MEDQUIST INC, 424B4, 1999-04-28

MEDQUIST INC
424B4, 1999-04-28
COMPUTER PROCESSING & DATA PREPARATION

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<PAGE>

Filed Pursuant to Rule 424(b)(4)
Registration Statement No. 333-75005

[GRAPHIC OMITTED]

4,493,467 Shares

MedQuist Inc.

Common Stock
--------------------

This prospectus relates to an offering of 4,493,467 shares of common stock
of MedQuist Inc. MedQuist is offering 800,000 of the shares to be sold in the
offering. The selling shareholders identified in the table beginning on page 26
of this prospectus are offering an additional 3,693,467 of the shares to be
sold in the offering. MedQuist will not receive any of the proceeds from the
sale of the shares sold by the selling shareholders.

The common stock is quoted on the Nasdaq National Market under the symbol
"MEDQ". On April 27, 1999, the last reported sale price for MedQuist's common
stock on the Nasdaq National Market was
$34.125 per share.

See "Risk Factors" beginning on page 6 to read about certain factors you
should consider before buying shares of the common stock.

--------------------
Neither the Securities and Exchange Commission nor any other regulatory
body has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.

--------------------

<TABLE>
<CAPTION>
Per Share Total
----------- --------------------
<S> <C> <C>
Initial public offering price ............................... $ 33.625 $ 151,092,827.88
Underwriting discount ....................................... $ 1.510 $ 6,785,135.17
Proceeds, before expenses, to MedQuist ...................... $ 32.115 $ 25,692,000.00
Proceeds, before expenses, to selling shareholders .......... $ 32.115 $ 118,615,692.71
</TABLE>

The underwriters may, under certain circumstances, purchase up to an
additional 674,020 shares from MedQuist at the initial public offering price
less the underwriting discount.

--------------------
The underwriters expect to deliver the shares against payment in New York,
New York on May 3, 1999.

Goldman, Sachs & Co.

BancBoston Robertson Stephens

Donaldson, Lufkin & Jenrette

Volpe Brown Whelan & Company

--------------------

Prospectus dated April 27, 1999.

<PAGE>

[THIS PAGE INTENTIONALLY LEFT BLANK]

<PAGE>

PROSPECTUS SUMMARY

The following summary highlights information contained elsewhere in this
prospectus. Because this is a summary, it is not complete and does not contain
all of the information that you should consider before investing in the common
stock. You should read the entire prospectus carefully. Unless stated
otherwise, the information in this prospectus assumes no exercise of the
underwriters' option to purchase additional shares from MedQuist.

MedQuist

MedQuist is the leading national provider of medical transcription
services, a key component in the provision of healthcare services.
Transcription is the process by which dictation is converted into an electronic
medical report. The timely production of accurate reports is necessary for
patient care and for healthcare providers to receive reimbursement. Through our
approximately 6,000 transcriptionists, proprietary software, sophisticated
digital dictation equipment and ability to interface with healthcare providers'
computer systems, we provide customized solutions to shorten our customers'
billing cycles and reduce their overhead and other administrative costs. We
serve approximately 2,300 clients nationwide through our 77 client service
centers.

As a result of internal growth and acquisitions, our revenue has
increased from $61.5 million in 1996 (before restatements for acquisitions
accounted for as pooling of interests) to $271.7 million in 1998. In December
1998, we acquired The MRC Group, Inc. adding approximately 500 clients and 2,400
experienced medical transcriptionists. MRC had revenue of approximately $108.0
million for the year ended December 31, 1997. Our experienced management team
and operating structure have enabled us to improve our operating margins. Our
growth has enabled us to take advantage of efficiencies such as a larger network
of transcriptionists and increased negotiating power with our vendors, including
telecommunication providers.

We believe that the demand for outsourced medical transcription services
will increase due to:

o continued consolidation among healthcare service providers;

o increased need for a diverse group of healthcare providers to
communicate and share medical data;

o increased importance of reducing overall healthcare costs; and

o increased focus of government agencies on detecting fraud and abuse in
the billing practices of healthcare providers.

Our objective is to maintain our position as the leading national
provider of medical transcription services and to enhance that position as the
information needs of healthcare providers continue to expand and evolve. Our
strategy contains five major initiatives. First, we will continue to focus on
increasing sales to our existing clients, including both medical records
departments and other departments of hospitals. Second, we will pursue new
clients, including additional hospital departments and non-hospital healthcare
companies. Third, we will continue to focus on improving the profitability of
our business by spreading the fixed portion of our overhead over a growing
revenue base. Fourth, we will pursue strategic relationships with companies
that provide new technologies or relationships that can enhance the services we
provide to our clients. Fifth, we will continue to pursue acquisitions that
will expand our client base, network of qualified transcriptionists and
geographic presence.

MedQuist was incorporated in New Jersey in 1984 and reorganized in 1987.
Our executive offices are located at Five Greentree Centre, Suite 311, Marlton,
New Jersey 08053 and our telephone number is (609) 596-8877.

3
<PAGE>

The Offering

<TABLE>
<S> <C>
Common stock offered by MedQuist ......................... 800,000 shares
Common stock offered by the selling shareholders ......... 3,693,467 shares
------------------
Total shares offered ..................................... 4,493,467 shares
==================
Common stock outstanding after the offering .............. 34,972,150 shares
</TABLE>

Use of Proceeds........... We will receive net proceeds from the offering of
common stock of approximately $25.6 million and we
intend to use the net proceeds for working capital
and general corporate purposes, including
acquisitions. If our recently-announced acquisition
of Lanier Transcription Services is completed as
expected, we intend to fund a substantial portion
of the $35 million purchase price with the net
proceeds of this offering.

MedQuist will not receive any proceeds from the
sale of common stock by the selling shareholders.

Risk Factors.............. An investment in the common stock involves
substantial risks. You should carefully read "Risk
Factors" beginning on page 6 before buying shares
of the common stock.

Nasdaq National
Market Symbol............ MEDQ

4
<PAGE>

Summary Financial Data

The following financial information is derived from MedQuist's audited
financial statements for the years ended December 31, 1996, 1997 and 1998
included in this prospectus, from its audited financial statements for the year
ended December 31, 1995, and from its unaudited financial statements for the
year ended December 31, 1994. The Company's financial statements have been
restated to reflect MedQuist's 1998 acquisitions accounted for as pooling of
interests. This information is only a summary and you should read it in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" beginning on page 12, MedQuist's financial
statements and related notes and other information that MedQuist has filed with
the SEC. See "Where You Can Find More Information" on page 31.

<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
(In thousands, except per share data)
1994 1995 1996 1997 1998
---------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue .......................................... $59,228 $109,657 $152,109 $ 216,158 $271,655
------- -------- -------- --------- --------
Costs and expenses:
Cost of revenue ................................. 46,873 86,265 118,978 169,235 209,587
Selling, general and administrative ............. 6,184 9,144 11,908 14,362 16,061
Depreciation .................................... 2,581 5,752 7,372 10,339 12,697
Amortization of intangible assets ............... 264 896 3,150 5,652 3,757
Transaction costs and restructuring
charges ........................................ -- 347 644 2,075 18,221
------- -------- -------- --------- --------
Total operating expenses ....................... 55,902 102,404 142,052 201,663 260,323
------- -------- -------- --------- --------
Operating income ................................. 3,326 7,253 10,057 14,495 11,332
Interest expense (income), net ................... 2,648 4,252 2,049 469 (325)
------- -------- -------- --------- --------
Income from continuing operations before
income taxes .................................... 678 3,001 8,008 14,026 11,657
Income tax provision (benefit) ................... (529) 640 2,720 5,293 8,472
------- -------- -------- --------- --------
Income from continuing operations ................ 1,207 2,361 5,288 8,733 3,185
Discontinued operations .......................... 1,612 (1,729) -- -- --
Extraordinary item ............................... -- (545) -- -- --
------- -------- -------- --------- --------
Net income ....................................... 2,819 87 5,288 8,733 3,185
Inducement of warrant exercise ................... -- -- (707) -- --
------- -------- -------- --------- --------
Net income available to common
shareholders .................................... $ 2,819 $ 87 $ 4,581 $ 8,733 $ 3,185
======= ======== ======== ========= ========
Basic income per share:
Continuing operations ........................... $ 0.12 $ 0.23 $ 0.22 $ 0.28 $ 0.10
Discontinued operations ......................... 0.17 (0.17) -- -- --
Extraordinary item .............................. -- (0.05) -- -- --
Inducement of warrant exercise .................. -- -- (0.03) -- --
------- -------- -------- --------- --------
$ 0.29 $ 0.01 $ 0.19 $ 0.28 $ 0.10
======= ======== ======== ========= ========
Diluted income per share:
Continuing operations ........................... $ 0.12 $ 0.22 $ 0.20 $ 0.26 $ 0.09
Discontinued operations ......................... 0.17 (0.16) -- -- --
Extraordinary item .............................. -- (0.05) -- -- --
Inducement of warrant exercise .................. -- -- (0.03) -- --
------- -------- -------- --------- --------
$ 0.29 $ 0.01 $ 0.17 $ 0.26 $ 0.09
======= ======== ======== ========= ========

Balance Sheet Data:
As of December 31,
-----------------------------------------------------------------------
(In thousands)
1994 1995 1996 1997 1998
-------- -------- -------- --------- --------
Working capital ................................... $ 6,453 $ 13,142 $ 33,483 $ 36,608 $ 41,852
Total assets ...................................... 85,811 91,191 158,551 173,773 187,311
Long-term debt, excluding current portion ......... 39,577 23,342 9,964 7,589 215
Shareholders' equity .............................. 12,096 30,572 120,710 131,373 151,186
</TABLE>

5
<PAGE>
RISK FACTORS

An investment in the common stock involves many risks including market,
liquidity, credit, operational, legal and regulatory risks. These risks may be
substantial and are inherent in the business of MedQuist. You should consider
carefully the following information about these risks, together with the other
information in this prospectus, before buying shares of common stock.

If any of the following risks actually occur, our business and prospects
could be materially adversely affected, the trading price of our common stock
could decline, and you might lose all or part of your investment.

Our success depends upon our ability to
recruit and retain qualified transcriptionists

Our success depends, in part, upon our ability to attract and retain
qualified transcriptionists who can provide accurate transcription quickly. It
can be difficult to recruit and retain qualified transcriptionists. Competition
for skilled transcriptionists is intense. In addition, transcriptionist is a
skilled position where experience is valuable and we require that our
transcriptionists have substantial experience or receive substantial training
before being hired.

Our growth strategy includes acquisitions

As part of our growth strategy, we have made, and plan to continue to
make, acquisitions of other companies. A portion of our recent growth in
revenue is a result of acquisitions of other medical transcription companies.
The number of large acquisition candidates is decreasing. As a result, our
acquisition activities may not be as significant in the future and our growth
rate could decline.

In addition, if we are successful in pursuing acquisitions, we may need
to borrow money or incur other liabilities to finance our acquisition activity.
This could limit our financial flexibility. We may also be required to issue
additional shares of stock which could result in dilution to our shareholders.

We depend on our senior management team

Our senior management team is crucial to our success. David A. Cohen,
our chief executive officer, and John A. Donohoe, our chief operating officer,
have 56 years of combined experience in the medical transcription industry.

New services or products using new technologies could adversely affect
the demand for our services

The introduction of competing services or products incorporating new
technologies, such as voice recognition capabilities or other alternative means
of data entry, could adversely affect the demand for our services. To maintain
our leadership position, we must improve our services to keep pace with
technological developments and changes in the marketplace.

We depend on a single line of business

We anticipate that we will continue to derive substantially all of our
revenue from providing medical transcription services. A reduction in demand or
an increase in competition in the market for our transcription services could
have a material adverse effect on our business, financial condition and results
of operations.

Our growth strategy includes the expansion of our customer base

Our core customer base has been the medical records departments of
hospitals. We plan to continue the recent expansion of our client base to
include additional outpatient clinics, physician practice groups and direct
patient care departments within hospitals. The success of our ongoing expansion
is important to our future because we expect an increase in the provision of
healthcare services at sites other than hospitals.

If we are not able to maintain our current rate of growth in revenue and
earnings, the market price of our common stock could decline

Our revenue and profits have grown in recent periods as a result of both
internal growth and acquisitions. The rate of growth in revenue and profits may
decline as a result of a variety of factors, including:

o our ability to hire and retain transcriptionists;

o size and timing of acquisitions;

o integration of acquired businesses into our operations;

o changes in demand for our services; and

o competitive conditions in the industry.

6
<PAGE>
It is possible that our future operating results may be below the
expectations of stock market analysts and investors. Any shortfall could cause
a decline in the price of our common stock.

In addition, a decline in the price of our common stock could make it
more difficult or expensive for us to acquire companies by issuing common
stock.

The market price of our common stock
may be volatile

The market price of our common stock has been volatile in the past and
may be volatile in the future. Our common stock price may be affected by many
factors, including the following:

o fluctuations in our operating results;

o acquisitions;

o technological innovations or new product or service introductions by
us or our competitors;

o government regulations;

o healthcare legislation and reforms; and

o general market and economic conditions.

The stock market in recent years has experienced substantial price and
volume fluctuations. This has been accompanied by extreme volatility in the
stock prices of healthcare service companies that often has been unrelated to
the operating performance of these companies. Similar market activity could
adversely affect the market price of our common stock in the future.

We compete with many others in the market for medical transcription services

We compete with approximately 1,500 medical transcription service
companies in the United States. These companies offer services that are similar
to ours and compete with us for both clients and qualified transcriptionists.
We also compete with the in-house transcription staffs of our current and
potential clients. Increased competition may result in lower prices for our
services, higher payroll costs, reduced operating margins and the inability to
increase our market share.

Although many of our competitors are small local or regional companies,
several of our competitors are large national companies. These companies
include Transcend Services, Inc., Rodeer Systems, Inc., and Lanier
Transcription Services, a subsidiary of Harris Corp. In addition, we anticipate
increasing competition from other large companies that were not traditionally
in the medical transcription business, such as IDX Systems Corporation. Current
and potential competitors may have financial, technical and marketing resources
that are greater than ours. As a result, competitors may be able to respond
more quickly to evolving technological developments or changing customer needs
or devote greater resources to the development, promotion or sale of their
services than we can.

In addition, competition may increase due to consolidation of
transcription companies. Current and potential competitors may establish
cooperative relationships with third parties to increase their ability to
attract our current and prospective clients.

A change in law or a challenge to our classification of our at-home
transcriptionists may result in additional employment costs, taxes or penalties

At-home transcriptionists who came to work for MedQuist as a result of
our acquisition of MRC and all at-home transcriptionists hired by our MedQuist
MRC subsidiary are treated as employees for state tax, benefits, unemployment,
federal income tax and social security tax purposes. All other at-home
transcriptionists
hired by MedQuist are treated as independent contractors for state tax,
benefits and unemployment purposes and as statutory employees for federal
income tax and social security tax purposes. If there is a change in law or a
successful challenge to our position regarding treatment of at-home
transcriptionists as independent contractors, we may have to pay or incur
additional employment costs, taxes and penalties.

Competitors and software providers may
claim that we are infringing on their
proprietary rights

Defending these claims, even if they have no merit, can be
time-consuming and expensive. In addition, in the event of infringement claims,
we may be required to enter into royalty or licensing agreements or cease the
claimed infringing activities.

7
<PAGE>

We may be subject to liability if we fail to
comply with confidentiality requirements

We are subject to many laws, regulations and contractual provisions that
require us to keep the medical information that we transcribe confidential. We
may be subject to liability if we fail to comply with confidentiality
requirements.

Our customers and suppliers may not be Year 2000 compliant

We rely heavily on the computer systems of our customers, suppliers and
other organizations such as telephone companies in operating our business. If
these systems are not Year 2000 compliant, our business, operating results and
financial position could be materially and adversely affected.

Significant number of shares eligible for future
sale could lower the market price for our
common stock

Sales of large numbers of shares of common stock after the offering, or
even the potential of those sales, would likely lower the market price of our
common stock. After the offering, we will have 34,972,150 shares of common
stock outstanding, substantially all of which will be freely tradeable. In
addition, 3,646,376 shares which may be issued upon the exercise of outstanding
options may be sold at various times after the offering.

Anti-takeover provisions may make it more
difficult for a third party to acquire control of
us and could reduce the amount that
shareholders would receive if we are sold

Anti-takeover provisions contained in New Jersey law and in our charter,
bylaws and contracts could make it more difficult for a third party to acquire
control of MedQuist, even if that change in control would be beneficial to
shareholders. These provisions could reduce the amount that shareholders would
receive if we are sold. These anti-takeover provisions include the following:

o New Jersey law prohibits us from entering into certain business
combination transactions with any shareholder that owns 10% or more of
our outstanding voting securities, except under limited circumstances.

o Our charter gives our board of directors the authority to issue shares
of preferred stock without shareholder approval. Any preferred stock
could have rights, preferences and privileges that could adversely
affect the voting power and the other rights of the holders of our
common stock.

o Our charter provides for staggered terms for the members of the board
of directors, with each board member serving a three year term.

o We have entered into severance arrangements with most of our senior
management which provide for significant payments upon a change in
control.

o All outstanding options to purchase our stock would become exercisable
immediately upon a change in control.

FORWARD-LOOKING STATEMENTS

Some of the information in this prospectus contains forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Securities Exchange Act. These statements express or are based on
expectations about future events and generally include forward-looking language
such as "will likely result," "may," "are expected to," "is anticipated,"
"believes," "estimated," "projected," "intends to" or other similar words. Our
actual results are likely to differ, and could differ materially, from the
results expressed in, or implied by, these forward-looking statements. There
are many factors that could cause these forward-looking statements to be
incorrect, including but not limited to the risks described above under "Risk
Factors". When considering these forward-looking statements, you should keep in
mind these risk factors and the other cautionary statements in this prospectus,
and should recognize that those forward-looking statements speak only as of the
date made. Neither MedQuist nor the underwriters undertakes any obligation to
update any forward-looking statement included in this prospectus.

8
<PAGE>

RECENT DEVELOPMENTS

Lanier Acquisition

On April 9, 1999, MedQuist entered into an agreement with Lanier
Worldwide, Inc. to acquire substantially all of the assets of Lanier
Transcription Services, a national provider of medical transcription services
located in Atlanta, Georgia. If completed, this acquisition will further expand
our client base, network of transcriptionists and geographic presence. During
fiscal year 1998, Lanier Transcription Services generated revenue of
approximately $25 million, operating through a network consisting of 30 offices
and 550 transcriptionists. MedQuist intends to integrate Lanier Transcription
Services into MedQuist's existing operations. The purchase price is $35
million. The transaction is expected to be accounted for as a purchase of
assets and is expected to close during the second quarter of 1999. The
completion of the acquisition is subject to regulatory approval and other
customary conditions to closing.

First Quarter 1999 Earnings

On April 21, 1999, MedQuist announced its earnings for the first quarter
of 1999. MedQuist reported revenue of approximately $75.7 million in the first
quarter of 1999, an increase of 18.4% in revenue over the comparable prior year
period. Net income for the first quarter of 1999 was $7.1 million, an increase
of 90.7% in net income over the comparable prior year period. Diluted earnings
per share increased 81.8% from $0.11 for the comparable prior year period to
$0.20 per share for the first quarter of 1999.

USE OF PROCEEDS

We estimate that the net proceeds from our sale of shares of common
stock in this offering will be approximately $25.6 million (approximately $47.3
million if the underwriters exercise their option to purchase additional shares
in full), after deducting the underwriting discounts and commissions and
estimated offering expenses payable by us. MedQuist will not receive any
proceeds from the sale of common stock by the selling shareholders.

We currently intend to use the net proceeds of this offering for working
capital and general corporate purposes, including acquisitions. If our
recently-announced acquisition of Lanier Transcription Services is completed as
expected, we intend to fund a substantial portion of the $35 million purchase
price with the net proceeds of this offering.

Pending such uses, we expect to invest the net proceeds from this
offering in government securities and other short-term, investment-grade,
interest-bearing instruments.

9
<PAGE>

MARKET FOR THE COMMON STOCK AND DIVIDEND POLICY

The common stock is traded on the Nasdaq National Market under the
symbol "MEDQ". The following table sets forth the high and low reported prices
for the common stock for the last two fiscal years and for the first and second
quarters of 1999. The bid quotations for the Nasdaq National Market reflect
inter-dealer prices, do not include retail mark-ups, mark-downs or commissions
and may not necessarily reflect actual transactions.

High Low
---------- ----------
1997
First Quarter ............................. $ 9.33 $ 7.17
Second Quarter ............................ 10.42 6.33
Third Quarter ............................. 12.00 9.33
Fourth Quarter ............................ 17.56 10.81
1998
First Quarter ............................. $ 19.56 $ 15.00
Second Quarter ............................ 29.38 17.63
Third Quarter ............................. 33.00 20.50
Fourth Quarter ............................ 40.00 21.75
1999
First Quarter ............................. $ 39.00 $ 25.25
Second Quarter (through April 27) ......... 36.38 25.56

The above noted bid quotations reflect a three for two stock split
effected on September 9, 1997 and a two for one stock split effected on June
15, 1998.

On April 27, 1999 the closing sale price for the common stock, as
reported on the Nasdaq National Market, was $34.125 per share.

We have never declared or paid any cash dividends on our capital stock.
We expect to retain any future earnings to fund operations and the continued
development of our business and, therefore, do not anticipate paying any cash
dividends in the foreseeable future. In addition, our agreements with our
senior lender restrict the payment of dividends.

10
<PAGE>

CAPITALIZATION

The table below sets forth our capitalization as of December 31, 1998 on
an actual basis and as adjusted to reflect our sale of 800,000 shares of common
stock in the offering at an initial public offering price of $33.625 per share
after deducting underwriting discounts and commissions and estimated offering
expenses payable by us. This table should be read in conjunction with our
consolidated financial statements and the other financial information included
in this prospectus.

<TABLE>
<CAPTION>
As of December 31, 1998
---------------------------
Actual As Adjusted
------------ ------------
(In thousands, except share
data)
<S> <C> <C>
Long-term debt, excluding current portion ............................. $ 215 $ 215
-------- --------
Shareholders' equity:
Common stock, no par value, 60,000,000 shares authorized,
33,258,000 shares issued and outstanding (actual), and
34,258,000 shares issued and outstanding (as adjusted) (1) ......... -- --
Additional paid-in capital ........................................... 136,603 162,237
Retained earnings .................................................... 14,536 14,536
Unrealized gain on marketable securities ............................. 585 585
Deferred compensation ................................................ (538) (538)
-------- --------
Total shareholder's equity ......................................... 151,186 176,820
-------- --------
Total capitalization .............................................. $151,401 $177,035
======== ========
</TABLE>

- ------------
(1) Excludes approximately 4,433,000 shares of common stock which may be issued
upon exercise of options outstanding as of December 31, 1998, and an
additional 273,000 shares of common stock reserved for issuance upon
exercise of options that may be granted in the future. As of December 31,
1998, the weighted average exercise price of all outstanding options was
approximately $12.00 per share.

11
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We are the leading national provider of medical transcription services.
Our fees are based primarily on contracted rates with our customers. We
recognize revenue when we render services and deliver reports to our customers.
Cost of revenue consists of all direct costs associated with providing
transcription related services, including payroll, telecommunications, repairs
and maintenance, rent and other direct costs. Most of our cost of revenue is
variable. Selling, general and administrative expenses include costs associated
with our senior executive management, marketing, accounting, legal and other
administrative functions. Selling, general and administrative expenses are
mostly fixed, but include certain variable components.

From 1995 through 1998, we completed 18 acquisitions. Five acquisitions
completed in 1998, including the acquisition of MRC, were accounted for as
pooling of interests. Four of these 1998 acquisitions were material and,
accordingly, we restated our financial statements.

On December 10, 1998, MedQuist acquired MRC through the issuance of
approximately 8.61 million shares of the Company's common stock. We believe
that the MRC acquisition will enable us to better utilize crucial resources and
reduce corporate overhead by combining accounting, legal and human resources.
Further, the additional 2,400 transcriptionists should permit a more efficient
workflow and faster customer service. In 1997, MRC's revenue and operating
income, before its restructuring charge, were $108.0 million and $1.2 million,
or 1.1% of its revenue. MedQuist's operating income, before restating for its
pooling of interests acquisitions, was 14.1% of revenue in 1997. We believe
that, over time, the operating margins of the combined company will continue to
improve and approach levels comparable to MedQuist's historical performance as
a stand-alone company.

Results of Operations

The following table sets forth, for the periods indicated, certain
financial data as a percentage of revenue, as restated for our acquisitions
accounted for as a pooling of interests:

<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Revenue .............................................. 100.0% 100.0% 100.0%
------ ------ ------
Costs and expenses:
Cost of revenue ..................................... 78.2 78.3 77.2
Selling, general and administrative ................. 7.8 6.6 5.9
Depreciation ........................................ 4.9 4.8 4.7
Amortization of intangible assets ................... 2.1 2.6 1.4
Transaction costs and restructuring charges ......... 0.4 1.0 6.7
------ ------ ------
Operating income ..................................... 6.6 6.7 4.1
Interest income (expense), net ....................... ( 1.4) ( 0.2) 0.1
------ ------ ------
Income before income taxes ........................... 5.2 6.5 4.2
Income tax provision ................................. 1.8 2.5 3.1
------ ------ ------
Net income ........................................... 3.4% 4.0% 1.1%
====== ====== ======
</TABLE>

---------------------------------
Year Ended December 31, 1998 Compared to
Year Ended December 31, 1997

Revenue. Revenue increased 25.7% from $216.2 million in 1997 to $271.7
million in 1998. The $55.5 million increase as compared to 1997 was composed of
$43.5 million from internally generated growth and $12.0 million from
acquisitions accounted for as purchase transactions.

Cost of Revenue. Cost of revenue increased 23.9% from $169.2 million in
1997 to $209.6 million in 1998 and was directly related to the increase in
revenue. As a percentage of revenue, cost of revenue decreased from 78.3% in
1997 to 77.2% in 1998 due primarily to the improved direct margins of MRC's
business in 1998 versus 1997.

12
<PAGE>

Selling, General and Administrative. Selling, general and
administrative expenses increased 11.8% from $14.4 million in 1997 to $16.1
million in 1998. The increase was due primarily to increased administrative
costs to support the increase in revenue, in addition to increased technology
development costs. This increase was partially offset by decreased marketing
costs at MRC. As a percentage of revenue, selling, general and administrative
expenses decreased from 6.6% in 1997 to 5.9% in 1998. The percentage decrease
was due primarily to our ability to spread the fixed portion of our overhead
over a larger revenue base.

Depreciation. Depreciation increased 23.3% from $10.3 million in 1997 to
$12.7 million in 1998. The increase in depreciation was a result of increased
capital expenditures to support the growth in revenue. As a percentage of
revenue, depreciation remained relatively constant at 4.7% in 1998 compared to
4.8% in 1997.

Amortization. Amortization of intangible assets was $5.7 million in 1997
compared to $3.8 million in 1998. The amount in 1997 includes amortization of
noncompete agreements from prior business acquisitions that were fully
amortized in late 1997.

Interest. We had interest expense of $469,000 in 1997 and interest
income of $325,000 in 1998. We repaid a significant portion of our debt in 1997
and invested a portion of our excess cash in 1998.

Transaction Costs and Restructuring Charges. In 1998, we (1) incurred
$11.0 million of transaction costs associated with pooling of interests
business combinations, (2) incurred $682,000 of transaction costs related to
MRC's terminated initial public offering and (3) recorded a $6.5 million
restructuring charge associated with the MRC acquisition. Generally,
transaction costs are not deductible for federal income tax purposes.

As of December 31, 1998, $10.5 million of transaction costs associated
with the pooling of interests acquisitions had been paid, with $500,000
included in accrued expenses for payments scheduled to be made in 1999.

In June 1998, MRC filed a registration statement for an initial public
offering that was terminated in September 1998 upon signing the merger
agreement with the Company. All transaction costs related to MRC's terminated
initial public offering were paid in 1998.

In December 1998, our board of directors approved a restructuring plan
associated with the MRC acquisition. In connection with the plan, we recorded a
$6.5 million charge, of which $3.8 million related to non-cancelable lease
obligations on duplicate facilities, $1.6 million related to employee severance
and $1.1 million related to contract cancellations and other exit costs. We
expect to complete the restructuring in 1999. As of December 31, 1998, $567,000
of the employee severance and $410,000 in other restructuring costs had been
paid. At December 31, 1998, $5.6 million was included in accrued expenses
related to the restructuring.

In 1997, MRC incurred a restructuring charge of $2.1 million related to
the closure and consolidation of less profitable or redundant client service
centers and other non-recurring acquisition and integration costs incurred in
connection with MRC's acquisition of Medical Records Corp. As of December 31,
1998, $1.2 million related to closed facility leases remained in accrued
expenses.

Year Ended December 31, 1997 Compared to
Year Ended December 31, 1996

Revenue. Revenue increased 42.1% from $152.1 million in 1996 to $216.2
million in 1997. The $64.1 million increase as compared to 1996 was composed of
$53.1 million from internally generated growth and $11.0 million from
acquisitions accounted for as purchase transactions.

Cost of Revenue. Cost of revenue increased 42.2% from $119.0 million in
1996 to $169.2 million in 1997. This increase was directly related to the
increase in revenue. As a percentage of revenue, cost of revenue remained
relatively constant at 78.3% in 1997 as compared to 78.2% in 1996.

Selling, General and Administrative. Selling, general and
administrative expenses increased 21.0% from $11.9 million in 1996 to $14.4
million in 1997. The increase was due primarily to increased administrative
costs to support the increase in revenue, in addition to increased marketing
costs and technology development costs incurred by MRC. As a percentage of
revenue, selling, general and

13
<PAGE>

administrative expenses decreased from 7.8% in 1996 to 6.6% in 1997. The
percentage decrease was due primarily to our ability to spread the fixed
portion of our overhead over a larger revenue base.

Depreciation. Depreciation increased 39.2% from $7.4 million in 1996 to
$10.3 million in 1997. The increase in depreciation was a result of capital
expenditures made to support the growth in revenue. As a percentage of revenue,
depreciation remained relatively constant at 4.8% in 1997 compared to 4.9% in
1996.

Amortization. Amortization of intangible assets was $5.7 million in 1997
as compared to $3.2 million in 1996. The increase in 1997 was attributable to
the acquisitions made in 1996 and 1997 accounted for as purchase transactions.

Interest. Interest expense decreased from $2.0 million in 1996 to
$469,000 in 1997. The decrease in 1997 was primarily related to the payment of
our senior term loans, reduced borrowings under our revolving credit facility
and the payment of the cash portion of the deferred purchase price on May 30,
1996 for our 1994 acquisition of Transcriptions, Ltd. This deferred purchase
price was paid using a portion of the proceeds from our 1996 common stock
offering. In 1996 we recorded $640,000 of non-cash imputed interest expense
associated with the Transcriptions, Ltd. deferred purchase price.

Restructuring Charges. MRC incurred restructuring charges of $2.1
million in 1997 and $644,000 in 1996. These charges were related to the closure
and consolidation of less profitable or redundant facilities. In addition, the
1997 restructuring charge included other acquisition and integration costs
incurred in connection with MRC's acquisition of Medical Records Corp.

Liquidity and Capital Resources

At December 31, 1998, we had working capital of $41.9 million, including
$15.9 million of cash and cash equivalents, and no outstanding bank debt.
During 1998, our operating activities provided cash of $22.9 million and during
1997, our operating activities provided cash of $21.4 million. Our cash flow
from operating activities is generated primarily from our net income before
depreciation and amortization, partially offset by increases in accounts
receivable. In 1998, the increase in operating cash flow was also affected by
increased accrued expenses, primarily related to the restructuring charge.

During 1998, we used cash for investing activities of $15.9 million,
consisting primarily of $14.0 million of capital expenditures. In addition, we
generated $4.0 million in cash from sales of short-term investments and used
$4.4 million for the acquisition of three transcription businesses accounted
for under the purchase method. In addition, we paid $1.4 millon to a dissenting
shareholder in connection with the Signal acquisition. During 1997, we used
cash for investing activities of $18.4 million, consisting primarily of $13.7
million of capital expenditures. In addition, in 1997 we generated $1.0 million
in cash from sales of short-term investments and used $5.6 million for the
acquisition of eight transcription businesses accounted for under the purchase
method.

During 1998, cash used in financing activities was $5.5 million,
consisting primarily of $10.0 million of debt repayments and $1.0 million of
distributions to former stockholders of acquired S-corporations, offset by $5.5
million in proceeds from the issuance of common stock, including option and
warrant exercises and sales in connection with employee benefit plans. During
1997, cash used in financing activities was $3.5 million, consisting primarily
of $3.8 million of debt repayments, $1.1 million of shareholder distributions
to former stockholders of acquired S-corporations, and $676,000 to purchase and
retire common stock, offset by $2.0 million in proceeds from the issuance of
common stock, including option and warrant exercises and sales in connection
with employee benefit plans.

We have a borrowing facility with Chase Manhattan Bank. The Chase
facility provides for a $10.0 million senior unsecured revolving credit
facility expiring April 23, 2000. The Chase facility bears interest at
resetting rates selected by the Company from various alternatives. The interest
rate alternatives are either (1) the greater of (a) the prime rate, (b) the
federal funds rate plus 0.5%, and (c) the bank's certificate of deposit rate
plus 1%, or (2) LIBOR plus 0.75%. The Chase facility also allows us to finance
up to 100% of any acquisitions of companies that are in the business of
providing transcriptions-related services. The financing of these acquisitions
may be carved out of the Chase facility and amortized over five-year

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<PAGE>
periods (20 consecutive quarters). Each acquisition term loan that is created
would permanently reduce the remaining Chase facility commitment by a like
amount.

We can use the Chase facility for working capital and general corporate
purposes. If any amounts under the Chase facility are repaid, other than
acquisition term loans, we may reborrow such amounts. The Chase facility
includes financial and other covenants applicable to us, including limitations
on capital expenditures and dividends. As of the date of this prospectus, we
had no outstanding borrowings under the Chase facility.

We believe that cash flow generated from operations and borrowing
capacity under the Chase facility will be sufficient to meet our current
working capital and capital expenditure requirements. We expect capital
expenditure requirements to be consistent with prior years as a percentage of
revenue in 1999.

Year 2000 Compliance

We are aware of the issues associated with the programming code in
existing computer systems as 2000 approaches. The Year 2000 problem is
pervasive and complex as virtually every computer operation will be affected in
some way by the rollover of the two digit year value to 00. The issue is
whether computer systems will recognize date sensitive information when the
year changes to 2000. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail. We rely on our systems
in operating and monitoring all aspects of our business. We also rely on the
external systems of our customers, suppliers, telecommunication carriers,
utilities and other organizations with which we do business.

We have approached the Year 2000 problem in the following manner:

o assessing, correcting and testing our internal systems;

o obtaining assurance or information on the state of Year 2000 readiness
of our material clients and suppliers; and

o developing contingency plans, when practical, to address expected Year
2000 failures.

A discussion of each of these areas follows.

Internal Systems. In 1998, we conducted an assessment of our internal
systems. This assessment covered embedded computer chips, computer software,
computer hardware, telephones, communications equipment, facsimile equipment,
scanners, copiers and voice recording systems which we own and were able to
identify as critical to our ability to provide services to our clients. The
assessment identified a variety of software and hardware issues that we needed
to address to be prepared for 2000. Some of these issues include the need to:

o upgrade or modify the BIOS (programs which allow personal computers to
run) on some of our PCs (or replace the PC);

o modify some of our server operating systems;

o reset the dates or modify some of our voice capture systems;

o modify the date fields of some of our interfaces;

o upgrade the version level of the transcription software of some of our
users and clients;

o accelerate the conversion of some clients from outdated software
applications to compliant software applications; and

o upgrade some of the financial systems.

June 30, 1999 is our internal target for rectifying Year 2000 issues for
all mission critical applications. From July 1 to December 31, 1999, we plan to
retest critical systems and evaluate non-critical applications for potential
Year 2000 compliance issues.

Clients and Suppliers. We also have exposure to Year 2000 problems that
may be experienced by others. These risks include the inability to exchange
electronic data and the risk of disruptions and failures of persons with whom
we do business or on whom we or our clients rely. Our business interacts with
or depends on the systems of clients, suppliers, telecommunication carriers,
utilities, vendors, financial institutions and others. If we are not able to
exchange information electronically with our clients and transcriptionists our
business may be materially impacted. For example, our business relies heavily
on telephone services. If phone service is lost, we will be unable to provide
services until phone service is restored or contingency plans can be put in
place.

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<PAGE>
If our clients, suppliers, vendors and financial institutions are not
Year 2000 compliant, there may be a material disruption to their businesses.
These disruptions could negatively impact us in many ways, including:

o a client may be unable to pay us;

o a financial institution may be unable to process checks drawn on our
bank accounts, accept deposits or process wire transfers;

o vendor deliveries of computer equipment and other supplies may be
delayed or cease;

o voice and data connections we use to share information may be
interrupted; and

o brokers who make a market in our stock may not be able to trade our
stock.

This list is not comprehensive. Other interruptions to our normal
business activities may occur, the nature and extent of which we cannot
foresee. In an effort to minimize the exposure to such third party Year 2000
problems, we have initiated a process of obtaining written assurances from
these third parties that they will be Year 2000 compliant. Based on the
response we receive from the third parties, we are identifying the associated
risks to our business and making necessary changes.

Contingency Plans. We are developing Year 2000 contingency plans where
practical. These plans address alternatives to electronic processing of medical
information, payroll, vendor payments, cash receipts from clients and
communicating without e-mail. These plans include identifying alternative
sources of goods and services and performing certain tasks manually. For
example, these contingency plans include requiring physicians to dictate into
hand held devices, delivering tapes from these devices to transcriptionists and
printing paper copies of reports to be delivered to clients.

In some situations, however, it is impractical to have an effective
contingency plan. For example, a failure of our primary banking institution may
interrupt our cash receipts and our ability to pay our employees and vendors in
a timely manner. Our contingency plan may call for paying employees in cash,
but may not be practical due to the amount of cash involved, the number of
locations and the number of individuals to be paid. The number of Year 2000
failures we suffer may exceed our ability to address them all at one time. In
addition, significant Year 2000 failures by third parties, including clients,
may jeopardize our financial strength. In severe circumstances, our ability to
continue as a going concern may be threatened or we may fail. We believe,
however, that we are taking reasonable and prudent steps to address the Year
2000 problem based on information currently available to us. We will continue
to monitor this issue and plan to modify our approach if we believe the
circumstances warrant such a change.

Based on the information available to date, we expect to incur
approximately $200,000 in expense to correct operational problems such as BIOS
fixes. We also believe we will incur approximately $1.2 million to replace and
upgrade voice capture systems, which will be capitalized and depreciated over
their estimated useful lives of five years.

Quantitative And Qualitative
Disclosure About Market Risk

We generally do not use derivative financial instruments in our
investment portfolio. We make investments in instruments that meet credit
quality standards, as specified in our investment policy guidelines; the policy
also limits the amount of credit exposure to any one issue, and type of
instrument. We do not expect any material loss with respect to our investment
portfolio.

The following table provides information about our investment portfolio
at December 31, 1998. For investment securities, the table presents principal
amounts and related weighted average interest rates (dollars in thousands).

Cash and cash equivalents ............... $15,936
Average interest rate .................. 4.0%
Warrant investment ...................... $ 900
Average interest rate .................. --
Total portfolio ......................... $16,836
Weighted average interest rate ......... 3.8%

The majority of our debt obligations were repaid in February 1999.
Remaining obligations consist primarily of relatively insignificant capital
lease obligations that mature through 2002.

Inflation

We believe that the effects of inflation and changing prices generally
have not had a material adverse effect on our results of operations or
financial condition.

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<PAGE>

BUSINESS

As a result of internal growth and acquisitions, our revenue has
increased from $61.5 million in 1996 (before restatements for acquisitions
accounted for as pooling of interests) to $271.7 million in 1998. Our
experienced management team and operating structure have enabled us to improve
our operating margins. Our growth has enabled us to take advantage of
efficiencies such as a larger network of transcriptionists and increased
negotiating power with our vendors, including telecommunication providers.

Recent Developments

On December 10, 1998, MedQuist acquired The MRC Group, Inc. in a pooling
of interests transaction issuing approximately 8.61 million shares of common
stock. MRC, now a subsidiary of MedQuist, serves approximately 500 clients and
employs approximately 2,400 experienced medical transcriptionists. For the year
ended December 31, 1997, MRC had revenue of approximately $108.0 million.

We believe that the MRC acquisition will enable us to better utilize key
resources. In addition to the reduction of corporate overhead costs by
combining accounting, legal and human resources, the addition of
transcriptionists will permit a more efficient workflow and faster customer
service. In 1997, MRC's operating income, before its restructuring charge, was
1.1% of total revenue while MedQuist's operating income, before restating for
the pooling of interests acquisitions, was 14.1% of total revenue. We believe
that, over time, the operating margins of the combined company will continue to
improve and approach levels comparable to MedQuist's historical performance as
a stand-alone company.

History

MedQuist was incorporated in New Jersey in 1984 and reorganized in 1987
as a group of out-patient healthcare businesses affiliated with a non-profit
healthcare provider. In May 1994, we acquired our first medical transcription
business, Transcriptions, Ltd. By the end of 1995, we had divested all of our
non-medical transcription businesses, and through December 31, 1998, we had
acquired MRC and 17 other medical transcription companies.

Industry Overview

Medical transcription is the process by which free-form dictated patient
information is recorded and converted into a useable format, electronically
routed to the appropriate location and added to a patient's medical record.
Physicians and other healthcare providers use this information for delivery of
patient care. Administrative personnel use the information for billing and
other administrative purposes. Accurate and prompt transcribed records are
required for reimbursement and to avoid healthcare fraud and abuse penalties.
We expect that, as the percentage of medical records that are stored
electronically continues to grow, the information management uses for such
records will increase.

The majority of dictated reports are generated within the medical
records departments of hospitals. Historically, transcription services were
performed by hospital employees and were costly and difficult to manage.
Examples of these reports include patient histories, discharge summaries,
operative reports and consultation reports. Increasingly, other hospital
departments, such as radiology, emergency, oncology, pediatrics and cardiology,
are dictating reports to improve delivery of care and administrative functions.
Health maintenance organizations, out-patient clinics and physician practice
groups are also expanding their use of transcribed medical reports.

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<PAGE>

We believe the market for outsourced transcription services will expand
due in part to the following trends:

Consolidation. As healthcare providers consolidate and increase in size,
their information management needs become more complex and they increasingly
require larger and more sophisticated vendors.

Connectivity. The exchange of patient information and the delivery of
patient care must be coordinated among many entities, including physicians,
hospitals and managed care companies. Increasingly, healthcare organizations
are centralizing patient data into an accessible system creating economies of
scale to reduce overall healthcare costs and to improve the efficient delivery
of patient care. Accurate medical transcription and distribution and storage of
transcribed records are critical to such coordination.

Cost Containment. Outsourcing services in the healthcare industry
continues to increase as a means to reduce administrative burdens and fixed
costs. Hospitals and other healthcare organizations increasingly are
outsourcing their electronic transcription of dictated patient records as their
information needs and volume of dictated reports expand. Outsourcing
transcription services permits providers:

o to reduce overhead and other administrative costs;

o to improve the quality of reports;

o to access leading technologies without development and investment
risk; and

o to obtain the expertise to implement and manage a system tailored to
the providers' specific requirements.

Compliance. Government agencies are increasingly focused on fraud and
abuse in the healthcare industry. For example, under Medicare, providers must
submit detailed documentation in order to receive reimbursement. In many
instances, providers have been fined and penalized for failing to substantiate
claims for reimbursement in an audit. As a result, Medicare, the insurance
industry and, in some cases healthcare accreditation organizations, are
requiring transcribed reports:

o to support claims for reimbursement;

o to facilitate communication between various parts of a healthcare
network;

o to improve the quality and efficiency of patient care; and

o to maintain a reliable record in the event of malpractice litigation.

Strategy

The key elements of our strategy include the following:

Expand Existing Client Relationships. We provide most of our
transcription services to hospital medical records departments. We will seek to
increase our share of transcription services through our close and continuing
client relationships as these departments outsource more of their transcription
requirements and as the volume of patient records continues to grow. In
addition, we will continue to penetrate the direct care departments at
hospitals such as radiology, emergency rooms, oncology, pathology, pediatrics
and cardiology, within our existing client base. Historically, these
departments have not dictated their patient data or outsourced the
transcription of their patient data to the same extent as medical records
departments.

Extend Current Client Base. We will continue to extend our base of
traditional hospital clients and to pursue additional clients such as health
maintenance organizations, out-patient clinics and physician practice groups
which we believe will represent a growing percentage of the available market.
Based upon input from new clients, we believe that references from our existing
client base represent a key component of our sales and marketing efforts.

Capitalize on Operating Expertise. Our experienced management team and
our operating structure have enabled us to consistently improve our operating
margins by spreading the fixed portion of our overhead over a growing revenue
base. We will focus on continuing to grow our revenue to take advantage of
efficiencies such as

18
<PAGE>

a larger network of transcriptionists and increased negotiating power with our
vendors, including telecommunication providers.

Pursue Strategic Relationships. We have initiated relationships with
developers and end-users of emerging technologies to create enhanced services
for our clients. We will continue to incorporate advances in technology to
improve the efficiency of our operations, reduce our costs, expand the breadth
and functionality of our services and enhance our competitive position.

Pursue Strategic Acquisitions. The medical transcription industry is
highly fragmented with approximately 1,500 providers of outsourced medical
transcription services. Most of these are small companies that lack the
financial resources or the technological capabilities necessary to provide
transcription services nationwide. We will continue to pursue acquisitions that
will expand our client base, network of qualified transcriptionists and
geographic presence.

MedQuist Services

Through our approximately 6,000 transcriptionists, proprietary software,
sophisticated digital dictation equipment and ability to interface with
healthcare providers' computer systems, we provide customized solutions to
shorten our customers' billing cycles and reduce their overhead and other
administrative costs. In addition to hospital medical records departments, our
target markets include patient care departments, such as radiology, emergency
rooms, oncology, pathology, pediatrics and cardiology departments, health
maintenance organizations, physician practice groups and out-patient clinics.

We record and store free-form medical dictation, transcribe the
dictation into reports, and electronically receive, review and distribute final
reports to a client. Authorized individuals at multiple locations can access
this electronic information when needed for administrative, billing and patient
care purposes.

We have designed our system to enable clients and individual healthcare
providers to review the status of particular patient data and transcribed
reports at any point in time and to advise us whether the production of a
particular report requires acceleration. In addition, our system permits us to
monitor our on-time performance, especially with respect to critical reports
requiring turnaround times of less than 24 hours.

Typical Medical Transcription Process

(1) A physician identifies himself and dictates the required patient reports
using any telephone.

(2) The dictation is recorded on a digital dictation system located in a
MedQuist client service center.

(3) The transcriptionist, working at home, accesses the dictated voice file.
The transcriptionist uses our proprietary software to verify, match and
import patient demographic information.

(4) The transcriptionist transcribes the dictation.

(5) Finished transcription text files are transferred electronically to the
client service center.

(6) Our software categorizes and records the details of the transcribed
document for use by our automatic payroll and billing systems.

(7) The transcription is subject to our quality assurance program.

(8) The work is verified against patient demographic information and
transferred to the client's system using a variety of interfaces.

(9) The transcribed report is electronically transferred to the physician for
review and signature.

(10) Copies of the report are available for distribution across the provider's
network. The work can be transmitted to out-patient clinics and is
available for viewing using browser-based technology.

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<PAGE>

We serve approximately 2,300 clients through 77 client service centers
nationwide. Each client service center is run by a manager who is supported by
three additional levels of operating management. Due to the large number of
trained transcriptionists and our ability to allocate work among them
efficiently, we believe that we are able to reduce the production turnaround
times for transcribed medical reports. An in-house staff or small transcription
company generally cannot achieve these efficiencies to the extent that we can.
Our system provides editing and electronic review capabilities, such as
specific reference to pages or clauses to alert clients to potential
deficiencies, that increase accuracy and reliability.

Our system provides flexibility to address individual client needs. We
are capable of modifying the system to interface with existing client systems.
Our technical staff works closely with our clients, both before and after
installation, to develop system modifications and refinements.

Medical Transcriptionist Recruitment

One of the most significant challenges to our continued growth is the
successful recruitment and retention of qualified transcriptionists. To address
this challenge, we have enhanced our recruitment process, increased training
and formed strategic relationships with various schools across the country.

We have hired a Director of National Recruitment and at least two
recruiters in each of our three regional groups. In addition, each client
service center has at least one person designated to monitor and manage
recruitment efforts.

Currently, we are experimenting with software that monitors
transcriptionist quality and should allow us to implement an accelerated
training program so that less experienced transcriptionists can be hired and
trained efficiently. In addition, we have established a "Partners in Education"
program with adult education programs, vocational technology schools, and
colleges offering medical transcription training programs.

Sales and Marketing Efforts

Our existing client base is a key component of our marketing and sales
strategy. Based on input from new clients, we believe that new clients have
utilized our services in large part due to recommendations and references by
our existing national client base. All office managers and operational vice
presidents, as well as our senior management, including Mr. Cohen, have sales
responsibilities.

We utilize a consultative sales and marketing approach by establishing a
working relationship with our clients through a series of direct meetings with
the chief financial officer, health information manager, chief information
officer and other key individuals at the client's organization. In this manner,
we obtain information concerning the particular needs of a client and educate
the client as to how our services can be customized to meet those needs. As
part of our marketing efforts, we also advertise in national healthcare trade
publications (including those sponsored by the American Health Information
Management Association) and participate in industry conventions.

Business Partners and Relationships

We are always evaluating emerging technologies and apply them as
appropriate to make our services more reliable, efficient and cost-effective,
and to assist our clients in meeting their transcription and document
management needs. We have initiated relationships with developers and end-users
of emerging technologies, such as voice-recognition, data mining and outcomes
analysis and Internet based telecommunications to create value added services
for our clients and to participate in the development of the computer based
patient record. Our Senior Vice President-New Business Development oversees our
strategic partnerships and manages our research and development department that
integrates these partnerships into useable product and service offerings. Some
of our current business partners and relationships in exploring these emerging
technologies are described below.

WebMD is an Internet-based healthcare network that connects physicians,
hospitals, third-party payers, and consumers to a virtual marketplace of
medical information, tools, and services. WebMD provides its subscribers with
access to our medical transcription services on its website.

Lernout & Hauspie Speech Products, N.V. is a global leader in advanced
speech and

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<PAGE>

language solutions for vertical markets, computers, automobiles,
telecommunications, embedded products, consumer goods and the Internet. Lernout
& Hauspie is making the speech user interface the keystone of simple,
convenient interaction between humans and technology, and is using advanced
translation technology to break down language barriers. With Lernout & Hauspie,
we have developed a clinical workstation that integrates voice recognition,
structured input and free-form dictation.

Synthesys Technologies, Inc. develops innovative clinical data
repository solutions for the healthcare industry. We have a co-marketing
agreement with Synthesys to sell Synthesys' data mining and outcomes analysis
software to our customer base. The software includes a search engine that
provides for analysis of transcribed clinical data.

MasterChart is a provider of solution-based technology to leading
healthcare system providers. Through an agreement with MasterChart, we offer
the Physassist Portable Dictation, a hand-held digital recorder; Respond, an
Internet document management system; and MasterChart Integration Engine, a
message translation, control and monitoring middleware. MasterChart also
provides product development and software design services to MedQuist.

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<PAGE>

MANAGEMENT

MedQuist's executive officers and directors are as follows:

<TABLE>
<CAPTION>
Year of Term
Expiration
Name Position as Director
- --------------------------------------- ----------------------------------------- -------------
<S> <C> <C>
David A. Cohen ........................ Chief Executive Officer and Chairman of 1999
the Board
John A. Donohoe, Jr. .................. President, Chief Operating Officer and 2001
Director
John R. Emery ......................... Senior Vice President, Treasurer and --
Chief Financial Officer
Ronald F. Scarpone .................... Senior Vice President, New Business --
Development
John M. Suender ....................... Senior Vice President, General Counsel --
and Secretary
Edward L. Samek ....................... Vice Chairman and Director 1999
Bruce K. Anderson ..................... Director 2000
William T. Carson, Jr. (1)(3) ......... Director 2001
John T. Casey (2) ..................... Director 2001
Richard J. Censits (1) ................ Director 2001
James R. Emshoff (1) .................. Director 2000
Terrence J. Mulligan (2) .............. Director 1999
A. Fred Ruttenberg (3) ................ Director 2000
R. Timothy Stack (3) .................. Director 2000
Richard H. Stowe ...................... Director 2001
John H. Underwood (2) ................. Director 1999
</TABLE>

- -------------------------
(1) Member of Audit Committee

(2) Member of Compensation Committee

(3) Member of Nominating Committee

David A. Cohen joined MedQuist in May 1994 as President of our
Transcriptions, Ltd. subsidiary and has been an executive officer and a
director of MedQuist since July 1994, our Chief Executive Officer since
November 1995 and Chairman of the Board of Directors since July 1996. Mr. Cohen
also served as our President from November 1995 to August 1998. Mr. Cohen
joined Transcriptions, Ltd. in 1973 and served as its Chief Executive Officer
for more than 15 years.

John A. Donohoe, Jr. has been a member of the Board of Directors since
May 1998. Mr. Donohoe joined MedQuist in May 1994 as Executive Vice President
of our Transcriptions, Ltd. subsidiary. Mr. Donohoe became Chief Operating
Officer in November 1995 and President in August 1998. Mr. Donohoe was employed
by Transcriptions, Ltd. since 1974, serving in numerous management capacities.
Mr. Donohoe is a member of the board of directors of the Medical Transcription
Industry Alliance.

John R. Emery has been our Treasurer and Chief Financial Officer since
March 1997 and was promoted from Vice President to Senior Vice President in
December 1998. Prior to joining MedQuist, Mr. Emery served in various executive
positions with Integra LifeSciences Corporation beginning in 1994, most
recently as Senior Vice President -- Operations and Finance. From 1987 to 1994,
Mr. Emery served in various operational and financial positions with Chemical
Waste Management, Inc., an environmental remediation firm.

Ronald F. Scarpone has been Senior Vice President - New Business
Development since

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<PAGE>

December 1998 and a Vice President of MedQuist since January 1996. Mr. Scarpone
joined MedQuist in May 1994 as Vice President -- Information Services. Mr.
Scarpone was employed by Transcriptions, Ltd. since 1989 and served as its Vice
President of Information Services since September 1993.

John M. Suender has been our General Counsel and Secretary since
September 1992. In December 1998, Mr. Suender was promoted to Senior Vice
President. Mr. Suender also serves as our Senior Vice President --
Acquisitions. Prior to joining MedQuist, Mr. Suender was with the law firm of
Pepper Hamilton LLP, Philadelphia, Pennsylvania.

Edward L. Samek has been a director of MedQuist since December 11, 1998
and serves as its Vice Chairman. Prior to our acquisition of The MRC Group, Mr.
Samek had been employed at MRC since 1994, most recently as Chairman and Chief
Executive Officer. Mr. Samek had also been a director of MRC since 1994. Prior
to MRC's December 1994 acquisition of SecrePhone, Ltd., a provider of medical
transcription services, Mr. Samek served as SecrePhone's Chairman, President
and Chief Executive Officer. Mr. Samek has been President of The Medical
Transcription Industry Alliance since 1996.

Bruce K. Anderson has been a director of MedQuist since December 11,
1998. He was a director of The MRC Group from July 1993 until MRC was acquired
by MedQuist on December 10, 1998. Since 1979, Mr. Anderson has been partner of
Welsh, Carson, Anderson & Stowe, an investment firm specializing in the
acquisition of companies in the information services and health care
industries. Mr. Anderson is also Chairman, Chief Executive Officer and a
director of AMDOCS Ltd., a software and services company focused on the
telephone industry, and a director of several private companies.

William T. Carson, Jr., a director of MedQuist since January 1991, is
currently a business consultant and is Vice Chairman of CIC Investment Co., a
capital investment firm. In 1988, he co-founded and became Vice President and
corporate secretary of Covenant Bank, Haddonfield, New Jersey, positions he
held until January 1998 when Covenant Bank was acquired by First Union Bank.
Mr. Carson is also a director of the Coriell Institute of Medical Research, a
genetic research firm and a former director of the Rutgers University School of
Business.

John T. Casey, a director of MedQuist since June 1997, has been Chairman
and Chief Executive Officer of Physician Reliance Network Inc. since October
1997. PRN is a Dallas-based provider of management facilities, administration
and technical support and ancillary services necessary to establish and
maintain a fully integrated network of oncology care. Mr. Casey formerly served
as President and Chief Executive Officer of American Medical International from
1991 until 1995, when it was acquired by Tenet Healthcare. Prior to that, Mr.
Casey was Chief Executive Officer of Samaritan Health Services in Phoenix,
Arizona, Methodist Health Services in Memphis, Tennessee, and Presbyterian/St.
Luke's Medical Center in Denver, Colorado. From 1995 until September 1997, Mr.
Casey served as Chairman and Chief Executive Officer of Intecare.

Richard J. Censits has been a director of MedQuist since January 1987.
Mr. Censits was our Chief Executive Officer from January 1, 1987 until March
1995, and was President of MedQuist until September 1994. He served as the Vice
President and Chief Financial Officer of Campbell Soup Company from 1975 to
1986. Mr. Censits currently serves as a director of Checkpoint Systems, Inc.
and as a Trustee of the University of Pennsylvania.

James R. Emshoff has been a director of MedQuist since December 1992.
Mr. Emshoff also served as our acting President and Chief Executive Officer
from April 1995 through November 1995 and as our Chairman of the Board of
Directors from November 1995 through July 1996. Since August 1992, Mr. Emshoff
has been the Chairman and Chief Executive Officer of IndeCap Enterprises, Inc.,
a firm providing consulting services on corporate restructuring issues and
venture participation in the outsourcing of management service functions. From
February 1991 to August 1992, Mr. Emshoff was Chairman and Chief Executive
Officer of Wellesley Medical Management Inc., an owner and operator of primary
healthcare centers. From January 1985 to February 1991, Mr. Emshoff was
President and Chief Executive Officer of Citicorp Diners Club.

Terrence J. Mulligan has been a director of MedQuist since May 1996. Mr.
Mulligan is

23
<PAGE>

currently a management consultant and private investor. Mr. Mulligan had held
several senior executive positions with Baxter International, Inc. from 1986
until his retirement in 1996, including Group Vice President, Health Systems,
from 1994 to 1996, Group Vice President, Multi-Hospital Systems from 1993 to
1994, and Senior Vice President, Corporate Sales and Marketing from 1988 to
1993. Mr. Mulligan also served on the Senior Management Committee and the
Operating Management Committee at Baxter. Mr. Mulligan currently serves as a
member of the Board of Visitors of the University of Iowa College of Business
Administration, is a past President of the University of Iowa Alumni
Association, and currently serves as a Trustee of Lake Forest College. Mr.
Mulligan is a member of the Board of Directors of Physician Reliance Network
and Physicians Dynamics Inc.

A. Fred Ruttenberg has been a director of MedQuist since December 1991.
Mr. Ruttenberg has, since September 1986, been a partner in the law firm of
Blank, Rome, Comisky & McCauley, Cherry Hill, New Jersey, which has acted as
special counsel to MedQuist for certain matters.

R. Timothy Stack has been a director of MedQuist since May 1997. Since
1987, Mr. Stack has been the President and Chief Executive Officer of Borgess
Health Alliance, an integrated health delivery and finance system that includes
a 469 bed regional referral center, seven community hospitals, two long-term
care facilities, financing/risk products, a medical foundation and physician
group practices, representing over 1,000 acute care and nursing beds. Prior to
joining Borgess, Mr. Stack served as President and Chief Executive Officer of
South Side Healthcare System from 1981-1987 and as Senior Vice President and
Chief Operating Officer of Central Medical Center and Hospital from 1979-1981.

Richard H. Stowe has been a director of MedQuist since December 11,
1998. He was a director of The MRC Group from July 1993 until MRC was acquired
by MedQuist on December 10, 1998. Mr. Stowe was a partner of Welsh, Carson,
Anderson & Stowe from 1979 until January 1999. Mr. Stowe serves on the Board of
Directors of The Cerplex Group, Inc., which provides repair and parts
distribution services for electronic equipment, and Health Management Systems,
Inc., a provider of revenue enhancement services to healthcare providers and
payors, New American Healthcare Corporation, a company that services and
manages non-urban hospitals, and several private companies.

John H. Underwood has been a director of MedQuist since July 1994. Mr.
Underwood is currently Managing Director with Pfingsten Partners, L.L.C., a
firm which originates and manages private equity investments in middle market
companies. Prior to joining Pfingsten Partners in December 1996, Mr. Underwood
had been, since 1989, a Vice President with Heller Equity Capital Corporation
and a Senior Vice President of its parent, Heller Financial, Inc. From 1986 to
1989, Mr. Underwood served as a Vice President of Citicorp North America, Inc.
as a member of its leveraged capital group.

DESCRIPTION OF CAPITAL STOCK

MedQuist is authorized to issue up to 60,000,000 shares of common stock.
After completion of the offering, MedQuist will have 34,972,150 outstanding
shares of common stock and 3,646,376 shares of common stock reserved for
issuance upon exercise of options granted under MedQuist's option plans.
Holders of common stock are entitled to one vote per share on all matters to be
voted upon by the shareholders. Subject to the rights of any preferred stock
holders, holders of common stock are entitled to receive such dividends as the
Board of Directors may declare in its discretion. In the event of a
liquidation, dissolution or winding up of MedQuist, after payment of
liabilities and any liquidation preference on any shares of preferred stock
then outstanding, the holders of shares of common stock are entitled to a
distribution of any remaining assets of MedQuist. Holders of common stock have
no cumulative voting or preemptive rights. All outstanding shares of common
stock are, and the shares of common stock offered hereby, when issued and paid
for, will be fully paid and non-assessable.

MedQuist is also authorized to issue up to 12,111,975 shares of
preferred stock, no par value. Without any further action by the shareholders,
our board of directors may issue from time to time the authorized and unissued
shares of preferred stock in one or more series, and may determine as to each
series the designation and number of shares to be issued

24
<PAGE>

and the relative rights, preferences and limitations of the shares of each
series, including provisions with respect to voting powers, redemption,
conversion, dividend rights and liquidation preferences. The issuance of
preferred stock could adversely affect the voting power of the holders of
common stock or could have the effect of deterring or delaying any attempt by a
person or group to obtain control of MedQuist.

Registration Rights

Under the terms of a registration rights agreement between MedQuist and
the sellers of Transcriptions, Ltd., Mr. Cohen is entitled to incidental
registration rights with respect to the resale of up to approximately 1,330,000
shares of his common stock. These registration rights will expire on August 1,
2002. MedQuist is obligated to pay the registration expenses in any such
registration unless the registration is initiated by another shareholder. Mr.
Cohen has waived the right to include any of his common stock in this offering.

Takeover Protection

The New Jersey Shareholders Protection Act prohibits, subject to certain
exceptions, New Jersey corporations, such as MedQuist, from engaging in any
business combination with any interested shareholder for a period of five years
following the date that such shareholder becomes an interested shareholder. A
business combination includes mergers, asset sales and other transactions that
may result in a financial benefit to shareholders. A person will be deemed an
interested shareholder if the person, with any affiliate or associate,
beneficially owns, directly or indirectly, 10% or more of our outstanding
stock. However, if our board of directors approves the business combination or
the transaction that results in the shareholder becoming an interested
shareholder, then the restrictions do not apply. After the five year waiting
period, we could enter into a business combination with an interested
shareholder if

o shareholders holding at least 662/3% of our outstanding stock approve
the business combination, or

o the business combination provides that all shareholders, other than
the interested shareholder, get a fair price for their shares.

This protection does not apply to business combinations with persons who
became interested shareholders before

o the corporation began filing under the Securities Act, or

o the corporation's securities were traded on a national exchange.

We have no additional anti-takeover protection other than

o the ability of the board of directors to issue, from time to time, up
to 12,111,975 shares of preferred stock in one or more series without
shareholder approval, and

o the separation of the board of directors into three classes.

Our option plan, in certain circumstances, provides for the automatic
vesting of all outstanding options upon a change in control of MedQuist. A
change in control includes a liquidation, a sale of all or substantially all of
our assets, an acquisition of MedQuist, the election of a majority of the
members of the board of directors as a result of proxy contests within any
period of three years, approval of a merger or a tender offer. The ability to
accelerate the vesting or exercise of options could be utilized as a method of
discouraging, delaying or preventing a change in control of our stock.

MedQuist has a severance plan for certain executive officers. The plan
provides that, under certain circumstances, the termination of covered
executives within 12 months after a change in control will trigger payments to
the terminated executive that will increase the cost of acquiring MedQuist and
that could discourage a change in control of our stock.

Transfer Agent and Registrar

The transfer agent and registrar for the common stock is American Stock
Transfer & Trust Company, New York, New York.

25
<PAGE>

PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth certain information regarding beneficial
ownership of the common stock as of the date of this prospectus adjusted to
reflect the sale of shares offered hereby for

o each person who is known by us to own beneficially more than five
percent of the common stock,

o each executive officer listed below,

o each director,

o all current executive officers and directors as a group, and

o each selling shareholder.

The selling shareholders have furnished to us the information set forth
below and this information is accurate to the best of our knowledge.

<TABLE>
<CAPTION>
Shares of Common Stock
Beneficially Owned Before
Name and Address(2) the Offering(1)
- ------------------------------------------------- -------------------------------------
Number Percentage(3)
-------------------- ---------------
<S> <C> <C>
Pilgrim Baxter & Associates, Ltd.(4) ........... 2,371,900 6.9%
825 Duportial Road
Wayne, PA 19087
Welsh, Carson, Anderson & Stowe, VI, LP(5) 3,275,884 9.6
320 Park Avenue
Suite 2500
New York, NY 10022
David A. Cohen ................................. 1,574,723(6) 4.6
John A. Donohoe, Jr. ........................... 283,279(7) *
John R. Emery .................................. 11,034(8) *
Ronald F. Scarpone ............................. 80,135(9) *
John M. Suender ................................ 45,079(10) *
Bruce K. Anderson .............................. 3,295,301(11) 9.6
William T. Carson, Jr. ......................... 100,570(12) *
John T. Casey .................................. 17,685(13) *
Richard J. Censits ............................. 307,145(14) *
James R. Emshoff ............................... 140,795(15) *
Terrence J. Mulligan ........................... 32,023(16) *
A. Fred Ruttenberg ............................. 96,026(17) *
Edward L. Samek ................................ 615,217(18) 1.8
R. Timothy Stack ............................... 19,807(19) *
Richard H. Stowe ............................... 6,310(20) *
John H. Underwood .............................. 21,676(21) *
All executive officers and directors as a
group (16 persons) ........................... 6,646,805(22) 19.5%

Other selling shareholders:
William Blair Capital Partners V, L.P.(23) ..... 1,122,081 3.3
William Blair & Company, L.L.C. ................ 169,613 *
M. and L. Marcus Family Limited
Partnership(24) ............................... 1,099,202 3.2
H. and R. Marcus Family Limited
Partnership(25) ............................... 649,961 1.9
John H. Dayani, Sr. ............................ 618,891(26) 1.8
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Shares of Common Stock
Shares to Beneficially Owned After
Name and Address(2) be Sold the Offering(1)
- ------------------------------------------------- ----------- ---------------------------
Number Percentage(3)
----------- --------------
<S> <C> <C> <C>
Pilgrim Baxter & Associates, Ltd.(4) ........... -- 2,371,900 6.8%
825 Duportial Road
Wayne, PA 19087
Welsh, Carson, Anderson & Stowe, VI, LP(5) 1,500,000 1,775,884 5.1
320 Park Avenue
Suite 2500
New York, NY 10022
David A. Cohen ................................. -- 1,574,723 4.5
John A. Donohoe, Jr. ........................... -- 283,279 *
John R. Emery .................................. -- 11,034 *
Ronald F. Scarpone ............................. -- 80,135 *
John M. Suender ................................ -- 45,079 *
Bruce K. Anderson .............................. -- 1,795,301 5.1
William T. Carson, Jr. ......................... -- 100,570 *
John T. Casey .................................. -- 17,685 *
Richard J. Censits ............................. -- 307,145 *
James R. Emshoff ............................... -- 140,795 *
Terrence J. Mulligan ........................... -- 32,023 *
A. Fred Ruttenberg ............................. -- 96,026 *
Edward L. Samek ................................ 180,387 434,830 1.2
R. Timothy Stack ............................... -- 19,807 *
Richard H. Stowe ............................... -- 6,310 *
John H. Underwood .............................. -- 21,676 *
All executive officers and directors as a
group (16 persons) ........................... 1,680,387 4,966,418 14.2

Other selling shareholders:
William Blair Capital Partners V, L.P.(23) ..... 350,000 772,081 2.2
William Blair & Company, L.L.C. ................ 169,613 0 0
M. and L. Marcus Family Limited
Partnership(24) ............................... 750,000 349,202 1.0
H. and R. Marcus Family Limited
Partnership(25) ............................... 500,000 149,961 *
John H. Dayani, Sr. ............................ 243,467 375,424 1.1
</TABLE>

26
<PAGE>

* Less than 1%.

(1) Beneficial ownership is determined in accordance with the rules of the
Commission, and includes voting or investment power with respect to the
shares beneficially owned. Shares of common stock subject to options or
warrants currently exercisable within 60 days after the date of this
prospectus are deemed outstanding for computing the percentage ownership
of the person holding such options or warrants but are not deemed
outstanding for computing the percentage ownership of any other person.

(2) Except where otherwise noted, the address of all persons listed is c/o
MedQuist Inc., Five Greentree Centre, Suite 311, Marlton, New Jersey
08053.

(3) Applicable percentage of ownership as of the date of this prospectus is
based upon 34,172,150 shares of common stock outstanding before the
offering and 34,972,150 shares of common stock outstanding after the
offering, and does not reflect purchases of common stock in the offering.

(4) Reflects information set forth in a Schedule 13G filed by Pilgrim, Baxter
& Associates, Ltd.

(5) The general partners of WCAS VI are Patrick I. Welsh, Russell L. Carson,
Andrew M. Paul, Thomas E. McInerney, Laura van Buren, James B. Hoover,
Bruce K. Anderson, Robert A. Minicucci, Anthony J. de Nicola, and Paul B.
Queally.

(6) Includes 246,000 shares of common stock issuable upon the exercise of
options granted to Mr. Cohen. Mr. Cohen owns 1,328,116 shares jointly with
his spouse.

(7) Includes 169,392 shares of common stock issuable upon the exercise of
options granted to Mr. Donohoe and 41,000 shares of common stock owned by
Mr. Donohoe's children.

(8) Includes 11,000 shares of common stock issuable upon the exercise of
options granted to Mr. Emery.

(9) Includes 59,088 shares of common stock issuable upon the exercise of
options granted to Mr. Scarpone.

(10) Includes 27,000 shares of common stock issuable upon the exercise of
options granted to Mr. Suender.

(11) Includes 3,275,884 shares of common stock held by WCAS, VI and 455 shares
issuable under MedQuist's Deferred Compensation Plan for Non-Employee
Directors (the "Deferred Stock Plan"). Mr. Anderson disclaims beneficial
ownership of WCAS, VI shares except to the extent of his pecuniary
interest therein. Mr. Anderson's decrease in beneficial ownership reflects
the sale of shares being sold by WCAS, VI. Mr. Anderson is not selling any
shares individually.

(12) Includes 55,000 shares of common stock issuable upon the exercise of
options granted to Mr. Carson and 28,700 shares of common stock held for
Mr. Carson's benefit in individual retirement accounts.

(13) Includes 15,000 shares of common stock issuable upon the exercise of
options granted to Mr. Casey and 2,685 shares issuable under the Deferred
Stock Plan.

(14) Includes 6,000 shares issuable upon the exercise of options granted to Mr.
Censits and 201,300 shares of common stock owned by Mr. Censits' spouse.

(15) Includes 101,806 shares of common stock issuable upon the exercise of
options granted to Mr. Emshoff and 3,231 shares issuable under the
Deferred Stock Plan.

(16) Includes 24,000 shares of common stock issuable upon the exercise of
options granted to Mr. Mulligan and 5,023 shares issuable under the
Deferred Stock Plan.
<PAGE>

(17) Includes 79,200 shares of common stock issuable upon the exercise of
options granted to Mr. Ruttenberg and 7,828 shares issuable under the
Deferred Stock Plan.

(18) Includes 268,795 shares of common stock issuable upon the exercise of
options granted to Mr. Samek.

(19) Includes 15,000 shares of common stock issuable upon the exercise of
options granted to Mr. Stack and 814 shares issuable under the Deferred
Stock Plan.

(20) Includes 455 shares issuable under the Deferred Stock Plan.

(21) Includes 15,000 shares of common stock issuable upon the exercise of
options granted to Mr. Underwood and 3,673 shares issuable under the
Deferred Stock Plan.

(22) Includes 1,086,281 options granted to directors and executive officers,
24,164 shares issuable under the Deferred Stock Plan and 3,275,884 shares
beneficially owned by WCAS, VI. See Note 5 above.

(23) The general partner of William Blair Capital Partners V, L.P. is William
Blair Capital Partners, LLC. The members of William Blair Capital
Partners, LLC are William Blair & Company, L.L.C., Wilblairco Associates,
Ellen Carnahan, David G. Chandler, James M. Denny, Samuel B. Guren, Edgar
D. Jannotta, Edgar D. Jannotta, Jr., Ian M. Larkin, Timothy M. Murray,
Gregg S. Newmark, Lawrence I. Shagrin, and Thomas C. Theobold.

(24) The 1991 L.W. Marcus Living Trust is the general partner of the M. and L.
Marcus Family Limited Partnership. Lois W. Marcus is the sole trustee of
the 1991 L.W. Marcus Living Trust. Mrs. Marcus is the wife of Martin H.
Marcus.

(25) The Herbert L. Marcus Living Trust is the general partner of the H. and R.
Marcus Family Limited Partnership. Herbert L. Marcus is the sole trustee
of the Herbert L. Marcus Living Trust.

(26) Includes 90,353 shares of Common Stock issuable upon the exercise of
options granted to Mr. Dayani.

27
<PAGE>

U.S. TAX CONSEQUENCES TO
NON-U.S. HOLDERS OF COMMON STOCK

The following discussion summarizes certain U.S. federal income and
estate tax consequences of the ownership and disposition of common stock by a
"non-U.S. holder." You are a "non-U.S. holder" if you are, for United States
federal income tax purposes:

o a non-resident alien individual,

o foreign corporation,

o a foreign partnership, or

o a foreign estate or trust.

This discussion does not consider the specific facts and circumstances
that may be relevant to a particular non-U.S. holder and does not address the
treatment of a non-U.S. holder under the laws of any state, local or foreign
taxing jurisdiction. The discussion is based on the tax laws of the United
States, which include the Internal Revenue Code of 1986, as amended, existing
regulations (some of which do not become effective until January 1, 2000), and
administrative interpretations and judicial decisions. The tax laws are subject
to change, and the changes can be applied on a retroactive basis. You should
consult a tax advisor regarding the U.S. federal tax consequences of acquiring,
holding and disposing of common stock in your particular circumstances, as well
as any tax consequences that may arise under the laws of any state, local or
foreign taxing jurisdiction.

Dividends

If you are a non-U.S. holder of common stock, dividends paid to you
before January 1, 2000 will be subject to withholding of United States federal
income tax at a 30% rate unless:

o you are eligible for the benefits of an income tax treaty that
provides for a lower rate, or

o the dividends are "effectively connected" with your conduct of a trade
or business in the United States.

If the dividends are "effectively connected" with your conduct of a
trade or business within the United States and you provide us a form 4224 on
which you certify that the dividends are "effectively connected" to your U.S.
trade or business, no federal income tax will be withheld (unless we know the
form is inaccurate). Unless an applicable income tax treaty provides otherwise,
the "effectively connected" dividends will be subject to federal income tax at
the rates applicable to U.S. resident individuals or domestic corporations.

If you are a foreign corporation and the dividends are "effectively
connected" to your U.S. trade or business, in addition to the corporate income
tax, you may, under certain circumstances, be subject to the "branch profits
tax." The branch profits tax, to the extent it applies, is generally 30% of the
effectively connected income (after reduction for the federal corporate income
taxes paid by you on the income). The branch profits tax may be reduced if you
are eligible for the benefits of an income tax treaty that provides for a lower
rate.

If the dividends paid on your common stock before January 1, 2000 are
paid to an address in a foreign country, and you have not provided us with a
form 4224 (claiming that the dividends are effectively connected to your U.S.
trade or business), we will assume that the dividend is subject to the 30%
withholding tax, or the lower rate provided in the income tax treaty between
the United States and the country to which we send the dividend.

For dividends paid on or after January 1, 2000, you will generally be
subject to either the 30% withholding tax described above, or the 31% "back-up"
withholding tax (which generally applies only to U.S. persons), unless:

o you provide us with certification on form w-8 (or its successor form)
that you are a foreign person, so that the "back-up" withholding does
not apply, or you are a person that is not subject to back-up
withholding even if you are a U.S. person (such as a corporation),
and, with respect to the 30% withholding tax,

o you provide us with certification on form w-8 (or its successor form)
that the dividends are "effectively connected" to your conduct of a
U.S. trade or business (which will require that you have a U.S.
Taxpayer Identification Number), or

o you provide us with certification on form W-8 (or its successor form)
that the 30%

28
<PAGE>

withholding tax should be reduced under an applicable income tax
treaty that you are eligible to use. So long as the common stock is
traded on a recognized exchange, an individual or corporation does
not have to have a U.S. Taxpayer Identification Number to complete
this certification.

If you are a foreign partnership, the certifications required for
dividends paid on or after January 1, 2000 generally will apply to the partners
of the partnership, and the partnership will be required to provide certain
information. Under certain circumstances (which require an agreement be filed
with the Internal Revenue Service), a foreign partnership that owns common
stock may be able to assume our withholding obligations on dividend payments
made on or after January 1, 2000.

If you are eligible for a reduced rate of U.S. withholding tax under a
tax treaty, you may obtain a refund of any amounts withheld in excess of that
rate by filing a refund claim with the Internal Revenue Service.

Gain on Disposition of Common Stock

If you are a non-U.S. holder, you generally will not be subject to
United States federal income tax on gain that you recognize on a disposition of
common stock unless:

o the gain is "effectively connected" with your conduct of a trade or
business in the United States (and the gain is attributable to a
permanent establishment that you maintain in the United States, if
that is required by an applicable income tax treaty as a condition
for subjecting you to U.S. taxation on a net income basis),

o you are an individual, you hold the common stock as a capital asset,
and you are present in the United States for 183 or more days in the
taxable year of the sale and certain other conditions exist, or

o MedQuist is or has been a "United States real property holding
corporation" for federal income tax purposes and you held, directly
or indirectly at any time during the five-year period ending on the
date of disposition, more than 5% of the common stock (and you are
not eligible for any treaty exemption).

If you are a foreign corporation, "effectively connected" gains that you
recognize may also, under certain circumstances, be subject to an additional
"branch profits tax." The branch profits tax, to the extent it applies, is
generally 30% of the "effectively connected income" (after reduction for the
federal corporate income taxes paid by you on the income). The branch profits
tax may be reduced if you are eligible for the benefits of an income tax treaty
that provides for a lower rate.

The Company has not been, is not, and does not anticipate becoming a
"United States real property holding corporation" for federal income tax
purposes.
Federal Estate Taxes

Common stock held by a non-U.S. holder at the time of death will be
included in the holder's gross estate for United States federal estate tax
purposes, unless an applicable estate tax treaty provides otherwise.

Information Reporting and Back-up Withholding

In general, dividends paid to you before January 1, 2000 will not be
subject to U.S. information reporting requirements and back-up withholding tax
if the dividend is paid to you outside the United States (unless we know you
are a U.S. person).

For payments of dividends made on or after January 1, 2000, as described
above in the "Dividends" section, back-up withholding will apply unless we
receive a certification that you are a foreign person, or you are otherwise
exempt from the back-up withholding rules.

If you sell your common stock outside of the United States through a
non-U.S. office of a non-U.S. broker, and the sale proceeds are paid to you
outside the United States, then U.S. back-up withholding and information
reporting requirements generally will not apply to that payment. However, U.S.
information reporting (but not back-up withholding) will apply to a payment of
sales proceeds (even if that payment is made to you outside the United States)
if you sell your common stock through a non-U.S. office of a broker that:

29
<PAGE>

o is a U.S. person,

o derives 50% or more of its gross income for certain periods from the
conduct of a trade or business in the United States,

o is a "controlled foreign corporation" as to the United States, or

o with respect to payments made after December 31, 1999, is a foreign
partnership, if at any time during its tax year:

o one or more of its partners are U.S. persons (as defined in
U.S. Treasury regulations) who in the aggregate hold more than
50% of the income or capital interest in the partnership, or

o such foreign partnership is engaged in a U.S. trade or
business, unless the broker has documentary evidence in its
files that you are a non-U.S. person or you otherwise
establish an exemption.

If you receive payment of the proceeds of a sale of common stock to or
through a U.S. office of a broker, the payment is subject to both United States
back-up withholding of 31% and information reporting unless you certify that
you are a non-U.S. person (under penalties of perjury) or you otherwise
establish an exemption.

You generally may obtain a refund of any amounts withheld under the
back-up withholding rules that exceed your income tax liability by filing a
refund claim with the Internal Revenue Service.

VALIDITY OF THE COMMON STOCK

Pepper Hamilton LLP will issue an opinion that the shares offered by
MedQuist and the selling shareholders are validly issued. The validity of the
common stock offered hereby will be passed upon for the underwriters by
Sullivan & Cromwell, New York, New York. Sullivan & Cromwell will rely as to
certain matters of New Jersey law on Pepper Hamilton LLP and John M. Suender,
Esq., Senior Vice President, General Counsel and Secretary of MedQuist.

EXPERTS

The audited consolidated financial statements of MedQuist Inc. and
subsidiaries included in this prospectus and elsewhere in this registration
statement of which this prospectus is a part, have been audited by Arthur
Andersen LLP, independent public accounts, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said reports.

The audited financial statements of The MRC Group, Inc. and subsidiary
incorporated by reference in this prospectus and elsewhere in this registration
statement of which this prospectus is a part, have been audited by Arthur
Andersen LLP, independent public accounts, as indicated in their reports with
respect thereto, and are incorporated by reference in this prospectus in
reliance upon the authority of said firm as experts in giving said reports.

30
<PAGE>

WHERE YOU CAN FIND ADDITIONAL INFORMATION

MedQuist Inc. files annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements and other information MedQuist files with the SEC at the
SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C., 20549.
You may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. MedQuist's SEC filings are also available on
the SEC's Internet site (http://www.sec.gov).

MedQuist has filed a registration statement on Form S-3 to register the
shares of MedQuist common stock offered under this prospectus. This prospectus
is a part of the registration statement on Form S-3 and constitutes a
prospectus of MedQuist. As allowed by SEC rules, this prospectus does not
contain all the information you can find in the registration statement on Form
S-3 or the exhibits to the registration statement on Form S-3.

The SEC also allows MedQuist to "incorporate by reference" the
information it files with the SEC, which means MedQuist can disclose
information to you by referring you to another document filed separately with
the SEC. Information incorporated by reference is deemed to be part of this
prospectus. Later information filed by MedQuist with the SEC updates and
supersedes this prospectus.

This prospectus incorporates important business and financial
information about MedQuist that is not included in or delivered with this
prospectus. Copies of any of that information are available without charge to
any person to whom this prospectus is delivered, upon written or oral request.
Written requests for those documents should be directed to the Corporate
Secretary, MedQuist Inc., Five Greentree Centre, Suite 311, Marlton, New
Jersey, 08053, and telephone requests may be directed to the Corporate
Secretary at (609) 596-8877.

The following documents previously filed by MedQuist with the SEC are
incorporated herein by this reference:

<TABLE>
<CAPTION>
SEC Filing Period (or Date Filed)
- ----------------------------------------------------------- -----------------------------
<S> <C>
Current Report on Form 8-K April 19, 1999

Current Report on Form 8-K March 25, 1999

Annual Report on Form 10-K, as amended (including Year ended December 31, 1998
those portions of MedQuist's proxy statement for its
1999 annual meeting of shareholders incorporated by
reference in the Annual Report on Form 10-K)

Registration Statement on Form S-4 (but only with respect October 30, 1998
to the audited financial statements of The MRC Group,
Inc. included therein)

Registration Statement on Form 8-A filed pursuant to March 11, 1992
Section 12(g) of the Exchange Act
</TABLE>

------------------------------------------

All documents filed by MedQuist pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this prospectus and prior
to the termination of the offering will be deemed to be incorporated by
reference in this prospectus and to be a part of this prospectus from the date
that document is filed.

31
<PAGE>

MEDQUIST INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Public Accountants ................ F-2
Consolidated Balance Sheets ............................. F-3
Consolidated Statements of Operations ................... F-4
Consolidated Statements of Shareholders' Equity ......... F-5
Consolidated Statements of Cash Flows ................... F-6
Notes to Consolidated Financial Statements .............. F-7

F-1
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To MedQuist Inc.:

We have audited the accompanying consolidated balance sheets of MedQuist
Inc. (a New Jersey corporation) and Subsidiaries as of December 31, 1997 and
1998, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MedQuist
Inc. and Subsidiaries as of December 31, 1997 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.

/s/ Arthur Andersen LLP

Philadelphia, Pa.,
February 1, 1999

F-2
<PAGE>

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

<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1998
----------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 14,489 $ 15,936
Short-term investments ............................................. 4,003 --
Accounts receivable, net of allowance of $1,298 and $2,274 ......... 41,819 52,477
Deferred income taxes .............................................. 3,177 6,438
Prepaid expenses and other ......................................... 307 233
--------- ---------
Total current assets ............................................ 63,795 75,084
Property and equipment, net ........................................... 25,442 27,022
Intangible assets, net ................................................ 82,382 82,216
Other ................................................................. 2,154 2,989
--------- ---------
$ 173,773 $ 187,311
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt .................................. $ 6,792 $ 2,372
Accounts payable ................................................... 5,777 5,010
Accrued expenses ................................................... 14,618 25,850
--------- ---------
Total current liabilities ....................................... 27,187 33,232
--------- ---------
Long-term debt ........................................................ 7,589 215
--------- ---------
Other long-term liabilities ........................................... 1,130 697
--------- ---------
Deferred income taxes ................................................. 6,494 1,981
--------- ---------
Commitments and contingencies (Note 10)
Shareholders' equity:
Common stock, no par value, 60,000 shares authorized, 32,138
and 33,258 shares issued and outstanding .......................... -- --
Additional paid-in capital ......................................... 119,008 136,603
Retained earnings .................................................. 12,365 14,536
Unrealized gain on marketable securities ........................... -- 585
Deferred compensation .............................................. -- (538)
--------- ---------
Total shareholders' equity ...................................... 131,373 151,186
--------- ---------
$ 173,773 $ 187,311
========= =========
</TABLE>

The accompanying notes are an integral part of these statements.

F-3
<PAGE>

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

<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1996 1997 1998
------------ -------------- ------------
<S> <C> <C> <C>
Revenue ................................................ $ 152,109 $ 216,158 $ 271,655
--------- ---------- ---------
Costs and expenses:
Cost of revenue ..................................... 118,978 169,235 209,587
Selling, general and administrative ................. 11,908 14,362 16,061
Depreciation ........................................ 7,372 10,339 12,697
Amortization of intangible assets ................... 3,150 5,652 3,757
Transaction costs and restructuring charges ......... 644 2,075 18,221
--------- ---------- ---------
Total operating expenses ......................... 142,052 201,663 260,323
--------- ---------- ---------
Operating income ....................................... 10,057 14,495 11,332
Interest expense (income), net ......................... 2,049 469 (325)
--------- ---------- ---------
Income before income taxes ............................. 8,008 14,026 11,657
Income tax provision ................................... 2,720 5,293 8,472
--------- ---------- ---------
Net income ............................................. 5,288 8,733 3,185
Inducement of warrant exercise ......................... (707) -- --
--------- ---------- ---------
Net income available to common shareholders ............ $ 4,581 $ 8,733 $ 3,185
========= ========== =========
Basic income per share:
Net income .......................................... $ 0.22 $ 0.28 $ 0.10
Inducement of warrant exercise ...................... ( 0.03) -- --
--------- ---------- ---------
Net income available to common shareholders ......... $ 0.19 $ 0.28 $ 0.10
========= ========== =========
Diluted income per share:
Net income .......................................... $ 0.20 $ 0.26 $ 0.09
Inducement of warrant exercise ...................... ( 0.03) -- --
--------- ---------- ---------
Net income available to common shareholders ......... $ 0.17 $ 0.26 $ 0.09
========= ========== =========
</TABLE>

The accompanying notes are an integral part of these statements.

F-4
<PAGE>

MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)

<TABLE>
<CAPTION>
Additional
Common Stock
-------------------- Paid-in
Shares Amount Capital
---------- -------- ------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 .............. 13,182 $ -- $ 29,493
Net income ............................. -- -- --
Exercise of common stock options,
including tax benefit ................ 98 -- 336
Issuance of common stock in
connection with business
acquisitions ......................... 4,773 -- 10,751
Sale of common stock, net of
expenses ............................. 10,395 -- 68,714
Distributions .......................... -- -- --
Exercise of warrants, including
inducement charge .................... 3,016 -- 6,980
Purchase and retirement of
common stock, at cost ................ (36) -- (296)
------ ---- ---------
BALANCE, DECEMBER 31, 1996 .............. 31,428 -- 115,978
Net income ............................. -- -- --
Exercise of common stock options
and warrants, including tax
benefit .............................. 759 -- 3,455
Issuance of common stock, net of
expenses ............................. 33 -- 251
Distributions .......................... -- -- --
Purchase and retirement of
common stock, at cost ................ (82) -- (676)
------ ---- ---------
BALANCE, DECEMBER 31, 1997 .............. 32,138 -- 119,008
Comprehensive income:
Net income ........................... -- -- --
Unrealized gain on available for
sale securities, net of tax ......... -- -- --
------ ---- ---------
Total comprehensive income .......... -- -- --
------ ---- ---------
Exercise of common stock options
and warrants, including tax
benefit .............................. 917 -- 9,662
Issuance of common stock, net of
expenses ............................. 203 -- 1,701
Distributions .......................... -- -- --
Grant of common stock options
below fair value ..................... -- -- 1,078
Amortization of deferred
compensation ......................... -- -- --
Cash paid to dissenting stockhold-
ers in pooling of interests
transaction .......................... -- -- (1,438)
Transaction costs paid by acquired
company stockholder in pooling
of interests transaction ............. -- -- 1,540
Income tax asset recognized in
pooling of interests transaction ..... -- -- 5,052
------ ---- ---------
BALANCE, DECEMBER 31, 1998 .............. 33,258 $ -- $ 136,603
====== ==== =========
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Unrealized
Gain on
Retained Marketable Deferred
Earnings Securities Compensation Total
------------ ------------ -------------- -------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 .............. $ 1,079 $ -- $ -- $ 30,572
Net income ............................. 5,288 -- -- 5,288
Exercise of common stock options,
including tax benefit ................ -- -- -- 336
Issuance of common stock in
connection with business
acquisitions ......................... -- -- -- 10,751
Sale of common stock, net of
expenses ............................. -- -- -- 68,714
Distributions .......................... (928) -- -- (928)
Exercise of warrants, including
inducement charge .................... (707) -- -- 6,273
Purchase and retirement of
common stock, at cost ................ -- -- -- (296)
-------- ----- -------- ---------
BALANCE, DECEMBER 31, 1996 .............. 4,732 -- -- 120,710
Net income ............................. 8,733 -- -- 8,733
Exercise of common stock options
and warrants, including tax
benefit .............................. -- -- -- 3,455
Issuance of common stock, net of
expenses ............................. -- -- -- 251
Distributions .......................... (1,100) -- -- (1,100)
Purchase and retirement of
common stock, at cost ................ -- -- -- (676)
-------- ----- -------- ---------
BALANCE, DECEMBER 31, 1997 .............. 12,365 -- -- 131,373
Comprehensive income:
Net income ........................... 3,185 -- -- 3,185
Unrealized gain on available for
sale securities, net of tax ......... -- 585 -- 585
-------- ----- -------- ---------
Total comprehensive income .......... 3,185 585 -- 3,770
-------- ----- -------- ---------
Exercise of common stock options
and warrants, including tax
benefit .............................. -- -- -- 9,662
Issuance of common stock, net of
expenses ............................. -- -- -- 1,701
Distributions .......................... (1,014) -- -- (1,014)
Grant of common stock options
below fair value ..................... -- -- (1,078) --
Amortization of deferred
compensation ......................... -- -- 540 540
Cash paid to dissenting stockhold-
ers in pooling of interests
transaction .......................... -- -- -- (1,438)
Transaction costs paid by acquired
company stockholder in pooling
of interests transaction ............. -- -- -- 1,540
Income tax asset recognized in
pooling of interests transaction ..... -- -- -- 5,052
-------- ----- -------- ---------
BALANCE, DECEMBER 31, 1998 .............. $ 14,536 $ 585 $ (538) $ 151,186
======== ===== ======== =========
</TABLE>

The accompanying notes are an integral part of these statements.

F-5
<PAGE>

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

<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income ........................................................ $ 5,288 $ 8,733 $ 3,185
Adjustments to reconcile net income to net cash provided by
operating activities--
Depreciation and amortization ................................... 10,522 15,991 16,454
Amortization of debt discounts .................................. 704 -- --
Amortization of deferred compensation ........................... -- -- 540
Deferred income tax provision (benefit) ......................... 1,105 (200) (3,213)
Loss on disposal of property and equipment ...................... -- 223 --
Transaction costs paid by acquired company stockholder .......... -- -- 1,540
Changes in assets and liabilities, excluding effects of
acquisitions and divestitures--
Accounts receivable, net ..................................... (5,571) (7,230) (10,345)
Prepaid expenses and other ................................... 1,403 631 97
Other assets ................................................. 182 (362) 65
Accounts payable ............................................. (1,983) 543 (767)
Accrued expenses ............................................. (832) 3,175 15,729
Other long-term liabilities .................................. (79) (87) (433)
--------- --------- ---------
Net cash provided by operating activities ................... 10,739 21,417 22,852
--------- --------- ---------
INVESTING ACTIVITIES:
Purchases of property and equipment ............................... (6,553) (13,716) (14,027)
Acquisitions, net of cash acquired ................................ (26,205) (5,628) (5,839)
Sale (purchase) of short-term investments ......................... (5,893) 973 4,003
--------- --------- ---------
Net cash used in investing activities ....................... (38,651) (18,371) (15,863)
--------- --------- ---------
FINANCING ACTIVITIES:
Repayments of long-term debt and subordinated payable ............. (38,728) (3,757) (10,006)
Proceeds from issuance of long-term debt .......................... 7,121 -- --
Distributions ..................................................... (928) (1,100) (1,014)
Proceeds from exercise of common stock options and
warrants ........................................................ 226 1,785 5,065
Net proceeds from issuance of common stock ........................ 68,714 251 413
Purchase and retirement of common stock ........................... (296) (676) --
--------- --------- ---------
Net cash provided by (used in) financing activities ......... 36,109 (3,497) (5,542)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ....................................................... 8,197 (451) 1,447
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ....................... 6,743 14,940 14,489
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR ............................. $ 14,940 $ 14,489 $ 15,936
========= ========= =========
</TABLE>

The accompanying notes are an integral part of these statements.

F-6
<PAGE>

MEDQUIST INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share amounts)

1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Background and Basis of Presentation

MedQuist Inc. (the "Company" or "MedQuist") is the leading national
provider of medical transcription services. MedQuist was incorporated in New
Jersey in 1984 and reorganized in 1987. From 1995 through 1998, the Company
completed 18 acquisitions, of which 13 were accounted for as purchase
transactions and five were accounted for as pooling of interests (see Note 2).
The pooling of interests transactions, all of which occurred in 1998, include
the acquisitions of Digital Dictation, Inc. ("DDI"), Signal Transcriptions
Network, Inc. ("Signal"), Transcriptions Ltd. of Florida, Inc. ("TLF") and The
MRC Group, Inc. ("MRC") which were material and required restatement of the
Company's financial statements. Accordingly, the accompanying financial
statements have been restated to reflect these 1998 acquisitions accounted for
under the pooling of interests method.

Principles of Consolidation

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

Common Stock Splits

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

Use of Estimates

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

Revenue Recognition

Fees for transcription-related services are based primarily on contracted
rates, and revenue is recognized upon the rendering of services and delivery of
reports.

Pro Forma Presentation for Income Taxes

Prior to their mergers with the Company, Signal and TLF were taxed as "S"
Corporations. Accordingly, no tax provision is included in the accompanying
financial statements related to their income prior to their respective
acquisition dates. The following pro forma presentation sets forth the
Company's income tax provision, net income and net income per share as if
Signal and TLF had been taxed as "C" Corporations for all periods presented.

F-7
<PAGE>

MEDQUIST INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

(in thousands, except per share amounts)

1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)

<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1996 1997 1998
------------ ------------- -------------
<S> <C> <C> <C>
Income before income taxes, as reported ......... $ 8,008 $ 14,026 $ 11,657
Pro forma income tax provision .................. 3,357 5,975 8,766
-------- --------- ---------
Pro forma net income ............................ $ 4,651 $ 8,051 $ 2,891
======== ========= =========
Pro forma net income per share:
Basic .......................................... $ 0.19 $ 0.25 $ 0.09
Diluted ........................................ $ 0.18 $ 0.24 $ 0.08
</TABLE>

Cash and Cash Equivalents

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

Investments

Short-term investments held by the Company at December 31, 1997 consisted
primarily of investments in high-quality, fixed-income bonds with varying
maturities and rates. In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," the Company classified their investments as
held-to-maturity since the Company had both the intent and ability to hold to
maturity. Accordingly, such investments were carried at amortized cost.

Included in other assets at December 31, 1998, is a warrant to purchase
common stock in Lernout and Hauspie, Inc. The warrant has been classified as
available-for-sale. Pursuant to SFAS No. 115, available-for-sale securities are
carried at fair value, with unrealized gains and losses, net of tax, reported
as a separate component of shareholders' equity. The unrealized gain, net of
taxes, at December 31, 1998 was $585.

Property and Equipment

Property and equipment are recorded at cost. Depreciation and amortization
have been provided using the straight-line method over the estimated useful
lives of the assets, which range from two to seven years for furniture,
equipment and software, and the lease term for leasehold improvements. Repairs
and maintenance costs are charged to expense as incurred. Additions and
betterments are capitalized. Gains or losses on disposals are charged to
operations.

Intangible Assets

Intangible assets consist primarily of goodwill, customer lists,
non-compete agreements and employee bases. The goodwill related to the May 1994
acquisition of Transcriptions, Ltd. (see Note 2) is being amortized over 40
years. All other goodwill is being amortized over 20-30 years. Customer lists
and employee bases are being amortized over 10-20 years and five years,
respectively. Non-compete agreements are amortized over their terms, ranging
from 1.5 years to four years. Subsequent to its acquisitions, the Company
continually evaluates whether later events and circumstances have occurred that
indicate that the remaining estimated useful life of intangible assets may
warrant revision or that the remaining balance may not be recoverable. When
factors indicate that intangible assets should be evaluated for possible
impairment, the Company uses an estimate of the related undiscounted cash flows

F-8
<PAGE>

MEDQUIST INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

(in thousands, except per share amounts)

1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)

in measuring whether the intangible asset should be written down to fair value.
Measurement of the amount of the impairment will be based on generally accepted
valuation methodologies, as deemed appropriate. As of December 31, 1998,
management believes that no revision to the remaining useful lives or
write-down of intangible assets is required.

Transaction Costs and Restructuring Charges

During 1996, 1997 and 1998, the Company incurred certain charges resulting
from restructurings and in 1998 incurred transaction costs associated with
pooling of interests acquisitions and professional fees in connection with
MRC's terminated initial public offering, as follows:

<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1996 1997 1998
-------- ---------- ----------
<S> <C> <C> <C>
Restructuring charges .......................................... $ 644 $ 2,075 $ 6,539
Transaction costs associated with pooling of interests ......... -- -- 11,000
Terminated initial public offering costs ....................... -- -- 682
----- ------- --------
$ 644 $ 2,075 $ 18,221
===== ======= ========
</TABLE>

In December 1998, the Company's board of directors approved management's
restructuring plan associated with the MRC merger. Costs associated with the
plan of approximately $6,539 have been recognized in 1998 in accordance with
Emerging Issues Task Force ("EITF") 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity," as follows:

Non-cancelable leases ................................. $ 3,835
Severance ............................................. 1,618
Non-cancelable contracts and other exit costs ......... 1,086
-------
$ 6,539
=======

The plan relates primarily to the closure of several redundant customer
service centers as well as certain corporate offices in order to improve
operating efficiencies. The Company expects to complete the plan in 1999. The
severance costs are attributable to 41 individuals from various levels of
operational and senior management. As of December 31, 1998, $567 of severance
had been paid and $410 of other restructuring costs had been paid. The
consolidated balance sheet at December 31, 1998 reflects $5,562 in accrued
expenses related to the 1998 restructuring charge.

In 1997, MRC approved a separate management plan to close and/or merge
several redundant customer service centers in order to further reduce costs and
improve operating efficiencies. The plan was completed during 1998 and included
the cost of exiting certain facilities, primarily related to non-cancelable
leases, the disposition of fixed assets and employee severance costs. Costs
associated with the plan of approximately $2,075 were recognized in 1997 in
accordance with EITF 94-3. Included in this amount is approximately $705 for
the disposal of assets and approximately $800 in severance and employee
contract buy outs. The balance is primarily related to non-cancelable lease
costs. The severance costs are attributable to eight individuals from various
levels of operational and senior management. At December 31, 1997 and 1998,
approximately $1,773 and $1,213, respectively, related to MRC's restructuring
charge is included in accrued expenses.

F-9
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

(in thousands, except per share amounts)

1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)

In 1996, MRC approved a separate management plan to close and/or merge
several redundant customer service centers as well as certain corporate offices
in order to reduce costs and improve operating efficiencies. The plan was
essentially completed during 1997 and included the cost of exiting certain
facilities, primarily related to non-cancelable leases, and employee severance
costs. Costs associated with the plan of approximately $644 were recognized in
1996 in accordance with EITF 94-3.

In 1998, the Company incurred the following transaction costs associated
with business combinations accounted for using the pooling of interests method:
<TABLE>
<S> <C>
Investment banker fees .................................. $ 7,200
Accounting, legal and other professional fees ........... 2,260
Broker fee paid by acquired company stockholder ......... 1,540
--------
$ 11,000
========
</TABLE>

At December 31, 1998, $500 of such costs are included in accrued expenses
for payments scheduled to be made in 1999.

Advertising Costs

The Company charges advertising costs to expense as incurred. Advertising
expense was $329, $678 and $650 for the years ended December 31, 1996, 1997 and
1998, respectively.

Research and Development Costs

Research and development costs are charged to expense as incurred. Total
research and development costs were approximately $450, $550 and $813 for the
years ended December 31, 1996, 1997 and 1998, respectively.

Statements of Cash Flow Information

For the years ended December 31, 1996, 1997 and 1998, the Company paid
interest of $1,404, $1,027 and $695, respectively, and income taxes of $1,700,
$3,162 and $6,705, respectively. Capital lease obligations of $191, $174 and
$98 were incurred on equipment leases entered into in 1996, 1997 and 1998,
respectively. In 1996, the Company exchanged $500 of debt for shares of capital
stock. In 1998, convertible notes totaling $1,288 were converted into 172
shares of common stock.

The following table displays the net noncash financing activities
resulting from the Company's business acquisitions (see Note 2):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1996 1997 1998
----------- ---------- ----------
<S> <C> <C> <C>
Noncash net assets acquired ........................................ $ 40,274 $ 8,965 $ 4,401
Less -- Seller notes and payables .................................. (3,318) (3,337) --
Common stock issued ................................................ (10,751) -- --
Cash paid to dissenting stockholder in pooling transaction ......... -- -- 1,438
--------- -------- -------
Net cash paid for business acquisitions ........................... $ 26,205 $ 5,628 $ 5,839
========= ======== =======
</TABLE>

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.

F-10
<PAGE>

MEDQUIST INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

(in thousands, except per share amounts)

1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)

Earnings Per Share

The Company follows SFAS No. 128, "Earnings per Share," which requires a
dual presentation of "basic" and "diluted" earnings per share on the face of
the income statement. Basic earnings per share is calculated by dividing net
income by the weighted average number of shares of common stock outstanding for
the period. Diluted earnings per share is calculated by dividing net income by
the weighted average number of shares of common stock outstanding for the
period, adjusted for the dilutive effect of common stock equivalents, which
consists primarily of stock options, using the treasury stock method.

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

<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------------------------------
1996 1997 1998
--------------------------------- --------------------------------- ---------------------------------
Per Per Per
Net Share Share Net Share
Income Shares Amount Income Shares Amount Income Shares Amount
---------- -------- ----------- ---------- -------- ----------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic ............... $ 5,288 24,138 $ 0.22 $ 8,733 31,726 $ 0.28 $ 3,185 33,087 $ 0.10
Effect of dilutive
securities ......... -- 1,906 ( 0.02) -- 1,632 ( 0.02) -- 1,818 ( 0.01)
------- ------ ------- ------- ------ ------- ------- ------ -------
Diluted ............. $ 5,288 26,044 $ 0.20 $ 8,733 33,358 $ 0.26 $ 3,185 34,905 $ 0.09
======= ====== ======= ======= ====== ======= ======= ====== =======
</TABLE>

For the years ended December 31, 1996, 1997 and 1998, 1,288, 1,961 and 654
common stock options and warrants were excluded from the diluted computation
because their effect would be anti-dilutive.

Fair Value of Financial Instruments

Cash, accounts receivable, accounts payable and accrued expenses are
reflected in the accompanying financial statements at fair value due to the
short-term nature of those instruments. Available-for-sale investments are also
reflected at fair value in accordance with SFAS No. 115. The carrying amount of
long-term notes receivable and debt obligations approximate fair value at the
balance sheet dates.

Comprehensive Income

In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components in a full set of general-purpose
financial statements that is presented with equal prominence as other financial
statements. The Company's comprehensive income consists of net income and
unrealized holding gains on available-for-sale securities. The adoption of SFAS
No. 130 had no impact on total shareholders' equity and is presented on the
accompanying Consolidated Statements of Shareholders' Equity. During 1996 and
1997, there were no other comprehensive items. For the year ended December 31,
1998, the pre-tax unrealized gain on available-for-sale securities was $900 and
the deferred tax recorded on the unrealized gain was $315.

Segment Reporting

In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information."
This statement establishes additional standards for segment reporting in the
financial statements and is effective for fiscal years beginning after December
15, 1997. As the Company operates in one reportable segment, SFAS No. 131 had
no effect on the Company's financial statements.

F-11
<PAGE>

MEDQUIST INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

(in thousands, except per share amounts)

1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)

Reclassifications

Certain prior year amounts have been reclassified to conform to the
current year presentation.

2. ACQUISITIONS

Effective May 1, 1994, the Company purchased substantially all of the
assets of Transcriptions, Ltd. and Affiliates ("Transcriptions"), as well as
assumed certain liabilities for $16,930 in cash, including acquisition costs of
$322, plus the payment of Transcriptions' interest bearing debt of $5,816, plus
a deferred purchase price based on future operating results. Effective December
29, 1995, the Company fixed the deferred purchase price by agreeing to pay the
former owners of Transcriptions $18,375 in cash and issue 2,584 shares of
common stock (valued at $4,550 for financial reporting purposes) on August 31,
1996. The total purchase price for the Transcriptions acquisition was $44,797.
The acquisition has been accounted for using the purchase method with the
purchase price allocated to the fair value of the acquired assets and
liabilities.

In July 1996, MRC acquired all of the outstanding capital stock of Medical
Records Corp. The former shareholders of Medical Records Corp. received total
consideration of approximately $27,000, consisting of cash, notes and shares of
common stock. The acquisition was accounted for as a purchase, and the results
of Medical Records Corp. are included in the accompanying consolidated
financial statements from the date of the acquisition. In connection with the
acquisition, MRC assumed certain acquisition-related liabilities from Medical
Records Corp. The cost of the acquisition has been allocated on the basis of
the estimated fair market value of the assets acquired and liabilities assumed.
The allocation resulted in goodwill and other intangible assets of
approximately $33,015, which are being amortized over lives of 1.5 to 30 years.

The following unaudited pro forma summary presents the results of
operations of the Company as if the payment of the Transcriptions deferred
purchase price, which causes additional amortization and interest expense, and
the Medical Records Corp. acquisition had occurred on January 1, 1996.

Year Ended
December 31, 1996
------------------
Revenue ............................. $ 179,683
Net income .......................... 726
Net income per share ................ .03

On May 28, 1998, the Company completed the acquisition of approximately
94% of the outstanding capital stock of DDI and on July 31, 1998 acquired the
remaining shares. The Company issued 912 shares in exchange for all DDI shares.
The acquisition was accounted for using the pooling of interests method of
accounting. Accordingly, the Company's historical financial statements were
retroactively restated to reflect the combination with DDI.

On August 18, 1998, the Company completed the acquisition of Signal, which
was accounted for using the pooling of interests method of accounting. The
Company issued 619 shares of its common stock and approximately $1,400 in cash
to a dissenting Signal stockholder in exchange for all Signal capital stock.
The Company's historical financial statements have been restated to reflect the
combination with Signal. Signal and the Company elected to treat their merger
as an asset purchase for income tax purposes. The Company recorded a deferred
tax asset of $5,052 that was credited directly to shareholders' equity to
reflect the tax effect of goodwill that was recorded for income tax purposes.

F-12
<PAGE>

MEDQUIST INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

(in thousands, except per share amounts)

2. ACQUISITIONS -- (Continued)

On November 30, 1998, the Company completed the acquisition of TLF, which
was accounted for using the pooling of interests method. The Company issued 800
shares of its common stock for all TLF capital stock. Accordingly, the
Company's consolidated financial statements have been restated to reflect the
combination with TLF.

On September 18, 1998 the Company signed a definitive merger agreement
with MRC and on December 10, 1998, the merger was consummated. Pursuant to the
agreement, each share of MRC common stock and each share of MRC preferred stock
on an as-converted basis was exchanged for 0.5163 shares of the Company's
common stock. In total, the Company issued 8,662 shares of its Common stock to
the former MRC shareholders and options to purchase an aggregate of 1,543
shares to the former MRC option holders. The MRC merger was accounted for as a
pooling of interests. Accordingly, the Company's consolidated financial
statements have been restated to reflect the merger with MRC.

Revenue and net income as previously reported for the years ended December
31, 1996, 1997 and 1998 and as restated for the pooling of interests
transactions are as follows:

<TABLE>
<CAPTION>
Year Ended
December 31, 1998
-------------------------------------
Revenue Net Income
------------------ ----------------
<S> <C> <C>
MedQuist, as previously reported ......... $ 164,779(a) $ (305)(a)
DDI ...................................... 6,165 (b) 253(b)
Signal ................................... 5,281 (b) 543(b)
TLF ...................................... 3,688 (c) 522(c)
MRC ...................................... 91,742 (c) 2,172(c)
-------------- -------
Restated ................................. $ 271,655 $ 3,185
============== =======
</TABLE>

- ------------
(a) Includes (i) DDI and Signal amounts from July 1, 1998, (ii) TLF and MRC
amounts from October 1, 1998 and (iii) $18,221 of pre-tax transaction and
restructuring costs.
(b) Reflects amounts from January 1, 1998 to June 30, 1998.
(c) Reflects amounts from January 1, 1998 to September 30, 1998.

Year Ended
December 31, 1997
-------------------------
Revenue Net Income
----------- -----------
MedQuist, as previously reported ......... $ 84,495 $ 7,631
DDI ...................................... 10,026 616
Signal ................................... 9,294 1,100
TLF ...................................... 4,226 712
MRC ...................................... 108,117 (1,326)
--------- --------
Restated ................................. $ 216,158 $ 8,733
========= ========

F-13
<PAGE>

MEDQUIST INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

(in thousands, except per share amounts)

2. ACQUISITIONS -- (Continued)

Year Ended
December 31, 1996
-------------------------
Revenue Net Income
----------- -----------
MedQuist, as previously reported ......... $ 61,480 $ 3,477
DDI ...................................... 6,937 440
Signal ................................... 8,058 842
TLF ...................................... 3,934 882
MRC ...................................... 71,700 (1,060)
--------- --------
Restated ................................. $ 152,109 $ 4,581
========= ========

Prior to their mergers with the Company, Signal and TLF were taxed as "S"
Corporations. The above net income amounts do not include an aggregate "C"
Corporation income tax provision for Signal and TLF of approximately $637, $682
and $294 for the years ended December 31, 1996, 1997 and 1998, respectively
(see Note 1).

From 1996 through 1998, the Company completed several smaller acquisitions
accounted for using the purchase method. Pro forma information is not presented
as these acquisitions are not material to the Company. Certain of the
acquisitions provide for additional consideration to be paid if net future
billings to defined customers exceed specified contractual levels. These
provisions expire in 2000 and 2001, and are generally payable on a quarterly
basis. When the contingency is resolved and additional consideration is due,
the Company will account for the payments as additional purchase price and
amortize the additional amount paid over the remaining life of the asset.

3. PROPERTY AND EQUIPMENT

<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1998
----------- -----------
<S> <C> <C>
Furniture, equipment and software ......................... $ 46,608 $ 52,571
Leasehold improvements .................................... 1,341 1,553
--------- ---------
47,949 54,124
Less -- Accumulated depreciation and amortization ......... (22,507) (27,102)
--------- ---------
$ 25,442 $ 27,022
========= =========
</TABLE>

4. INTANGIBLE ASSETS

December 31,
-------------------------
1997 1998
----------- -----------
Goodwill ................................. $ 64,600 $ 67,109
Customer lists ........................... 21,552 22,640
Non-compete agreements ................... 3,405 3,405
Employee base ............................ 2,514 2,514
Other .................................... 137 150
-------- ---------
92,208 95,818
Less -- Accumulated amortization ......... (9,826) (13,602)
-------- ---------
$ 82,382 $ 82,216
======== =========

F-14
<PAGE>

MEDQUIST INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

(in thousands, except per share amounts)

5. ACCRUED EXPENSES:
December 31,
-----------------------
1997 1998
---------- ----------
Accrued payroll and related taxes ......... $ 7,175 $ 9,329
Restructuring charges ..................... 1,733 6,775
Other ..................................... 5,710 9,746
-------- --------
$ 14,618 $ 25,850
======== ========
6. LONG-TERM DEBT

<TABLE>
<CAPTION>
December 31,
------------------------
1997 1998
---------- -----------
<S> <C> <C>
Note payable to bank, repaid in 1998 .................................... $ 5,250 $ --
Note payable to former shareholders of Medical Records Corp.,
repaid in 1999 ......................................................... 2,000 2,000
Promissory notes, repaid or converted into common stock in 1998 ......... 5,085 --
Capital lease obligations ............................................... 1,786 468
Other ................................................................... 260 119
-------- --------
14,381 2,587
Less -- current portion ................................................. (6,792) (2,372)
-------- --------
$ 7,589 $ 215
======== ========
</TABLE>

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

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

For the year ended December 31, 1997 and 1998, the Company did not incur
any interest expense on the revolving credit facility, as there were no
borrowings on the credit facility. For the year ended December 31, 1996, the
Company incurred interest expense of $49 on the revolving credit facility, at a
weighted average interest rate of 9.78%. The highest outstanding borrowing
under the revolver during 1996 was $2,534.

In connection with the acquisition of Medical Records Corp., MRC entered
into a note agreement with a bank. The note was for $7,000 with an interest
rate of LIBOR plus 1.65%, which totaled approximately 7.3% at December 31,
1997. The note was secured by substantially all of MRC's assets. The agreement
required the payment of interest quarterly along with equal monthly principal
payments of $117 through September 2001. The note was repaid in 1998.

F-15
<PAGE>

MEDQUIST INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

(in thousands, except per share amounts)

6. LONG-TERM DEBT -- (Continued)

Also, in connection with the acquisition of Medical Records Corp., MRC
issued seven year, 8% unsecured notes to former shareholders of Medical Records
Corp. for $2,000. The notes require the payment of interest quarterly, with
annual principal payments of $500 beginning in July 2000. The Company repaid
these notes in 1999.

In January 1998, subordinated convertible 6% promissory notes in the
amount of $1,288 were converted into 172 shares of common stock at a conversion
price of $7.48 per share.

Long-term debt maturities as of December 31, 1998, are as follows:

1999 ................... $ 2,372
2000 ................... 138
2001 ................... 48
2002 ................... 29
-------
$ 2,587
=======

7. SHAREHOLDERS' EQUITY

In May 1996, MedQuist consummated a secondary public offering of its
common stock, selling 6,600 shares at a price of $5.67 per share. In June 1996,
the underwriters exercised their overallotment option for an additional 922
shares. After deducting the underwriters' discount and offering expenses, the
net proceeds to the Company were $39,442. In July 1996, MRC issued shares of
preferred stock for total consideration, net of offering expenses, of $29,272.
Such preferred stock was exchanged for MedQuist common in the merger (see Note
2).

In connection with the 1992 issuance of a senior subordinated note, the
Company sold to the holder for $1,100, warrants to purchase 1,732 shares of
Class A and 1,068 shares of Class B preferred stock at an exercise price of
$2.50 per share. Each share of Class A and Class B preferred stock was
convertible into one share of common stock. During 1994, the holder was issued
additional warrants and all warrant exercise prices were reset at $2.43, in
accordance with the antidilution provisions of the original warrant agreement.
Simultaneous with the closing of the secondary public offering, the company and
the holder agreed that the holder would exercise the warrants by tendering the
$7,000 principal amount of the senior subordinated notes and simultaneously
converting the shares of preferred stock received upon such exercise into 2,888
shares of common stock. As an inducement for the holder to exercise the
warrants and convert the preferred stock, the Company issued the holder 128
additional shares of common stock. This inducement, valued at $707 or $0.03 per
diluted share, has been recorded as a deduction from the net income available
to common shareholders in 1996.

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

In connection with the sale of equity securities to certain investors in
1992 and 1993, warrants to purchase common stock at $12.69 per share were
issued by MRC. The warrants were fully vested and exercisable at the date of
issuance and have terms which permit conversion into common stock at specified
prices during periods ranging from four to five years. The fair value of the
warrants at the date of grant was de minimis and therefore no compensation
expense has been recorded in the accompanying financial statements. During
1998, 157 warrants were exercised and 37 were cancelled. At December 31, 1998,
no warrants were outstanding.

F-16
<PAGE>

MEDQUIST INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

(in thousands, except per share amounts)

8. STOCK OPTION PLANS

The Company has six stock option plans that provide for the granting of
options to purchase shares of common stock to eligible employees (including
officers) and nonemployee directors of the Company. Options granted may be at
fair market value of the common stock or at a price determined by a committee
of the Company's board of directors. The stock options vest and are exercisable
over periods determined by the committee.

In February 1998, MRC granted 165 stock options to employees with exercise
prices below the fair market value of MRC's common stock. Accordingly, MRC
recorded deferred compensation totaling $1,078, of which $540 was amortized to
expense in 1998.

Information with respect to the Company's common stock options is as
follows:

<TABLE>
<CAPTION>
Option Price Aggregate
Shares Per Share Proceeds
--------- ----------------- ------------
<S> <C> <C> <C>
Outstanding, December 31, 1995 ......... 2,407 $1.14 - $8.31 $ 7,141
Granted ............................... 1,670 2.71 - 10.48 10,810
Exercised ............................. (98) 2.17 - 5.13 (220)
Canceled .............................. (156) 2.71 - 3.17 (271)
----- ----------------- --------
Outstanding, December 31, 1996 ......... 3,823 1.14 - 10.48 17,460
Granted ............................... 1,240 5.21 - 16.49 13,345
Exercised ............................. (533) 1.56 - 10.42 (1,018)
Canceled .............................. (193) 3.17 - 8.67 (412)
----- ----------------- --------
Outstanding, December 31, 1997 ......... 4,337 1.14 - 16.49 29,375
Granted ............................... 1,015 5.21 - 31.19 26,012
Exercised ............................. (760) 1.14 - 16.49 (1,887)
Canceled .............................. (159) 5.21 - 25.63 (391)
----- ----------------- --------
Outstanding, December 31, 1998 ......... 4,433 $ 1.34 - $31.19 $ 53,109
===== ================= ========
</TABLE>

At December 31, 1998, there were 2,172 exercisable options with an
aggregate exercise price of $16,204 and 273 additional options available for
grant under the plans.

The options outstanding and exercisable by exercise price at December 31,
1998 are as follows:

<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Range Of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- ------------------ ------------- ------------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C>
$0.00 - $3.11 463 5.9 $ 2.36 321 $ 2.20
3.12 - 6.23 845 7.0 4.56 488 4.42
6.24 - 9.35 833 5.9 8.12 650 8.17
9.36 - 12.47 935 7.4 10.48 567 10.48
12.48 - 15.59 524 9.0 14.34 144 14.26
15.60 - 18.71 11 8.8 15.90 2 15.94
18.72 - 21.83 52 9.4 21.43 -- --
21.84 - 24.95 116 9.6 23.11 -- --
24.96 - 28.06 43 9.6 25.63 -- --
28.07 - 31.18 611 9.7 31.13 -- --
--- --- -------- --- -------
4,433 7.5 $ 12.00 2,172 $ 7.46
===== === ======== ===== =======
</TABLE>

F-17

<PAGE>

MEDQUIST INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

(in thousands, except per share amounts)

8. STOCK OPTION PLANS -- (Continued)

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

Year Ended December 31,
------------------------------------
1996 1997 1998
---------- ---------- ----------
Net income:
As reported ................ $ 5,288 $ 8,733 $ 3,185
Pro forma .................. 4,454 7,613 1,705
Basic net income per share:
As reported ................ .22 .28 .10
Pro forma .................. .18 .24 .05
Diluted net income per share:
As reported ................ .20 .26 .09
Pro forma .................. .17 .23 .05

The fair value of the options granted is estimated using the Black-Scholes
option pricing model with the following assumptions: dividend yield of 0.0%,
volatility of 50.0%-55.0%, risk-free interest rates of 4.5% to 8.0%, and
expected lives of five to ten years. The above pro forma amounts may not be
indicative of future amounts because option grants prior to January 1, 1995
have not been included and because future option grants are expected.

9. INCOME TAXES
The income tax provision consists of the following:

Year Ended December 31,
----------------------------------
1996 1997 1998
-------- ---------- ----------
Current:
State and local ......... $ 79 $ 1,176 $ 1,596
Federal ................. 1,536 4,317 10,089
------ ------- --------
1,615 5,493 11,685
Deferred ................. 1,105 (200) (3,213)
------ ------- --------
$2,720 $ 5,293 $ 8,472
====== ======= ========

F-18
<PAGE>

MEDQUIST INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

(in thousands, except per share amounts)

9. INCOME TAXES -- (Continued)

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

<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Statutory federal income tax rate ....................... 34.0% 35.0% 35.0%
State income taxes, net of federal benefit .............. 3.0 3.0 3.7
Non-deductible merger costs ............................. -- -- 30.8
Impact of Signal and TLF "S" Corporation status ......... (8.0) (4.9) (4.4)
Other ................................................... 5.0 4.6 7.6
----- ----- -----
34.0% 37.7% 72.7%
===== ===== =====
</TABLE>

Signal and TLF were taxed as an "S" Corporation prior to their mergers
with MedQuist. Accordingly, the former Signal and TLF shareholders were taxed
individually on their companies' taxable income. Therefore, no tax provision is
included in the accompanying financial statements related to Signal and TLF's
net income prior to their mergers with the Company (see Note 1).

At December 31, 1997, the tax bases of Signal's net assets approximated
their reported amount for financial statement purposes. However, Signal and the
Company elected to treat their merger as an asset purchase for income tax
purposes. Accordingly, the Company recorded a deferred tax asset and an
increase in additional paid-in capital of $5,052, which represents the tax
effect of goodwill that was recorded for income tax purposes.

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

December 31,
-----------------------------
1997 1998
------------- -------------
Deferred tax asset:
Restructuring accruals ........... $ 602 $ 2,722
Carryforwards .................... 338 --
Accruals and reserves ............ 2,237 3,716
--------- ---------
$ 3,177 $ 6,438
========= =========
Deferred tax liability:
Accumulated depreciation ......... $ (1,475) $ (1,725)
Accumulated amortization ......... (3,518) 1,124
Deferred compensation ............ 210 289
Marketable security .............. -- (315)
Other ............................ (1,711) (1,354)
--------- ---------
$ (6,494) $ (1,981)
========= =========

10. COMMITMENTS AND CONTINGENCIES

Rent expense for operating leases was $5,053, $4,599 and $5,618 for the
years ended December 31, 1996, 1997 and 1998, respectively. Minimum annual
rental commitments for noncancelable operating leases having terms in excess of
one year as of December 31, 1998, are as follows:

F-19
<PAGE>

MEDQUIST INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

(in thousands, except per share amounts)

10. COMMITMENTS AND CONTINGENCIES -- (Continued)

1999 ......... $ 4,857
2000 ......... 3,590
2001 ......... 2,564
2002 ......... 1,616
2003 ......... 550
2004 ......... 29
--------
$ 13,206
========

The Company has an employment agreement, as amended, with a former Chief
Executive Officer who is currently a director of the Company. The agreement
entitles this individual to receive retirement benefits of $75 per year for
life plus certain other benefits, as defined. Included in other long-term
liabilities is $544 and $457at December 31, 1997 and 1998, respectively,
related to these retirement benefits. The employment agreement also requires
the Company to loan the former Chief Executive Officer's estate the necessary
funds to exercise any options owned by the individual at the time of his death.

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

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

11. EMPLOYEE BENEFIT PLANS

Savings Plan

The Company offers a savings plan under section 401(k) of the Internal
Revenue Code. This savings plan allows eligible employees to contribute up to
15% of their compensation on a pre-tax basis. The Company matches 50% of
participant's contribution, up to 5% of the participant's total compensation.
Effective October 1, 1996, the Company's matching contribution is made in the
form of the Company's common stock. The charge to operations for the Company's
matching contributions was $63, $80 and $125 in 1996, 1997 and 1998,
respectively. The Company issued approximately five thousand shares in both
1997 and 1998, in connection with the Company's matching contribution. The
Company did not issue shares in 1996 in connection with the savings plan.

MRC has two defined contribution 401(k) plans, covering substantially all
employees. Eligible employees of MRC may contribute certain amounts of their
annual compensation. During 1996, 1997 and 1998, MRC made matching
contributions to the plans of $171, $117 and $114, respectively.

Stock Purchase Plan

All full-time employees except those who own five percent or more of the
voting stock of the Company are eligible to participate in the Company's
Employee Stock Purchase Plan (SPP). The SPP provides that participants may
authorize the Company to withhold up to 10% of their earnings for the purchase
of the Company's common stock. The purchase price of the common stock is
determined by the Compensation Committee but shall not be less than eighty-five
percent of the fair market value of the common stock. Through the SPP, five and
15 shares of common stock have been purchased in 1997 and 1998, respectively.
In connection with the SPP, the Company did not issue any shares in 1996.

F-20
<PAGE>

MEDQUIST INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

(in thousands, except per share amounts)

12. QUARTERLY SUPPLEMENTAL FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, 1997: -------------------------------------------------------------
March 31 June 30 September 30 December 31
------------- ------------- -------------- ------------
<S> <C> <C> <C> <C>
Revenue .............................. $ 49,914 $ 52,999 $ 55,269 $ 57,976
Income before income taxes ........... 3,283 4,557 4,632 1,554
Net income ........................... 2,058 2,931 2,910 834
Basic net income per share ........... 0.07 0.10 0.10 0.02
Diluted net income per share ......... 0.06 0.09 0.09 0.02
</TABLE>

<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, 1998: -------------------------------------------------------------
March 31 June 30 September 30 December 31
------------- ------------- -------------- ------------
<S> <C> <C> <C> <C>
Revenue .............................. $ 63,915 $ 66,870 $ 69,005 $ 71,865
Income before income taxes ........... 6,214 6,327 6,155 (7,039)
Net income ........................... 4,004 3,969 3,776 (8,564)
Basic net income per share ........... 0.12 0.12 0.12 (0.24)
Diluted net income per share ......... 0.12 0.12 0.11 (0.24)
</TABLE>

F-21
<PAGE>
UNDERWRITING

MedQuist, the selling shareholders and the underwriters for the offering
named below have entered into an underwriting agreement with respect to the
shares being offered. Subject to certain conditions, each underwriter has
severally agreed to purchase the number of shares indicated in the following
table. Goldman, Sachs & Co., BancBoston Robertson Stephens Inc., Donaldson,
Lufkin & Jenrette Securities Corporation and Volpe Brown Whelan & Company, LLC
are the representatives of the underwriters.
<TABLE>
<CAPTION>
Underwriters Number of Shares
- ------------------------------------------------------------------ -----------------
<S> <C>
Goldman, Sachs & Co. ......................................... 950,869
BancBoston Robertson Stephens Inc. ........................... 950,866
Donaldson, Lufkin & Jenrette Securities Corporation .......... 950,866
Volpe Brown Whelan & Company, LLC ............................ 950,866
Advest, Inc. ................................................. 55,000
EVEREN Securities, Inc. ...................................... 120,000
Gruntal & Co., L.L.C. ........................................ 55,000
ING Baring Furman Selz LLC ................................... 120,000
J.C. Bradford & Co. .......................................... 55,000
Needham & Company, Inc. ...................................... 55,000
Punk, Ziegel & Company L.P. .................................. 55,000
The Robinson-Humphrey Company, LLC ........................... 55,000
Warburg Dillon Read LLC ...................................... 120,000
-------
Total ....................................................... 4,493,467
=========
</TABLE>
------------------------------------------

If the underwriters sell more shares than the total number set forth in
the table above, the underwriters have an option to buy up to an additional
674,020 shares from MedQuist to cover such sales. They may exercise that option
for 30 days. If any shares are purchased pursuant to this option, the
underwriters will severally purchase shares in approximately the same
proportion as set forth in the table above.

The following tables show the per share and total underwriting discounts
and commissions to be paid to the underwriters by MedQuist and the selling
shareholders. Such amounts are shown assuming both no exercise and full
exercise of the underwriters' option to purchase additional shares.

Paid by MedQuist
-------------------------------------
No Exercise Full Exercise
----------------- -----------------
Per Share $ 1.510 $ 1.510
Total $ 1,208,000.00 $ 2,225,770.20

Paid by the selling shareholders
-------------------------------------
No Exercise Full Exercise
----------------- -----------------
Per Share $ 1.510 $ 1.510
Total $ 5,577,135.17 $ 5,577,135.17

Shares sold by the underwriters to the public will initially be offered
at the initial public offering price set forth on the cover of this prospectus.
Any shares sold by the underwriters to securities dealers may be sold at a
discount of up to $0.91 per share from the initial public offering price. Any
such securities dealers may resell any shares purchased from the underwriters
to certain other brokers or dealers at a discount of up to $0.10 per share from
the initial public offering price. If all the shares are not sold at the
initial public offering price, the representatives may change the offering
price and the other selling terms.

MedQuist, the selling shareholders and certain officers and directors of
MedQuist, have agreed not to sell or dispose of or hedge any of their common
stock or securities convertible into or exchangeable for shares of common stock
during the period from the date of this prospectus continuing through the date
90 days after the date of this prospectus, without the prior written consent of
Goldman, Sachs & Co., except that MedQuist may issue common stock upon the
exercise of outstanding options or in connection with an acquisition. This
agreement does not apply to any existing employee benefit plans.

In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing

U-1
<PAGE>

transactions and purchases to cover positions created by short sales. Short
sales involve the sale by the underwriters of a greater number of shares than
they are required to purchase in the offering. Stabilizing transactions consist
of certain bids or purchases made for the purpose of preventing or retarding a
decline in the market price of the common stock while the offering is in
progress.

The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares
sold by or for the account of such underwriter in stabilizing or short covering
transactions.

These activities by the underwriters may stabilize, maintain or
otherwise affect the market price of the common stock. As a result, the price
of the common stock may be higher than the price that otherwise might exist in
the open market. If these activities are commenced, they may be discontinued by
the underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.

MedQuist and the selling shareholders estimate that their shares of the
total expenses of the offerings, excluding underwriting discounts and
commissions, will be approximately $57,805 and $266,876, respectively.

MedQuist and the selling shareholders have agreed to indemnify the
several underwriters against certain liabilities, including liabilities under
the Securities Act of 1933.

U-2
<PAGE>
================================================================================

No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the shares offered hereby, but only under circumstances
and in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.

----------------------------------------
TABLE OF CONTENTS

Page
-----------
Prospectus Summary .......................... 3
Risk Factors ................................ 6
Forward-Looking Statements .................. 8
Recent Developments ......................... 9
Use of Proceeds ............................. 9
Market for the Common Stock and Dividend
Policy ................................... 10
Capitalization .............................. 11
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ............................... 12
Business .................................... 17
Management .................................. 22
Description of Capital Stock ................ 24
Principal and Selling Shareholders .......... 26
U.S. Tax Consequences to Non-U.S. Holders
of Common Stock .......................... 28
Validity of the Common Stock ................ 30
Experts ..................................... 30
Where You Can Find Additional
Information .............................. 31
Index to Consolidated Financial
Statements ............................... F-1
Underwriting ................................ U-1

================================================================================
<PAGE>

================================================================================

4,493,467 Shares

MedQuist Inc.

Common Stock

--------------------------------

[GRAPHIC OMITTED]

--------------------------------
Goldman, Sachs & Co.

BancBoston
Robertson Stephens

Donaldson, Lufkin & Jenrette

Volpe Brown Whelan
& Company

Representatives of the Underwriters

================================================================================