##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2007.
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                      to
 Commission file number:
 MEDQUIST INC.
 (Exact name of registrant as specified in its charter)
 New Jersey
    
    22-2531298(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)1000 BISHOPS GATE BOULEVARD
    
    08054-4632SUITE 300
    
    (Zip Code)MOUNT LAUREL, NEW JERSEYAddress of principal executive offices)
 (856) 206-4000  (Registrants telephone number, including area code)
 þ o
  o þ o
 o þ




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##### 



MEDQUIST INC.
 INDEX
  
 PagePART I. FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements
    
    
    3Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 4. Controls and Procedures
    
    
    28PART II. OTHER INFORMATION
    
    
    29Item 1. Legal Proceedings
    
    
    29Item 1A. Risk Factors
    
    
    32Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    33Item 3. Defaults Upon Senior Securities
    
    
    33Item 4. Submission of Matters to a Vote of Security Holders
    
    
    33Item 5. Other Information
    
    
    33Item 6. Exhibits
    
    
    34Amended and Restated OEM Supply AgreementCertification of Chief Executive OfficerCertification of Chief Financial OfficerCertification of Chief Executive Officer pursuant to 18 U.S.C. 1350Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 MedQuist Inc. and Subsidiaries
 Consolidated Statements of Operations
(In thousands, except per share amounts)
Unaudited
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net revenues
    
    $
    82,518
    
    
    $
    82,096
    
    
    $
    260,276
    
    
    $
    271,469Operating costs and expenses:Cost of revenues
    
    
    64,290
    
    
    
    67,929
    
    
    
    198,918
    
    
    
    214,656Selling, general and administrative
    
    
    15,548
    
    
    
    12,765
    
    
    
    48,158
    
    
    
    39,408Research and development
    
    
    3,808
    
    
    
    3,447
    
    
    
    10,073
    
    
    
    9,705Depreciation
    
    
    2,861
    
    
    
    3,149
    
    
    
    8,040
    
    
    
    9,043Amortization of intangible assets
    
    
    1,361
    
    
    
    1,363
    
    
    
    4,065
    
    
    
    4,474Cost of investigation and legal proceedings, net
    
    
    4,441
    
    
    
    (3,854
    )
    
    
    (456
    )
    
    
    9,019Restructuring charges
    
    
    554
    
    
    
    1,234
    
    
    
    935
    
    
    
    2,939Total operating costs and expenses
    
    
    92,863
    
    
    
    86,033
    
    
    
    269,733
    
    
    
    289,244Operating loss
    
    
    (10,345
    )
    
    
    (3,937
    )
    
    
    (9,457
    )
    
    
    (17,775
    )Equity in income of affiliated company
    
    
    124
    
    
    
    180
    
    
    
    447
    
    
    
    738Interest income, net
    
    
    2,302
    
    
    
    1,977
    
    
    
    6,477
    
    
    
    5,675Loss before income taxes
    
    
    (7,919
    )
    
    
    (1,780
    )
    
    
    (2,533
    )
    
    
    (11,362
    )Income tax provision
    
    
    1,016
    
    
    
    324
    
    
    
    2,402
    
    
    
    1,629Net loss
    
    $
    (8,935
    )
    
    $
    (2,104
    )
    
    $
    (4,935
    )
    
    $
    (12,991
    )Net loss per share:Basic
    
    $
    (0.24
    )
    
    $
    (0.06
    )
    
    $
    (0.13
    )
    
    $
    (0.35
    )Diluted
    
    $
    (0.24
    )
    
    $
    (0.06
    )
    
    $
    (0.13
    )
    
    $
    (0.35
    )Weighted average shares outstanding:Basic
    
    
    37,484
    
    
    
    37,484
    
    
    
    37,484
    
    
    
    37,484Diluted
    
    
    37,484
    
    
    
    37,484
    
    
    
    37,484
    
    
    
    37,484
 The accompanying notes are an integral part of these consolidated financial statements.
 3




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##### Table of Contents



MedQuist Inc. and Subsidiaries
 Consolidated Balance Sheets
(In thousands)
Unaudited
 September 30,
    
    
    December 31,2007
    
    
    2006AssetsCurrent assets:Cash and cash equivalents
    
    $
    165,942
    
    
    $
    175,412Accounts receivable, net of allowance of $4,053 and $4,494, respectively
    
    
    54,039
    
    
    
    54,778Insurance receivable
    
    
    
    
    
    
    707Income tax receivable
    
    
    1,923
    
    
    
    1,772Deferred income taxes
    
    
    297
    
    
    
    298Other current assets
    
    
    8,599
    
    
    
    7,645Total current assets
    
    
    230,800
    
    
    
    240,612Property and equipment, net of accumulated depreciation of $45,240 and
$37,838, respectively
    
    
    22,231
    
    
    
    20,969Goodwill
    
    
    125,683
    
    
    
    124,826Other intangible assets, net of accumulated amortization of $48,386 and
$44,218, respectively
    
    
    42,923
    
    
    
    45,448Deferred income taxes
    
    
    2,335
    
    
    
    2,378Other assets
    
    
    7,570
    
    
    
    6,906Total assets
    
    $
    431,542
    
    
    $
    441,139Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    15,101
    
    
    $
    10,779Accrued expenses
    
    
    19,271
    
    
    
    28,812Accrued compensation
    
    
    16,521
    
    
    
    15,558Customer accommodation and quantification
    
    
    18,768
    
    
    
    24,777Deferred revenue
    
    
    15,312
    
    
    
    15,202Total current liabilities
    
    
    84,973
    
    
    
    95,128Deferred income tax liability
    
    
    19,957
    
    
    
    18,034Other non-current liabilities
    
    
    2,204
    
    
    
    458Commitments and contingencies (Note 11)Shareholders equity:Common stock  no par value; authorized 60,000 shares;
37,484 and 37,484 shares issued and outstanding, respectively
    
    
    235,526
    
    
    
    235,080Retained earnings
    
    
    83,147
    
    
    
    87,693Deferred compensation
    
    
    332
    
    
    
    332Accumulated other comprehensive income
    
    
    5,403
    
    
    
    4,414Total shareholders equity
    
    
    324,408
    
    
    
    327,519Total liabilities and shareholders equity
    
    $
    431,542
    
    
    $
    441,139
 The accompanying notes are an integral part of these consolidated financial statements.
 4




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##### Table of Contents



MedQuist Inc. and Subsidiaries
 Consolidated Statements of Cash Flows
(In thousands)
Unaudited
 Nine months endedSeptember 30,2007
    
    
    2006Operating activities:Net loss
    
    $
    (4,935
    )
    
    $
    (12,991
    )Adjustments to reconcile net loss to cash used in operating activities:Depreciation and amortization
    
    
    12,105
    
    
    
    13,517Equity in income of affiliated company
    
    
    (447
    )
    
    
    (738
    )Deferred income tax provision
    
    
    1,848
    
    
    
    3,680Stock option expense
    
    
    446
    
    
    
    1,591Provision for doubtful accounts
    
    
    3,649
    
    
    
    4,725Asset writeoff charges
    
    
    78
    
    
    
    498Changes in operating assets and liabilities excluding effects of acquisitions:Accounts receivable
    
    
    (4,707
    )
    
    
    9,021Income tax receivable
    
    
    (151
    )
    
    
    1,431Insurance receivable
    
    
    707
    
    
    
    (8,702
    )Other current assets
    
    
    (954
    )
    
    
    1,544Other non-current assets
    
    
    (219
    )
    
    
    1,129Accounts payable
    
    
    3,156
    
    
    
    1,035Accrued expenses
    
    
    (9,341
    )
    
    
    (9,119
    )Accrued compensation
    
    
    929
    
    
    
    (3,999
    )Customer accommodation and quantification
    
    
    (4,048
    )
    
    
    (14,329
    )Deferred revenue
    
    
    (84
    )
    
    
    (2,174
    )Other non-current liabilities
    
    
    1,938
    
    
    
    (2,447
    )Net cash used in operating activities
    
    $
    (30
    )
    
    $
    (16,328
    )Investing activities:Purchase of property and equipment
    
    
    (8,337
    )
    
    
    (7,296
    )Capitalized software
    
    
    (1,218
    )
    
    
    (21
    )Net cash used in investing activities
    
    
    (9,555
    )
    
    
    (7,317
    )Effect of exchange rate changes
    
    
    115
    
    
    
    52Net decrease in cash and cash equivalents
    
    
    (9,470
    )
    
    
    (23,593
    )Cash and cash equivalents  beginning of period
    
    
    175,412
    
    
    
    178,271Cash and cash equivalents  end of period
    
    $
    165,942
    
    
    $
    154,678Supplemental cash flow information:Cash paid (recovered) for income taxes
    
    $
    167
    
    
    $
    (3,465
    )Accommodation payments paid with credits
    
    $
    1,961
    
    
    $
    424
 The accompanying notes are an integral part of these consolidated financial statements.
 5




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##### Table of Contents



MedQuist Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
 1.  Description of Business
  2.  Introductory Note
      6




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MedQuist Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
   3.  Basis of Presentation
  Accounting for Income Taxes in Interim
Periods
  4.  Stock-Based Compensation
 Share-Based Payment Accounting for Stock-Based Compensation
  Three months ended September 30,
    
    
    Nine months ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Selling, general and
administrative
    
    $
    130
    
    
    $
    87
    
    
    $
    188
    
    
    $
    398Research and development
    
    
    39
    
    
    
    39
    
    
    
    62
    
    
    
    175Cost of revenues
    
    
    70
    
    
    
    313
    
    
    
    196
    
    
    
    1,018Total
    
    $
    239
    
    
    $
    439
    
    
    $
    446
    
    
    $
    1,591
 7




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##### Table of Contents



MedQuist Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
     Options exercisableAverageNumber of
    
    
    Intrinsic
    
    
    ExerciseRange of Exercise Prices
    
    
    Shares
    
    
    Value
    
    
    Price$
    2.71
    
    
    
    
    
    
    $
    10.00
    
    
    
    34
    
    
    $
    240
    
    
    $
    5.39$
    10.01
    
    
    
    
    
    
    $
    20.00
    
    
    
    146
    
    
    
    
    
    
    $
    15.02$
    20.01
    
    
    
    
    
    
    $
    70.00
    
    
    
    524
    
    
    
    
    
    
    $
    46.76704
    
    
    $
    240
  WeightedWeighted
    
    
    AverageShares
    
    
    Average
    
    
    Remaining
    
    
    AggregateSubject to
    
    
    Exercise
    
    
    Contractual
    
    
    IntrinsicOptions
    
    
    Price
    
    
    Life in Years
    
    
    ValueOutstanding, December 31, 2006
    
    
    2,282
    
    
    $
    32.70Forefeited
    
    
    (110
    )
    
    $
    30.76Canceled
    
    
    (4
    )
    
    $
    17.45Outstanding, September 30, 2007
    
    
    2,168
    
    
    $
    32.82
    
    
    
    3.0
    
    
    $
    246Exercisable, September 30, 2007
    
    
    2,110
    
    
    $
    33.25
    
    
    
    2.9
    
    
    $
    246Options vested and expected to vest
as of September 30, 2007
    
    
    2,130
    
    
    $
    33.10
    
    
    
    3.0
    
    
    $
    246
  8




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##### Table of Contents



MedQuist Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
  Options outstanding
    
    
    Options exercisableWeightedAverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedRemaining
    
    
    Average
    
    
    
    
    
    
    AverageRange of
    
    
    Number
    
    
    Contractual Life
    
    
    Exercise
    
    
    Number
    
    
    ExerciseExercise Prices
    
    
    of Shares
    
    
    (in years)
    
    
    Price
    
    
    of Shares
    
    
    Price$
    2.71 - $10.00
    
    
    
    34
    
    
    
    2.0
    
    
    $
    5.39
    
    
    
    34
    
    
    $
    5.39$
    10.01 - $20.00
    
    
    
    543
    
    
    
    3.8
    
    
    $
    16.48
    
    
    
    485
    
    
    $
    16.37$
    20.01 - $30.00
    
    
    
    819
    
    
    
    3.5
    
    
    $
    26.71
    
    
    
    819
    
    
    $
    26.71$
    30.01 - $40.00
    
    
    
    218
    
    
    
    1.7
    
    
    $
    32.23
    
    
    
    218
    
    
    $
    32.23$
    40.01 - $70.00
    
    
    
    554
    
    
    
    1.8
    
    
    $
    59.84
    
    
    
    554
    
    
    $
    59.842,168
    
    
    
    3.0
    
    
    $
    32.82
    
    
    
    2,110
    
    
    $
    33.25
  Three months ended September 30,
    
    
    Nine months ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Selling, general
and administrative
    
    $
    71
    
    
    $
    
    
    
    $
    84
    
    
    $
    72Research and development
    
    
    30
    
    
    
    
    
    
    
    36
    
    
    
    30Total
    
    $
    101
    
    
    $
    
    
    
    $
    120
    
    
    $
    102
  5.  Other Comprehensive Loss
  Three months ended September 30,
    
    
    Nine months ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net loss
    
    $
    (8,935
    )
    
    $
    (2,104
    )
    
    $
    (4,935
    )
    
    $
    (12,991
    )Foreign currency translation adjustment
    
    
    587
    
    
    
    486
    
    
    
    989
    
    
    
    625Comprehensive loss
    
    $
    (8,348
    )
    
    $
    (1,618
    )
    
    $
    (3,946
    )
    
    $
    (12,366
    )
 6.  Net Loss per Share
  9




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MedQuist Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
  Three months ended September 30,
    
    
    Nine months ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net loss
    
    $
    (8,935
    )
    
    $
    (2,104
    )
    
    $
    (4,935
    )
    
    $
    (12,991
    )Weighted average
shares outstanding:Basic
    
    
    37,484
    
    
    
    37,484
    
    
    
    37,484
    
    
    
    37,484Diluted
    
    
    37,484
    
    
    
    37,484
    
    
    
    37,484
    
    
    
    37,484Net loss per share:Basic
    
    $
    (0.24
    )
    
    $
    (0.06
    )
    
    $
    (0.13
    )
    
    $
    (0.35
    )Diluted
    
    $
    (0.24
    )
    
    $
    (0.06
    )
    
    $
    (0.13
    )
    
    $
    (0.35
    )
  7.  Customer Accommodation and Quantification
      10




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##### Table of Contents



MedQuist Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
   Nine months ended
    
    
    Year endedSeptember 30, 2007
    
    
    December 31, 2006Beginning balance
    
    $
    24,777
    
    
    $
    46,878Customer accommodation
    
    
    
    
    
    
    10,402Payments and other adjustments
    
    
    (4,048
    )
    
    
    (31,523
    )Credits
    
    
    (1,961
    )
    
    
    (980
    )Ending balance
    
    $
    18,768
    
    
    $
    24,777
 8.  Cost of Investigation and Legal Proceedings, Net
  Three months ended September 30,
    
    
    Nine months ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Legal fees
    
    $
    3,937
    
    
    $
    3,327
    
    
    $
    12,783
    
    
    $
    11,552Other professional fees
    
    
    504
    
    
    
    805
    
    
    
    1,948
    
    
    
    3,642Nightingale & Associates, LLC (Nightingale) services
    
    
    
    
    
    
    648
    
    
    
    197
    
    
    
    2,356Insurance claims
    
    
    
    
    
    
    (8,702
    )
    
    
    (15,386
    )
    
    
    (8,702
    )Other
    
    
    
    
    
    
    68
    
    
    
    2
    
    
    
    171Total
    
    $
    4,441
    
    
    $
    (3,854
    )
    
    $
    (456
    )
    
    $
    9,019
 9.  Restructuring Plans
  Nine Months Ended September 30, 2007
    
    
    Year Ended December 31, 2006Non-Cancelable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-CancelableTotal
    
    
    Leases
    
    
    Severance
    
    
    Equipment
    
    
    Total
    
    
    Leases
    
    
    Severance
    
    
    EquipmentBeginning balance
    
    $
    712
    
    
    $
    648
    
    
    $
    64
    
    
    $
    
    
    
    $
    2,050
    
    
    $
    1,693
    
    
    $
    357
    
    
    $
    Additional charge
    
    
    404
    
    
    
    233
    
    
    
    146
    
    
    
    25
    
    
    
    3,442
    
    
    
    1,653
    
    
    
    1,447
    
    
    
    342Usage
    
    
    (974
    )
    
    
    (739
    )
    
    
    (210
    )
    
    
    (25
    )
    
    
    (4,780
    )
    
    
    (2,698
    )
    
    
    (1,740
    )
    
    
    (342
    )Ending balance
    
    $
    142
    
    
    $
    142
    
    
    $
    
    
    
    $
    
    
    
    $
    712
    
    
    $
    648
    
    
    $
    64
    
    
    $
    
  11




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##### Table of Contents



MedQuist Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
  10.  Income Taxes
  Accounting for Uncertainty in
Income Taxes  an interpretation of FASB Statement 109 Accounting for Income Taxes Recognition Measurement
    11.  Commitments and Contingencies
 Governmental Investigations
   12




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##### Table of Contents



MedQuist Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
    Shareholder Securities Litigation
 William Steiner v. MedQuist,
Inc., et al.
  Customer Litigation
  13




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##### Table of Contents



MedQuist Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
      Medical Transcriptionist Litigation
 Hoffmann Putative Class Action
  14




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##### Table of Contents



MedQuist Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
  Force Putative Class Action
  Myers Putative Class Action
    Reseller Arbitration Demand
  15




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##### Table of Contents



MedQuist Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
  Other Matters
       12.  Related Party Transactions
   Licensing Agreement
  16




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##### Table of Contents



MedQuist Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
     OEM Supply Agreement
    Equipment Sales
  Insurance Coverage through Philips
  17




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##### Table of Contents



MedQuist Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
 Purchasing Agreements
     Three months ended September 30,
    
    
    Nine months ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006PSRS licensing
    
    $
    645
    
    
    $
    718
    
    
    $
    1,747
    
    
    $
    1,843PSRS consulting
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3OEM agreement
    
    
    1,564
    
    
    
    383
    
    
    
    1,865
    
    
    
    928Dictation equipment
    
    
    292
    
    
    
    129
    
    
    
    613
    
    
    
    659Insurance
    
    
    121
    
    
    
    843
    
    
    
    1,682
    
    
    
    1,289PENAC
    
    
    (10
    )
    
    
    
    
    
    
    30
    
    
    
    20Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42Total
    
    $
    2,612
    
    
    $
    2,073
    
    
    $
    5,937
    
    
    $
    4,784
   18




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  
    
    each of the matters discussed in Part II, Item 1, Legal Proceedings, and Part II, Item
1A, Risk Factors;
    
    difficulties relating to our significant management turnover;
    
    our ability to recruit and retain qualified medical transcriptionists (MTs) and other
employees;
    
    the impact of our new services and products on the demand for our existing services and
products;
    
    our current dependence on medical transcription for substantially all of our business;
    
    our ability to expand our customer base;
    
    changes in law, including, without limitation, the impact Health Insurance Portability
and Accountability Act of 1996 (HIPAA) will have on our business;
    
    infringement on the proprietary rights of others;
    
    our ability to diversify into other businesses;
    
    the results of our review of strategic alternatives, including our evaluation of whether
a sale of us is in the best interest of our shareholders and us;
    
    our ability to effectively integrate newly-acquired operations;
    
    competitive pricing pressures in the medical transcription industry and our response to
those pressures; and
    
    general conditions in the economy and capital markets.
    Executive Overview
  19




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##### Table of Contents



tm
     
    
    A shortage of qualified domestic MTs has increased the demand for outsourced medical
transcription services by U.S.-based healthcare providers. This demand for qualified MTs, as
well as budgetary pressures experienced by healthcare providers, has also caused many more
U.S.-based healthcare providers to evaluate and consider the use of offshore medical
transcription labor.
    
    Several low cost providers have emerged and aggressively moved into our market offering
medical transcription services (performed both domestically and offshore) at prices
significantly below our traditional price point. While we believe the market for outsourced
medical transcription continues to expand, the growing acceptance by customers of the use of
offshore labor has further increased the competitive environment in the medical
transcription industry.
 20




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##### Table of Contents




    
    There have been technological advances by us and our competitors which have reduced the
length of time required to transcribe medical reports, in turn reducing the overall cost of
medical transcription services.
    
    Other companies in the healthcare IT space have developed alternative solutions for the
creation of electronic clinical documentation that, if successfully implemented, will reduce
the overall demand for medical transcription services.
   
    
    reduction in overhead and other administrative costs;
    
    improvement in the quality and speed of delivery of transcribed medical reports;
    
    access to leading technologies, such as speech recognition technology, without any
development and investment risk;
    
    expertise in implementing and managing a medical transcription system tailored to the
providers specific requirements;
    
    access to skilled MTs; and
    
    support for compliance with governmental and industry mandated privacy and security
requirements and electronic health record initiatives.
   
    
    revenues;
    
    operating income;
    
    net income per share;
    
    net cash provided by operating activities; and
    
    days sales outstanding.
  Critical Accounting Policies, Judgments and Estimates
  21




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##### Table of Contents



Basis of Presentation
 Sources of Revenues
  Cost of Revenues
  Selling, General and Administrative (SG&A)
  Research and Development (R&D)
  Depreciation and amortization
  Cost of investigation and legal proceedings, net
  Consolidated Results of Operations
  22




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##### Table of Contents



Comparison of Three Months Ended September 30, 2007 and 2006
 Three months ended September 30,2007
    
    
    2006% of Net
    
    
    
    
    
    
    % of Net($ in thousands)
    
    Amount
    
    
    Revenues
    
    
    Amount
    
    
    Revenues
    
    
    $ Change
    
    
    % ChangeNet revenues
    
    $
    82,518
    
    
    
    100.0
    %
    
    $
    82,096
    
    
    
    100.0
    %
    
    $
    422
    
    
    
    0.5
    %Operating costs and expenses:Cost of revenues
    
    
    64,290
    
    
    
    77.9
    %
    
    
    67,929
    
    
    
    82.7
    %
    
    
    (3,639
    )
    
    
    (5.4
    %)Selling, general and administrative
    
    
    15,548
    
    
    
    18.8
    %
    
    
    12,765
    
    
    
    15.5
    %
    
    
    2,783
    
    
    
    21.8
    %Research and development
    
    
    3,808
    
    
    
    4.6
    %
    
    
    3,447
    
    
    
    4.2
    %
    
    
    361
    
    
    
    10.5
    %Depreciation
    
    
    2,861
    
    
    
    3.5
    %
    
    
    3,149
    
    
    
    3.8
    %
    
    
    (288
    )
    
    
    (9.1
    %)Amortization of intangible assets
    
    
    1,361
    
    
    
    1.6
    %
    
    
    1,363
    
    
    
    1.7
    %
    
    
    (2
    )
    
    
    (0.1
    %)Cost of investigation and legal proceedings, net
    
    
    4,441
    
    
    
    5.4
    %
    
    
    (3,854
    )
    
    
    (4.7
    %)
    
    
    8,295
    
    
    
    (215.2
    %)Restructuring charges
    
    
    554
    
    
    
    0.7
    %
    
    
    1,234
    
    
    
    1.5
    %
    
    
    (680
    )
    
    
    (55.1
    %)Total operating costs and expenses
    
    
    92,863
    
    
    
    112.5
    %
    
    
    86,033
    
    
    
    104.8
    %
    
    
    6,830
    
    
    
    7.9
    %Operating loss
    
    
    (10,345
    )
    
    
    (12.5
    %)
    
    
    (3,937
    )
    
    
    (4.8
    %)
    
    
    (6,408
    )
    
    
    162.8
    %Equity in income of affiliated company
    
    
    124
    
    
    
    0.2
    %
    
    
    180
    
    
    
    0.2
    %
    
    
    (56
    )
    
    
    (31.1
    %)Interest income, net
    
    
    2,302
    
    
    
    2.8
    %
    
    
    1,977
    
    
    
    2.4
    %
    
    
    325
    
    
    
    16.4
    %Loss before income taxes
    
    
    (7,919
    )
    
    
    (9.6
    %)
    
    
    (1,780
    )
    
    
    (2.2
    %)
    
    
    (6,139
    )
    
    
    344.9
    %Income tax provision
    
    
    1,016
    
    
    
    1.2
    %
    
    
    324
    
    
    
    0.4
    %
    
    
    692
    
    
    
    213.6
    %Net loss
    
    $
    (8,935
    )
    
    
    (10.8
    %)
    
    $
    (2,104
    )
    
    
    (2.6
    %)
    
    $
    (6,831
    )
    
    
    324.7
    %
 Net revenues
  
    
    increased transcription service revenues of $1.7 million resulting primarily from an
$8.5 million charge for the customer accommodation program in the 2006 period. Excluding
this charge, transcription revenue declined $6.8 million due to lower medical transcription
volume and lower pricing to both new and existing customers. We believe the reduction in
volume was the result primarily of customer losses to other outsourced medical
transcription providers due to, among other things, price competition and our requirement
that our medical transcription customers migrate from disparate and older technology
platforms to our DEP;
    
    increased other services revenues of $0.4 million; offset by
    
    reduced sales and implementations of our technology products of $1.7 million.
  23




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##### Table of Contents



Cost of revenues
  
    
    reduced medical transcription payroll costs of $3.3 million related directly to the
decrease in our service revenues as well as our increased use of speech recognition
technology, which reduces the payroll costs associated with the production of revenues;
    
    decreased telecommunications costs of $0.6 million associated with both the decrease in
our service revenues and the transition of customers from our non-DEP medical transcription
platforms, which required MTs to access dictation using traditional phone lines, to our
DEP, which allows MTs to access dictation through the internet; offset by
    
    an increase in technology product costs of $0.4 million;
  Selling, general and administrative
  Research and development
  Depreciation
  Amortization
  Cost of investigation and legal proceedings, net
  24




---



##### Table of Contents



Restructuring charges
  Interest income, net
  Income tax provision
  Comparison of Nine Months Ended September 30, 2007 and 2006
 25




---



##### Table of Contents



Nine months ended September 30,2007
    
    
    2006% of Net
    
    
    
    
    
    
    % of Net($ in thousands)
    
    Amount
    
    
    Revenues
    
    
    Amount
    
    
    Revenues
    
    
    $ Change
    
    
    % ChangeNet revenues
    
    $
    260,276
    
    
    
    100.0
    %
    
    $
    271,469
    
    
    
    100.0
    %
    
    $
    (11,193
    )
    
    
    (4.1
    %)Operating costs and expenses:Cost of revenues
    
    
    198,918
    
    
    
    76.4
    %
    
    
    214,656
    
    
    
    79.1
    %
    
    
    (15,738
    )
    
    
    (7.3
    %)Selling, general and administrative
    
    
    48,158
    
    
    
    18.5
    %
    
    
    39,408
    
    
    
    14.5
    %
    
    
    8,750
    
    
    
    22.2
    %Research and development
    
    
    10,073
    
    
    
    3.9
    %
    
    
    9,705
    
    
    
    3.6
    %
    
    
    368
    
    
    
    3.8
    %Depreciation
    
    
    8,040
    
    
    
    3.1
    %
    
    
    9,043
    
    
    
    3.3
    %
    
    
    (1,003
    )
    
    
    (11.1
    %)Amortization of intangible assets
    
    
    4,065
    
    
    
    1.6
    %
    
    
    4,474
    
    
    
    1.6
    %
    
    
    (409
    )
    
    
    (9.1
    %)Cost of investigation and legal proceedings, net
    
    
    (456
    )
    
    
    (0.2
    %)
    
    
    9,019
    
    
    
    3.3
    %
    
    
    (9,475
    )
    
    
    (105.1
    %)Restructuring charges
    
    
    935
    
    
    
    0.4
    %
    
    
    2,939
    
    
    
    1.1
    %
    
    
    (2,004
    )
    
    
    (68.2
    %)Total operating costs and expenses
    
    
    269,733
    
    
    
    103.6
    %
    
    
    289,244
    
    
    
    106.5
    %
    
    
    (19,511
    )
    
    
    (6.7
    %)Operating loss
    
    
    (9,457
    )
    
    
    (3.6
    %)
    
    
    (17,775
    )
    
    
    (6.5
    %)
    
    
    8,318
    
    
    
    (46.8
    %)Equity in income of affiliated company
    
    
    447
    
    
    
    0.2
    %
    
    
    738
    
    
    
    0.3
    %
    
    
    (291
    )
    
    
    (39.4
    %)Interest income, net
    
    
    6,477
    
    
    
    2.5
    %
    
    
    5,675
    
    
    
    2.1
    %
    
    
    802
    
    
    
    14.1
    %Loss before income taxes
    
    
    (2,533
    )
    
    
    (1.0
    %)
    
    
    (11,362
    )
    
    
    (4.2
    %)
    
    
    8,829
    
    
    
    (77.7
    %)Income tax provision
    
    
    2,402
    
    
    
    0.9
    %
    
    
    1,629
    
    
    
    0.6
    %
    
    
    773
    
    
    
    47.5
    %Net loss
    
    $
    (4,935
    )
    
    
    (1.9
    %)
    
    $
    (12,991
    )
    
    
    (4.8
    %)
    
    $
    8,056
    
    
    
    (62.0
    %)
 Net revenues
  
    
    decreased transcription service revenues of
$9.4 million.
Excluding $9.8 million of
charges for the customer accommodation program included in the 2006 period,
transcription revenues declined by $19.2 million. This decline was due primarily to lower
medical transcription volume and lower pricing to both new and existing customers. We
believe the reduction in volume was the result primarily of customer losses to other
outsourced medical transcription providers due to, among other things, price competition
and our requirement that our medical transcription customers migrate from disparate and
older technology platforms to our DEP; and
    
    reduced sales and implementations of our technology products of $1.7 million.
 Cost of revenues
  
    
    reduced medical transcription payroll costs of $7.1 million related directly to the
decrease in our service revenues as well as our increased use of speech recognition
technology, which reduces the payroll costs associated with the production of revenues;
    
    decreased telecommunications costs of $3.4 million associated with both the decrease in
our service revenues and the transition of customers from our non-DEP medical transcription
platforms, which required MTs to access dictation using traditional phone lines, to our
DEP, which allows MTs to access dictation through the internet;
 26




---



##### Table of Contents




    
    reduced other costs of $5.3 million resulting from headcount and facility reductions
associated with our 2005 restructuring plan based on a centralized national service
delivery model to streamline our organizational and operating structure to better service
our customers; offset by
    
    an increase in technology product costs of $0.1 million.
  Selling, general and administrative
  Depreciation
  Amortization
  Cost
of investigation and legal proceedings, net
  Restructuring charges
  27




---



##### Table of Contents



Interest income, net
  Income tax provision
  Liquidity and Capital Resources
   
    
    the SEC, DOJ and DOL investigations and proceedings; and
    
    the defense and resolution of the civil litigation matters.
 Off-Balance Sheet Arrangements
  
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
 28




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##### Table of Contents



Changes in Internal Control Over Financial Reporting
   
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 Governmental Investigations
     Shareholder Securities Litigation
 William Steiner v. MedQuist,
Inc., et al.
 29




---



##### Table of Contents



Customer Litigation
     30




---



##### Table of Contents



Medical Transcriptionist Litigation
 Hoffmann Putative Class Action
  Force Putative Class Action
  Myers Putative Class Action
  31




---



##### Table of Contents



Reseller Arbitration Demand
  
 Item 1A. Risk Factors
  Philips owns approximately 69.6% of our outstanding common stock, and its interests may conflict
with the interests of our other shareholders.
   32




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##### Table of Contents



If the electronic health records (EHR) companies produce solutions acceptable to large hospital
systems for the creation of electronic clinical documentation that are not based on the conversion
of voice to text, the overall demand for medical transcription services could be reduced.
   
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  33




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##### Table of Contents



Item 6. Exhibits
 Exhibits
 No.
    
    Description10.1* (1)
    
    Indemnification Agreement, dated as of July 3, 2007 between MedQuist Inc. and John H. Underwood10.2* (2)
    
    Indemnification Agreement, dated as of July 3, 2007 between MedQuist Inc. and Richard H. Stowe10.3* (3)
    
    Indemnification Agreements, dated August 23, 2007, with each of Howard Hoffmann, Kathy Donovan, James
Brennan, Mark Sullivan, Mark Ivie, Michael Clark and Scott Bennett10.4* (4)
    
    Letter Agreement by and between MedQuist Inc. and Nightingale and Associates, LLC dated September 19, 200710.5* (5)
    
    Retention and Strategic Transaction Bonus Agreements, dated September 20, 2007, with each of Kathy
Donovan, Mark Ivie and Scott Bennett10.6* (6)
    
    Retention and Strategic Transaction Bonus Agreements, dated September 20, 2007, with each of Mark
Sullivan and Michael Clark10.7#
    
    Amended and Restated OEM Supply Agreement dated September 21, 2007 by and between MedQuist Inc. and
Philips Speech Recognition Systems GmbH f/k/a Philips Austria GmbH, Philips Speech Processing31.1
    
    Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
 
 (1)
    
    Incorporated by reference to Exhibit 10.39 to the Companys Form 10-K for the fiscal year ended
December 31, 2005 filed with the Securities and Exchange Commission on July 5, 2007.(2)
    
    Incorporated by reference to Exhibit 10.40 to the Companys Form 10-K for the fiscal year ended
December 31, 2005 filed with the Securities and Exchange Commission on July 5, 2007.(3)
    
    Incorporated by reference to Exhibit 10.1 to the Companys Form 8-K filed with the Securities
and Exchange Commission on August 28, 2007.(4)
    
    Incorporated by reference to Exhibit 10.1 to the Companys Form 8-K filed with the Securities
and Exchange Commission on September 25, 2007.(5)
    
    Incorporated by reference to Exhibit 10.2 to the Companys Form 8-K filed with the Securities
and Exchange Commission on September 25, 2007.(6)
    
    Incorporated by reference to Exhibit 10.3 to the Companys Form 8-K filed with the Securities
and Exchange Commission on September 25, 2007.*
    
    Management contract or compensatory plan or arrangement.#
    
    Portions of this Exhibit were omitted and filed separately with the Secretary of the SEC pursuant
to a request for confidential treatment that has been filed with the SEC. 34




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##### Table of Contents



SIGNATURES
  MEDQUIST INC./s/  Howard S. HoffmannHoward S. HoffmannPresident and Chief Executive Officer
(Principal Executive Officer)  /s/  Kathleen E. DonovanKathleen E. DonovanSenior Vice President and Chief Financial
Officer (Principal Financial Officer)  35




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##### Table of Contents



Exhibit Index
 No.
    
    Description10.7#
    
    Amended and Restated OEM Supply Agreement dated September 21, 2007 by and between MedQuist
Inc. and Philips Speech Recognition Systems GmbH f/k/a Philips Austria GmbH, Philips
Speech Processing31.1
    
    Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of
the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of
the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
 
 #
    
    Portions of this Exhibit were omitted and filed separately
with the Secretary of the SEC pursuant to a request for confidential
treatment that has been filed with the SEC. 36