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 June 30, 1998                                              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: 23,097,889 shares of
common stock, no par value, as of August 10, 1998.


<PAGE>


                                  MedQuist Inc.

                     INDEX TO QUARTERLY REPORT ON FORM 10-Q




PART I.    FINANCIAL INFORMATION                                        PAGE NO.
-------    ---------------------                                        --------

Item 1.    Consolidated Financial Statements

           Consolidated Balance Sheets at June 30, 1998
           (Unaudited) and December 31, 1997                               1

           Consolidated Statements of Income for the six
           months ended June 30, 1998 and 1997 (Unaudited)                 2

           Consolidated Statements of Income for the three
           months ended June 30, 1998 and 1997 (Unaudited)                 3

           Consolidated Statements of Cash Flows for the six
           months ended June 30, 1998 and 1997 (Unaudited)                 4

           Notes to Consolidated Financial Statements (Unaudited)          5

Item 2.    Management's Discussion and Analysis of Financial
           Condition and Results of Operations                             7

           Special Note Concerning Forward Looking Statements             11

PART II.   OTHER INFORMATION
--------   -----------------

Item 1.    Legal Proceedings                                              12

Item 2.    Changes in Securities                                          12

Item 3.    Defaults upon Senior Securities                                12

Item 4.    Submission of Matters to a Vote of Security Holders            12

Item 5.    Other Information                                              12

Item 6.    Exhibits and Reports on Form 8-K                               13

SIGNATURE                                                                 14
---------                                                                 --



<PAGE>


                         MEDQUIST INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                June 30,       December 31,
                                                                  1998            1997
                                                                 -------         -------
                                                               (Unaudited)     
<S>                                                            <C>             <C>
Assets                                                                         
Current assets:                                                                
  Cash and cash equivalents                                      $13,040         $12,337
    Accounts receivable, net of allowance  of $527 and $479       23,122          21,532
    Prepaid expenses and other current assets                        945             903
                                                                 -------         -------
       Total current assets                                       37,107          34,772
                                                                               
Property and equipment - net                                      12,333          11,329
                                                                               
Other assets                                                         696             552
                                                                               
Marketable security                                                1,400            --
                                                                               
Intangible assets - net                                           47,683          47,489
                                                                 -------         -------
                                                                               
                                                                 $99,219         $94,142
                                                                 =======         =======
                                                                               
Liabilities and Shareholders' Equity                                           
                                                                               
Current liabilities:                                                           
     Current portion of long-term debt                           $   322         $ 3,935
     Accounts payable                                              1,631           1,408
     Accrued payroll                                               3,256           3,141
     Accrued expenses                                              3,125           2,981
                                                                 -------         -------
       Total current liabilities                                   8,334          11,465
                                                                               
Long-term debt                                                        28           1,405
                                                                               
Other liabilities                                                    499             544
                                                                               
Deferred income taxes                                              2,710           2,710
                                                                               
Shareholders' equity:                                                          
     Common stock, no par value, 60,000 shares authorized,                     
         23,058 and 22,264 issued and  outstanding                  --              --
     Additional paid-in capital                                   62,897          60,103
     Retained earnings                                            23,351          17,915
     Unrealized gain on marketable security                        1,400            --
                                                                 -------         -------
       Total shareholders' equity                                 87,648          78,018
                                                                 -------         -------
                                                                 $99,219         $94,142
                                                                 =======         =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.


                                       1

<PAGE>


                         MEDQUIST INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                                   (UNAUDITED)
                (Amounts in thousands, except per share amounts)



                                                         SIX MONTHS ENDED
                                                           JUNE 30, 1998
                                                      -------------------------
                                                        1998            1997
                                                      --------         --------

Revenues                                              $ 62,919          $43,162
                                                      --------          -------

Costs and expenses:
  Cost of revenues                                      47,086           32,353
  Selling, general and administrative                    2,775            2,188
  Depreciation                                           2,529            1,761
  Amortization of intangible assets                        885              710
  Nonrecurring merger costs                                750             --
                                                      --------         --------
     Total operating expenses                           54,025           37,012
                                                      --------         --------

Operating income                                         8,894            6,150
Other income (expense):
    Interest income                                        124             --
    Interest expense                                       (42)            (128)
                                                      --------         --------

    Total other income (expense)                            82             (128)
                                                      --------         --------

Income before income taxes                               8,976            6,022
Income tax provision                                     3,441            2,329
                                                      --------         --------
Net income                                            $  5,535         $  3,693
                                                      ========         ========

Basic Net Income Per Common Share                     $   0.24         $   0.17
                                                      ========         ========

Diluted Net Income Per Common Share                   $   0.23         $   0.16
                                                      ========         ========




See Accompanying Notes to Consolidated Financial Statements.


                                       2

<PAGE>


                         MEDQUIST INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                                   (UNAUDITED)
                (Amounts in thousands, except per share amounts)



                                                         THREE MONTHS ENDED
                                                            JUNE 30, 1998
                                                      -------------------------
                                                        1998             1997
                                                      --------         --------

Revenues                                              $ 32,209         $ 22,547
                                                      --------         --------

Costs and expenses:
  Cost of revenues                                      24,110           16,913
  Selling, general and administrative                    1,409            1,129
  Depreciation                                           1,327              933
  Amortization of intangible assets                        445              360
  Nonrecurring merger costs                                750             --
                                                      --------         --------
     Total operating expenses                           28,041           19,335
                                                      --------         --------

Operating income                                         4,168            3,212
Other income (expense):
  Interest income                                          124             --
  Interest expense                                         (28)             (62)
                                                      --------         --------

    Total other income (expense)                            96              (62)
                                                      --------         --------

Income before income taxes                               4,264            3,150
Income tax provision                                     1,663            1,211
                                                      --------         --------
Net income                                            $  2,601         $  1,939
                                                      ========         ========

Basic Net Income Per Common Share                     $   0.11         $   0.09
                                                      ========         ========

Diluted Net Income Per Common Share                   $   0.11         $   0.08
                                                      ========         ========




See Accompanying Notes to Consolidated Financial Statements.



                                       3
<PAGE>


                         MEDQUIST INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                 SIX MONTHS ENDED
                                                                     JUNE 30,
                                                             -----------------------
                                                               1998           1997
                                                             --------       --------
<S>                                                          <C>            <C>     
Operating activities:
     Net income                                              $  5,535       $  3,693
     Adjustments to reconcile net income to net
       cash provided by operating activities:
     Depreciation and amortization                              3,414          2,471
     Changes in assets and liabilities:
     Accounts receivable, net                                  (1,548)        (2,445)
     Prepaid expenses and other current assets                    (42)          (382)
     Other assets                                                (144)            (5)
     Accounts payable                                             223           (136)
     Accrued payroll                                              276             95
     Accrued expenses                                             161            194
     Other liabilities                                            (45)           (46)
                                                             --------       --------
       Net cash provided by operating activities                7,830          3,439
                                                             --------       --------

Investing activities:
     Purchases of property and equipment, net                  (3,450)        (2,405)
     Acquisitions, net of cash acquired                        (1,101)          (972)
                                                             --------       --------
       Net cash used in investing activities                   (4,551)        (3,377)
                                                             --------       --------

Financing activities:
     Net borrowings on revolving line of credit                  --              (62)
     Repayments of long-term debt                              (3,463)          (135)
     Repayments of obligations under capital leases              (239)          (149)
     Net proceeds from issuance of common stock                  --              739
     Proceeds from the exercise of common stock options         1,225           --
     Dividends to former shareholders                             (99)          --
     Repurchase of common stock                                  --             (467)
                                                             --------       --------
       Net cash used in financing activities                   (2,576)           (74)
                                                             --------       --------

Net increase in cash and cash equivalents                         703            (12)

Cash and cash equivalents, beginning of period                 12,337          8,967
                                                             --------       --------

Cash and cash equivalents, end of period                     $ 13,040       $  8,955
                                                             ========       ========

Supplemental disclosure of cash flow information:
       Cash paid during period for:
         Interest                                            $     26       $    109
                                                             ========       ========
         Income taxes                                        $  2,928       $  1,411
                                                             ========       ========
</TABLE>


See Accompanying Notes to Consolidated Financial Statements.


                                       4

<PAGE>

                         MedQuist Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                      Six Month Period Ended June 30, 1998
                    (Unaudited - dollar amounts in thousands)

Note 1.  Basis of Presentation
------------------------------

     The information set forth in these statements is unaudited. 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
June 30, 1998 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.

     On September 9, 1997, the Company effected a three for two stock split and
on June 15, 1998, the Company effected a two for one stock split. All share data
presented herein has been adjusted to reflect the stock splits.

Note 2. Acquisitions
--------------------

     During 1997, the Company completed five acquisitions. The acquisitions were
accounted for using the purchase method. During 1998, the Company completed one
acquisition accounted for using the purchase method and one immaterial
acquisition accounted for using the pooling-of-interest method. Pro forma
information is not presented as the acquisitions are not material to the
Company.

     On May 28, 1998, the Company completed the acquisition of approximately 94%
of the outstanding stock of Digital Dictation, Inc. ("DDI") and on July 31,
1998, acquired the remaining 6%. The Company issued approximately 912,000 shares
of its common stock in exchange for all DDI capital stock and each outstanding
option to purchase DDI common stock was converted into an option to purchase
Company common stock at an exchange rate of .1440899. The Company's financial
statements have been restated to reflect the pooling of DDI.

Note 3. Net Income Per Common Share
-----------------------------------

     In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." This statement establishes new standards for computing and presenting
earnings per share and requires the restatement of prior year amounts. The
Company adopted SFAS No. 128 effective December 31, 1997.


                                       5

<PAGE>

     Basic net income per share is calculated by dividing net income by the
weighted average number of shares of Common stock outstanding for the period.
Diluted net income per share is calculated by dividing net income by the
weighted average number of shares of Common stock outstanding for the period,
adjusted for the dilutive effective of Common stock equivalents, which consist
of stock options, using the treasury stock method.

     The table below sets forth the reconciliation of the numerators and
denominators of the basic and diluted net income per share computations:

<TABLE>
<CAPTION>
                                            Three Months Ended June 30,
                        -------------------------------------------------------------------
                                     1998                                1997
                        ------------------------------       ------------------------------
                        Net                     Per Share    Net                    Per Share
                        Income      Shares        Amount     Income      Shares       Amount
                        ------      ------        ------     ------      ------       ------
<S>                     <C>         <C>         <C>          <C>         <C>         <C>   
Basic                   $2,601      22,985      $ 0.11       $1,939      21,984      $ 0.09
                                                            
Effect of dilutive                                          
  Securities              --         1,334         --          --         1,292       (0.01)
                        ------      ------      ------       ------      ------      ------
                                                            
                                                            
Diluted                 $2,601      24,319      $ 0.11       $1,939      23,276      $ 0.08
                        ======      ======      ======       ======      ======      ======


<CAPTION>
                                             Six Months Ended June 30,
                        -------------------------------------------------------------------
                                     1998                                1997
                        ------------------------------       ------------------------------
                        Net                     Per Share    Net                    Per Share
                        Income      Shares        Amount     Income      Shares       Amount
                        ------      ------        ------     ------      ------       ------
<S>                     <C>         <C>         <C>          <C>         <C>         <C>   
Basic                   $5,535      22,853      $ 0.24       $3,693      21,464      $ 0.17
                                                            
Effect of dilutive                                          
  Securities              --         1,340       (0.01)        --         1,734       (0.01)
                        ------      ------      ------       ------      ------      ------
                                                            
Diluted                 $5,535      24,193      $ 0.23       $3,693      23,198      $ 0.16
                        ======      ======      ======       ======      ======      ======
</TABLE>

Note 4.  New Accounting Pronouncement
-------------------------------------

     In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." This statement establishes new standards
for segment reporting in the financial statements and is effective for fiscal
years beginning after December 15, 1997. Management believes that SFAS No. 131
will have no effect on the Company's financial statements.



                                       6

<PAGE>

Note 5.  Shareholders' Equity
-----------------------------

     On September 9, 1997, the Company effected a three for two stock split for
all shares of common stock. On June 15, 1998, the Company effected a two for one
stock split for all shares of common stock. All share and per share amounts have
been restated for the stock splits.


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
information management solutions to the healthcare industry.

     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>
                                                  Six Months Ended        Three Months Ended
                                                      June 30,                  June 30,
                                                  ----------------        ------------------
                                                  1998        1997        1998          1997
                                                  ----        ----        ----          ----
<S>                                                <C>         <C>         <C>           <C> 
                                                  100.0%      100.0%      100.0%        100.0%
Revenues
Costs and expenses:
  Cost of revenues..........................       74.8        75.0        74.8          75.0
  Selling, general and administrative.......        4.4         5.1         4.4           5.0
  Depreciation..............................        4.0         4.1         4.1           4.1
  Amortization of intangible assets.........        1.4         1.6         1.4           1.6
  Nonrecurring charge.......................        1.2          --         2.3            --
                                                  -----       -----       -----         -----

Operating income............................       14.2        14.2        13.0          14.3
Other income (expense)......................        0.1        (0.3)        0.3          (0.3)
                                                  -----       -----       -----         -----
Income before income taxes..................       14.3        13.9        13.3          14.0
Income tax provision........................        5.5         5.4         5.2           5.4
                                                  -----       -----       -----         -----
Net income .................................        8.8%        8.5%        8.1%          8.6%
                                                  =====       =====       =====         =====
</TABLE>


                                       7


<PAGE>

Six Months Ended June 30, 1998 and 1997
---------------------------------------

Revenues. Revenues increased 45.8% to $62.9 million for the six months ended
June 30, 1998 from $43.2 million for the comparable 1997 period. The $19.7
million increase reflects approximately $13.8 million of additional revenues
generated from new and existing clients, and $5.9 million of revenues from the
Company's 1997 and 1998 medical transcription acquisitions that were accounted
for using the purchase method.

Cost of Revenues. Cost of revenues increased from $32.4 million for the six
months ended June 30, 1997 to $47.1 million for the comparable 1998 period. As a
percentage of revenues, cost of revenues decreased from 75.0% for the six months
ended June 30, 1997 to $74.8% for the comparable 1998 period. The percentage
decrease in cost of revenues primarily resulted from a decrease in
telecommunication costs.

Selling, General and Administrative. Selling, general and administrative
expenses increased to $2.8 million for the six months ended June 30, 1998 from
$2.2 million for the comparable 1997 period. As a percentage of revenues,
selling, general and administrative expenses decreased from 5.1% for the six
months ended June 30, 1997 to 4.4% in the comparable 1998 period. The percentage
decrease is primarily due to the Company's ability to leverage its overhead
expenses.

Depreciation. Depreciation expense increased from $1.8 million for the six
months ended June 30, 1997 to $2.5 million for the comparable 1998 period. As a
percentage of revenue, depreciation remained relatively consistent at 4.0% for
the six months ended June 30, 1998 as compared to 4.1% for the comparable 1997
period.

Amortization. Amortization of intangible assets was $885,000 for the six months
ended June 30, 1998 as compared to $710,000 for the comparable 1997 period. The
increase is attributable to the amortization of intangible assets associated
with the Company's acquisitions which were accounted for using purchase
accounting in 1997 and 1998.

Non-Recurring Merger Costs. The non-recurring merger costs of approximately
$750,000 relate to transaction costs associated with the two acquisitions
consummated in May 1998 that are being accounted for under the pooling of
interests method.


Three Months Ended June 30, 1998 and 1997
-----------------------------------------

Revenues. Revenues increased 42.8% to $32.2 million for the three months ended
June 30, 1998 from $22.5 million for the comparable 1997 period. The $9.7
million increase reflected approximately $6.8 million of additional revenues
generated from new and existing clients, and $2.9 million of revenues from the
Company's 1997 and 1998 acquisitions accounted for using the purchase method.



                                       8

<PAGE>

Cost of Revenues. Cost of revenues increased from $16.9 million for the three
months ended June 30, 1997 to $24.1 million for the comparable 1998 period. As a
percentage of revenues, cost of revenues decreased from 75.0% in the second
quarter of 1997 to 74.8% for the comparable 1998 period. The percentage decrease
in cost of revenues primarily resulted from a decrease in telecommunication
costs.

Selling, General and Administrative. Selling, general and administrative
expenses increased to $1.4 million for the three months ended June 30, 1998 from
$1.1 million for the comparable 1997 period. As a percentage of revenues,
selling, general and administrative expenses decreased from 5.0% in the second
quarter of 1997 to 4.4% for the comparable 1998 period. The decrease in selling,
general and administrative expenses as a percentage of revenue is due to the
ability of the Company to leverage its overhead expenses.

Depreciation. Depreciation expense increased from $933,000 for the three months
ended June 30, 1997 to $1.3 million for the comparable 1998 period. As a
percentage of revenues, depreciation remained consistent at 4.1%.

Amortization. Amortization of intangible assets was $360,000 for the three
months ended June 30, 1997 as compared to $445,000 for the comparable 1998
period. The increase is attributable to the amortization of intangible assets
associated with the Company's acquisitions which were accounted for using the
purchase method in 1997 and 1998.

Non-Recurring Merger Costs. The non-recurring merger costs of approximately
$750,000 relate to transaction costs associated with the two acquisitions
consummated in May 1998 that are being accounted for under the pooling of
interests method.


Liquidity and Capital Resources
-------------------------------

     At June 30, 1998, the Company had working capital of $28.8 million,
including $13.0 million of cash and cash equivalents. During the six months
ended June 30, 1998, the Company's operating activities provided cash of $7.8
million as compared to $3.4 million during the comparative prior year six month
period. The increase in cash provided by operating activities was primarily
related to increases in net income and accrued liabilities and less of an
increase in accounts receivable in 1998.

     During the six months ended June 30, 1998, the Company purchased $3.5
million of capital equipment and completed one acquisition, under the purchase
method of accounting.

     In January 1998, the Company repaid $3.3 million in subordinated promissory
notes issued in connection with certain 1997 acquisitions.

     For the six months ended June 30, 1998 option holders exercised 629,000
options to purchase common stock. The exercises generated $1.2 million in cash
proceeds.


                                       9


<PAGE>

     The Company has a $10 million senior unsecured revolving credit facility
expiring April 23, 2000 (the "Chase Facility"). The revolver bears interest at
resetting rates selected by the Company from various alternatives. The interest
rate alternatives are either (i) the greater of (x) prime rate, (y) the federal
funds rate plus 0.5% (z) the bank's certificate of deposit rate plus 1%, or (ii)
LIBOR plus 0.75%. The Chase Facility also allows for the Company to finance up
to 100% of any acquisitions of companies that are in the business of providing
transcriptions-related services. The financing of these acquisitions may be
carved out of the revolving credit facility and amortized over five year periods
(20 consecutive quarters). Each acquisition term loan that is created would
permanently reduce the remaining revolving credit commitment by a like amount.

     In addition to acquisitions, the revolver can be used for working capital
and general corporate purposes. To the extent any amounts under the revolver are
repaid, other than acquisition term loans, the Company may reborrow such
amounts. The Chase Facility includes certain financial and other covenants
applicable to the Company, including limitations on capital expenditures and
dividends.

     The Company believes that cash flow generated from the Company's operations
and its borrowing capacity under the Chase 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.


Year 2000 Compliance
--------------------

     The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The "year 2000 problem"
is pervasive and complex as virtually every computer operation will be affected
in some way by the rollover of the two-digit year value to 00. The issue is
whether computer systems will properly recognize data sensitive information when
the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail. The company
relies on its systems in operating and monitoring all aspects of its business.
The Company also relies on the external systems of its customers, suppliers and
other organizations with which it does business. Management is in the process of
assessing its internal and external systems to assure the Company is prepared
for the year 2000. Management does not anticipate that the Company will incur
significant expenses or be required to invest heavily in computer systems
improvements to be year 2000 compliant. To date, no material issue has been
identified as they relate to the Company's efforts to identify year 2000 issues.
However, despite the Company's efforts thus far to address year 2000 compliance,
the Company cannot guarantee that all internal or external systems will be
compliant, or that its business will not be materially adversely affected by any
such non-compliance.



                                       10


<PAGE>

Special Note Concerning Forward Looking Statements
--------------------------------------------------

     Other than the historical Financial Information and related Notes
contained in Part I, Item 1 hereof, this Report, including, without limitation,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, 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; inability to
make and successfully integrate 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.



                                       11

<PAGE>



                           Part II - Other Information
                           ---------------------------



Item 1. -   Legal Proceedings                                   - Not Applicable

Item 2. -   Changes in Securities and Use of Proceeds           - Not Applicable

Item 3. -   Default upon Senior Securities                      - Not Applicable

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

            On May 27, 1998, the Annual Meeting of Shareholders' of the
            Company was held. At that meeting, (a) the following persons
            were elected as directors to serve until the expiration of the
            terms indicated and (b) the shareholders approved an amendment
            to increase the number of shares for issuance under the Stock
            Option Plan by 600,000 (adjusted to reflect the June 1, 1998
            2-for-1 stock split).

            The number of votes cast for, against, as well as abstentions
            and broker non-votes as to each such matter, including a
            separate tabulation with respect to each director nominee was
            as follows:

            (a)  Election of Directors:

<TABLE>
<CAPTION>
                    Expiration                            Votes
Director              of Term         Votes For          Against          Abstentions        Non-Votes
--------            ----------        ---------          -------          -----------        ---------
<S>                    <C>            <C>                <C>              <C>                <C>
William T. Carson      2001           6,835,768          336,541              --                 --
Richard J. Censits     2001           6,835,768          336,541              --                 --
John A. Donohoe        2001           6,835,768          336,541              --                 --
</TABLE>

            The term of office as a director continued after the meeting
            for the following persons (expiration of term in parenthesis):
            David A. Cohen (1999); James R. Emshoff (2000); Terrence J.
            Mulligan (1999); A. Fred Ruttenberg (2000); R. Timothy Stack
            (2000); and John H. Underwood (1999).

            (a)  Amendments to Stock Option Plan to increase number of shares:

                 6,399,875    shares were voted for the proposal and
                   761,379    shares were voted against the proposal and
                    11,055    shares abstained from voting and
                         0    shares were not voted



                                       12

<PAGE>

Item 5. -        Other Information

                 a)  On July 31, 1998, MedQuist Inc. completed the acquisition,
                     by merger, of Digital Dictation, Inc. The transaction has
                     been accounted for as a pooling-of-interests. Set forth
                     on pages F-1 through F-20 is the Company's 1997 audited
                     financial statements restated for the pooling-of-interests
                     transaction.

                 b)  Selected Consolidated Financial Data, restated for pooling-
                     of-interests discussed above, is attached as Attachment 5.

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

                 a)  Exhibits:

                     Consent of Arthur Andersen LLP                       23.0
                     Financial Data Schedule                              27.0
                     Financial Data Schedule, Restated 1996               27.1
                     Financial Data Schedule, Restated 1997               27.2
                     Financial Data Schedule, Restated 1998               27.3

                 b)  Reports on Form 8-K were filed on the following dates
                     during the quarter for which this report is filed:

                          File Date                    Item Reported
                          ---------                    -------------
                     *  June 29, 1998           Digital Dictation, Inc. Merger
                        June 12, 1998           Digital Dictation, Inc. Merger
                        May 13, 1998            2-for-1 stock split






*   The June 29, 1998 filing included financial information required to be
    filed under Item 7 of of Form 8-K for the Digital Dictation, Inc. Merger.



                                       13

<PAGE>


                                    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:  August ___, 1998
                                               By:  /s/ John R. Emery
                                                   ----------------------------
                                                    John R. Emery
                                                     Chief Financial Officer


<PAGE>

                         MEDQUIST INC. AND SUBSIDIARIES
                         ------------------------------


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------




                                                                        Page
                                                                        ----

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                                 F-2

CONSOLIDATED BALANCE SHEETS                                              F-3

CONSOLIDATED STATEMENTS OF OPERATIONS                                    F-4

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY                          F-5

CONSOLIDATED STATEMENTS OF CASH FLOWS                                    F-6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                               F-7

FINANCIAL STATEMENT SCHEDULE:
     II. Valuation and Qualifying Accounts                               F-20


                                       F-1

<PAGE>


                  REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To MedQuist Inc.:

We have audited the accompanying consolidated balance sheets of MedQuist Inc. (a
New Jersey corporation) and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of MedQuist Inc. and subsidiaries
as of December 31, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the Index to
Consolidated Financial Statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.


                                                     ARTHUR ANDERSEN LLP


Philadelphia, Pa.,
  August 10, 1998

                                       F-2

<PAGE>


                         MEDQUIST INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                                 (in thousands)
<TABLE>
<CAPTION>

                                                                                 December 31
                                                                             -----------------
                                                                               1997      1996
                                                                             -------   -------
                                     ASSETS
                                     ------
<S>                                                                          <C>       <C>
Current assets:
   Cash and cash equivalents                                                 $12,337   $ 8,967
   Accounts receivable, net of allowance of $479 and $318                     21,532    15,396
   Deferred income taxes                                                         741       334
   Prepaid expenses and other                                                    162       154
                                                                             -------   -------
                  Total current assets                                        34,772    24,851
Property and equipment, net                                                   11,329     8,985
Intangible assets, net                                                        47,489    42,436
Other                                                                            552       323
                                                                             -------   -------
                                                                             $94,142   $76,595
                                                                             =======   =======

                      LIABILITIES AND SHAREHOLDERS' EQUITY
                      ------------------------------------
Current liabilities:
   Current portion of long-term debt                                         $ 3,935   $   682
   Accounts payable                                                            1,408     1,185
   Accrued payroll                                                             3,141     2,028
   Accrued expenses                                                            2,981     1,888
                                                                             -------   -------
                  Total current liabilities                                   11,465     5,783
                                                                             -------   -------
Long-term debt                                                                 1,405     1,750
                                                                             -------   -------
Other long-term liabilities                                                      544       631
                                                                             -------   -------
Deferred income taxes                                                          2,710     1,691
                                                                             -------   -------
Commitments and contingencies (Note 11) 
Shareholders' equity:
   Common stock, no par value, 60,000 shares authorized, 22,264 and
     21,554 shares issued and outstanding                                       --        --
   Additional paid-in capital                                                 60,103    57,072
   Retained earnings                                                          17,915     9,668
                                                                             -------   -------
                  Total shareholders' equity                                  78,018    66,740
                                                                             -------   -------
                                                                             $94,142   $76,595
                                                                             =======   =======
</TABLE>

                                      F-3

        The accompanying notes are an integral part of these statements.


<PAGE>


                         MEDQUIST INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (in thousands, except per-share amounts)

<TABLE>
<CAPTION>

                                                          Year Ended December 31
                                                     -------------------------------
                                                       1997       1996        1995
                                                     --------   --------    --------
<S>                                                  <C>        <C>         <C>     
Revenues                                             $ 94,616   $ 68,417    $ 50,185
                                                     --------   --------    --------
Costs and expenses:
   Cost of revenues                                    70,906     51,516      38,190
   Selling, general and administrative                  4,620      3,579       4,325
   Depreciation                                         3,940      2,750       2,110
   Amortization of intangible assets                    1,517      1,176         496
                                                     --------   --------    --------
                  Total operating expenses             80,983     59,021      45,121
                                                     --------   --------    --------
Operating income                                       13,633      9,396       5,064
Interest expense                                          194      1,686       3,720
                                                     --------   --------    --------
Income from continuing operations
   before income taxes                                 13,439      7,710       1,344
Income tax provision                                    5,192      3,086         633
                                                     --------   --------    --------
Income from continuing operations                       8,247      4,624         711
Discontinued operations, net of income taxes:
     Income from operations                              --         --         1,451
     Loss on disposal                                    --         --        (3,180)
                                                     --------   --------    --------
Income (loss) before extraordinary item                 8,247      4,624      (1,018)
Loss on early extinguishment of debt, net of
   income tax benefit                                    --         --          (545)
                                                     --------   --------    --------
Net income (loss)                                       8,247      4,624      (1,563)
Inducement of warrant exercise                           --         (707)       --
                                                     --------   --------    --------
Net income (loss) available to common shareholders   $  8,247   $  3,917    $ (1,563)
                                                     ========   ========    ========

Basic income (loss) per common share (Note 1):
   Income from continuing operations                 $   0.38   $   0.27    $   0.09
   Discontinued operations                               --         --         (0.22)
   Extraordinary item                                    --         --         (0.07)
   Inducement of warrant exercise                        --        (0.04)       --
                                                     --------   --------    --------
                                                     $   0.38   $   0.23    $  (0.20)
                                                     ========   ========    ========
Diluted income (loss) per common share (Note 1):
   Income from continuing operations                 $   0.35   $   0.24    $   0.08
   Discontinued operations                               --         --         (0.21)
   Extraordinary item                                    --         --         (0.06)
   Inducement of warrant exercise                        --        (0.04)       --
                                                     --------   --------    --------
                                                     $   0.35   $   0.20    $  (0.19)
                                                     ========   ========    ========
</TABLE>

        The accompanying notes are an integral part of these statements.


                                       F-4

<PAGE>


                         MEDQUIST INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                 (in thousands)

<TABLE>
<CAPTION>

                                                                        Common Stock          Additional
                                                                   ----------------------       Paid-in      Retained
                                                                    Shares        Amount        Capital      Earnings       Total
                                                                   --------      --------      --------      --------      --------
<S>                                                                   <C>        <C>           <C>           <C>           <C>     
BALANCE, DECEMBER 31, 1994                                            7,652      $   --        $  3,661      $  7,860      $ 11,521
   Net loss                                                            --            --            --          (1,563)       (1,563)
   Exercise of Common stock options,
     including tax benefit                                              520          --           1,210          --           1,210
   Merger costs                                                        --            --             (51)         --             (51)
   Dividends to former stockholders                                    --            --             269          (546)         (277)
   Issuance of Common stock in connection with
     business acquisition                                                70          --             185          --             185
                                                                   --------      --------      --------      --------      --------

BALANCE, DECEMBER 31, 1995                                            8,242          --           5,274         5,751        11,025
   Net income                                                          --            --            --           4,624         4,624
   Exercise of Common stock options,
     including tax benefit                                               98          --             336          --             336
   Issuance of Common stock in connection with
     business acquisitions                                            2,668          --           5,040          --           5,040
   Sale of Common stock, net of expenses                              7,530          --          39,442          --          39,442
   Exercise of warrants, including
     inducement charge                                                3,016          --           6,980          (707)        6,273
                                                                   --------      --------      --------      --------      --------

BALANCE, DECEMBER 31, 1996                                           21,554          --          57,072         9,668        66,740
   Net income                                                          --            --            --           8,247         8,247
   Exercise of Common stock options,
     including tax benefit                                              533          --           2,377          --           2,377
   Sale of Common stock, net of expenses                                 33          --             251          --             251
   Purchase and retirement of Common stock, at cost                     (82)         --            (676)         --            (676)
   Exercise of warrant, including
     tax benefit                                                        226          --           1,079          --           1,079
                                                                   --------      --------      --------      --------      --------

BALANCE, DECEMBER 31, 1997                                           22,264      $   --        $ 60,103      $ 17,915      $ 78,018
                                                                   ========      ========      ========      ========      ========
</TABLE>



        The accompanying notes are an integral part of these statements.

                                      F-5


<PAGE>


                         MEDQUIST INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>

                                                                                                  Year Ended December 31
                                                                                       --------------------------------------------
                                                                                         1997              1996              1995
                                                                                       --------          --------          --------
<S>                                                                                    <C>               <C>               <C>
OPERATING ACTIVITIES:
   Net income (loss)                                                                   $  8,247          $  4,624          $ (1,563)
   Adjustments to reconcile net income (loss) to net cash
     provided by operating activities-
       Depreciation and amortization                                                      5,457             3,926             4,253
       Amortization of debt discounts                                                      --                 704               131
       Loss on disposal of discontinued operations                                         --                --               4,286
       Loss on early extinguishment of debt                                                --                --                 545
       Deferred income tax provision (benefit)                                              311             1,512              (153)
       Changes in assets and liabilities, excluding
          effects of acquisitions and divestitures--
           Accounts receivable, net                                                      (4,503)           (4,549)           (2,467)
           Prepaid expenses and other                                                       220               707               682
           Other assets                                                                    (214)              182              (129)
           Accounts payable                                                                  66            (1,267)              734
           Accrued payroll                                                                  801               670              (290)
           Other long-term liabilities                                                      (87)              (79)              (91)
                                                                                       --------          --------          --------
                  Net cash provided by operating activities                              12,451             5,433             6,738
                                                                                       --------          --------          --------
INVESTING ACTIVITIES:
   Purchases of property and equipment                                                   (5,673)           (3,528)           (3,857)
   Acquisitions, net of cash acquired                                                    (3,707)           (4,810)               (7)
   Proceeds from divestiture                                                               --                --              16,723
                                                                                       --------          --------          --------
                  Net cash provided by (used in)
                    investing activities                                                 (9,380)           (8,338)           12,859
                                                                                       --------          --------          --------
FINANCING ACTIVITIES:
   Repayments of long-term debt and subordinated payable                                 (1,061)          (29,678)          (19,160)
   Proceeds for issuance of long-term debt                                                 --                  18              --
   Borrowing under line of credit                                                          --                  64               265
   Merger costs                                                                            --                --                 (52)
   Dividend to former stockholders                                                         --                 (45)             (232)
   Proceeds from exercise of Common stock options                                         1,277               226              --
   Net proceeds from issuance of Common stock                                               251            39,442               796
   Purchase and retirement of Common stock, at cost                                        (676)             --                --
   Deferred financing costs                                                                --                --                (178)
   Proceeds from exercise of warrants                                                       508              --                --
                                                                                       --------          --------          --------
                  Net cash provided by (used in)
                    financing activities                                                    299            10,027           (18,561)
                                                                                       --------          --------          --------
NET INCREASE IN CASH AND CASH EQUIVALENTS                                                 3,370             7,122             1,036
CASH AND CASH EQUIVALENTS, BEGINNING
   OF YEAR                                                                                8,967             1,845               809
                                                                                       --------          --------          --------
CASH AND CASH EQUIVALENTS, END OF YEAR                                                 $ 12,337          $  8,967          $  1,845
                                                                                       ========          ========          ========
</TABLE>


        The accompanying notes are an integral part of these statements.

                                      F-6

<PAGE>


                         MEDQUIST INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                    (in thousands, except per-share amounts)



1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:


Background
----------

MedQuist Inc. is a leading national provider of electronic transcription and
document management services to the health care industry in the United States.
MedQuist Inc. was incorporated in New Jersey in 1987 as a group of outpatient
health care businesses affiliated with a nonprofit health care provider. In May
1994, Transcriptions, Ltd. was acquired (see Note 2). In November 1995, MedQuist
Inc. discontinued its receivables management business. The operations and net
assets of the receivables management business and the outpatient businesses,
which together formed one business segment, have been accounted for as
discontinued operations (see Note 3).

Principles of Consolidation
---------------------------

The accompanying consolidated financial statements include the accounts of
MedQuist Inc. and its subsidiaries (the "Company"). All material intercompany
balances and transactions have been eliminated.

Common Stock Split
------------------

On September 9, 1997, the Company effected a 3-for-2 stock split for all shares
of Common stock. Further, on June 15, 1998, the Company effected a 2-for-1 stock
split for all shares of Common stock. All share data in the accompanying
financial statements has been retroactively adjusted to reflect both stock
splits.

Use of Estimates
----------------

The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported assets and liabilities and contingency disclosures at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

Revenue Recognition
-------------------

Fees for transcription-related services are based primarily on contracted rates,
and revenue is recognized upon the rendering of services and delivery of
records. Included in revenues are franchise fees of $121, $239 and $317 for the
years ended December 31, 1997, 1996 and 1995, respectively.

                                      F-7


<PAGE>


Cash and Cash Equivalents
-------------------------

Cash and cash equivalents include cash and highly liquid investments purchased
with an original maturity of three months or less, consisting primarily of cash
on deposit with banks. At December 31, 1997, cash and cash equivalents included
a restricted certificate of deposit of $1,339 which was used to repay a note
payable in January 1998.

Property and Equipment
----------------------

Property and equipment are recorded at cost. Depreciation and amortization have
been provided using the straight-line method over the estimated useful lives of
the assets, which range from three to five years for furniture, equipment and
software, and the lease term for leasehold improvements. Certain internally
developed software costs totaling $171, incurred in 1997 have been capitalized
in accordance with an AICPA exposure draft dated December 17, 1996 of a
Statement of Position, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use." These costs include $142 of salaries and fringe
benefits for software developers and $29 of telecommunications and outside
consultant costs. Repairs and maintenance costs are expensed as incurred.
Additions and betterments are capitalized. Gains or losses on the disposition of
property and equipment are charged to operations.

Intangible Assets
-----------------

Intangible assets consist primarily of the excess of cost over the net asset
value of acquired businesses and customer lists and are being amortized over 20
to 40 years and 20 years, respectively. Subsequent to its acquisitions, the
Company continually evaluates whether later events and circumstances have
occurred that indicate that the remaining estimated useful life of intangible
assets may warrant revision or that the remaining balance may not be
recoverable. When factors indicate that intangible assets should be evaluated
for possible impairment, the Company uses an estimate of the related
undiscounted cash flows in measuring whether the intangible asset should be
written down to fair value. As of December 31, 1997, management believes that no
revision to the remaining useful lives or write-down of intangible assets is
required.

Accrued Expenses
----------------

Accrued expenses consist primarily of deferred revenue, accrued interest,
deferred telephone credits and accrued professional fees. At December 31, 1997
and 1996, deferred revenue was $496 and $492, respectively.

Advertising Costs
-----------------

The Company expenses advertising costs as incurred. Advertising expense was
$180, $154 and $187 for the years ended December 31, 1997, 1996 and 1995,
respectively.

                                      F-8

<PAGE>

Statements of Cash Flow Information
-----------------------------------

For the years ended December 31, 1997, 1996 and 1995, the Company paid interest
of $197, $713 and $3,180, respectively, and income taxes of $2,530, $1,700 and
$478, respectively. Capital lease obligations of $174, $191 and $612 were
incurred on equipment leases entered into in 1997, 1996 and 1995, respectively.

The following table displays the net noncash assets and liabilities that were
consolidated as a result of the Company's business acquisitions (see Note 2):

<TABLE>
<CAPTION>

                                                                              Year Ended December 31
                                                                   --------------------------------------------
                                                                     1997              1996              1995
                                                                   --------          --------          --------
<S>                                                                <C>               <C>               <C>
            Noncash assets (liabilities):
               Accounts receivable                                 $  1,633          $    364          $    169
               Prepaid expenses and other                               243                59                19
               Property and equipment                                   613               446               213
               Intangible assets                                      6,588             6,389            23,183
               Accounts payable and accrued
                 expenses                                            (1,781)             (335)             (299)
               Long-term debt                                          (252)             (305)             (379)
                                                                   --------          --------          --------

                              Net noncash assets acquired             7,044             6,618            22,906

               Less-Seller notes and payables                        (3,337)           (1,318)          (22,714)
               Common stock issued                                     --                (490)             (185)
                                                                   --------          --------          --------

                              Net cash paid for business
                                 acquisitions                      $  3,707          $  4,810          $      7
                                                                   ========          ========          ========
</TABLE>


Income Taxes
------------

Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the
enactment date.

Income (Loss) Per Common Share
------------------------------

In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." This statement establishes new standards for computing and presenting
earnings per share and requires the restatement of prior year amounts. The
Company adopted SFAS No. 128 effective December 31, 1997.


                                      F-9

<PAGE>


Basic income per share is calculated by dividing net income by the weighted
average number of shares of Common stock outstanding for the period. Diluted
income per share is calculated by dividing net income by the weighted average
number of shares of Common stock outstanding for the period, adjusted for the
dilutive effect of Common stock equivalents, which consist of stock options,
using the treasury stock method.

The table below sets forth the reconciliation of the numerators and denominators
of the basic and diluted income per share computations for income from
continuing operations:


<TABLE>
<CAPTION>

                                                       Year Ended December 31
                        -----------------------------------------------------------------------------------------
                                   1997                          1996                         1995
                        ----------------------------  ---------------------------   -----------------------------
                                           Per Share                    Per Share                     Per Share
                        Income    Shares    Amount    Income    Shares   Amount     Income    Shares   Amount
                        -------   ------   -------    -------   -------  -------    -------   -------  ---------
<S>                     <C>      <C>       <C>        <C>       <C>      <C>          <C>      <C>      <C>
Basic income from
   continuing
   operations           $ 8,247   21,907    $  0.38    $ 4,624   17,015  $  0.27     $ 711     7,871   $ 0.09
Effect of dilutive                                                                     
   securities               --     1,632      (0.03)       --     1,906    (0.03)       --       552    (0.01)
                        -------   ------    -------    -------   ------  -------     -----     -----   ------
Diluted income from                                                                    
   continuing                                                                          
   operations           $ 8,247   23,539    $  0.35    $ 4,624   18,921  $  0.24     $ 711     8,423   $ 0.08
                        =======   ======    =======    =======   ======  =======     =====     =====   ======
</TABLE>                                                            

In 1997, 540 Common stock options were excluded from the diluted computation
because their effect would be anti-dilutive.

New Accounting Pronouncements
-----------------------------

In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about
Capital Structure." This statement establishes standards for disclosing
information about an entity's capital structure. The Company has complied with
the disclosure requirements of this statement.

In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." This statement establishes additional
standards for segment reporting in the financial statements and is effective for
fiscal years beginning after December 15, 1997. Management believes that SFAS
No. 131 will have no effect on the Company's financial statements.

2. ACQUISITIONS:

Effective May 1, 1994, the Company purchased substantially all of the assets of
Transcriptions, Ltd. and affiliates ("Transcriptions"), as well as assumed
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, and in connection with the sale of the receivables
management division (see Note 3), the Company fixed the deferred purchase price
by agreeing to pay the former owners of Transcriptions $18,375 in cash and issue
2,584 shares of Common stock (valued at $4,550 for financial reporting purposes)
on August 31, 1996.

                                      F-10

<PAGE>

The total purchase price for the Transcriptions acquisition was $44,797. 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.

The following unaudited pro forma summary presents the results of operations of
the Company as if the Transcriptions acquisition, including the payment of the
deferred purchase price which causes additional amortization and interest
expense, had occurred on January 1, 1995. The pro forma information does not
purport to be indicative of the results that would have been attained if the
operations had actually been combined during the period presented.


<TABLE>
<CAPTION>

                                                                              Year Ended
                                                                             December 31,
                                                                                 1995
                                                                             ------------
<S>                                                                            <C>     
      Revenues                                                                 $ 50,185
      Loss from continuing operations                                              (597)
      Basic and diluted loss per share from continuing operations                 (0.08)
      Shares used in computing loss per share                                     7,871
</TABLE>

From 1995 through 1997, the Company completed twelve acquisitions. The
acquisitions have been accounted for using the purchase method. Pro forma
information is not presented as these acquisitions are not material to the
Company.

In May 1998, the Company completed an acquisition accounted for under the
pooling-of-interests method (see Note 12).

3. DISCONTINUED OPERATIONS:

In December 1995, the Company sold its receivables management business for total
consideration of $17,330. The accompanying financial statements reflect the
receivables management business as discontinued operations. For the years ended
December 31, 1995, the discontinued operation generated revenue of $18,767 and
net income of $1,451. The 1995 divestiture generated an after-tax loss of
$3,180, which includes net income of $113 related to operations from the
November 14, 1995 measurement date through the December 29, 1995 disposal date.

                                      F-11

<PAGE>

4. PROPERTY AND EQUIPMENT:

                                                              December 31
                                                      --------------------------
                                                        1997            1996
                                                        ----            ----
   Furniture, equipment and software                  $ 20,307        $ 14,269
   Leasehold improvements                                  304             143
                                                      --------        --------
                                                        20,611          14,412
   Less- Accumulated depreciation
     and amortization                                   (9,282)         (5,427)
                                                       --------        --------
                                                       $ 11,329        $  8,985
                                                       ========        ========

5. INTANGIBLE ASSETS:

                                                               December 31
                                                        -----------------------
                                                           1997         1996
                                                           ----         ----
    Excess of cost over net asset value of            
       acquired businesses                              $   34,187   $   34,162
    Customer lists                                          16,519        9,972
    Deferred financing costs                                   100           84
                                                        ----------   ----------
                                                      
                                                            50,806       44,218
    Less- Accumulated amortization                          (3,317)      (1,782)
                                                        ----------   ----------
                                                      
                                                        $   47,489   $   42,436
                                                        ==========   ==========
                                                  
6. LONG-TERM DEBT:

<TABLE>
<CAPTION>
                                                                            December 31
                                                                     --------------------------
                                                                        1997           1996
                                                                        ----           ----
<S>                                                                 <C>          <C>       
   Line of credit                                                   $      132   $      329
   Subordinated convertible 6% promissory note, due September
     2003, converted in January 1998                                     1,288        1,288
   Subordinated 5.25% promissory notes, due January 1998                 1,357          --
   Subordinated 4.5% promissory notes, due January 1998                  1,940          --
   Subordinated 6.75% promissory notes, due
     March 1998                                                             20          --
   Subordinated 6.75% promissory note, due
     March 1999                                                             20          --
   Subordinated 5% promissory note, repaid in 1997                         --            30
   10% automobile loan, due December 1998                                    7           13
   Capital lease obligations                                               576          772
                                                                    ----------   ----------
                                                                         5,340        2,432
   Less-  Current portion                                               (3,935)        (682)
                                                                    ----------   ----------
                                                                    $    1,405   $    1,750
                                                                    ==========   ==========

</TABLE>

                                      F-12
<PAGE>



On April 23, 1997, the Company amended its credit facility to provide for a $10
million unsecured senior revolving line of credit through April 23, 2000. The
revolver bears interest at resetting rates selected by the Company from various
alternatives. The interest rate alternatives are either (i) the greater of (x)
prime rate, (y) the federal funds rate plus 0.5% (z) the bank's certificate of
deposit rate plus 1%, or (ii) LIBOR plus 0.75%. The credit facility also allows
for the Company to finance up to 100% of any acquisitions of companies that are
in the business of providing transcriptions-related services. The financing of
these acquisitions may be carved out of the revolver and amortized over 20
consecutive quarters. Each acquisition term loan that is created would
permanently reduce the remaining borrowings under the revolver.

In addition to acquisitions, the revolver can be used for working capital and
general corporate purposes. To the extent any amounts under the revolver are
repaid, other than acquisition term loans, the Company may reborrow such
amounts. The credit facility requires the Company to maintain certain financial
and non-financial covenants, including limitations on capital expenditures and
dividends.

For the year ended December 31, 1997, the Company did not incur any interest
expense on the revolving credit facility as there were no borrowings on this
credit facility during the year.

For the years ended December 31, 1996 and 1995, the Company incurred interest
expense of $49 and $498 on the revolving credit facility, at a weighted average
interest rate of 9.78% and 8.96%. The highest outstanding borrowings under the
revolver during 1996 and 1995 were $2,534 and $7,332, respectively.

In December 1995, the Company restructured its prior credit facility. In
connection with the restructuring, the Company expensed, as an extraordinary
item, the related deferred financing costs of $826, increasing the 1995 net loss
by $545.

In January 1998, the subordinated convertible 6% promissory note was converted
into 172 shares of Common stock at a conversion price of $7.48 per share.


                                      F-13
<PAGE>


Long-term debt maturities as of December 31, 1997, are as follows:

       1998                                               $    3,970
       1999                                                      127
       2000                                                        8
       2001                                                        8
       2002                                                        1
       2003 and thereafter                                     1,288
                                                          ----------

                                                               5,402
       Less- Interest on capital lease obligations               (62)
                                                          ----------
                                                          $    5,340
                                                          ==========

7. 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 provided
for the Company to pay $18,375 in cash and issue 2,584 shares of Common stock
(valued at $4,550 for financial reporting purposes) on August 31, 1996. In May
1996, the Company repaid the cash portion of the payable, and the Common stock
was issued in August 1996.

8. SHAREHOLDERS' EQUITY:

On September 9, 1997, the Company effected a 3-for-2 stock split for all shares
of Common stock. Further, on June 15, 1998, the Company effected a 2-for-1 stock
split for all shares of Common stock.

In May 1996, the Company consummated a secondary public offering of its Common
stock, selling 6,600 shares at a price of $5.67 per share. In June 1996, the
underwriters exercised their overallotment option for an additional 922 shares.
After deducting the underwriters' discount and offering expenses, the net
proceeds to the Company were $39,442.

In connection with the 1992 issuance of a senior subordinated note, the Company
sold to the holder for $1,100 warrants to purchase 1,732 shares of Class A and
1,068 shares of Class B Preferred Stock at an exercise price of $2.5 per share.
Each share of Class A and Class B Preferred Stock was convertible into one share
of Common stock. During 1994, the holder was issued additional warrants and all
warrant exercise prices were reset at $2.43, in accordance with the antidilution
provisions of the original warrant agreement. Simultaneous with the closing of
the secondary stock offering, the Company and the holder agreed that the holder
would exercise the warrants by tendering the $7,000 principal amount of the
senior subordinated notes and simultaneously converting the shares of Preferred
stock received upon such exercise into 2,888 shares of Common stock. As an
inducement for the holder to exercise the warrants and convert the Preferred
stock, the Company issued the holder 128 additional shares of Common stock. This
inducement, valued at $707 or $0.04 per diluted share, has been recorded as a
deduction from the net income available to common shareholders in 1996.


                                      F-14
<PAGE>


In connection with the Company's May 1994 credit agreement, the Company issued
the agent bank warrants to purchase 226 shares of Common stock at an exercise
price of $2.25 per share. These warrants were exercised on June 12, 1997 by the
agent bank for proceeds to the Company of $508.

9. STOCK OPTION PLANS:

The Company has three stock option plans that provide the granting of options to
purchase an aggregate of 5,860 shares of Common stock to eligible employees
(including officers) and nonemployee directors of the Company. Options granted
may be at fair market value of the Common stock or at a price determined by a
committee of the Company's board of directors. The stock options vest and are
exercisable over a period determined by the committee.

Information with respect to the Company's options follows:


<TABLE>
<CAPTION>

                                                                       Option Price         Aggregate
                                                       Shares           Per Share           Proceeds
                                                       ------        ----------------       ---------
<S>                                                    <C>        <C>                      <C>         
      Outstanding, December 31, 1994                    1,500    $   0.67   -     $2.25    $      2,510
        Granted                                           918        2.42   -      3.17           2,594
        Exercised                                        (520)       0.67   -      2.42            (796)
        Canceled                                         (136)       0.67   -      2.50            (259)
                                                     --------    ----------------------    ------------
      Outstanding, December 31, 1995                    1,762        0.67   -      3.17           4,049
         Granted                                          961        2.80   -      6.94           4,509
         Exercised                                        (98)       1.14   -      5.13            (226)
         Canceled                                         (90)             3.17                    (285)
                                                     --------    -----------------------   ------------
      Outstanding, December 31, 1996                    2,535        1.14   -      6.94           8,047
        Granted                                           918        5.21   -     16.52          10,988
        Exercised                                        (533)       1.14   -     10.41          (1,277)
        Canceled                                          (94)       4.37   -     16.52            (481)
                                                     --------    ----------------------    ------------
      Outstanding, December 31, 1997                    2,826    $   1.14   -    $16.52    $     17,277
                                                     ========    ======================    ============
</TABLE>


At December 31, 1997, there were 1,255 exercisable options at an aggregate
exercise price of $3,664 and 624 additional options were available for grant
under the plans.

                                      F-15

<PAGE>


The options outstanding and exercisable by exercise price at December 31, 1997
are as follows:

<TABLE>
<CAPTION>
                                       Weighted
                                        Average
                                       Remaining        Weighted                             Weighted
    Exercise           Number         Contractual       Average            Number             Average
     Prices          Outstanding         Life        Exercise Price      Exercisable      Exercise Price
    --------         -----------      -----------    --------------      -----------      --------------
<S>                  <C>               <C>           <C>               <C>               <C>    
$ 1.14 - $  3.83         1,365             6.15          $    2.40         1,135             $  2.33
  5.13 -   11.31           894             8.72               6.54            90                6.68
 13.82 -   16.52           567             9.96              14.41            30               13.81
                      --------            -----          ---------         -----             -------
                         2,826             7.73          $    6.12         1,255             $  2.92
                      ========            =====          =========         =====             =======
</TABLE>


The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and the related interpretations in accounting for
its stock option plans. Had compensation cost for the Company's Common stock
options been determined based upon the fair value of the options at the date of
grant, as prescribed under SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net income (loss) available to common shareholders
would have been the following pro forma amounts:

                                                   Year Ended December 31
                                          -------------------------------------
                                             1997          1996           1995
                                             ----          ----           ----
  Net income (loss):
     As reported                          $ 8,247       $ 3,917        $ (1,563)
     Pro forma                              6,793         2,936          (1,887)
                                                                      
  Basic income (loss) per share:                                      
     As reported                              .38           .23            (.20)
     Pro forma                                .31           .17            (.24)
                                                                      
  Diluted income (loss) per share:                                    
     As reported                              .35           .20            (.19)
     Pro forma                                .29           .16            (.24)
                                                                   
The fair value of the options granted is estimated using the Black-Scholes
option pricing model with the following assumptions: dividend yield of 0.0%,
volatility of 50.0%-55.0%, risk-free interest rates of 5.3% to 8.0%, and an
expected life of five years. The above pro forma amounts may not be indicative
of future amounts because option grants prior to January 1, 1995 have not been
included and because future option grants are expected.

                                      F-16

<PAGE>


10. INCOME TAXES:

The income tax provision (benefit) consists of the following:

                                              Year Ended December 31
                                    -------------------------------------------
                                       1997          1996          1995
                                       ----          ----          ----
     Current:
        State                       $      721    $       79     $      181
        Federal                          4,201         1,495            161
                                    ----------    ----------     ----------

                                         4,922         1,574            342
     Deferred                              270         1,512           (355)
                                    ----------    ----------     ----------

                                    $    5,192    $    3,086     $      (13)
                                    ==========    ==========     ==========

                                              Year Ended December 31
                                    ------------------------------------------
                                        1997         1996          1995
                                        ----         ----          ----

     Continuing operations          $    5,192    $    3,086     $     431
     Discontinued operations:
        Income from operations             --            --            796
        Loss on disposal                   --            --           (959)
     Extraordinary item                    --            --           (281)
                                    ----------    ----------     ---------

                                    $    5,192    $    3,086     $     (13)
                                    ==========    ==========     =========

A reconciliation of the statutory federal income tax rate to the effective
continuing operations income tax rate is as follows:

                                                        Year Ended December 31
                                                     ---------------------------
                                                      1997       1996      1995
                                                      ----       ----      ----

     Statutory federal income tax rate                35.0%      34.0%     34.0%
     State income taxes, net of federal benefit        3.0%       3.0%      6.5%
     Other                                             0.6%       3.0%      6.5%
                                                     ------     ------    ------
                                                      38.6%      40.0%     47.0%
                                                     ======     ======    ======

                                      F-17

<PAGE>


The tax effected temporary differences that give rise to deferred income taxes
are as follows:

                                                   December 31
                                              -----------------------
                                                1997          1996
                                                ----          ----
    Deferred tax asset:
       Allowance for doubtful accounts       $       177   $       113
       Vacation accrual                              125           --
       Other                                         439           221
                                             -----------   -----------

                                             $       741   $       334
                                             ===========   ===========
    Deferred tax liability:
      Accumulated depreciation               $    (1,160)  $    (1,022)
      Accumulated amortization                    (1,220)         (546)
      Deferred compensation                          210           224
      Other                                         (540)         (347)
                                             -----------   -----------

                                             $    (2,710)  $    (1,691)
                                             ===========   ===========

11. COMMITMENTS AND CONTINGENCIES:

Rent expense for operating leases was $1,705, $1,345 and $798 for the years
ended December 31, 1997, 1996 and 1995, respectively. Minimum annual rental
commitments for noncancelable operating leases having terms in excess of one
year as of December 31, 1997, are as follows:

              1998            $       1,756
              1999                    1,102
              2000                      570
              2001                      273
              2002                       36
                              -------------
                              $       3,737
                              =============

The Company has an employment agreement, as amended, with a former Chief
Executive Officer who is currently a director of the Company. The agreement
entitles this individual to receive retirement benefits of $75 per year for life
plus certain other benefits, as defined. Included in other long-term liabilities
is $544 and $631 at December 31, 1997 and 1996, respectively, related to these
retirement benefits. The employment agreement also requires the Company to loan
the former Chief Executive Officer's estate the necessary funds to exercise any
options owned by the individual at the time of his death.

The Company has adopted a severance plan for certain executive officers that
provides for one-time payments in the event of a change in control, as defined.
No liabilities are currently required to be recorded with respect to this plan.

In the normal course of business, the Company is a party to various claims and
legal proceedings. Although the ultimate outcome of these matters is presently
not determinable, management of the Company, after consultation with legal
counsel, does not believe that the resolution of these matters will have a
material effect upon the Company's financial position or results of operations.

                                      F-18
<PAGE>

12. ACQUISITION SUBSEQUENT TO DECEMBER 31, 1997:

On May 28, 1998, the Company completed the acquisition of approximately 94% of
the outstanding capital stock of Digital Dictation, Inc. ("DDI") and on July 31,
1998 acquired the remaining shares. The Company issued 912 shares in exchange
for all DDI shares. The acquisition has been accounted for under the
pooling-of-interest method. Accordingly, the Company's financial statements have
been restated to reflect the pooling of DDI.

13.   QUARTERLY FINANCIAL DATA (UNAUDITED):

Year Ended December 31, 1997:
<TABLE>
<CAPTION>

                                                                 Three Months Ended
                                          -------------------------------------------------------------------
                                           March 31           June 30        September 30         December 31
                                           --------      -------------     --------------      --------------
<S>                                       <C>              <C>               <C>                 <C>       
Revenues                                  $  20,615        $    22,547       $   24,584          $   26,870
Income before income taxes                    2,872              3,150            3,502               3,915
Net income                                    1,754              1,939            2,154               2,400
Basic net income per share                     0.08               0.09             0.10                0.11
Diluted net income per share                   0.08               0.08             0.09                0.10

Year Ended December 31, 1996:

                                                                 Three Months Ended
                                       ----------------------------------------------------------------------
                                           March 31           June 30        September 30         December 31
                                       ---------------   ---------------   --------------      --------------

Revenues                               $   15,520        $    16,080       $     17,336        $     19,481
Income before income taxes                  1,064              1,596              2,387               2,663
Net income                                    632                948              1,426               1,618
Basic net income per share                   0.06               0.07               0.07                0.07
Diluted net income per share                 0.05               0.06               0.06                0.07

</TABLE>

                                      F-19
<PAGE>


                                                                     SCHEDULE II


                         MEDQUIST INC. AND SUBSIDIARIES

                        VALUATION AND QUALIFYING ACCOUNTS

                       THREE YEARS ENDED DECEMBER 31, 1997

                                 (in thousands)


<TABLE>
<CAPTION>



                                        Balance,    Charged to    Charged to
                                       Beginning     Costs and       Other                        Balance,
         Description                    of Year      Expenses      Accounts       Deductions     End of Year
         -----------                   ----------    ---------    ----------      ----------     ------------  
Allowances for doubtful accounts:
<S>                                     <C>           <C>         <C>                <C>            <C>    
   1997                                 $   318       $   313     $    20            $  (172)       $   479
   1996                                     550 (a)        44        (272) (a)            (4)           318
   1995                                     316           243         487               (496)           550 (a)
</TABLE>

----------------
(a)   Includes amounts related to discontinued operations.



                                      F-20

<PAGE>


                                                                    Attachment 5




                         MEDQUIST INC. AND SUBSIDIARIES
                      SELECTED CONSOLIDATED FINANCIAL DATA
                      (In thousands, except per share data)


<TABLE>
<CAPTION>


                                                                 Year Ended December 31,
                                                       -----------------------------------------
                                                1997        1996         1995        1994        1993
                                                ----        ----         ----        ----        ----
<S>                                           <C>         <C>          <C>          <C>         <C> 
Statement of Operation Data:
  Revenues ...............................    $ 94,616    $ 68,417     $ 50,185     $ 28,679    $  2,746

  Costs and expenses:
    Cost of revenues .....................      70,906      51,516       38,190       21,960       2,381

    Selling, general and administrative ..       4,620       3,579        4,325        2,798       1,688

    Depreciation .........................       3,940       2,750        2,110          861         310

    Amortization .........................       1,517       1,176          496          264          12
                                              --------    --------     --------     --------    --------
          Total operating expenses .......      80,983      59,021       45,121       25,883       4,391
                                              --------    --------     --------     --------    --------
  Operating income (loss) ................      13,633       9,396        5,064        2,796      (1,645)

  Interest expense .......................         194       1,686        3,720        2,765       1,457
                                              --------    --------     --------     --------    --------
  Income (loss) from continuing operations
    before income taxes ..................      13,439       7,710        1,344           31      (3,102)
                                                                                                --------
  Income tax provision (benefit) .........       5,192       3,086          633            3      (1,290)
                                              --------    --------     --------     --------    --------
  Income (loss) from continuing operations       8,247       4,624          711           28      (1,812)
 
  Discontinued operations ................        --          --         (1,729)       1,612       3,746

  Extraordinary item .....................        --          --           (545)        --          --
                                              --------    --------     --------     --------    --------
  Net income (loss) ......................       8,247       4,624       (1,563)       1,640       1,934

  Inducement deduction ...................        --          (707)        --           --          --
                                              --------    --------     --------     --------    --------
  Net income (loss) available to common
    shareholders .........................    $  8,247    $  3,917     $ (1,563)    $  1,640    $  1,934
                                              ========    ========     ========     ========    ========

Basic income (loss) per common share:
  Continuing operations ..................    $   0.38    $   0.27     $   0.09     $   0.00    $  (0.19)
 
  Discontinued operations ................        --          --          (0.22)        0.21        0.40
 
  Extraordinary item .....................        --          --          (0.07)        --          --

  Inducement deduction ...................        --         (0.04)        --           --          --
                                              --------    --------     --------     --------    --------
                                              $   0.38    $   0.23     $  (0.20)    $   0.21    $   0.21
                                              ========    ========     ========     ========    ========
Diluted income (loss) per common share:
  Continuing operations ..................    $   0.35    $   0.24     $   0.08     $   0.00    $  (0.19)
         
  Discontinued operations ................        --          --          (0.21)        0.21        0.40
         
  Extraordinary item .....................        --          --          (0.06)        --          --
   
  Inducement deduction ...................        --         (0.04)        --           --          --
                                              --------    --------     --------     --------    --------
                                              $   0.35    $   0.20     $  (0.19)    $   0.21    $   0.21
                                              ========    ========     ========     ========    ========



Balance Sheet Data:
  Working capital ........................    $ 23,307    $ 19,068     $  4,788     $  1,121    $  2,246
  Total assets ...........................      94,142      76,595       59,735       52,631      30,347

                                                 1,405       1,750       16,013       30,514      12,663
  Shareholders' equity ...................      78,018      66,740       11,025       11,521       9,574

</TABLE>