UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended ~~June~~March 3031, ~~2006~~2009


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

For the transition period from to .

COMMISSION FILE NUMBER: 333-132641

SPHERIS INC.

(Exact name of registrant as specified in its charter)

Delaware		62-1805254
Delaware (State or other jurisdiction of incorporation or organization)		62-1805254 (I.R.S. Employer Identification No.)
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
9009 Carothers Pkwy, Suite C-3 Franklin, Tennessee (Address of principal executive offices)		37067 (Zip Code)
incorporation or organization)
720 Cool Springs Boulevard, Suite 200		37067
Franklin, Tennessee		(Zip Code)
(Address of principal executive offices)

(615) 261-1500
(Registrant’s telephone number, including area code)

Not applicable.
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or ~~for~~ for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ~~YES þ NO~~ Yes o No þ

~~Indicate~~(Note: byAs ~~check~~a ~~mark~~voluntary ~~whether~~filer, ~~the~~not ~~registrant~~subject isto athe ~~large~~filing ~~accelerated filer~~requirements, anthe ~~accelerated~~registrant ~~filer,~~filed all orreports aunder ~~non-accelerated~~Section 13 ~~filer.~~or ~~See~~15(d) ~~definition~~ of ~~“accelerated~~the ~~filer~~Exchange ~~and~~Act ~~large~~during ~~accelerated~~the ~~filer”~~preceding ~~in Rule~~12 ~~12b-2~~months of(or such shorter period that the ~~Exchange~~registrant ~~Act.~~was ~~(Check~~required ~~one~~to file such reports):.)

~~Large~~Indicate ~~accelerated~~by ~~filer~~check ~~o Accelerated~~mark ~~filer~~whether ~~o Non~~the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-~~accelerated~~T ~~filer~~(§232.405 þof this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes o No o

Indicate by check mark whether the registrant is a ~~shell~~large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. ~~(as~~See ~~defined~~the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act). (Check ~~YES o NO þ~~one):

AsLarge ofaccelerated ~~August 11,~~filer ~~2006,~~o ~~100%~~Accelerated offiler ~~Spheris~~o ~~Inc.’s~~Non-accelerated ~~common~~filer ~~stock~~þ(Do ~~outstanding~~not ~~was~~check ~~owned~~if bya ~~Spheris~~smaller ~~Holding II,~~reporting ~~Inc~~company.,) ~~its~~Smaller ~~sole~~reporting ~~stockholder.~~ company o

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

As of May 12, 2009, 100%, or 10 shares of Spheris Inc.’s common stock outstanding was owned by Spheris Holding II, Inc., its sole stockholder.

SPHERIS INC.

TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q

		Page
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements.		1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		1719
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		2425
Item 4.	Controls and Procedures		24
Item 4T.	Controls and Procedures		26
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings		2527
Item 1A.	Risk Factors		2527
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		2527
Item 3.	Defaults Upon Senior Securities		2527
Item 4.	Submission of Matters to a Vote of Security Holders		2527
Item 5.	Other Information		2527
Item 6.	Exhibits		2527
SIGNATURES			2628
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.1
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-31.2
EX-32 SECTION 906 CERTIFICATION OF THE CEO & CFO

WeUnless ~~are~~this aQuarterly ~~Delaware~~Report ~~corporation.~~on ~~Our~~Form ~~former~~10-Q ~~parent company, Spheris Holdings LLC~~ (this “~~Holdings~~Quarterly Report”), ~~was formed~~indicates onotherwise ~~July 31,~~or ~~2001. On August 17, 2001, Holdings was funded by institutional and individual~~the ~~investors~~context ~~and~~otherwise ~~purchased 100% of our outstanding stock from an unrelated third party. On June 18~~requires, ~~2003,~~ ~~we acquired all of~~ the ~~outstanding~~terms ~~stock of EDiX Corporation (~~“~~EDiX~~we”~~) from IDX Systems Corporation. On November 5~~, ~~2004~~“us”, ~~Spheris Holding, Inc. (~~“~~Spheris Holding~~our”), ~~an indirect subsidiary of Spheris Holding III, Inc. (~~“~~Spheris Holding III~~Company”), aor ~~company owned by affiliates of Warburg Pincus, LLC, TowerBrook Capital Partners, LLC (collectively the~~ “~~Parent Investors~~Spheris”) ~~and indirectly~~as byused ~~certain~~in ~~members of our senior management team, acquired us from Holdings (the~~this ~~“November 2004~~Quarterly ~~Recapitalization”).~~Report ~~Subsequent~~refer to ~~the November 2004 Recapitalization,~~ Spheris ~~Holding~~ ~~merged with and into us. On December 22, 2004, we acquired HealthScribe,~~ Inc. ~~(“HealthScribe”).~~ ~~On January 1, 2006, we merged EDiX, HealthScribe,~~ and ~~HealthScribe-Scribes Acquisition,~~its ~~Inc.,~~subsidiaries aas ~~wholly-owned subsidiary~~ of ~~HealthScribe, into Spheris Operations Inc., a wholly-owned subsidiary of ours. On~~ March 31, ~~2006, we acquired Vianeta Communications (“Vianeta”)~~2009. ~~Effective July 1, 2006, Spheris Operations Inc. was converted from a Tennessee~~ ~~corporation to a single member Tennessee limited liability company, and renamed Spheris Operations LLC (“Operations”).~~

We conduct our operations through our direct and indirect wholly-owned subsidiaries: Operations, Spheris Leasing LLC, Spheris Canada Inc., Spheris, India Private Limited (“SIPL”), and Vianeta.

PART I
FINANCIAL INFORMATION

Item 1. Financial Statements

Spheris Inc. Financial Statements For the Quarterly Period Ended ~~June~~March 3031, ~~2006~~2009

Condensed Consolidated Balance Sheets as of June 30, 2006 (Unaudited) and December 31, 2005			2
Condensed Consolidated Balance Sheets as of March 31, 2009 (Unaudited) and December 31, 2008			2
Condensed Consolidated Statements of Operations (Unaudited) for the three and six months ended June 30, 2006 and 2005			3
Condensed Consolidated Statements of Operations (Unaudited) for the three months ended March 31, 2009 and 2008			3
Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2006 and 2005			4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2009 and 2008			4
Notes to Condensed Consolidated Financial Statements (Unaudited)			5

Spheris Inc. Condensed Consolidated Balance Sheets (Amounts in Thousands, Except Share Amounts)

Condensed Consolidated Balance Sheets


	(Unaudited)
	March 31, 2009			December 31, 2008


Assets
Current assets
Unrestricted cash and cash equivalents	$	9,929		$	3,262
Restricted cash		1,197			309
Accounts receivable, net of allowance of $915 and $1,332, respectively		28,465			28,510
Deferred taxes		353			372
Prepaid expenses and other current assets		4,556			4,430

Total current assets		44,500			36,883

Property and equipment, net		11,848			12,309
Internal-use software, net		1,286			1,586
Goodwill		218,841			218,841
Other noncurrent assets		5,490			5,459

Total assets	$	281,965		$	275,078


Liabilities and stockholders’ equity
Current liabilities
Accounts payable	$	2,928		$	2,893
Accrued wages and benefits		10,432			8,545
Current portion of long-term debt and lease obligations		297			683
Other current liabilities		8,804			5,327

Total current liabilities		22,461			17,448

Long-term debt and lease obligations, net of current portion		197,998			195,499
Deferred tax liabilities		356			300
Other long-term liabilities		5,294			5,710

Total liabilities		226,109			218,957


Commitments and contingencies

Common stock, $0.01 par value, 100 shares authorized, 10 shares issued and outstanding		—			—
Other comprehensive loss		(2,563	)		(1,344	)
Contributed capital		111,727			111,680
Accumulated deficit		(53,308	)		(54,215	)

Total stockholders’ equity		55,856			56,121


Total liabilities and stockholders’ equity	$	281,965		$	275,078

(Amounts in Thousands)

	(Unaudited)
	June 30, 2006			December 31, 2005
Assets
Current assets
Unrestricted cash and cash equivalents	$	7,320		$	7,339
Restricted cash		876			1,320
Accounts receivable, net of allowance of $932 and $929, respectively		32,411			30,715
Deferred taxes		2,010			1,374
Other current assets		2,418			2,389
Total current assets		45,035			43,137
Property and equipment, net		8,503			9,152
Internally generated software, net		7,394			8,153
Customer contracts, net		37,940			45,799
Goodwill		219,300			211,116
Other noncurrent assets		3,438			2,929
Total assets	$	321,610		$	320,286
Liabilities and stockholders’ equity
Current liabilities
Accounts payable	$	2,192		$	3,030
Accrued wages and benefits		16,230			14,094
Current portion of long-term debt		750			750
Current portion of capital lease obligations		128			221
Other current liabilities		6,756			4,798
Total current liabilities		26,056			22,893
Long-term debt, net of current portion		194,006			195,702
Capital lease obligations, net of current portion		66			105
Deferred tax liabilities		7,869			10,375
Other long-term liabilities		456			524
Total liabilities		228,453			229,599
Common stock, $0.01 par value, 100 shares authorized, 10 shares issued and outstanding		—			—
Other comprehensive income		(176	)		(89	)
Contributed capital		110,559			102,301
Accumulated deficit		(17,226	)		(11,525	)
Total stockholders’ equity		93,157			90,687
Total liabilities and stockholders’ equity	$	321,610		$	320,286

See accompanying notes.

Spheris Inc. Condensed Consolidated Statements of Operations (Unaudited and Amounts in Thousands)

Condensed Consolidated Statements of Operations


	Three Months ended March 31,
	2009			2008

Net revenues	$	41,849		$	49,270

Direct costs of revenues (exclusive of depreciation and amortization below)		28,574			36,422
Marketing and selling expenses		611			1,310
General and administrative expenses		5,628			6,355
Depreciation and amortization		1,772			5,910
Restructuring charges		689			—

Total operating costs		37,274			49,997


Operating income (loss)		4,575			(727	)

Interest expense, net of income		4,370			4,930
Other (income) expense		(1,056	)		1,354


Net income (loss) before income taxes		1,261			(7,011	)


Provision for (benefit from) income taxes		354			(2,188	)


Net income (loss)	$	907		$	(4,823	)

(Unaudited and Amounts in Thousands)

	Three Months ended June 30,						Six Months ended June 30,
	2006			2005			2006			2005
Net revenues	$	52,335		$	53,059		$	104,308		$	106,403
Operating expenses:
Direct costs of revenues (exclusive of depreciation and amortization below)		38,493			39,251			77,294			78,524
Marketing and selling expenses		1,487			1,316			2,765			2,902
General and administrative expenses		4,728			4,076			8,919			9,300
Depreciation and amortization		6,566			6,636			13,123			13,404
Total operating costs		51,274			51,279			102,101			104,130
Operating income		1,061			1,780			2,207			2,273
Interest expense, net of income		5,156			5,186			10,296			10,066
Other (income) expense		(5	)		(20	)		62			(55	)
Net loss before income taxes		(4,090	)		(3,386	)		(8,151	)		(7,738	)
Benefit from income taxes		(1,303	)		(1,505	)		(2,450	)		(3,160	)
Net loss	$	(2,787	)	$	(1,881	)	$	(5,701	)	$	(4,578	)

See accompanying notes.

Spheris Inc. Condensed Consolidated Statements of Cash Flows (Unaudited and Amounts in Thousands)

Condensed Consolidated Statements of Cash Flows


	Three Months Ended March 31,
	2009			2008


Cash flows from operating activities:
Net income (loss)	$	907		$	(4,823	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		1,772			5,910
Amortization of acquired technology		—			162
Deferred taxes		75			(2,168	)
Change in fair value of derivative financial instruments		(527	)		1,255
Amortization of debt discounts and issuance costs		228			153
Other non-cash items		69			170
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable		45			(876	)
Prepaid expenses and other current assets		(1,014	)		(846	)
Accounts payable		141			(713	)
Accrued wages and benefits		1,887			(4,185	)
Other current liabilities		3,467			4,176
Other noncurrent assets and liabilities		(111	)		(386	)

Net cash provided by (used in) operating activities		6,939			(2,171	)


Cash flows from investing activities:
Purchases of property and equipment		(868	)		(1,272	)
Purchase and development of internal-use software		(156	)		(165	)

Net cash used in investing activities		(1,024	)		(1,437	)


Cash flows from financing activities:
Proceeds from debt		2,500			—
Payments on debt and lease obligations		(529	)		(16	)

Net cash provided by (used in) financing activities		1,971			(16	)


Effect of exchange rate change on cash and cash equivalents		(1,219	)		162

Net increase (decrease) in unrestricted cash and cash equivalents		6,667			(3,462	)
Unrestricted cash and cash equivalents, at beginning of period		3,262			7,195

Unrestricted cash and cash equivalents, at end of period	$	9,929		$	3,733

(Unaudited and Amounts in Thousands)

	Six Months Ended June 30,
	2006			2005
Cash flows from operating activities:
Net loss	$	(5,701	)	$	(4,578	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		13,123			13,404
Write-off of acquired technology		412			—
Deferred taxes		(2,885	)		(3,080	)
Amortization of debt discounts and issuance costs		341			281
Other non-cash items		(10	)		179
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable		(399	)		(4,020	)
Other current assets		(29	)		(213	)
Accounts payable		(993	)		457
Accrued wages and benefits		2,072			1,061
Other current liabilities		(542	)		(3,516	)
Other noncurrent assets and liabilities		(1,756	)		(619	)
Net cash provided by (used in) operating activities		3,633			(644	)
Cash flows from investing activities:
Purchases of property and equipment		(2,496	)		(2,768	)
Purchase of Vianeta, net of cash acquired		(8,199	)		—
Net cash used in investing activities		(10,695	)		(2,768	)
Cash flows from financing activities:
Payments on debt and capital leases		(508	)		(808	)
Debt issuance costs		(449	)		—
Capital contributions		8,000			350
Net cash provided by (used in) financing activities		7,043			(458	)
Net decrease in unrestricted cash and cash equivalents		(19	)		(3,870	)
Cash and cash equivalents, at beginning of period		7,339			6,051
Cash and cash equivalents, at end of period	$	7,320		$	2,181

See accompanying notes.

Spheris Inc. Notes to Condensed Consolidated Financial Statements March 31, 2009 (Unaudited)

Notes to Condensed Consolidated Financial Statements

June 30, 2006 (Unaudited)

1. Description of Business and Summary of Significant Accounting Policies

Organization and Operations

~~On August 17, 2001,~~ Spheris ~~Holdings~~Inc. ~~LLC~~ (“~~Holdings~~Spheris”), ~~entered~~is ~~into~~a anDelaware ~~agreement~~corporation. ~~whereby institutional~~On ~~and~~June 18, ~~individual~~2003, ~~investors~~Spheris ~~funded~~ Holdings ~~for the purpose of acquiring Spheris Inc.~~LLC (“~~Spheris~~Holdings”). Onacquired ~~that~~all ~~same date, Holdings entered into a separate agreement whereby Holdings purchased 100%~~ of the outstanding stock of ~~Spheris from Medscape Enterprises, Inc. During 2003, Holdings obtained additional funding from external creditors and existing investors to fund the purchase of~~ EDiX Corporation (“EDiX”). On December 22, 2004, Spheris acquired ownership of HealthScribe, Inc. and its subsidiaries (“HealthScribe”). On January 1, 2006, EDiX, ~~HealthScribe~~ and HealthScribe~~-Scribes~~ ~~Acquisition, Inc., a wholly-owned subsidiary of HealthScribe,~~ were merged into Spheris Operations Inc., a wholly-owned subsidiary of Spheris. On March 31, 2006, Spheris acquired Vianeta Communications (“Vianeta”). ~~See Note 2 below.~~ Effective July 1, 2006, Spheris Operations Inc. was converted from a Tennessee corporation to a single member Tennessee limited liability company, and renamed Spheris Operations LLC (“Operations”).

Spheris and its direct or indirect wholly-owned subsidiaries: Operations, Spheris Leasing LLC, Spheris Canada Inc., Spheris, India Private Limited (“SIPL”) and Vianeta (sometimes referred to collectively as the “Company”), provide ~~medical~~clinical ~~record~~documentation ~~transcription~~technology and ~~related~~ services to ~~approximately~~ ~~500~~ health systems, hospitals and group medical practices located throughout the United States. The Company receives medical dictation in digital format from subscribing physicians, ~~transcribes~~converts the dictation into text format, stores specific data elements from the records, then transmits the completed medical record to the originating physician in the prescribed format. As of ~~June~~March 3031, ~~2006~~2009, the Company employed approximately 54,500 skilled medical ~~transcriptionists~~ language specialists (“~~MTs~~MLS”) in the U.S., ~~Canada~~ and India. ~~Approximately~~More than 2,000 of these ~~MTs~~MLS ~~are located~~work inout of the Company’s ~~two~~ facilities in India, making the Company one of the largest global providers of ~~medical~~clinical ~~transcription~~documentation technology and services.

Reporting Unit and Principles of Condensed Consolidation

~~For~~Prior ~~all periods~~to ~~presented~~its inacquisition ~~the~~by ~~accompanying~~certain ~~interim~~institutional ~~condensed~~investors ~~financial~~in ~~statements~~November 2004 ~~and~~(the ~~footnotes~~“November 2004 Recapitalization”), Spheris iswas ~~the reporting~~a ~~unit.~~wholly-owned ~~All~~subsidiary ~~dollar~~of ~~amounts~~Holdings. ~~shown~~Subsequent into ~~these~~the ~~financial~~November 2004 ~~statements~~Recapitalization, ~~and~~Spheris ~~tables~~became ina ~~the~~wholly-owned ~~notes~~subsidiary ~~are in~~of ~~thousands~~Spheris ~~unless~~Holding ~~otherwise~~II, ~~noted~~Inc. (“Spheris ~~The~~Holding ~~condensed~~II”), ~~consolidated~~and ~~financial~~an ~~statements~~indirect ~~include~~wholly-owned ~~the financial~~subsidiary ~~statements~~ of Spheris Holding III, ~~including~~Inc. (“Spheris ~~its~~Holding ~~direct~~III”), oran ~~indirect~~entity ~~wholly-~~owned ~~subsidiaries.~~by ~~All~~affiliates of Warburg Pincus LLC and TowerBrook Capital ~~significant~~Partners ~~intercompany~~LLC ~~balances~~(together, the “Parent Investors”), CHS/Community Health Systems, Inc. (“CHS”), and indirectly ~~transactions~~by ~~have~~certain ~~been~~members ~~eliminated~~of inSpheris’ ~~consolidation~~management team.

~~Additionally,~~For all periods presented in the accompanying ~~interim~~ condensed consolidated financial statements ~~have been prepared by the Company without audit~~ and footnotes, inSpheris ~~the~~is ~~opinion of management, reflect all normal recurring adjustments necessary for a fair presentation of results for~~ the ~~unaudited~~reporting ~~interim periods presented~~unit. ~~Certain~~All ~~information~~dollar ~~and~~amounts ~~footnote~~shown ~~disclosures~~in ~~normally~~these ~~included~~condensed ~~in year-end~~consolidated financial statements ~~prepared~~and tables in ~~accordance~~the ~~with~~notes ~~generally~~are ~~accepted~~in ~~accounting~~thousands ~~principles~~unless ~~have~~otherwise ~~been condensed or omitted~~noted. The condensed ~~results~~consolidated offinancial ~~operations~~statements ~~for~~include the ~~interim~~financial ~~period~~statements ~~are~~of ~~not~~Spheris, ~~necessarily~~including ~~indicative~~its ofdirect ~~the~~or ~~results~~indirect towholly-owned ~~be obtained for the full fiscal year~~subsidiaries. ~~These~~All ~~condensed~~significant ~~consolidated financial~~intercompany ~~statements~~balances ~~should be read in conjunction with the audited financial statements~~ and ~~the~~ ~~notes~~transactions ~~thereto~~have ~~included~~been eliminated in ~~the Company’s Registration Statement on Form S-4 (Registration No~~consolidation. ~~333-132641).~~

~~Recent~~Additionally, ~~Accounting~~the ~~Pronouncements~~accompanying interim condensed consolidated financial statements have been prepared by the Company without audit and, in the opinion of management, reflect all normal recurring adjustments necessary for a fair presentation of results for the unaudited interim periods presented. Certain information and footnote disclosures normally included in year-end financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The results of operations for the interim period are not necessarily indicative of the results to be obtained for the full fiscal year. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the Securities and Exchange Commission (“SEC”).

FIN 48. In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 provides additional guidance for financial statement recognition of tax positions taken in tax returns. The interpretation is effective for fiscal years beginning after December 15, 2006. Management does not anticipate that the guidance in the interpretation will have a material affect on the Company’s consolidated financial position or results of operations.

SFAS No. 123(R). In December 2004, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payments” (“SFAS No. 123(R)”). SFAS No. 123(R) supersedes Accounting Principals Board No. 25 and requires companies to recognize compensation expense, using a fair-value based method, for costs related

Spheris Inc. Notes to Condensed Consolidated Financial Statements ~~June~~March 3031, ~~2006~~2009 (Unaudited)

toRecently ~~share-based~~Adopted ~~payments,~~Accounting ~~including stock options. SFAS No. 123(R) was~~Pronouncements effective in the first annual reporting period beginning after December 15, 2005. Under SFAS No. 123(R), the Company is required to determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost, and the transition method to be used at the date of adoption. The Company adopted SFAS No. 123(R) on January 1, 2006. However, as further discussed in Note 7, all share-based payments received by the Company’s employees, non-employee directors and other designated persons providing substantial services to the Company are based on equity instruments issued by the Company’s indirect parent, Spheris Holding III, Inc. (“Spheris Holding III”). The adoption of SFAS No. 123(R) has not had a material impact on the Company’s consolidated financial position or results of operations during the first six months of 2006.

SFAS No. 157. In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which establishes a framework for measuring fair value and expands fair value measurement disclosures. SFAS No. 157 applies to other accounting pronouncements that require or permit fair value measurements. SFAS No. 157 was effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In February 2008, the FASB issued Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157”, ~~Vianeta~~which ~~Acquisition~~delayed the effective date of SFAS No. 157 until fiscal years beginning after November 15, 2008 for certain nonfinancial assets and liabilities, except those that are measured at fair value in the financial statements on a nonrecurring basis. Effective January 1, 2008, the Company adopted the provisions of SFAS No. 157 related to financial assets and liabilities and to nonfinancial assets and liabilities measured at fair value on a recurring basis. Effective January 1, 2009, the Company adopted without material impact on its condensed consolidated financial statements the provisions of SFAS No. 157 related to nonfinancial assets and liabilities that are not required or permitted to be measured at fair value on a recurring basis, which include the following items: nonfinancial assets and liabilities measured at fair value in goodwill impairment testing, indefinite-lived intangible assets measured at fair value for impairment testing, nonfinancial long-lived assets measured at fair value for impairment testing, asset retirement obligations initially measured at fair value, and nonfinancial assets and liabilities initially measured at fair value pursuant to business combinations.

~~Operations,~~SFAS aNo. 141(R) ~~wholly-owned~~and ~~subsidiary~~FSP ofFAS ~~Spheris~~141(R)-1. In December 2007, ~~Spheris~~the ~~Merger~~FASB ~~Sub,~~issued ~~Inc~~SFAS No. 141(R), “Business Combinations” (“~~Merger~~SFAS ~~Sub~~No. 141(R)”). SFAS No. 141(R) retains the current purchase method of accounting for acquisitions, anbut requires a number of changes, including changes in the way assets ~~indirect~~and ~~wholly-owned~~liabilities ~~subsidiary~~are recognized in purchase accounting, as well as requiring the expensing of acquisition-related ~~Spheris~~costs ~~formed~~as incurred. Furthermore, SFAS No. 141(R) provides guidance for recognizing and measuring the ~~purpose~~goodwill ofacquired ~~being~~in a ~~party~~business combination and specifies what information to disclose to enable users of the ~~Merger~~financial statements to evaluate the nature and ~~(as~~financial ~~defined~~effects ~~below~~of a business combination. In April 2009, the FASB issued FSP FAS 141(R)-1, “Accounting for Assets Acquired and ~~Spheris~~Liabilities ~~Holding~~Assumed ~~III~~in a Business Combination That Arise from Contingencies” (“FSP FAS 141(R)-1”), anwhich ~~indirect~~amends ~~parent~~SFAS ofNo. 141(R) ~~Spheris~~by establishing a model to account for certain pre-acquisition contingencies. Under FSP FAS 141(R)-1, ~~entered~~an ~~into~~acquirer is required to recognize at fair value an asset acquired or a liability assumed in a business combination that ~~Agreement~~arises ~~and~~from ~~Plan~~a contingency if the acquisition-date fair value of ~~Merger~~that (asset or liability can be determined during the measurement period. If the acquisition-date fair value cannot be determined, then the acquirer should follow the recognition criteria in SFAS No. 5, “~~Agreement~~Accounting for Contingencies”), onand ~~December~~FASB Interpretation No. 1314, ~~2005~~“Reasonable ~~with~~Estimation ~~Vianeta~~of ~~and~~the ~~certain~~Amount of ~~its~~a Loss — ~~principal~~an ~~shareholders,~~interpretation ~~whereby~~of ~~Merger~~FASB ~~Sub~~Statement ~~would~~No. 5”. ~~merge~~SFAS ~~with~~No. 141(R) and ~~into~~FSP ~~Vianeta~~FAS 141(R)-1 became effective for the Company beginning January 1, ~~with~~2009, ~~Vianeta~~and will apply prospectively to business combinations ~~surviving~~completed ason aor ~~wholly-owned~~after ~~subsidiary~~that ofdate. ~~Operations~~The (impact of the ~~“Merger”)~~adoption of SFAS No. 141(R) ~~The~~and ~~Merger~~FSP ~~was~~FAS 141(R)-1 ~~consummated~~will depend on ~~March 31,~~ ~~2006~~the nature of acquisitions completed after the date of adoption.

~~The~~SFAS ~~Agreement~~No. 160. ~~provided~~In ~~for~~December 2007, ~~consideration~~the toFASB beissued ~~paid~~SFAS toNo. 160, ~~the~~“Noncontrolling ~~Vianeta~~Interests ~~shareholders~~in Consolidated Financial Statements — an amendment of ARB No. 51” (i“SFAS No. 160”). $8SFAS No.5 ~~million~~160 inestablishes ~~cash~~accounting ~~minus~~and anreporting ~~estimated~~standards ~~tax~~for ~~amount~~the ofnoncontrolling ~~$0.4 million;~~interest ~~(ii) 0.5 million~~in ~~shares~~a ofsubsidiary ~~Spheris Holding~~and ~~III~~for ~~common~~the ~~stock;~~deconsolidation ~~(iii)~~of $1a subsidiary.~~5 million~~ inSFAS ~~cash~~No. 160 asrequires ~~additional~~that ~~consideration~~earnings ~~for~~or ~~intellectual~~losses ~~property~~attributed ~~rights~~ to ~~Vianeta’s~~noncontrolling ~~technology~~interests ~~upon~~be ~~the~~reported ~~satisfaction~~as part of ~~certain~~consolidated ~~objectives~~earnings asrather ~~set~~than ~~forth~~as in a separate ~~schedule~~component toof ~~the~~income ~~Agreement;~~or ~~and~~expense. ~~(iv)~~SFAS No. a160 ~~cash~~became ~~payment~~effective ~~based~~for the Company on ~~software~~January 1, ~~sales~~2009. As toall ~~Vianeta~~of the Company’s ~~existing customer~~subsidiaries ~~pipeline~~are ~~not~~wholly-owned, tothe ~~exceed~~adoption $2of SFAS No.0 ~~million~~160 ~~upon~~did ~~the~~not ~~satisfaction~~have ofa material ~~certain~~impact ~~objectives~~on asthe ~~set forth~~Company’s inresults aof ~~schedule~~operations toor ~~the~~financial ~~Agreement~~position.

ToSFAS ~~fund~~No. 161. aIn ~~portion~~March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (“SFAS No. 161”). SFAS No. 161 requires entities that utilize derivative instruments to provide qualitative disclosures about their objectives and strategies for using such instruments, as well as any details of credit-risk-related contingent features contained within the ~~purchase~~derivative ~~price~~instruments. SFAS No. 161 requires disclosure of ~~Vianeta~~the amounts and location of derivative instruments included in an entity’s financial statements, ~~our~~as ~~current~~well ~~equity~~as ~~investors~~the ~~contributed~~accounting $8treatment of such instruments under FASB Statement No.0 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended ~~million~~(“SFAS inNo. 133”), ~~cash~~and ~~through~~the impact that hedges have on an ~~equity~~entity’s ~~investment~~financial toposition, ~~Spheris~~financial performance ~~Holding~~and ~~III~~cash flows. The Company adopted the provisions of SFAS No. 161 effective January 1, ~~which~~2009. ~~was~~Since ~~contributed~~SFAS toNo. 161 requires only additional disclosures concerning derivatives ~~Operations~~and hedging activities, the adoption of SFAS No. 161 did not affect the presentation of the Company’s results of operations or financial position. See “Fair Value of Financial Instruments” below for the Company’s disclosures about its derivative financial instruments.

An initial purchase price of $10.4 million, including transaction costs of $0.2 million, was allocated to the assets and liabilities acquired based on estimated fair values as of March 31, 2006. These assets and liabilities were reflected in the accompanying condensed consolidated balance sheet as of March 31, 2006, including allocations of $8.4 million to goodwill and $1.3 million to internally generated software. The preliminary purchase price allocation is subject to revision as target objectives are met and additional information becomes available. As of June 30, 2006, $0.5 million was included as a component of the Company’s restricted cash and current liabilities as a result of the Vianeta acquisition. Additionally, $0.3 million of the purchase price was assigned to the estimated fair value of acquired in-process research and development that had not yet reached technological feasibility and had no alternative use. In accordance with FASB Interpretation No. 4, “Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method,” this amount was immediately expensed in the Company’s condensed consolidated statement of operations upon the acquisition date. This charge is reflected in direct costs of revenues in the accompanying condensed consolidated statement of operations for the six-month period ended June 30, 2006.

3. Customer Contracts

The Company assigned a value to customer contracts in connection with its November 2004 Recapitalization and HealthScribe acquisition, both completed in 2004. Additionally, the Company assigned a value of $0.1 million for customer contracts acquired in connection with the Vianeta acquisition consummated on March 31, 2006. These contracts are being amortized over an expected life of four to five years.

Spheris Inc. Notes to Condensed Consolidated Financial Statements ~~June~~March 3031, ~~2006~~2009 (Unaudited)

~~The~~Recently ~~components~~Issued ofAccounting ~~the~~Pronouncements ~~Company’s~~Not ~~customer~~Yet ~~contracts were as follows (in thousands):~~Adopted

	June 30, 2006					December 31, 2005
	Gross Carrying		Accumulated			Gross Carrying		Accumulated
	Amount		Amortization			Amount		Amortization
Customer contracts	$	63,864	$	(25,924	)	$	63,754	$	(17,955	)

FSP FAS 107-1 and APB 28-1. In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 29-1”), which amends FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments” and APB Opinion No. 28, “Interim Financial Reporting”. FSP FAS 107-1 and APB 28-1 applies to all financial instruments within the scope of Statement 107 held by publicly traded companies, as defined by Opinion 28, and requires disclosures at interim reporting periods to provide qualitative and quantitative information about such financial instruments. FSP FAS 107-1 and APB 28-1 is effective for interim and annual periods ending after June 15, 2009. Early adoption is permitted for interim and annual periods ending after March 15, 2009, subject to the early adoption of FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”, and FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”. The Company has not yet fully evaluated the impact, if any, that the implementation of FSP FAS 107-1 and APB 28-1 will have on its results of operations or financial position.

~~Amortization~~Fair ~~expense~~Value ~~for~~of ~~customer~~Financial ~~contracts for the three and six months ended June 30, 2006 and~~Instruments ~~2005 was $4.0 million and $8.0 million, respectively. Estimated amortization expense for the five succeeding fiscal years is as follows (in thousands):~~

2006 (remainder)	$	8,053
2007		15,966
2008		13,921
2009		—
2010		—

The Company adopted the provisions of SFAS No. 157 as of January 1, 2008, for financial instruments. SFAS No. 157 establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into the following three levels:

4• Level 1 — observable inputs such as quoted prices in active markets. ~~Other~~• ~~Comprehensive~~Level ~~Loss~~ 2 — inputs other than quoted prices in active markets that are either directly or indirectly observable. • Level 3 — unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

~~Other~~As ~~comprehensive~~of ~~loss~~March 31, ~~was~~2009, asthe ~~follows~~Company held certain financial instruments that are required to be measured at fair value on a recurring basis. These included the Company’s Senior Subordinated Notes (as defined in ~~thousands~~Note 3): as well as derivative financial instruments utilized by the Company to mitigate risks related to interest rates and foreign currency exchange rates.

	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Net loss	$	(2,787	)	$	(1,881	)	$	(5,701	)	$	(4,578	)
Foreign currency translation gain (loss)		(203	)		67			(87	)		159
Comprehensive loss	$	(2,990	)	$	(1,814	)	$	(5,788	)	$	(4,419	)

The Company determines the fair value of its Senior Subordinated Notes through quoted prices in active markets. As a result, the Company has determined that its valuation of its Senior Subordinated Notes is classified in Level 1 of the fair value hierarchy. The Company’s Senior Subordinated Notes had a quoted market value of $46.3 million and $37.5 million at March 31, 2009 and December 31, 2008, respectively.

5The Company utilizes derivative financial instruments to reduce interest rate risks and to manage risk exposure to foreign currency changes. ~~Restructuring~~The Company records these derivatives in accordance with the provisions of SFAS No. 133, which established accounting and ~~Termination~~reporting ~~Benefits~~standards for derivative instruments and hedging activities. SFAS No. 133 requires all derivatives to be recognized in the statement of financial position and to be measured at fair value. Changes in the fair value of those instruments are reported in earnings or other comprehensive income depending on the use of the derivative and whether it qualifies for hedge accounting.

~~During~~The ~~2004,~~Company inhas ~~connection~~entered ~~with~~into ~~the~~certain ~~HealthScribe~~interest ~~acquisition,~~rate ~~the~~management ~~Company~~agreements ~~approved~~with a ~~plan~~single ofcounterparty ~~restructuring~~to reduce its exposure to ~~eliminate~~fluctuations ~~redundant~~in ~~positions~~market ~~for~~interest ~~the~~rates ~~newly~~under ~~combined~~its ~~company,~~senior ~~including~~secured ~~the~~credit ~~payment~~facilities. An event of updefault tounder ~~$1.8 million~~the Company’s senior credit facility agreement would create an event of ~~severance~~default under these interest rate management agreements, which may cause amounts due under these agreements to ~~impacted~~become ~~employees~~immediately due and payable. The ~~following~~Company’s ~~table~~accounting ~~summarizes~~for these ~~the~~derivative ~~activity~~financial ofinstruments did not meet the ~~2004~~hedge ~~restructuring~~accounting criteria under SFAS No. 133 and related ~~termination~~interpretations. ~~plan~~Accordingly, changes in fair value were included as ~~the~~a ~~result~~component of ~~the HealthScribe~~other ~~acquisition~~(income) expense ~~for~~in the ~~six~~accompanying ~~months~~condensed ~~ended~~consolidated ~~June 30,~~statements ~~2006~~of ~~(in thousands):~~operations.

	2004
	HealthScribe
	Acquisition Plan
Balance, December 31, 2005	$	526
Additions		—
Payments		(526	)
Balance, June 30, 2006	$	—

Spheris Inc. Notes to Condensed Consolidated Financial Statements ~~June~~March 3031, ~~2006~~2009 (Unaudited)

6The fair value of these interest rate management agreements is determined using valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This ~~Debt~~analysis considers the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of these interest derivatives are determined using the methodology of discounting the future expected cash flows on the instrument. The interest rates used in the calculation of projected cash flows are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities. To comply with the provisions of SFAS No. 157, the Company incorporates credit valuation adjustments to appropriately reflect nonperformance risk in the fair value measurements.

~~Outstanding~~Although ~~debt~~the ~~obligations~~Company has determined that the majority of the ~~Company~~inputs atused ~~June 30~~to value its interest derivatives fall within Level 2 of the fair value hierarchy, ~~2006~~the ~~and~~credit ~~December~~ valuation adjustments associated with its interest derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by its counterparties. However, as of March 31, ~~2005~~2009, ~~consisted~~the Company has assessed the significance of the impact of the credit valuation ~~following~~adjustments (on the overall valuation of its interest derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its interest derivatives. As a result, the Company has determined that its valuations for the interest derivatives in ~~thousands):~~their entirety are classified in Level 2 of the fair value hierarchy.

	June 30,			December 31,
	2006			2005
2004 Senior Facility, with fixed quarterly principal payments and unpaid balance due November 2010; interest payable periodically at variable rates. The interest rate was 9.11% and 8.2%, respectively, at June 30, 2006 and December 31, 2005	$	72,307		$	74,110
11.0% Senior Subordinated Notes, principal due at maturity in December 2012; interest payable semi-annually in June and December		122,449			122,342
		194,756			196,452
Less: Current portion of long-term debt obligations		(750	)		(750	)
Long-term portion of total debt obligations	$	194,006		$	195,702

Payments to SIPL are denominated in U.S. dollars. In order to hedge against fluctuations in exchange rates, SIPL maintains a portfolio of forward currency exchange contracts, which are transacted with a single counterparty. The Company’s accounting for these derivative financial instruments did not meet the hedge accounting criteria under SFAS No. 133 and related interpretations. Changes in fair value were included as a component of other (income) expense in the accompanying condensed consolidated statements of operations.

~~2004~~The ~~Senior~~Company ~~Facility~~determines the fair value of its foreign currency exchange contracts utilizing inputs for similar or identical assets or liabilities that are either readily available in public markets, can be derived from information available in publicly quoted markets or are quoted by counterparties to these contracts. The future value of each contract out to its maturity is calculated using observable market data, such as the foreign currency exchange rate forward curve. The present value of each contract is then determined by using discount factors based on the forward curve for the more liquid currency. To comply with the provisions of SFAS No. 157, the Company incorporates credit valuation adjustments to appropriately reflect nonperformance risk in the fair value measurements.

~~During~~Although ~~November 2004,~~ the Company ~~entered~~has ~~into~~determined athat ~~$100.0 million~~the ~~credit~~majority ~~facility, consisting~~ of ~~a $75.0 million term loan facility and a $25.0 million revolving credit facility (~~the ~~“2004~~inputs ~~Senior Facility”).~~used ~~The~~to ~~2004~~value ~~Senior~~its ~~Facility bears interest at prime or Eurodollar rates, at the Company’s~~foreign ~~option,~~currency ~~plus~~exchange ancontracts ~~applicable~~fall ~~margin~~within ~~based~~Level on2 ~~pricing~~of ~~criteria established in~~ the ~~2004~~fair ~~Senior~~value ~~Facility agreement.~~hierarchy, ~~The 2004 Senior Facility also charges 0.25% per annum on unused revolver commitment amounts. Interest on borrowings under~~ the ~~2004~~credit ~~Senior Facility is due on applicable Interest~~valuation ~~Payment~~adjustments ~~Dates~~associated ~~(as~~with ~~defined~~these inderivatives ~~the~~utilize ~~2004~~Level ~~Senior~~3 ~~Facility agreement)~~inputs, orsuch ~~may~~as beestimates ~~converted~~of ~~into~~current ~~revolving~~credit ~~loan~~spreads ~~borrowings~~to ~~until~~evaluate the ~~revolving~~likelihood ~~credit~~of ~~maturity~~default ~~date~~by onits ~~November 5, 2009~~counterparties. ~~The~~However, ~~2004 Senior~~as ~~Facility debt obligation in the accompanying condensed consolidated balance sheets includes accrued interest~~ of ~~$1.6 million at December~~ March 31, ~~2005.~~2009, Nothe ~~accrued~~Company ~~interest~~has ~~was~~assessed ~~outstanding under~~ the ~~2004~~significance ~~Senior~~of ~~Facility at June 30, 2006. Principal payments on~~ the ~~term~~impact ~~loan facility are payable quarterly through maturity~~ of the ~~2004~~credit ~~Senior~~valuation adjustments ~~Facility~~ on ~~November 5, 2010. Available borrowings under~~ the ~~revolver~~overall ~~portion~~valuation of ~~the~~its ~~2004~~derivative ~~Senior~~positions ~~Facility~~and ~~are~~has ~~reduced~~determined bythat ~~letters~~the of credit ~~issued~~valuation ~~under~~adjustments ~~the~~are ~~2004~~not ~~Senior~~significant ~~Facility.~~to ~~At June 30, 2006,~~ the ~~Company~~overall ~~had~~valuation ~~one letter~~ of ~~credit outstanding under~~ the ~~2004~~derivatives. ~~Senior~~As ~~Facility for~~ a result, ~~total~~the ~~of $1.6 million. The~~ Company’s ~~total capacity~~has ~~for~~determined ~~borrowings~~that ~~under~~its ~~the~~valuations ~~revolver~~for ~~portion of~~ the ~~2004~~foreign ~~Senior~~currency ~~Facility~~exchange ~~was $23.4 million~~contracts ~~during~~in ~~the~~their ~~second~~entirety ~~quarter~~are ofclassified ~~2006.~~in ~~However,~~Level ~~due~~2 ~~to covenant restrictions, available borrowings under the revolver portion~~ of the ~~2004~~fair ~~Senior~~value ~~Credit Facility were limited to $1~~hierarchy.~~8 million at June~~ ~~30, 2006.~~

InThe ~~connection with the borrowings under the 2004 Senior Facility, the~~ Company’s ~~incurred~~derivative ~~$0.2 million and $2.1 million in debt issuance costs and debt discounts, respectively. During the third quarter of 2005, the Company amended certain of the~~ financial ~~covenants~~instruments ~~contained~~measured inat ~~the~~fair ~~2004~~value ~~Senior Facility~~on ina anrecurring ~~effort~~basis ~~to provide sufficient flexibility for the Company to operate its business in~~and ~~continued~~recorded compliance with its covenants. In connection with this amendment, the Company incurred $0.3 million of debt issuance costs. The remaining balance of the issuance costs at June 30, 2006 of $0.5 million, net of accumulated amortization, was reflected in ~~other noncurrent assets on~~ the accompanying condensed consolidated balance ~~sheet~~sheets ~~and~~were ~~will continue to be amortized over the term of the debt. The remaining debt discount at June 30, 2006 of $1.6 million was reflected~~ as afollows: ~~reduction in the carrying amount of the debt.~~

The 2004 Senior Facility is secured by substantially all of the Company’s assets and is guaranteed by the Company’s direct parent, Spheris Holding II, Inc., and all of the Company’s subsidiaries, except for SIPL. The 2004 Senior Facility contains restrictive covenants regarding certain financial covenants and other operational items as defined in the 2004 Senior Facility agreement, including restricting the Company’s ability to declare and pay dividends or other distributions to Holdings.


	Classification in the
	Condensed Consolidated			December 31,
	Balance Sheets	March 31, 2009		2008
Interest rate management agreements	Other current liabilities	$	329	$	106
	Other long-term liabilities		1,928		2,360

	Total	$	2,257	$	2,466


Foreign currency exchange contracts	Other current liabilities	$	698	$	1,016

Spheris Inc. Notes to Condensed Consolidated Financial Statements ~~June~~March 3031, ~~2006~~2009 (Unaudited)

AsThe ~~of June 30,~~gains 2006, the Company believes it was in compliance with the financial covenants in its 2004 Senior Facility agreement. As of and for the period ended June 30, 2006, the 2004 Senior Facility agreement required that the Company comply with the following financial covenants: a minimum interest coverage ratio test (~~currently 1.5 to 1.0~~losses)~~, a capital expenditure test (currently not to exceed $13.5~~ ~~million~~from ~~per~~changes ~~year) and a maximum leverage ratio test (currently 6.25 to 1.0). These financial covenants will become more restrictive over time beginning~~ in ~~the~~fair ~~third quarter~~value of ~~2006. The Company is currently evaluating whether such additional restrictions and its anticipated future financial results will require~~ the Company’s toderivative ~~amend the~~ financial covenants for future periods or take other actions permitted by the 2004 Senior Facility agreement to maintain compliance with its existing financial covenants. Although the Company currently believes it will be able to obtain such an amendment or take other actions permitted by its 2004 Senior Facility agreement in the event the Company believes it necessaryinstruments, ~~there can be no assurance that the~~as ~~Company~~recorded ~~will be able to do so on terms that are acceptable to the Company or that the Company will remain~~ in ~~compliance with its financial covenants for future periods. In addition, if~~ the ~~Company defaults~~accompanying ~~under~~condensed ~~any~~consolidated statements of ~~its covenants~~operations, ~~there~~were ~~can~~as ~~be no assurance that the Company will be able to~~follows: ~~obtain waivers or amendments that will allow the Company to operate its business in accordance with its plans.~~

Senior Subordinated Notes



	Location of (Gain) Loss	Three Months Ended March 31,
	Recognized	2009			2008
Interest rate management agreements	Other (income) expense	$	(209	)	$	1,144
Foreign currency exchange contracts	Other (income) expense		(318	)		111


Total		$	(527	)	$	1,255

~~On December 22, 2004, the Company issued $125~~2.~~0 million~~ ofOther ~~11%~~Comprehensive ~~senior subordinated notes due 2012~~Loss (the “Senior Subordinated Notes”). These Senior Subordinated Notes bear interest at a fixed rate of 11.0% per annum. Interest is payable in semi-annual installments beginning on June 15, 2005 until maturity on December 15, 2012.

~~The~~Other ~~Company~~comprehensive ~~incurred~~loss $1.7 million and $2.9 million in debt issuance costs and debt discounts, respectively, in connection with closing on the Senior Subordinated Notes. These costs are being amortized as additional interest expense over the term of the Senior Subordinated Notes. The remaining balance of the issuance costs at June 30, 2006 of $1.8 million, net of accumulated amortization, was ~~reflected in other noncurrent assets on the accompanying condensed consolidated balance sheet. The remaining debt discount at June 30, 2006 of $2.6 million was reflected~~ as afollows: ~~reduction in the carrying amount of the Senior Subordinated Notes.~~

The Senior Subordinated Notes are junior to the obligations of the 2004 Senior Facility, but are senior to general purpose credit obligations of the Company. The Senior Subordinated Notes are guaranteed by our domestic operating subsidiaries. These Senior Subordinated Notes contain certain restrictive covenants that place limitations on the Company regarding incurrence of additional debt, payment of dividends and other items as specified in the indenture governing the Senior Subordinated Notes. The Senior Subordinated Notes are redeemable at the option of the Company subject to certain prepayment penalties and restrictions as set forth in the indenture governing the Senior Subordinated Notes.


	Three Months Ended March 31,
	2009			2008
Net income (loss)	$	907		$	(4,823	)
Foreign currency translation (loss) gain		(1,219	)		162


Other comprehensive loss	$	(312	)	$	(4,661	)

The Company completed the sale and issuance of the Senior Subordinated Notes in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”)3. ~~Pursuant to the terms of the registration rights agreement between~~Debt the Company and the noteholders, the Company was required to use its reasonable best efforts to file, and cause to become effective, a registration statement with the Securities and Exchange Commission (“SEC”) to exchange the Senior Subordinated Notes for a new issuance of identical debt securities that have been registered under the Securities Act. The Company filed the registration statement with the SEC on March 22, 2006, and it became effective on May 10, 2006. The exchange offer was completed during June 2006.

7.Outstanding ~~Stockholders’~~debt ~~Equity~~obligations of the Company at March 31, 2009 and December 31, 2008 consisted of the following:

During November 2004, Spheris Holding III approved the establishment of the Spheris Holding III, Inc. Stock Incentive Plan for issuance of stock to employees, non-employee directors and other designated persons providing substantial services to the Company. Approximately 14.6 million shares have been authorized for issuance under this plan. Shares are subject to restricted stock agreements and typically vest over a four-year period. As of June 30, 2006, an aggregate of approximately 14.3 million shares of restricted stock were issued and outstanding under the plan. As these shares were issued for services to be provided to the Company, compensation expense of $30,000 and $59,000, respectively, was reflected in the accompanying condensed consolidated statements of operations for


	March 31,			December 31,
	2009			2008
2007 Senior Credit Facility, net of discount, with principal due at maturity on July 17, 2012; interest payable periodically at variable rates. The weighted average interest rate was 3.9% at March 31, 2009	$	74,386		$	72,290
11.0% Senior Subordinated Notes, net of discount, with principal due at maturity in December 2012; interest payable semi-annually in June and December		123,297			123,208
Financed lease obligations		612			684

		198,295			196,182
Less: Current portion of long-term debt and financed lease obligations		(297	)		(683	)

Long-term debt and financed lease obligations, net of current portion	$	197,998		$	195,499

2007 Senior Credit Facility

In July 2007, the Company entered into a financing agreement (the “2007 Senior Credit Facility”), to replace the Company’s previous $100.0 million facility. The 2007 Senior Credit Facility consists of a term loan in the original principal amount of $70.0 million and a revolving credit facility in an aggregate principal amount not to exceed $25.0 million at any time outstanding. The revolving loans and the term loan bear interest at LIBOR plus an applicable margin or a reference bank’s base rate plus an applicable margin, at the Company’s option. Under the revolving credit facility, the Company may borrow up to the lesser of $25.0 million or a loan limiter amount, as defined in the 2007 Senior Credit Facility, less amounts outstanding under letters of credit.

Spheris Inc. Notes to Condensed Consolidated Financial Statements ~~June~~March 3031, ~~2006~~2009 (Unaudited)

~~the~~As ~~three~~of ~~and~~March 31, ~~six~~2009, ~~months~~the ~~ended~~Company ~~June~~had $5.7 ~~30,~~million ~~2006~~outstanding asunder ~~compared~~the ~~to compensation~~revolver ~~expense~~portion of ~~$8,000~~the 2007 ~~and~~Senior ~~$16~~Credit Facility. As a result,~~000,~~ the Company’s total remaining capacity for borrowings under the ~~three~~2007 ~~and~~Senior ~~six~~Credit ~~months~~Facility ~~ended~~was ~~June~~$19.3 ~~30,~~million ~~2005~~as of March 31, 2009. Capacity for ~~respectively~~borrowings may be limited in the future based on financial covenants described in the 2007 Senior Credit Facility.

8All unpaid principal amounts under the 2007 Senior Credit Facility are due at maturity on July 17, 2012. ~~Income~~Additionally, ~~Taxes~~the Company is required to perform annual excess cash flow calculations, as defined in the 2007 Senior Credit Facility, and to remit any applicable amounts to reduce the outstanding term loan balance. Based on the annual excess cash flow calculation for the year ended December 31, 2008, the Company remitted $0.4 million to pay down its debt balances following delivery of its year-end covenant compliance certificates. As a result, the Company classified this $0.4 million as a current portion of outstanding debt as of December 31, 2008. Interest payments under the 2007 Senior Credit Facility are due monthly or at other intervals not to exceed every three months, depending on the interest elections made by the Company. At March 31, 2009, there were no outstanding interest payments due under the 2007 Senior Credit Facility.

~~Income~~Under ~~taxes~~the ~~are~~2007 ~~accounted~~Senior ~~for~~Credit ~~under~~Facility, Operations is the ~~provisions~~borrower. The 2007 Senior Credit Facility is secured by substantially all of ~~SFAS~~the NoCompany’s assets and is guaranteed by Spheris, Spheris Holding II and all of Operations’ subsidiaries, except SIPL. ~~109~~ The 2007 Senior Credit Facility contains certain covenants which, ~~“Accounting~~among ~~for~~other ~~Income~~things, ~~Taxes”~~limit the incurrence of additional ~~(“SFAS~~indebtedness, ~~109”)~~investments, dividends, transactions with affiliates, asset sales, acquisitions, mergers and consolidations, liens and encumbrances and other matters customarily restricted in such agreements. ~~SFAS~~The ~~109~~2007 ~~requires~~Senior Credit Facility also contains customary events of default, the occurrence ~~Company~~of which could allow the collateral agent to ~~record~~declare ~~deferred~~any ~~income~~outstanding ~~taxes~~amounts ~~for~~to be immediately due and payable. The financial covenants contained in the ~~tax~~2007 ~~effect~~Senior ofCredit Facility ~~differences~~include ~~between~~(a) a ~~book~~maximum leverage test, (b) a minimum fixed charge coverage test and ~~tax~~(c) a ~~bases~~minimum earnings ofbefore ~~its~~interest, ~~assets~~taxes, depreciation and ~~liabilities~~amortization requirement, among others. Based on current operating results, the Company believes that covenant (c) will be the most challenging covenant to meet in future periods. These financial covenants will become more restrictive over time.

~~The~~Future ~~Company~~drawings ~~currently~~under ~~benefits~~the ~~from~~2007 ~~federal~~Senior ~~and~~Credit ~~state~~Facility ~~net~~will ~~operating~~be ~~loss~~available ~~carryforwards.~~only ~~The Company’s~~if, ~~consolidated~~among ~~federal~~other things, ~~net~~the ~~operating~~Company ~~loss~~is ~~carryforwards~~in ~~available~~compliance towith ~~reduce~~the ~~future~~financial ~~taxable income~~covenants ~~were $101.3 million~~ and ~~$104.4 million~~other atconditions ~~June 30, 2006 and December 31, 2005, respectively,~~required ~~and~~under ~~will~~the ~~begin~~2007 toSenior ~~expire~~Credit ~~in 2007~~Facility. The ~~Company’s~~2007 ~~state~~Senior ~~net~~Credit ~~operating~~Facility ~~loss~~also ~~carryforwards~~contains ~~at June 30,~~provisions ~~2006~~that ~~and~~provide ~~December 31,~~for ~~2005~~the ~~were $71.6 million and $77.4 million, respectively, with a portion expiring annually. The~~ Company’s utilization of ~~these~~equity ~~net~~cures ~~operating loss carryforwards are limited due to ownership changes that resulted~~ in ~~connection with previous transactions. In accordance with~~ the ~~provisions~~event of ~~SFAS No~~default. ~~109,~~ ~~the~~These ~~Company~~cures may ~~has~~not ~~recorded~~be autilized ~~valuation~~more ~~allowance~~than totwice ~~reduce~~in ~~its net~~any ~~deferred~~calendar ~~tax assets~~year, ~~including~~may ~~its~~not ~~net~~exceed ~~operating~~$5.0 million ~~loss~~per ~~carryforwards~~occasion, and to the ~~amount~~Company ~~that~~must ishave ~~more likely~~at ~~than~~least ~~not~~$7.5 million toin beavailability ~~realized.~~following To the ~~extent~~cure. ~~valuation~~The ~~allowance~~Company has iscommitments ~~released~~to ~~that~~fund ~~was recorded as~~ a ~~result of earlier transactions~~cure, ~~the~~if ~~offsetting~~any ~~credit~~are ~~will~~needed, berelated ~~recognized~~to ~~first~~covenant asfilings afor ~~reduction~~the to2009 fiscal ~~goodwill,~~year. ~~then~~The toCompany ~~other~~believes ~~intangible~~it ~~assets,~~was ~~and~~in ~~lastly~~compliance aswith athe ~~reduction~~financial covenants in the ~~current~~2007 ~~period’s income~~Senior ~~tax~~Credit ~~provisions.~~Facility Asas of ~~June~~March 3031, ~~2006,~~2009. Although the Company ~~had~~believes ~~recorded~~that ~~a reserve~~it ~~against~~will ~~the~~be ~~majority~~able ofto maintain ~~its~~continued ~~net~~compliance ~~operating~~with ~~loss~~its ~~carryforwards~~financial covenants, ~~resulting~~ inthere acan ~~tax~~be ~~effected~~no ~~valuation~~assurance ~~allowance of $33.2 million~~ that ~~is reflected as a~~the ~~reduction~~Company ofwill ~~net~~remain ~~deferred~~in ~~tax~~compliance ~~assets~~with on the ~~consolidated~~financial ~~balance~~covenants ~~sheet.~~for Infuture ~~addition~~periods or that, if the Company ~~has~~defaults ~~alternative~~under ~~minimum~~any ~~tax~~of ~~credits~~its ~~which~~covenants, dothe ~~not~~Company ~~have~~will anbe ~~expiration~~able ~~date~~to ~~and~~obtain ~~certain~~waivers ~~other~~or ~~federal~~amendments ~~tax credits~~ that will ~~begin~~allow the Company to ~~expire~~operate its business in ~~2014~~accordance with its plans.

~~The~~In ~~Company~~connection ~~recognized~~with athe borrowings under the 2007 Senior Credit Facility, the Company incurred $10.3 6 million and $21.51 million ~~income~~in ~~tax~~debt ~~benefit~~issuance ~~during~~costs ~~the~~and ~~three~~debt ~~and~~discounts, ~~six~~respectively. These costs are ~~months~~being ~~ended~~amortized ~~June 30,~~as ~~2006,~~additional ~~respectively,~~interest ~~compared~~expense toover athe $1term of the debt.5 The balance of the issuance costs at March ~~million~~31, ~~and~~2009 of $30.24 million, ~~income~~net ~~tax benefit~~of ~~during~~accumulated ~~the~~amortization, ~~same~~was ~~periods~~reflected in other ~~2005,~~noncurrent ~~respectively.~~assets ~~The change~~ in the ~~total~~accompanying ~~effective~~condensed ~~tax~~consolidated ~~rate was~~balance ~~due~~sheet. toThe ~~changes~~debt discount inat ~~the~~March 31, ~~expected~~2009 ~~utilization~~ of ~~net~~$0.9 million ~~operating~~was ~~loss~~reflected ~~carryforwards,~~ as ~~well~~a asreduction in the ~~expiration~~ ofcarrying ~~certain~~amount ~~tax~~of the ~~holidays~~debt atunder ~~our~~the ~~facilities~~2007 ~~located~~Senior inCredit ~~India~~Facility.

9.Senior ~~Commitments~~Subordinated ~~and Contingencies~~Notes

~~Litigation~~In December 2004, the Company issued $125.0 million of 11% senior subordinated notes due 2012 (the “Senior Subordinated Notes”). The Senior Subordinated Notes bear interest at a fixed rate of 11.0% per annum. Interest is payable in semi-annual installments through maturity on December 15, 2012.

The Company is subject to various claims and legal actions that arise in the ordinary course of business. In the opinion of management, any amounts for probable exposures are adequately reserved for in the Company’s condensed consolidated financial statements, and the ultimate resolution of such matters is not expected to have a material adverse effect on the Company’s financial position or results of operations.

Employment Agreements

The Company has employment agreements with certain members of senior management that provide for the payment to these persons of amounts equal to the applicable base salary, unpaid annual bonus and health insurance premiums over the applicable duration covered under the agreements in the event the employee’s employment is terminated without cause. The maximum unaccrued contingent liabilities under these agreements were $2.5 million and $2.3 million at June 30, 2006 and December 31, 2005, respectively.

10. Information Concerning Guarantor and Non-Guarantor Subsidiaries

All but one of the Company’s subsidiaries guarantee the 2004 Senior Facility and Senior Subordinated Notes (the “Guarantors”). Each of the Guarantors is 100% owned, directly or indirectly, by Spheris. Additionally, each of the guarantees is full and unconditional, and guaranteed by the Guarantors on a joint and several basis. SIPL does not guarantee the 2004 Senior Facility or the Senior Subordinated Notes (the “Non-Guarantor”). The condensed consolidating financial information includes certain allocations of revenues and expenses based on management’s best estimates, which are not necessarily indicative of financial position, results of operations and cash flows that these entities would have achieved on a stand alone basis.

Spheris Inc. Notes to Condensed Consolidated Financial Statements ~~June~~March 3031, ~~2006~~2009 (Unaudited)

The ~~following~~Company ~~unaudited~~incurred ~~condensed~~$1.9 million ~~consolidating~~and ~~schedules~~$2.9 million ~~present~~in ~~condensed~~debt ~~financial~~issuance ~~information of~~costs ~~Spheris~~and debt discounts, respectively, ~~the~~in ~~Guarantors~~connection ~~and~~with the ~~Non-Guarantor~~Senior Subordinated Notes. These costs are being amortized as additional interest expense over the term of ~~June~~the Senior Subordinated Notes. The remaining balance of the issuance costs at March 3031, ~~2006~~2009 ~~and~~of ~~December~~$1.1 31million, ~~2005~~net ~~and~~of ~~for~~accumulated amortization, was reflected in other noncurrent assets in the ~~three~~Company’s ~~and~~condensed ~~six~~consolidated ~~months~~balance ~~ended~~sheet. ~~June~~The remaining debt discount at March 3031, ~~2006~~2009 ~~and~~of ~~2005:~~$1.7 million was reflected as a reduction in the carrying amount of the Senior Subordinated Notes.

~~Condensed~~The ~~Consolidating~~Senior ~~Balance~~Subordinated ~~Sheet~~Notes are junior to the obligations of the 2007 Senior Credit Facility, but ~~(Unaudited~~are senior to general purpose credit obligations of the Company. The Senior Subordinated Notes are guaranteed by the Company’s domestic operating subsidiaries. The Senior Subordinated Notes contain certain restrictive covenants that place limitations on the Company regarding incurrence of additional debt, payment of dividends and ~~Amounts~~other items as specified in ~~Thousands)~~the indenture governing the Senior Subordinated Notes. Default under, and acceleration of amounts due on, the Company’s obligations under the 2007 Senior Credit Facility would create an event of default under the Senior Subordinated Notes, which would cause the notes to become due and payable immediately upon notice by the holders. The Senior Subordinated Notes are redeemable at the option of the Company subject to certain prepayment penalties and restrictions as set forth in the indenture governing the Senior Subordinated Notes.

	June 30, 2006
	Issuer				Non-
	(Spheris)		Guarantors		Guarantor			Eliminations			Consolidated
Assets
Current assets
Unrestricted cash and cash equivalents	$	—	$	6,228	$	1,092		$	—		$	7,320
Restricted cash		—		876		—			—			876
Accounts receivable, net of allowance		—		32,411		—			—			32,411
Intercompany receivables		64,419		33,312		6,761			(104,492	)		—
Deferred taxes		—		2,010		—			—			2,010
Other current assets		33		2,211		174			—			2,418
Total current assets		64,452		77,048		8,027			(104,492	)		45,035
Property and equipment, net		—		6,258		2,245			—			8,503
Internally generated software, net		—		7,394		—			—			7,394
Customer contracts, net		—		37,940		—			—			37,940
Goodwill		—		219,300		—			—			219,300
Investment in subsidiaries		305,285		—		—			(305,285	)		—
Other noncurrent assets		1,694		1,461		283			—			3,438
Total assets	$	371,431	$	349,401	$	10,555		$	(409,777	)	$	321,610
Liabilities and stockholders’ equity
Current liabilities
Accounts payable	$	—	$	1,787	$	405		$	—		$	2,192
Accrued wages and benefits		—		14,085		2,145			—			16,230
Intercompany payables		33,312		71,180		—			(104,492	)		—
Current portion of long-term debt		750		—		—			—			750
Current portion of capital lease obligations		—		128		—			—			128
Other current liabilities		610		5,999		147			—			6,756
Total current liabilities		34,672		93,179		2,697			(104,492	)		26,056
Long-term debt, net of current portion		194,006		—		—			—			194,006
Capital lease obligations, net of current portion		—		66		—			—			66
Deferred tax liabilities		—		8,036		(167	)		—			7,869
Other long-term liabilities		—		456		—			—			456
Total liabilities		228,678		101,737		2,530			(104,492	)		228,453
Stockholders’ equity		142,753		247,664		8,025			(305,285	)		93,157
Total stockholders’ equity		142,753		247,664		8,025			(305,285	)		93,157
Total liabilities and stockholders’equity	$	371,431	$	349,401	$	10,555		$	(409,777	)	$	321,610

4. Stockholders’ Equity

Subsequent to the November 2004 Recapitalization, Spheris Holding III approved the establishment of the Spheris Holding III, Inc. Stock Incentive Plan (the “Plan”) for issuance of common stock to employees, non-employee directors and other designated persons providing substantial services to the Company. As of March 31, 2009, 15.6 million shares have been authorized for issuance under the Plan. Shares are subject to restricted stock and stock option agreements and typically vest over a three or four-year period. As of March 31, 2009, an aggregate of 12.1 million shares of restricted stock and 2.3 million stock options were issued and outstanding under the Plan. Additionally, 0.1 million shares of Series A convertible preferred restricted stock have been issued by Spheris Holding III to the Company’s board members for services rendered. As these shares were issued for services to be provided to the Company, compensation expense of $0.1 million was reflected in general and administrative expenses in the accompanying condensed consolidated statements of operations for both the three months ended March 31, 2009 and 2008.

During October 2008, the Company entered into an agreement for health information processing services with Community Health Systems Professional Services Corporation, an affiliate of CHS, to provide clinical documentation technology and services to certain of its affiliated hospitals. In connection with entering into the agreement for health information processing services, Spheris Holding III issued warrants to CHS to purchase 14.3 million shares of common stock of Spheris Holding III upon the attainment of certain revenue milestones set forth in the warrants. Since the warrants were issued by Spheris Holding III in order to induce sales by the Company, the costs of the warrants subject to vesting are recognized over the period in which the revenue is earned and are reflected as a reduction of revenue. Accordingly, $8,000 of such costs is reflected as a reduction to net revenues in the accompanying condensed consolidated statement of operations for the three months ended March 31, 2009.

5. Income Taxes

Income taxes are accounted for under the provisions of SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). SFAS No. 109 generally requires the Company to record deferred income taxes for the tax effect of differences between book and tax bases of its assets and liabilities. In accordance with the provisions of SFAS No. 109, the Company records a valuation allowance to reduce its net deferred tax assets to the amount that is more likely than not to be realized. The valuation allowance decreased by $0.2 million in the three months ended March 31, 2009 and $0.1 million in the three months ended March 31, 2008. As of March 31, 2009, the Company’s valuation allowance that is reflected as a reduction to the carrying value of its net deferred tax balances was $43.2 million.

Spheris Inc. Notes to Condensed Consolidated Financial Statements ~~June~~March 3031, ~~2006~~2009 (Unaudited)

~~Condensed~~In ~~Consolidating~~the ~~Balance~~United ~~Sheet~~States, the Company currently benefits from federal and state net operating loss ~~(Amounts~~carryforwards. The Company’s consolidated federal net operating loss carryforwards available to reduce future taxable income were $103.6 million and $104.5 million at March 31, 2009 and December 31, 2008, respectively, and began to expire in ~~Thousands)~~2007. State net operating loss carryforwards at March 31, 2009 and December 31, 2008 were $66.2 million and $67.3 million, respectively, and began to expire in 2005. The majority of these federal and state net operating loss carryforwards are restricted due to limitations associated with ownership change, and as such, are fully reserved to reduce the amount that is more likely than not to be realized. In addition, the Company has alternative minimum tax credits which do not have an expiration date and certain other federal tax credits that will begin to expire in 2014.

	December 31, 2005
	Issuer				Non-
	(Spheris)		Guarantors		Guarantor			Eliminations			Consolidated
Assets
Current assets
Unrestricted cash and cash equivalents	$	1	$	6,820	$	518		$	—		$	7,339
Restricted cash		—		1,320		—			—			1,320
Accounts receivable, net of allowance		—		30,715		—			—			30,715
Intercompany receivables		60,624		22,829		7,256			(90,709	)		—
Deferred taxes		—		1,374		—			—			1,374
Other current assets		83		2,100		206			—			2,389
Total current assets		60,708		65,158		7,980			(90,709	)		43,137
Property and equipment, net		—		6,772		2,380			—			9,152
Internally generated software, net		—		8,153		—			—			8,153
Customer contracts, net		—		45,799		—			—			45,799
Goodwill		—		211,116		—			—			211,116
Investment in subsidiaries		296,740		—		—			(296,740	)		—
Other noncurrent assets		1,775		920		234			—			2,929
Total assets	$	359,223	$	337,918	$	10,594		$	(387,449	)	$	320,286
Liabilities and stockholders’ equity
Current liabilities
Accounts payable	$	—	$	2,044	$	986		$	—		$	3,030
Accrued wages and benefits		—		12,306		1,788			—			14,094
Intercompany payables		22,829		67,880		—			(90,709	)		—
Current portion of long-term debt		750		—		—			—			750
Current portion of capital lease obligations		—		221		—			—			221
Other current liabilities		611		3,815		372			—			4,798
Total current liabilities		24,190		86,266		3,146			(90,709	)		22,893
Long-term debt, net of current portion		195,702		—		—			—			195,702
Capital lease obligations, net of current portion		—		105		—			—			105
Deferred tax liabilities		—		10,551		(176	)		—			10,375
Other long-term liabilities		—		524		—			—			524
Total liabilities		219,892		97,446		2,970			(90,709	)		229,599
Stockholders’ equity		139,331		240,472		7,624			(296,740	)		90,687
Total stockholders’ equity		139,331		240,472		7,624			(296,740	)		90,687
Total liabilities and stockholders’ equity	$	359,223	$	337,918	$	10,594		$	(387,449	)	$	320,286

The Company recognized income tax expense of $0.4 million during the three months ended March 31, 2009, as compared to an income tax benefit of $2.2 million during the three months ended March 31, 2008. The change in the total effective tax rate for the three months ended March 31, 2009 as compared to the prior year period resulted primarily from the timing of the deduction for transaction related expenses and changes in valuation allowance amounts on the Company’s net deferred tax assets.

Spheris Holding III and related subsidiaries (the “filing group members”) file their U.S. federal and certain state income tax returns on a consolidated, unitary, combined or similar basis. To accurately reflect each filing group member’s share of consolidated tax liabilities on separate company books and records, on November 5, 2004, Spheris Holding III and each of its subsidiaries entered into a tax sharing agreement. Under the terms of the tax sharing agreement, each subsidiary of Spheris Holding III is obligated to make payments to Spheris Holding III equal to the amount of the federal and state income taxes that its subsidiaries would have owed if such subsidiaries did not file federal and state income tax returns on a consolidated, unitary, combined or similar basis. Likewise, Spheris Holding III may make payments to subsidiaries if it benefits from the use of a subsidiary loss or other tax benefit. The tax sharing agreement allows each subsidiary to bear its respective tax burden (or enjoy use of a tax benefit, such as a net operating loss) as if its return was prepared on a stand-alone basis. To date, no amounts have been paid under this agreement.

Operations pays certain franchise tax obligations on behalf of Spheris Holding III. Approximately $0.6 million of payments by Operations related to these taxes is reflected as a receivable due from affiliate and included as a component of prepaid expenses and other current assets in the accompanying condensed consolidated balance sheet as of March 31, 2009.

The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109” (“FIN No. 48”), effective January 1, 2007. The Company has analyzed filing positions for all federal, state and international jurisdictions for all open tax years where it is required to file income tax returns. Although the Company files tax returns in every jurisdiction in which it has a legal obligation to do so, it has identified the following as “major” tax jurisdictions, as defined in FIN No. 48: Tennessee, Michigan and Texas, as well as India. Within these major jurisdictions, the Company has tax examinations in progress related to transfer pricing rates for its Indian facilities, as discussed in Note 6, as well as significant federal and state net operating loss carryovers, for which the earliest open tax year is 1996. Based on the facts of these examinations, the Company believes that it is more likely than not that it will be successful in supporting its current positions related to the applicable filings. The Company believes that all income tax filing positions and deductions will be sustained upon audit and does not anticipate any adjustments resulting in a material adverse impact on the Company’s financial condition, results of operations or cash flow. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to FIN No. 48. In addition, the Company did not record a cumulative effect adjustment related to the adoption of FIN No. 48.

Spheris Inc. Notes to Condensed Consolidated Financial Statements ~~June~~March 3031, ~~2006~~2009 (Unaudited)

~~Condensed~~6. ~~Consolidating~~Commitments ~~Statement of Operations (Unaudited~~ and ~~Amounts in Thousands)~~Contingencies

	For the Three Months Ended June 30, 2006
	Issuer						Non-
	(Spheris)			Guarantors			Guarantor			Eliminations			Consolidated
Net revenues	$	—		$	52,335		$	4,055		$	(4,055	)	$	52,335
Operating expenses:
Direct costs of revenues (exclusive of depreciation and amortization below)		—			38,865			3,683			(4,055	)		38,493
Marketing and selling expenses		—			1,487			—			—			1,487
General and administrative expenses		25			4,703			—			—			4,728
Depreciation and amortization		—			6,373			193			—			6,566
Total operating costs		25			51,428			3,876			(4,055	)		51,274
Operating income (loss)		(25	)		907			179			—			1,061
Interest expense, net of income		3,942			1,216			(2	)		—			5,156
Other (income) expense		—			36			(41	)		—			(5	)
Net income (loss) before income taxes		(3,967	)		(345	)		222			—			(4,090	)
Provision for (benefit from) income taxes		(597	)		(716	)		10			—			(1,303	)
Net income (loss)	$	(3,370	)	$	371		$	212		$	—		$	(2,787	)

Litigation

~~Condensed~~On ~~Consolidating~~November 6, ~~Statement~~2007, the Company was sued for patent infringement by Anthurium Solutions, Inc. in the U.S. District Court for the Eastern District of ~~Operations~~Texas, alleging that the Company had infringed ~~(Unaudited~~and continues to infringe United States Patent No. 7,031,998 through the Company’s use of its Clarity technology platform. The complaint also alleges claims against MedQuist Inc. and ~~Amounts~~Arrendale Associates, inInc., ~~Thousands)~~and seeks injunctive relief and unspecified damages, including enhanced damages and attorneys’ fees. The Company timely filed its answer and a counterclaim seeking a declaratory judgment of non-infringement and invalidity. Although the Company currently believes these claims are without merit, the Company’s investigation of the claims is ongoing. The discovery phase of the litigation is ongoing, and the trial date is currently set for October 6, 2009. The Company plans to vigorously defend against the claim of infringement and pursue all available defenses.

	For the Three Months Ended June 30, 2005
	Issuer						Non-
	(Spheris)			Guarantors			Guarantor			Eliminations			Consolidated
Net revenues	$	—		$	53,059		$	4,440		$	(4,440	)	$	53,059
Operating expenses:
Direct costs of revenues (exclusive of depreciation and amortization below)		—			39,940			3,751			(4,440	)		39,251
Marketing and selling expenses		—			1,316			—			—			1,316
General and administrative expenses		25			4,051			—			—			4,076
Depreciation and amortization		—			6,509			127			—			6,636
Total operating costs		25			51,816			3,878			(4,440	)		51,279
Operating income (loss)		(25	)		1,243			562			—			1,780
Interest expense, net of income		5,086			104			(4	)		—			5,186
Other income		—			(16	)		(4	)		—			(20	)
Net income (loss) before income taxes		(5,111	)		1,155			570			—			(3,386	)
Provision for (benefit from) income taxes		(1,717	)		230			(18	)		—			(1,505	)
Net income (loss)	$	(3,394	)	$	925		$	588		$	—		$	(1,881	)

The Company is also subject to various other claims and legal actions that arise in the ordinary course of business. In the opinion of management, any amounts for probable exposures are adequately reserved for in the Company’s condensed consolidated financial statements, and the ultimate resolution of such matters is not expected to have a material adverse effect on the Company’s financial position or results of operations.

Employment Agreements

The Company has employment agreements with certain members of senior management that provide for the payment to these persons of amounts equal to the applicable base salary, unpaid annual bonus and health insurance premiums over the applicable periods specified in their individual employment agreements in the event the employee’s employment is terminated without cause or for certain other specified reasons. The maximum contingent liabilities, excluding any earned but unpaid bonuses accrued in the Company’s condensed consolidated financial statements, under these agreements were $1.5 million and $1.6 million at March 31, 2009 and December 31, 2008, respectively.

Tax Assessment

SIPL has received notification of a tax assessment resulting from a transfer pricing tax audit by Indian income tax authorities amounting to 52.2 million Rupees (approximately $1.0 million), including penalties and interest, for the fiscal tax period ended March 31, 2004 (the “2004 Assessment”). In January 2007, the Company filed a formal appeal with the India Commissioner of Income Tax. Prior to resolution of the Company’s appeals process, the Indian income tax authorities have required the Company to make advance payments toward the 2004 Assessment of approximately $0.8 million. Any amounts paid by the Company related to the 2004 Assessment are subject to a claim by the Company for reimbursement against the HealthScribe acquisition escrow funds. Accordingly, the Company has recorded the advance payments as receivables from the escrow funds, which are reflected as a component of prepaid expenses and other current assets in the accompanying condensed consolidated balance sheet as of March 31, 2009.

During the fourth quarter of 2008, SIPL received notification of a tax assessment from a transfer pricing tax audit by Indian income tax authorities amounting to 40.6 million Rupees (approximately $0.8 million), including penalties and interest, for the fiscal tax period ended March 31, 2005 (the “2005 Assessment”). In December 2008, the Company filed a formal appeal with the India Commissioner of Income Tax. Prior to resolution of the Company’s appeals process, the Company was required to provide a bank guarantee in January 2009 for the full amount of the 2005 Assessment. The guarantee amount is classified in restricted cash in the accompanying condensed consolidated balance sheet as of March 31, 2009. Approximately $0.6 million of the 2005 assessment is subject to a claim for reimbursement against the HealthScribe acquisition escrow funds.

Spheris Inc. Notes to Condensed Consolidated Financial Statements ~~June~~March 3031, ~~2006~~2009 (Unaudited)

~~Condensed~~The ~~Consolidating~~Company ~~Statement~~intends ofto ~~Operations~~vigorously pursue all avenues with the Indian taxing authorities, legal and ~~(Unaudited~~administrative agencies, and ~~Amounts~~if necessary, the Indian courts to rescind the assessments. If the assessments were brought forward from March 31, 2005 through March 31, 2009, a reasonable estimate of additional liability could range from zero to $4.1 million, contingent upon the final outcome of the claim. Payment of such amounts would also result in ~~Thousands)~~potential credit adjustments to the Company’s U.S. federal tax returns. The Company currently believes that it is more likely than not that it will be successful in supporting its position relating to these assessments. Accordingly, in accordance with FIN No. 48, the Company has not recorded any accrual for contingent liabilities associated with the tax assessments as of March 31, 2009 or December 31, 2008.

	For the Six Months Ended June 30, 2006
	Issuer						Non-
	(Spheris)			Guarantors			Guarantor			Eliminations			Consolidated
Net revenues	$	—		$	104,308		$	8,470		$	(8,470	)	$	104,308
Operating expenses:
Direct costs of revenues (exclusive of depreciation and amortization below)		—			78,171			7,593			(8,470	)		77,294
Marketing and selling expenses		—			2,765			—			—			2,765
General and administrative expenses		58			8,861			—			—			8,919
Depreciation and amortization		—			12,749			374			—			13,123
Total operating costs		58			102,546			7,967			(8,470	)		102,101
Operating income (loss)		(58	)		1,762			503			—			2,207
Interest expense, net of income		7,772			2,532			(8	)		—			10,296
Other expense		—			44			18			—			62
Net income (loss) before income taxes		(7,830	)		(814	)		493			—			(8,151	)
Provision for (benefit from) income taxes		(1,043	)		(1,412	)		5			—			(2,450	)
Net income (loss)	$	(6,787	)	$	598		$	488		$	—		$	(5,701	)

7. Related Party Transactions

~~Condensed~~On ~~Consolidating~~October 3, ~~Statement~~2008, Operations entered into an agreement for health information processing services with Community Health Systems Professional Services Corporation, an affiliate of ~~Operations~~CHS, to provide ~~(Unaudited~~clinical documentation technology and ~~Amounts~~services to certain of its affiliated hospitals. The initial term of the agreement is five years, and unless terminated in ~~Thousands)~~accordance with the terms of such agreement, will be automatically extended for additional successive one-year periods.

	For the Six Months Ended June 30, 2005
	Issuer						Non-
	(Spheris)			Guarantors			Guarantor			Eliminations			Consolidated
Net revenues	$	—		$	106,403		$	8,709		$	(8,709	)	$	106,403
Operating expenses:
Direct costs of revenues (exclusive of depreciation and amortization below)		—			79,864			7,369			(8,709	)		78,524
Marketing and selling expenses		—			2,902			—			—			2,902
General and administrative expenses		50			9,250			—			—			9,300
Depreciation and amortization		—			13,157			247			—			13,404
Total operating costs		50			105,173			7,616			(8,709	)		104,130
Operating income (loss)		(50	)		1,230			1,093			—			2,273
Interest expense, net of income		9,955			120			(9	)		—			10,066
Other (income) expense		—			(70	)		15			—			(55	)
Net income (loss) before income taxes		(10,005	)		1,180			1,087			—			(7,738	)
Provision for (benefit from) income taxes		(3,381	)		235			(14	)		—			(3,160	)
Net income (loss)	$	(6,624	)	$	945		$	1,101		$	—		$	(4,578	)

In connection with entering into the agreement for health information processing services, CHS became a minority owner in Spheris Holding III, the Company’s indirect parent. Additionally, Spheris Holding III issued warrants to CHS to purchase shares of common stock of Spheris Holding III upon the attainment of certain revenue milestones set forth in the warrants. Also in connection with entering into the agreement for health information processing services, CHS acquired the right to appoint two members to the Company’s board of directors. Simultaneous with the closing of the transaction, CHS appointed two of its senior executives to the Company’s board of directors, James W. Doucette and Martin G. Schweinhart, and Wayne T. Smith, Chairman, President and Chief Executive Officer of CHS, stepped down from the Company’s board of directors.

During both the three months ended March 31, 2009 and 2008, the Company provided clinical documentation technology and services to CHS in the ordinary course of business at prices and on terms and conditions that the Company believes are the same as those that would result from arm’s-length negotiations between unrelated parties. The Company recognized net revenues from this customer of $1.4 million and $0.4 million during the three months ended March 31, 2009 and 2008, respectively, in the accompanying condensed consolidated statements of operations.

8. Restructuring Charges

During October 2008, the Company commenced a restructuring plan to effect changes in both the Company’s management structure and the nature and focus of operations. In accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” the Company initially recognized $0.5 million in charges related to this restructuring plan during the fourth quarter of 2008. As a continuation of this plan, during January 2009, the Company eliminated a significant portion of its U.S-based administrative and corporate workforce, recognizing an additional $0.7 million in restructuring charges, which were reflected in the accompanying condensed consolidated statement of operations for the three months ended March 31, 2009.

The following table sets forth the activity for accrued restructuring charges, included in other current liabilities in the accompanying condensed consolidated balance sheets:


	Personnel
Balance at December 31, 2008	$	484
Restructuring charges		689
Cash payments		(438	)

Balance at March 31, 2009	$	735

During 2009, the Company expects to incur up to $0.5 million of additional restructuring charges, including one-time termination benefits and other restructuring related charges. The Company’s estimates of future liabilities may change, requiring the Company to record additional restructuring charges or reduce the amount of liabilities recorded.

Spheris Inc. Notes to Condensed Consolidated Financial Statements ~~June~~March 3031, ~~2006~~2009 (Unaudited)

~~Condensed~~9. ~~Consolidating~~Information ~~Statement~~Concerning ofGuarantor ~~Cash Flows (Unaudited~~ and ~~Amounts~~Non-Guarantor ~~in Thousands)~~Subsidiaries

	For the Six Months Ended June 30, 2006
	Issuer						Non-
	(Spheris)			Guarantors			Guarantor			Eliminations			Consolidated
Cash flows from operating activities:
Net cash provided by operating activities	$	824		$	1,996		$	813		$	—		$	3,633
Net cash provided by operating activities		824			1,996			813			—			3,633
Cash flows from investing activities:
Purchases of property and equipment		—			(2,257	)		(239	)		—			(2,496	)
Investment in affiliates		(8,000	)		—			—			8,000			—
Purchase of Vianeta, net of cash acquired		—			(8,199	)		—			—			(8,199	)
Net cash used in investing activities		(8,000	)		(10,456	)		(239	)		8,000			(10,695	)
Cash flows from financing activities:
Payments on debt and capital leases		(376	)		(132	)		—			—			(508	)
Contributed capital		8,000			8,000			—			(8,000	)		8,000
Debt issuance costs		(449	)		—			—			—			(449	)
Net cash provided by financing activities		7,175			7,868			—			(8,000	)		7,043
Net increase (decrease) in unrestricted cash and cash equivalents		(1	)		(592	)		574			—			(19	)
Cash and cash equivalents, at beginning of period		1			6,820			518			—			7,339
Cash and cash equivalents, at end of period	$	—		$	6,228		$	1,092		$	—		$	7,320

All but one of the Company’s subsidiaries guarantee the Senior Subordinated Notes (the “Guarantors”). Each of the Guarantors is 100% owned, directly or indirectly, by Spheris. Additionally, each of the guarantees is full and unconditional, and guaranteed by the Guarantors on a joint and several basis. SIPL does not guarantee the Senior Subordinated Notes (the “Non-Guarantor”). The condensed consolidating financial information includes certain allocations of revenues and expenses based on management’s best estimates, which are not necessarily indicative of financial position, results of operations and cash flows that these entities would have achieved on a stand alone basis.

The following unaudited condensed consolidating schedules present condensed financial information of Spheris, the Guarantors and the Non-Guarantor as of March 31, 2009 and December 31, 2008 and for the three months ended March 31, 2009 and 2008:

Condensed Consolidating Balance Sheet
(Unaudited and Amounts in Thousands)

March 31, 2009

Issuer

Non-

(Spheris)

Guarantors

Guarantor

Eliminations

Consolidated

Assets

Current assets

Unrestricted cash and cash equivalents

7,985

1,939

—

9,929

Restricted cash

—

309

888

—

1,197

Accounts receivable, net of allowance

—

28,465

—

28,465

Intercompany receivables

—

139,899

5,980

(145,879

)

—

Deferred taxes

—

353

—

353

Prepaid expenses and other current assets

—

3,337

1,219

—

4,556

Total current assets

179,995

10,379

(145,879

)

44,500

Property and equipment, net

—

9,653

2,195

—

11,848

Internal-use software, net

—

1,286

—

1,286

Goodwill

—

218,841

—

218,841

Investment in subsidiaries

305,285

—

(305,285

)

—

Other noncurrent assets

1,132

3,461

897

—

5,490

Total assets

306,422

413,236

13,471

(451,164

)

281,965

Liabilities and stockholders’ equity

Current liabilities

Accounts payable

—

2,666

262

—

2,928

Accrued wages and benefits

—

7,749

2,683

—

10,432

Intercompany payables

139,899

5,980

—

(145,879

)

—

Current portion of long-term debt and lease obligations

—

297

—

297

Other current liabilities

4,010

3,831

963

—

8,804

Total current liabilities

143,909

20,523

3,908

(145,879

)

22,461

Long-term debt and lease obligations, net of current portion

123,297

74,701

—

197,998

Deferred tax liabilities

—

619

(263

)

—

356

Other long-term liabilities

—

5,294

—

5,294

Total liabilities

267,206

101,137

3,645

(145,879

)

226,109

Stockholders’ equity

39,216

312,099

9,826

(305,285

)

55,856

Total stockholders’ equity

39,216

312,099

9,826

(305,285

)

55,856

Total liabilities and stockholders’ equity

306,422

413,236

13,471

(451,164

)

281,965

Spheris Inc. Notes to Condensed Consolidated Financial Statements ~~June~~March 3031, ~~2006~~2009 (Unaudited)

Condensed Consolidating ~~Statement~~Balance ~~of Cash Flows~~Sheet (~~Unaudited and~~ Amounts in Thousands)

	For the Six Months Ended June 30, 2005
	December 31, 2008
	Issuer						Non-
	(Spheris)			Guarantors			Guarantor			Eliminations			Consolidated
Cash flows from operating activities:
Assets
Net cash provided by (used in) operating activities	$	51		$	(816	)	$	121		$	—		$	(644	)
Current assets
Net cash provided by (used in) operating activities		51			(816	)		121			—			(644	)
Unrestricted cash and cash equivalents	$	1		$	952		$	2,309		$	—		$	3,262
Cash flows from investing activities:
Restricted cash		—			309			—			—			309
Purchases of property and equipment		—			(2,388	)		(380	)		—			(2,768	)
Accounts receivable, net of allowance		—			28,510			—			—			28,510
Net cash used in investing activities		—			(2,388	)		(380	)		—			(2,768	)
Intercompany receivables		—			141,074			6,309			(147,383	)		—
Cash flows from financing activities:
Deferred taxes		—			—			372			—			372
Payments on debt and capital leases		(399	)		(409	)		—			—			(808	)
Prepaid expenses and other current assets		—			2,854			1,576			—			4,430
Capital contributions		350			—			—			—			350
Total current assets		1			173,699			10,566			(147,383	)		36,883
Net cash used in financing activities		(49	)		(409	)		—			—			(458	)
Property and equipment, net		—			9,969			2,340			—			12,309
Net increase (decrease) in unrestricted cash and cash equivalents		2			(3,613	)		(259	)		—			(3,870	)
Internal-use software, net		—			1,586			—			—			1,586
Cash and cash equivalents, at beginning of period		—			4,770			1,281			—			6,051
Goodwill		—			218,841			—			—			218,841
Cash and cash equivalents, at end of period	$	2		$	1,157		$	1,022		$	—		$	2,181
Investment in subsidiaries		305,285			—			—			(305,285	)		—
Deferred taxes		—			(257	)		257						—
Other noncurrent assets		1,191			3,326			942			—			5,459
Total assets	$	306,477		$	407,164		$	14,105		$	(452,668	)	$	275,078
Liabilities and stockholders’ equity
Current liabilities
Accounts payable	$	—		$	2,520		$	373		$	—		$	2,893
Accrued wages and benefits		—			5,768			2,777			—			8,545
Intercompany payables		141,074			6,309			—			(147,383	)		—
Current portion of long-term debt and lease obligations		—			683			—			—			683
Other current liabilities		573			3,367			1,387			—			5,327
Total current liabilities		141,647			18,647			4,537			(147,383	)		17,448
Long-term debt and lease obligations, net of current portion		123,208			72,291			—			—			195,499
Deferred tax liabilities		—			300			—			—			300
Other long-term liabilities		—			5,710			—			—			5,710
Total liabilities		264,855			96,948			4,537			(147,383	)		218,957
Stockholders’ equity		41,622			310,216			9,568			(305,285	)		56,121
Total stockholders’ equity		41,622			310,216			9,568			(305,285	)		56,121
Total liabilities and stockholders’ equity	$	306,477		$	407,164		$	14,105		$	(452,668	)	$	275,078

Spheris Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2009
(Unaudited)

Condensed Consolidating Statement of Operations
(Unaudited and Amounts in Thousands)

For the Three Months Ended March 31, 2009

Issuer

Non-

(Spheris)

Guarantors

Guarantor

Eliminations

Consolidated

Net revenues

—

41,849

5,441

(5,441

)

41,849

Operating expenses:

Direct costs of revenues (exclusive of depreciation and amortization below)

—

30,010

4,005

(5,441

)

28,574

Marketing and selling expenses

—

611

—

611

General and administrative expenses

5,464

156

—

5,628

Depreciation and amortization

—

1,601

171

—

1,772

Restructuring charges

—

689

—

689

Total operating costs

38,375

4,332

(5,441

)

37,274

Operating income (loss)

)

3,474

1,109

—

4,575

Interest expense, net of income

3,585

797

(12

)

—

4,370

Other income

—

(100

)

(956

)

—

(1,056

)

Net income (loss) before income taxes

(3,593

)

2,777

2,077

—

1,261

Provision for (benefit from) income taxes

(1,187

)

941

600

—

354

Net income (loss)

(2,406

)

1,836

1,477

—

907

Condensed Consolidating Statement of Operations
(Unaudited and Amounts in Thousands)


	For the Three Months Ended March 31, 2008
	Issuer						Non-
	(Spheris)			Guarantors			Guarantor			Eliminations			Consolidated

Net revenues	$	—		$	49,270		$	5,905		$	(5,905	)	$	49,270

Operating expenses:
Direct costs of revenues (exclusive of depreciation and amortization below)		—			36,987			5,340			(5,905	)		36,422
Marketing and selling expenses		—			1,310			—			—			1,310
General and administrative expenses		1			6,140			214			—			6,355
Depreciation and amortization		—			5,605			305			—			5,910

Total operating costs		1			50,042			5,859			(5,905	)		49,997


Operating income (loss)		(1	)		(772	)		46			—			(727	)

Interest expense, net of income		14,609			(9,672	)		(7	)		—			4,930
Other (income) expense		5,500			(4,380	)		234			—			1,354

Net income (loss) before income taxes		(20,110	)		13,280			(181	)		—			(7,011	)


Provision for (benefit from) income taxes		(6,981	)		4,909			(116	)		—			(2,188	)

Net income (loss)	$	(13,129	)	$	8,371		$	(65	)	$	—		$	(4,823	)

Spheris Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2009
(Unaudited)

Condensed Consolidating Statement of Cash Flows
(Unaudited and Amounts in Thousands)


	For the Three Months Ended March 31, 2009
	Issuer					Non-
	(Spheris)		Guarantors			Guarantor			Eliminations		Consolidated
Cash flows from operating activities:
Net cash provided by operating activities	$	4	$	6,046		$	889		$	—	$	6,939


Net cash provided by operating activities		4		6,046			889			—		6,939


Cash flows from investing activities:
Purchases of property and equipment		—		(828	)		(40	)		—		(868	)
Purchase and development of internal-use software		—		(156	)		—			—		(156	)


Net cash used in investing activities		—		(984	)		(40	)		—		(1,024	)


Cash flows from financing activities:
Proceeds from debt		—		2,500			—			—		2,500
Payments on debt and lease obligations		—		(529	)		—			—		(529	)


Net cash provided by financing activities		—		1,971			—			—		1,971


Effect of exchange rate change on cash and cash equivalents		—		—			(1,219	)		—		(1,219	)

Net increase (decrease) in unrestricted cash and cash equivalents		4		7,033			(370	)		—		6,667
Unrestricted cash and cash equivalents, at beginning of period		1		952			2,309			—		3,262

Unrestricted cash and cash equivalents, at end of period	$	5	$	7,985		$	1,939		$	—	$	9,929

Condensed Consolidating Statement of Cash Flows
(Unaudited and Amounts in Thousands)


	For the Three Months Ended March 31, 2008
	Issuer						Non-
	(Spheris)			Guarantors			Guarantor			Eliminations		Consolidated
Cash flows from operating activities:
Net cash (used in) provided by operating activities	$	(1	)	$	(2,397	)	$	227		$	—	$	(2,171	)


Net cash (used in) provided by operating activities		(1	)		(2,397	)		227			—		(2,171	)


Cash flows from investing activities:
Purchases of property and equipment		—			(1,056	)		(216	)		—		(1,272	)
Purchase and development of internal-use software		—			(165	)		—			—		(165	)


Net cash used in investing activities		—			(1,221	)		(216	)		—		(1,437	)


Cash flows from financing activities:
Payments on debt and lease obligations		—			(16	)		—			—		(16	)


Net cash used in financing activities		—			(16	)		—			—		(16	)


Effect of exchange rate change on cash and cash equivalents		—			—			162			—		162

Net (decrease) increase in unrestricted cash and cash equivalents		(1	)		(3,634	)		173			—		(3,462	)
Unrestricted cash and cash equivalents, at beginning of period		5			4,967			2,223			—		7,195

Unrestricted cash and cash equivalents, at end of period	$	4		$	1,333		$	2,396		$	—	$	3,733

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

The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes thereto included elsewhere in this document. Data for the three ~~and six~~ months ended ~~June~~March 3031, ~~2006~~2009 and ~~2005~~2008 has ~~been~~ been derived from our unaudited condensed consolidated financial statements.

FORWARD LOOKING STATEMENTS

This ~~document~~Quarterly Report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Those forward-looking statements include all statements that are not historical statements of fact and those regarding our intent, belief or expectations, including, but not limited to, those statements including the words “expects,”, “intends,” , “believes,”, “may,”, “will,”, “should,”, “continue” and similar language or the negative of such terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, our actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, the following in addition to those discussed elsewhere in this ~~document~~Quarterly Report:

• the effect our substantial indebtedness has on our ability to raise additional capital to fund our business, to react to changes in the economy or our business and to fulfill our obligations under our indebtedness, including our ability to meet financial covenants and other conditions of our senior secured credit ~~facilities~~facility and indenture ~~relating~~governing to our senior subordinated notes; • the effect of interest rate fluctuations on our variable rate debt; • restrictions on our operations under our senior secured credit ~~facilities~~facility and indenture ~~relating~~governing to our senior subordinated notes; • our ability to fulfill our repayment and repurchase obligations under our senior secured credit facility and the indenture governing our senior subordinated notes ~~upon~~in the event of a change of control; • the recent global economic and financial market crisis has had and may continue to have a negative impact on our business and results of operations; • capital markets are currently experiencing a period of dislocation and instability, which has had and could continue to have a negative impact on our business and results of operations; • our history of losses and accumulated deficit; • our ability to effectively manage our ~~domestic and~~ global production capacity, including our ability to recruit, train and retain qualified medical ~~transcriptionists~~language specialists (“~~MTs~~MLS”) and ~~other technical and managerial personnel and to~~ maintain high standards of quality service in our operations; • our ability to ~~adapt~~support ~~and~~existing technologies as well as integrate new technology into our ~~medical~~clinical ~~transcription~~documentation platforms to improve our production capabilities and expand the breadth of our ~~service offerings, as well as our ability to address any potential unanticipated problems with our information~~ technology ~~systems~~and ~~that~~service ~~could cause an interruption in our services or a decrease in our responsiveness to our customers~~offerings; • our ability to maintain ~~and continue~~ our competitive position against current and ~~potential~~future competitors, including our ability to gain new business with acceptable operating margins and on-going ~~cost~~price pressures related to our technology and services and the healthcare markets in general; • the reluctance of potential customers to outsource or change providers of their ~~medical~~clinical ~~transcription~~documentation technology and services and its impact on our ability to attract new customers and increase revenues; • financial and operational risks inherent in our global operations, including foreign currency exchange rate fluctuations and transfer pricing laws between the United States and India; • our ability to attract, hire or retain technical and managerial personnel necessary to develop and implement technology and services to our customers; • the effect on our business if we incur additional debt, and assume contingent liabilities and expenses in connection with future acquisitions or if we cannot effectively integrate newly acquired operations; • our ability to adequately protect our intellectual property ~~and~~rights, ~~renew~~including our proprietary technology and the intellectual property ~~licenses~~we license from third parties; • our ability to comply with extensive laws and government regulations applicable to us and our customers and our contractual obligations, including those relating to the Health Insurance Portability and Accountability Act (“HIPAA”), and industry scrutiny of billing practices relating to the counting of transcription lines that has been the subject of controversy in the ~~medical~~clinical ~~transcription~~documentation industry; • proposed legislation and possible negative publicity limiting the use of our global service capabilities; • ~~financial and operational risks inherent in~~ our ~~global~~intangible ~~operations~~assets, ~~including~~which ~~foreign~~have ~~currency~~significant ~~rate~~carrying ~~fluctuations between the United States and India; • our inability to attract~~values, ~~hire~~may ornever ~~retain~~generate ~~necessary~~the ~~technical~~returns ~~and~~we ~~managerial personnel~~expect; and • the effect on our business, including potential operational limitations and conflicts of interest, caused by Warburg Pincus, LLC’s control of us and the right of our Parent Investors and CHS to designate certain members of our board of directors and make decisions concerning our business and operations.

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InAny ~~addition,~~or ~~factors~~all ~~that~~of weour ~~are~~forward-looking ~~not~~statements ~~currently~~in ~~aware~~this ofQuarterly ~~could~~Report ~~harm~~may turn out to be inaccurate. We have based these forward-looking statements largely on our current expectations and projections about future ~~operating~~events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. They can be affected by ~~You~~inaccurate assumptions we might make or by known or unknown risks, uncertainties and assumptions, including the risks, uncertainties and assumptions described in “Risk Factors” disclosed in detail in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 (our “Annual Report”), filed with the Securities and Exchange Commission (the “SEC”) on March 20, 2009 and in other reports we file with the SEC from time to time. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date ~~of this document~~hereof. We undertake no obligation to ~~release~~publicly ~~any~~revise ~~revisions~~these ~~to the~~ forward-looking statements orto reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this Quarterly Report and in our Annual Report.

OVERVIEW

We are a leading ~~outsource~~global provider of ~~medical~~clinical ~~transcription~~documentation technology and services to ~~approximately~~ ~~500~~ health systems, hospitals and group medical practices throughout the United States, with significant scale in ~~the~~a highly fragmented ~~medical~~clinical ~~transcription~~documentation marketplace. As of ~~June~~ March 3031, ~~2006~~2009, we employed approximately 54,500 skilled ~~MTs~~MLS in the U.S., ~~Canada~~ and India. ~~Approximately~~ More than 2,000 of these ~~MTs~~MLS ~~are~~work ~~located~~out in of our ~~two~~three facilities in India, making us one of the largest global providers of ~~medical~~clinical documentation ~~transcription~~ technology and services in the industry. We provide a quality, value-added ~~medical~~clinical documentation ~~transcription~~ technology and ~~services~~service ~~solution~~solutions with flexible dictation options for our physician clients, flexible data review options for hospital administrators and well- managed work flow and protocols through our proprietary MTMLS workstation software and integrated ~~medical~~clinical ~~transcription~~ documentation platforms.

~~Medical~~Clinical ~~transcription~~documentation is the process of converting dictated patient information into a ~~text format~~textual format for inclusion in the patient’s medical record and is an integral part of the ~~medical~~health information ~~records~~management, or HIM, department for healthcare providers. Clinical documentation is used by many healthcare industry participants to further patient care, support medical reimbursements, facilitate legal and compliance standards and conduct research. We believe an increase in demand for ~~medical~~clinical ~~transcription~~documentation technology and services will be driven by:

	•		the growing and aging population’s need for more medical tests, treatments and procedures that require documentation;

	•		the migration of record-keeping from paper to electronic format;

	•		the need for accurate documentation necessary to comply with increasingly stringent regulations and reimbursement requirements;

	•		the desire of healthcare providers to maximize the amount of time spent on patient care, while minimizing the physicians’ administrative duties; and

	•		the need for healthcare providers to have timely and accurate documentation in order to improve receivables collection, manage costs and provide high quality care.

We utilize leading technologies to support our ~~medical~~clinical ~~transcription~~documentation technology and services. Our systems have the capability to capture, store and manage voice dictation, digitize voice dictation and deliver electronically formatted records via print, facsimile, ~~e-mail,~~secure ~~Internet~~internet ~~and~~portal and direct interface with a customer’s ~~information~~HIM system. We also utilize encryption and security systems that assist our customers ~~with~~and ~~their~~us with compliance with privacy and security standards, such as HIPAA, and the protection of the confidentiality of medical records. ~~In addition, we provide flexible dictation~~ ~~options for physicians, flexible data review options for hospital administrators and steady workflow for our MTs.~~

~~Our~~We ~~operations~~conduct ~~are~~our ~~conducted~~operations through Spheris Operations LLC and its subsidiaries — Spheris Leasing LLC, which has historically been used to facilitate the Company’s equipment procurement; Spheris Canada Inc., which was formed to facilitate ~~the employment of~~ our Canadian ~~employees~~operations; SIPL, which was formed to conduct our Indian operations; and Vianeta, which ~~develops~~was ~~and~~acquired ~~supplies~~in ~~enterprise-wide clinical documentation technology for group practices, hospitals and health systems~~March 2006.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Critical accounting policies are those accounting policies that can have a significant impact on the presentation of our financial condition and results of operations, and that require the use of complex and subjective estimates and assumptions that are believed to be reasonable under the circumstances based on past experience and management’s judgment. Actual results could differ from these estimates. As more information becomes known, these estimates and assumptions could change, having an impact on the amounts reported in the future. A summary of our critical accounting policies is described under the caption “Critical Accounting Policies and Estimates” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report.

1820

Discussion and Analysis of Financial Condition and Results of Operations in our Registration Statement on Form S-4 (Registration No. 333-123641). There have been no changes in the nature of our critical accounting policies or the application of those policies since December 31, 2005.

RESULTS OF OPERATIONS

Net Revenues and Expense Components

The following descriptions of the components of net revenues and expenses apply to the comparison of results of operations for the periods presented.

Net Revenues. Net revenues are generated primarily from the provision of ~~medical~~clinical ~~transcription and~~documentation and related services to healthcare providers, including the sale and licensing of ~~medical transcription~~clinical documentation software products. Historical net revenue growth has been driven by revenue from acquisitions, market share gains from competitors, new business from increased outsourcing of in-house ~~medical transcription~~clinical documentation departments and revenue growth from existing customers. Other factors affecting net revenues include customer retention, competing technologies and price stability. Net revenues from existing customers are primarily driven by three factors: (i) adding new departments within existing customers, (ii) growth in the number of authors at customer sites and (iii) growth in transcribed lines per author (generally resulting from increased documentation of patient encounters and increased familiarity with our ~~medical~~clinical ~~transcription~~documentation system). Additionally, net revenues are impacted by contractual revenue adjustments, which represent credits against billings and ultimately reductions to revenues. We monitor actual ~~MT transcription~~ performance against contract standards and record credits against billings when the contract standards are not met. We have historically experienced no material seasonal fluctuation that affects operating results.

Direct Costs of Revenues. Direct costs of revenues consist primarily of salaries of, and employee benefits for, ~~MTs~~MLS and the functions that support our ~~medical~~clinical ~~transcription~~documentation technology and services, including: (i) MT MLS managers and personnel involved with helpdesk services, (ii) new customer implementation, (iii) MT MLS recruiting, (iv) training, (v) account services, (vi) telecommunications support and (vii) other applications support. Other direct costs include telecommunication costs and other production-related operating expenses, including: (i) MT MLS recruitment advertising, (ii) maintenance and support for hardware and software, (iii) travel for support personnel, (iv) bad debt expense, (v) professional fees, (vi) shipping and (vii) supplies. Additionally, direct costs of revenues include the costs of the development of software products. Direct costs of revenues do not include depreciation and amortization, which are discussed below.

Selling, General and Administrative Expenses. Selling expenses include sales and marketing expenses associated with our sales personnel and marketing department. General and administrative expenses represent costs associated with our senior management team, back office support and other non-operating departments. Additionally, general and administrative expenses include costs associated with the research and development of our software products.

Depreciation and Amortization. Depreciation and amortization consist of fixed asset depreciation and amortization of intangibles considered to have finite lives.

Interest Expense. Interest expense primarily relates to interest paid on outstanding debt balances and ~~capital~~financed ~~leases~~lease obligations.

Executive Summary

Our long-term strategy is to be the ~~medical~~leading ~~transcription~~supplier ~~industry~~of ~~leader~~clinical bydocumentation ~~providing technology and outsourced~~ services ~~to healthcare providers supported~~ by ~~a global workforce network. The~~ ~~industry,~~utilizing asstate ~~a whole, continues to be challenged by on-going issues related to a shortage~~ of ~~qualified~~ ~~MTs in~~ the ~~U.S.~~art ~~market,~~technology ~~as well challenges of adapting~~ and ~~integrating~~our ~~new~~global ~~technology into~~workforce ~~transcription~~to ~~service~~optimize ~~offerings~~workflow, to improve customer ~~production~~efficiencies ~~capabilities~~ and ~~expand~~reduce ~~the breadth of services~~costs. The increased demand for electronic health records ~~and~~ , shorter turnaround times ~~for transcribed~~and ~~medical~~on-going ~~records~~pricing ~~also~~pressures isrelated ~~placing~~to ~~additional~~our ~~pressure~~products onand ~~the~~services ~~medical transcription~~and ~~industry.~~the Wehealthcare ~~have~~markets ~~identified~~in ~~various~~general ~~initiatives~~continue to ~~address~~place ~~these~~additional ~~industry~~pressure ~~pressures and capitalize~~ on ~~opportunities~~the toclinical documentation ~~improve~~industry. Additionally, the ~~quality~~clinical ~~and~~documentation ~~breadth~~industry, ofas ~~our~~a ~~technology~~whole, ~~and service~~continues ~~offerings.~~to ~~Some~~be ofchallenged ~~these~~by ~~initiatives~~on-going ~~include~~issues ~~increasing~~related ~~utilization~~to ofa ~~our~~shortage ~~global~~of MTqualified ~~capacity~~MLS, ~~improving~~ ~~our~~as MTwell ~~recruiting,~~as ~~training~~challenges of adapting and ~~retention~~integrating ~~programs,~~new ~~reviewing~~technology ~~our~~into ~~resource~~clinical ~~allocation strategies~~documentation toservice ~~increase~~offerings MTto ~~productivity~~improve production ~~levels~~capabilities and ~~making~~expand ~~additional~~the ~~investments~~breadth inof ~~technology~~products and services offered.

19We experienced a challenging year during 2008 due largely to market challenges and internal strategic changes. However, we have already begun to realize positive results from several of the more significant changes that we made during the last quarter of 2008, including the signing of the largest customer contract in our history and a restructuring of our management team. We believe these changes, as well as the continued global and technology investments we have made since 2004 have positioned us well to succeed in coming periods.

Because of the industry-wide domestic MT capacity shortage, we acquired HealthScribe, with its global capabilities, in December 2004. We also expanded our global capacity by adding a second facility in Coimbatore, India, which became operational during the late third quarter of 2005. Additionally, we reevaluated the financial terms, production obligations and profitability of existing customer contracts. We identified those customers we considered to be low-margin accounts, which were primarily those that we inherited from acquisitions. Accordingly, we terminated contracts aggregating $4.2 million of annualized business during 2005, as those identified customers did not contribute an acceptable operating margin to our financial performance. We also implemented new domestic MT training and career advancement programs during 2005 to increase the supply of qualified domestic MTs. Overall, the impact of the industry-wide MT capacity shortage resulted in a reduction in net revenues during the second quarter and first six months of 2006, as compared to the same periods in the prior year, due to customers we terminated, as well as customers we lost.

During 2005 and the first half of 2006, we continued to invest in advanced technologies to enhance our customer offerings and to further improve the efficiencies of our MTs, thereby increasing our production capacities. During the fourth quarter of 2005, we entered into an agreement with a technology partner to advance the integration of speech recognition technology offerings into our medical transcription platforms. During the first half of 2006, we continued to test our speech recognition technology prototype. We also consummated the acquisition of Vianeta on March 31, 2006. We believe the Vianeta acquisition will provide significant technology advancements and efficiencies to us. We have begun to integrate Vianeta’s open and scalable XML-based technology into our existing medical transcription technology in an effort to accelerate several initiatives we are currently executing and to further develop our technology and service capabilities.

During the third quarter of 2005, we substantially completed the integration of HealthScribe’s operations. These integration efforts included consolidation of senior management, production management, recruiting, training, sales and marketing and administrative functions. During 2006, we believe we will begin to see the full impact of these integration savings in our results of operations. We do not anticipate incurring any additional HealthScribe integration costs during 2006.

Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005

Net Revenues. Net revenues were $52.3 million for the quarter ended June 30, 2006 as compared to $53.1 million for the quarter ended June 30, 2005. The decrease in net revenues during the quarter ended June 30, 2006, as compared to the same period in the prior year, was primarily due to a $0.7 million second quarter 2006 impact from customer contracts we terminated in 2005, as the contracts did not contribute an acceptable operating margin to our financial performance, and $0.3 million of net lost business. These decreases in net revenues were partially offset by a $0.2 million decrease in contractual revenue adjustments related to service level requirements in the second quarter of 2006, as compared to the second quarter of 2005.

Direct Costs of Revenues. Direct costs of revenues were $38.5 million, or 73.6% of net revenues, for the quarter ended June 30, 2006 compared to $39.3 million, or 74.0% of net revenues, for the quarter ended June 30, 2005. The decrease in direct costs of revenues was primarily due to a $0.8 million reduction in MT costs related to customer contracts we terminated during 2005 and net sales losses. Additionally, we realized an incremental $0.1 million of savings related to the HealthScribe acquisition during the second quarter of 2006, as compared to the same period in the prior year. The decrease in direct costs of revenues during the second quarter of 2006, as compared to the same period in 2005, was partially offset by a $0.2 million write-off of technology acquired as part of the Vianeta acquisition.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $6.2 million, or 11.9% of net revenues, for the quarter ended June 30, 2006 compared to $5.4 million, or 10.2% of net revenues, for the quarter ended June 30, 2005. The increase in selling, general and administrative expenses was primarily due to costs of $0.9 million resulting from the Vianeta acquisition, including overhead and technology and platform investments. Additionally, the increase was the result of $0.5 million of compensation costs during the second quarter of 2006, including severance costs incurred in connection with management changes during the second quarter of 2006 and other compensation-related costs. These increases in selling, general and administrative expenses were partially offset by $0.2 million from incremental savings related to the HealthScribe acquisition. Additionally, we incurred $0.4 million of integration costs, as part of the HealthScribe acquisition, during the second quarter of 2005. No such costs were incurred during the second quarter of 2006.

Depreciation and Amortization. Depreciation and amortization was $6.6 million, or 12.5% of net revenues, for both the quarter ended June 30, 2006 and 2005.

Interest Expense. Interest expense was $5.2 million, or 9.9% of net revenues, for the quarter ended June 30, 2006 compared to $5.2 million, or 9.8% of net revenues, for the quarter ended June 30, 2005.

Income Taxes. We recognized a $1.3 million income tax benefit during the quarter ended June 30, 2006 compared to a $1.5 million income tax benefit for the quarter ended June 30, 2005. The change in our total effective tax rate was due to changes in the expected utilization of net operating loss carryforwards, as well as the expiration of certain tax holidays at our facilities located in India.

Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005

Net Revenues. Net revenues were $104.3 million for the six months ended June 30, 2006 as compared to $106.4 million for the six months ended June 30, 2005. The decrease in net revenues during the six months ended June 30, 2006, as compared to the same period in the prior year, was primarily due to a $2.0 million impact during the first six months of 2006 from customer contracts we terminated in 2005, as the contracts did not contribute an acceptable operating margin to our financial performance, and $1.0 million of net lost business. These decreases in net revenues were partially offset by a $0.9 million increase in revenues from an additional business day in the first half of 2006, as compared to the first half of 2005.

Direct Costs of Revenues. Direct costs of revenues were $77.3 million, or 74.1% of net revenues, for the six months ended June 30, 2006 compared to $78.5 million, or 73.8% of net revenues, for the six months ended June 30, 2005. The decrease in direct costs of revenues was primarily due to a $2.3 million reduction in MT costs related to customer contracts we terminated during 2005 and net sales losses. Additionally, we realized an incremental $0.3 million of savings related to the HealthScribe acquisition during the first half of 2006, as compared to the same period in the prior year. The decrease in direct costs of revenues during the first half of 2006, as compared to the same period in 2005, was partially offset by a $0.5 million increase in MT costs related to an additional business day in the first half of 2006, as compared to the first half of 2005, and a $0.4 million write-off of technology acquired as part of the Vianeta acquisition. The increase in direct costs of revenues as a percentage of net revenues during the first six months of 2006, as compared to the same period in the prior year, was primarily due to a $0.5 million increase in MT healthcare costs.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $11.7 million, or 11.2% of net revenues, for the six months ended June 30, 2006 compared to $12.2 million, or 11.5% of net revenues, for the six months ended June 30, 2005. The decrease in selling, general and administrative expenses during the first six months of 2006 was due largely to $0.7 million from incremental savings related to the HealthScribe acquisition. Additionally, we incurred $1.0 million of integration costs, as part of the HealthScribe acquisition, during the first half of 2005. No such costs were incurred during the first half of 2006. These reductions in selling, general and administrative expenses were partially offset by costs of $0.7 million resulting from the Vianeta acquisition, including overhead and technology and platform investments. Further offsetting the reductions in selling, general and administrative costs was $0.5 million of compensation costs during the second quarter of 2006, including severance costs incurred in connection with management changes during the second quarter of 2006 and other compensation-related costs.

Depreciation and Amortization. Depreciation and amortization was $13.1 million, or 12.6% of net revenues, for the six months ended June 30, 2006 compared to $13.4 million, or 12.6% of net revenues, for the six months ended June 30, 2005. The reduction in depreciation and amortization expense during the first half of 2006, as compared to the same period in 2005, was primarily due to the full depreciation and amortization of certain tangible and intangible assets, which occurred during the first quarter of 2006 and the fourth quarter of 2005.

Interest Expense. Interest expense was $10.3 million, or 9.9% of net revenues, for the six months ended June 30, 2006 compared to $10.1 million, or 9.5% of net revenues, for the six months ended June 30, 2005. Interest expense increased during the first half of 2006 versus the same period in 2005 due to increased interest rates on our senior secured credit facilities.

~~Income~~During ~~Taxes.~~October 2008, Wewe ~~recognized~~commenced a ~~$2.5 million~~restructuring ~~income~~plan ~~tax~~to ~~benefit~~effect ~~during~~changes in both our management structure and the ~~six~~nature ~~months~~and ~~ended~~focus ~~June 30~~of our operations. Pursuant to this plan, ~~2006~~ ~~versus~~we arecognized $30.2 5 million ~~income~~of ~~tax~~restructuring ~~benefit~~charges ~~for~~during the ~~six~~fourth ~~months~~quarter ~~ended~~of ~~June~~2008. As a continuation of this plan, during January 302009, ~~2005.~~we ~~The~~eliminated ~~change in~~a ~~our~~significant ~~total~~portion ~~effective~~of ~~tax~~our ~~rate~~U.S-based ~~was~~administrative ~~due~~and corporate toworkforce, ~~changes~~resulting in the ~~expected~~recognition ~~utilization~~of $0.7 million of ~~state~~restructuring ~~net~~charges during ~~operating~~the ~~loss~~first ~~carryforwards,~~quarter asof ~~well~~2009. asWe ~~the~~expect ~~expiration~~to ofincur ~~certain~~additional ~~tax~~restructuring ~~holidays~~charges, atincluding ~~our facilities~~one-time ~~located~~termination benefits and other restructuring related charges, in ~~India~~later periods.

Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008

Net Revenues. Net revenues were $41.8 million for the quarter ended March 31, 2009 as compared to $49.3 million for the quarter ended March 31, 2008. The decrease in net revenues during the first quarter of 2009 as compared to the prior year period was due primarily to the impact of net lost business and lower average contract pricing.

Direct Costs of Revenues. Direct costs of revenues were $28.6 million, or 68.4% of net revenues, for the quarter ended March 31, 2009 as compared to $36.4 million, or 73.8% of net revenues, for the quarter ended March 31, 2008. The decrease in direct costs of revenues during the first quarter of 2009 as compared to the prior year period was due largely to lower volumes as well as improved direct operating margins associated with increased utilization of the Company’s global production workforce and speech recognition technologies.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $6.2 million, or 14.8% of net revenues, for the quarter ended March 31, 2009 as compared to $7.7 million, or 15.6% of net revenues, for the quarter ended March 31, 2008. The decrease in selling, general and administrative expenses during the first quarter of 2009 as compared to the prior year period was primarily due to $1.3 million of expenses recognized in the first quarter of 2008 relating to a transaction that was not consummated, as well as lower overhead costs during the first quarter of 2009 associated with Company restructuring efforts.

Depreciation and Amortization. Depreciation and amortization was $1.8 million, or 4.3% of net revenues, for the quarter ended March 31, 2009 as compared to $5.9 million, or 12.0% of net revenues, for the quarter ended March 31, 2008. The decrease in depreciation and amortization expense during the first quarter of 2009 as compared to the prior year period resulted primarily from lower amortization expense associated with acquired customer contracts that became fully amortized at the end of 2008.

Restructuring Charges. As part of our restructuring plan, we recognized $0.7 million of charges during the first quarter of 2009.

Interest Expense. Interest expense was $4.4 million, or 10.5% of net revenues, for the quarter ended March 31, 2009 as compared to $4.9 million, or 9.9% of net revenues, for the quarter ended March 31, 2008. The decrease in interest expense during the first quarter of 2009 as compared to the prior year period was due to lower current-year interest rates on our outstanding variable interest 2007 Senior Credit Facility.

Income Taxes. We recognized $0.4 million of income tax expense during the quarter ended March 31, 2009 as compared to a $2.2 million income tax benefit for the quarter ended March 31, 2008. The change in the total effective tax rate as compared to the prior year period resulted primarily from the timing of the deduction for transaction related expenses and changes in valuation allowance amounts on the Company’s net deferred tax assets.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow provided by our operations, available cash on hand and borrowings under our revolving credit facility. We had total unrestricted cash and cash equivalents and net working capital of $79.39 million and $1922.0 million, respectively, as of ~~June 30,~~March ~~2006~~31, 2009 as compared to total unrestricted cash and cash equivalents and net working capital of $73.3 million and $2019.24 million, respectively, as of December 31, ~~2005~~2008.

We generated cash from operating activities of $3.6.9 million during the ~~first~~quarter ~~six~~ended ~~months of 2006~~March 31, as2009 as compared to ~~a $0.6 million use of~~ cash ~~from~~used by operating activities of $2.2 million during the same period in ~~2005~~2008. ~~Some~~The ofincrease ~~the~~in ~~significant~~cash ~~factors~~generated ~~contributing~~from tooperating ~~the~~activities ~~$4.3 million~~was ~~improvement~~primarily inattributable ~~operating~~to ~~cash~~the ~~flow~~period ~~during~~over ~~the~~period ~~first~~change ~~half~~in ofoperating ~~2006,~~performance asin ~~compared~~addition to ~~the~~changes ~~first~~in ~~half~~working ofcapital ~~2005,~~items including ~~were~~the following: (ia) achanges ~~$2.3 million improvement~~ in ~~the~~accrued ~~first~~wages ~~half~~and ofbenefits ~~2006~~resulting from ~~accounts receivable due to~~ the timing of ~~customer~~ ~~collections~~bi-weekly ~~and~~payrolls ~~(ii) payments~~as ~~during~~well as the ~~first~~payment ~~quarter~~ of ~~2005~~annual ~~of:~~bonuses ~~(A) $1.6 million for transaction-related fees~~ in ~~connection with~~ the ~~November 2004~~first ~~Recapitalization~~quarter ~~and~~of ~~the~~2008 ~~HealthScribe acquisition~~while ~~and (B) $2.2 million in HealthScribe integration related payments, including $1.2~~none ~~million in severance payments. These improvements~~ were ~~partially~~paid ~~offset by an additional $1.6 million of interest payments on the senior secured credit facilities~~ during ~~the~~2009, ~~first~~(b) timing ~~quarter~~ of ~~2006~~ ~~due~~receivables tocollections, ~~the~~and (c) timing of ~~payments~~payables disbursements.

We had $2.5 million, or 2.4% of net revenues, of capital expenditures during the first half of 2006 as compared to $2.8 million, or 2.6% of net revenues, of capital expenditures for the same period in 2005. Our growth strategy will require continued capital expenditures during the remainder of 2006. We currently expect that our capital expenditures will be approximately $6.0 million to $8.0 million in 2006. During the remainder of 2006, we anticipate incurring additional capital expenditures related to technology improvements and upgrades to support our systems and services, as well as leasehold improvements to be incurred in connection with moving our Franklin, Tennessee corporate offices in the fourth quarter of 2006. We plan to finance our proposed capital expenditures primarily with cash generated from operations, cash on hand and, if necessary, borrowings under our revolving credit facility.

Our senior secured credit facilities provide for senior secured financing of $100.0 million, consisting of a $75.0 million term loan facility with a maturity of six years that was drawn in full in connection with the consummation of the November 2004 Recapitalization, a $25.0 million revolving loan facility, including a letter of credit sub-facility of $10.0 million and a swingline loan sub-facility of $5.0 million. The senior secured credit facilities are secured by substantially all of our assets and guaranteed by our direct parent, Spheris Holding II, Inc., and all of our subsidiaries, except SIPL. The proceeds of the revolving loan are available to provide financing for working capital and general corporate purposes. At June 30, 2006, $73.9 million was outstanding under the term loan facility, no amounts were outstanding under the revolving loan facility and $1.6 million was outstanding in letters of credit. Our total capacity for borrowings under the revolver portion of the senior secured credit facilities, which are available for working capital and general corporate purposes, was $23.4 million during the second quarter of 2006. However, due to covenant restrictions, available borrowings under the revolver portion of the senior secured credit facilities at June 30, 2006 were limited to $1.8 million. Quarterly principal payments of $0.2 million are due on the term loan portion of the facilities with unpaid amounts due on maturity in 2010. Additionally, during the next 12 months we are required to pay $0.1 million under our capital lease obligations. Future drawings under our senior secured credit facilities will be available only if, among other things, we are in compliance with the financial covenants and other conditions required under the senior secured credit facilities agreement. Our ability to meet those covenants and conditions will depend on our results of operations.

As of June 30, 2006, we believe we were in compliance with the financial covenants in our senior secured credit facilities agreement. As of and for the period ended June 30, 2006, the senior secured credit facilities agreement required that we comply with the following financial covenants: a minimum interest coverage ratio test (currently 1.5 to 1.0), a capital expenditure test (currently not to exceed $13.5 million per year) and a maximum leverage ratio test (currently 6.25 to 1.0). These financial covenants will become more restrictive over time beginning in the third quarter of 2006. We are currently evaluating whether such additional restrictions and our anticipated future financial results will require us to amend the financial covenants for future periods or take other actions permitted by the senior secured credit facilities agreement to

~~maintain~~We ~~compliance~~had ~~with~~$1.0 million, ~~our~~or ~~existing financial covenants~~2.4% ~~Although~~of wenet ~~currently~~revenues, ~~believe~~of wecapital ~~will be~~expenditures ~~able~~during tothe ~~obtain~~quarter ~~such~~ended March 31, an2009 ~~amendment~~as orcompared ~~take~~to ~~other~~$1.4 million, ~~actions~~or ~~permitted~~2.8% byof ~~our~~net ~~senior~~revenues, ~~secured~~of ~~credit facilities~~capital ~~agreement~~expenditures in for the ~~event~~quarter weended ~~believe it necessary~~March 31, ~~there~~2008. ~~can~~Capital bespending noduring ~~assurance~~the ~~that~~first wequarter ~~will~~of be2009 ~~able~~related primarily to do sotechnology onand ~~terms~~infrastructure ~~that~~improvements ~~are acceptable~~ to ussupport orour ~~that~~systems weand ~~will~~services. ~~remain~~Our growth instrategy ~~compliance~~will ~~with~~require ~~our~~capital ~~financial covenants~~expenditures ~~for~~of ~~future periods~~$6.0 million Into ~~addition,~~$8.0 million ifduring we2009 ~~default~~for additional ~~under~~technology ~~any~~improvements ofand ~~our~~upgrades ~~covenants,~~to ~~there~~support ~~can~~our ~~be no~~systems ~~assurance~~and ~~that~~services. weWe ~~will~~plan beto finance ~~able~~our toproposed ~~obtain~~capital ~~waivers~~expenditures orwith ~~amendments~~cash ~~that~~generated ~~will~~from ~~allow~~operations, uscash toon ~~operate~~hand ~~our~~and, if ~~business~~necessary, inborrowings ~~accordance~~under ~~with~~ our ~~plans~~revolving credit facility.

~~Our~~The 2007 Senior Credit Facility consists of a term loan in the original principal amount of $~~125~~70.0 million ofand ~~11%~~a ~~senior~~revolving ~~subordinated~~credit ~~notes~~facility ~~are~~in ~~due~~an ~~2012.~~aggregate ~~The~~principal ~~notes~~amount ~~are~~not ~~general~~to ~~unsecured~~exceed $25.0 ~~senior~~million ~~subordinated~~at ~~obligations~~any oftime ~~ours,~~outstanding. ~~are~~The ~~subordinated~~revolving inloans ~~right~~and ofthe ~~payment~~term toloan ~~existing~~bear ~~and future~~interest ~~senior~~at ~~debt,~~LIBOR ~~are~~plus an ~~pari~~applicable ~~passu~~margin inor ~~right~~a ofreference ~~payment~~bank’s ~~with~~rate ~~any~~plus ~~future~~an ~~senior~~applicable ~~subordinated~~margin, ~~debt~~at ~~and~~our option. Under ~~are~~the ~~senior~~revolving incredit ~~right~~facility, ofwe ~~payment~~may borrow up to ~~any~~the ~~future~~lesser ~~subordinated~~of ~~debt~~$25.0 million ~~Our~~or ~~domestic~~a ~~operating~~loan limiter ~~subsidiaries~~amount, ~~are~~as ~~guarantors~~defined ofin the ~~notes.~~2007 ~~Interest~~Senior isCredit ~~payable~~Facility, ~~semi-annually~~less onamounts ~~these~~outstanding ~~notes,~~under ~~and~~letters of ~~all~~credit. ~~principal~~As isof ~~due~~March 31, on2009, ~~maturity~~we inhad ~~2012~~$5.7 million ~~The~~outstanding ~~notes~~under ~~are~~the ~~effectively~~revolver ~~subordinated~~portion ~~to all~~ of ~~our and~~the ~~our~~2007 ~~guarantors’~~Senior ~~secured~~Credit ~~debt~~Facility. toAs ~~the~~a ~~extent~~result, ofour ~~the~~total ~~value~~remaining ofcapacity ~~the~~for ~~assets~~borrowings ~~securing~~under the 2007 ~~debt~~Senior ~~and~~Credit ~~are structurally~~Facility ~~subordinated~~was to$19.3 million ~~all~~as ~~liabilities~~of ~~and~~March 31, ~~commitments~~2009. ~~(including~~Capacity ~~trade~~for ~~payables~~borrowings ~~and~~may ~~lease~~be ~~obligations)~~limited ofin ~~our~~the ~~subsidiaries~~future ~~that~~based ~~are~~on ~~not~~financial ~~guarantors~~covenants ofdescribed in the ~~notes~~2007 Senior Credit Facility.

WeAll ~~completed~~unpaid ~~the~~principal ~~sale~~amounts ~~and~~under ~~issuance~~the of2007 ~~our~~Senior ~~senior~~Credit ~~subordinated~~Facility ~~notes~~are indue aat ~~private~~maturity ~~placement~~on toJuly 17, ~~qualified~~2012. ~~institutional~~Additionally, ~~buyers~~we ~~pursuant~~are required to ~~Rule 144A~~perform ~~under~~annual ~~the~~excess ~~Securities~~cash ~~Act.~~flow ~~Pursuant~~calculations, toas ~~the terms~~defined of in the ~~registration~~2007 ~~rights~~Senior ~~agreement~~Credit ~~between~~Facility, us and ~~the~~to ~~noteholders,~~remit weany ~~were~~applicable ~~required~~amounts to ~~use~~reduce the outstanding term ~~our~~loan ~~reasonable~~balance. ~~best~~Based ~~efforts~~on tothe ~~file~~annual excess cash flow calculation for the year ended December 31, 2008, ~~and~~we ~~cause~~remitted $0.4 million to ~~become~~pay ~~effective,~~down aour ~~registration~~debt ~~statement~~balances ~~with the~~following ~~Securities~~delivery ~~and~~of ~~Exchange~~our ~~Commission~~year-end covenant ~~(“SEC”)~~compliance tocertificates. ~~exchange~~As ~~the~~a ~~senior~~result, ~~subordinated~~we ~~notes~~classified ~~for~~this $0.4 million as a ~~new~~current ~~issuance~~portion of ~~identical~~outstanding debt ~~securities~~as ~~that~~of ~~have~~December 31, ~~been~~2008. ~~registered~~Interest payments under the ~~Securities~~2007 ~~Act.~~Senior Credit WeFacility ~~filed a~~are ~~Registration~~due ~~Statement~~monthly onor ~~Form~~at ~~S-4~~other ~~(Registration~~intervals ~~No. 333-132641)~~not ~~with~~to ~~the~~exceed ~~SEC~~every onthree ~~March 22~~months, ~~2006,~~depending ~~and~~on itthe ~~became~~interest ~~effective~~elections onmade ~~May~~by us. At March 1031, ~~2006.~~2009, ~~The~~there ~~exchange~~were ~~offer~~no ~~was~~outstanding ~~completed~~interest payments ~~during~~due ~~June 2006~~under the 2007 Senior Credit Facility.

ToUnder ~~fund~~the a2007 ~~portion~~Senior ofCredit Facility, Operations is the ~~purchase~~borrower. ~~price~~The of2007 ~~Vianeta,~~Senior ~~our~~Credit ~~current~~Facility is ~~equity~~secured ~~investors~~by ~~contributed~~substantially ~~$8.0 million~~all inof ~~cash~~Operations’ ~~through~~assets anand ~~equity~~is ~~investment~~guaranteed toby Spheris, Spheris Holding II ~~III,~~and ~~which~~all ~~was~~of ~~contributed to~~ Operations’ subsidiaries, except SIPL. ~~Other~~The ~~than~~2007 ~~initial~~Senior ~~integration~~Credit ~~costs~~Facility ~~associated~~agreement contains ~~with~~certain ~~this~~covenants ~~transaction~~which, among other things, limit the ~~results~~incurrence of additional ~~operations~~indebtedness, ofinvestments, ~~Vianeta~~dividends, ~~are~~transactions ~~not~~with ~~anticipated~~affiliates, toasset ~~have~~sales, aacquisitions, mergers ~~material~~and ~~adverse~~consolidations, ~~impact~~liens onand ~~our~~encumbrances ~~operating~~and other matters customarily restricted in such ~~results~~agreements. orThe ~~operating~~2007 ~~cash~~Senior ~~flows~~Credit ~~for~~Facility agreement also contains customary events of default, the ~~foreseeable~~occurrence ~~future.~~of Wewhich ~~held~~could $0allow the collateral agent to declare any outstanding amounts to be immediately due and payable.~~5 million~~ The financial covenants contained in ~~restricted cash~~the as2007 ofSenior ~~June~~Credit Facility include (a) 30a maximum leverage test, ~~2006~~(b) a asminimum ~~part~~fixed ofcharge ~~the~~coverage ~~Vianeta~~test ~~acquisition~~and (c) a minimum earnings before interest, ~~which~~taxes, isdepreciation ~~being~~and ~~held~~amortization ~~for~~requirement, ~~future~~among others. Based on ~~distributions~~current operating results, we believe covenant (c) will be the most challenging covenant to ~~Vianeta~~meet ~~shareholders~~in future periods. These financial covenants will become more restrictive over time.

WeFuture ~~believe~~drawings ~~that~~under the ~~results~~2007 ofSenior ~~our~~Credit ~~anticipated~~Facility ~~future~~will ~~operations,~~be ~~together~~available ~~with~~only ~~our~~if, ~~cash~~among ~~and cash~~other ~~equivalents~~things, ~~restricted~~we ~~cash~~are ~~and~~in ~~available~~compliance ~~capacity~~with onthe ~~our~~financial ~~revolving credit~~covenants ~~facility~~and ~~(even~~other ~~with~~conditions required under the ~~current~~2007 ~~limit~~Senior ~~due~~Credit toFacility ~~covenant~~agreement. ~~restrictions)~~The ~~will~~2007 beSenior ~~sufficient~~Credit toFacility ~~meet~~agreement ~~anticipated~~also ~~cash~~contains provisions ~~needs~~that provide for ~~principal~~ ~~and~~our ~~interest~~utilization ~~payments~~of onequity ~~our~~cures ~~outstanding~~in ~~indebtedness,~~the ~~working~~event ~~capital,~~of ~~new~~default. ~~product~~These cures ~~development,~~may ~~capital~~not ~~expenditures,~~be ~~contractual~~utilized ~~obligations~~more ~~and~~than ~~other~~twice ~~operating~~in ~~needs~~any ~~for~~calendar atyear, ~~least the~~may ~~next~~not ~~12 months~~exceed $5.0 million Inper ~~evaluating~~occasion, and ~~the~~we ~~sufficiency~~must ofhave ~~our~~at ~~liquidity,~~least we$7.5 million ~~considered~~in availability following the ~~expected cash~~cure. ~~flow~~We have commitments to fund bea ~~generated~~cure, byif ~~our~~any ~~operations~~is needed, ~~cash~~related onto ~~hand~~covenant ~~and~~filings for the ~~available~~2009 ~~borrowings~~fiscal ~~under~~year. ~~our~~Our ability ~~senior~~to ~~secured~~meet ~~credit~~those ~~facilities~~covenants ~~compared~~and toconditions will depend on our ~~anticipated~~results ~~cash~~of ~~requirements~~operations. ~~for~~We ~~debt~~believe ~~service,~~we ~~working~~were ~~capital,~~in ~~new~~compliance ~~product~~with ~~development,~~the ~~capital~~financial ~~expenditures~~covenants ~~and~~in the ~~payment~~2007 ofSenior ~~taxes,~~Credit asFacility ~~well~~agreement as of ~~funding~~March 31, ~~requirements~~2009. ~~for~~Although ~~long-term~~we ~~liabilities.~~believe Wethat ~~cannot~~we ~~assure~~will ~~you,~~be ~~however,~~able ~~that~~to ~~our~~maintain ~~operating~~continued compliance with our ~~performance~~financial ~~will~~covenants, ~~generate~~there ~~sufficient~~can ~~cash~~be ~~flow~~no orassurance that ~~future~~we ~~borrowings~~ will beremain ~~available~~in ~~under our~~compliance ~~senior~~with ~~secured~~the ~~credit~~financial covenants ~~facilities,~~for future periods or ~~otherwise~~that, toif ~~enable~~we usdefault tounder ~~grow~~any of our ~~business~~covenants, ~~service~~we ~~our~~will be able to ~~indebtedness,~~obtain ~~including~~waivers ~~our~~or ~~senior~~amendments ~~secured~~that ~~credit~~will ~~facilities~~allow ~~and~~us ~~the~~to ~~senior~~operate ~~subordinated~~our ~~notes,~~business ~~or make~~in ~~anticipated~~accordance ~~capital~~with ~~expenditures~~our plans.

Our $125.0 million of 11% senior subordinated notes mature on December 15, 2012. The notes are general unsecured senior subordinated obligations of ours, are subordinated in right of payment to existing and future senior debt, are pari passu in right of payment with any future senior subordinated debt and are senior in right of payment to any future subordinated debt. Our domestic operating subsidiaries are guarantors of the notes. Interest is payable semi-annually on these notes, and all principal is due on maturity in 2012. The notes are effectively subordinated to all of our and our guarantors’ secured debt to the extent of the value of the assets securing the debt and are structurally subordinated to all liabilities and commitments (including trade payables and lease obligations) of our subsidiary that is not a guarantor of the notes. We determine the fair value of the notes through quoted prices in active markets. As a result, we have determined that our valuation of the notes is classified as Level 1 in the fair value hierarchy. The notes had a quoted market value of $46.3 million and $37.5 million at March 31, 2009 and December 31, 2008, respectively.

We believe that the results of our anticipated future operations, together with our cash and cash equivalents, restricted cash and available capacity on our revolving credit facility will be sufficient to meet anticipated cash needs for principal and interest payments on our outstanding indebtedness, working capital, new product development, capital expenditures, contractual obligations and other operating needs for at least the next 12 months. In evaluating the sufficiency of our liquidity, we considered the expected cash flow to be generated by our operations, cash on hand and the available borrowings under the 2007 Senior Credit Facility compared to our anticipated cash requirements for debt service, working capital, new product development, capital expenditures and the payment of taxes, as well as funding requirements for long-term liabilities. We cannot provide assurance, however, that our operating performance will generate sufficient cash flow or that future borrowings will be available under the 2007 Senior Credit Facility, or otherwise, to enable us to grow our business, service our indebtedness, including the 2007 Senior Credit Facility and the senior subordinated notes, or make anticipated capital expenditures. In addition, the credit markets have become more volatile and the availability of funds has become more limited as a result of adverse economic conditions that have caused the failure and near failure of a number of large financial services companies. If the credit markets continue to experience volatility and the availability of funds remains limited, it is possible that our ability to access the credit markets may be limited by these or other factors at a time when we would like, or need, to access such markets, which could have an impact on our ability to refinance debt and/or react to changing economic and business conditions.

Off-Balance Sheet Arrangements

None.

~~Recent~~Recently Adopted Accounting Pronouncements

~~FIN~~SFAS 48No. 157. In ~~June~~September 2006, the Financial Accounting Standards Board (“FASB”) issued ~~Interpretation~~SFAS No. 48157, “~~Accounting~~Fair ~~for~~Value ~~Uncertainty~~Measurements” in(“SFAS ~~Income~~No. 157”), ~~Taxes~~which —establishes ana ~~interpretation~~framework offor ~~FASB~~measuring ~~Statement~~fair value and expands fair value measurement disclosures. SFAS No. ~~109”~~157 applies to other accounting ~~(“FIN~~pronouncements ~~48”)~~that require or permit fair value measurements. ~~FIN~~SFAS 48No. 157 ~~provides~~was ~~additional~~effective ~~guidance~~for financial statements issued for ~~financial~~fiscal ~~statement~~years ~~recognition~~beginning ofafter ~~tax~~November 15, 2007, and interim periods ~~positions~~within ~~taken~~those infiscal ~~tax~~years. ~~returns~~In February 2008, the FASB issued Staff Position No. FAS ~~The~~157-2, “Effective ~~interpretation~~Date isof FASB Statement No. 157”, which delayed the effective ~~for~~date of SFAS No. 157 until fiscal years beginning after ~~December~~ November 15, ~~2006.~~2008 Wefor docertain ~~not~~nonfinancial ~~anticipate~~assets and liabilities, except those that ~~the~~are ~~guidance~~measured at fair value in the ~~interpretation~~financial ~~will~~statements ~~have~~on a nonrecurring basis. Effective January 1, 2008, we adopted the provisions of SFAS No. 157 related to financial assets and liabilities and to nonfinancial assets and liabilities measured at fair value on a recurring basis. Effective January 1, 2009, we adopted without material ~~affect~~impact on our ~~consolidated~~condensed consolidated financial ~~position~~statements orthe ~~results~~provisions of ~~operations~~SFAS No. 157 related to nonfinancial assets and liabilities that are not required or permitted to be measured at fair value on a recurring basis, which include the following items: nonfinancial assets and liabilities measured at fair value in goodwill impairment testing, indefinite-lived intangible assets measured at fair value for impairment testing, nonfinancial long-lived assets measured at fair value for impairment testing, asset retirement obligations initially measured at fair value, and nonfinancial assets and liabilities initially measured at fair value pursuant to business combinations.

23SFAS No. 141(R) and FSP FAS 141(R)-1. In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS No. 141(R)”). SFAS No. 141(R) retains the current purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in purchase accounting, as well as requiring the expensing of acquisition-related costs as incurred. Furthermore, SFAS No. 141(R) provides guidance for recognizing and measuring the goodwill acquired in a business combination and specifies what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of a business combination. In April 2009, the FASB issued FSP FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (“FSP FAS 141(R)-1”), which amends SFAS No. 141(R) by establishing a model to account for certain pre-acquisition contingencies. Under FSP FAS 141(R)-1, an acquirer is required to recognize at fair value an asset acquired or a liability assumed in a business combination that arises from a contingency if the acquisition-date fair value of that asset or liability can be determined during the measurement period. If the acquisition-date fair value cannot be determined, then the acquirer should follow the recognition criteria in SFAS No. 5, “Accounting for Contingencies”, and FASB Interpretation No. 14, “Reasonable Estimation of the Amount of a Loss — an interpretation of FASB Statement No. 5”. SFAS No. 141(R) and FSP FAS 141(R)-1 became effective for us beginning January 1, 2009, and will apply prospectively to business combinations completed on or after that date. The impact of the adoption of SFAS No. 141(R) and FSP FAS 141(R)-1 will depend on the nature of acquisitions completed after the date of adoption.

SFAS No. ~~123(R)~~160. In December ~~2004~~2007, the FASB issued ~~Statement of Financial Accounting Standards (“~~SFAS”) No. ~~123(R)~~160, “~~Share-Based~~Noncontrolling ~~Payments~~Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (“SFAS No. ~~123(R)~~160”). SFAS No. ~~123(R) supersedes~~160 ~~Accounting~~establishes ~~Principals~~accounting ~~Board No. 25~~ and ~~requires~~reporting ~~companies~~standards ~~to recognize compensation expense, using a fair-value based method,~~ for ~~costs~~the ~~related~~noncontrolling tointerest ~~share-based~~in ~~payments,~~a ~~including~~subsidiary ~~stock options.~~and ~~SFAS~~for ~~No. 123(R) was effective in~~ the ~~first~~deconsolidation ~~annual~~of ~~reporting~~a ~~period beginning after December 15, 2005~~subsidiary. ~~Under~~ SFAS No. ~~123(R),~~160 werequires ~~are~~that ~~required~~earnings toor ~~determine~~losses ~~the~~attributed to ~~appropriate~~noncontrolling ~~fair~~interests ~~value model to~~ be ~~used~~ ~~for~~reported ~~valuing~~as ~~share-based~~part ~~payments,~~of ~~the~~consolidated ~~amortization~~earnings ~~method~~rather ~~for~~than ~~compensation~~as ~~cost,~~a ~~and the~~separate ~~transition~~component ~~method~~of toincome beor ~~used at the date of adoption~~expense. ~~We adopted~~ SFAS No. ~~123(R)~~160 became effective for us on January 1, ~~2006~~ 2009. ~~However,~~As all of ~~share-based payments received by~~ our ~~employees,~~subsidiaries ~~non-employee directors and other designated persons providing substantial services to us~~ are ~~based on equity instruments issued by our indirect parent~~wholly-owned, ~~Spheris~~the ~~Holding III. The~~ adoption of SFAS No. ~~123(R)~~160 ~~has~~did not ~~had~~have a material impact on our ~~consolidated financial position or~~ results of operations ~~during~~or ~~the~~financial ~~first half of 2006~~position.

SFAS No. 161. In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (“SFAS No. 161”). SFAS No. 161 requires entities that utilize derivative instruments to provide qualitative disclosures about their objectives and strategies for using such instruments, as well as any details of credit-risk-related contingent features contained within the derivative instruments. SFAS No. 161 requires disclosure of the amounts and location of derivative instruments included in an entity’s financial statements, as well as the accounting treatment of such instruments under FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended (“SFAS No. 133”) and the impact that hedges have on an entity’s financial position, financial performance and cash flows. We adopted the provisions of SFAS No. 161 effective January 1, 2009. Since SFAS No. 161 requires only additional disclosures concerning derivatives and hedging activities, the adoption of SFAS No. 161 did not affect the presentation of our results of operations or financial position.

Recently Issued Accounting Pronouncements Not Yet Adopted

FSP FAS 107-1 and APB 28-1. In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”), which amends FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments” and APB Opinion No. 28, “Interim Financial Reporting”. FSP FAS 107-1 and APB 28-1 applies to all financial instruments within the scope of Statement 107 held by publicly traded companies, as defined by Opinion 28, and requires disclosures at interim reporting periods to provide qualitative and quantitative information about such financial instruments. FSP FAS 107-1 and APB 28-1 is effective for interim and annual periods ending after June 15, 2009. Early adoption is permitted for interim and annual periods ending after March 15, 2009, subject to the early adoption of FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”, and FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”. We have not yet fully evaluated the impact, if any, that the implementation of FSP FAS 107-1 and APB 28-1 will have on our results of operations or financial position.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The variable interest rates under ~~our~~the ~~senior~~2007 ~~secured~~Senior ~~credit~~Credit ~~facilities~~Facility expose us to market risk ~~from~~ from changes in interest rates. We manage this risk by managing the time span of the interest ~~periods~~ periods elected under ~~these~~this ~~facilities~~facility. In addition, we maintain interest rate cap contracts to place limits on our exposure to the risk of changes in rates as required by our senior secured credit facilities. Our capital lease obligations were $0.2 million as of June 30, 2006, and therefore, we do not believe that we are currently exposed to significant interest rate risk on these facilities. Assuming a 10% increase in interest rates ~~available~~applicable to usthe ~~on our~~ variable portion of our debt, we would have incurred $0.21 million ~~and~~in ~~$0.3 million, respectively, of~~ additional interest expense during the quarter ~~three and six months~~ ended ~~June~~March 3031, ~~2006~~2009.

WeIn ~~are~~addition, ~~exposed~~we tohave ~~market~~entered ~~risk~~into ~~with~~certain ~~respect~~interest rate management agreements to reduce our exposure ~~cash~~to ~~and~~fluctuations ~~cash~~in ~~equivalent~~interest ~~balances~~rates under the 2007 Senior Credit Facility. AsAn ofevent ~~June~~of ~~30,~~default ~~2006,~~under wethe ~~had~~2007 ~~unrestricted~~Senior ~~cash~~Credit ~~and~~Facility ~~cash~~agreement ~~equivalents~~would ofcreate ~~$7.3 million.~~an ~~The~~event ~~remaining~~of ~~cash~~default ofunder ~~$0.9 million~~these asinterest ofrate ~~June 30~~management agreements, ~~2006~~which ~~was~~may ~~primarily~~cause ~~restricted~~amounts ~~cash~~due ~~that~~under isthese ~~being~~agreements ~~held~~to become immediately due and payable. Our accounting for ~~future~~these derivative financial instruments did ~~distributions~~not tomeet ~~former~~the ~~Vianeta~~hedge accounting criteria under SFAS No. 133 and ~~HealthScribe~~related ~~shareholders~~interpretations. Accordingly, ~~Assuming~~changes in fair value were included as a ~~10%~~component ~~decrease~~of other (income) expense in ~~interest~~our ~~rates~~condensed ~~available~~consolidated onstatements ~~invested~~of ~~cash~~operations. ~~balances,~~We ~~interest~~recognized $0.2 million of other income ~~would~~during the ~~have~~three ~~decreased~~months byended ~~$18~~March 31,~~000~~ ~~and $26~~2009,~~000,~~ ~~respectively,~~as ~~during~~compared ~~the~~to ~~three~~$1.1 million ~~and~~of ~~six~~other expense during the three months ended ~~June~~March 3031, ~~2006~~2008 related to changes in fair value for these interest derivatives.

WeThe ~~had~~fair ~~approximately~~value ~~$1.1 million~~of inthese interest rate management agreements is determined using valuation techniques including discounted cash ~~accounts~~flow inanalysis ~~India~~on inthe Uexpected cash flows of each derivative.S. This ~~dollar~~analysis ~~equivalents~~considers asthe contractual terms of ~~June 30,~~the ~~2006~~derivatives, ~~which~~including isthe ~~included~~period into ~~consolidated~~maturity, and ~~unrestricted~~uses ~~cash~~observable ~~balances~~market-based inputs, including interest rate curves and implied volatilities. The Wefair ~~manage~~values of these interest derivatives are determined using the ~~risk~~methodology of discounting ~~changes~~the future expected cash flows on the instrument. The interest rates used in ~~exchange~~the calculation of projected cash flows are based on an expectation of future interest rates ~~through~~derived ~~forward~~from ~~foreign~~observable market ~~currency~~interest ~~contracts~~rate curves and volatilities. To comply with the provisions of SFAS No. 157, we incorporate credit valuation adjustments to appropriately reflect nonperformance risk in the fair value measurements.

Although we have determined that the majority of the inputs used to value our interest derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our interest derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by our counterparties. However, as of March 31, 2009, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our interest derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of our interest derivatives. As a result, we have determined that our valuations for the interest derivatives in their entirety are classified in Level 2 of the fair value hierarchy. The interest derivatives were recorded at a fair value of $2.3 million and $2.5 million as of March 31, 2009 and December 31, 2008, respectively, as a component of other current liabilities and other long-term liabilities in our condensed consolidated balance sheets.

We are exposed to market risk with respect to our cash and cash equivalent balances. As of March 31, 2009, we had cash and cash equivalents of $11.1 million. Assuming a 10% decrease in interest rates available on invested cash balances, interest income would have decreased by $2,000 during the quarter ended March 31, 2009. We had $2.8 million in cash accounts in India in U.S. dollar equivalents as of March 31, 2009, which was included in consolidated cash balances.

Payments to SIPL are denominated in U.S. dollars. In order to hedge against fluctuations in exchange rates, SIPL maintains a portfolio of forward currency exchange contracts, which are transacted with a single counterparty. Our accounting for these derivative financial instruments did not meet the hedge accounting criteria under SFAS No. 133 and related interpretations. Changes in fair value were included as a component of other (income) expense in our condensed consolidated statements of operations. We recognized $0.3 million of other income during the three months ended March 31, 2009, as compared to $0.1 million of other expense during the three months ended March 31, 2008 related to changes in fair value of these derivatives.

We determine the fair value of our foreign currency exchange contracts utilizing inputs for similar or identical assets or liabilities that are either readily available in public markets, can be derived from information available in publicly quoted markets or are quoted by counterparties to these contracts. The future value of each contract out to its maturity is calculated using observable market data, such as the foreign currency exchange rate forward curve. The present value of each contract is then determined by using discount factors based on the forward curve for the more liquid currency. To comply with the provisions of SFAS No. 157, we incorporate credit valuation adjustments to appropriately reflect nonperformance risk in the fair value measurements.

Although we have determined that the majority of the inputs used to value our foreign currency exchange contracts fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with these derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by our counterparties. However, as of March 31, 2009, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of the derivatives. As a result, we have determined that our valuations for the foreign currency exchange contracts in their entirety are classified in Level 2 of the fair value hierarchy. The derivatives were recorded at a fair value of $0.7 million and $1.0 million as of March 31, 2009 and December 31, 2008, respectively, as a component of other current liabilities.

The above market risk discussion and the estimated amounts presented are forward-looking statements of market risk assuming the occurrence of certain adverse market conditions. Actual results in the future may differ materially from those projected as a result of actual developments in the market.

Item 44T. Controls and Procedures

Disclosure Controls. An evaluation was performed under the supervision and with the participation of our senior management, including our Chief Executive Officer and Chief Financial Officer, of the ~~effectiveness~~ effectiveness of the design and operation of our disclosure controls and procedures ~~pursuant~~(as todefined in Rules 13a-15(e) and 15d-15(e) ofunder the ~~Securities~~ Exchange Act) ~~of 1934~~ as of the end of the period covered by this ~~quarterly~~Quarterly ~~report~~Report. Based on that evaluation, our senior management, including our Chief Executive Officer and Chief Financial Officer, concluded that as of the end of the period covered by this ~~quarterly~~Quarterly ~~report~~Report our disclosure controls and procedures were effective in causing material information relating to us (including our consolidated subsidiaries) to be recorded, processed, summarized and reported by management on a timely basis and to ensure that the quality and timeliness of our public disclosures complies with SEC disclosure obligations. ~~There have been no~~ changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are likely to materially affect, our internal control over financial reporting.

24Changes in Internal Control Over Financial Reporting. There have been no changes in our internal control over financial reporting that occurred during the first quarter of 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and internal procedures will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, with the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error and mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of controls.

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, a control may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.

PART II
OTHER INFORMATION

Item 1. Legal Proceedings

~~None~~On November 6, 2007, we were sued for patent infringement by Anthurium Solutions, Inc. in the U.S. District Court for the Eastern District of Texas, alleging that we had infringed and continue to infringe United States Patent No. 7,031,998 through our use of our Clarity technology platform. The complaint also alleges claims against MedQuist Inc. and Arrendale Associates, Inc., and seeks injunctive relief and unspecified damages, including enhanced damages and attorneys’ fees. We timely filed our answer and a counterclaim seeking a declaratory judgment of non-infringement and invalidity. Although we currently believe these claims are without merit, our investigation of the claims is ongoing. The discovery phase of the litigation is ongoing, and the trial date is currently set for October 6, 2009. We plan to vigorously defend against the claim of infringement and pursue all available defenses.

Item 1A. Risk Factors

There have not been any material changes in our risk factors as previously disclosed in our ~~Registration~~ ~~Statement on Form S-4 (Registration No~~Annual Report. ~~333-132641).~~

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

None.

Item 3. Defaults Upon Senior Securities

None.

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

~~On May 23, 2006, Spheris Holding II, Inc~~None.~~, the sole stockholder of Spheris, Inc., pursuant to an~~ action taken on written consent in lieu of a meeting, elected the following directors to serve until the next annual meeting of stockholders or until their successors are duly elected and qualified or their earlier death, resignation or removal: Steven Simpson, David Wenstrup, Joel Ackerman, Jonathan Bilzin, Neal Moszkowski, Michael King and Wayne Smith.

Item 5. Other Information

None.

Item 6. Exhibits

The following exhibits are filed herewith:

Exhibit
Number		Description of Exhibits
31.1		Certification of the Company’s Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of the Company’s Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32		Certification of the Company’s Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	SPHERIS INC.	~~SPHERIS INC.~~
Date: August 14, 2006
Date: May 15, 2009
	By:	~~By:~~/s/ Daniel J. Kohl	~~/s/ Steven E. Simpson~~
			Steven E. Simpson
		Daniel J. Kohl
		President and Chief Executive Officer	~~President and Chief Executive Officer~~
	By:	~~By:~~/s/ Brian P. Callahan	~~/s/ Brian P. Callahan~~
		Brian P. Callahan	~~Brian P. Callahan~~
		Chief Financial Officer	~~Chief Financial Officer~~

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