial reporting that may exist but have not yet been identified. Any failure to maintain adequate internal control over financial reporting could prevent us from reporting our financial results in a complete and accurate, and timely, manner. If we are not able to report our future operating results and financial condition in such a manner, we could face litigation or regulatory action. Any of such consequences could adversely affect our business and result in a decline in the market price of our common stock.

Risks Related to Our Health Information Division

Improper actions by our paramedical examiners or our physician practitioners could cause us to lose business and result in claims against us or our incurring expenses to indemnify our life insurance carrier customers.

In the first quarter of 2006, a life insurance company client informed us that, after investigation, the client has determined that it issued certain life insurance policies that were procured by fraudulent means employed by insurance applicants, the client’s agents, the Company’s sub-contracted examiners and others. As of the date of filing this Form 10-Q, no claim has been asserted against the Company by the client, nor has the client produced any evidence pertaining to the matter. The service agreement between the Company and the client contains certain indemnification provisions which may be applicable. While the Company believes it is probable that the client will assert a claim against the Company for partial indemnification, it also believes that the Company has meritorious defenses to any such claim. However, the risk exists in this situation (and in other instances where allegations of wrongdoing are made regarding our paramedical examiners or physician practitioners) that the client relationship may be damaged, such that we experience a drop-off in the volume of business from a client or the loss of a client’s business.

Risks Related to Our Claims Evaluation Division

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

As we disclosed in the 2005 annual report on Form 10-K, our management perceives that the outsourced medical claims management market in the United States, including the market for our claims evaluation services (e.g., independent medical exams and peer reviews), may be contracting.

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Property and casualty insurance is largely regulated on a state level. Most of the demand for our claims evaluation services is a function of insurers’ efforts to combat fraudulent claims by those who abuse existing no-fault personal injury protection and workers’ compensation insurance laws. Several states, including New York (where a significant portion of the CED’s revenues have been derived since the Company entered this business in 2002), have proposed or adopted reforms intended to more effectively combat fraud. While the Company is uncertain of the effect such reforms have had in combating fraud and lowering claims costs, our Claims Evaluation Division has observed a decline in the number of claims for which its customers are seeking the division’s services. The CED has also experienced a drop-off in the number of IMEs and peer reviews being performed per claim. We believe that the decreased use of IMEs and peer reviews may be attributable to insurers’ greater cost consciousness and their perception of the limited value of peer reviews based on unfavorable experiences in litigating insurance claims. In view of these developments, it appears that the growth potential of the CED’s business may be limited. Further, the division may be at a competitive disadvantage in dealing with a contracting market as a result of the more narrow focus of its present business activities relative to certain of its larger competitors that are engaged in other segments of the outsourced medical claims management market.

We may experience unintended negative consequences as a result of the realignment of the CED constituent companies into Hooper Evaluations, Inc.

Effective February 2006, we merged the four companies (i.e., D&D Associates, Medimax, Allegiance Health Inc. and Michigan Evaluation Group) into Hooper Evaluations, Inc. The restructuring of the CED’s businesses was motivated by the objective of lowering the division’s operating costs. However, the restructuring could have unintended negative consequences, including a loss of customers, business disruptions and/or loss of employees. Further, we may not realize the anticipated levels of cost improvements, greater efficiencies and improved synergies from this restructuring.

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