<PAGE>

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

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549

                                   FORM 10-Q


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

                 For the quarterly period ended June 30, 2001

                                      OR

( )  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 0-18217


                           TRANSCEND SERVICES, INC.
            (Exact name of registrant as specified in its charter)


            Delaware                                   33-0378756
  (State or other jurisdiction of                    (I.R.S Employer
   incorporation or organization)                  Identification No.)

          945 East Paces Ferry Rd, Suite 1475, Atlanta, Georgia 30326
             (Address of principal executive offices and zip code)
      Registrant's telephone number, including area code: (404) 364-8000

                                      N/A
             (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 Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes   X    No
                                               -----     -----


     Indicate the number of shares outstanding of the Registrant's common stock
as of the latest practicable date.

               Class                           Outstanding at July 31, 2001
               -----                           ----------------------------
     Common Stock, $.05 par value                     4,413,143 Shares


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

<PAGE>

                                     INDEX

                                                                           Page
                                                                          Number
                                                                          ------
PART I.   FINANCIAL INFORMATION

Item 1.   Financial Statements

            Consolidated Balance Sheets as of
            June 30, 2001 and December 31, 2000..........................    3

            Consolidated Statements of Operations for the
            Three and Six Months Ended June 30, 2001 and 2000............    4

            Consolidated Statements of Cash Flows for the
            Six Months Ended June 30, 2001 and 2000......................    5

            Notes to Consolidated Financial Statements...................    6

Item 2.     Management's Discussion and Analysis of
              Financial Condition and Results of Operations..............    8

Item 3.     Quantitative and Qualitative Disclosures About Market Risk...   11

PART II.    OTHER INFORMATION............................................   12

Item 1.     Legal Proceedings............................................   12

Item 4.     Submission of Matters to a Vote of Security Holders..........   12

Item 6.     Exhibits and Reports on Form 8-K.............................   12

SIGNATURES  .............................................................   13


                                       2
<PAGE>

PART I.   FINANCIAL INFORMATION
Item 1.   Financial Statements

                           TRANSCEND SERVICES, INC.
                          CONSOLIDATED BALANCE SHEETS
                                  (Unaudited)
<TABLE>
<CAPTION>
                                                                                              June 30, 2001     December 31, 2000
                                                                                            -------------------------------------
<S>                                                                                           <C>               <C>
                                       ASSETS
Current assets:
Cash and cash equivalents                                                                      $     98,000          $      6,000
Short-term investment                                                                                     0               870,000
Accounts receivable, net of allowance for doubtful accounts of $293,000 at June 30, 2001
  and $542,000 at December 31, 2000                                                               1,549,000             1,974,000
Prepaid expenses and other current assets                                                            54,000               165,000
                                                                                               ------------          ------------
Total current assets                                                                              1,701,000             3,015,000
                                                                                               ------------          ------------
Property and equipment:
  Computer equipment                                                                              3,148,000             2,975,000
  Software development                                                                            1,550,000             1,550,000
  Furniture and fixtures                                                                            224,000               220,000
                                                                                               ------------          ------------
     Property and equipment                                                                       4,922,000             4,745,000
  Accumulated depreciation                                                                       (3,070,000)           (2,487,000)
                                                                                               ------------          ------------
     Property and equipment, net                                                                  1,852,000             2,258,000
                                                                                               ------------          ------------
Notes receivable and other assets                                                                   407,000               406,000
                                                                                               ------------          ------------
Total assets                                                                                   $  3,960,000          $  5,679,000
                                                                                               ============          ============
                        LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under line of credit                                                                $    395,000          $          0
Accounts payable                                                                                    312,000             1,059,000
Accrued compensation and benefits                                                                   347,000               399,000
Other accrued liabilities                                                                           777,000             1,310,000
Deferred income taxes                                                                                     0               121,000
                                                                                               ------------          ------------
Total current liabilities                                                                         1,831,000             2,889,000
                                                                                               ------------          ------------
Borrowings under line of credit                                                                           0               614,000
                                                                                               ------------          ------------
Commitments and contingencies

Stockholders' equity:
Preferred stock, $.01 par value; 21,000,000 shares authorized:
  Series A convertible preferred stock; 212,800 shares issued and outstanding at
      June 30, 2001 and December 31, 2000                                                             2,000                 2,000
  Series B convertible preferred stock; 60,000 shares issued and outstanding at
      June 30, 2001 and December 31, 2000                                                             1,000                 1,000
Common Stock, $.05 par value; 6,000,000 shares authorized, 4,413,000 and 4,383,000
  shares issued and outstanding at June 30, 2001 and December 31, 2000, respectively                225,000               224,000
Additional paid-in capital                                                                       28,015,000            27,982,000
Unrealized loss on short-term investment                                                                  0              (866,000)
Accumulated deficit                                                                             (26,114,000)          (25,167,000)
                                                                                               ------------          ------------
  Total stockholders' equity                                                                      2,129,000             2,176,000
                                                                                               ------------          ------------
Total liabilities and stockholders' equity                                                     $  3,960,000          $  5,679,000
                                                                                               ============          ============
</TABLE>


                 The accompanying notes are an integral part
                     of these consolidated balance sheets.

                                       3
<PAGE>

                           TRANSCEND SERVICES, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                       Three Months Ended              Six Months Ended
                                                   ---------------------------     -------------------------
                                                      6/30/01         6/30/00        6/30/01       6/30/00
                                                   ------------     ----------     ----------    -----------
<S>                                                <C>              <C>            <C>           <C>
Revenue:
  Transcription Services                            $ 2,916,000     $3,479,000     $5,817,000    $ 7,490,000
  Cascade Software                                      347,000        750,000      1,005,000      1,304,000
  Co-Sourcing and CodeRemote                                  0      3,898,000              0      7,460,000
                                                    -----------     ----------     ----------    -----------
    Total revenue                                     3,263,000      8,127,000      6,822,000     16,254,000
                                                    -----------     ----------     ----------    -----------
Direct costs:
  Transcription Services                              2,221,000      2,832,000      4,360,000      6,267,000
  Cascade Software                                      232,000        277,000        466,000        434,000
  Co-Sourcing and CodeRemote                                  0      3,292,000              0      6,370,000
                                                    -----------     ----------     ----------    -----------
    Total direct costs                                2,453,000      6,401,000      4,826,000     13,071,000
                                                    -----------     ----------     ----------    -----------
Gross profit:
  Transcription Services                                695,000        647,000      1,456,000      1,223,000
  Cascade Software                                      115,000        473,000        539,000        870,000
  Co-Sourcing and CodeRemote                                  0        606,000              0      1,090,000
                                                    -----------     ----------     ----------    -----------
    Total gross profit                                  810,000      1,726,000      1,996,000      3,183,000
                                                    -----------     ----------     ----------    -----------
Operating expenses:
  Sales and marketing                                   223,000        256,000        455,000        461,000
  Research and development                              194,000        287,000        404,000        539,000
  General and administrative                            693,000        920,000      1,347,000      1,882,000
                                                    -----------     ----------     ----------    -----------
     Total operating expenses                         1,110,000      1,463,000      2,206,000      2,882,000
                                                    -----------     ----------     ----------    -----------
Operating income (loss)                                (300,000)       263,000       (210,000)       301,000

Interest expense, net                                   (15,000)      (139,000)       (38,000)      (251,000)
                                                    -----------     ----------     ----------    -----------
Income (loss) before income tax and
  discontinued operations                              (315,000)       124,000       (248,000)        50,000
Income tax (expense) benefit                             (5,000)             0        116,000              0
                                                    -----------     ----------     ----------    -----------
Income (loss) from continuing operations               (320,000)       124,000       (132,000)        50,000

Income (loss) from discontinued operations             (576,000)             0       (576,000)       272,000
                                                    -----------     ----------     ----------    -----------
Net income (loss)                                      (896,000)       124,000       (708,000)       322,000
Dividends on preferred stock                           (120,000)      (120,000)      (239,000)      (239,000)
                                                    -----------     ----------     ----------    -----------
Net income (loss) attributable to
  common stockholders                               $(1,016,000)    $    4,000      $(947,000)   $    83,000
                                                    ===========     ==========     ==========    ===========

Basic income (loss) per share:
  From continuing operations                        $     (0.10)    $     0.00     $    (0.08)   $     (0.04)
  From discontinued operations                            (0.13)          0.00          (0.13)          0.06
                                                    -----------     ----------     ----------    -----------
     Net income (loss) attributable to
       common stockholders                          $     (0.23)    $     0.00     $    (0.22)   $      0.02
                                                    ===========     ==========     ==========    ===========
Weighted average shares outstanding                   4,403,000      4,322,000      4,393,000      4,325,000
                                                    ===========     ==========     ==========    ===========
Diluted income (loss) per share
  From continuing operations                        $     (0.10)    $     0.00     $    (0.08)   $     (0.04)
  From discontinued operations                            (0.13)          0.00          (0.13)          0.06
                                                    -----------     ----------     ----------    -----------
     Net income (loss) attributable to
       common stockholders                          $     (0.23)    $     0.00     $    (0.22)   $      0.02
                                                    ===========     ==========     ==========    ===========
Weighted average shares outstanding                   4,403,000      4,322,000      4,393,000      4,325,000
                                                    ===========     ==========     ==========    ===========
</TABLE>


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

                                       4
<PAGE>

                           TRANSCEND SERVICES, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Unaudited)
<TABLE>
<CAPTION>
                                                                              Six Months Ended June 30,
                                                                             ---------------------------
                                                                                 2001           2000
                                                                             -----------    ------------
<S>                                                                          <C>            <C>
Cash flows from operating activities:
Net income (loss) attributable to common stockholders                        $ (947,000)    $    83,000
                                                                             ----------     -----------
Adjustments to reconcile net income (loss) to net cash
  provided by (used in) operating activities:
  Depreciation and amortization                                                 583,000         824,000
  Income (loss) from discontinued operations                                    576,000        (272,000)
  Non-cash operating expenses                                                         0         553,000
  Preferred stock dividends                                                     239,000         239,000
  Changes in assets and liabilities:
     Accounts receivable, net                                                   425,000         516,000
     Prepaid expenses                                                           111,000        (322,000)
     Notes receivable and other assets                                           (1,000)        291,000
     Accounts payable                                                          (747,000)     (1,421,000)
     Accrued liabilities                                                       (706,000)     (3,579,000)
                                                                             ----------     -----------
        Total adjustments                                                      (480,000)     (3,171,000)
                                                                             ----------     -----------
Net cash used in continuing operations                                         (467,000)     (3,088,000)
Net cash provided by discontinued operations                                  1,160,000          18,000
                                                                             ----------     -----------
Net cash provided by (used in) operating activities                             693,000      (3,070,000)
                                                                             ----------     -----------

Cash flows from investing activities:
  Capital expenditures                                                         (177,000)       (508,000)
                                                                             ----------     -----------
Net cash used in investing activities                                          (177,000)       (508,000)
                                                                             ----------     -----------

Cash flows from financing activities:
  Repayments of borrowings under line of credit agreement, net                 (219,000)       (327,000)
  Principle payments on long-term debt                                                0        (171,000)
  Preferred stock dividends                                                    (239,000)       (239,000)
  Proceeds from the exercise of stock options and other issuances                34,000          90,000
                                                                             ----------     -----------
Net cash used in financing activities                                          (424,000)       (647,000)
                                                                             ----------     -----------

Net increase (decrease) in cash and cash equivalents                             92,000      (4,225,000)
Cash and cash equivalents, at beginning of period                                 6,000       4,388,000
                                                                             ----------     -----------
Cash and cash equivalents, at end of period                                  $   98,000     $   163,000
                                                                             ==========     ===========
Supplemental cash flow information:
Cash paid for interest expense                                               $   38,000     $   251,000
Non-cash investing and financing activities:
  Receipt of short-term investment in legal settlement                       $        0     $ 1,740,000
  Unrealized loss on short-term investment                                   $        0     $   (52,000)
  Conversion of convertible notes payable to a related party to
    Series B Convertible Preferred Stock                                     $        0     $ 1,500,000
</TABLE>


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

                                       5
<PAGE>

                           TRANSCEND SERVICES, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                            June 30, 2001 and 2000
                                  (Unaudited)

(1) The accompanying consolidated financial statements are unaudited and have
been prepared by the management of Transcend Services, Inc. (the "Company") in
accordance with the rules and regulations of the Securities and Exchange
Commission.  In the opinion of management, all adjustments, consisting of normal
recurring accruals necessary for the fair presentation of the consolidated
financial position, results of operations and cash flows, have been included.
Common shares and per share data have been restated to include the 1-for-5
reverse stock split effected by the Company on January 14, 2000.  For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Form 10-K for the year ended December 31,
2000.  Footnote disclosure that substantially duplicates the disclosure
contained in that document has been omitted.

(2) On March 13, 2001, the Company announced the termination of its efforts to
sell Cascade Health Information Software, Inc. ("Cascade"), which had previously
been reported as discontinued operations in the Company's consolidated financial
statements, due to market conditions.  All information presented has been
restated to show the reclassification of Cascade from discontinued to continuing
operations.

(3) The short-term investment reflected in the accompanying consolidated balance
sheet as of December 31, 2000 was sold in the open market for approximately
$1,164,000, net of commission expense of approximately $10,000, on April 2,
2001.  This investment consisted of the unregistered common stock of a publicly
traded company (Core, Inc.) with a cost basis of approximately $1,740,000 that
was received in a legal settlement effective March 31, 2000 and was included in
the short-term investment account at that time, but it was not available-for-
sale until April 1, 2001 due to resale restrictions.  Subsequent to acquiring
this short-term investment, its carrying value in the Company's books and
records was adjusted to the lower of cost or fair market value by entries to a
separate valuation account included in the stockholders' equity section of the
Company's balance sheet.  The fair market value of this short-term investment
was approximately $1,181,000 as of March 31, 2001, thereby resulting in an
unrealized loss of approximately $559,000, which is reflected as a reduction in
stockholders' equity in the Company's balance sheet as of that date.  The sale
transaction resulted in a loss of approximately $576,000, which is presented as
a loss from discontinued operations in the accompanying consolidated statements
of operations for the three and six months ended June 30, 2001, and a reduction
in stockholders' equity of approximately $17,000 as of April 2, 2001.  The
proceeds from this sale were used to reduce borrowings under the Company's line
of credit. See notes 8 and 9.

(4) The Company accounts for its income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109.  Certain deferred tax
liabilities established in prior years related to the expected tax consequences
of temporary differences between the tax basis of assets and liabilities and
their related reported amounts are no longer required. Accordingly, an income
tax benefit of $121,000 was included in the consolidated statements of
operations during the three months ended March 31, 2001.

(5) The Company follows SFAS No. 128, "Earnings per Share."  That statement
requires the disclosure of basic net income (loss) per share and diluted net
income (loss) per share.  Basic net income (loss) per share is computed by
dividing net income (loss) available to common shareholders by the weighted-
average number of common shares outstanding during the period and does not
include any other potentially dilutive securities.  Diluted net income per share
gives effect to all potentially dilutive securities.  All potentially dilutive
securities were antidilutive and therefore are not included in diluted net
income (loss) per share calculations for the three and six months ended June 30,
2001 and 2000.

                                       6
<PAGE>

(6) The Company accounts for comprehensive income (loss) under the provisions of
SFAS No. 130, Reporting Comprehensive Income.  The Company's comprehensive
income is presented below for the periods indicated:

<TABLE>
<CAPTION>
                       (in 000's)                                    Three Months Ended            Six Months Ended
                                                                   -----------------------     -----------------------
                                                                    6/30/01        6/30/00     6/30/01        6/30/00
                                                                    -------       --------     -------        --------
   <S>                                                              <C>           <C>          <C>            <C>
   Net income (loss) attributable to common stockholders            $(1,016)      $      4     $  (947)       $     83
   Unrealized gain (loss) on short-term investment                      559            346         866             (52)
                                                                    -------       --------     -------        --------
   Comprehensive income (loss)                                      $  (457)      $    350     $   (81)       $     31
                                                                    =======       ========     =======        ========
</TABLE>


(7) Effective on January 14, 2000 the Company converted $1,500,000 in
convertible notes held by certain directors and executive officers of the
Company into 60,000 shares of Transcend Series B Convertible Preferred Stock
(the "Preferred B Shares").  The Preferred B Shares have a stated value of
$25.00 per share.  The Preferred B Shares do not pay dividends and have voting
rights equal to the number of shares of Transcend common stock into which the
Preferred B Shares may be converted from time to time.  Each share is
convertible, at the option of the holder, at any time into 6.9 unregistered
shares of Transcend Common Stock. The Series B Preferred Shares were issued
pursuant to the exemption from registration contained in Section 4(2) of the
Securities Act of 1933.

(8) On March 30, 2001, the Company extended the due date of its $1.5 million
line of credit to March 31, 2002.  Repayment of borrowings, if any, under this
line of credit are personally guaranteed by the Company's Chief Executive
Officer and one of its Directors.

(9) On March 16, 1998, Transcend sold the net assets of Transcend Case
Management, Inc. ("TCM"), its wholly owned subsidiary, to TCM Services, Inc., a
wholly owned subsidiary of Core, Inc. ("Core").  On December 23, 1998 the
Company reacquired TCM from Core and filed an arbitration claim against Core
after learning of Core's intent to discontinue the business. The reacquisition
of TCM was accounted for under the purchase method of accounting.  On February
8, 2000, an arbitrator ruled that Core breached its purchase contract with
Transcend and awarded approximately $1.7 million, plus attorney's fees and
arbitration costs, to Transcend.  On March 31, 2000, Core issued 248,703 shares
of its unregistered common stock to Transcend in full and complete settlement of
the arbitrator's award in favor of Transcend.  The Company reported a gain of
$269,000 on this legal settlement, which was included in income from
discontinued operations in the consolidated statements of operations for the
three months ended March 31, 2000.  The Company ceased TCM's operations
effective December 31, 1999.  See note 3.

(10) On October 13, 2000, the Company completed the sale of its Co-Sourcing and
CodeRemote businesses (the "Businesses") to Provider HealthNet Services, Inc.
The unaudited  revenue, direct costs and gross profit for the Businesses are
presented separately in the accompanying consolidated statements of operations.
Since many of the assets and operating expenses of the Businesses are not
separately identifiable, these divestitures are not reported as discontinued
operations.  See note 11.

(11) The Company's reportable segments are strategic business units that offer
different services and products.  Beginning January 1, 2001, the Company
operates in two segments: (1) Transcription Services; and (2) Cascade Software.
The Company operated in four segments (Transcription Services, Cascade Software,
Co-Sourcing and CodeRemote) throughout most of 2000.  With the exception of
Cascade Software, the Company evaluated the other three business segments on the
basis of revenue and gross profit during 2000, since many of the assets and
operating expenses of these segments were not separately identifiable.  Cascade
is evaluated based on revenue, gross profit and operating income. The revenue
and gross profit for each segment are presented in the accompanying consolidated
statements of operations for the three and six months ended June 30, 2001 and
2000.  Co-Sourcing and CodeRemote are combined in these statements due to the
insignificance of CodeRemote and the fact that both Co-Sourcing and CodeRemote
were sold during October 2000.  The operating losses for Transcription Services
and Cascade Software were $95,000 and $205,000, respectively, for the three
months ended June 30, 2001 and $86,000 and $124,000, respectively, for the six
months ended June 30, 2001.

                                       7
<PAGE>

(12)  On April 5, 2001, Our Lady of the Lakes Hospital, Inc. ("OLOL") filed a
lawsuit against the Company.  The lawsuit, styled "Our Lady of the Lakes
Hospital, Inc. v. Transcend Services, Inc." was filed in the 19th Judicial
District Court, Parish of East, State of Louisiana, Civil Case Number 482775,
Div. A. The lawsuit alleges, among other things, that the Company breached
certain contracts entered into between OLOL and the Company, including a
staffing and management servicing contract, a transcription platform agreement
and a marketing agreement. OLOL is seeking an unspecified amount of monetary
damages.  On May 30, 2001, the Company filed a timely Answer which generally
denied all liability, and the Company filed a counterclaim against OLOL
primarily seeking fees owed by OLOL for services performed by the Company and
interest on unpaid invoices.

The Company intends to vigorously defend all claims made by OLOL.  The lawsuit
is in a very early procedural stage, however, and therefore it is not possible
at this time to determine the outcome of the actions or the effect that their
outcome may have on the Company's financial condition or operating results.
There can be no assurances that this litigation will not have a material adverse
effect on the Company's results of operations or the Company's financial
condition.

In addition, the Company is party to various lawsuits encountered in the normal
course of business and believes that it has meritorious defenses to the related
claims and assertions, however, there can be no assurance that the Company will
be successful in defending such claims and assertions.

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

Certain information included in this Quarterly Report on Form 10-Q contains, and
other reports or materials filed or to be filed by the Company with the
Securities and Exchange Commission (as well as information included in oral
statements or other written statements made or to be made by the Company or its
management) contain or will contain, "forward-looking statements" within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
Section 27A of the Securities Act of 1933, as amended and pursuant to the
Private Securities Litigation Reform Act of 1995.  Such forward-looking
statements may relate to financial results and plans for future business
activities, and are thus prospective.  Such forward-looking statements are
subject to risks, uncertainties and other factors that could cause actual
results to differ materially from future results expressed or implied by such
forward-looking statements.  Potential risks and uncertainties include, but are
not limited to, general economic conditions, competition and other uncertainties
detailed in this report and detailed from time to time in other filings by the
Company with the Securities and Exchange Commission (as well as information
included in oral statements or other written statements made or to be made by
the Company or its management).  Any forward-looking statements are made
pursuant to the Private Securities Litigation Reform Act of 1995 and, as such
speak only as of the date made.

Results of Operations

Transcend Services, Inc. (the "Company" or "Transcend") provides medical
transcription services and coding and abstracting software to the healthcare
industry.  In the Company's Transcription Services business unit, home-based
medical transcription professionals utilizing web-based voice and data
distribution technology document patient care by converting physicians' voice
recordings into electronic medical record documents.  The Company's wholly owned
subsidiary, Cascade Health Information Software, Inc. ("Cascade"), provides
state-of-the-art software for the coding and abstracting of patient medical
records.

On October 13, 2000, the Company sold both its facility management business
("Co-Sourcing"), which provided on-site management of hospital medical records
operations, and its remote coding business ("CodeRemote"), which helped
healthcare providers code their medical records, to Provider HealthNet Services,
Inc.

Results of operations presented in the accompanying consolidated statements of
operations include the continuing operations of Transcend Services and Cascade,
two sold operations (Co-Sourcing and CodeRemote) and one discontinued operation
(Transcend Case Management, Inc. ("TCM"), a wholly owned subsidiary that ceased
operations effective December 31, 1999.

                                       8
<PAGE>

Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000

Revenue decreased $4.9 million, or 60%, to $3.3 million for the three months
ended June 30, 2001 compared to revenue of $8.1 million for the three months
ended June 30, 2000.  $3.9 million of the $4.9 million decrease is attributable
to the loss of revenue from the businesses that were sold during October 2000
(Co-Sourcing and CodeRemote).  Transcription Services revenue also declined
$563,000, or 16%, to $2.9 million as a result of the Company's restructuring
activities in late 1999 and 2000.  At that time, the Company determined that it
was not prudent to convert certain transcription customer accounts to its T2K
technology.  The Transcription Services revenue of $3.5 million reported in the
second quarter of 2000 includes $623,000 from 11 transcription service
agreements that were terminated by the Company during 2000.  Accordingly,
Transcription Services revenue attributable to current customers increased
slightly in the second quarter of 2001 compared to the second quarter of 2000.
Cascade's revenue decreased $403,000, or 54%, to $347,000 due primarily to
relatively low software revenue generated from new customer accounts during the
second quarter of 2001.

While gross profit decreased $916,000, or 53%, to $810,000 for the three months
ended June 30, 2001 compared to the amount in the comparable prior year period,
gross profit as a percentage of revenue increased from 21% to 25% during the
same periods.  The decrease in gross profit is attributable to the sale of the
Co-Sourcing and CodeRemote businesses, which collectively contributed gross
profit of $606,000 in the second quarter of 2000.  The improvement in gross
profit as a percentage of revenue is due to the disposal of Co-Sourcing and
CodeRemote, which only had 16% gross profit margins, and the significant
improvement in the gross profit as a percentage of revenue achieved by
Transcription Services, which reported 24% gross profit margins in the second
quarter of 2001, compared to 19% gross profit margins in the second quarter of
2000.  This improvement is due in large part to the restructuring activity
referred to above.  Cascade's gross profit decreased $358,000, or 76%, to
$115,000 for the second quarter of 2001 compared to the second quarter of 2000
due to the lower level of high-gross margin software in the second quarter of
2001 discussed above.  As a result, Cascade's gross profit as a percentage of
revenue decreased to 33% in the second quarter of 2001 compared to 63% in the
second quarter of 2000.

Sales and marketing expenses decreased slightly in the second quarter of  2001
when compared to the same prior year period, but increased significantly as a
percentage of  revenue to 7% in the second quarter of 2001 compared to 3% in the
second quarter of 2000.  The Company revamped and expanded its sales force to
enhance the opportunity for revenue growth.

Research and development expenses decreased $93,000, or 32%, to $194,000 in the
second quarter of 2001 when compared to the same prior year period, but
increased as a percentage of revenue to 6% in the second quarter of 2001
compared to 4% in the second quarter of 2000. The Company believes that the size
of its current research and development staff is sufficient to accomplish its
planned development activities for the remainder of the year.

General and administrative expenses decreased $227,000, or 25%, to $693,000 in
the second quarter of 2001 when compared to the same prior year period as a
result of the Company substantially reducing its infrastructure expense required
to handle its lower level of operating activity and revenue.

Net interest expense decreased $124,000 to $15,000 in the second quarter of 2001
from $139,000 in the second quarter of 2000 due to:  (1) the reduction of debt
using a portion of the proceeds from the sale of the Co-Sourcing and CodeRemote
businesses on October 13, 2000; (2) the reduction of debt using a portion of the
proceeds from the sale of the short-term investment on April 2, 2001; (3) the
nation-wide reduction in the prime interest rate; and (4) the below-prime
borrowing rate on the Company's line of credit made possible by the personal
repayment guarantees of the Company's Chief Executive Officer and one of its
Directors.

The Company incurred an insignificant amount of state income taxes in the second
quarter of 2001 despite having net operating loss carry-forwards in excess of
approximately $20 million.

The Company reported  a loss from discontinued operations of $576,000 in the
second quarter of 2001 attributable to the sale of the short-term investment in
April 2001 that was acquired in conjunction with ceasing the operations of TCM
in 1999.

                                       9
<PAGE>

Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000

Revenue decreased $9.4 million, or 58%, to $6.8 million for the six months ended
June 30, 2001 compared to revenue of $16.3 million for the six months ended June
30, 2000.  $7.5 million of the $9.4 million decrease is attributable to the loss
of revenue from the businesses that were sold during October 2000 (Co-Sourcing
and CodeRemote).  Transcription Services revenue also declined $1.7 million, or
22%, to $5.8 million as a result of the Company's restructuring activities in
late 1999 and 2000.  At that time, the Company determined that it was not
prudent to convert certain transcription customer accounts to its T2K
technology.  The Transcription Services revenue of  $7.5 million reported in the
first half of 2000 includes $1.75 million from 11 transcription service
agreements that were terminated by the Company during 2000.  Accordingly,
Transcription Services revenue attributable to current customers increased
slightly in the first half of 2001 compared to the first half of 2000.
Cascade's revenue decreased $299,000, or 23%, to $1.0 million due primarily to
relatively low software revenue generated from new customer accounts during the
second quarter of 2001.

While gross profit decreased $1.2 million, or 37%, to $2.0 million for the six
months ended June 30, 2001 compared to the amount in the comparable prior year
period, gross profit as a percentage of revenue increased from 20% to 29% during
the same periods.  The decrease in gross profit is attributable to the sale of
the Co-Sourcing and CodeRemote businesses, which contributed gross profit of
$1.1 million in the first half of 2000.  The improvement in gross profit as a
percentage of revenue is due to the disposal of Co-Sourcing and CodeRemote,
which only had 15% gross profit margins, and the significant improvement in the
gross profit as a percentage of revenue achieved by Transcription Services,
which reported 25% gross profit margins in the first half of 2001, compared to
16% gross profit margins in the first half of 2000.  This improvement is due in
large part to the restructuring activity referred to above.  Cascade's gross
profit decreased $331,000, or 38%, to $539,000 for the first half of 2001
compared to the first half of 2000 due to the lower level of high-gross margin
software in the second quarter of 2001 discussed above.  As a result, Cascade's
gross profit as a percentage of revenue decreased to 54% in the first half of
2001 compared to 67% in the first half of 2000.

Sales and marketing expenses were relatively constant between years, but
increased significantly as a percentage of  revenue to 7% in the first half of
2001 compared to 3% in the first half of 2000.  The Company revamped and
expanded its sales force to enhance the opportunity for revenue growth.

Research and development expenses decreased $135,000, or 25%, to $404,000 for
the six months ended June 30, 2001 as compared to the same prior year period,
but increased as a percentage of revenue to 6% in the first half of 2001
compared to 3% in the first half of 2000.   The Company believes that the size
of its current research and development staff is sufficient to accomplish its
planned development activities for the remainder of the year.

General and administrative expenses decreased $535,000, or 28%, to $1.3 million
for the six months ended June 30, 2001 compared to the six months ended June 30,
2000 as the Company substantially reduced its infrastructure expense required to
handle its lower level of operating activity and revenue.

Net interest expense decreased $213,000 to $38,000 in the first half of 2001
from $251,000 in the first half of 2000 due to:  (1) the reduction of debt using
a portion of the proceeds from the sale of the Co-Sourcing and CodeRemote
businesses on October 13, 2000; (2) the reduction of debt using a portion of the
proceeds from the sale of the short-term investment on April 2, 2001; (3) the
nation-wide reduction in the prime interest rate; and (4) the below-prime
borrowing rate on the Company's line of credit made possible by the personal
repayment guarantees of the Company's Chief Executive Officer and one of its
Directors.

The Company previously reported an income tax benefit of $121,000 in the first
quarter of 2001 due to the elimination of deferred tax liabilities established
in prior years that are no longer required.  In the second quarter of 2001, the
Company reported an insignificant amount of state income taxes despite having
net operating loss carry-forwards in excess of approximately $20 million.

The Company reported a loss from discontinued operations of $576,000 in the
second quarter of 2001 attributable to the sale of  the short-term investment in
April 2001 that was acquired in conjunction with ceasing the operations of TCM
in 1999.  In the first half of 2000, the Company reported income from
discontinued operations of $272,000 due substantially to a one-time gain on the
favorable settlement of the arbitration case related to TCM.

                                       10
<PAGE>

Liquidity and Capital Resources

On April 2, 2001, the Company sold its short-term investment in the common stock
of Core, Inc. ("Core") for approximately $1.2 million and used a portion of the
proceeds to reduce its borrowings under its $1.5 million line of credit.  There
is approximately $1.1 million available for borrowing under the Company's line
of credit as of June 30, 2001.  This line of credit expires on March 31, 2002.
The sale of the Core stock not only financed substantially all of the Company's
operating, investing and financing activities described below, but also enabled
the Company to increase its cash balance by $92,000 during the first half of
2001.  The Company's cash balance is $98,000 as of June 30, 2001.

Continuing operations used cash of $467,000 in operating activities during the
first half of 2001 primarily due to a scheduled reduction in accounts payable
and accrued liabilities.  The Company has a working capital deficit of $130,000
as of June 30, 2001 compared to a working capital balance of $126,000 as of
December 31, 2000 due primarily to a change in the classification of borrowings
under the line of credit from a long-term to a current liability.   This change
in working capital of $256,000 approximates the reduction in the level of
borrowings under the line of credit of $219,000 between December 31, 2000 and
June 30, 2001.

The Company reported a relatively low level of capital expenditures of $177,000
for the six months ended June 30, 2001.  Such capital expenditures were
primarily made for planned additions of computer equipment.

In addition to reducing borrowings under the line of credit during the first
half of 2001, the Company also paid preferred stock dividends of $239,000.

Potential sources of non-operational cash flow during the remainder of 2001
include: (1) an undetermined amount of potential earn-out payments, if any, from
Provider HealthNet Services, Inc. ("PHNS") based on a fixed percentage of
certain defined future revenue recognized by PHNS from the Co-Sourcing and
CodeRemote businesses sold to PHNS in October 2000; (2) an undetermined amount
of potential earn-out payments, if any, from MedQuist, Inc. ("MedQuist") based
on the renewal of certain medical transcription contracts sold to MedQuist in
December 1999; and (3) payment of the note receivable approximating $350,000
from MedQuist, which becomes due in December 2001.

The Company anticipates that cash on hand, together with internally generated
funds, cash available under its line of credit, cash collected from the MedQuist
note receivable and potential cash from the PHNS and MedQuist earn-out
agreements, if any, should be sufficient to finance continuing operations, make
capital investments in the normal and ordinary course of its business and meet
its Series A Convertible Preferred Stock dividend payment requirements during
the remainder of 2001.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Since the Company sold its short-term investment in the unregistered common
stock of a publicly traded company on April 2, 2001, the Company has no material
exposure to market risk from derivatives or other financial instruments.  See
note 3 to the accompanying consolidated financial statements.

                                       11
<PAGE>

PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings

On April 5, 2001, Our Lady of the Lakes Hospital, Inc. ("OLOL") filed a lawsuit
against the Company.  The lawsuit, styled "Our Lady of the Lakes Hospital, Inc.
v. Transcend Services, Inc." was filed in the 19th Judicial District Court,
Parish of East, State of Louisiana, Civil Case Number 482775, Div. A. The
lawsuit alleges, among other things, that the Company breached certain contracts
entered into between OLOL and the Company, including a staffing and management
servicing contract, a transcription platform agreement and a marketing
agreement. OLOL is seeking an unspecified amount of monetary damages.  On May
30, 2001, the Company filed a timely Answer which generally denied all
liability, and the Company filed a counterclaim against OLOL primarily seeking
fees owed by OLOL for services performed by the Company and interest on unpaid
invoices.

The Company intends to vigorously defend all claims made by OLOL.  The lawsuit
is in a very early procedural stage, however, and therefore it is not possible
at this time to determine the outcome of the actions or the effect that their
outcome may have on the Company's financial condition or operating results.
There can be no assurances that this litigation will not have a material adverse
effect on the Company's results of operations or the Company's financial
condition.

In addition, the Company is party to various lawsuits encountered in the normal
course of business and believes that it has meritorious defenses to the related
claims and assertions, however, there can be no assurance that the Company will
be successful in defending such claims and assertions.

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

The Company held its Annual Meeting of Stockholders on May 8, 2001.  The
Stockholders voted on the following three proposals and the results of the
voting are presented below.

1.  To elect a Board of Directors consisting of four members to hold office
until the next annual meeting of stockholders or until their successors are
elected and qualified:

                                                          Votes
             Nominee                 Votes For           Withheld
        Joseph P. Clayton            4,757,899            71,273
        Larry G. Gerdes              4,667,724           161,448
        Walter S. Huff, Jr.          4,731,046            98,126
        Charles E. Thoele            4,757,821            71,351

2.  To approve the Transcend Services, Inc. 2001 Stock Option Plan:   The
Stockholders approved said stock option plan with 2,929,382 votes FOR, 216,218
votes AGAINST, 2,813 ABSTAINING and 1,680,759 BROKER NON-VOTES.

3. To ratify the appointment of Arthur Andersen LLP as independent public
accountants to audit the accounts of the Company and its subsidiaries for the
year ending December 31, 2001:  The Stockholders ratified said appointment with
4,815,518 votes FOR, 10,641 votes AGAINST and 3,013 ABSTAINING.

Item 6.  Exhibits and Reports on Form 8-K

       (a)   No exhibits are required to be filed with this report.

       (b)   Reports on Form 8-K:

             During the quarter ended June 30, 2001 the Company did not file any
reports on Form 8-K.

                                       12
<PAGE>

                                 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 hereunto duly authorized.


                                 TRANSCEND SERVICES, INC.



August 6, 2001                   By: /s/ Larry G. Gerdes
                                     ------------------------------------------
                                     Larry G. Gerdes,
                                     President, Chief Executive Officer and
                                     Chief Financial Officer
                                     (Principal Executive and Financial Officer)

                                       13