##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the quarterly period ended June 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:
 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 BOULEVARD 
SUITE 300
MOUNT LAUREL, NEW JERSEY(Address of principal executive offices)
    
    08054-4632(Zip Code)
 (856) 206-4000  (Registrants telephone number, including area code)
 þ o
  Large accelerated filer o
Accelerated filer þNon-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
    
    
    23Item 4.
    
    Controls and Procedures
    
    
    32PART II.
    
    OTHER INFORMATION
    
    
    33Item 1.
    
    Legal Proceedings
    
    
    33Item 1A.
    
    Risk Factors
    
    
    38Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    38Item 3.
    
    Defaults Upon Senior Securities
    
    
    38Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    39Item 5.
    
    Other Information
    
    
    39Item 6.
    
    Exhibits
    
    
    39Certification of Chief Executive OfficerCertification of Chief Financial OfficerCertification of Chief Executive OfficerCertification of Chief Financial Officer
  2




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##### Table of Contents



Item 1. Financial Statements
 MedQuist Inc. and Subsidiaries
 Consolidated Statements of Operations
(In thousands, except per share amounts)
Unaudited
 Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net revenues
    
    $
    82,454
    
    
    $
    88,692
    
    
    $
    166,179
    
    
    $
    177,758Operating costs and expenses:Cost of revenues
    
    
    58,015
    
    
    
    66,283
    
    
    
    119,273
    
    
    
    134,628Selling, general and administrative
    
    
    12,804
    
    
    
    17,917
    
    
    
    25,899
    
    
    
    32,610Research and development
    
    
    3,735
    
    
    
    2,823
    
    
    
    7,854
    
    
    
    6,265Depreciation
    
    
    2,996
    
    
    
    2,640
    
    
    
    5,924
    
    
    
    5,179Amortization of intangible assets
    
    
    1,373
    
    
    
    1,358
    
    
    
    2,734
    
    
    
    2,704Cost of investigation and legal proceedings, net
    
    
    1,728
    
    
    
    (6,638
    )
    
    
    8,126
    
    
    
    (4,897
    )Restructuring charges
    
    
    (45
    )
    
    
    125
    
    
    
    (45
    )
    
    
    381Total operating costs and expenses
    
    
    80,606
    
    
    
    84,508
    
    
    
    169,765
    
    
    
    176,870Operating income (loss)
    
    
    1,848
    
    
    
    4,184
    
    
    
    (3,586
    )
    
    
    888Equity in income of affiliated company
    
    
    25
    
    
    
    63
    
    
    
    41
    
    
    
    323Other income
    
    
    
    
    
    
    
    
    
    
    438
    
    
    
    Interest income, net
    
    
    895
    
    
    
    2,073
    
    
    
    2,183
    
    
    
    4,175Income (loss) before income taxes
    
    
    2,768
    
    
    
    6,320
    
    
    
    (924
    )
    
    
    5,386Income tax provision
    
    
    933
    
    
    
    434
    
    
    
    1,658
    
    
    
    1,386Net income (loss)
    
    $
    1,835
    
    
    $
    5,886
    
    
    $
    (2,582
    )
    
    $
    4,000Net income (loss) per share:Basic
    
    $
    0.05
    
    
    $
    0.16
    
    
    $
    (0.07
    )
    
    $
    0.11Diluted
    
    $
    0.05
    
    
    $
    0.16
    
    
    $
    (0.07
    )
    
    $
    0.11Weighted average shares outstanding:Basic
    
    
    37,544
    
    
    
    37,484
    
    
    
    37,544
    
    
    
    37,484Diluted
    
    
    37,553
    
    
    
    37,497
    
    
    
    37,544
    
    
    
    37,499
 The accompanying notes are an integral part of these consolidated financial statements.
 3




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##### Table of Contents



MedQuist Inc. and Subsidiaries
 Consolidated Balance Sheets
(In thousands)
Unaudited
 June 30,
    
    
    December 31,2008
    
    
    2007AssetsCurrent assets:Cash and cash equivalents
    
    $
    151,095
    
    
    $
    161,582Accounts receivable, net of allowance of $4,417 and
$4,359, respectively
    
    
    48,215
    
    
    
    48,725Income tax receivable
    
    
    716
    
    
    
    815Other current assets
    
    
    8,757
    
    
    
    7,920Total current assets
    
    
    208,783
    
    
    
    219,042Property and equipment, net of accumulated depreciation of
$38,825 and $38,772, respectively
    
    
    18,920
    
    
    
    21,366Goodwill
    
    
    125,418
    
    
    
    125,505Other intangible assets, net of accumulated amortization of
$44,610 and $45,209, respectively
    
    
    41,363
    
    
    
    42,262Deferred income taxes
    
    
    2,722
    
    
    
    2,712Other assets
    
    
    6,117
    
    
    
    6,885Total assets
    
    $
    403,323
    
    
    $
    417,772Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    11,137
    
    
    $
    12,754Accrued expenses
    
    
    13,501
    
    
    
    18,989Accrued compensation
    
    
    14,495
    
    
    
    14,826Customer accommodation and quantification
    
    
    12,242
    
    
    
    18,459Deferred income tax liability  current
    
    
    4,783
    
    
    
    4,783Deferred revenue
    
    
    16,280
    
    
    
    16,023Total current liabilities
    
    
    72,438
    
    
    
    85,834Deferred income taxes
    
    
    16,635
    
    
    
    15,151Other non-current liabilities
    
    
    2,065
    
    
    
    2,143Commitments and contingencies (Note 11)Shareholders equity:Common stock  no par value; authorized 60,000 shares;
37,544 and 37,544 shares issued and outstanding, respectively
    
    
    236,574
    
    
    
    236,412Retained earnings
    
    
    70,294
    
    
    
    72,876Accumulated other comprehensive income
    
    
    5,317
    
    
    
    5,356Total shareholders equity
    
    
    312,185
    
    
    
    314,644Total liabilities and shareholders equity
    
    $
    403,323
    
    
    $
    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
 Six months endedJune 30,2008
    
    
    2007Operating activities:Net income (loss)
    
    $
    (2,582
    )
    
    $
    4,000Adjustments to reconcile net income (loss) to cash provided by (used
in) operating activities:Depreciation and amortization
    
    
    8,658
    
    
    
    7,883Equity in income of affiliated company
    
    
    (41
    )
    
    
    (323
    )Deferred income tax provision
    
    
    1,491
    
    
    
    974Stock option expense
    
    
    162
    
    
    
    207Provision for doubtful accounts
    
    
    1,205
    
    
    
    2,431Loss on disposal of property and equipment
    
    
    38
    
    
    
    61Changes in operating assets and liabilities excluding effects
of acquisitions:Accounts receivable
    
    
    (1,334
    )
    
    
    (4,088
    )Income tax receivable
    
    
    99
    
    
    
    (267
    )Insurance receivable
    
    
    
    
    
    
    (11,143
    )Other current assets
    
    
    (837
    )
    
    
    (511
    )Other non-current assets
    
    
    116
    
    
    
    (52
    )Accounts payable
    
    
    (2,065
    )
    
    
    1,613Accrued expenses
    
    
    (5,405
    )
    
    
    (8,060
    )Accrued compensation
    
    
    (309
    )
    
    
    297Customer accommodation and quantification
    
    
    (5,593
    )
    
    
    (2,976
    )Deferred revenue
    
    
    172
    
    
    
    (1,210
    )Other non-current liabilities
    
    
    8
    
    
    
    1,962Net cash used in operating activities
    
    $
    (6,217
    )
    
    $
    (9,202
    )Investing activities:Purchase of property and equipment
    
    
    (3,078
    )
    
    
    (4,137
    )Capitalized software
    
    
    (1,862
    )
    
    
    (824
    )Proceeds from sale of investments
    
    
    692
    
    
    
    Net cash used in investing activities
    
    
    (4,248
    )
    
    
    (4,961
    )Financing activities:Net cash provided by financing activities
    
    
    
    
    
    
    Effect of exchange rate changes
    
    
    (22
    )
    
    
    32Net decrease in cash and cash equivalents
    
    
    (10,487
    )
    
    
    (14,131
    )Cash and cash equivalents  beginning of period
    
    
    161,582
    
    
    
    175,412Cash and cash equivalents  end of period
    
    $
    151,095
    
    
    $
    161,281Supplemental cash flow information:Cash paid for income taxes
    
    $
    263
    
    
    $
    276Accommodation payments paid with credits
    
    $
    611
    
    
    $
    1,288
 The accompanying notes are an integral part of these consolidated financial statements
 5




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##### Table of Contents



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




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##### Table of Contents



MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
  Fair Value Measurements 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 June 30,
    
    
    Six months ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Selling, general and administrative
    
    $
    49
    
    
    $
    34
    
    
    $
    105
    
    
    $
    58Research and development
    
    
    21
    
    
    
    14
    
    
    
    45
    
    
    
    23Cost of revenues
    
    
    
    
    
    
    76
    
    
    
    12
    
    
    
    126Total
    
    $
    70
    
    
    $
    124
    
    
    $
    162
    
    
    $
    207
    Options exercisable(1)AverageNumber of
    
    Intrinsic
    
    ExerciseRange of Exercise Prices
    
    
    
    
    
    Shares
    
    Value
    
    Price$2.71    -    $10.00
    
    
    
    
    
    
    31
    
    
    $
    65
    
    
    $
    5.71$10.01  -    $20.00
    
    
    
    
    
    
    47
    
    
    
    
    
    
    $
    14.38$20.01  -    $70.00
    
    
    
    
    
    
    76
    
    
    
    
    
    
    $
    33.28154
    
    
    $
    65
 
 (1)
    
    Of the remaining 154 options, 12 were exercised in July 2008 and the remaining 142 expire on
October 3, 2009. Accounting for Stock Issued to
Employees
 8




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##### Table of Contents



MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
  WeightedWeighted
    
    
    AverageShares
    
    
    Average
    
    
    Remaining
    
    
    AggregateSubject to
    
    
    Exercise
    
    
    Contractual
    
    
    IntrinsicOptions
    
    
    Price
    
    
    Life in Years
    
    
    ValueOutstanding, December 31, 2007
    
    
    2,359
    
    
    $
    31.08Forefeited
    
    
    (2
    )
    
    $
    17.45Canceled
    
    
    (762
    )
    
    $
    40.09Outstanding, June 30, 2008
    
    
    1,595
    
    
    $
    26.80
    
    
    
    3.7
    
    
    $
    65Exercisable, June 30, 2008
    
    
    1,396
    
    
    $
    29.03
    
    
    
    2.9
    
    
    $
    65Options vested and expected to
vest as of June 30, 2008
    
    
    1,566
    
    
    $
    27.09
    
    
    
    3.6
    
    
    $
    65
    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
    
    
    30
    
    
    
    1.3
    
    
    $
    5.71
    
    
    
    30
    
    
    $
    5.71$10.01 - $20.00
    
    
    569
    
    
    
    5.6
    
    
    $
    14.80
    
    
    
    369
    
    
    $
    16.75$20.01 - $30.00
    
    
    658
    
    
    
    3.1
    
    
    $
    26.41
    
    
    
    658
    
    
    $
    26.41$30.01 - $40.00
    
    
    121
    
    
    
    1.5
    
    
    $
    32.89
    
    
    
    121
    
    
    $
    32.89$40.01 - $70.00
    
    
    217
    
    
    
    2.0
    
    
    $
    58.88
    
    
    
    217
    
    
    $
    58.881,595
    
    
    
    3.7
    
    
    $
    26.80
    
    
    
    1,395
    
    
    $
    29.03
  5. Other Comprehensive Income (Loss)
  Three months ended June 30,
    
    
    Six months ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income (loss)
    
    $
    1,835
    
    
    $
    5,886
    
    
    $
    (2,582
    )
    
    $
    4,000Foreign currency translation adjustment
    
    
    65
    
    
    
    408
    
    
    
    (39
    )
    
    
    402Comprehensive income (loss)
    
    $
    1,900
    
    
    $
    6,294
    
    
    $
    (2,621
    )
    
    $
    4,402
 9




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##### Table of Contents



MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
 6. Net
Income (Loss) per Share
   Three months ended June 30,
    
    
    Six months ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income (loss)
    
    $
    1,835
    
    
    $
    5,886
    
    
    $
    (2,582
    )
    
    $
    4,000Weighted average shares outstanding:Basic
    
    
    37,544
    
    
    
    37,484
    
    
    
    37,544
    
    
    
    37,484Effect of dilutive shares
    
    
    9
    
    
    
    13
    
    
    
    
    
    
    
    15Diluted
    
    
    37,553
    
    
    
    37,497
    
    
    
    37,544
    
    
    
    37,499Net income (loss) per share:Basic
    
    $
    0.05
    
    
    $
    0.16
    
    
    $
    (0.07
    )
    
    $
    0.11Diluted
    
    $
    0.05
    
    
    $
    0.16
    
    
    $
    (0.07
    )
    
    $
    0.11
  7. Customer Accommodation and Quantification
     10




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MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
    Six months ended
    
    
    Year endedJune 30, 2008
    
    
    December 31, 2007Beginning balance
    
    $
    18,459
    
    
    $
    24,777Payments and other adjustments
    
    
    (5,606
    )
    
    
    (3,723
    )Credits
    
    
    (611
    )
    
    
    (2,595
    )Ending balance
    
    $
    12,242
    
    
    $
    18,459
 8. Cost of Investigation and Legal Proceedings, Net
  Three months ended June 30,
    
    
    Six months ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Legal fees
    
    $
    1,606
    
    
    $
    4,369
    
    
    $
    6,267
    
    
    $
    8,846Other professional fees
    
    
    122
    
    
    
    843
    
    
    
    359
    
    
    
    1,444Nightingale services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    197Insurance recoveries and claims
    
    
    
    
    
    
    (11,850
    )
    
    
    
    
    
    
    (15,386
    )Other
    
    
    
    
    
    
    
    
    
    
    1,500
    
    
    
    2Total
    
    $
    1,728
    
    
    $
    (6,638
    )
    
    $
    8,126
    
    
    $
    (4,897
    )
  11




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MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
  9. Restructuring Plans
 2007 Restructuring Plans
  Six Months Ended
    
    
    Year EndedJune 30, 2008
    
    
    December 31, 2007Total Severance
    
    
    Total SeveranceBeginning balance
    
    $
    1,493
    
    
    $
    2,263Reversal
    
    
    (45
    )
    
    
    Cash paid
    
    
    (1,417
    )
    
    
    (770
    )Ending balance
    
    $
    31
    
    
    $
    1,493
  2005 Restructuring Plan
  Six Months Ended
    
    
    Year EndedJune 30, 2008
    
    
    December 31, 2007Total Non-Cancelable
    
    
    Total Non-CancelableLeases
    
    
    LeasesBeginning balance
    
    $
    126
    
    
    $
    648Additional charge
    
    
    
    
    
    
    322Cash paid
    
    
    (70
    )
    
    
    (844
    )Ending balance
    
    $
    56
    
    
    $
    126
  10. Income Taxes
  Accounting for Uncertainty in Income Taxes  an interpretation
of FASB Statement 109
 12




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MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
  11. Commitments and Contingencies
 Governmental Investigations
     Customer Litigation
 South Broward Putative Class Action
   Kaiser Litigation
  13




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




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




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##### Table of Contents



MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
 Reseller Arbitration Demand
   Anthurium Patent Litigation
  Other Matters
    18




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MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
  12. Related Party Transactions
    Licensing Agreement
     OEM Supply Agreement
   19




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MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
   Equipment Purchases
  Insurance Coverage
  Purchasing Agreements
  CBaySystems Holdings Purchase
     20




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MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
 Three months ended June 30,
    
    
    Six months ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Licensing agreement
    
    $
    910
    
    
    $
    588
    
    
    $
    1,715
    
    
    $
    1,102OEM supply agreement
    
    
    625
    
    
    
    135
    
    
    
    1,500
    
    
    
    301Equipment purchases
    
    
    188
    
    
    
    150
    
    
    
    489
    
    
    
    321Insurance coverage
    
    
    167
    
    
    
    840
    
    
    
    334
    
    
    
    1,561Purchasing agreement
    
    
    
    
    
    
    40
    
    
    
    
    
    
    
    40CBay Transaction
    
    
    (119
    )
    
    
    
    
    
    
    (119
    )
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    (39
    )
    
    
    Total
    
    $
    1,771
    
    
    $
    1,753
    
    
    $
    3,880
    
    
    $
    3,325
   13. Investment in A-Life Medical, Inc. (A-Life)
    14. Subsequent Events
   21




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MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
   22




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##### Table of Contents



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
   23




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##### Table of Contents




    
    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;
 24




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##### Table of Contents




    
    access to skilled MTs; and
    
    support for compliance with governmental and industry mandated privacy and security
requirements and electronic health record initiatives.
   
    
    revenues;
    
    operating income;
    
    net income per share;
    
    net cash provided by operating activities; and
    
    days sales outstanding.
  Critical Accounting Policies, Judgments and Estimates
   Basis of Presentation
 Sources of Revenues
  Cost of Revenues
 25




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##### Table of Contents



Selling, General and Administrative (SG&A)
  Research and Development (R&D)
  Depreciation and amortization
  Cost of investigation and legal proceedings, net
  Consolidated Results of Operations
  26




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##### Table of Contents



Comparison of Three Months Ended June 30, 2008 and 2007
 Three months ended June 30,2008
    
    
    2007% of Net
    
    
    
    
    
    
    % of Net($ in thousands)
    
    Amount
    
    
    Revenues
    
    
    Amount
    
    
    Revenues
    
    
    $ Change
    
    
    % ChangeNet revenues
    
    $
    82,454
    
    
    
    100.0
    %
    
    $
    88,692
    
    
    
    100.0
    %
    
    $
    (6,238
    )
    
    
    (7.0
    %)Operating costs and expenses:Cost of revenues
    
    
    58,015
    
    
    
    70.4
    %
    
    
    66,283
    
    
    
    74.7
    %
    
    
    (8,268
    )
    
    
    (12.5
    %)Selling, general and administrative
    
    
    12,804
    
    
    
    15.5
    %
    
    
    17,917
    
    
    
    20.2
    %
    
    
    (5,113
    )
    
    
    (28.5
    %)Research and development
    
    
    3,735
    
    
    
    4.5
    %
    
    
    2,823
    
    
    
    3.2
    %
    
    
    912
    
    
    
    32.3
    %Depreciation
    
    
    2,996
    
    
    
    3.6
    %
    
    
    2,640
    
    
    
    3.0
    %
    
    
    356
    
    
    
    13.5
    %Amortization of intangible assets
    
    
    1,373
    
    
    
    1.7
    %
    
    
    1,358
    
    
    
    1.5
    %
    
    
    15
    
    
    
    1.1
    %Cost of investigation and legal
proceedings, net
    
    
    1,728
    
    
    
    2.1
    %
    
    
    (6,638
    )
    
    
    (7.5
    %)
    
    
    8,366
    
    
    
    (126.0
    %)Restructuring charges
    
    
    (45
    )
    
    
    (0.1
    %)
    
    
    125
    
    
    
    0.1
    %
    
    
    (170
    )
    
    
    (136.0
    %)Total operating costs and expenses
    
    
    80,606
    
    
    
    97.8
    %
    
    
    84,508
    
    
    
    95.3
    %
    
    
    (3,902
    )
    
    
    (4.6
    %)Operating income
    
    
    1,848
    
    
    
    2.2
    %
    
    
    4,184
    
    
    
    4.7
    %
    
    
    (2,336
    )
    
    
    (55.8
    %)Equity in income of affiliated company
    
    
    25
    
    
    
    0.0
    %
    
    
    63
    
    
    
    0.1
    %
    
    
    (38
    )
    
    
    (60.3
    %)Interest income, net
    
    
    895
    
    
    
    1.1
    %
    
    
    2,073
    
    
    
    2.3
    %
    
    
    (1,178
    )
    
    
    (56.8
    %)Income before income taxes
    
    
    2,768
    
    
    
    3.4
    %
    
    
    6,320
    
    
    
    7.1
    %
    
    
    (3,552
    )
    
    
    (56.2
    %)Income tax provision
    
    
    933
    
    
    
    1.1
    %
    
    
    434
    
    
    
    0.5
    %
    
    
    499
    
    
    
    115.0
    %Net income
    
    $
    1,835
    
    
    
    2.2
    %
    
    $
    5,886
    
    
    
    6.6
    %
    
    $
    (4,051
    )
    
    
    (68.8
    %)
 Net revenues
  
    
    reduced service revenues of $5.8 million resulting from lower medical transcription volume
and pricing to both new and existing customers. Pricing pressures are still a concern with our
existing and potential customers seeking opportunities to reduce costs, particularly through
the utilization of offshore labor. We believe the reduction in volume was the result primarily
of customer losses to other outsourced medical transcription providers primarily in the second
half of 2007; and
    
    reduced revenues from our technology products of $0.5 million .
 Cost of revenues
  
    
    reduced medical transcription payroll costs of $4.9 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 costs of $0.6 million due to the reduction of our technology
product revenue; and
    
    reduced other costs of $2.8 million resulting from headcount reductions taken to better
align our overhead costs with our lower revenue levels.
 27




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##### Table of Contents



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




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##### Table of Contents



Comparison of Six Months Ended June 30, 2008 and 2007
 Six months ended June 30,2008
    
    
    2007% of Net
    
    
    
    
    
    
    % of Net($ in thousands)
    
    Amount
    
    
    Revenues
    
    
    Amount
    
    
    Revenues
    
    
    $ Change
    
    
    % ChangeNet revenues
    
    $
    166,179
    
    
    
    100.0
    %
    
    $
    177,758
    
    
    
    100.0
    %
    
    $
    (11,579
    )
    
    
    (6.5
    %)Operating costs and expenses:Cost of revenues
    
    
    119,273
    
    
    
    71.8
    %
    
    
    134,628
    
    
    
    75.7
    %
    
    
    (15,355
    )
    
    
    (11.4
    %)Selling, general and administrative
    
    
    25,899
    
    
    
    15.6
    %
    
    
    32,610
    
    
    
    18.3
    %
    
    
    (6,711
    )
    
    
    (20.6
    %)Research and development
    
    
    7,854
    
    
    
    4.7
    %
    
    
    6,265
    
    
    
    3.5
    %
    
    
    1,589
    
    
    
    25.4
    %Depreciation
    
    
    5,924
    
    
    
    3.6
    %
    
    
    5,179
    
    
    
    2.9
    %
    
    
    745
    
    
    
    14.4
    %Amortization of intangible assets
    
    
    2,734
    
    
    
    1.6
    %
    
    
    2,704
    
    
    
    1.5
    %
    
    
    30
    
    
    
    1.1
    %Cost of
investigation and legal proceedings, net
    
    
    8,126
    
    
    
    4.9
    %
    
    
    (4,897
    )
    
    
    (2.8
    %)
    
    
    13,023
    
    
    
    (265.9
    %)Restructuring charges
    
    
    (45
    )
    
    
    (0.0
    %)
    
    
    381
    
    
    
    0.2
    %
    
    
    (426
    )
    
    
    (111.8
    %)Total operating costs and expenses
    
    
    169,765
    
    
    
    102.2
    %
    
    
    176,870
    
    
    
    99.5
    %
    
    
    (7,105
    )
    
    
    (4.0
    %)Operating income (loss)
    
    
    (3,586
    )
    
    
    (2.2
    %)
    
    
    888
    
    
    
    0.5
    %
    
    
    (4,474
    )
    
    
    (503.8
    %)Equity in income of affiliated company
    
    
    41
    
    
    
    0.0
    %
    
    
    323
    
    
    
    0.2
    %
    
    
    (282
    )
    
    
    (87.3
    %)Other income
    
    
    438
    
    
    
    0.3
    %
    
    
    
    
    
    
    
    
    
    
    438
    
    
    
    Interest income, net
    
    
    2,183
    
    
    
    1.3
    %
    
    
    4,175
    
    
    
    2.3
    %
    
    
    (1,992
    )
    
    
    (47.7
    %)Income (loss) before income taxes
    
    
    (924
    )
    
    
    (0.6
    %)
    
    
    5,386
    
    
    
    3.0
    %
    
    
    (6,310
    )
    
    
    (117.2
    %)Income tax provision
    
    
    1,658
    
    
    
    1.0
    %
    
    
    1,386
    
    
    
    0.8
    %
    
    
    272
    
    
    
    19.6
    %Net income (loss)
    
    $
    (2,582
    )
    
    
    (1.6
    %)
    
    $
    4,000
    
    
    
    2.3
    %
    
    $
    (6,582
    )
    
    
    (164.6
    %)
 Net revenues
  
    
    reduced service revenues of $9.2 million resulting primarily from lower medical
transcription volume. Pricing pressures are still a concern with our existing and potential
customers seeking opportunities to reduce costs, particularly through the utilization of
offshore labor. We believe the reduction in volume was the result primarily of customer losses
to other outsourced medical transcription providers primarily in the second half of 2007; and
    
    reduced revenues from our technology products of $2.4 million.
 29




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##### Table of Contents



Cost of revenues
  
    
    reduced medical transcription payroll costs of $7.1 million related directly to the
decrease in our service revenues as well as our increased use of speech recognition technology,
which reduces the payroll costs associated with the production of revenues;
    
    reduced technology product costs of $1.6 million due to the reduction of our technology
product revenue; and
    
    reduced other costs of $6.7 million resulting from headcount reductions taken to better
align our
overhead costs with our lower revenue levels.
  Selling, general and administrative
  Research & development
  Depreciation
  Cost of investigation and legal proceedings, net
  30




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##### Table of Contents



Interest income, net
  Income tax provision
  Liquidity and Capital Resources
    
    
    the SEC and DOJ investigations and proceedings; and
    
    the defense and resolution of the civil litigation matters.
 Off-Balance Sheet Arrangements
  31




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##### Table of Contents



Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  32




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 Governmental Investigations
     Customer Litigation
 South Broward Putative Class Action
   Kaiser Litigation
  33




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##### Table of Contents



Medical Transcriptionist Litigation
 Hoffmann Putative Class Action
  Force Putative Class Action
  Myers Putative Class Action
    34




---



##### Table of Contents



Shareholder Litigation
 Costa Brava Partnership III, L.P. Shareholder Litigation
      35




---



##### Table of Contents



Kahn Putative Class Action
     Newcastle Shareholder Litigation
   36




---



##### Table of Contents



.
   Reseller Arbitration Demand
   37




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##### Table of Contents



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.
   
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
 38




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##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 Exhibits
 No.
    
    Description10.1(1)
    
    Settlement Agreement and General Release dated May 21, 2008 by and among
MedQuist Inc., MedQuist Transcriptions, Ltd., Ronald Scarpone, John Suender, Brian Kearns, and
Michael Clark, on the one hand, and South Broward Hospital District, Partners HealthCare System,
Inc., NorthBay HealthCare Group, Riverside Healthcare System, LP d/b/a Riverside Community
Hospital, West Hills Hospital d/b/a West Hills Hospital and Medical Center, HCA Management
Services, LP on behalf of the HCA Affiliates (as specified in Attachment A to the Settlement
Agreement), St. Lukes Regional Medical Center, Ltd., an Idaho non-profit corporation, Palisades
Medical Center, Mt. Sinai Medical Center of Florida, Inc., Ascension Health, Bayonne Medical
Center, Bon Secours Health System, Inc., and University of Colorado Hospital, on the other hand.31.1
    
    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/A filed with the SEC on June 13, 2008
 39




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##### Table of Contents



SIGNATURES
  MEDQUIST INC./s/ Mark IvieMark IvieInterim President and Chief Executive Officer
(Principal Executive Officer)  /s/ Kathleen E. DonovanKathleen E. DonovanSenior Vice President and Chief Financial
Officer (Principal Financial Officer)  40




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##### Table of Contents



Exhibit Index
 No.
    
    Description31.1
    
    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
 41