Q2 and Half Year Results -9-


|                                |          |  Six months |          |   Year ended | 
|                                |          |       ended |          |              | 
+--------------------------------+----------+-------------+----------+--------------+ 
|                                |          |    June 30, |          | December 31, | 
|                                |          |        2010 |          |         2009 | 
+--------------------------------+----------+-------------+----------+--------------+ 
| Beginning balance              |        $ |       2,064 |        $ |            - | 
+--------------------------------+----------+-------------+----------+--------------+ 
| Charge                         |          |         121 |          |        2,810 | 
+--------------------------------+----------+-------------+----------+--------------+ 
| Cash paid                      |          |       (834) |          |        (746) | 
+--------------------------------+----------+-------------+----------+--------------+ 
| Ending balance                 |        $ |       1,351 |        $ |        2,064 | 
+--------------------------------+----------+-------------+----------+--------------+ 
 
The charge for the six months ended June 30, 2010 reflected costs related to 
vacating facilities. 
 
5.  Cost of Legal Proceedings and Settlements 
 
The following is a summary of the amounts recorded as Cost of legal proceedings 
and settlements in the accompanying consolidated statements of operations: 
 
+--------------------------+----------+-------+-+-------+--+-------+--+--------+ 
|                          |          |  Three months   |  |    Six months     | 
|                          |          |      ended      |  |      ended        | 
|                          |          |     June 30,    |  |     June 30,      | 
+--------------------------+----------+-----------------+--+-------------------+ 
|                          |          | 2010  | | 2009  |  | 2010  |  |  2009  | 
+--------------------------+----------+-------+-+-------+--+-------+--+--------+ 
| Legal fees               |        $ |   199 |$ | 4,384 |$ | 1,242 |$ |  6,278 | 
+--------------------------+----------+-------+-+-------+--+-------+--+--------+ 
| Other professional fees  |          |     - | |     - |  |     - |  |     30 | 
+--------------------------+----------+-------+-+-------+--+-------+--+--------+ 
| Settlements              |          |   910 | |     - |  |   910 |  |  5,850 | 
+--------------------------+----------+-------+-+-------+--+-------+--+--------+ 
|                          |        $ | 1,109 |$ | 4,384 |$ | 2,152 |$ | 12,158 | 
+--------------------------+----------+-------+-+-------+--+-------+--+--------+ 
 
The amount included in settlements for 2010 represent an additional charge of 
$0.9 million required to bring the total Kaiser litigation settlement amount 
accrued to $2.0 million as a result of the settlement agreement with Kaiser more 
fully discussed in Note 7 below. The amount included in Settlements for 2009 
represents the settlement of a patent litigation matter. 
 
6.  Income Taxes 
 
The Company's consolidated income tax benefit consists principally of a 
reduction in certain reserves for uncertain tax positions offset by an increase 
in the deferred tax liability related to indefinite life liabilities, state 
income taxes and foreign taxes. The Company has recorded a valuation allowance 
to reduce its net deferred tax assets to an amount that is more likely than not 
to be realized in future years. The Company regularly assesses the future 
realization of deferred taxes and whether the valuation allowance against the 
domestic deferred tax assets is still warranted.  To the extent sufficient 
positive evidence, including past results and future projections, exists to 
realize all or part of these benefits, the valuation allowance will be released 
accordingly.  The Company has recorded certain domestic deferred tax assets to 
the extent it has recorded deferred tax liabilities that will provide a source 
of taxable income in the same periods in which the deferred tax assets are 
expected to reverse. However, to the extent the deferred tax liability was 
indefinite in nature, it will be considered a source of evidence for benefiting 
only the deferred tax assets that are indefinite in nature. 
 
Under the Indian Income Tax Act, a substantial portion of the profits of the 
Company's Indian operations are exempt from Indian income tax under specified 
tax holiday schemes. 
 
The Company classifies penalties and interest related to uncertain tax positions 
as part of income tax expense. During the second quarter of 2010, the Company 
reduced its accrual for uncertain tax positions by $515 related to various state 
uncertain tax positions as a result of filing voluntary disclosure agreements 
with state jurisdictions. In addition, during the second quarter of 2010, the 
Company's accrual for uncertain tax positions increased by $4,831 as a result of 
the Acquisition and consolidation of Spheris. Related to its uncertain tax 
positions the Company has prepaid taxes and a deposit securing a bank guarantee 
totaling $2,127. 
 
7. Commitments and Contingencies 
 
(a) Commitments 
 
The Company entered into a consulting services agreement with an affiliate of 
its majority shareholder in August 2008 for annual fees of $ 2,750 through 
August 2013.  Management fees amounting to $688 and $1,375 were recorded for the 
three months and six months ended June 30, 2010 and 2009, respectively. In May 
2010, 652 shares were issued to S.A.C. PEI CB Investments II, LLC. ("SAC") in 
lieu of the management fees accrued to SAC through March 2010. As of June 30, 
2010 and December 31, 2009, $2,162 and $2,185, respectively, is accrued as a 
result of this agreement and is recorded in due to related parties in the 
accompanying consolidated balance sheets. 
 
(b) Customer Litigation 
 
Kaiser Litigation 
 
On June 6, 2008, plaintiffs Kaiser Foundation Health Plan, Inc., Kaiser 
Foundation Hospitals, The Permanente Medical Group, Inc., Kaiser Foundation 
Health Plan of the Mid-Atlantic States, Inc., and Kaiser Foundation Health Plan 
of Colorado (collectively, Kaiser) filed suit against MedQuist Inc. and MedQuist 
Transcriptions, Ltd. (collectively, MedQuist) in the Superior Court of the State 
of California in and for the County of Alameda. The action is entitled 
Foundation Health Plan Inc., et al v. MedQuist Inc. et al., Case No. 
CV-078-03425 PJH. The complaint asserts five causes of action, for common law 
fraud, breach of contract, violation of California Business and Professions Code 
section 17200, unjust enrichment, and a demand for an accounting. 
 
On August 12, 2010, the parties entered into a Settlement Agreement and General 
Release ("Settlement Agreement") whereby MedQuist made a lump sum payment of 
$2,000 to resolve all of Kaiser's claims.  Neither MedQuist, nor Kaiser, 
admitted to any liability or wrongdoing in connection with the settlement. On 
July 15, 2010, after the parties notified the Court that they had reached an 
agreement in principle to settle the action, the Court entered an Order of 
Dismissal without costs and without prejudice to the right, upon motion and good 
cause shown, within 60 days, to reopen the Action. Upon the parties' entry into 
the Settlement Agreement on August 12, 2010, the dismissal became final, with 
prejudice and without right of appeal.  Under the Settlement Agreement, the 
parties further agreed that each of the parties shall be solely responsible for 
their own costs and that the Court shall retain continuing jurisdiction over 
implementation of the Settlement Agreement. 
 
 
 
Kahn Putative Class Action 
 
On January 22, 2008, Alan R. Kahn, one of MedQuist's shareholders, filed a 
shareholder putative class action lawsuit against MedQuist, Koninklijke Philips 
Electronics N.V. (Philips), its former majority shareholder, and four of its 
former non-independent directors, Clement Revetti, Jr., Stephen H. Rusckowski, 
Gregory M. Sebasky and Scott Weisenhoff. The action, entitled Alan R. Kahn v. 
Stephen H. Rusckowski, et al., Docket No. BUR-C-000007-08, was venued in the 
Superior Court of New Jersey, Chancery Division, Burlington County. In the 
action, plaintiff purports to bring the action on his own behalf and on behalf 
of all current holders of MedQuist common stock. The original complaint alleged 
that defendants breached their fiduciary duties of good faith, fair dealing, 
loyalty, and due care by purportedly agreeing to and initiating a process for 
MedQuist's sale or a change of control transaction which will allegedly cause 
harm to plaintiff and members of the putative class. Plaintiff sought damages in 
an unspecified amount, plus costs and interest, a judgment declaring that 
defendants breached their fiduciary duties and that any proposed transactions 
regarding MedQuist's sale or change of control are void, an injunction 
preventing its sale or any change of control transaction that is not entirely 
fair to the class, an order directing it to appoint three independent directors 
to its board of directors, and attorneys' fees and expenses. 
 
On June 12, 2008, plaintiff filed an amended class action complaint against 
MedQuist, eight of its then current and former directors, and Philips in the 
Superior Court of New Jersey, Chancery Division. In the amended complaint, 
plaintiff alleged that MedQuist's then current and former directors breached 
their fiduciary duties of good faith, fair dealing, loyalty, and due care by not 
providing its public shareholders with the opportunity to decide whether they 
wanted to participate in a share purchase offer with non-party CBaySystems 
Holdings Ltd. (CBaySystems Holdings) that would have allowed the public 
shareholders to sell their shares of MedQuist's common stock for an amount above 
market price. Plaintiff further alleged that CBaySystems Holdings made the share 
purchase offer to Philips and that Philips breached its fiduciary duties by
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