e10vq

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N347bNNBK4Ld1nkcoM5DcIUBkj0FYAVlJIAVQTxqjk7gJA/kAZqehTivezCl5iDq owirMTrvWF9bh+dHV/usUA== 0000893220-07-003599.txt : 20071108 0000893220-07-003599.hdr.sgml : 20071108 20071108160122 ACCESSION NUMBER: 0000893220-07-003599 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20070930 FILED AS OF DATE: 20071108 DATE AS OF CHANGE: 20071108 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDQUIST INC CENTRAL INDEX KEY: 0000884497 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 222531298 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19941 FILM NUMBER: 071225797 BUSINESS ADDRESS: STREET 1: 1000 BISHOPS GATE BLVD STREET 2: SUITE 300 CITY: MOUNT LAUREL STATE: NJ ZIP: 08054-4632 BUSINESS PHONE: 8568108000 MAIL ADDRESS: STREET 1: 1000 BISHOPS GATE BLVD STREET 2: SUITE 300 CITY: MOUNT LAUREL STATE: NJ ZIP: 08054-4632 10-Q 1 w42097e10vq.htm FORM 10-Q MEDQUIST INC. e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)


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

For the quarterly period ended September 30, 2007.


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

For the transition period from to

Commission file number:

MEDQUIST INC.

(Exact name of registrant as specified in its charter)


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

1000 BISHOPS GATE BOULEVARD		08054-4632
SUITE 300		(Zip Code)
MOUNT LAUREL, NEW JERSEY
Address of principal executive offices)

(856) 206-4000
(Registrant’s telephone number, including area code)

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 þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer þ Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of registrant’s shares of common stock, no par value, outstanding as of October 31, 2007 was 37,487,323.

MEDQUIST INC.

INDEX


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

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MedQuist Inc. and Subsidiaries

Consolidated Statements of Operations
(In thousands, except per share amounts)
Unaudited


	Three months ended						Nine months ended
	September 30,						September 30,
	2007			2006			2007			2006
Net revenues	$	82,518		$	82,096		$	260,276		$	271,469


Operating costs and expenses:
Cost of revenues		64,290			67,929			198,918			214,656
Selling, general and administrative		15,548			12,765			48,158			39,408
Research and development		3,808			3,447			10,073			9,705
Depreciation		2,861			3,149			8,040			9,043
Amortization of intangible assets		1,361			1,363			4,065			4,474
Cost of investigation and legal proceedings, net		4,441			(3,854	)		(456	)		9,019
Restructuring charges		554			1,234			935			2,939


Total operating costs and expenses		92,863			86,033			269,733			289,244


Operating loss		(10,345	)		(3,937	)		(9,457	)		(17,775	)

Equity in income of affiliated company		124			180			447			738
Interest income, net		2,302			1,977			6,477			5,675


Loss before income taxes		(7,919	)		(1,780	)		(2,533	)		(11,362	)

Income tax provision		1,016			324			2,402			1,629


Net loss	$	(8,935	)	$	(2,104	)	$	(4,935	)	$	(12,991	)


Net loss per share:
Basic	$	(0.24	)	$	(0.06	)	$	(0.13	)	$	(0.35	)

Diluted	$	(0.24	)	$	(0.06	)	$	(0.13	)	$	(0.35	)


Weighted average shares outstanding:
Basic		37,484			37,484			37,484			37,484

Diluted		37,484			37,484			37,484			37,484

The accompanying notes are an integral part of these consolidated financial statements.

MedQuist Inc. and Subsidiaries

Consolidated Balance Sheets
(In thousands)
Unaudited


	September 30,		December 31,
	2007		2006
Assets
Current assets:
Cash and cash equivalents	$	165,942	$	175,412
Accounts receivable, net of allowance of $4,053 and $4,494, respectively		54,039		54,778
Insurance receivable		—		707
Income tax receivable		1,923		1,772
Deferred income taxes		297		298
Other current assets		8,599		7,645

Total current assets		230,800		240,612

Property and equipment, net of accumulated depreciation of $45,240 and $37,838, respectively		22,231		20,969
Goodwill		125,683		124,826
Other intangible assets, net of accumulated amortization of $48,386 and $44,218, respectively		42,923		45,448
Deferred income taxes		2,335		2,378
Other assets		7,570		6,906

Total assets	$	431,542	$	441,139


Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	15,101	$	10,779
Accrued expenses		19,271		28,812
Accrued compensation		16,521		15,558
Customer accommodation and quantification		18,768		24,777
Deferred revenue		15,312		15,202

Total current liabilities		84,973		95,128

Deferred income tax liability		19,957		18,034
Other non-current liabilities		2,204		458


Commitments and contingencies (Note 11)

Shareholders’ equity:
Common stock — no par value; authorized 60,000 shares; 37,484 and 37,484 shares issued and outstanding, respectively		235,526		235,080
Retained earnings		83,147		87,693
Deferred compensation		332		332
Accumulated other comprehensive income		5,403		4,414


Total shareholders’ equity		324,408		327,519


Total liabilities and shareholders’ equity	$	431,542	$	441,139

The accompanying notes are an integral part of these consolidated financial statements.

MedQuist Inc. and Subsidiaries

Consolidated Statements of Cash Flows
(In thousands)
Unaudited


	Nine months ended
	September 30,
	2007			2006
Operating activities:
Net loss	$	(4,935	)	$	(12,991	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization		12,105			13,517
Equity in income of affiliated company		(447	)		(738	)
Deferred income tax provision		1,848			3,680
Stock option expense		446			1,591
Provision for doubtful accounts		3,649			4,725
Asset writeoff charges		78			498
Changes in operating assets and liabilities excluding effects of acquisitions:
Accounts receivable		(4,707	)		9,021
Income tax receivable		(151	)		1,431
Insurance receivable		707			(8,702	)
Other current assets		(954	)		1,544
Other non-current assets		(219	)		1,129
Accounts payable		3,156			1,035
Accrued expenses		(9,341	)		(9,119	)
Accrued compensation		929			(3,999	)
Customer accommodation and quantification		(4,048	)		(14,329	)
Deferred revenue		(84	)		(2,174	)
Other non-current liabilities		1,938			(2,447	)

Net cash used in operating activities	$	(30	)	$	(16,328	)


Investing activities:
Purchase of property and equipment		(8,337	)		(7,296	)
Capitalized software		(1,218	)		(21	)

Net cash used in investing activities		(9,555	)		(7,317	)

Effect of exchange rate changes		115			52

Net decrease in cash and cash equivalents		(9,470	)		(23,593	)

Cash and cash equivalents — beginning of period		175,412			178,271

Cash and cash equivalents — end of period	$	165,942		$	154,678


Supplemental cash flow information:

Cash paid (recovered) for income taxes	$	167		$	(3,465	)

Accommodation payments paid with credits	$	1,961		$	424

The accompanying notes are an integral part of these consolidated financial statements.

MedQuist Inc. and Subsidiaries

Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited

1. Description of Business

We are a provider of medical transcription technology and services which are integral to the clinical documentation workflow. We service health systems, hospitals and large group medical practices throughout the U.S. In the clinical documentation workflow, we provide, in addition to medical transcription technology and services, digital dictation, speech recognition, electronic signature and medical coding technology and services. We are a member of the Philips Group of Companies and collaborate with Philips Medical Systems in product development. On November 2, 2007, our majority shareholder, Koninklijke Philips Electronics N.V. (Philips), announced that it was going to proceed with the sale of its ownership interest in us if a satisfactory price and other acceptable terms can be realized. In addition, on November 2, 2007 we announced, in light of Philips’ announcement, that our board of directors, in connection with its previously disclosed review of our strategic alternatives, is evaluating whether a sale of us is in our best interests and the best interests of our shareholders. See Note 11.

2. Introductory Note

In November 2003, one of our employees raised allegations that we had engaged in improper billing practices. In response, our board of directors undertook an independent review of these allegations and engaged the law firm of Debevoise and Plimpton LLP, who in turn retained PricewaterhouseCoopers LLP, to assist in the review (Review). Subsequently, on March 25, 2004, we filed a Form 8-K detailing our determination that the Review would not be completed by the March 30, 2004 filing deadline for our 2003 Form 10-K. As a result of our noncompliance with the U.S. Securities and Exchange Commission’s (SEC) periodic disclosure requirements, our common stock was delisted from the NASDAQ National Market on June 16, 2004.

On July 30, 2004, we issued a press release entitled “MedQuist Announces Key Findings Of Independent Review Of Client Billing,” which announced certain findings in the Review regarding our billing practices (July 2004 Press Release). The Review found, among other things, that with respect to our medical transcription services contracts that called for billing based on the “AAMT line” billing unit of measure, we used ratios and formulae to help calculate the number of AAMT transcription lines for which our customers (AAMT Customers) were billed rather than counting each of the relevant characters to determine a billable line as provided for in the contracts. With respect to these contracts, our use of ratios and formulae to arrive at AAMT line counts was generally not disclosed to our AAMT Customers.

The AAMT line unit of measure was developed in 1993 by three medical transcription industry groups, including the American Association for Medical Transcription (AAMT), in an attempt to standardize industry billing practices for medical transcription services. Following the development of the AAMT line unit of measure, customers increasingly began to request AAMT line billing. Accordingly, we, along with other vendors in the medical transcription industry, began to incorporate the AAMT line unit of measure into certain customer contracts. The AAMT line definition provides that a “line” consists of 65 characters and defined the term “character” to include such things as macros and function keys as well as other information necessary for the final appearance and content of a document. However, these definitions turned out to be inherently ambiguous and difficult to apply in practice. As a result, the AAMT line was applied inconsistently throughout the medical transcription industry. In fact, no single set of AAMT characters was ever defined or agreed upon for this unit of measure, and it was eventually renounced by the groups responsible for its development.

The Review concluded that our rationale for using ratios and formulae to determine the number of AAMT transcription lines for billing was premised on a good faith attempt to adopt a consistent and commercially reasonable billing method given the lack of common standards in the industry and ambiguities inherent in the AAMT line definition. The Review concluded that the use of ratios and formulae within the medical transcription platform setups may have resulted in over billing and under billing of some customers. In addition, in some instances, customers’ ratios and formulae were adjusted without disclosure to the AAMT Customers. However, the Review found no evidence that the amounts we billed AAMT Customers were, in general, commercially unfair or inconsistent with what competitors would have charged. Moreover, it was noted in the Review that we have been able to attract and retain customers in a competitive market.

Following the issuance of the July 2004 Press Release, we began an extensive review of our historical AAMT line billing (Management’s Billing Assessment) and in August 2004 informed our current and former customers that we would be contacting them to discuss how they might have been impacted. In response, several former and current customers, including some of our largest customers, contacted us requesting, among other things, (i) an explanation of the billing methods employed by us for the customer’s account; (ii) an individualized review of the customer’s past billings, and/or (iii) a meeting with a member of our management team to discuss the July 2004 Press Release as it pertained to the customer’s particular account. Some customers demanded an immediate refund or credit to their account; others threatened to withhold payment on invoices and/or take their business elsewhere unless we timely responded to their information and/or audit requests.

MedQuist Inc. and Subsidiaries

Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited

In response to our customers’ concern over the July 2004 Press Release, we made the decision to take action to try to avoid litigation and preserve and solidify our customer business relationships by offering a financial accommodation to our AAMT Customers. See Note 7.

Disclosure of the findings of the Review, along with the delisting of our common stock, precipitated a number of governmental investigations and civil lawsuits. See Note 11.

3. Basis of Presentation

The consolidated financial statements included herein are unaudited and have been prepared by us pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been omitted pursuant to such rules and regulations although we believe that the disclosures are adequate to make the information presented not misleading. The consolidated financial statements include our accounts and the accounts of all of our wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.

These statements reflect all normal recurring adjustments that, in the opinion of management, are necessary for the fair presentation of the information contained herein. These consolidated financial statements should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations. As permitted under U.S. generally accepted accounting principles, interim accounting for certain expenses is based upon full year assumptions. Such amounts are expensed in full in the year incurred. For interim financial reporting purposes, income taxes are recorded based upon actual year to date income tax rates as permitted by Financial Accounting Standards Board (FASB) Interpretation 18, Accounting for Income Taxes in Interim Periods.

Our accounting policies are set forth in detail in Note 3 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2006 filed with the SEC on August 31, 2007.

4. Stock-Based Compensation

On January 1, 2006, we adopted the fair value recognition provisions of FASB Statement 123 (revised 2004), Share-Based Payment, (Statement 123(R)), using the modified prospective transition method which requires application of Statement 123(R) on the date of adoption. Under the modified prospective transition method, compensation cost associated with share-based awards recognized in 2006 includes compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value previously estimated in accordance with the provisions of FASB Statement 123, Accounting for Stock-Based Compensation (Statement 123). Had we granted options during the nine months ended September 30, 2007, the compensation cost for those options would have been based on the grant-date fair value estimated in accordance with the provisions of Statement 123(R). In March 2005, the SEC issued SAB 107 (SAB 107) which provided supplemental guidance related to Statement 123(R). We have applied the provisions of SAB 107 in our adoption of Statement 123(R).

Statement 123(R) requires companies to estimate the fair value of stock options on the date of grant using an option pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as compensation expense over the requisite service periods. The following table summarizes the stock-based compensation expense related to employee stock options recognized under Statement 123(R). Included in these expenses for the three months ended September 30, 2007 and 2006, were $101 and $0, respectively, and for the nine months ended September 30, 2007 and 2006, $120 and $102, respectively, that were related to options that were issued to certain executive officers on October 4, 2007, which was the date we became current in our periodic reporting obligations with the SEC.


	Three months ended September 30,				Nine months ended September 30,
	2007		2006		2007		2006
Selling, general and administrative	$	130	$	87	$	188	$	398
Research and development		39		39		62		175
Cost of revenues		70		313		196		1,018

Total	$	239	$	439	$	446	$	1,591

MedQuist Inc. and Subsidiaries

Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited

As of September 30, 2007, total unamortized stock-based compensation cost related to non-vested stock options, net of expected forfeitures, was $131, which is expected to be recognized over a weighted-average period of .4 years.

The fair value of the options granted is estimated using the Black-Scholes option-pricing model.

Our stock option plans provide for the granting of options to purchase shares of common stock to eligible employees (including officers) as well as to our non-employee directors. Options may be issued with exercise prices equal to the fair market value of the common stock on the date of grant or at a price determined by our board of directors or a committee of our board of directors. Stock options vest and are exercisable over periods determined by the committee, generally five years, and expire no more than 10 years after the grant.

In July 2004, our board of directors affirmed our June 2004 decision to indefinitely suspend the exercise and future grant of options under our stock option plans. Ten former executives separated from us in 2005 and 2004. Notwithstanding the suspension, to the extent such executives held options that were vested as of their resignation date, such options remain exercisable for the post-termination period, generally 90 days, commencing on the date that the suspension is lifted for the exercise of options. This suspension was lifted on October 4, 2007. The extension of the life of the awards was recorded as a modification of the grants. There are 704 shares that have qualified for this post-termination exercise period. A summary of these post-termination options as of September 30, 2007 is as follows:


					Options exercisable
									Average
					Number of		Intrinsic		Exercise
Range of Exercise Prices					Shares		Value		Price
$	2.71	—	$	10.00		34	$	240	$	5.39
$	10.01	—	$	20.00		146		—	$	15.02
$	20.01	—	$	70.00		524		—	$	46.76

						704	$	240

Information with respect to our common stock as of September 30, 2007 is as follows:


						Weighted
				Weighted		Average
	Shares			Average		Remaining		Aggregate
	Subject to			Exercise		Contractual		Intrinsic
	Options			Price		Life in Years		Value
Outstanding, December 31, 2006		2,282		$	32.70
Forefeited		(110	)	$	30.76
Canceled		(4	)	$	17.45

Outstanding, September 30, 2007		2,168		$	32.82		3.0	$	246

Exercisable, September 30, 2007		2,110		$	33.25		2.9	$	246


Options vested and expected to vest as of September 30, 2007		2,130		$	33.10		3.0	$	246

There were no options granted or exercised during the nine months ended September 30, 2007 and 2006. The total fair value of shares vested during the nine months ended September 30, 2007 was $276. The aggregate intrinsic value is calculated using the difference between the closing stock price on the last trading day of the quarter and the option exercise price, multiplied by the number of in-the-money options.

MedQuist Inc. and Subsidiaries

Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited

A summary of outstanding and exercisable options as of September 30, 2007 is as follows:


Options outstanding								Options exercisable
				Weighted
				Average		Weighted				Weighted
				Remaining		Average				Average
Range of		Number		Contractual Life		Exercise		Number		Exercise
Exercise Prices		of Shares		(in years)		Price		of Shares		Price
$	2.71 - $10.00		34		2.0	$	5.39		34	$	5.39
$	10.01 - $20.00		543		3.8	$	16.48		485	$	16.37
$	20.01 - $30.00		819		3.5	$	26.71		819	$	26.71
$	30.01 - $40.00		218		1.7	$	32.23		218	$	32.23
$	40.01 - $70.00		554		1.8	$	59.84		554	$	59.84

			2,168		3.0	$	32.82		2,110	$	33.25

As of September 30, 2007, there were 1,151 additional options available for grant under our stock option plans. On October 4, 2007, certain executive officers, in accordance with their employment agreements, received an aggregate of 200 options with an exercise price of $11.20, which was equal to the closing price of our common stock on the date of grant as reported by the Pink Sheets, LLC. The following table reflects the expenses related to these stock options that were included as part of the Statement 123(R) stock-based compensation expense in the accompanying consolidated statements of operations with respect to these stock options:


	Three months ended September 30,				Nine months ended September 30,
	2007		2006		2007		2006
Selling, general and administrative	$	71	$	—	$	84	$	72
Research and development		30		—		36		30

Total	$	101	$	—	$	120	$	102

Since the exercise price of these options was not known until October, 2007, the fair value of such awards was remeasured as of each balance sheet date until the exercise price was determined.

5. Other Comprehensive Loss

Other comprehensive loss was as follows:


	Three months ended September 30,						Nine months ended September 30,
	2007			2006			2007			2006
Net loss	$	(8,935	)	$	(2,104	)	$	(4,935	)	$	(12,991	)
Foreign currency translation adjustment		587			486			989			625

Comprehensive loss	$	(8,348	)	$	(1,618	)	$	(3,946	)	$	(12,366	)

6. Net Loss per Share

Basic net loss per share is computed by dividing net loss by the weighted average number of shares outstanding during each period. Diluted net loss per share is computed by dividing net loss by the weighted average shares outstanding, as adjusted for the dilutive effect of common stock equivalents, which consist only of stock options, using the treasury stock method.

MedQuist Inc. and Subsidiaries

Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited

The following table reflects the weighted average shares outstanding used to compute basic and diluted net loss per share:


	Three months ended September 30,						Nine months ended September 30,
	2007			2006			2007			2006
Net loss	$	(8,935	)	$	(2,104	)	$	(4,935	)	$	(12,991	)


Weighted average shares outstanding:
Basic		37,484			37,484			37,484			37,484
Diluted		37,484			37,484			37,484			37,484

Net loss per share:
Basic	$	(0.24	)	$	(0.06	)	$	(0.13	)	$	(0.35	)
Diluted	$	(0.24	)	$	(0.06	)	$	(0.13	)	$	(0.35	)

The computation of diluted net loss per share does not assume conversion, exercise or issuance of shares that would have an anti-dilutive effect on diluted net loss per share. For the three months ended September 30, 2007 and 2006, shares having an anti-dilutive effect on net loss per share and, therefore, excluded from the calculation of diluted loss per share, totaled 2,168 and 2,237 shares, respectively. For the nine months ended September 30, 2007 and 2006, shares excluded from the calculation of diluted net loss per share, totaled 2,168 and 2,237 shares, respectively.

7. Customer Accommodation and Quantification

In connection with our decision to offer financial accommodations to our AAMT Customers, we analyzed our historical billing information and the available report-level data to develop individualized accommodation offers to be made to our AAMT Customers (Accommodation Analysis). This analysis took approximately one year to complete. The methodology utilized to develop the individual accommodation offers was designed to generate positive accommodation outcomes for our AAMT Customers. As such, the methodology was not a calculation of potential over billing nor was it intended as a measure of damages or a reflection of any admission of liability due and owed to our AAMT Customers. Instead, the Accommodation Analysis was a methodology that was developed to arrive at commercially reasonable and fair accommodation offers that would be acceptable to our AAMT Customers without negotiation.

In the fourth quarter of 2005, based on the Accommodation Analysis, our board of directors authorized management to make cash accommodation offers to AAMT customers in the aggregate amount of $65,413. In 2006, this amount was adjusted by a net additional amount of $1,157 based on a refinement of the Accommodation Analysis resulting in an aggregate amount of $66,570. By accepting our accommodation offer, an AAMT Customer must agree, among other things, to release us from any and all claims and liability regarding AAMT line and other billing related issues.

As part of this process, we also conducted an analysis in an attempt to quantify the economic consequences of potentially unauthorized adjustments to AAMT Customers’ ratios and formulae within the transcription platform setups (Quantification). This Quantification was calculated to be $9,835.

Of the authorized cash accommodation amount of $66,570, $1,157 and $57,678 were treated as consideration given by a vendor to a customer and accordingly recorded as a reduction in revenues in 2006 and 2005, respectively. The balance of $7,735 plus an additional $2,100 has been accounted for as a billing error associated with the Quantification resulting in a reduction of revenues in various reporting periods from 1999 to 2005.

The goal of our accommodation program was to reach a settlement with our AAMT Customers. However, the Accommodation Analysis for certain AAMT Customers did not result in positive accommodation outcomes. For certain other customers, the Accommodation Analysis resulted in calculated cash accommodation offers that we believed were insufficient as a percentage of their historical AAMT line billing to motivate such customers to resolve their billing disputes with us. Therefore, in 2006 we modified our accommodation program to enable us to offer this group of AAMT Customers credits for the purchase of future products and/or services from us over a defined period of time. On July 21, 2006, our board of directors authorized management to make credit

MedQuist Inc. and Subsidiaries

Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited

accommodation offers up to an additional $8,676 beyond amounts previously authorized. During 2006, this amount was adjusted by a net additional amount of $569 based on a refinement of the Accommodation Analysis resulting in an aggregate amount of $9,245. In connection with the credit accommodation offers we recorded a reduction in revenues and corresponding increase in accrued expenses of $9,245 in the third quarter of 2006.

The following is a summary of the financial statement activity related to the customer accommodation and the Quantification which is included as a separate line item in the accompanying consolidated balance sheets as of September 30, 2007 and December 31, 2006:


	Nine months ended			Year ended
	September 30, 2007			December 31, 2006
Beginning balance	$	24,777		$	46,878
Customer accommodation		—			10,402
Payments and other adjustments		(4,048	)		(31,523	)
Credits		(1,961	)		(980	)

Ending balance	$	18,768		$	24,777

8. Cost of Investigation and Legal Proceedings, Net

For the three months ended September 30, 2007 and 2006, we recorded a charge of $4,441 and a credit of ($3,854), respectively, and for the nine months ended September 30, 2007 and 2006, we recorded a credit of ($456) and a charge of $9,019, respectively, for costs associated with Management’s Billing Assessment as well as defense and other costs associated with the SEC and U.S. Department of Justice (DOJ) investigations and civil litigation that we deemed to be unusual in nature. These costs are net of insurance claim reimbursements. We record insurance claims when the realization of the claims is probable. See Note 11. The following is a summary of the amounts recorded in the accompanying consolidated statements of operations:


	Three months ended September 30,					Nine months ended September 30,
	2007		2006			2007			2006
Legal fees	$	3,937	$	3,327		$	12,783		$	11,552
Other professional fees		504		805			1,948			3,642
Nightingale & Associates, LLC (Nightingale) services		—		648			197			2,356
Insurance claims		—		(8,702	)		(15,386	)		(8,702	)
Other		—		68			2			171

Total	$	4,441	$	(3,854	)	$	(456	)	$	9,019

9. Restructuring Plans

During 2005, we implemented a restructuring plan (2005 Plan) based on the implementation of a centralized national service delivery model. The 2005 Plan involved the consolidation of operating facilities and a related reduction in workforce. The table below reflects the financial statement activity related to the 2005 Plan which is included in accrued expenses in the accompanying consolidated balance sheets:


	Nine Months Ended September 30, 2007												Year Ended December 31, 2006
				Non-Cancelable												Non-Cancelable
	Total			Leases			Severance			Equipment			Total			Leases			Severance			Equipment
Beginning balance	$	712		$	648		$	64		$	—		$	2,050		$	1,693		$	357		$	—
Additional charge		404			233			146			25			3,442			1,653			1,447			342
Usage		(974	)		(739	)		(210	)		(25	)		(4,780	)		(2,698	)		(1,740	)		(342	)

Ending balance	$	142		$	142		$	—		$	—		$	712		$	648		$	64		$	—

The 2005 Plan severance was completed during the third quarter of 2007 and the non-cancelable leases will be completed in 2009.

MedQuist Inc. and Subsidiaries

Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited

During the third quarter of 2007, we implemented a restructuring plan (2007 Plan) related to the reduction in workforce of 104 employees as a result of the refinement of our centralized national services delivery model. We recorded $531 in severance charges and paid $24 related to the 2007 Plan during the three months ended September 30, 2007. Payments related to the 2007 Plan will be completed in 2008.

10. Income Taxes

Our consolidated income tax expense for the three and nine months ended September 30, 2007 was $1,016 and $2,402, respectively, and consists principally of an increase in deferred tax liabilities related to goodwill amortization deductions for income tax purposes during the current year as well as state and foreign income taxes. We have recorded a valuation allowance to reduce our net deferred tax assets to an amount that is more likely than not to be realized in future years.

Effective January 1, 2007, we adopted FASB Interpretation 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement 109 (FIN 48). FIN 48 prescribes, among other things, a recognition threshold and measurement attributes for the financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in a company’s income tax return. FIN 48 utilizes a two-step approach for evaluating uncertain tax positions accounted for in accordance with FASB Statement 109, Accounting for Income Taxes. Step one, Recognition, requires a company to determine if the weight of available evidence indicates that a tax position is more likely than not to be sustained upon audit, including resolution of related appeals or litigation processes, if any. Step two, Measurement, is based on the largest amount of benefit, which is more likely than not to be realized on settlement with the taxing authority. We recorded a cumulative effect increase to retained earnings of $389 upon adoption.

As of January 1, 2007, the date of adoption, and after accounting for the cumulative effect adjustment noted above, our unrecognized tax benefits were $5,444 which includes $440 of accrued interest related to unrecognized income tax benefits, which we recognize as a component of the provision for income taxes. Of this amount $3,584 is attributable to uncertain tax positions with respect to certain deferred tax assets, which if recognized would be offset by a full valuation allowance due to the fact that it is not more likely than not that we would recognize sufficient income in the future to recognize these assets. Of the unrecognized tax benefits, $4,648 would impact the effective tax rate if recognized in a future period, not considering the impact of the current valuation allowance. $2,788 of this benefit would currently be offset by an increase in the valuation allowance as it is not more likely than not that we would have sufficient earnings to recognize this amount.

We anticipate decreases in unrecognized tax benefits of approximately $195 related to state statutes of limitations expiring as well as miscellaneous settlements during 2007.

We file income tax returns in the U.S. federal jurisdiction, all U.S. states which require income tax returns and foreign jurisdictions. Due to the nature of our operations, no state or foreign jurisdiction is individually significant. We have completed examinations by the U.S. federal jurisdiction through the year ended December 31, 2004. We are not currently under examination by the Internal Revenue Service. With limited exceptions we are no longer subject to examination by the U.S. federal or states jurisdiction for years beginning prior to 2003. We are no longer subject to examination by the UK federal jurisdiction for years beginning prior to 2005. We do have various state tax audits and appeals in process at any given time. We do not anticipate any adjustments that would result in a material change to our financial position or results of operations.

11. Commitments and Contingencies

Governmental Investigations

The SEC is currently conducting a formal investigation of us relating to our billing practices. We have been fully cooperating with the SEC since it opened its investigation in 2004. We have complied and are continuing to comply with information and document requests by the SEC.

MedQuist Inc. and Subsidiaries

Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited

connection with the provision of medical transcription services. We have complied and are continuing to comply with information and document requests by the DOJ.

The DOL is currently conducting a formal investigation into the administration of our 401(k) plan. We have been fully cooperating with the DOL since it opened its investigation in 2004. We have complied and are continuing to comply with information and document requests by the DOL.

Developments relating to the SEC, DOJ and/or DOL investigations will continue to create various risks and uncertainties that could materially and adversely affect our business and our historical and future financial condition, results of operations and cash flows.

Shareholder Securities Litigation

A shareholder putative class action lawsuit was filed against us in the United States District Court District of New Jersey on November 8, 2004. The action, entitled William Steiner v. MedQuist, Inc., et al., Case No. 1:04-cv-05487-FLW (Shareholder Putative Action), was filed against us and certain of our former officers, purportedly on behalf of an alleged class of all persons who purchased our common stock during the period from April 23, 2002 through November 2, 2004, inclusive (Securities Class Period). The complaint specifically alleged that defendants violated federal securities laws by purportedly issuing a series of false and misleading statements to the market throughout the Securities Class Period, which statements allegedly had the effect of artificially inflating the market price of our securities. The complaint asserted claims under Section 10(b) and 20(a) of the Exchange Act and Rule 10b-5, thereunder. Named as defendants, in addition to us, were our former President and Chief Executive Officer and our former Executive Vice President and Chief Financial Officer.

On August 16, 2005, a First Amended Complaint in the Shareholder Putative Class Action was filed against us in the United States District Court District of New Jersey. The First Amended Complaint named additional defendants, including certain current and former directors, certain of our former officers, our former and current external auditors and Philips. Like the original complaint, the First Amended Complaint asserted claims under Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 thereunder. The Securities Class Period of the original complaint was expanded 20 months to include the period from March 29, 2000 through June 14, 2004. Pursuant to an October 17, 2005 consent order approved by the Court, lead plaintiff Greater Pennsylvania Pension Fund filed a Second Amended Complaint on November 15, 2005. The Second Amended Complaint dropped Philips as a defendant, but alleged the same claims and the same purported class period as the First Amended Complaint. Plaintiffs sought unspecified damages. Pursuant to the provisions of the Private Securities Litigation Reform Act, discovery in the action was stayed pending the filing and resolution of the defendants’ motions to dismiss, which were filed on January 17, 2006, and which were fully briefed as of June 16, 2006. On September 29, 2006, the Court denied our motions to dismiss and the motion to dismiss of the individual defendants. In the same order, the Court granted the motion to dismiss filed by our former and current external auditors. On November 3, 2006, we filed our Answer denying the material allegations contained in the Second Amended Complaint. On March 23, 2007, we entered into a memorandum of understanding and a stipulation of settlement with the lead plaintiff in which we agreed to pay $7,750 to settle all claims throughout the class period against all defendants in the action. We accrued the aforementioned $7,750 as of December 31, 2005. In April 2007, we paid the entire $7,750 into an escrow account for the eventual distribution to the plaintiffs. On May 16, 2007, the Court issued an Order Preliminarily Approving Settlement and Providing for Notice. The Court conducted a final approval hearing and approved the settlement on August 15, 2007. Neither we nor any of the individuals named in the action has admitted to liability or any wrongdoing in connection with the settlement.

Customer Litigation

A putative class action was filed in the United States District Court for the Central District of California. The action, entitled South Broward Hospital District, d/b/a Memorial Regional Hospital, et al. v. MedQuist, Inc. et al., Case No. CV-04-7520-TJH-VBKx, was filed on September 9, 2004 against us and certain of our present and former officials, purportedly on behalf of an alleged class of non-federal governmental hospitals and medical centers that the complaint claims were wrongfully and fraudulently overcharged for transcription services by defendants based primarily on our use of the AAMT line billing unit of measure. The complaint charged fraud, violation of the California Business and Professions Code, unjust enrichment, conversion, negligent supervision and violation of RICO. Plaintiffs seek damages in an unspecified amount, plus costs and interest, an injunction against alleged continuing illegal activities, an accounting, punitive damages and attorneys’ fees. Named as defendants, in addition to us, were one of our senior vice

MedQuist Inc. and Subsidiaries

Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited

presidents, our former executive vice president of marketing and new business development, our former executive vice president and chief legal officer, and our former executive vice president and chief financial officer.

On December 20, 2004, we and the individual defendants filed motions to dismiss for lack of personal jurisdiction and improper venue, or in the alternative, to transfer the putative action to the United States District Court for the District of New Jersey. On February 2, 2005, plaintiffs filed a Second Amended Complaint both adding and deleting named plaintiffs in an attempt to keep the putative action in the United States District Court for the Central District of California. On March 30, 2005, the United States District Court for the Central District of California issued an order transferring the putative action to the United States District Court District of New Jersey.

On August 1, 2005, we and the individual defendants filed their respective Answers denying the material allegations contained in the Second Amended Complaint. On August 31, 2005, we and the individual defendants filed motions to dismiss the Second Amended Complaint for failure to state a claim and a motion to dismiss in favor of arbitration, or in the alternative, to stay pending arbitration. On December 12, 2005, the plaintiffs filed an Amendment to the Second Amended Complaint. On December 13, 2005, the Court issued an order requiring plaintiffs to file a Third Amended Complaint.

Plaintiffs filed the Third Amended Complaint on January 4, 2006. The Third Amended Complaint expands the claims made beyond issues arising from contracts based on AAMT line billing and beyond customers billed based on an AAMT line, alleging that we engaged in a scheme to inflate customers’ invoices without regard to the terms of individual contracts and even in the absence of any written contract. The Third Amended Complaint also limits plaintiffs’ claim for fraud in the inducement of the agreement to arbitrate to the three named plaintiffs whose contracts contain an arbitration provision and a subclass of similarly situated customers. On January 20, 2006 we and the individual defendants filed motions to dismiss the Third Amended Complaint for failure to state a claim and a motion to compel arbitration of all claims by the arbitration subclass and to stay the case in its entirety pending arbitration. On March 8, 2006 the Court held a hearing on these motions, and took the matter under submission. On March 30, 2007, the Court issued an order holding that plaintiffs could not make out a claim that we had violated the federal RICO statute, thus eliminating any claim against us for treble damages. The Court also found that plaintiffs could not make out a claim that we had engaged in any unfair or deceptive acts or practices in violation of state law, or that we had made any negligent misrepresentations to plaintiffs. In its ruling, the Court, without reaching a decision of whether any wrongdoing had occurred, allowed plaintiffs to proceed with their claims against us for fraud, unjust enrichment and an accounting. In its order, the Court denied our motion to compel arbitration regarding those customers whose contracts contained an agreement to arbitrate. We have appealed that decision to the Third Circuit Court of Appeals, and we moved the district court to stay the matter pending that appeal. The district court heard oral argument on our motion to stay on May 30, 2007 and took the motion under submission.

On June 8, 2007, plaintiffs filed a Motion for Summary Action with the Third Circuit Court of Appeals, asking the Court to dismiss plaintiffs who did not enter into arbitration agreements with us from the appeal. We filed our opposition to this motion on June 25, 2007. The Court has referred the motion to the merits panel for decision after full briefing. On August 1, 2007, plaintiffs filed a motion for expedited review on appeal. We did not oppose this motion, and the Third Circuit granted the request for expedited treatment, adopting the briefing schedule agreed to by the parties. The appeal will be fully briefed by November 16, 2007, and the Third Circuit has tentatively set oral argument for December 13, 2007. The Third Circuit ordered the parties to court-sponsored mediation. The parties participated in an initial session with the mediator on September 12, 2007 and a second session on October 12, 2007. An additional telephonic conference is scheduled for November 9, 2007. We believe that the claims asserted have no merit and intend to defend the case vigorously.

Medical Transcriptionist Litigation

Hoffmann Putative Class Action

MedQuist Inc. and Subsidiaries

Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited

action: fraud, breach of contract, demand for accounting, quantum meruit, unjust enrichment, conversion, negligence, negligent supervision, and RICO violations. Plaintiffs sought unspecified compensatory damages, punitive damages, disgorgement and restitution. On December 1, 2005, the Hoffmann matter was transferred to the United States District Court for the District of New Jersey. On January 12, 2006, the Court ordered this case consolidated with the Myers Putative Class Action discussed below. As set forth below, we believe that the claims asserted in the consolidated Myers Putative Class Action have no merit and intend to vigorously defend that action.

Force Putative Class Action

A putative class action entitled Force v. MedQuist Inc. and MedQuist Transcriptions, Ltd., Case No. 05-cv-2608-WSD, was filed against us on October 11, 2005, in the United States District Court for the Northern District of Georgia. The action was brought on behalf of a putative class of current and former employees who claim they are or were compensated on a “per line” basis for medical transcription services but were allegedly underpaid due to the actions of defendants. The named plaintiff asserted claims for breach of contract, quantum meruit and unjust enrichment, and demand an accounting. Upon stipulation and consent of the parties, on February 17, 2006, the Force matter was ordered transferred to the United States District Court for the District of New Jersey. Subsequently, on April 4, 2006, the parties entered into a stipulation and consent order whereby the Force matter was consolidated with the Myers Putative Class Action discussed below, and the consolidated amended complaint filed in the Myers action on January 31, 2006 was deemed to supersede the original complaint filed in the Force matter. As set forth below, we believe that the claims asserted in the consolidated Myers Putative Class Action have no merit and intend to vigorously defend that action.

Myers Putative Class Action

A putative class action entitled, Myers, et al. v. MedQuist Inc. and MedQuist Transcriptions, Ltd., Case No. 05-cv-4608 (JBS), was filed against us on September 22, 2005 in the United States District Court for the District of New Jersey. The action was brought on behalf of a putative class of our employee and independent contractor transcriptionists who claim that they contracted with us to be paid on a 65 character line, but were allegedly underpaid due to intentional miscounting of the number of characters and lines transcribed. The named plaintiffs asserted claims for breach of contract and unjust enrichment, and demand an accounting.

The allegations contained in the Myers case are substantially similar to those contained in the Hoffmann and Force putative class actions and, as detailed above, the three actions have now been consolidated. A consolidated amended complaint was filed on January 31, 2006. In the consolidated amended complaint, the named plaintiffs assert claims for breach of contract, breach of the covenant of good faith and fair dealing and unjust enrichment and demand an accounting. On March 7, 2006 we filed a motion to dismiss all claims in the consolidated amended complaint. The motion was fully briefed and argued on August 7, 2006. The Court denied the motion on December 21, 2006. On January 19, 2007, we filed an answer denying the material allegations pleaded in the consolidated amended complaint. The parties are now proceeding with discovery.

On October 11, 2007, the Court entered a Scheduling Order, ordering plaintiffs to file their motion for class certification not later than December 14, 2007 and setting a deadline of January 14, 2008, for the conclusion of factual discovery. A further status conference is set for January 10, 2008. No date has been set for trial. We believe that the claims asserted in the consolidated actions have no merit and intend to vigorously defend the suit.

Reseller Arbitration Demand

MedQuist Inc. and Subsidiaries

Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited

that we: (i) would provide new products, opportunities and support to the Claimants; (ii) were committed to continuing to use Claimants; (iii) did not intend to create our own sales force with respect to the Claimants’ territory; and (iv) would stay out of the Claimants’ territories and would not attempt to take over the Claimants business and relationships with the Claimants’ customers and end-users. The Claimants assert that they are seeking damages in excess of $24,300. The AAA has not yet set a date for us to formally respond to the arbitration demand. We deny all wrongdoing and intend to defend ourselves vigorously including asserting counterclaims against the Claimants as appropriate.

Other Matters

From time to time, we have been involved in various other claims and legal actions arising in the ordinary course of business. In our opinion, the outcome of such actions will not have a material adverse effect on our consolidated financial position, results of operations, liquidity or cash flows.

We provide certain indemnification provisions within our standard agreement for the sale of software and hardware (collectively, Products) to protect our customers from any liabilities or damages resulting from a claim of U.S. patent, copyright or trademark infringement by third parties relating to our Products. We believe that the likelihood of any future payout relating to these provisions is remote. Accordingly, we have not recorded any liability in our consolidated financial statements as of September 30, 2007 or December 31, 2006 related to these indemnification provisions.

We have insurance policies which provided coverage for certain of the matters related to the legal actions described herein. We filed claims for insurance recoveries commencing in the third quarter of 2006 and as of September 30, 2007 we have recovered $24,794 in the aggregate. We do not expect to receive any further recoveries related to these claims.

In June 2007, we engaged Bear, Stearns & Co. Inc. as our financial advisor to review our strategic alternatives. We are uncertain as to what impact any particular strategic alternative will have on our operating results, our stock price and our business, if accomplished, or whether any transaction will even occur as a result of this review.

On September 20, 2007, we entered into retention and strategic transaction bonus agreements with certain of our executive officers and also entered into retention bonus agreements with certain other employees. The purpose of these bonus agreements is to provide our executive officers and employees with an incentive to remain with us through February 29, 2008 and to further reward each eligible executive officer in the event we are able to successfully complete a strategic transaction.

On November 2, 2007, Philips announced that it was going to proceed with the sale of its ownership interest in us if a satisfactory price and other acceptable terms can be realized. In addition, on November 2, 2007, we announced, in light of Philips announcement, that our board of directors, in connection with its previously disclosed review of our strategic alternatives, is evaluating whether a sale of us is in our best interests and the best interests of our shareholders. There is no assurance that any sale transaction involving us will occur as a result of the evaluation.

12. Related Party Transactions

From time to time, we enter into transactions in the normal course of business with related parties. The audit committee of our board of directors has been charged with the responsibility of approving or ratifying all material related party transactions other than those between us and Philips.

In connection with Philips’ investment in us, we have entered into various agreements with Philips. All material transactions between Philips and us are reviewed and approved by the supervisory committee of our board of directors. The supervisory committee is comprised of directors’ independent from Philips. Listed below is a summary of our material agreements with Philips.

Licensing Agreement

In connection with Philips’ tender offer, we entered into a Licensing Agreement with Philips Speech Processing GmbH, an affiliate of Philips which is now known as Philips Speech Recognition Systems GmbH (PSRS), on May 22, 2000 (Licensing Agreement). The

MedQuist Inc. and Subsidiaries

Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited

Licensing Agreement was subsequently amended by the parties as of January 1, 2002, February 23, 2003, August 10, 2003, September 1, 2004, December 30, 2005 and February 13, 2007.

Under the Licensing Agreement, we license from PSRS its SpeechMagic speech recognition and processing software, including any updated versions of the software developed by PSRS during the term of the License Agreement (Licensed Product), for use by us anywhere in the world. We pay a fee for use of this license based upon a per line fee for each transcribed line of text processed through the Licensed Product.

Upon the expiration of its initial term on June 28, 2005, the Licensing Agreement was renewed for an additional five year term.

In connection with the Licensing Agreement, we have a consulting arrangement with PSRS whereby PSRS assists us with the integration of its speech and transcription technologies.

OEM Supply Agreement

On September 21, 2007, we entered into an Amended and Restated OEM Supply Agreement (Amended OEM Agreement) with PSRS. The Amended OEM Agreement amends and restates a previous OEM Supply Agreement with PSRS dated September 23, 2004. In connection with the Amended OEM Agreement certain amounts paid to PSRS were capitalized in fixed assets and are being amortized over a three-year period.

Pursuant to the Amended OEM Agreement, we purchased a co-ownership interest in all rights and interests in and to SpeechQ for Radiology together with its components, including object and source code for the SpeechQ for Radiology application and the SpeechQ for Radiology integration SDK (collectively, the Product), but excluding the SpeechMagic speech recognition and processing software, which we separately license from PSRS for a fee under the Licensing Agreement. Additionally, the Amended OEM Agreement provides that we shall receive, in exchange for a fee, the exclusive right in the United States, Canada and certain islands of the Caribbean (collectively the Exclusive Territory) to sell, service and deliver the Product. In addition, PSRS has agreed that for the term of the Amended OEM Agreement it will not release a front-end multi-user reporting solution (including one similar to the Product) in the medical market in the Exclusive Territory nor will it directly authorize or assist any of its affiliates to do so either; provided that the restriction does not prevent PSRS’s affiliates from integrating SpeechMagic within their general medical application products. The Amended OEM Agreement further provides that we shall make payments to PSRS for PSRS’ development of an interim version of the software included in the Product (Interim Version). Except for the Interim Version which we and PSRS will co-own, the Amended OEM Agreement provides that any improvements, developments or other enhancements either we or PSRS makes to the Product (collectively, Improvements) shall be owned exclusively by the party that developed such Improvement. Each party has the right to seek patent or other protection of the Improvements it owns independent of the other party.

The term of the Amended OEM Agreement extends through June 30, 2010 and will automatically renew for an additional three year term provided that we are in material compliance with the Amended OEM Agreement as of such date. If PSRS decides to discontinue all business relating to the Product in the Exclusive Territory on or after June 30, 2010, PSRS can effect such discontinuation by terminating the Amended OEM Agreement by providing us with six months’ prior written notice of such discontinuation, provided the earliest such notice can be delivered is June 30, 2010. Either party may terminate the Amended OEM Agreement for cause immediately in the event that a material breach by the other party remains uncured for more than 30 days following delivery of written notice or in the event that the other party becomes insolvent or files for bankruptcy.

Equipment Sales

We purchase dictation related equipment from Philips.

Insurance Coverage through Philips

We obtain all of our business insurance coverage (other than workers’ compensation) through Philips.

MedQuist Inc. and Subsidiaries

Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited

Purchasing Agreements

We enter into annual letter agreements with Philips Electronics North America Corporation (PENAC), an affiliate of Philips, to purchase products and services from certain suppliers under the terms of the prevailing agreements between such suppliers and PENAC.

From time to time, we enter into other miscellaneous transactions with Philips including Philips purchasing certain products and implementation services from us. We recorded net revenues from sales to Philips of $0 and $0 for the three months ended September 30, 2007 and 2006, respectively, and $0 and $26 for the nine months ended September 30, 2007 and 2006, respectively.

Our consolidated balance sheets as of September 30, 2007 and December 31, 2006 reflect accrued expenses due to Philips of $3,622 and $2,030, respectively.

Listed below is a summary of the expenses incurred by us in connection with the various Philips agreements mentioned above for the three and nine months ended September 30, 2007 and 2006. Charges related to these agreements are included in cost of revenues and selling, general and administrative expenses in the accompanying consolidated statements of operations.


	Three months ended September 30,					Nine months ended September 30,
	2007			2006		2007		2006
PSRS licensing	$	645		$	718	$	1,747	$	1,843
PSRS consulting		—			—		—		3
OEM agreement		1,564			383		1,865		928
Dictation equipment		292			129		613		659
Insurance		121			843		1,682		1,289
PENAC		(10	)		—		30		20
Other		—			—		—		42

Total	$	2,612		$	2,073	$	5,937	$	4,784

On July 29, 2004, we entered into an agreement with Nightingale & Associates, LLC (Nightingale) under which Nightingale agreed to provide interim chief executive services to us. On July 30, 2004, our board of directors appointed Howard S. Hoffmann to serve as our interim Chief Executive Officer (CEO). Mr. Hoffmann serves as the Managing Partner of Nightingale. With the departure of our former President in May 2007, our board of directors appointed Mr. Hoffmann to the additional position of President in June 2007. Mr. Hoffmann continues to serve as our President and Chief Executive Officer pursuant to the terms of the agreement between us and Nightingale which was amended on September 19, 2007 (Amendment). The Amendment, among other things, extends the term of Mr. Hoffmann’s role as our President and Chief Executive Officer through February 29, 2008. Our board of directors is responsible for monitoring and reviewing the performance of Mr. Hoffmann on an ongoing basis. Our agreement with Nightingale also permits us to engage additional personnel employed by Nightingale to provide consulting services to us from time to time.

For the three months ended September 30, 2007 and 2006, we incurred charges of $792 and $648, respectively, and for the nine months ended September 30, 2007 and 2006, we incurred charges of $2,279 and $2,356, respectively, for Nightingale services. During the three and nine months ended September 30, 2007, $792 and $2,082, respectively, of the charges for Nightingale’s services were recorded in selling, general and administrative expenses in the accompanying consolidated statements of operations due to Nightingale’s focus on operational matters instead of the Review and Management’s Billing Assessment. Previously charges related to Nightingale were recorded in cost of investigation and legal proceedings, net (see Note 8). As of September 30, 2007 and December 31, 2006, accrued expenses included $899 and $548, respectively, for amounts due to Nightingale for services performed.

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

This report contains forward-looking statements that are based on current expectations, estimates, forecasts and projections about us, the industry in which we operate and other matters, as well as management’s beliefs and assumptions and other statements regarding matters that are not historical facts. These statements include, in particular, statements about our plans, strategies and prospects. For example, when we use words such as “projects,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “should,” “would,” “could,” “will,” “opportunity,” “potential” or “may,” variations of such words or other words that convey uncertainty of future events or outcomes, we are making forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (Securities Act) and Section 21E of the Securities Exchange Act of 1934 (Exchange Act). Our forward-looking statements are subject to risks and uncertainties. Actual events or results may differ materially from the results anticipated in these forward-looking statements as a result of a variety of factors. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include:

	•		each of the matters discussed in Part II, Item 1, Legal Proceedings, and Part II, Item 1A, Risk Factors;

	•		difficulties relating to our significant management turnover;

	•		our ability to recruit and retain qualified medical transcriptionists (MTs) and other employees;

	•		the impact of our new services and products on the demand for our existing services and products;

	•		our current dependence on medical transcription for substantially all of our business;

	•		our ability to expand our customer base;

	•		changes in law, including, without limitation, the impact Health Insurance Portability and Accountability Act of 1996 (HIPAA) will have on our business;

	•		infringement on the proprietary rights of others;

	•		our ability to diversify into other businesses;

	•		the results of our review of strategic alternatives, including our evaluation of whether a sale of us is in the best interest of our shareholders and us;

	•		our ability to effectively integrate newly-acquired operations;

	•		competitive pricing pressures in the medical transcription industry and our response to those pressures; and

	•		general conditions in the economy and capital markets.

These and other risks and uncertainties that could affect our actual results are discussed in this report and in our other filings with the SEC, particularly in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2006 in the section entitled “Risk Factors.”

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, events, levels of activity, performance, or achievements. We do not assume responsibility for the accuracy and completeness of the forward-looking statements other than as required by applicable law. We do not undertake any duty to update any of the forward-looking statements after the date of this report to conform them to actual results, except as required by the federal securities laws.

You should read this section in combination with the section entitled Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2006, included in our Annual Report on Form 10-K for the year ended December 31, 2006.

Executive Overview

We are the leading provider of medical transcription technology and services, which are integral to the clinical documentation workflow. We service health systems, hospitals and large group medical practices throughout the U.S., and we employ approximately

5,900 skilled MTs, making us the largest employer of MTs in the U.S. In the clinical documentation workflow, we provide, in addition to medical transcription technology and services, digital dictation, speech recognition, electronic signature and medical coding technology and services. We are a member of the Philips Group of Companies and collaborate with Philips Medical Systems in product development to leverage Philips’ technologies and professional expertise to deliver industry-leading solutions for our customers.

We were incorporated in New Jersey in 1984 and reorganized in 1987 as a group of outpatient healthcare businesses affiliated with a non-profit healthcare provider. In May 1994, we acquired our first medical transcription business. Through the date of this report, we have acquired over 50 companies. By the end of 1995, we had divested all of our non-medical transcription businesses.

In July 2000, Philips completed a tender offer in which it acquired approximately 60% of our outstanding common stock. Subsequent to the completion of the tender offer, Philips increased its ownership position and currently owns approximately 69.6% of our common stock. On November 2, 2007, Philips announced that it was going to proceed with the sale of its ownership interest in us if a satisfactory price and other acceptable terms can be realized. In addition, on November 2, 2007, we announced, in light of Philips announcement, that our board of directors, in connection with its previously-disclosed review of our strategic alternatives, is evaluating whether a sale of MedQuist is in our best interests and the best interests of our shareholders. There is no assurance that any sale transaction involving us will occur as a result of the evaluation.

In 2001, we acquired Speech Machines, a company based in the United Kingdom, whose technology has since developed into our DocQment^tm Enterprise Platform (DEP). In 2002, we began the process of migrating our customers to our DEP from our many disparate transcription platforms. Following our press release in July 2004 announcing the results of the independent review of our billing practices (Review) resulting from allegations of one of our employees that we engaged in improper billing practices, we accelerated this process and completed it in the first quarter of 2007. As a result of this process, we encountered customer attrition.

In July 2002, we acquired Lanier Healthcare, LLC (Lanier), which derived revenue largely from the sale and implementation of voice-capture and document management solutions and maintenance service of these products. In conjunction with the Lanier acquisition, we began operating in two segments: a Services segment, through which we provided our customers with medical transcription and coding reimbursement services, and a Solutions segment, which was comprised of the operations of Lanier. Effective January 1, 2005, we changed the way we review our financial performance and thus began operating in one segment for financial reporting purposes.

The past few years have been marked by dramatic changes for both us and our industry. During this period, a significant portion of our time and attention has been devoted to matters outside the ordinary course of business such as replacing key members of our executive management team, cooperating with federal investigators, responding to ongoing legal proceedings, and completing the Review and the extensive review of our historical AAMT line billing (Management’s Billing Assessment). A summary of significant events that have occurred during this period is more fully described in our Annual Report on Form 10-K for the year ended December 31, 2006 under the caption “Significant Events Over the Past Few Years” in Item 1, Business and in Part II, Item 1, Legal Proceedings in this report.

We have devoted significant resources over the past few years to improving our fundamental business systems, including our corporate governance functions, financial controls, and operational infrastructure. As our organization was focusing on all of these issues, we also pursued major operational initiatives to consolidate technology platforms, communicate actively with our customers, and restructure our business.

During this same period there have been several significant developments in the medical transcription industry, including:

	•		A shortage of qualified domestic MTs has increased the demand for outsourced medical transcription services by U.S.-based healthcare providers. This demand for qualified MTs, as well as budgetary pressures experienced by healthcare providers, has also caused many more U.S.-based healthcare providers to evaluate and consider the use of offshore medical transcription labor.

	•		Several low cost providers have emerged and aggressively moved into our market offering medical transcription services (performed both domestically and offshore) at prices significantly below our traditional price point. While we believe the market for outsourced medical transcription continues to expand, the growing acceptance by customers of the use of offshore labor has further increased the competitive environment in the medical transcription industry.

	•		There have been technological advances by us and our competitors which have reduced the length of time required to transcribe medical reports, in turn reducing the overall cost of medical transcription services.

	•		Other companies in the healthcare IT space have developed alternative solutions for the creation of electronic clinical documentation that, if successfully implemented, will reduce the overall demand for medical transcription services.

Although we remain the leading provider of medical transcription services in the U.S., we experience competition from many local, regional and national businesses. The medical transcription industry is highly fragmented, and we believe there are hundreds of companies in the U.S. performing medical transcription services. There are currently two large service providers, one of which is us and the other of which is Spheris Inc., several mid-sized service providers with annual revenues of between $15 million and $100 million and hundreds of smaller, independent businesses with annual revenues of less than $15 million.

We believe the outsourced portion of the medical transcription services market will increase due in part to healthcare providers seeking the following:

	•		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.

Although we believe the outsourced portion of the medical transcription services market continues to grow, in order to benefit from this trend we must overcome the following challenges: reverse our recent market share decline, increase our profit margins and continue to develop technological advances.

We evaluate our performance based upon the following factors:

	•		revenues;

	•		operating income;

	•		net income per share;

	•		net cash provided by operating activities; and

	•		days sales outstanding.

Our goal is to execute our strategy to yield growth in net revenues, operating income and net income per share.

Critical Accounting Policies, Judgments and Estimates

Our discussion and analysis of our financial condition and consolidated results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, net revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based upon historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates. These critical accounting policies and estimates have been discussed with the Audit Committee of our board of directors.

We believe that our critical accounting policies affect our more significant estimates and judgments used in the preparation of our condensed consolidated financial statements. Our Annual Report on Form 10-K for the year ended December 31, 2006 contains a discussion of these critical accounting policies. There have been no significant changes in our critical accounting policies from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2006.

Basis of Presentation

Sources of Revenues

We derive revenues primarily from the provision of medical transcription services to health systems, hospitals and large group medical practices. Our customers are generally charged a rate times the volume of work that we transcribe. In the clinical documentation workflow, we provide, in addition to medical transcription technology and services, maintenance services, digital dictation, speech recognition, electronic signature and medical coding technology and services. Our medical transcription revenues, excluding charges for the customer accommodation program, have been declining over the past several years, as prices have declined and some customers have switched to alternative vendors. Our technology products and services revenues also declined over the past several years, as many products reached end of life and new products have not replaced the lost revenue.

Cost of Revenues

Cost of revenues includes compensation of MTs, other payroll costs (primarily related to operational and production management, quality assurance, quality control and customer and field service personnel), telecommunication costs and facility costs. Cost of revenues also includes the direct cost of technology products sold to customers. MT payroll cost is directly related to medical transcription revenues and is based on lines transcribed or edited multiplied by a specific rate. Therefore, MT costs trend directly in line with revenues. Fixed costs have been reduced though not at the same pace as net revenues.

Selling, General and Administrative (SG&A)

Our SG&A expenses include marketing and sales costs, accounting costs, information technology costs, professional fees, corporate facility costs, corporate payroll and benefits expenses.

Research and Development (R&D)

Our R&D expenses consist primarily of personnel and related costs, including salaries and employee benefits for software engineers and consulting fees paid to independent consultants who provide software engineering services to us. To date, our R&D efforts have been devoted to new products and services offerings and increases in features and functionality of our existing products and services.

Depreciation and amortization

Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets which range from two to seven years for furniture, equipment and software, and the lesser of the lease term or estimated useful life for leasehold improvements. Intangible assets are being amortized using the straight-line method over their estimated useful lives which range from three to 20 years.

Cost of investigation and legal proceedings, net

Cost of investigation and legal proceedings, net include legal fees incurred in connection with the SEC and DOJ investigations and proceedings and the defense of civil litigation matters described in Part II, Item 1, Legal Proceedings in this report, litigation support consulting, and consulting services provided during 2006 by Nightingale and Associates, LLC (Nightingale) in connection with the Review and Management’s Billing Assessment, net of insurance claims reimbursement.

Consolidated Results of Operations

The following tables set forth our consolidated results of operations for the periods indicated below:

Comparison of Three Months Ended September 30, 2007 and 2006


	Three months ended September 30,
	2007						2006
				% of Net						% of Net
($ in thousands)	Amount			Revenues			Amount			Revenues			$ Change			% Change
Net revenues	$	82,518			100.0	%	$	82,096			100.0	%	$	422			0.5	%

Operating costs and expenses:
Cost of revenues		64,290			77.9	%		67,929			82.7	%		(3,639	)		(5.4	%)
Selling, general and administrative		15,548			18.8	%		12,765			15.5	%		2,783			21.8	%
Research and development		3,808			4.6	%		3,447			4.2	%		361			10.5	%
Depreciation		2,861			3.5	%		3,149			3.8	%		(288	)		(9.1	%)
Amortization of intangible assets		1,361			1.6	%		1,363			1.7	%		(2	)		(0.1	%)
Cost of investigation and legal proceedings, net		4,441			5.4	%		(3,854	)		(4.7	%)		8,295			(215.2	%)
Restructuring charges		554			0.7	%		1,234			1.5	%		(680	)		(55.1	%)


Total operating costs and expenses		92,863			112.5	%		86,033			104.8	%		6,830			7.9	%


Operating loss		(10,345	)		(12.5	%)		(3,937	)		(4.8	%)		(6,408	)		162.8	%

Equity in income of affiliated company		124			0.2	%		180			0.2	%		(56	)		(31.1	%)
Interest income, net		2,302			2.8	%		1,977			2.4	%		325			16.4	%


Loss before income taxes		(7,919	)		(9.6	%)		(1,780	)		(2.2	%)		(6,139	)		344.9	%

Income tax provision		1,016			1.2	%		324			0.4	%		692			213.6	%


Net loss	$	(8,935	)		(10.8	%)	$	(2,104	)		(2.6	%)	$	(6,831	)		324.7	%

Net revenues

Net revenues increased $0.4 million, or 0.5%, to $82.5 million for the three months ended September 30, 2007 compared with $82.1 million for the three months ended September 30, 2006. This increase was attributable primarily to:

	•		increased transcription service revenues of $1.7 million resulting primarily from an $8.5 million charge for the customer accommodation program in the 2006 period. Excluding this charge, transcription revenue declined $6.8 million due to lower medical transcription volume and lower pricing to both new and existing customers. We believe the reduction in volume was the result primarily of customer losses to other outsourced medical transcription providers due to, among other things, price competition and our requirement that our medical transcription customers migrate from disparate and older technology platforms to our DEP;

	•		increased other services revenues of $0.4 million; offset by

	•		reduced sales and implementations of our technology products of $1.7 million.

We continue to experience pricing pressures as our existing and potential customers seek out opportunities to reduce costs, particularly through the utilization of offshore labor.

Cost of revenues

Cost of revenues decreased $3.6 million, or 5.4%, to $64.3 million for the three months ended September 30, 2007 compared with $67.9 million for the three months ended September 30, 2006. This decrease was attributable primarily to:

	•		reduced medical transcription payroll costs of $3.3 million related directly to the decrease in our service revenues as well as our increased use of speech recognition technology, which reduces the payroll costs associated with the production of revenues;

	•		decreased telecommunications costs of $0.6 million associated with both the decrease in our service revenues and the transition of customers from our non-DEP medical transcription platforms, which required MTs to access dictation using traditional phone lines, to our DEP, which allows MTs to access dictation through the internet; offset by

	•		an increase in technology product costs of $0.4 million;

As a percentage of net revenues, cost of revenues decreased to 77.9% for the three months ended September 30, 2007 from 82.7% for the same period in 2006 (the 2006 period included the aforementioned $8.5 million charge for the customer accommodation program).

Selling, general and administrative

SG&A expenses increased $2.8 million, or 21.8%, to $15.5 million for the three months ended September 30, 2007 compared with $12.8 million for the three months ended September 30, 2006. This increase was due primarily to $1.3 million of professional fees incurred related to the evaluation of strategic alternatives for us; an increase in audit fees of $0.8 million related to the audit of our consolidated financial statements and the audit of our internal control over financial reporting; an increase of $0.8 million due to the reassignment of Nightingale services in 2007 due to Nightingale’s focus on operational matters instead of the Review and Management’s Billing Assessment. These increases were partially offset by a decrease in all other SG&A expenses of $0.1 million. SG&A expenses as a percentage of net revenues were 18.8% for the three months ended September 30, 2007 compared with 15.5% for the same period in 2006.

Research and development

R&D expenses increased $0.4 million, or 10.5%, to $3.8 million for the three months ended September 30, 2007 compared with $3.4 million for the three months ended September 30, 2006. This increase was due primarily to an increase in consulting fees for enhancements being made to our speech recognition software. R&D expenses as a percentage of net revenues were 4.6% for the three months ended September 30, 2007 compared with 4.2% for the same period in 2006.

Depreciation

Depreciation expense decreased $0.3 million, or 9.1%, to $2.9 million for the three months ended September 30, 2007 compared with $3.1 million for the three months ended September 30, 2006. This decrease was attributable primarily to fixed assets reaching the end of their depreciable period. Depreciation expense as a percentage of net revenues was 3.5% for the three months ended September 30, 2007 compared with 3.8% for the same period in 2006.

Amortization

Amortization of intangible assets remained unchanged for the three months ended September 30, 2007 compared with the three months ended September 30, 2006. Amortization of intangible assets as a percentage of net revenues was 1.6% for the three months ended September 30, 2007 compared with 1.7% for the same period in 2006.

Cost of investigation and legal proceedings, net

Costs and expenses associated with the Review and Management’s Billing Assessment are being reported as cost of investigation and legal proceedings. These costs and expenses increased $8.3 million to $4.4 million for the three months ended September 30, 2007 compared with ($3.9) million for the three months ended September 30, 2006. This increase in costs was the result of the recognition of $8.7 million in insurance claim reimbursements in the three months ended September 30, 2006. In addition, for the three months

ended September 30, 2007, costs declined $0.4 million due primarily to the reassignment to SG&A expenses of Nightingale’s services in connection with its focus on operational matters instead of the Review and Management’s Billing Assessment.

Restructuring charges

We have implemented various restructuring plans to streamline our organizational and operational structure and to better service our customers. These restructuring plans have involved the consolidation of operating facilities and the related reduction in workforce. During the three months ended September 30, 2007, we recorded a restructuring charge of $0.6 million compared with $1.2 million in 2006. Restructuring charges were lower in 2007 as a majority of our actions were completed during 2006.

Interest income, net

Interest income, net reflects interest earned on cash and cash equivalent balances. Interest income, net increased $0.3 million, or 16.4%, to $2.3 million for the three months ended September 30, 2007 compared with $2.0 million for the three months ended September 30, 2006. This increase was attributable to higher interest rates earned in the 2007 period (5.6%) compared with the 2006 period (5.0%). Our average cash balance for the three months ended September 30, 2007 was $6.3 million greater than the comparable 2006 period.

Income tax provision

The effective income tax rate for the three months ended September 30, 2007 was 12.8% compared with an effective income tax rate of 18.2% for the three months ended September 30, 2006. The 2007 rate consists primarily of provisions for the deferred tax liability related to the current year tax goodwill amortization, which is indefinite in nature as well as the valuation allowance provided against a majority of U.S. deferred tax assets created in 2007. The provision also includes state and foreign income taxes and accrued interest on tax uncertainties. Also, a tax rate change in the United Kingdom reduced the value of our United Kingdom deferred tax assets. No additional current federal income taxes were provided because of the availability of deductible temporary differences. The resulting rate is a function of a fixed positive tax expense due primarily to the deferred tax liability recorded related to tax goodwill amortization and the United Kingdom tax rate change.

Comparison of Nine Months Ended September 30, 2007 and 2006


	Nine months ended September 30,
	2007						2006
				% of Net						% of Net
($ in thousands)	Amount			Revenues			Amount			Revenues			$ Change			% Change
Net revenues	$	260,276			100.0	%	$	271,469			100.0	%	$	(11,193	)		(4.1	%)


Operating costs and expenses:
Cost of revenues		198,918			76.4	%		214,656			79.1	%		(15,738	)		(7.3	%)
Selling, general and administrative		48,158			18.5	%		39,408			14.5	%		8,750			22.2	%
Research and development		10,073			3.9	%		9,705			3.6	%		368			3.8	%
Depreciation		8,040			3.1	%		9,043			3.3	%		(1,003	)		(11.1	%)
Amortization of intangible assets		4,065			1.6	%		4,474			1.6	%		(409	)		(9.1	%)
Cost of investigation and legal proceedings, net		(456	)		(0.2	%)		9,019			3.3	%		(9,475	)		(105.1	%)
Restructuring charges		935			0.4	%		2,939			1.1	%		(2,004	)		(68.2	%)


Total operating costs and expenses		269,733			103.6	%		289,244			106.5	%		(19,511	)		(6.7	%)


Operating loss		(9,457	)		(3.6	%)		(17,775	)		(6.5	%)		8,318			(46.8	%)

Equity in income of affiliated company		447			0.2	%		738			0.3	%		(291	)		(39.4	%)
Interest income, net		6,477			2.5	%		5,675			2.1	%		802			14.1	%


Loss before income taxes		(2,533	)		(1.0	%)		(11,362	)		(4.2	%)		8,829			(77.7	%)

Income tax provision		2,402			0.9	%		1,629			0.6	%		773			47.5	%


Net loss	$	(4,935	)		(1.9	%)	$	(12,991	)		(4.8	%)	$	8,056			(62.0	%)

Net revenues

Net revenues decreased $11.2 million, or 4.1%, to $260.3 million for the nine months ended September 30, 2007 compared with $271.5 million for the nine months ended September 30, 2006. This decrease was attributable primarily to:

	•		decreased transcription service revenues of $9.4 million. Excluding $9.8 million of charges for the customer accommodation program included in the 2006 period, transcription revenues declined by $19.2 million. This decline was due primarily to lower medical transcription volume and lower pricing to both new and existing customers. We believe the reduction in volume was the result primarily of customer losses to other outsourced medical transcription providers due to, among other things, price competition and our requirement that our medical transcription customers migrate from disparate and older technology platforms to our DEP; and

	•		reduced sales and implementations of our technology products of $1.7 million.

Cost of revenues

Cost of revenues decreased $15.7 million, or 7.3%, to $198.9 million for the nine months ended September 30, 2007 compared with $214.7 million for the nine months ended September 30, 2006. This decrease was attributable primarily to:

	•		reduced medical transcription payroll costs of $7.1 million related directly to the decrease in our service revenues as well as our increased use of speech recognition technology, which reduces the payroll costs associated with the production of revenues;

	•		decreased telecommunications costs of $3.4 million associated with both the decrease in our service revenues and the transition of customers from our non-DEP medical transcription platforms, which required MTs to access dictation using traditional phone lines, to our DEP, which allows MTs to access dictation through the internet;

	•		reduced other costs of $5.3 million resulting from headcount and facility reductions associated with our 2005 restructuring plan based on a centralized national service delivery model to streamline our organizational and operating structure to better service our customers; offset by

	•		an increase in technology product costs of $0.1 million.

As a percentage of net revenues, cost of revenues decreased to 76.4% for the nine months ended September 30, 2007 from 79.1% for the same period in 2006 (the 2006 period included the aforementioned $9.8 million charge for the customer accommodation program).

Selling, general and administrative

SG&A expenses increased $8.8 million, or 22.2%, to $48.2 million for the nine months ended September 30, 2007 compared with $39.4 million for the nine months ended September 30, 2006. This increase was due primarily to an increase of $3.1 million due to higher legal fees for matters unrelated to the Review and Management’s Billing Assessment; an increase in audit fees of $2.3 million related to the audit of our consolidated financial statements and the audit of our internal control over financial reporting; $2.1 million due to the reassignment of Nightingale’s services in 2007 to SG&A due to Nightingale’s focus on operational matters instead of the Review and Management’s Billing Assessment; and an increase of $1.3 million of professional fees related to the evaluation of strategic alternatives for us. SG&A expenses as a percentage of net revenues were 18.5% for the nine months ended September 30, 2007 compared with 14.5% for the same period in 2006.

Depreciation

Depreciation expense decreased $1.0 million, or 11.1%, to $8.0 million for the nine months ended September 30, 2007 compared with $9.0 million for the nine months ended September 30, 2006. This decrease was attributable primarily to fixed assets reaching the end of their depreciable period. Depreciation expense as a percentage of net revenues was 3.1% for the nine months ended September 30, 2007 compared with 3.3% for the same period in 2006.

Amortization

Amortization of intangible assets decreased $0.4 million, or 9.1%, to $4.1 million for the nine months ended September 30, 2007 compared with $4.5 million for the nine months ended September 30, 2006. This decrease was the result primarily of several intangible assets reaching the end of their amortization period. Amortization of intangible assets as a percentage of net revenues was 1.6% for the nine months ended September 30, 2007 and for the same period in 2006.

Cost of investigation and legal proceedings, net

Costs and expenses associated with the Review and Management’s Billing Assessment are being reported as cost of investigation and legal proceedings. These costs and expenses decreased $9.5 million to ($0.5) million for the nine months ended September 30, 2007 compared with $9.0 million for the nine months ended September 30, 2006. This reduction in costs was primarily due to the recognition of $15.4 million of insurance claim reimbursements in 2007 compared with $8.7 million for the same period in 2006; $2.2 million due to the reassignment of Nightingale’s services in 2007 due to Nightingale’s focus on operational matters instead of the Review and Management’s Billing Assessment; offset by an increase in legal fees in connection with the SEC and DOJ investigations and proceedings; the defense of civil litigation matters as well as litigation support consulting of $0.6 million.

Restructuring charges

We have implemented various restructuring plans to streamline our organizational and operational structure and to better service our customers. These restructuring plans have involved the consolidation of operating facilities and the related reduction in workforce. During the nine months ended September 30, 2007, we recorded a restructuring charge of $0.9 million compared with $2.9 million in the same period in 2006. Restructuring charges were lower in 2007 as a majority of our actions were completed during 2006.

Interest income, net

Interest income, net reflects interest earned on cash and cash equivalent balances. Interest income, net increased $0.8 million, or 14.1%, to $6.5 million for the nine months ended September 30, 2007 compared with $5.7 million for the nine months ended September 30, 2006. This increase was attributable to higher interest rates earned in the 2007 period (5.2%) compared with the 2006 period (4.7%).

Income tax provision

The effective income tax rate for the nine months ended September 30, 2007 was 94.8% compared with an effective income tax rate of 14.3% for the nine months ended September 30, 2006. The 2007 rate consists primarily of provisions for deferred tax liabilities related to the current year for goodwill amortization, which is indefinite in nature as well as the valuation allowance provided against a majority of U.S. deferred tax assets created in the nine months ended September 30, 2007. The provision also includes state and foreign income taxes and accrued interest on tax uncertainties. Also a tax rate change in the United Kingdom reduced the value of our United Kingdom deferred tax assets. No additional current federal income taxes were provided because of the availability of deductible temporary differences. Additionally, favorable Texas legislation was enacted that resulted in an increase of a deferred tax asset. The resulting rate is a function of a fixed positive tax expense due primarily to the deferred tax liability recorded related to tax goodwill amortization offset by the favorable Texas legislation. The 2006 rate is impacted by adjustments made to income tax expense to reflect the tax benefits for alternative minimum tax credits offset by adjustments from various state tax exposures.

Liquidity and Capital Resources

As of September 30, 2007, we had net working capital of $145.8 million compared with $145.5 million as of December 31, 2006. Our principal sources of liquidity was available cash on hand. Cash and cash equivalents decreased $9.5 million for the nine months ended September 30, 2007 to $165.9 million as of September 30, 2007 from $175.4 million as of December 31, 2006. This decrease was driven primarily by purchases of property and equipment of $8.3 million. The slight cash usage from operating activities during the nine months ended September 30, 2007 reflects customer accommodation payments of $4.1 million, payments of $7.8 million related to the settlement of shareholder securities litigation, as well as other operating activities of $3.2 million. These payments were offset by insurance recoveries of $16.1 million during the nine months ended September 30, 2007.

We believe our existing cash and cash equivalents and cash to be generated from operations, if any, will be sufficient to finance our operations for the foreseeable future. However, if we fail to generate adequate cash flows from operations in the future, due to an unexpected decline in our net revenues, or due to increased cash expenditures in excess of the net revenues generated, then our cash balances may not be sufficient to fund our continuing operations without obtaining additional debt or equity. There are no assurances that sufficient funding from external sources will be available to us on acceptable terms, if at all. For instance, we may have increased cash expenditures relating to:

	•		the SEC, DOJ and DOL investigations and proceedings; and

	•		the defense and resolution of the civil litigation matters.

Off-Balance Sheet Arrangements

We are not involved in any off-balance sheet arrangements that have or are reasonably likely to have a material current or future impact on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management team, under the supervision and with the participation of our principal executive officer and our principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act, as of the last day of the fiscal period covered by this report, September 30, 2007. The term disclosure controls and procedures means our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our principal executive officer and our principal financial officer concluded that, because of the material weaknesses in our internal control over financial reporting described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006, our disclosure controls and procedures were not effective as of September 30, 2007. To compensate for the material weaknesses in our internal control over financial reporting described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006, we performed additional manual procedures and analysis and other post-closing procedures in order to prepare the consolidated financial statements included in this report. As a result of these expanded procedures, we believe that the consolidated financial statements contained in this report present fairly, in all material respects, our financial condition, results of operations and cash flows for the periods covered thereby in conformity with U.S. generally accepted accounting principles.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the fiscal quarter ended Septemer 30, 2007 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Although our remediation efforts are underway, material weaknesses identified as of December 31, 2006 will not be considered remediated until new internal controls over financial reporting are fully implemented and operational for a period of time and are operating effectively.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Governmental Investigations

We also received an administrative HIPAA subpoena for documents from the DOJ on December 17, 2004. The subpoena sought information primarily about our provision of medical transcription services to governmental and non-governmental customers. The information was requested in connection with a government investigation into whether we and others violated federal laws in connection with the provision of medical transcription services. We have complied and are continuing to comply with information and document requests by the DOJ.

Shareholder Securities Litigation

statements to the market throughout the Securities Class Period, which statements allegedly had the effect of artificially inflating the market price of our securities. The complaint asserted claims under Section 10(b) and 20(a) of the Exchange Act and Rule 10b-5, thereunder. Named as defendants, in addition to us, were our former President and Chief Executive Officer and our former Executive Vice President and Chief Financial Officer.

On August 16, 2005, a First Amended Complaint in the Shareholder Putative Class Action was filed against us in the United States District Court District of New Jersey. The First Amended Complaint named additional defendants, including certain current and former directors, certain of our former officers, our former and current external auditors and Philips. Like the original complaint, the First Amended Complaint asserted claims under Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 thereunder. The Securities Class Period of the original complaint was expanded 20 months to include the period from March 29, 2000 through June 14, 2004. Pursuant to an October 17, 2005 consent order approved by the Court, lead plaintiff Greater Pennsylvania Pension Fund filed a Second Amended Complaint on November 15, 2005. The Second Amended Complaint dropped Philips as a defendant, but alleged the same claims and the same purported class period as the First Amended Complaint. Plaintiffs sought unspecified damages. Pursuant to the provisions of the Private Securities Litigation Reform Act, discovery in the action was stayed pending the filing and resolution of the defendants’ motions to dismiss, which were filed on January 17, 2006, and which were fully briefed as of June 16, 2006. On September 29, 2006, the Court denied our motions to dismiss and the motion to dismiss of the individual defendants. In the same order, the Court granted the motion to dismiss filed by our former and current external auditors. On November 3, 2006, we filed our Answer denying the material allegations contained in the Second Amended Complaint. On March 23, 2007, we entered into a memorandum of understanding and a stipulation of settlement with the lead plaintiff in which we agreed to pay $7.75 million to settle all claims throughout the class period against all defendants in the action. On May 16, 2007, the Court issued an Order Preliminarily Approving Settlement and Providing for Notice. The Court conducted a final approval hearing and approved the settlement on August 15, 2007. Neither we nor any of the individuals named in the action has admitted to liability or any wrongdoing in connection with the settlement.

Customer Litigation

March 8, 2006 the Court held a hearing on these motions, and took the matter under submission. On March 30, 2007, the Court issued an order holding that plaintiffs could not make out a claim that we had violated the federal RICO statute, thus eliminating any claim against us for treble damages. The Court also found that plaintiffs could not make out a claim that we had engaged in any unfair or deceptive acts or practices in violation of state law, or that we had made any negligent misrepresentations to plaintiffs. In its ruling, the Court, without reaching a decision of whether any wrongdoing had occurred, allowed plaintiffs to proceed with their claims against us for fraud, unjust enrichment and an accounting. In its order, the Court denied our motion to compel arbitration regarding those customers whose contracts contained an agreement to arbitrate. We have appealed that decision to the Third Circuit Court of Appeals, and we moved the district court to stay the matter pending that appeal. The district court heard oral argument on our motion to stay on May 30, 2007 and took the motion under submission.

On June 8, 2007, plaintiffs filed a Motion for Summary Action with the Third Circuit Court of Appeals, asking the Court to dismiss plaintiffs who did not enter into arbitration agreements with us from the appeal. We filed our opposition to this motion on June 25, 2007. The Court has referred the motion to the merits panel for decision after full briefing. On August 1, 2007, plaintiffs filed a motion for expedited review on appeal. We did not oppose this motion, and the Third Circuit granted the request for expedited treatment, adopting the briefing schedule agreed to by the parties. The appeal will be fully briefed by November 16, 2007, and the Third Circuit has tentatively set oral argument for December 13, 2007. The Third Circuit ordered the parties to court-sponsored mediation. The parties participated in an initial session with the mediator on September 12, 2007, and a second session on October 12, 2007. An additional telephonic conference is scheduled for November 9, 2007. We believe that the claims asserted have no merit and intend to defend the case vigorously.

Medical Transcriptionist Litigation

Hoffmann Putative Class Action

A putative class action lawsuit was filed against us in the United States District Court for the Northern District of Georgia. The action, entitled Brigitte Hoffmann, et al. v. MedQuist, Inc., et al., Case No. 1:04-CV-3452, was filed with the Court on November 29, 2004 against us and certain current and former officials, purportedly on behalf of an alleged class of current and former employees and statutory workers, who are or were compensated on a “per line” basis for medical transcription services (Class Members) from January 1, 1998 to the time of the filing of the complaint (Class Period). The complaint specifically alleged that defendants systematically and wrongfully underpaid the Class Members during the Class Period. The complaint asserted the following causes of action: fraud, breach of contract, demand for accounting, quantum meruit, unjust enrichment, conversion, negligence, negligent supervision, and RICO violations. Plaintiffs sought unspecified compensatory damages, punitive damages, disgorgement and restitution. On December 1, 2005, the Hoffmann matter was transferred to the United States District Court for the District of New Jersey. On January 12, 2006, the Court ordered this case consolidated with the Myers Putative Class Action discussed below. As set forth below, we believe that the claims asserted in the consolidated Myers Putative Class Action have no merit and intend to vigorously defend that action.

Force Putative Class Action

A putative class action entitled Force v. MedQuist Inc. and MedQuist Transcriptions, Ltd., Case No. 05-cv-2608-WSD, was filed against us on October 11, 2005, in the United States District Court for the Northern District of Georgia. The action was brought on behalf of a putative class of current and former employees who claim they are or were compensated on a “per line” basis for medical transcription services but were allegedly underpaid due to the actions of defendants. The named plaintiff asserted claims for breach of contract, quantum meruit and unjust enrichment and demand an accounting. Upon stipulation and consent of the parties, on February 17, 2006, the Force matter was ordered transferred to the United States District Court for the District of New Jersey. Subsequently, on April 4, 2006, the parties entered into a stipulation and consent order whereby the Force matter was consolidated with the Myers Putative Class Action discussed below, and the consolidated amended complaint filed in the Myers action on January 31, 2006 was deemed to supersede the original complaint filed in the Force matter. As set forth below, we believe that the claims asserted in the consolidated Myers Putative Class Action have no merit and intend to vigorously defend that action.

Myers Putative Class Action

paid on a 65 character line, but were allegedly underpaid due to intentional miscounting of the number of characters and lines transcribed. The named plaintiffs asserted claims for breach of contract and unjust enrichment and demand an accounting.

On October 11, 2007, the Court entered a Scheduling Order, ordering plaintiffs to file their motion for class certification not later than December 14, 2007, and setting a deadline of January 14, 2008, for the conclusion of factual discovery. A further status conference is set for January 10, 2008. No date has been set for trial. We believe that the claims asserted in the consolidated actions have no merit and intend to vigorously defend the suit.

Reseller Arbitration Demand

On October 1, 2007, we received, from counsel to nine current and former resellers of our products (Claimants), a copy of an arbitration demand filed by the Claimants, initiating an arbitration proceeding styled Diskriter, Inc., Electronic Office Systems, Inc., Milner Voice & Data, Inc., Nelson Systems, Inc., NEO Voice and Communications, Inc., Office Business Systems, Inc., Roach-Reid Office Systems, Inc., Stiles Office Systems, Inc. and Travis Voice and Data, Inc. v. MedQuist Inc. and MedQuist Transcriptions, Ltd. (filed on September 27, 2007, AAA, Case Number Not Yet Assigned). The arbitration demand purports to set forth claims for (i) breach of contract; (ii) breach of covenant of good faith and fair dealing; (iii) promissory estoppel; (iv) misrepresentation; and (v) tortious interference with contractual relations. The Claimants allege that we breached our written agreements with the Claimants by: (i) failing to provide reasonable training, technical support, and other services; (ii) using the Claimants’ confidential information to compete against the Claimants; (iii) directly competing with the Claimants’ territories; and (iv) failing to make new products available to the Claimants. In addition, the Claimants allege that we made false oral representations that we: (i) would provide new products, opportunities and support to the Claimants; (ii) were committed to continuing to use Claimants; (iii) did not intend to create our own sales force with respect to the Claimants’ territory; and (iv) would stay out of the Claimants’ territories and would not attempt to take over the Claimants business and relationships with the Claimants’ customers and end-users. The Claimants assert that they are seeking damages in excess of $24.3 million. The AAA has not yet set a date for us to formally respond to the arbitration demand. We deny all wrongdoing and intend to defend ourselves vigorously including asserting counterclaims against the Claimants as appropriate.

Item 1A. Risk Factors

Except as set forth below, there have been no material changes to the risks to our business described in our Annual Report on Form 10-K for the year ended December 31, 2006 filed with the SEC on August 31, 2007.

Philips owns approximately 69.6% of our outstanding common stock, and its interests may conflict with the interests of our other shareholders.

Philips beneficially owns approximately 69.6% of our outstanding common stock. Philips has the ability to cause the election of all of the members of our board of directors, the appointment of new management and the approval of any action requiring the approval of our shareholders, including amendments to our certificate of incorporation and mergers or sales of substantially all of our assets. The directors elected by Philips will be able to make decisions affecting our capital structure, including decisions to issue additional capital stock, implement stock repurchase programs and declare dividends. Our interests and the interests of our affiliates, including Philips, could conflict with the interest of our other shareholders.

In July 2007, Philips announced that it is reviewing all of its options with respect to its ownership interest in us following a determination by Philips that it views its ownership interest in us to be a non-core holding. In connection with such review, Philips may consider possible transactions or other changes in its ownership interest. On November 2, 2007, Philips announced that it was going to proceed with the sale of its ownership interest in us if a satisfactory price and other acceptable terms can be realized. In addition, on November 2, 2007, we announced, in light of Philips announcement, that our board of directors, in connection with its

previously-disclosed review of our strategic alternatives, is evaluating whether a sale of MedQuist is in our best interests and the best interests of our shareholders. There is no assurance that any sale transaction involving us will occur as a result of the evaluation.

If the electronic health records (EHR) companies produce solutions acceptable to large hospital systems for the creation of electronic clinical documentation that are not based on the conversion of voice to text, the overall demand for medical transcription services could be reduced.

EHR companies’ solutions for the collection of clinical data typically require physicians to directly enter and organize patient chart information through templates thereby eliminating or dramatically reducing the use of dictation or transcription. Although the EHR market is in the early stages of development and is rapidly evolving, a number of market entrants have introduced or developed products and services that are competitive with one or more components of the solutions we offer. We expect that additional companies will continue to enter this market. In new and rapidly evolving industries, there is significant uncertainty and risk as to the demand for, and market acceptance of, recently introduced solutions for the creation of electronic clinical documentation. In the event that such solutions are successful and gain wide acceptance, the overall demand for medical transcription services could be reduced. In the event that markets develop more quickly than expected, our business, financial condition and results of operations could be adversely affected.

In addition to factors set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Cautionary Statement Regarding Forward-Looking Statements,” in Part I, Item 2 of this report, you should carefully consider the factors discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006, which could materially affect our business, financial condition or future results. The risks described in this report and in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

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

None.

Item 5. Other Information

None.

Item 6. Exhibits

(a) Exhibits


No.		Description
10.1* (1)		Indemnification Agreement, dated as of July 3, 2007 between MedQuist Inc. and John H. Underwood

10.2* (2)		Indemnification Agreement, dated as of July 3, 2007 between MedQuist Inc. and Richard H. Stowe

10.3* (3)		Indemnification Agreements, dated August 23, 2007, with each of Howard Hoffmann, Kathy Donovan, James Brennan, Mark Sullivan, Mark Ivie, Michael Clark and Scott Bennett

10.4* (4)		Letter Agreement by and between MedQuist Inc. and Nightingale and Associates, LLC dated September 19, 2007

10.5* (5)		Retention and Strategic Transaction Bonus Agreements, dated September 20, 2007, with each of Kathy Donovan, Mark Ivie and Scott Bennett

10.6* (6)		Retention and Strategic Transaction Bonus Agreements, dated September 20, 2007, with each of Mark Sullivan and Michael Clark

10.7#		Amended and Restated OEM Supply Agreement dated September 21, 2007 by and between MedQuist Inc. and Philips Speech Recognition Systems GmbH f/k/a Philips Austria GmbH, Philips Speech Processing

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 2002

31.2		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 2002

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


(1)		Incorporated by reference to Exhibit 10.39 to the Company’s Form 10-K for the fiscal year ended December 31, 2005 filed with the Securities and Exchange Commission on July 5, 2007.

(2)		Incorporated by reference to Exhibit 10.40 to the Company’s Form 10-K for the fiscal year ended December 31, 2005 filed with the Securities and Exchange Commission on July 5, 2007.

(3)		Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on August 28, 2007.

(4)		Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on September 25, 2007.

(5)		Incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed with the Securities and Exchange Commission on September 25, 2007.

(6)		Incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed with the Securities and Exchange Commission on September 25, 2007.

*		Management contract or compensatory plan or arrangement.

#		Portions of this Exhibit were omitted and filed separately with the Secretary of the SEC pursuant to a request for confidential treatment that has been filed with the SEC.

SIGNATURES

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.
	/s/ Howard S. Hoffmann
	Howard S. Hoffmann
	President and Chief Executive Officer (Principal Executive Officer)

Date: November 8, 2007



	/s/ Kathleen E. Donovan
	Kathleen E. Donovan
	Senior Vice President and Chief Financial Officer (Principal Financial Officer)

Date: November 8, 2007

Exhibit Index


No.		Description
10.7#		Amended and Restated OEM Supply Agreement dated September 21, 2007 by and between MedQuist Inc. and Philips Speech Recognition Systems GmbH f/k/a Philips Austria GmbH, Philips Speech Processing

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 2002

31.2		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 2002

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		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.

EX-10.7 2 w42097exv10w7.htm AMENDED AND RESTATED OEM SUPPLY AGREEMENT exv10w7

Exhibit 10.7

Portions of this exhibit were omitted and filed separately with the Secretary of the Commission pursuant to an application for confidential treatment filed with the Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934. Such portions are marked by a series of asterisks.

AMENDED AND RESTATED OEM SUPPLY AGREEMENT

THIS AMENDED AND RESTATED OEM SUPPLY AGREEMENT (the “Agreement”, “Amended and Restated Agreement”) is entered into and made effective as of September 21, 2007 (“Amended and Restated Agreement Effective Date”), amending and restating that certain OEM Supply Agreement made and entered into as of the 23rd day of September, 2004 (the “Original Effective Date”), by and between Philips Speech Recognition Systems GmbH f/k/a Philips Austria GmbH, Philips Speech Processing, a Republic of Austria corporation (hereinafter “PSP”), and MEDQUIST INC., a New Jersey, USA corporation (hereinafter “MedQuist”).

MedQuist and PSP hereinafter also collectively referred to as the “Parties” and individually as a “Party”.

RECITALS

WHEREAS, MedQuist and PSP entered into that certain OEM Supply Agreement (the “Original Agreement”) as of the Original Effective Date; and

WHEREAS, the parties desire to amend and restate the Original Agreement as set forth herein.

NOW THEREFORE, in consideration of the mutual agreements and covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, it is mutually agreed and covenanted by and between the parties to this Amendment, as follows:

1. Definitions.

1.1 [Intentionally Omitted]

1.2 “Documentation” means user manuals, training materials, product descriptions, product specifications, technical manuals, license agreements, supporting materials, and like information related to the Products, which Documentation may be distributed in print, electronic, video, or other formats.

1.3 “End User” means the means final retail purchasers or licensees at the sites where
the Products are installed.

1.4 “Products” means, individually or collectively as appropriate, the Software, Documentation, developed products and hardware, supplies, accessories, and other commodities related to any of the foregoing, provided or to be provided by PSP pursuant to this Agreement, as described in Schedule B attached to this Agreement, as modified from time to time.

1.5 “Affiliate” shall mean any corporation, limited liability company, partnership or other legal entity, present or future, which is owned or controlled or owns or controls or is under common control with, directly or indirectly, a Party to this Agreement, as the case may be, as long as such ownership or control exists and where control means ownership or control of more than fifty percent (50%) of voting stock in the case of a stock-issuing entity, or more than fifty percent (50%) of voting


*******		- Material has been omitted and filed separately with the Commission.

control of a non-stock-issuing entity. For the purpose of this Agreement MedQuist and PSP shall not be deemed to be each others Affiliates.

1.6 “Software” means certain computer programs and software (collectively, the “Programs”), which Programs may incorporate certain third-party software products provided or to be provided by PSP pursuant to this Agreement.

1.7 “Source Code” means the underlying instructions for a computer written in programming languages, including all embedded comments, as well as procedural code such as job control language statements, in a form readable by human beings when displayed on a monitor or printed on paper, etc. and that must be translated (using off-the-shelf commercially available software compilers, linkers and assemblers or other items delivered with such code or reasonably available including documentation) into a form that is directly executable by a computer by a process generally known as compiling or assembly, along with any related documentation, including annotations, flow charts, schematics, statements of principles of operations, software summaries, software design, program logic, program listings, functional specifications, logical models and architecture standards, describing the data flows, data structures, and control logic of the software. For purposes of this Agreement, mere access to the Source Code in the PSP online controlled environment is not a sufficient provision or transfer of Source Code hereunder.

1.8 “Intellectual Property Rights” shall mean any and all patents, utility certificates, utility models, industrial design rights, copyrights, database rights, trade secrets, any protection offered by law to information, semiconductor IC topography rights and all registrations, applications, renewals, extensions, combinations, divisions, continuations or reissues of any of the foregoing.

2. Grant of license.

2.1 Subject to the terms of this Agreement and MedQuist’s rights under Sections 15 and 17, PSP hereby grants to MedQuist, and MedQuist hereby accepts from PSP, an exclusive, perpetual and non-transferable license to offer for sale, sublicense, sell, deliver and service the Products, and to authorize others to offer for sale, sublicense, sell, deliver, and service the Products, directly and through one or more tiers of distributors, dealers, and resellers (collectively, the “Dealers”), within the territory set forth on Schedule A to this Agreement (“Territory”); provided that such rights are nonefxclusive for the specified nonexclusive Territory on Schedule A.

2.2 PSP reserves all rights related to the Products that PSP does not expressly grant MedQuist in this Agreement. Outside MedQuist’s exclusive Territory, PSP may offer for sale, sell, deliver, and service the Products, and may authorize others to offer for sale, sell, deliver, and service the Products, without providing any rights or compensation to MedQuist. During and after the Term, inside MedQuist’s exclusive Territory, PSP and any Affiliate: (i) may not offer for sale, sell, deliver or service the Products; or (ii) authorize others to offer for sale, sell, deliver, or service the Products.

2.2.1 [Intentionally Omitted]

2.2.2 [Intentionally Omitted]

2.2.3 [Intentionally Omitted]


*******		- Material has been omitted and filed separately with the Commission.

-2-

2.3 MedQuist is authorized to appoint Dealers within the Territory defined in Schedule A to offer for sale, sell, deliver, and service the Products at its discretion and without approval from PSP. MedQuist will give PSP written notice of the identity of any Dealer that MedQuist intends to appoint in the non-exclusive Territory. MedQuist will ensure that all Dealers appointed by MedQuist are sufficiently trained and competent to sell and support the Product in their respective territories.

3. Initial Term and Renewal.

3.1 Initial Term. This Agreement will be deemed to have commenced on June 1, 2004, and had an initial term that ended on June 30, 2007 (“Initial Term”). Pursuant to the renewal terms set forth below in Section 3.2, the term was extended through June 30, 2010 for the first Renewal Term (of the two possible Renewal Terms), and is subject to termination as set forth in this Agreement.

3.2 Renewal. Subject to Philips’ right to terminate below, this Agreement will automatically renew for two (2) additional three (3) year terms (each such renewal term being referred to in this Agreement as a “Renewal Term,” and together with the Initial Term referenced above in Section 3.1 as the “Term”), provided that MedQuist is, at the end of the Initial Term or the first Renewal Term, in material compliance with this Agreement. If PSP decides to discontinue all business relating to the Products in the Territory on or after June 30, 2010, PSP can effect such discontinuation by terminating this Agreement by providing Medquist six (6) months prior written notice of such discontinuation (by way of clarification, the earliest such discontinuation can therefore occur is at the end of the first Renewal Term (June 30, 2010), and therefore the notice of termination from PSP for such date would have to be provided to MedQuist by January 1, 2010). Otherwise, this Agreement will automatically expire at the end of the second Renewal Term (June 30, 2013).

3.2.1 [Intentionally Omitted]

3.2.2 [Intentionally Omitted]

4. Fees.

4.1 Product Co-Ownership Fee. In consideration of PSP’s grant of co-ownership of the Products in accordance with the terms of this Agreement, MedQuist will pay PSP a Product co-ownership fee in cash in the amount of ******* (the “Product Co-Ownership Fee”), as follows: 100% on the date PSP delivers a duly-executed original of this Amended and Restated Agreement and a copy of the Source Code of the Products to MedQuist.

4.2 License Fee. During the Term, MedQuist will pay PSP sums owed for the License Fees set forth on Schedule C to this Agreement, on a calendar monthly basis, within ******* from the end of each such calendar month. The foregoing does not alter the reporting requirement of Section 6.2. For License Fees set forth on Schedule C to this Agreement and software maintenance fees set forth in Section 4.3 reported in calendar year 2006, the Parties agree that these License Fees and software maintenance fees only become due after MedQuist reports in writing to PSP that these Product installations have been successfully implemented at the MedQuist customer sites. For calendar year 2007 and thereafter, the Parties agree to jointly annually review the payment terms if the implementation phase at the MedQuist customer sites, as determined by MedQuist, can on average be reduced from currently ******* (as of the Amended and Restated Agreement Effective Date) to ******* or less. In that case the payment terms set forth in this Section will be reduced from ******* or any agreed upon shorter period


*******		- Material has been omitted and filed separately with the Commission.

-3-

required for the average implementation.

4.3 Software Maintenance Fee.

4.3.1 During the Term, MedQuist will use reasonable commercial efforts to sell its End Users a software maintenance agreement (an “SMA”). Such SMA will provide that the subscribing End User will obtain, directly from PSP or from PSP through MedQuist or directly from MedQuist, as MedQuist deems appropriate:

4.3.1.1 Software Releases. As used in this Agreement, “Software Release” means a new version of the Products delivered to MedQuist for internal or external user testing or commercial availability. Software Releases are typically numbered sequentially (e.g., Release 4.x, Release 6.x).

4.3.1.2 Patch Releases. As used in this Agreement, “Patch Release” means a change PSP makes to a Software Release, which is an internal change designed to correct minor anomalies or defects in the Software (colloquially referred to as “bugs”), or otherwise to provide minor improvements to performance without changing the Software’s basic design, structure, or functionality. Patch Releases are typically numbered to signify modifications to a version of Software Release (e.g., Version 4.1.05, Version 4.1.06).

4.3.1.3 Point Releases. As used in this Agreement, “Point Release” means a modification or enhancement (colloquially referred to as an “upgrade”) to a Software Release that: (i) enables the Software Release to perform new or different functions; (ii) increases the capability of the Software; or (iii) enables the Software to function on new or different hardware or in a new or different software environment without changing its basic design, structure or functionality. Point Releases are typically numbered as versions of a Software Release (e.g., Version 4.1, Version 4.2, etc.).

4.3.1.4 Technical Support to resolve technical issues that are more practicably resolved by PSP (as to PSP supported Products) than by MedQuist.

4.3.2 SMA contracts MedQuist sells will begin at the end of PSP’s Warranty Period (as set forth in Section 8.1 of this Agreement) and will be renewable on an annual basis. In the event that MedQuist allows an End User to terminate or cancel an SMA before the end of the term of such SMA, MedQuist will provide notice of such termination to PSP, and PSP will refund to MedQuist the pro-rata portion of fees paid to PSP for such SMA within thirty (30) days after MedQuist provides such notice.

4.3.3 For each SMA contract that MedQuist sells, it will pay PSP the following sums within ******* after the reporting date for the Software licenses are due per Section 6.2.:

4.3.3.1 For sums owed for the period beginning with the Original Effective Date of this Agreement through June 30, 2006: ******* of the License Fee set forth on Schedule C to this Agreement.

4.3.3.2 For sums owed for the period beginning July 1, 2006, through the remainder of the Initial Term and all Renewal Terms of this Agreement: ******* of the License Fee set forth on Schedule C to this Agreement.

4.3.4 All sums owed set forth in Section 4.3.3 of this Agreement: (i) will he


*******		- Material has been omitted and filed separately with the Commission.

-4-

calculated based on the License Fee and without regard to any discounts available to MedQuist; and (ii) will be amortized on a straight-line basis for each month over the term of the SMA.

4.3.5 PSP will maintain the current code base of the Products until the earlier of: (i) *******; or (ii) MedQuist terminates the PSP maintenance and support obligations hereunder via thirty (30) days advance written notice to PSP. The PSP maintenance includes supporting MedQuist integrations of the Products to PACS, RIS and HIS vendors existing as of September 30, 2007. If the actual costs of PSP for maintaining the Products (the “Maintenance Costs”) during the period commencing on ******* and ending on ******* (the “Maintenance Period”) are higher than the Software maintenance fees to be paid to PSP during that period, then PSP shall be entitled to request a reasonable increase of the maintenance fees; provided, however, that in connection with such request, PSP will provide to MedQuist all necessary supporting cost documentation and will permit MedQuist representatives to audit such information upon reasonable advance notice from MedQuist; provided further, that PSP shall provide MedQuist with (i) a good faith estimate of the Maintenance Costs incurred by PSP during each calendar month within the Maintenance Period (each month a “Reporting Month”) no later than ten (10) days following the last day of such Reporting Month, and (ii) a report detailing the actual Maintenance Costs incurred by PSP during each Reporting Month no later than twenty-five (25) days following the last day of such Reporting Month.

4.4 Additional Development Fees: MedQuist agrees to fund the development of a version 1.2 “Lite” of the Software in 2007 as specified in NEW SCHEDULE A-1 (SOW) to this Agreement. The “Additional Development Fee” to be paid by MedQuist to PSP for such development is dependent upon the actual hours spent and the prices per hour as itemized in NEW SCHEDULE B-1 to this Agreement. The current estimated Additional Development Fee is based on an estimate of ******* on average per month, starting from July 2007 until December 31, 2007; provided, however that PSP and MedQuist agree to a “not to exceed” cap on the Additional Development Fee of *******. Any changes to the specifications in NEW SCHEDULE A-1 (SOW) are subject to mutual agreement and may have influences on the required development work and/or may require an increase or reduction to the “not to exceed” cap. The product and program management of version 1.2 “Lite” will be a collaborative effort between PSP and MedQuist. In addition, because of the version 1.2 “Lite” timeline (as further described in Section 7), the SOW includes a supplemental role for MedQuist in additional quality assurance testing of this version of the Software. PSP will provide MedQuist a monthly detailed accounting, within thirty (30) days of the end of each calendar month, of the monthly hours and an agreed rate will be set as described in NEW SCHEDULE B-1.

4.5 Additional Consulting Services. During the Term, for matters not related to version 1.2 “Lite” but involving MedQuist development related to the Philips SpeechMagic SDK, PSP will provide to MedQuist, upon MedQuist’s request from time to time, and at no additional charge to MedQuist, additional consulting/development/training services worth an aggregate of ******* (using the rates set forth in NEW SCHEDULE B-1) (“Additional Consulting Services”). The Additional Consulting Services will be tracked using the same process as the development hours set forth in Section 4.4 above. Any additional consulting services to be provided by PSP beyond the Additional Consulting Services specified in this Section, shall be subject to the mutual agreement of PSP and MedQuist.

5. Order Placement.

5.1 Upon MedQuist’s request, PSP will provide MedQuist with the Products as described in this Agreement, including without limitation the accompanying Schedules.

5.2 PSP will deliver to MedQuist a “gold master” of the then-current version of the Software: (i) within seven (7) days after the execution and delivery of this Amended and Restated


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Agreement by both parties to this Agreement; and (ii) promptly on the commercial availability of each Software Release. Software MedQuist distributes under this Agreement will be copies of the gold master PSP most recently furnished to MedQuist pursuant to this Agreement or, as determined by MedQuist, such other subsequent versions created by MedQuist following the transfer set forth in Section 15.

6. Payment.

6.1 MedQuist will pay such sums owed free and clear of, and without offset or deduction for, any and all state and local use, sales, property, and similar taxes, levied or assessed on or in respect of such payments (other than any tax measured by or attributable to MedQuist’s gross or net income), as and when the same are due.

6.2 By thirty (30) days after the end of each calendar month, MedQuist will furnish to PSP a written statement showing, in such detail as PSP may reasonably request, the quantities of Software actually licensed, and the quantities of Products actually sold and delivered, during the immediately-preceding month.

6.3 MedQuist will, throughout the Term of this Agreement and for one (1) year following the expiration or termination of this Agreement, maintain a full and accurate record of the number of copies of the Software sublicensed in such detail as may enable PSP to verify the amount of license fees due under this Agreement. So as to permit verification, MedQuist will permit PSP to examine such records on reasonable advance written notice, during normal business hours at MedQuist’s offices at reasonable intervals no more frequently than two (2) times per calendar year. PSP will bear all costs and expenses for such an examination, except in those cases in which the examining accountant ascertains a discrepancy of more than five percent (5%) during the audited period to the disadvantage of PSP between payments actually made and payments due, in which event MedQuist will reimburse PSP all reasonable costs and expenses for such audit.

6.4 PSP reserves the right to charge an interest rate of the lesser of: (i) eight percent (8%) per annum; or (ii) the maximum amount permitted by applicable law, on past-due sums MedQuist owes under this Agreement.

6.5 Payment of the Additional Development Fees outlined in 4.4 above will be due within thirty (30) days from the date of the invoice.

7. Development Services.

7.1 PSP will deliver a beta ready version of version 1.2 “Lite” Software to MedQuist for internal and external user testing on or before *******, including a full copy of the Source Code thereto (“Beta Deliverable”). PSP will deliver a commercial version 1.2 “Lite” Software to MedQuist on or before *******, including a full copy of the Source Code thereto (“Commercial Deliverable”). This will enable MedQuist to showcase a new version of the Software at the annual ******* and make the version commercially available by no later than *******.

7.2 Acceptance Process. “Deliverable” shall mean the Beta Deliverable or the Commercial Deliverable as applicable. MedQuist will notify PSP within 30 days after its receipt of the applicable Deliverable from PSP whether or not the Deliverable meets the applicable Acceptance criteria (“Acceptance Process”). If MedQuist determines that the Deliverable does not meet the applicable Acceptance criteria, MedQuist will notify PSP in writing of the non-conformities and/or Severity 1


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Defects, and PSP shall correct such non-conformities and/or Severity 1 Defects and then re-deliver the revised Deliverable to MedQuist as promptly as practicable (but in no later than thirty (30) days from the date MedQuist notifies PSP of the non-conformities and/or Severity 1 Defects). Upon such re-delivery, the Acceptance Process shall repeat until MedQuist has affirmatively notified PSP in writing that the Deliverable meets the applicable Acceptance criteria or thirty (30) days from such re-delivery have passed with no notification from MedQuist of any non-conformities and/or Severity 1 Defects in such Deliverable.

7.3 Acceptance Delays. To the extent that Acceptance of a Deliverable is delayed, for reasons solely attributable to PSP, beyond the original scheduled Acceptance date (for the Beta Deliverable: November 30, 2007; for the Commercial Deliverable: January 30, 2008), PSP shall pay to MedQuist ******* of delay until such Deliverable meets Acceptance (“Acceptance Delay Payments”). MedQuist may, at MedQuist’s option, in lieu of cash payments from PSP for the Acceptance Delay Payments, offset such amounts from any other payment amounts or obligations due from MedQuist to PSP.

7.4 Acceptance Definitions.

			“Acceptance” means the Products conform to the agreed product specification and feature content detailed in the Statement of Work in Schedule A and no mutually agreed to, new or subsequent Severity 1 Defect(s) have been identified in such Products during the acceptance testing.

			“Severity 1 Defect(s)” means a software defect that causes loss of critical functionality, or corruption or loss of data without possibility of recovery for which no work around exists. A work around that may exist will not alter the requirement that the Product meet the product specification and feature content detailed in the Statement of Work in Schedule A.

8. Limited Warranty.

8.1 PSP warrants that, for a period of ninety (90) days after the delivery date (the “Warranty Period”), the Software will perform in all material respects in accordance with the Documentation accompanying the Software. If any copy of the Software is found not to perform materially in accordance with the Documentation, PSP will correct such error or malfunction or (at PSP’s sole option) replace such Software free of charge as soon as is reasonably practicable, provided that: (i) the Software has been used in accordance with instructions for use; (ii) no alteration, modification or addition has been made to the Software without PSP’s prior written consent; and (iii) PSP has been promptly notified of the alleged non-conformity within the Warranty Period specified.

8.2 MedQuist will send each claim of MedQuist under this warranty to PSP in accordance with the notice provisions of this Agreement. Each such claim will state generally the nature of the alleged non-conformity. If PSP determines in its sole discretion to repair the Software (or such portion of it as is giving rise to the non-conformity), MedQuist will afford PSP a reasonable time in which to do so. Any Software so repaired or replaced will be warranted for such period of time as is remaining in the original Warranty Period.

8.3 This Limited Warranty is subject to the terms of Section 12 below. This Limited Warranty is PSP’s only obligations and the exclusive remedy of the End User with respect to the PSP supported Products and PSP’s only warranty with respect to the Products to the End User. PSP will have no responsibility whatsoever with respect to the Products if the failure is due to accident, abuse, or misapplication on the part of MedQuist or the End User.


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8.4 MedQuist may offer any warranty that PSP makes hereunder to any End Users provided that warranty claims by MedQuist’s End Users will be made solely against MedQuist and not PSP. The warranties contained in this Agreement are solely for the benefit of MedQuist.

9. Notification of Upgrades and Updates.

9.1 PSP will notify MedQuist of any revisions and updates to the Software with respect to the development, maintenance and other PSP services provided hereunder that affect the operation, performance, or cost of such Software.

9.2 MedQuist will apply any revisions or updates to the PSP supported Software as soon as reasonably practicable after receipt of notification from PSP.

10. MedQuist’s Representations and Undertakings. MedQuist represents and undertakes with PSP that:

10.1 It will use commercially reasonable efforts to promote, market, and sell the Products during the term of this Agreement;

10.2 It has the resources, facilities, and financial ability to market, distribute and provide first line customer support for the Product and fulfill all of its obligations under this Agreement;

10.3 [Intentionally Omitted]

10.4 It will not incur any liability on behalf of PSP, pledge or purport to pledge PSP’s credit, or purport to act as an agent of PSP or make any contract binding on PSP;

10.5 [Intentionally Omitted]

10.6 It will permit PSP or any independent third party PSP retains to enter MedQuist’s premises at a time MedQuist agrees to for the purpose of reviewing records related to this Agreement (including, without limitation, verifying the number of Software sublicenses granted by or through MedQuist and obtaining information concerning any Product complaints);

10.7 [Intentionally Omitted]

10.8 Third party software, as defined in Schedule E to this Agreement (the “Third Party Software”), that is provided by PSP to MedQuist and distributed with the Software will not be used in conjunction with any other programs or software whatsoever;

10.9 It will obtain and maintain at its sole risk, cost, and expense, all governmental approvals required for or applicable to its distribution and other activities contemplated by this Agreement, and will be responsible at its sole risk, cost, and expense for complying with all applicable governmental statues, regulations, and ordinances (collectively, the “Laws”) related to such activities; and

10.10 It will, before the delivery of the Products to an End User, ensure that such End


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User enters into a software license agreement with MedQuist that will accompany each copy of the Software in substantially the form set forth on Schedule F to this Agreement or such other end user license agreement as determined by MedQuist from time to time (the “End User License Agreement”). MedQuist will, from time to time, provide PSP with a copy of any such updates to MedQuist’s standard End User License Agreement as such applies to the PSP supported Products.

11. PSP’s Obligations. PSP covenants, warrants, and agrees that it:

11.1 Has the necessary approvals and licenses to grant to MedQuist the co-ownership, right to use, sublicense, and distribute the Software in accordance with the terms of this Agreement.

11.2 Has the resources, facilities, and financial ability to develop and provide second line
support for the Products and to fulfill all of its obligations under this Agreement.

11.3 Will provide initial 2 days of training in the use of the Products to technical staff of MedQuist at no additional charge, at the place agreed on by both parties. PSP and MedQuist will mutually limit the number of personnel participating in training sessions. On MedQuist’s request, PSP will provide a similar training program for all upgrades to the Software. Each first technical training for a new version will be done free of charge; for any subsequent training, PSP and MedQuist will agree on a reasonable price.

11.4 Will at all times during the Term of this Agreement and where applicable, following
termination hereof, observe and perform the terms and conditions set out in this Agreement.

11.5 [Intentionally Omitted]

11.6 Will not, during the Term of this Agreement, develop, create or release a front-end multi-user reporting solution (including but not limited to the Products or any solution substantially similar thereto) into the medical market in North America (as defined in Schedule B) nor, directly authorize, direct, assist or otherwise facilitate any of its Affiliates to do so.; however, for avoidance of doubt, nothing stated in this clause shall prohibit PSP’s Affiliates from integrating SpeechMagic within their general medical application products.

12. Exclusion Of Warranties. EXCEPT AS EXPRESSLY SET FORTH IN SECTION 8 OF THIS AGREEMENT, PSP MAKES NO WARRANTIES, EXPRESS, IMPLIED, OR STATUTORY, WHATSOEVER, AS TO THE PRODUCTS AND THE DOCUMENTATION. PSP EXPRESSLY DISCLAIMS, ANY AND ALL WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSES, ACCURACY, SATISFACTORY QUALITY, NON-INFRINGEMENT, COURSE OF DEALING, OR COURSE OF PERFORMANCE.

13. Limited Liability. IN NO EVENT WILL EITHER PARTY OR ANY OF ITS AFFILIATES, SUBSIDIARIES, OR LICENSORS BE LIABLE FOR ANY SPECIAL, INDIRECT, INCIDENTAL, EXEMPLARY, CONSEQUENTIAL, MULTIPLIED, ENHANCED, OR PUNITIVE DAMAGES, INCLUDING, WITHOUT LIMITATION, LOSS OF REVENUE, PROFITS, OR GOODWILL, BUSINESS INTERRUPTION, OR LOST IN CONNECTION WITH THIS AGREEMENT OR THE PRODUCT, REGARDLESS OF THE FORM OF ACTION, WHETHER IN CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT PRODUCT LIABILITY, OR OTHERWISE, EVEN IF SUCH PARTY, ITS AFFILIATES, ITS SUBSIDIARIES, OR ITS LICENSORS HAVE BEEN ADVISED OF


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THE POSSIBILITY OF SUCH DAMAGES AND EVEN IF ANY LIMITED REMEDY SPECIFIED IN THIS AGREEMENT IS DEEMED TO HAVE FAILED ITS ESSENTIAL PURPOSE. SOME JURISDICTIONS DO NOT ALLOW THE EXCLUSION OR LIMITATION OF LIABILITY FOR CONSEQUENTIAL OR INCIDENTAL DAMAGES, SO THIS LIMITATION MAY NOT APPLY IN THOSE JURISDICTIONS. IF ANY CLAIM IS MADE AGAINST A PARTY, INCLUDING WITHOUT LIMITATION CLAIMS AS A RESULT OF THE SUBSTANTIAL NONCONFORMANCE OF THE SOFTWARE TO THE DOCUMENTATION OR OTHERWISE, THE PARTY’S TOTAL LIABILITY FOR DAMAGES WILL BE LIMITED, IN THE AGGREGATE, TO ITS ACTUAL DIRECT DAMAGES, AND IN ANY EVENT WILL NOT EXCEED THE TOTAL OF ALL AMOUNTS MEDQUIST IS OBLIGATED TO PAY PSP UNDER THIS AGREEMENT. SOME JURISDICTIONS MAY NOT ALLOW LIMITATIONS OF LIABILITY FOR CERTAIN TYPES OF DAMAGE OR CERTAIN CLAIMS, SO SUCH LIMITATION MAY NOT APPLY IN SUCH JURISDICTION.

14. Intellectual Property Indemnification. PSP will indemnify, defend, and hold harmless MedQuist, and MedQuist’s directors, officers, shareholders, employees, agents, and attorneys, and MedQuist’s affiliates and their directors, officers, shareholders, partners, members, employees, agents, and attorneys, and the End Users, and the successor, and assigns of any or all of them, from all third-party Claims for infringement, misappropriation or violation of copyrights, trademarks, trade secrets, or other proprietary rights associated with any portion of the Product, or any other material delivered under this Agreement; provided that: (i) MedQuist promptly notifies PSP in writing of the Claim; (ii) PSP has sole control of the defense and all related settlement negotiations with respect to the Claim; provided however, that MedQuist has the right, but not the obligation, to participate in the defense of any such Claim through counsel of its own choosing (at MedQuist’s sole expense), which right will not detract from PSP’s sole right to control such defense; and (iii) MedQuist cooperates fully to the extent reasonably necessary, and executes all documents reasonably necessary for the defense of such Claim. “Claim” will mean all loss, losses, liabilities, damage, damages, claims, taxes, and all related costs and expenses; including, without limitation, reasonable attorneys’ fees and costs of investigation, litigation, settlement, judgment, interest, and penalties. If MedQuist provides PSP with notice of a Claim, MedQuist may withhold any further payments due to PSP pursuant to this Agreement, and deposit the same in an interest-bearing escrow account with a commercial bank. On the resolution of any claim, the amounts in escrow, including accrued interest thereon, will be distributed to PSP after deductions of amounts PSP is required to pay MedQuist under this Section 14. If MedQuist’s or its End Users’ use of any portion of the Product or any other material delivered under this Agreement is enjoined in an action by reason of a Claim of infringement, violation or misappropriation of any third party’s patents, copyrights, trademarks, trade secrets or other proprietary rights, or PSP reasonably believes that it will be so enjoined, then PSP will, at its sole option and expense, in addition to its other obligations in this Section 14: (i) procure for MedQuist and its End Users the right to continue using the Product or any portion thereof; (ii) replace the same with software of equivalent functions and efficiency that is not subject to an action described in this section; or (iii) modify the applicable Software so that there is no longer any infringement or breach, provided that such modification does not adversely affect the functional capabilities of the Product as set out in this Agreement. If neither (i), (ii), or (iii) may be accomplished despite PSP’s reasonably diligent efforts, MedQuist may terminate this Agreement with regard to the portion of the Product that is alleged to infringe, violate, or misappropriate a third party’s rights, and MedQuist shall, during the Term of this Agreement, be entitled to a pro-rata refund of the total of all amounts MedQuist has paid and is obligated to pay PSP under clauses 4.1 and 4.4 of this Agreement after the Amended and Restated Agreement Effective Date, with respect to such portion. PSP will have no liability respecting any claim of infringement or breach as aforesaid to the extent such claim is based on the combination, operation, or use of the Software with other equipment, software, apparatus, devices, or things not supplied by PSP or in a manner not substantially consistent with PSP’s specifications and instructions.


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Notwithstanding anything to the contrary provided in this Agreement, PSP shall not be liable for and the obligations of PSP in this Section will not apply to the extent of the use of the Product other than in accordance with its specifications or normal intended use; or any Claim based on or related to any modification or adaptation of the Product by any person other than PSP unless made on PSP’s behalf.

In no event shall PSP’s liability under this Section 14 exceed, in the aggregate, the total of all amounts MedQuist has paid and is obligated to pay PSP under this Agreement.

This Section 14 states the entire liability of PSP for any type of infringement or breach whatsoever of Intellectual Property Rights of third parties related to the manufacture, sale, operation, or use of the Product.

15. Product Co-Ownership. Upon the execution and delivery of this Amended and Restated Agreement, PSP and MedQuist shall jointly own all right title and interest in and to the Products (including object and Source Code for the SpeechQ for Radiology application and the SpeechQ for Radiology Integration SDK, but excluding the SpeechMagic engine and SpeechMagic SDK which MedQuist separately licenses) and the Intellectual Property Rights therein and all derivatives, modifications, enhancements, corrections, additions, and extensions to the Products (and Source Code) provided by PSP hereunder (including but not limited to the beta version of version 1.2 “Lite” Software and the commercial version of SpeechQ for Radiology version 1.2 “Lite”), without any right or duty of accounting to or consulting with the other party (excluding the obligations of Section 4.2 during the Term) and in relation to which each party shall, and does hereby, assign and convey to the other all rights, titles and interests necessary to give full effect to such joint ownership. Each party shall, and does hereby, assign and convey to the other all rights, titles and interests necessary to give full effect to such joint ownership of the Products (including Source Code); PSP covenants and agrees that PSP has all of the right, title and interest to the Products necessary to effectuate the foregoing and no further transfer or assignments from any other PSP Affiliate or any third party are necessary to effectuate the foregoing. Upon the request of MedQuist, PSP shall take such further actions, at MedQuist’s expense, as may be reasonably appropriate or necessary to confirm such rights. PSP represents, warrants and covenants that: (i) it has and will have the full and sufficient right to assign and grant the rights granted to MedQuist pursuant to this Agreement free and clear of any liens, claims or encumbrances and (ii) to PSP’s knowledge, none of the Products at the Amended and Restated Agreement Effective Date, infringes any Intellectual Property Rights of any third party, nor has any claim of such infringement been threatened or asserted. The sole remedy for MedQuist for any breach of the warranty in subsection (ii) of the preceding sentence is set forth in clause 14 of this Agreement. PSP agrees MedQuist may make further derivatives, modifications, enhancements, corrections, additions, and extensions to the Products (“MedQuist Modifications”) and that MedQuist will be the sole and exclusive owner of the MedQuist Modifications without a duty to disclose or provide such to PSP, and PSP agrees to do nothing inconsistent with such ownership by MedQuist and nothing herein grants any license to such MedQuist Modifications to PSP. MedQuist agrees that PSP may make further derivatives, modifications, enhancements, corrections, additions, and extensions to the Products separate and apart from the development, maintenance and other PSP services provided hereunder (“PSP Modifications”) and that PSP will be the sole and exclusive owner of the PSP Modifications without a duty to disclose or provide such to MedQuist, and MedQuist agrees to do nothing inconsistent with such ownership by PSP and nothing herein grants any license to such PSP Modifications to MedQuist; provided that the foregoing shall not relieve PSP of any of its development, maintenance and other PSP service obligations hereunder. The provisions of this Section shall survive the termination or expiration of this Agreement.


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16. Legal Compliance.

16.1 Neither party may download or otherwise export or re-export the Software or any underlying information or technology except in full compliance with all United States and other applicable laws and regulations. In particular, but without limitation, none of the Software or underlying information or technology may be downloaded or otherwise exported or re-exported: (i) into (or to a national or resident of) Cuba, Iran, Iraq, Libya, North Korea, Syria, or Sudan (as such list is updated by the US Government from time to time); or (ii) to anyone on the U.S. Treasury Department’s list of Specially Designated Nationals or the U.S. Commerce Department’s Table of Deny Orders.

16.2 In accordance with the Federal Center for Devices and Radiological Health regulations, in order to permit tracing in the event of recall, each party will retain distribution records for the Products for a period of five (5) years from the date of termination or expiration of this Agreement.

16.3 Each party is aware of and will advise its End Users to comply with Section 112B(b) of the Social Security Act (42 U.S.C. 1320a-7b) (the “Act”) when seeking reimbursement from any governmental entity for products supplied under this Agreement. Specifically, each party acknowledges that the Act may require proper disclosure of any discounts, rebates, credits, reimbursements, and other programs PSP or MedQuist provide in connection with delivery of the Products.

16.4 Neither party will ship, transfer, or export any of the Products, or any derivative thereof, directly or indirectly, into any country except as permitted by the U.S. Export Administration Act and the regulations thereunder, or use any of the Products for any purpose prohibited by the U.S. Export Administration Act.

17. Intellectual Property Rights.

17.1 With respect to the co-owned Products, in the event that either MedQuist or PSP, or both, wish to pursue a patent in any Product technology or any component thereof provided hereunder, they shall cooperate with each other in preparing and submitting one or more patent applications. Where the Parties agree to, and do, share equally in the cost of prosecuting these patent applications in any Product technology or any component thereof provided hereunder, the Parties shall jointly own any resulting patent without any right or duty of accounting to or consulting with the other party. Where the Parties agree that one of them shall pay more than half of the cost of prosecuting the patent application, and it does so, that Party shall own the patent and shall grant to the other party, absent any other written agreement between the Parties, a non exclusive, perpetual, transferable, worldwide, irrevocable, royalty-free, fully paid-up license to use, copy, modify and prepare derivative works of the patent (including, without limitation, the right to make, have made, use, import, offer for sale and sell or otherwise provide or dispose of products and services using or incorporating the same) or to practice any process in connection therewith, with the right to sublicense the same.

17.2 The Parties shall cooperate with each other and execute such other documents as may be necessary and appropriate to achieve the objectives of this Section and Section 15. Each of the joint owners of the Products shall have the right to assign its rights and interest in any jointly owned Product (including the Intellectual Property Rights therein) to an Affiliate or to an acquirer of (or a part of) the joint owner’s business, as part of a bona fide and solvent divestiture carried out at arm’s length basis, to which the jointly owned Product is relevant. For purposes of this Agreement, the terms


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joint ownership and co-ownership are used interchangeably to mean joint ownership by PSP and MedQuist.

17.3 In no event shall either party be precluded from independently developing for itself, or for others, anything, whether in tangible or non-tangible form, which is competitive with, or similar to, the co-owned Products. In addition, both parties shall be free to use its general knowledge, skills and experience, and any ideas, concepts, know-how, and techniques that are acquired or used in the course of providing or receiving the co-owned Products hereunder.

17.4 PSP grants MedQuist a limited, nonexclusive right to use PSP’s trademarks and trade names (the “Marks”) in connection with the advertising, marketing and sale of the Products. To the extent necessary in connection with the foregoing, PSP shall cause its applicable Affiliates to grant similar rights to MedQuist as set forth in this Section with respect to any Marks used by PSP but held in the name of any such Affiliates. MedQuist will not use PSP’s trade names or abbreviations (with the exception of a logo or mark or graphic design PSP provides which indicates MedQuist is an authorized value-added reseller of PSP) in MedQuist’s corporate title or name, or in any manner that may result in confusion as to separate and distinct identities of PSP and MedQuist. MedQuist agrees that it has no right, title, or interest in or to the Marks except the limited right of use set forth in this Agreement. MedQuist will not use any Mark in any way except as PSP may authorize. MedQuist will submit to PSP representative samples of all labels, advertising, promotional and marketing materials, and other items that use or bear any Mark for PSP’s approval prior to publication or distribution. MedQuist will use the Marks only in the forms PSP designate, will not alter or modify any Mark, and will include an appropriate trademark notice ^® or ^TMwith each use of any

Mark. On expiration or termination of this Agreement, the license granted under this Section 17.4 will automatically terminate and MedQuist will immediately cease and desist all use of the Marks licensed under this Agreement.

17.5 MedQuist intends to market the Products described in this Agreement under the trademark “SpeechQ^TM” and certain trademarks, trade names, service marks, logotypes, and other commercial symbols related thereto (collectively, the “SpeechQ Marks”). PSP further acknowledges and agree that: (i) there is substantial and valuable goodwill in the SpeechQ Marks; (ii) as between PSP and any of its Affiliates on the one hand, and MedQuist and any of its Affiliates on the other, MedQuist owns all rights to the SpeechQ Marks and all goodwill related to them; (iii) neither PSP nor any of its Affiliates will contest MedQuist’s ownership of the SpeechQ Marks, or the validity of the SpeechQ Marks, at any time during or after the Term of this Agreement; and (iv) neither PSP nor any of its Affiliates will misappropriate the SpeechQ Marks, infringe on MedQuist’s rights in the SpeechQ Marks, or use the SpeechQ Marks without MedQuist’s prior written consent, at any time during or after the Term of this Agreement.

17.6 Any advertising, publicity, release or other disclosure of information concerning this Agreement should be released only after receiving a prior written approval by both parties except as required by law.

17.7 Neither Party, unless approved by both Parties in writing, is allowed to link, combine or otherwise use the co-owned Products with any open source software, if such linkage, combination or use would create a risk, or have the “viral” effect, of requiring the disclosure or licensure of the co-owned Products as open source under the GNU General Public License or under the terms of any other comparable viral open source license. In the event an action is performed resulting in the co-owned Products being licensed under the GNU General Public License or under the terms of any other


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comparable viral open source license without approval by both Parties, the Party causing this action shall indemnify the other Party against and hold the other Party harmless from any and all damages and/or costs arising from or in connection with any breach of the provisions of this Section 17.7 and shall reimburse any and all costs and expenses incurred by the other Party in defending any claim, demand, suit or proceeding arising from or in connection with such breach. The indemnification in this Section is not subject to the limitations set forth in Sections 13 or 14 of this Agreement.

18. Confidential Information. Each party to this Agreement has imparted and may from time to time impart to the other certain confidential information related to the performance of this Agreement, and the Products or the marketing or support thereof (including specifications therefor), and each party may otherwise obtain confidential information concerning the business and affairs of the other pursuant to this Agreement. Each party hereby agrees that it will use such confidential information solely for the purposes of this Agreement and that it will not disclose, whether directly or indirectly, to any third party such information other than as required to carry out the purposes of this Agreement. In the event of and prior to such disclosure, the disclosing party will obtain from such third parties duly binding agreements to maintain in confidence the information to be disclosed to the same extent at least as such party is so bound hereunder. The foregoing provision will not prevent the disclosure or use by a party of any information which is or hereafter, through no fault of such party, becomes public knowledge or to the extent permitted by law, provided that each party has a reasonable opportunity to prevent or limit such disclosure. MedQuist will return to PSP all confidential information received pursuant to this Agreement or otherwise in its possession or control on termination of this Agreement, or forthwith on the request of PSP.

19. Remedies on Breach. Each party acknowledges that the unauthorized use or disclosure of any confidential information will cause irreparable harm to the other for which damages will be an inadequate remedy, and the each party hereby agrees that, in additional to all other remedies available to it at law and in equity, it will have the right to obtain injunctive relief.

20. Termination.

20.1 Either party may terminate this Agreement on written notice to the other if any of the
following events occur:

20.1.1 If any proceeding in bankruptcy, receivership, liquidation or insolvency is commenced against the other party or its property, and the same is not dismissed within ninety (90) days; or

20.1.2 If the other party makes any assignment for the benefit of its creditors, becomes insolvent, commits any act of bankruptcy, ceases to do business as a going concern, or seeks any arrangement or compromise with its creditors under any statute or otherwise.

20.2 PSP may terminate this Agreement on written notice to MedQuist if any of the following
events occur:

20.2.1 In the event that a material breach by MedQuist remains uncured for more than thirty (30) days following PSP’s delivery of written notice to MedQuist specifying the nature of the breach; or

20.2.2. [Intentionally Omitted]


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20.3 MedQuist may terminate this Agreement on written notice to PSP in the event that a material breach by PSP remains uncured for more than thirty (30) days following MedQuist’s delivery of written notice to PSP specifying the nature of the breach.

21. Obligations On Termination. On the expiration or termination of this Agreement:

21.1 PSP will be under no obligation to refund to MedQuist any licensing fees paid pursuant to this Agreement so long as PSP has fulfilled all of its obligations under this Agreement related to such licensing fees; including, without limitation, delivery of the Software license and fulfilling the warranty obligations for such Software license;

21.2 Subject to Section 4.3.5., PSP will continue to perform its support obligations to MedQuist for the duration of all service agreements between MedQuist and the End Users entered into before such expiration or termination (but, in accordance with Section 4.3.5, in no event beyond ******* unless otherwise separately agreed by PSP and MedQuist), where support fees have been paid to PSP;

21.3 Any End User licenses granted before the expiration or termination of this Agreement will continue to survive after the effective date of termination provided that MedQuist has paid all amounts owing hereunder; and

21.4 The following provisions shall survive termination or expiration of this Agreement: 1, 2.1 and 2.2 (including the Territorial restrictions therein), 2.3, 6.3, 12, 13, 14, 15, 17, 18, 19, 20, 21 and 22.

22. Miscellaneous.

22.1 Force Majeure. The term “Force Majeure” will be defined as an act of God; severe weather conditions; strikes; war, terror or other violence; law or proclamation, demand, or requirement of any governmental agency; or any other similar act or condition whatsoever, beyond the reasonable control of the parties to this Agreement. If the performance of this Agreement by either party or any obligation under this Agreement is prevented, restricted, or interfered with by reason of a Force Majeure event, the party whose performance is so affected, on giving prompt notice to the other party, will be excused from such performance to the extent of such Force Majeure event; provided, however, that the party so affected will take all reasonable steps to avoid or remove such causes of nonperformance and will continue performance under this Agreement with dispatch whenever such causes are removed.

22.2 Relationship of MedQuist to PSP. Neither party is an agent, employee, fiduciary, partner, or representative of the other, and has no authority or power to bind or contract in the name of or to create any liability against the other in any way or for any purpose. It is understood that MedQuist is an independent contractor with rights confirmed by this Agreement to market, distribute, and support the Product on its own accord and responsibility in the Territory.

22.3 Waiver. Failure or neglect by either party to enforce at any time any of the provisions of this Agreement will not be construed nor will be deemed to be a waiver of either party’s rights under this Agreement nor in any way affect the validity of the whole or any part of this Agreement nor prejudice either party’s rights to take subsequent action.

22.4 Agreement. This Agreement, including the Schedules attached to this Agreement, states the completed agreement between the parties concerning this subject and supersedes earlier


*******		- Material has been omitted and filed separately with the Commission.

-15-

oral and written communications between the parties concerning this subject. No addition, amendment to, or modification of this Agreement will be effective unless it is in writing and signed by both parties. This Agreement takes precedence over and supersedes any previous agreements between the parties regarding the subject matter hereof, even if such agreements are still in effect as of the Original Effective Date hereof.

22.5 Assignment. This Agreement is personal to the Parties, and therefore, it may not be assigned by either Party whether voluntarily or involuntarily or by operation of law, in whole or in part, to any party without the prior written consent of the other Party, which consent will not be unreasonably withheld. No such assignment by either Party, howsoever occurring, will relieve the Parties of their obligations under this Agreement. Notwithstanding the foregoing, either Party may assign this Agreement without consent: (a) if this Party undergoes a change of control, whether by means of a sale or issuance of shares or otherwise; (b) to any of its Affiliates or (c) to any purchaser of substantially all of the assets or the business of this respective Party.

If MedQuist becomes an Affiliate – directly or indirectly – of a direct competitor of PSP via a transaction involving MedQuist, PSP may, at its sole discretion, decide to prematurely terminate its maintenance and support obligations under Section 4.3 and the distribution rights of MedQuist in the Non exclusive Territory of this agreement by giving MedQuist a 12 months written notice period; provided that in no event shall such termination operate to relieve PSP of its development services obligations hereunder.

If PSP becomes an Affiliate – directly or indirectly – of a direct competitor of MedQuist via a transaction involving PSP, Medquist may, at its sole discretion, decide to prematurely terminate the maintenance and support obligations under Sections 4.3 of this agreement by giving PSP a 12 months written notice period; provided that in no event shall such termination operate to relieve PSP of its development services obligations hereunder.


*******		- Material has been omitted and filed separately with the Commission.

-16-

22.6 Notices. Any notice required or permitted under the terms of this Agreement or required by Law will, unless otherwise provided, be in writing and will he delivered in person, sent by registered mail or air mail as appropriate, properly posted and fully prepaid, in an envelope properly addressed; or sent by next-day delivery via a courier that has the ability to track deliveries and confirm receipts to the respective parties, as follows:


To PSP:		Philips Speech Recognition Systems GmbH
		Attn: Marcel Wassinc
		Triester Strasse 64
		1101 Vienna, Austria

To MedQuist:		MedQuist Inc.
		100 Bishops Gate Blvd. #300
		Mount Laurel, NJ 08054

		Attn: Chief Legal Officer

with a simultaneous copy, which will not constitute notice, to:

		David Gould, Esq.
		Buchanan Ingersoll & Rooney PC
		One Oxford Centre
		301 Grant Street, 20th Floor
		Pittsburgh, PA 15219-1410
		Fax: 412-562-1041

or to such other address as may from time to time be designated by written notice hereunder. Any such notice will be in the English language and will be considered to have been given at the time when actually delivered if delivered by hand, on the next business day following sending by courier or in any other event within seven (7) days after it was mailed in the manner provided in this Section 22.6.

22.7 Headings. The headings of the sections of this Agreement are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement.

22.8 Severability. In the event that any or any part of the terms, conditions, or provisions contained in this Agreement arc determined by any competent authority to be invalid, unlawful, or unenforceable to any extent, such term, condition, or provision will to that extent be severed from the remaining terms, conditions, and provisions, which will continue to be valid and enforceable to the fullest extent permitted by law.

22.9 Governing Law. The parties hereby agree that this Agreement will be governed by and construed and interpreted in accordance with the laws of the State of New York and the laws of the United States applicable in the State of New York, The parties agree that the U.N. Convention on Contracts for the International Sale of Goods does not apply to this Agreement.

22.10 Dispute Resolution.

22.10.1 All disputes arising under this Agreement will be settled, if possible, by good faith negotiation of the parties, which negotiations will not terminate until the President of MedQuist and the President of PSP have considered the dispute.


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-17-

22.10.2 If such negotiations fail to resolve any dispute within thirty (30) days after a party has given written notice of the dispute to the other party or parties, then such dispute will be resolved, if possible, by a process of mediation agreed on by the parties (acting reasonably), which mediation will be conducted by a mediator agreed on by the parties (acting reasonably). Such mediator will be an individual with significant experience in and understanding of the software industry. Such mediation will be held within 30 days after cessation of negotiations as described in Section 22.10,1 of this Agreement.

22,10.3 If the dispute has not been settled within ten (10) days of the commencement of the mediation described in Section 22.10.2 of this Agreement, then the dispute will be finally settled by arbitration and this Agreement specifically excludes the power of the Court to refuse to stay judicial proceedings. The arbitration will take place in, New York, New York unless otherwise agreed. Within twenty (20) days after the party requesting arbitration has given written notice of such request to the other party, the parties (acting reasonably) will jointly appoint a single arbitrator who will be an individual (other than the mediator selected pursuant to Section 22.10.2 of this Agreement, with significant experience in and understanding of the software industry. If the parties are unable to appoint a single arbitrator within the such twenty (20) day period, then MedQuist will appoint one arbitrator and PSP will appoint one arbitrator, both such arbitrators to be appointed within ten (10) days after the end of the aforementioned twenty (20) day period, with a third arbitrator then being selected by those two arbitrators (none of these three being the mediator selected pursuant to Section 22.10.2 within five (5) days following their appointment. Such third arbitrator will alone conduct the arbitration. The arbitration will be final and binding and not subject to appeal and the procedures and substance of the arbitration will be governed by the U.S. Federal Arbitration Act. The arbitrator may, in addition to any other remedies, grant injunctive relief. The non-prevailing party will pay all costs of the arbitration,

22.11 No Damages for Termination or Expiration. PSP WILL NOT BE LIABLE TO MEDQUIST FOR DAMAGES OF ANY KIND, INCLUDING BUT NOT LIMITED TO INCIDENTAL OR CONSEQUENTIAL DAMAGES, SOLELY ON ACCOUNT OF PSP’S TERMINATION OR EXPIRATION OF THIS AGREEMENT IN ACCORDANCE WITH ITS TERMS. MEDQUIST WAIVES ANY RIGHT IT MAY HAVE TO RECEIVE ANY COMPENSATION OR REPARATIONS ON TERMINATION (OTHER THAN IN THE CASE OF A TERMINATION OF THIS AGREEMENT BY MEDQUIST FOR CAUSE UNDER SECTION 20.3 OF THIS AGREEMENT) OR EXPIRATION OF THIS AGREEMENT IN ACCORDANCE WITH ITS TERMS UNDER THE LAW OF ANY TERRITORY, STATE, OR OTHERWISE. PSP will not be liable to MedQuist on account of termination (other than in the case of termination of this Agreement by MedQuist for cause under Section 20.3 of this Agreement) or expiration of this Agreement in accordance with its terms for reimbursement or damages for the loss of goodwill, prospective profits, or anticipated income, or on account of any expenditures, investments, or commitments made by MedQuist, or for any other reason whatsoever, based on or growing out of such expectation or termination.

22.12 Authority. Each of the parties hereby represents that it has full power and authority to enter into and perform its respective obligations under this Agreement, and does not know of any contracts, agreements, promises, or undertaking, that would prevent the full performance and compliance with this Agreement.

[SIGNATURES CONTAINED ON FOLLOWING PAGE]


*******		- Material has been omitted and filed separately with the Commission.

-18-

IN WITNESS WHEREOF, the parties have duly executed and delivered this Amended and Restated Agreement as of the Amended and Restated Agreement Effective Date.


MEDQUIST INC.				PHILIPS SPEECH RECOGNITION SYSTEMS GMBH

By:				By:


Name:				Name:


Title:				Title:


Date:				Date:


*******		- Material has been omitted and filed separately with the Commission.

SCHEDULE A

TERRITORY’

Description of Territory:

MedQuist’s exclusive Territory shall be all that area within North America.

“North America” shall specifically include, without limitation: (i) the United States of America; (ii) the Dominion of Canada; (iii) those islands in the Caribbean Basin beginning with Bermuda to the north and extending to Grenada and Barbados in the south, as the borders of such countries are configured as of the Effective Date of this Agreement.

The United States of America shall expressly include: (i) the following dependent areas of the United States of America: American Samoa, Baker Island, Guam, Howland Island, Jarvis Island, Johnston Atoll, Kingman Reef, the Midway Islands, Navassa Island, the Northern Mariana Islands, Palmyra Atoll, Puerto Rico, the U.S. Virgin Islands, and Wake Island; (ii) those areas leased by the United States from separate sovereign nations, including without limitation Guantanamo Bay, Cuba;

The Dominion of Canada shall expressly include Hans Island, in the Kennedy Channel between Ellesmere Island and Greenland, which area is subject to a border dispute between the Dominion of Canada and the Kingdom of Denmark.

MedQuist’s non-exclusive Territory shall be all that area of Australia and the United Kingdom.

“Australia” shall specifically include, without limitation (i) the Australian continent; (ii) the major island of Tasmania; (iii) the Australian controlled islands in the Southern, Indian and Pacific Oceans; and (iv) New Zealand (including the North Island and the South Island and the other islands controlled by New Zealand, most notably Stewart Island/Rakiura and the Chatham Islands).

“United Kingdom” shall specifically include, without limitation: (i) the United Kingdom of Great Britain and Northern Ireland (including England, Northern Ireland, Scotland and Wales); (ii) The Crown Dependencies of the Channel Islands and the Isle of Man; and (iii) the British Overseas Territories.


*******		- Material has been omitted and filed separately with the Commission.

SCHEDULE A-1

STATEMENT OF WORK (SOW)

*******


*******		- Material has been omitted and filed separately with the Commission.

SCHEDULE B

PRODUCTS

Description of Products:

The Products that are the subject of this Agreement shall include, without limitation:

	1.		“SpeechQ for Radiology”, together with its components; front-end Integration SDK, SpeechLink, and future versions thereof which could be used in specialties outside of radiology.

	2.		The Products shall specifically exclude software development kit (“SDK”) products that PSP develops, currently known as Speech SDK, SpeechMagic, SpeechMagic SDK, and SpeechMagic InterActive SDK and future versions thereof.


*******		- Material has been omitted and filed separately with the Commission.

SCHEDULE B-1

HOURLY PRICES FOR SPEECHQ 1.2 LITE DEVELOPMENT


Price per hour for PSRS Development resources:		*******

Price per hour for Multisoft development resources:		*******

The hourly rates above include

	•		personnel-related expenses, i.e. compensation and traveling.

	•		a ******* allocation for infrastructure i.e. R&D’s share of office rent, IT expenses, and (shared) services (including back office, such as HR).

The Multisoft tariff has been based on actual invoices from Multisoft plus the same infrastructure allocation as above, as they are engineers partly located in our premises and using Philips IT equipment and infrastructure.

In addition, there is a fiscal uplift of ******* added to the hourly rate as a percentage that Philips require Philips Austria to apply to services provided to other Philips parties.


*******		- Material has been omitted and filed separately with the Commission.

SCHEDULE C

PRICING

Pricing may be adjusted from time to time based upon the mutual agreement of the need for such a change by both MedQuist and Philips Speech Processing.

The license fee for the Software (the “License Fee”) shall be as follows:

Table 1


	Item	License Fee
1.1	Server	*******
1.2	Link	*******
1.3	Report Station Workstation Client*	*******
1.4	Report Station Concurrent License*	*******
1.5	Report Station Concurrent Transcription License*	*******
1.6	Report Station Concurrent Dictation License*	*******
1.7	Test Server Package	*******


*		For every transcription user or workstation, a Report Station needs to be purchased.

For end-customers who have no SMA contracts, PSP and MedQuist will agree on a case by case basis on a recommended end-user upgrade price for patches and point releases, and PSP will get ******* of that price.

On ******* Table 1 will be amended to reflect the following change:

Licenses in rows 1.3 and 1.4 will be replaced by a Concurrent SpeechMagic SDK Runtime License. The License Fee will be ******* of the MSRP (as of the Amended and Restated Effective Date, the current MSRP is *******). The MSRP is subject to change upon notification by PSP to MedQuist; provided that, notwithstanding such changes to the MSRP from time to time, such Concurrent SpeechMagic SDK Runtime License Fee shall in no event exceed *******.


*******		- Material has been omitted and filed separately with the Commission.

C-1

SCHEDULE D

[Intentionally Omitted]


*******		- Material has been omitted and filed separately with the Commission.

D-1

SCHEDULE E

THIRD PARTY SOFTWARE

*******


*******		- Material has been omitted and filed separately with the Commission.

E-1

END USER LICENSE AGREEMENT

END USER LICENSE AGREEMENT for MEDQUIST ‘Branded’ SOFTWARE

THIS END USER LICENSE AGREEMENT (“EULA”) is between MEDQUIST, Inc. (“MEDQUIST”), having a business address of 5430 Metric Place, Suite 200, Norcross, Georgia 30092, and CUSTOMER.

DEFINITIONS

	a)		“Software” shall mean separate MedQuist ‘branded’ computer programs, (whether or not included within or separately from any data processing unit), provided now or later by MedQuist, its parent, subsidiaries, or affiliates and not otherwise so provided under a separate license agreement, which can be read and used directly by a machine or device, and shall include without limitation, data, instructions, and media. “Non-branded Software” shall mean Software bearing a trademark other than MedQuist’s.

	b)		“Documentation” shall mean the separate MedQuist ‘branded’ operator, user, or installation instruction sets, provided now or later, and in whatever form, by MedQuist, its parent, subsidiaries, or affiliates and not otherwise provided under a separate license agreement. “Non-branded Documentation” shall mean Documentation bearing a trademark other than MedQuist’s.

LICENSE OF RIGHTS.

	a)		Customer is granted a non-exclusive, non-assignable, non-transferable, permanent, revocable license of rights to use and display each of the Software and Documentation, whether separately or combined, with others of the Software or Documentation, only in data processors which are in Customer’s exclusive possession and designated by Customer for such use in its internal business, with such Software or Documentation, or such combined Software or Documentation.

	b)		Customer is granted a non-exclusive, non-assignable, non-transferable, permanent, revocable license of rights to use the Documentation only in direct connection with such Software or Documentation use and display, internally in its own business.

3.		Customer acknowledges that the Software and Documentation, including without limitation all ideas, procedures, processes, systems, methods of operation, concepts, principles, discoveries, and inventions, are the exclusive property of MedQuist or its licensors and acknowledges their exclusive rights to the application, manufacture, development, use, display, reproduction, modification, and the transfer of the Software and Documentation and to all worldwide patent and copyright rights to and in the Software or Documentation. Customer shall not prepare a derivative work or a compilation from such Software or Documentation, or modify, combine, or copy the Software or Documentation in any manner, including without limitation decompiling or disassembling the Software or Documentation to any third party, in whole or part, in any form or in any manner, unless expressly permitted in writing by MedQuist. The sole exception allowed is the copying of the Software or Documentation when loading the Software or Documentation within the internal memory of Customer’s data processor, and when an essential step in the utilization of the Software or Documentation in conjunction with such data processor. No other manner of copying is permitted. Customer shall reproduce and include all copyright notices provided with the Software or Documentation on all copies, compilations, or derivative works of the Software or Documentation produced by the Customer, as may be authorized under this Paragraph 3.

4.		Customer acknowledges the proprietary rights in the trademarks shown on the Software and Documentation delivered to the Customer, and Customer shall deal with and treat such trademarks according to applicable trademark law.

5.		Customer shall limit access to the Software or Documentation to its authorized employees. Customer shall advise such employees of the terms of this EULA and shall take all necessary steps to ensure compliance with the EULA terms, by such employees.

6.		Customer shall defend, indemnify, and hold MedQuist harmless from any and all claims, actions, losses, damages, (including reasonable legal fees), obligations, liabilities, and liens (including, without limitation, any of the foregoing arising out of or imposed in connection with latent or other defects, or under the doctrine of “strict liability”), arising out of the purchase, lease, possession, operation, condition, return, or use of the Software or Documentation, or by operation of law, excluding, however, any of the foregoing resulting solely and directly from the acts of MedQuist.

7.		This EULA is not assignable by Customer unless permitted in writing by MedQuist and any attempt at assignment without such permission shall be void. This EULA is assignable in whole or part by MedQuist without consent of Customer. Customer agrees to execute all documents and consents requested by MedQuist to complete any assignment by MedQuist.

8.		Customer agrees to keep the Software and Documentation at the location(s) of its designated data processors, as set forth in Paragraph 2 above. Customer agrees to return the Software or Documentation delivered by MedQuist under this EULA immediately upon Customer relinquishing possession of any of said data processors, except to the extent that the Software or Documentation has been transferred to replacement data processors possessed by Customer or to third parties in accordance with Paragraph 7 above.

9.		MedQuist warrants that it has and conveys good title to the Software. MedQuist warrants that the Software will perform to the specifications identified within the user Documentation current at the time of Software sale. Documentation and media containing Software or Documentation are provided “AS IS” without warranty of any kind, either expressed or implied. MedQuist does not warrant that the functions contained in the Software or Documentation will meet Customer’s requirements or that the operation of the Software or Documentation will be uninterrupted or error free. Should the Documentation prove defective, Customer alone assumes the entire cost of all necessary correction.

10.		MedQuist’s warranty of Software shall be void and of no effect if: (a) the Software is not properly stored, installed, or maintained in accordance with MedQuist’s recommendations or standard industry practice; (b) the Software is not operated under normal conditions and in accordance with MedQuist’s recommendations or standard industry practice; (c) the defect has arisen from damages occurring to the Software subsequent to MedQuist’s delivery or is related to the use of unauthorized hardware or software; or (d) failure of the Software due to (i) inadequate electrical power, air-conditioning, or humidity-control, (ii) accident or disaster, including without limitation, fire, flood, water, wind, and lightning, (iii) neglect, including without limitation, power transients, abuse or misuse, and failure of the Customer to follow MedQuist’s published operating instructions, (iv) unauthorized modification or repair of Software by persons other than authorized representatives of MedQuist, or (v) use of the Software for purposes other than those for which designed.

11.		MedQuist’s warranty of Software does not include (a) performing services connected with relocation of Software or adding or removing interfaces, accessories, attachments or other devices, (b) repair of damage due to other than normal wear, (c) electrical work external to the Software, (d) any maintenance of interfaces, accessories, attachments, or other devices not furnished by MedQuist, or (e) any issues resulting from an unsupported service.

12.		THE WARRANTY MADE BY MEDQUIST HEREIN, IS EXCLUSIVE AND IS MADE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTY OF MERCHANTABILITY, AND IMPLIED WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE, AND ANY WARRANTY ARISING OUT OF ANY COURSE OF DEALING, CUSTOM, OR USAGE OF TRADE. IN NO EVENT, SHALL MEDQUIST BE LIABLE FOR SPECIAL, INDIRECT, INCIDENTAL, OR CONSEQUENTIAL DAMAGE.S OR ECONOMIC LOSS UNDER ANY LEGAL THEORY ASSERTED, EVEN IF MEDQUIST HAS BEEN ADVISED OF THE POSSIBILITY THEREOF.

13.		ALL NON-BRANDED SOFTWARE AND NON-BRANDED DOCUMENTATION ARE PROVIDED HEREUNDER ON AN “AS IS” BASIS. NON-MEDQUIST MANUFACTURERS OR SUPPLIERS MAY PROVIDE WARRANTIES FOR THEIR SOFTWARE OR DOCUMENTATION AND ALL WARRANTY QUESTIONS OR PROBLEMS WITH RESPECT TO SUCH SOFTWARE OR DOCUMENTATION SHOULD BE ADDRESSED DIRECTLY TO SUCH NON-MEDQUIST MANUFACTURER OR SUPPLIER. CUSTOMER EXPRESSLY ASSUMES ALL LIABILITY FOR ALL AND ANY LOSSES, DAMAGES, AND COSTS (INCLUDING COURT COSTS AND LEGAL FEES) IN CONNECTION WITH, OR RELATED TO, SUCH NON-BRANDED SOFTWARE OR NON-BRANDED DOCUMENTATION. THE ENTIRE RISK AS TO THE QUALITY OR PERFORMANCE OF SUCH NON-BRANDED SOFTWARE OR NON-BRANDED DOCUMENTATION IS WITH CUSTOMER.


*******		- Material has been omitted and filed separately with the Commission.

-1-

14.

LIMITATION OF REMEDY

	a)		If any Software is found to be defective within the warranty period, MedQuist’s only obligation, and Customer’s exclusive and sole remedy, as MedQuist may choose in MedQuist’s sole best judgment, shall be either (a) the repair or replacement of such defective Software by MedQuist, or (b) the return of such defective Software to MedQuist and a refund to Customer of its license fee. Customer acknowledges and agrees that MedQuist’s right to refund Customer’s license fee shall not be diminished or restricted in any way or for any reason. The provision of such remedy shall be conditioned upon notification, and substantiation as may be required by MedQuist, that such Software has been stored, installed, maintained, and operated in accordance with MedQuist’s recommendations or standard industry practice. Unless otherwise directed by MedQuist, all such defective Software shall be returned to MedQuist’s warehouse, or to such other location as MedQuist shall select, all at MedQuist’s expense.

	b)		Except for MedQuist’s obligations set out in Section 14 (a) above, MedQuist shall have no obligation, liability, or responsibility to Customer or any other party with respect to any claim or cause of action arising in connection with, or related to, this EULA, whether legal or equitable, including, without limitation, any claim or cause of action in contract or in tort (whether in negligence or in strict liability)..Customer acknowledges and agrees MedQuist’s total obligation and liability for any such claim or cause of action shall be limited to an amount in the aggregate which shall not exceed the total price paid by Customer for the specific Software or Documentation which are the subject matter of and directly related to such claim or cause of action. Customer expressly assumes all liability for all and any losses, damages, and costs (including court costs and legal fees) in excess of such amount. No claim or causes of action, regardless of form, may be brought more than one (1) year after such claim or cause of action arises.

	c)		The purpose of the above stated remedy is to correct any defects or to refund the license fee paid. Customer acknowledges and agrees that such exclusive remedy is an essential term in the bargain represented by this EULA and that such remedy shall, in view of the consideration paid to MedQuist, operate as a full satisfaction to Customer for any and all claims related thereto. In further view of the foregoing, Customer acknowledges and agrees that in the event a court of competent jurisdiction or an arbitration panel rules this exclusive remedy does not give the Customer the benefit of its bargain or that such exclusive remedy fails for any reason, then any such ruling with regard to such exclusive remedy or any such failure of such exclusive remedy, shall not effect or modify in any way, any limitation or exclusion of warranties, and all such limitations and exclusions shall continue in full force and effect.

15.		This Agreement shall be governed by the laws of the state listed in Customer’s address on the Final Terms of Sale referenced by the Product Sales Agreement within which this EULA is incorporated. Any term or condition prohibited by law shall, to the extent prohibited, be ineffective without affecting the other terms and conditions.

16.		All parties acknowledge and agree that in entering into this transaction, they have not relied upon any representations regarding this EULA, other than those explicitly set forth herein. Further, the parties expressly admit that any term or condition which is, or may be asserted, as material by any party and which is not expressly stated in this EULA, shall not be part of this EULA and shall not be binding on any parties hereto. Each party waives all defenses, with regard to any such asserted material, term, or conditions not expressly stated within this EULA.

17.		If either party to this EULA is temporarily unable to perform its obligations because of causes reasonably beyond its control, then no liability to the other party or right to terminate shall exist for failure of that party to perform during such period.

18.		MedQuist’s failure to insist on strict performance of this EULA or to enforce a default upon the occurrence of any single, repeated, or continuing violation of any particular term or condition hereof, shall not be considered a waiver of MedQuist’s right to insist on strict performance of this EULA or to enforce a default with respect to the violation of any other term or condition or, at any later time or upon any subsequent occurrence, with respect to that particular term or condition.

No waiver, change, or amendment of any term or condition of this EULA is effective against MedQuist unless made in writing and signed by an authorized official of MedQuist.


*******		- Material has been omitted and filed separately with the Commission.

-2-

EX-31.1 3 w42097exv31w1.htm CERTIFICATION OF CHIEF EXECUTIVE OFFICER exv31w1

Exhibit 31.1

I, Howard S. Hoffmann, certify that:

1. I have reviewed this quarterly report on Form 10-Q of MedQuist Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a — 15(e) and 15d — 15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a — 15(f) and 15d — 15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



By:	/s/ Howard S. Hoffmann
	Name:	Howard S. Hoffmann
	Title:	President and Chief Executive Officer

Dated: November 8, 2007

EX-31.2 4 w42097exv31w2.htm CERTIFICATION OF CHIEF FINANCIAL OFFICER exv31w2

Exhibit 31.2

I, Kathleen E. Donovan, certify that:

1. I have reviewed this quarterly report on Form 10-Q of MedQuist Inc.;

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



By:	/s/ Kathleen E. Donovan
	Name:	Kathleen E. Donovan
	Title:	Senior Vice President and Chief Financial Officer

Dated: November 8, 2007

EX-32.1 5 w42097exv32w1.htm CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. 1350 exv32w1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Medquist Inc. (the “Company”) on Form 10-Q for the fiscal quarter ended September 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Howard S. Hoffmann, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



	/s/ Howard S. Hoffmann
	Howard S. Hoffmann
	President and Chief Executive Officer

Date: November 8, 2007

EX-32.2 6 w42097exv32w2.htm CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. 1350 exv32w2

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Medquist Inc. (the “Company”) on Form 10-Q for the fiscal quarter ended September 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kathleen E. Donovan, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



	/s/ Kathleen E. Donovan
	Kathleen E. Donovan
	Senior Vice President and Chief Financial Officer

Date: November 8, 2007

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