SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    Form 10-Q


                              --------------------

           (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                              --------------------

For the quarterly period                                  Commission file number
ended September 30, 1996                                         0-19941


                                  MedQuist Inc.
             (Exact name of registrant as specified in its charter)


         New Jersey                                              22-2531298
(State or other jurisdiction of                               (I.R.S. Employer
 incorporation or organization)                              identification No.)


               Five Greentree Centre, Suite 311, Marlton, NJ 08053
               (Address of principal executive offices) (Zip Code)


                                 (609) 596-8877
              (Registrant's telephone number, including area code)



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


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

         Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 6,879,313 shares of
common stock, no par value, as of November 5, 1996.

<PAGE>



                                  MedQuist Inc.

                     INDEX TO QUARTERLY REPORT ON FORM 10-Q


<TABLE>


PART I.  FINANCIAL INFORMATION
                                                                                                           PAGE NO.
<S>               <C>                                                                                           <C>
Item 1.           Financial Statements

                  Consolidated Balance Sheets at September 30, 1996 (Unaudited) and
                  December 31, 1995                                                                             1

                  Consolidated Statements of Earnings for the nine months ended September 30, 1996 and
                  1995 (Unaudited)                                                                              2

                  Consolidated Statements of Earnings for the three months ended September 30, 1996 and
                  1995 (Unaudited)                                                                              3

                  Consolidated Statements of Cash Flows for the nine months ended September 30, 1996 and
                  1995 (Unaudited)                                                                              4

                  Notes to Consolidated Financial Statements (Unaudited)                                        5

                  Management's Discussion and Analysis of Financial Condition and Results of Operations         8


PART II.          OTHER INFORMATION

Item 1.           Legal Proceedings                                                                             13

Item 2.           Changes in Securities                                                                         13

Item 3.           Defaults upon Senior Securities                                                               13

Item 4.           Submission of Matters to a Vote of Security Holders                                           13

Item 5.           Other Information                                                                             14

Item 6.           Exhibits and Reports on Form 8-K                                                              14

SIGNATURE                                                                                                       15

</TABLE>



<PAGE>



                         MEDQUIST INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS


(Amounts in thousands)
                                                  September 30,     December 31,
                                                     1996               1995
                                                     ----               ----
                                                  (Unaudited)
Assets
Current assets:
     Cash and cash equivalents                      $10,322           $ 1,812
     Accounts receivable, net of allowance                        
       of $244 and $257                              13,226             9,769
     Prepaid expenses and other current assets        1,407             1,720
                                                    -------           -------
       Total current assets                          24,955            13,301
                                                                  
Property and equipment - net                          7,784             6,725
                                                    -------           -------
                                                                  
Other long term assets                                  394               643
                                                    -------           -------
                                                                  
Intangible assets - net                              40,517            37,426
                                                    -------           -------
                                                                  
                                                    $73,650           $58,095
                                                    =======           =======
                                                                  
Liabilities and shareholders' equity                              
                                                                  
Current liabilities:                                              
     Current portion of long term debt              $   261           $ 2,246
     Accounts payable                                 1,209             1,646
     Accrued payroll                                  2,064             1,092
     Accrued expenses                                 2,976             3,391
                                                    -------           -------
       Total current liabilities                      6,510             8,375
                                                    -------           -------
                                                                  
Long-term debt                                        1,803            15,956
                                                    -------           -------
                                                                  
Subordinated payable to related parties                --              21,887
                                                    -------           -------
                                                                  
Other long-term liabilities                             650               848
                                                    -------           -------
                                                                  
Deferred income taxes                                   609               609
                                                    -------           -------
                                                                  
Shareholders' equity:                                             
     Class A preferred stock, no par value,                       
       650 shares authorized, none issued              --                --
     Class B preferred stock, no par value,                       
       400 shares authorized, none issued              --                --
     Common stock, no par value,                                  
       20,000 shares authorized,                                  
       6,844 and 2,446 issued and                                 
       outstanding                                   56,311             4,639
     Retained earnings                                7,767             5,781
                                                    -------           -------
       Total shareholders' equity                    64,078            10,420
                                                    -------           -------
                                                                  
                                                    $73,650           $58,095
                                                    =======           =======
                                                               


See Accompanying Notes to Consolidated Financial Statements.

                                        1

<PAGE>



                         MEDQUIST INC. AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF EARNINGS
                                   (UNAUDITED)

(Amounts in thousands, except per share data)
                                                         NINE MONTHS ENDED
                                                           SEPTEMBER 30,
                                                       1996              1995
                                                     --------          --------
Revenues                                             $ 43,862          $ 32,770

Costs and expenses:
  Cost of revenues                                     32,607            24,152
  Selling, general and administrative                   2,558             3,509
  Depreciation                                          1,770             1,306
  Amortization of intangible assets                       835               329
                                                     --------          --------
     Total operating expenses                          37,770            29,296
                                                     --------          --------

Operating income                                        6,092             3,474

Interest expense                                        1,552             2,793
                                                     --------          --------

Income from continuing operations
before income taxes                                     4,540               681
Income tax provision                                    1,848               282
                                                     --------          --------
Income from continuing operations                    $  2,692          $    399
Discontinued operations, net of income taxes             --               1,261
                                                     --------          --------

Net income                                           $  2,692          $  1,660
                                                     ========          ========


Income Per Share:
  Income from continuing operations                  $   0.49          $   0.22
  Discontinued operations                                --                0.35
  Inducement deduction (Note 6)                         (0.13)             --
                                                     --------          --------
    Net Income per share                             $   0.36          $   0.57
                                                     ========          ========


Shares used in computing net earnings per
share (Note 3)                                          5,528             3,620
                                                     ========          ========


See Accompanying Notes to Consolidated Financial Statements.


                                        2

<PAGE>



                         MEDQUIST INC. AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF EARNINGS
                                   (UNAUDITED)

(Amounts in thousands, except per share data)
                                                         THREE MONTHS ENDED
                                                            SEPTEMBER 30,
                                                        1996            1995
                                                     -------         -------
Revenues                                             $15,511         $11,538

Costs and expenses:
  Cost of revenues                                    11,490           8,578
  Selling, general and administrative                    857             762
  Depreciation                                           609             538
  Amortization of intangible assets                      291             110
                                                     -------         -------
     Total operating expenses                         13,247           9,988
                                                     -------         -------

Operating income                                       2,264           1,550

Interest expense                                          63             884
                                                     -------         -------

Income from continuing operations before
income taxes                                           2,201             666
Income tax provision                                     890             276
                                                     -------         -------
Income from continuing operations                      1,311         $   390
Discontinued operations, net of income taxes            --               339
                                                     -------         -------


Net income                                           $ 1,311         $   729
                                                     =======         =======


Income Per Share:
  Income from Continuing Operations                  $  0.18         $  0.14
  Discontinued Operations                               --              0.10
                                                     -------         -------
    Net Income per share                             $  0.18         $  0.24
                                                     =======         =======


Shares used in computing net earnings                  7,261           3,645
  per share (Note 3)                                 =======         =======


See Accompanying Notes to Consolidated Financial Statements.

                                                         3

<PAGE>



                         MEDQUIST INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
<TABLE>
<CAPTION>

(Amounts in thousands)
                                                                         NINE MONTHS ENDED
                                                                           SEPTEMBER 30,
                                                                        1996           1995
                                                                        ----           ----

<S>                                                                   <C>            <C>
Operating activities:
     Net earnings                                                     $  2,692       $  1,660
     Adjustments to reconcile net earnings to net cash
       provided by (used in) operating activities:
       Depreciation and amortization                                     2,605          2,754
       Amortization of debt discount                                        54             98
       Deferred income taxes                                              --               26
     Changes in assets and liabilities:
       Accounts receivable, net                                         (3,092)        (1,111)
       Prepaid expenses and other current assets                           325           (266)
       Other assets                                                        247            (31)
       Accounts payable                                                   (464)           199
       Accrued payroll                                                     904             14
       Accrued expenses                                                   (497)           141
       Other long term liabilities                                        (197)          (289)
                                                                      --------       --------
         Net cash provided by operating activities                       2,577          3,195
                                                                      --------       --------

Investing activities:
     Purchases of equipment and leasehold improvements, net             (2,369)        (1,861)
     Other assets                                                         (153)          --
     Acquisitions, net of cash acquired                                 (2,619)          --
                                                                      --------       --------
       Net cash used in investing activities                            (5,141)        (1,861)
                                                                      --------       --------

Financing activities:
     Net borrowings on revolving line of credit                           --            1,287
     Repayments of long-term debt                                      (28,350)        (3,400)
     Repayments of obligations under capital leases                       (229)          (203)
     Net proceeds from issuance of common stock                         39,653            669
       Deferred financing costs                                           --               (6)
                                                                      --------       --------
       Net cash provided by (used in) financing activities              11,074         (1,653)
                                                                      --------       --------

Net increase (decrease) in cash and cash equivalents                     8,510           (319)
                                                                      --------       --------

Cash and cash equivalents, beginning of period                           1,812            807
                                                                      --------       --------

Cash and cash equivalents, end of period                              $ 10,322       $    488
                                                                      ========       ========


Supplemental disclosure of cash flow information:
  Cash paid during period for:
       Interest                                                       $    655       $  2,423
                                                                      ========       ========
       Income taxes                                                   $  1,303       $    363
                                                                      ========       ========

     New capital lease arrangements                                   $    190       $    389
                                                                      ========       ========

</TABLE>


See Accompanying Notes to Consolidated Financial Statements.

                                        4

<PAGE>



                         MedQuist Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
              Three and Nine Month Periods Ended September 30, 1996
                    (Unaudited - dollar amounts in thousands)

Note 1.  Basis of Presentation

         The information set forth in these statements is unaudited and may be
subject to normal year-end adjustments. The information reflects all
adjustments, consisting only of normal recurring adjustments, that, in the
opinion of management, are necessary to present a fair statement of operations
of MedQuist Inc. (the "Company"), and its consolidated subsidiaries for the
periods indicated. Results of operations for the interim periods ended September
30, 1996 are not necessarily indicative of the results of operations for the
full year.

         Certain information in footnote disclosures normally included in
financial statements have been condensed or omitted in accordance with the rules
and regulations of the Securities and Exchange Commission.

         In addition, certain reclassifications have been made to the 1995
financial statements to conform with current year presentations.

Note 2.  Acquisitions

         Effective May 1, 1994, the Company purchased substantially all of the
assets of Transcriptions, Ltd. and affiliates ("Transcriptions") as well as
assuming certain liabilities, as defined, for $16,930 in cash, including
acquisition costs of $322, plus the payment of Transcriptions interest bearing
debt of $5,816, plus a deferred purchase price based on future operating
results. Effective December 29, 1995, the Company fixed the deferred purchase
price by agreeing to pay the former owners of Transcriptions $18,375 in cash and
861,463 shares of Common Stock (valued at $4,550 for financial reporting
purposes) on August 31, 1996. The $18,375 of cash consideration has been
discounted and presented as a part of the $21,887 long-term subordinated payable
at December 31, 1995. In addition, the shares to be issued have been presented
as part of the subordinated payable at December 31, 1995. Upon fixing the
deferred purchase price, the total purchase price for the Transcriptions
acquisition was $44,633. The acquisition has been accounted for using the
purchase method with the purchase price allocated to the fair value of the
acquired assets and liabilities.

         On May 30, 1996, the Company paid $18,146 in full settlement of the
cash portion of the deferred purchase price. This payment was funded with a
portion of the net proceeds from the Company's 2.2 million share equity offering
(See Note 6).

         During 1995, the Company purchased substantially all of the assets of
Transcriptions, Ltd. of Michigan, a former franchisee, and entered into a merger
agreement with Brawn Transcriptions, Inc. The total consideration paid for these
acquisitions was $1,019, consisting of $7 in cash, $185 in Company common stock
and a $827, 9% subordinated promissory note.

         During the three month period ended September 30, 1996, the Company
purchased (i) substantially all of the assets of California Transcription
Services and Oakland Associates, Inc. and (ii) all of the capital stock of
MedScribe, Inc. The total consideration paid for these acquisitions was $3,314,
consisting of

                                        5

<PAGE>



$1,506 in cash, $490 in Company common stock, $30 in a 5% subordinated
convertible promissory note and $1,288, in a 6% subordinated convertible
promissory note.

         The results of operations of these acquisitions are included in the
accompanying consolidated statement of operations since the dates of the
acquisition. Pro forma information is not presented as these acquisitions are
not material to the Company.

Note 3.  Earnings Per Share

         For the three and nine month periods ended September 30, 1996, the
Company has performed the income per share computations under the Treasury Stock
method, as required under Accounting Principle Board Opinion No. 15.

         For the three and nine month periods ended September 30, 1995, the
Company's total outstanding common stock options and warrants exceeded 20% of
the total outstanding common stock. Therefore, the income per share computations
are modified for such periods, as required under Accounting Principles Board
Opinion No. 15, to assume all outstanding common stock options and warrants were
exercised and the related proceeds were used to repurchase up to 20% of the
total outstanding common stock. Any remaining proceeds are assumed to be used to
reduce borrowings, thereby reducing interest expense, net of tax. Because
interest expense has not been allocated to discontinued operations, the
reduction of interest expense only impacts income per share from continuing
operations.

Note 4.  New Accounting Pronouncements

         In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
(SFAS No. 121). SFAS No. 121 establishes accounting standards for the impairment
of long-lived assets, certain identifiable intangibles and goodwill. The Company
was required to adopt SFAS No. 121 effective January 1, 1996. The adoption of
SFAS No. 121 did not have any effect on the Company's financial condition or
results of operations.

         In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). SFAS No. 123 establishes financial accounting and
reporting standards for stock-based employee compensation plans. This statement
also applies to transactions in which an entity issues its equity instruments to
acquire goods or services from non-employees. The Company was required to adopt
SFAS No. 123 effective January 1, 1996. The Company has elected to adopt the
disclosure requirements of this statement.

Note 5.  Subordinated Payable to Related Parties.

         Effective December 29, 1995, the Company and the former owners of
Transcriptions, who include the Company's current Chief Executive Officer and
Chief Operating Officer, amended the Transcriptions purchase agreement to fix
the amount of the deferred purchase price (see Note 2). The amendment provides
for the Company to pay $18,375 in cash and issue 861,463 shares of Common Stock
(valued at $4,550 for financial reporting purposes) on August 31, 1996. The cash
portion of the deferred purchase price was discounted using an 8.75% rate and is
presented as part of the $21,887 long-term subordinated payable at December 31,
1995.


                                        6

<PAGE>



         On May 30, 1996, the Company paid $18,146 in full settlement of the
cash portion of the deferred purchase price. This payment was funded with a
portion of the net proceeds from the Company's 2.2 million share equity offering
(See Note 6). On August 31, 1996, the Company issued 861,463 shares of Common
Stock in satisfaction of the stock portion of the deferred purchase price.

Note 6.  Common Stock

         On May 24, 1996, the Securities and Exchange Commission declared
effective a registration statement relating to the sale of 2,200,000 shares of
Common Stock of the Company at a price of $17.00 per share. A portion of the net
proceeds from the offering have been used to pay in full the cash portion of the
deferred purchase price payable to related parties in connection with the
acquisition of Transcriptions, Ltd. and to repay in full borrowings outstanding
under the Company's senior credit facility with certain lenders (See Notes 2 and
5). The remaining net proceeds will be used by the Company for general corporate
purposes.

         Simultaneous with the closing of this Offering, the Company issued
962,675 shares of Common Stock to a warrant holder. The warrant holder exercised
its warrants to Preferred Stock by canceling the $7,000 principal amount of a
senior subordinated note and simultaneously converted such Preferred Stock into
Common Stock. In addition, the Company issued 42,500 shares of Common Stock to
induce the warrant holder to exercise. As a result of this issuance, the Company
has recorded a $707,000 or $0.13 per share second quarter non-recurring
deduction from net earnings available to common shareholders.

         On June 21, 1996, the underwriters exercised the over-allotment option
for the purchase of 307,160 additional shares of the Company's Common Stock at
the offering price of $17.00 per share. The Company's net proceeds for the
exercise of the over-allotment option of approximately $4.9 million will be
utilized for general corporate purposes.



                                        7

<PAGE>



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

General

         The Company is a leading national provider of electronic transcription
and document management services to the healthcare industry. As a result of
acquisition and divestiture activity from 1992 through 1995, the Company's
operations have changed considerably and the financial statements included in
this Report relate only to its continuing transcription business.

         Fees for transcription related services are based primarily on
contracted rates, and revenue is recognized upon the rendering of services and
delivery of reports. Cost of revenues consists of all direct costs associated
with providing transcription related services, including payroll,
telecommunications, software customization, repairs and maintenance, rent and
other direct costs. Selling, general and administrative expenses include costs
associated with the Company's senior executive management, marketing and sales,
finance, legal and other administrative functions.

Results of Operations

The following table sets forth for the periods indicated, certain financial data
in the Company's Unaudited Consolidated Statements of Operations as a percentage
of net revenues:


<TABLE>

<CAPTION>

                                                     Three Months Ended               Nine Months Ended
                                                          September 30,                      September 30,

<S>                                                <C>              <C>               <C>               <C> 
                                                   1996              1995             1996              1995
                                                   ----              ----             ----              ----
 Continuing Operations:
  Revenues..................................      100.0%            100.0%           100.0%            100.0%
Costs and expenses:
  Cost of revenues..........................       74.1              74.3             74.3              73.7
  Selling, general and administrative.......        5.5               6.6              5.8              10.7
  Depreciation..............................        3.9               4.7              4.0               4.0
  Amortization of intangible assets.........        1.9               1.0              1.9               1.0
Operating income............................       14.6              13.4             13.9              10.6
Interest expense............................         .4               7.7              3.5               8.5
Income from continuing operations
  before income taxes.......................       14.2               5.8             10.4               2.1
Income tax provision........................        5.7               2.4              4.2               --
Income from continuing operations...........        8.5               3.4              6.1               2.1


</TABLE>

                                        8

<PAGE>



Nine Months Ended September 30, 1996 and 1995

Revenues. Revenues increased 33.8% to $43.9 million for the nine months ended
September 30, 1996 from $32.8 million in the comparable 1995 period. The $11.1
million increase reflected approximately $8.0 million of additional revenues
generated from new and existing clients, and $3.1 million of revenues from the
Company's 1995 and 1996 medical transcription acquisitions.

Cost of Revenues. Cost of revenues increased from $24.2 million in the nine
months ended September 30, 1995 to $32.6 million in the comparable 1996 period.
As a percentage of revenues, cost of revenues increased from 73.7% in the first
nine months of 1995 to 74.3% for the comparable 1996 period. The percentage
increase in cost of revenues primarily resulted from increases in the Company's
telecommunications costs.

Selling, General and Administrative. Selling, general and administrative
expenses decreased to $2.6 million in the nine months ended September 30, 1996
from $3.5 million in the comparable 1995 period. As a percentage of revenues,
selling, general and administrative expenses decreased from 10.7% in the first
nine months of 1995 to 5.8% in the comparable 1996 period. Included in the 1995
selling, general and administrative costs were non-recurring retirement and
severance costs associated with the departure of certain executive personnel.

Depreciation. Depreciation expense increased from $1.3 million for the nine
months ended September 30, 1995 to $1.8 million for the comparable 1996 period.
The increase in depreciation expense resulted primarily from an increased level
of capital expenditures during 1995.

Amortization. Amortization of intangible assets was $835,000 for the nine months
ended September 30, 1996 as compared to $329,000 for the comparable 1995 period.
The increase is directly attributable to the increase in intangible assets
associated with the fixing of the deferred purchase price for Transcriptions,
Ltd. which began to be amortized effective December 29, 1995 and the
amortization of intangible assets associated with the Company's three medical
transcription company acquisitions completed during the third quarter of 1996.

Interest. Interest expense decreased from $2.8 million for the nine months ended
September 30, 1995 to $1.6 million for the comparable 1996 period. The decrease
was due to the prepayment of approximately $16.7 million of the Chemical
Facility with the net proceeds from the sale of the receivables management
business in December 1995, partially offset by an increase of $640,000 related
to the non-cash interest associated with the fixing of the debt portion of the
deferred purchase price for Transcriptions, Ltd. in December 1995. In addition,
on May 30, 1996 the Company's senior term loans, borrowings under the Revolving
Credit Facility and the cash portion of the deferred purchase price were paid in
full with a portion of the proceeds from the Company's 2,200,000 share equity
offering.

                                        9

<PAGE>



Three Months Ended September 30, 1996 and 1995

Revenues. Revenues increased 34.4% to $15.5 million for the three months ended
September 30, 1996 from $11.5 million in the comparable 1995 period. The $4.0
million increase reflected approximately $2.8 million of additional revenues
generated from new and existing clients, and $1.2 million of revenues from the
Company's 1995 and 1996 medical transcription acquisitions.

Cost of Revenues. Cost of revenues increased from $8.6 million in the three
months ended September 30, 1995 to $11.5 million in the comparable 1996 period.
As a percentage of revenues, cost of revenues decreased from 74.3% in the third
quarter of 1995 to 74.1% for the comparable 1996 period.

Selling, General and Administrative. Selling, general and administrative
expenses increased to $857,000 in the three months ended September 30, 1996 from
$762,000 in the comparable 1995 period. As a percentage of revenues, selling,
general and administrative expenses decreased from 6.6% in the third quarter of
1995 to 5.5% in the comparable 1996 period.

Depreciation. Depreciation expense increased from $538,000 for the three months
ended September 30, 1995 to $609,000 for the comparable 1996 period. The
increase in depreciation expense resulted primarily from an increased level of
capital expenditures during 1995.

Amortization. Amortization of intangible assets was $291,000 for the three
months ended September 30, 1996 as compared to $110,000 for the comparable 1995
period. The increase is directly attributable to the intangible assets
associated with the fixing of the deferred purchase price for Transcriptions,
Ltd. which began to be amortized effective December 29, 1995 and the
amortization of intangible assets associated with the Company's three medical
transcription company acquisitions completed during the third quarter of 1996.

Interest. Interest expense decreased from $884,000 for the three months ended
September 30, 1995 to $63,000 for the comparable 1996 period. The decrease was
due to the prepayment of approximately $16.7 million of the Chemical Facility
with the net proceeds from the sale of the receivables management business in
December 1995, partially offset by an increase of $251,000 related to the
non-cash interest associated with the fixing of the debt portion of the deferred
purchase price for Transcriptions, Ltd. in December 1995. In addition, on May
30, 1996 the Company's senior term loans, borrowings under the Revolving Credit
Facility and the cash portion of the deferred purchase price were paid in full
with a portion of the proceeds from the Company's 2,200,000 share equity
offering.

                                       10

<PAGE>



Liquidity and Capital Resources

         At September 30, 1996, the Company had working capital of $18.4
million, including $10.3 million of cash and cash equivalents. During the nine
months ended September 30, 1996, the Company's operating activities provided
cash of $2.6 million as compared to $3.2 million during the prior year nine
month period. The decrease in cash provided by operating activities was
primarily related to an increase in accounts receivable and a decrease in
accrued expenses and accounts payable partially offset by an increase in net
earnings.

         During the nine months ended September 30, 1996, the Company purchased
$2.4 million of capital equipment. These expenditures were financed through cash
flow from operations, capital lease arrangements and the Chemical Facility.

         The Company entered into the Chemical Facility when it acquired
Transcriptions, Ltd. in May 1994. The Chemical Facility was restructured in
December 1995 to provide for an aggregate of $9.5 million of Term Loans (which
the Company prepaid in full on May 30, 1996), and a $10.0 million Revolving
Credit Facility expiring December 31, 1998, which is subject to a borrowing base
limitation based on a percentage of eligible accounts receivable. The Revolving
Credit Facility is secured by substantially all of the assets of the Company.
The Revolving Credit Facility bears interest at resetting rates selected by the
Company from various alternatives and the Company's level of compliance with
certain financial covenants. The interest rate alternatives are either (i) 0.5%
to 1.5% in excess of the greater of (x) Chemicals' base lending rate, (y) the
federal funds rate plus 1.0% or (z) the bank's certificate of deposit rate, or
(ii) LIBOR plus 2.0% to 3.0%. The Company may not reborrow amounts under the
Term Loan.

         The Revolving Credit Facility can be used for working capital and
general corporate purposes or, subject to a $7.5 million maximum, for future
acquisitions. Borrowings for acquisitions under the Revolving Credit Facility
("Acquisition Loans") are repayable in equal quarterly installments ending
December 31, 2001. Under the Chemical Facility, 50% of defined Excess Cash Flow
for each year commencing with 1996 is required to be used first to prepay
outstanding amounts under the Acquisition Loans, and thereafter to reduce
borrowings under the Revolving Credit Facility. To the extent any amounts under
the Revolving Credit Facility are repaid, the Company may reborrow such amounts.
The Chemical Facility includes certain financial and other covenants applicable
to the Company, including limitations on capital expenditures.

         On May 30, 1996, the Term Loans and borrowings under the Revolving
Credit Facility were paid in full with a portion of the proceeds from the
Company's 2,200,000 share equity offering.

         In connection with the fixing on December 29, 1995 of the deferred
purchase price for the acquisition of Transcriptions, Ltd., the Company agreed
to pay $24.5 million on August 31, 1996 in the form of 861,463 shares of Common
Stock and $18,375,000 in cash. Because payment of the deferred purchase price
was not due until August 31, 1996, the cash portion has been discounted and
presented as a subordinated payable at December 31, 1995.

         On May 30, 1996, the Company paid $18,146,000 in full settlement of the
cash portion of the deferred purchase price. This payment was funded with a
portion of the net proceeds from the Company's 2,200,000 share equity offering.
See Notes 2 and 5 to Consolidated Financial Statements.


                                       11

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         On March 29, 1996, Heller entered into an agreement with the Company
pursuant to which, on the closing date of the Offering, Heller exercised the
Heller Warrants by applying the $7 million of outstanding principal amount under
the Heller Facility against the exercise price (canceling the note related
thereto having a carrying value of $6.5 million at March 31, 1996 due to
original issue discount), and converting the Class A and Class B Preferred Stock
received upon such exercise into 962,675 shares of Common Stock. Additionally,
in connection with such exercise and conversion, the Company has issued to
Heller an additional 42,500 shares of Common Stock. The cancellation of the
Heller subordinated note resulted in a reduction in the Company's interest
expense of $490,000 per year.

         The Company believes that cash flow generated from the Company's
operations and its borrowing capacity under the Chemical Facility should be
sufficient to meet its current working capital and capital expenditure
requirements. Additional funds may be required in connection with future
acquisitions, if any.

Special Note Concerning Forward Looking Statements

         This Report contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in any such forward-looking statements as a result of various risks,
including, without limitation, the dependence on a single line of business;
rapid technological change; inability to expand into new markets and make
acquisitions; inability to attract and retain key personnel and
transcriptionists; the effects of regulatory changes in the healthcare industry;
the potential for significant fluctuations in operating results; and the
potential volatility of the Company's common stock.

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                           Part II - Other Information



Item 1. -         Legal Proceedings                            - Not Applicable

Item 2. -         Changes in Securities                        - Not Applicable

Item 3. -         Default upon Senior Securities               - Not Applicable

Item 5. -         Other Information                            - Not Applicable


Item 6. -         Exhibits and Reports on Form 8-K

                  a) Exhibits:

                      Computation of earnings per share              11.0

                      Financial Data Schedule                        27.0

                  b) Reports on Form 8-K                       - Not Applicable




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                                    SIGNATURE

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.


                                              MedQuist Inc.
                                              Registrant

Date:  November ___, 1996
                                              By:
                                                 -------------------------------
                                                 Robert F. Graham
                                                 Chief Financial Officer

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