UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2008.
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                to
 Commission
file number: 001-13326
 MEDQUIST INC.
 (Exact name of registrant as specified in its charter)
 New Jersey(State or other jurisdiction of 
incorporation or organization)
    
    22-2531298(I.R.S. Employer
Identification No.)1000 BISHOPS GATE BOULEVARDSUITE 300MOUNT LAUREL, NEW JERSEY
    
    08054-4632(Address of principal executive offices)
    
    (Zip Code)
 (856) 206-4000  (Registrants telephone number, including area code)
 þ o
  Large accelerated filer o
Accelerated filer þ
Non-accelerated filer o(Do not check if a smaller reporting company)
Smaller reporting company o o þ




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##### 



MEDQUIST INC.
INDEX
 PagePART I.
    
    FINANCIAL INFORMATION
    
    
    3Item 1.
    
    Financial Statements
    
    
    3Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    22Item 4.
    
    Controls and Procedures
    
    
    29PART II.
    
    OTHER INFORMATION
    
    
    30Item 1.
    
    Legal Proceedings
    
    
    30Item 1A.
    
    Risk Factors
    
    
    34Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    35Item 3.
    
    Defaults Upon Senior Securities
    
    
    35Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    35Item 5.
    
    Other Information
    
    
    35Item 6.
    
    Exhibits
    
    
    35Transcription Services AgreementCertification of Chief Executive OfficerCertification of Chief Financial OfficerCertification of Chief Executive OfficerCertification of Chief Financial Officer
 2




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##### 



Item 1. Financial Statements
 MedQuist Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share amounts)
Unaudited
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net revenues
    
    $
    81,287
    
    
    $
    82,518
    
    
    $
    247,466
    
    
    $
    260,276Operating costs and expenses:Cost of revenues
    
    
    57,235
    
    
    
    64,290
    
    
    
    176,508
    
    
    
    198,918Selling, general and administrative
    
    
    13,148
    
    
    
    15,548
    
    
    
    39,047
    
    
    
    48,158Research and development
    
    
    4,648
    
    
    
    3,808
    
    
    
    12,502
    
    
    
    10,073Depreciation
    
    
    2,977
    
    
    
    2,861
    
    
    
    8,901
    
    
    
    8,040Amortization of intangible assets
    
    
    1,411
    
    
    
    1,361
    
    
    
    4,145
    
    
    
    4,065Cost of investigation and legal proceedings, net
    
    
    7,181
    
    
    
    4,441
    
    
    
    15,307
    
    
    
    (456
    )Restructuring charges
    
    
    (37
    )
    
    
    554
    
    
    
    (82
    )
    
    
    935Total operating costs and expenses
    
    
    86,563
    
    
    
    92,863
    
    
    
    256,328
    
    
    
    269,733Operating loss
    
    
    (5,276
    )
    
    
    (10,345
    )
    
    
    (8,862
    )
    
    
    (9,457
    )Equity in income of affiliated company
    
    
    159
    
    
    
    124
    
    
    
    200
    
    
    
    447Other income
    
    
    
    
    
    
    
    
    
    
    438
    
    
    
    Interest income, net
    
    
    418
    
    
    
    2,302
    
    
    
    2,601
    
    
    
    6,477Loss before income taxes
    
    
    (4,699
    )
    
    
    (7,919
    )
    
    
    (5,623
    )
    
    
    (2,533
    )Income tax provision
    
    
    1,063
    
    
    
    1,016
    
    
    
    2,721
    
    
    
    2,402Net loss
    
    $
    (5,762
    )
    
    $
    (8,935
    )
    
    $
    (8,344
    )
    
    $
    (4,935
    )Net loss per share:Basic
    
    $
    (0.15
    )
    
    $
    (0.24
    )
    
    $
    (0.22
    )
    
    $
    (0.13
    )Diluted
    
    $
    (0.15
    )
    
    $
    (0.24
    )
    
    $
    (0.22
    )
    
    $
    (0.13
    )Weighted average shares outstanding:Basic
    
    
    37,554
    
    
    
    37,484
    
    
    
    37,547
    
    
    
    37,484Diluted
    
    
    37,554
    
    
    
    37,484
    
    
    
    37,547
    
    
    
    37,484
 The accompanying notes are an integral part of these consolidated financial statements.
 3




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##### 



MedQuist Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands)
Unaudited
 September 30,
    
    
    December 31,2008
    
    
    2007AssetsCurrent assets:Cash and cash equivalents
    
    $
    47,297
    
    
    $
    161,582Accounts receivable, net of allowance of $4,565 and $4,359, respectively
    
    
    47,815
    
    
    
    48,725Income tax receivable
    
    
    631
    
    
    
    815Other current assets
    
    
    9,349
    
    
    
    7,920Total current assets
    
    
    105,092
    
    
    
    219,042Property and equipment, net
    
    
    17,926
    
    
    
    21,366Goodwill
    
    
    124,510
    
    
    
    125,505Other intangible assets, net
    
    
    40,631
    
    
    
    42,262Deferred income taxes
    
    
    2,225
    
    
    
    2,712Other assets
    
    
    6,745
    
    
    
    6,885Total assets
    
    $
    297,129
    
    
    $
    417,772Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    8,684
    
    
    $
    12,754Accrued expenses
    
    
    18,377
    
    
    
    18,989Accrued compensation
    
    
    14,750
    
    
    
    14,826Customer accommodation and quantification
    
    
    12,136
    
    
    
    18,459Deferred income tax liability  current
    
    
    4,783
    
    
    
    4,783Deferred revenue
    
    
    15,926
    
    
    
    16,023Total current liabilities
    
    
    74,656
    
    
    
    85,834Deferred income taxes
    
    
    17,248
    
    
    
    15,151Other non-current liabilities
    
    
    2,079
    
    
    
    2,143Commitments and contingenciesShareholders equity:Common stock  no par value; authorized 60,000 shares;
37,556 and 37,544 shares issued and outstanding, respectively
    
    
    237,842
    
    
    
    236,412Retained earnings (deficit)
    
    
    (38,746
    )
    
    
    72,876Accumulated other comprehensive income
    
    
    4,050
    
    
    
    5,356Total shareholders equity
    
    
    203,146
    
    
    
    314,644Total liabilities and shareholders equity
    
    $
    297,129
    
    
    $
    417,772
 The accompanying notes are an integral part of these consolidated financial statements.
 4




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##### 



MedQuist Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Unaudited
 Nine months endedSeptember 30,2008
    
    
    2007Operating activities:Net loss
    
    $
    (8,344
    )
    
    $
    (4,935
    )Adjustments to reconcile net loss to cash provided by (used
in) operating activities:Depreciation and amortization
    
    
    13,046
    
    
    
    12,105Equity in income of affiliated company
    
    
    (200
    )
    
    
    (447
    )Deferred income tax provision
    
    
    2,425
    
    
    
    1,848Stock option expense
    
    
    1,361
    
    
    
    446Provision for doubtful accounts
    
    
    2,065
    
    
    
    3,649Loss on disposal of property and equipment
    
    
    47
    
    
    
    78Changes in operating assets and liabilities:Accounts receivable
    
    
    (1,917
    )
    
    
    (4,707
    )Income tax receivable
    
    
    184
    
    
    
    (151
    )Insurance receivable
    
    
    
    
    
    
    707Other current assets
    
    
    (1,437
    )
    
    
    (954
    )Other non-current assets
    
    
    117
    
    
    
    (219
    )Accounts payable
    
    
    (4,393
    )
    
    
    3,156Accrued expenses
    
    
    (984
    )
    
    
    (9,341
    )Accrued compensation
    
    
    (53
    )
    
    
    929Customer accommodation and quantification
    
    
    (5,651
    )
    
    
    (4,048
    )Deferred revenue
    
    
    (57
    )
    
    
    (84
    )Other non-current liabilities
    
    
    (92
    )
    
    
    1,938Net cash used in operating activities
    
    $
    (3,883
    )
    
    $
    (30
    )Investing activities:Purchase of property and equipment
    
    
    (5,015
    )
    
    
    (8,337
    )Capitalized software
    
    
    (2,712
    )
    
    
    (1,218
    )Proceeds from sale of investments
    
    
    692
    
    
    
    Net cash used in investing activities
    
    
    (7,035
    )
    
    
    (9,555
    )Financing activities:Dividends paid
    
    
    (103,279
    )
    
    
    Proceeds from exercise of stock options
    
    
    68
    
    
    
    Net cash used in financing activities
    
    
    (103,211
    )
    
    
    Effect of exchange rate changes
    
    
    (156
    )
    
    
    115Net decrease in cash and cash equivalents
    
    
    (114,285
    )
    
    
    (9,470
    )Cash and cash equivalents  beginning of period
    
    
    161,582
    
    
    
    175,412Cash and cash equivalents  end of period
    
    $
    47,297
    
    
    $
    165,942Supplemental cash flow information:Cash paid for income taxes
    
    $
    249
    
    
    $
    167Accommodation payments paid with credits
    
    $
    659
    
    
    $
    1,961
 The accompanying notes are an integral part of these consolidated financial statements
 5




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##### 



MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
 1. Description of Business
  Change in Majority Owner
  Other Matters
  2. Introductory Note
     3. Basis of Presentation
   6




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##### 



MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
   Fair Value Effective Date
of FASB Statement No. 157
 The Fair Value Option for Financial Assets and
Financial Liabilities  including an amendment of FASB Statement No .115
    7




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##### 



MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
    4. Stock-Based Compensation
 Share Based Payment
 Three
months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Selling, general and administrative
    
    $
    840
    
    
    $
    130
    
    
    $
    944
    
    
    $
    188Research and development
    
    
    359
    
    
    
    39
    
    
    
    405
    
    
    
    62Cost of revenues
    
    
    
    
    
    
    70
    
    
    
    12
    
    
    
    196Total
    
    $
    1,199
    
    
    $
    239
    
    
    $
    1,361
    
    
    $
    446
     8




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##### 



MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
 Options exercisableAverageNumber of
    
    Intrinsic
    
    ExerciseRange of Exercise Prices
    
    Shares
    
    Value
    
    Price$  2.71  $10.00
    
    
    19
    
    
    $
    
    
    
    $
    5.71$10.01  $20.00
    
    
    47
    
    
    
    
    
    
    $
    14.38$20.01  $70.00
    
    
    76
    
    
    
    
    
    
    $
    33.28142
    
    
    $
    
 Accounting for Stock Issued to
Employees
  WeightedWeighted
    
    
    AverageShares
    
    
    Average
    
    
    Remaining
    
    
    AggregateSubject to
    
    
    Exercise
    
    
    Contractual
    
    
    IntrinsicOptions
    
    
    Price
    
    
    Life in Years
    
    
    ValueOutstanding, December 31, 2007
    
    
    2,359
    
    
    $
    31.08Granted
    
    
    296
    
    
    
    4.85Exercised
    
    
    (12
    )
    
    
    5.71Forefeited
    
    
    (2
    )
    
    
    17.45Canceled
    
    
    (807
    )
    
    
    39.30Outstanding, September 30, 2008
    
    
    1,834
    
    
    $
    23.41
    
    
    
    4.5
    
    
    $
    Exercisable, September 30, 2008
    
    
    1,538
    
    
    $
    26.98
    
    
    
    3.5
    
    
    $
    Options vested and expected to
vest as of September 30, 2008
    
    
    1,834
    
    
    $
    23.41
    
    
    
    4.5
    
    
    $
    
   Expected term (years)
    
    
    5.92Expected volatility
    
    
    54.46
    %Dividend yield
    
    
    0
    %Expected risk free interest rate
    
    
    3.25
    %
   9




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##### 



MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
 Options outstanding
    
    Options exercisableWeightedAverage
    
    
    
    Weighted
    
    
    
    
    
    
    
    WeightedRemaining
    
    
    
    Average
    
    
    
    
    
    
    
    AverageNumber
    
    
    
    Contractual Life
    
    
    
    Exercise
    
    
    
    Number
    
    
    
    ExerciseRange of Exercise Prices
    
    
    of Shares
    
    
    
    (in years)
    
    
    
    Price
    
    
    
    of Shares
    
    
    
    Price$  2.71  $10.00
    
    
    314
    
    
    
    9.5
    
    
    $
    4.90
    
    
    
    18
    
    
    $
    5.71$10.01  $20.00
    
    
    560
    
    
    
    5.4
    
    
    $
    14.76
    
    
    
    560
    
    
    $
    14.76$20.01  $30.00
    
    
    628
    
    
    
    2.9
    
    
    $
    26.48
    
    
    
    628
    
    
    $
    26.48$30.01  $40.00
    
    
    117
    
    
    
    1.3
    
    
    $
    32.94
    
    
    
    117
    
    
    $
    32.94$40.01  $70.00
    
    
    215
    
    
    
    1.7
    
    
    $
    58.86
    
    
    
    215
    
    
    $
    58.861,834
    
    
    
    4.5
    
    
    $
    23.41
    
    
    
    1,538
    
    
    $
    26.98
  5. Other Comprehensive Loss
  Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net loss
    
    $
    (5,762
    )
    
    $
    (8,935
    )
    
    $
    (8,344
    )
    
    $
    (4,935
    )Foreign currency translation adjustment
    
    
    (1,266
    )
    
    
    587
    
    
    
    (1,305
    )
    
    
    989Comprehensive loss
    
    $
    (7,028
    )
    
    $
    (8,348
    )
    
    $
    (9,649
    )
    
    $
    (3,946
    )
 6. Net Loss per Share
   Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net loss
    
    $
    (5,762
    )
    
    $
    (8,935
    )
    
    $
    (8,344
    )
    
    $
    (4,935
    )Weighted average shares outstanding:Basic
    
    
    37,554
    
    
    
    37,484
    
    
    
    37,547
    
    
    
    37,484Effect of dilutive shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted
    
    
    37,554
    
    
    
    37,484
    
    
    
    37,547
    
    
    
    37,484Net loss per share:Basic
    
    $
    (0.15
    )
    
    $
    (0.24
    )
    
    $
    (0.22
    )
    
    $
    (0.13
    )Diluted
    
    $
    (0.15
    )
    
    $
    (0.24
    )
    
    $
    (0.22
    )
    
    $
    (0.13
    )
  10




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##### 



MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
  7. Customer Accommodation and Quantification
       Nine months ended
    
    
    Year endedSeptember 30, 2008
    
    
    December 31, 2007Beginning balance
    
    $
    18,459
    
    
    $
    24,777Payments and other adjustments
    
    
    (5,664
    )
    
    
    (3,723
    )Credits
    
    
    (659
    )
    
    
    (2,595
    )Ending balance
    
    $
    12,136
    
    
    $
    18,459
 8. Cost of Investigation and Legal Proceedings, Net
 11




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##### 



MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
  Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Legal fees
    
    $
    1,125
    
    
    $
    3,937
    
    
    $
    7,392
    
    
    $
    12,783Other professional fees
    
    
    131
    
    
    
    504
    
    
    
    490
    
    
    
    1,948Nightingale services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    197Insurance recoveries and claims
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,386
    )Other
    
    
    5,925
    
    
    
    
    
    
    
    7,425
    
    
    
    2Total
    
    $
    7,181
    
    
    $
    4,441
    
    
    $
    15,307
    
    
    $
    (456
    )
  9. Restructuring Plans
 2007 Restructuring Plans
  Nine Months Ended
    
    
    Year EndedSeptember 30, 2008
    
    
    December 31, 2007Total Severance
    
    
    Total SeveranceBeginning balance
    
    $
    1,493
    
    
    $
    Charge (Reversal)
    
    
    (76
    )
    
    
    2,263Cash paid
    
    
    (1,417
    )
    
    
    (770
    )Ending balance
    
    $
    0
    
    
    $
    1,493
  2005 Restructuring Plan
  12




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##### 



MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
  Nine Months Ended
    
    
    Year EndedSeptember 30, 2008
    
    
    December 31, 2007Total Non-Cancelable
    
    
    Total Non-CancelableLeases
    
    
    LeasesBeginning balance
    
    $
    126
    
    
    $
    648Charge (Reversal)
    
    
    (6
    )
    
    
    322Cash paid
    
    
    (90
    )
    
    
    (844
    )Ending balance
    
    $
    30
    
    
    $
    126
  10. Income Taxes
  Accounting for Uncertainty in Income Taxes  an interpretation
of FASB Statement 109
 11. Commitments and Contingencies
 Governmental Investigations
  qui tam qui tam qui tam qui tam
   13




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##### 



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




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##### 



MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
      Shareholder Litigation
 Costa Brava Partnership III, L.P. Shareholder Litigation
   15




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##### 



MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
  Kahn Putative Class Action
      Newcastle Shareholder Litigation
   16




---



##### 



MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
    Reseller Arbitration Demand
   17




---



##### 



MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
 Anthurium Patent Litigation
  Other Matters
    12. Related Party Transactions
     Licensing Agreement
  18




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##### 



MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
   .
 OEM Supply Agreement
    Equipment Purchases
  Insurance Coverage
  Purchasing Agreements
 19




---



##### 



MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
  CBaySystems Holdings Purchase Incremental Costs
     Three months ended September 30,
    
    
    Nine months ended September 30,2008 *
    
    
    2007
    
    
    2008 *
    
    
    2007Licensing agreement
    
    $
    355
    
    
    $
    645
    
    
    $
    2,070
    
    
    $
    1,747OEM supply agreement
    
    
    36
    
    
    
    1,564
    
    
    
    1,645
    
    
    
    1,865Equipment purchases
    
    
    97
    
    
    
    292
    
    
    
    586
    
    
    
    613Insurance coverage
    
    
    65
    
    
    
    121
    
    
    
    399
    
    
    
    1,682Purchasing agreement
    
    
    
    
    
    
    (10
    )
    
    
    
    
    
    
    30CBay Transaction
    
    
    
    
    
    
    
    
    
    
    (172
    )
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    (39
    )
    
    
    Total
    
    $
    553
    
    
    $
    2,612
    
    
    $
    4,489
    
    
    $
    5,937
 
 *
    
    Philips ceased being a related party on August 6, 2008.    20




---



##### 



MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
  13. Investment in A-Life Medical, Inc. (A-Life)
    21




---



##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  
    
    each of the factors discussed in this Item 1A, Risk Factors in our Annual Report on Form 10-K for the year
ended December 31, 2007, as well as risks discussed elsewhere in this report;
    
    each of the matters discussed in Part II, Item 1, Legal Proceedings;
    
    difficulties relating to our significant management turnover;
    
    our ability to recruit and retain qualified medical transcriptionists (MTs) and other employees;
    
    the impact of our new services and products on the demand for our existing services and products;
    
    our current dependence on medical transcription for substantially all of our business;
    
    our ability to expand our customer base;
    
    changes in law, including, without limitation, the impact Health Insurance Portability and Accountability
Act of 1996 (HIPAA) will have on our business;
    
    infringement on the proprietary rights of others;
    
    our ability to diversify into other businesses;
    
    our ability to effectively integrate newly-acquired operations, if any;
    
    competitive pricing pressures in the medical transcription industry and our response to those pressures; and
    
    general conditions in the economy and capital markets.
    Executive Overview
    22




---



##### 




    
    A shortage of qualified domestic MTs has increased the demand for
outsourced medical transcription services by U.S.-based healthcare
providers. This demand for qualified MTs, as well as budgetary
pressures experienced by healthcare providers, has also caused many
more U.S.-based healthcare providers to evaluate and consider the use
of offshore medical transcription labor;
    
    Several low cost providers have emerged and aggressively moved into
our market offering medical transcription services (performed both
domestically and offshore) at prices significantly below our
traditional price point. One of these low cost providers is owned by
CBaySystems Holdings. While we believe the market for outsourced
medical transcription continues to expand, the growing acceptance by
customers of the use of offshore labor has further increased the
competitive environment in the medical transcription industry;
    
    Technological advances by us and our competitors which have reduced
the length of time required to transcribe medical reports, in turn
reducing the overall cost of medical transcription services; and
    
    Increasing requirements for electronic medical records, driving up
demand for transcription services in some cases where records used to
be paper based, and driving down demand in other cases as customers
attempt to implement electronic medical records.
   
    
    reduction in overhead and other administrative costs;
    
    improvement in the quality and speed of delivery of transcribed medical reports;
    
    access to leading technologies, such as speech recognition technology, without any development and investment risk;
    
    expertise in implementing and managing a medical transcription system tailored to the providers specific
requirements;
    
    access to skilled MTs; and
    
    support for compliance with governmental and industry mandated privacy and security requirements and electronic
health record initiatives.
  23




---



##### 




    
    revenues;
    
    operating income;
    
    net income per share;
    
    net cash provided by operating activities; and
    
    days sales outstanding.
  Critical Accounting Policies, Judgments and Estimates
   Basis of Presentation
 Sources of Revenues
  Cost of Revenues
  Selling, General and Administrative (SG&A)
  Research and Development (R&D)
  24




---



##### 



Depreciation and amortization
  Cost of investigation and legal proceedings, net
  Consolidated Results of Operations
  Comparison of Three Months Ended September 30, 2008 and 2007
 Three months ended September 30,2008
    
    
    2007% of Net
    
    
    
    
    
    
    % of Net($ in thousands)
    
    Amount
    
    
    Revenues
    
    
    Amount
    
    
    Revenues
    
    
    $ Change
    
    
    % ChangeNet revenues
    
    $
    81,287
    
    
    
    100.0
    %
    
    $
    82,518
    
    
    
    100.0
    %
    
    $
    (1,231
    )
    
    
    (1.5
    %)Operating costs and expenses:Cost of revenues
    
    
    57,235
    
    
    
    70.4
    %
    
    
    64,290
    
    
    
    77.9
    %
    
    
    (7,055
    )
    
    
    (11.0
    %)Selling, general and administrative
    
    
    13,148
    
    
    
    16.2
    %
    
    
    15,548
    
    
    
    18.8
    %
    
    
    (2,400
    )
    
    
    (15.4
    %)Research and development
    
    
    4,648
    
    
    
    5.7
    %
    
    
    3,808
    
    
    
    4.6
    %
    
    
    840
    
    
    
    22.1
    %Depreciation
    
    
    2,977
    
    
    
    3.7
    %
    
    
    2,861
    
    
    
    3.5
    %
    
    
    116
    
    
    
    4.1
    %Amortization of intangible assets
    
    
    1,411
    
    
    
    1.7
    %
    
    
    1,361
    
    
    
    1.6
    %
    
    
    50
    
    
    
    3.7
    %Cost of investigation and legal proceedings, net
    
    
    7,181
    
    
    
    8.8
    %
    
    
    4,441
    
    
    
    5.4
    %
    
    
    2,740
    
    
    
    61.7
    %Restructuring charges
    
    
    (37
    )
    
    
    (0.0
    %)
    
    
    554
    
    
    
    0.7
    %
    
    
    (591
    )
    
    
    (106.7
    %)Total operating costs and expenses
    
    
    86,563
    
    
    
    106.5
    %
    
    
    92,863
    
    
    
    112.5
    %
    
    
    (6,300
    )
    
    
    (6.8
    %)Operating loss
    
    
    (5,276
    )
    
    
    (6.5
    %)
    
    
    (10,345
    )
    
    
    (12.5
    %)
    
    
    5,069
    
    
    
    (49.0
    %)Equity in income of affiliated company
    
    
    159
    
    
    
    0.2
    %
    
    
    124
    
    
    
    0.2
    %
    
    
    35
    
    
    
    28.2
    %Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    n.a.Interest income, net
    
    
    418
    
    
    
    0.5
    %
    
    
    2,302
    
    
    
    2.8
    %
    
    
    (1,884
    )
    
    
    (81.8
    %)Loss before income taxes
    
    
    (4,699
    )
    
    
    (5.8
    %)
    
    
    (7,919
    )
    
    
    (9.6
    %)
    
    
    3,220
    
    
    
    (40.7
    %)Income tax provision
    
    
    1,063
    
    
    
    1.3
    %
    
    
    1,016
    
    
    
    1.2
    %
    
    
    47
    
    
    
    4.6
    %Net loss
    
    $
    (5,762
    )
    
    
    (7.1
    %)
    
    $
    (8,935
    )
    
    
    (10.8
    %)
    
    $
    3,173
    
    
    
    (35.5
    %)
 Net revenues
  25




---



##### 



Cost of revenues
  
    
    reduced medical transcription payroll costs of $3.4 million related
directly to our increased use of speech recognition technology, which
reduces the payroll costs associated with the production of revenues;
    
    reduced technology product costs of $1.0 million; and
    
    reduced costs of $2.7 million resulting from headcount reductions
taken in 2007 to better align our overhead costs with our lower
revenues levels.
  Selling, general and administrative
  Research & development
  Depreciation
  Cost of investigation and legal proceedings, net
  Interest income, net
  Income tax provision
  26




---



##### 



Comparison of Nine Months Ended September 30, 2008 and 2007
 Nine months ended September 30,2008
    
    
    2007% of Net
    
    
    
    
    
    
    % of Net($ in thousands)
    
    Amount
    
    
    Revenues
    
    
    Amount
    
    
    Revenues
    
    
    $ Change
    
    
    % ChangeNet revenues
    
    $
    247,466
    
    
    
    100.0
    %
    
    $
    260,276
    
    
    
    100.0
    %
    
    $
    (12,810
    )
    
    
    (4.9
    %)Operating costs and expenses:Cost of revenues
    
    
    176,508
    
    
    
    71.3
    %
    
    
    198,918
    
    
    
    76.4
    %
    
    
    (22,410
    )
    
    
    (11.3
    %)Selling, general and administrative
    
    
    39,047
    
    
    
    15.8
    %
    
    
    48,158
    
    
    
    18.5
    %
    
    
    (9,111
    )
    
    
    (18.9
    %)Research and development
    
    
    12,502
    
    
    
    5.1
    %
    
    
    10,073
    
    
    
    3.9
    %
    
    
    2,429
    
    
    
    24.1
    %Depreciation
    
    
    8,901
    
    
    
    3.6
    %
    
    
    8,040
    
    
    
    3.1
    %
    
    
    861
    
    
    
    10.7
    %Amortization of intangible assets
    
    
    4,145
    
    
    
    1.7
    %
    
    
    4,065
    
    
    
    1.6
    %
    
    
    80
    
    
    
    2.0
    %Cost of investigation and legal proceedings, net
    
    
    15,307
    
    
    
    6.2
    %
    
    
    (456
    )
    
    
    (0.2
    %)
    
    
    15,763
    
    
    
    (3,456.8
    %)Restructuring charges
    
    
    (82
    )
    
    
    (0.0
    %)
    
    
    935
    
    
    
    0.4
    %
    
    
    (1,017
    )
    
    
    (108.8
    %)Total operating costs and expenses
    
    
    256,328
    
    
    
    103.6
    %
    
    
    269,733
    
    
    
    103.6
    %
    
    
    (13,405
    )
    
    
    (5.0
    %)Operating loss
    
    
    (8,862
    )
    
    
    (3.6
    %)
    
    
    (9,457
    )
    
    
    (3.6
    %)
    
    
    595
    
    
    
    (6.3
    %)Equity in income of affiliated company
    
    
    200
    
    
    
    0.1
    %
    
    
    447
    
    
    
    0.2
    %
    
    
    (247
    )
    
    
    (55.3
    %)Other income
    
    
    438
    
    
    
    0.2
    %
    
    
    
    
    
    
    
    
    
    
    438
    
    
    
    n.a.Interest income, net
    
    
    2,601
    
    
    
    1.1
    %
    
    
    6,477
    
    
    
    2.5
    %
    
    
    (3,876
    )
    
    
    (59.8
    %)Loss before income taxes
    
    
    (5,623
    )
    
    
    (2.3
    %)
    
    
    (2,533
    )
    
    
    (1.0
    %)
    
    
    (3,090
    )
    
    
    122.0
    %Income tax provision
    
    
    2,721
    
    
    
    1.1
    %
    
    
    2,402
    
    
    
    0.9
    %
    
    
    319
    
    
    
    13.3
    %Net loss
    
    $
    (8,344
    )
    
    
    (3.4
    %)
    
    $
    (4,935
    )
    
    
    (1.9
    %)
    
    $
    (3,409
    )
    
    
    69.1
    %
 Net revenues
  
    
    reduced service revenues of $9.2 million resulting primarily from lower medical transcription volume. We
believe the reduction in volume was the result primarily of customer losses to other outsourced medical
transcription providers; and
    
    reduced revenues from our technology products of $3.6 million due primarily to reduced maintenance contracts.
 Cost of revenues
  
    
    reduced medical transcription payroll costs of $9.8 million related
directly to the decrease in our service revenues as well as our
increased use of speech recognition technology, which reduces the
payroll costs associated with the production of revenues;
    
    reduced technology product cost of goods sold of $2.8 million; and
    
    reduced employee related costs of $9.8 million resulting from
headcount reductions taken in 2007 to better align our overhead costs
with our lower revenues.
  27




---



##### 



Selling, general and administrative
  Research & development
  Depreciation
  Cost of investigation and legal proceedings, net
  Interest income, net
  Income tax provision
  Liquidity and Capital Resources
  28




---



##### 




    
    the SEC and DOJ investigations and proceedings; and
    
    the defense and resolution of the civil litigation matters.
 Off-Balance Sheet Arrangements
  
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  29




---



##### 



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 Governmental Investigations
  qui tam qui tam qui tam qui tam
   Customer Litigation
 Kaiser Litigation
  Medical Transcriptionist Litigation
 Hoffmann Putative Class Action
  30




---



##### 



Force Putative Class Action
  Myers Putative Class Action
     31




---



##### 



Shareholder Litigation
 Costa Brava Partnership III, L.P. Shareholder Litigation
   Kahn Putative Class Action
     32




---



##### 



Newcastle Shareholder Litigation
     Reseller Arbitration Demand
  33




---



##### 



Anthurium Patent Litigation
 Anthurium Solutions,
Inc. v. MedQuist Inc., et al.,
 Other Matters
    
 Item 1A. Risk Factors
  As of August 6, 2008, CBaySystems Holdings owns approximately 69.5% of our outstanding common
stock, and its interests may conflict with the interests of MedQuist and the interests of our other
shareholders.
   34




---



##### 



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 Exhibits
 No.
    
    Description3.1(1)
    
    Second Amended and Restated By-Laws of MedQuist Inc., as amended10.1(*)
    
    Transcription Services Agreement by and between MedQuist Transcriptions, Ltd. and CBay Systems &
Services, Inc. dated September 15, 200810.2(2)
    
    Form of Amendment of Indemnification Agreement for Executive Officers10.3(3)
    
    Employment Agreement by and between Peter Masanotti and MedQuist Inc., dated September 3, 200831.1
    
    Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
200231.2
    
    Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
200232.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
 
 (1)
    
    Incorporated by reference to our Current Report on Form 8-K filed with the SEC on July 15, 2008(2)
    
    Incorporated by reference to our Current Report on Form 8-K filed with the SEC on August 25, 2008(3)
    
    Incorporated by reference to our Current Report on Form 8-K filed with the SEC on September 9, 2008(*)
    
    Portions of this Exhibit were omitted and filed separately with the Secretary of the SEC pursuant
to a request for confidential treatment that has been filed with the SEC. 35




---



##### 



SIGNATURES
  MEDQUIST INC.Date: November 4, 2008
    /s/ Peter MasanottiPeter MasanottiPresident and Chief Executive Officer
(Principal Executive Officer) Date: November 4, 2008
    /s/ Kathleen E. DonovanKathleen E. DonovanSenior Vice President and Chief Financial Officer
(Principal Financial Officer) 36




---



##### 



Exhibit Index
 No.
    
    Description10.1(*)
    
    Transcription Services Agreement by and between
MedQuist Transcriptions, Ltd. and CBay Systems &
Services, Inc. dated September 15, 200831.1
    
    Certification of Chief Executive Officer required by
Rule 13a-14(a) or Rule 15d-14(a) of the Securities
Exchange Act of 1934, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer required by
Rule 13a-14(a) or Rule 15d-14(a) of the Securities
Exchange Act of 1934, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 
 (*)
    
    Portions of this Exhibit were omitted and filed
separately with the Secretary of the SEC pursuant to a
request for confidential treatment that has been filed
with the SEC. 37