<PAGE>

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



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



                                  FORM 10-Q/A

                                AMENDMENT NO. 1
                                      TO



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



                 For the quarterly period ended June 30, 1999




                        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.)



        3353 Peachtree Road, N.E., Suite 1000, Atlanta, Georgia  30326
             (Address of principal executive offices and zip code)
      Registrant's telephone number, including area code: (404) 364-8000


     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 August 9, 1999
          -----                              -----------------------------
  Common Stock, $.01 par value                         22,093,479



     The undersigned registrant hereby amends the following items, financial
statements, exhibits or other portions of its Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1999:



(List all such items, financial statements, exhibits or other portions amended)


                        PART  I.  FINANCIAL INFORMATION



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

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<PAGE>

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 which 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.

Overview
--------

  Transcend Services, Inc. (the "Company"), and its wholly-owned subsidiary,
Cascade Health Information Software, Inc. ("Cascade"), provide patient
information management solutions to hospitals and other associated health care
providers. These solutions include medical records department management,
transcription of physicians' dictated medical notes, coding and compliance
services, and state-of-the-art software for the management of patient
information. The Company's wholly-owned subsidiary, Transcend Case Management,
Inc. ("tcm"), also provides case management services to insurance carriers,
third party benefit administrators, and self-insured employers.

Results of Operations

  Results of operations include the consolidated results of Transcend Services,
Inc. and its subsidiaries. Consolidated results do not include Cascade prior to
its June 1, 1998 acquisition, as the amounts were immaterial, and TCM, after
March 16, 1998, the date on which it was sold.

Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998

  Net revenues for the Company increased from $12,831,000 for the three months
ended June 30, 1998, to $13,297,000 for the three months ended June 30, 1999, an
increase of 3.6 percent. Patient information management services ("Services")
including medical record department management ("Co-Soucing"), transcription,
and coding and compliance, accounted for 93 percent of the Company's net
revenues for the three months ended June 30, 1999, and 99 percent of net
revenues for the three months ended June 30, 1998.  Co-Sourcing revenues
decreased 18 percent year over year and represented 56 percent of Services
revenues for the three months ended June 30, 1999, and 61 percent for the three
months ended June 30, 1998. The decrease is primarily attributable to three
contracts that converted to transcription services only contracts. Medical
transcription revenues increased 11.1 percent year over year and represented 44
percent of Services revenues for the three months ended June 30, 1999, and 39
percent for the same period the prior year. The increase in transcription
revenues resulted from new contracts, net of terminations.  Coding and
compliance revenues decreased 49.3 percent year over year and represented less
than 1 percent of Services revenues in the three months ended June 30, 1999, and
1 percent in 1998.

  Patient information software revenues represented 6 percent of revenues for
the three months ended June 30, 1999 and 1 percent of revenues for the three
months ended June 30, 1998. Case management services accounted for 1 percent of
total revenues for the three months ended June 30, 1999.

                                       2
<PAGE>

  Gross profit decreased 31.6 percent to $1,501,000 for the three months ended
June 30, 1999, from $2,195,000 for the same three months in the prior year.
Gross profit margins decreased to 11.3 percent for the three months ended June
30, 1999, from 17.1 percent for the same three months in the prior year.
Services produced margins of 6.9 percent for the three months ended June 30,
1999, compared to 15.8 percent for the three months ended June 30, 1998.  The
year over year decline was attributable to start up losses in the Company's
national transcription hub, unexpected telecommunication issues that impaired
transcription services performance, and several Co-Sourcing sites that were
failing to meet their contract performance deliverables and required additional
resources resulting in lower gross profit margins.  In addition, there were non-
recurring charges of $50,000 from exit costs related to the termination of a Co-
Sourcing contract. Software gross profit margins were 74.2 percent for the three
months ended June 30, 1999, compared to 76.2 percent for the three months ended
June 30, 1998. Case management gross profit margins were 5.5 percent for the
three months ended June 30,1999.

  Marketing and sales expenses increased 23.3 percent to $619,000 for the three
months ended June 30, 1999, from $502,000 for the same three months in the prior
year and as a percentage of revenues was 4.8 percent for the three months ended
June 30, 1999 and 3.9 percent for the three months ended June 30, 1998. The year
over year increase in marketing and sales expenses is the result of the addition
of Cascade.

  General and administrative expenses of $1,930,000 for the three months ended
June 30, 1999, increased 82.4 percent over the $1,058,000 expended in the same
prior year period. The increase in general and administrative expenses year over
year is attributable to the acquisition of Cascade, an increase of approximately
$200,000 in health benefit claims reserves, and a non-recurring adjustment of
$500,000 made to the receivables reserve due to the recent bankruptcy filing of
a former Co-Sourcing client.

  Amortization expenses increased to $64,000, for the three months ended June
30, 1999, from $50,000 for the three months ended June 30, 1998.

  Net interest expense increased to $217,000 for the three months ended June 30,
1999, as compared to $101,000 for the three months ended June 30, 1998,
primarily due to increased borrowings.

  The Company reported losses before discontinued operations of $1,521,000 for
the three months ended June 30, 1999, compared to income of  $395,000 for the
same three months in 1998. The year over year decline was attributable to start
up losses in the Company's national transcription hub, unexpected
telecommunication issues that impaired transcription services performance, and
several Co-Sourcing sites that were failing to meet their contract performance
deliverables and required additional resources resulting in lower profit
margins.  In addition, there were non-recurring charges of $750,000, including
$500,000 in accounts receivable reserves due to the recent bankruptcy filing of
a former client, $200,000 in health benefit claims reserves, and $50,000 in exit
costs related to the termination of a Co-Sourcing contract.

  The loss from discontinued operations increased slightly to $23,000 for the
three months ended June 30, 1999, from $17,000 for the three months ended June
30, 1998, representing charges for legal fees incurred in connection with the
Company's civil lawsuit against certain insurance companies in the state of
California discussed in item 1 of part II of this report.

                                       3
<PAGE>

<TABLE>
<CAPTION>

                                           Three Months Ended June 30
-----------------------------------------------------------------------------------------------------
                                            1998           1998             Change          % Change
-----------------------------------------------------------------------------------------------------
<S>                                       <C>            <C>              <C>                 <C>
Net revenues                               $13,297       $12,831          $   466              3.6%
-----------------------------------------------------------------------------------------------------
Gross profit                                 1,501         2,195             (694)           (31.6%)
-----------------------------------------------------------------------------------------------------
Gross margin                                  11.3%         17.1%
-----------------------------------------------------------------------------------------------------
Marketing and sales expenses                   619           502              117             23.3%
-----------------------------------------------------------------------------------------------------
General and administrative expenses          1,930         1,058              872             82.4%
-----------------------------------------------------------------------------------------------------
Amortization expenses                           64            50               14             28.0%
-----------------------------------------------------------------------------------------------------
Research and development expenses              192            29              163
-----------------------------------------------------------------------------------------------------
Net Income (loss)                          $(1,544)         $378          $(1,922)          (508.5%)
------------------------------------------------------------------------------------------------------

                                                       Three Months Ended June 30
------------------------------------------------------------------------------------------------------
                                              1999                       1998                Change
------------------------------------------------------------------------------------------------------
Net revenues                                 100.0%                     100.0%                  --
------------------------------------------------------------------------------------------------------
Direct costs                                  88.7%                      82.9%                 5.8%
------------------------------------------------------------------------------------------------------
Gross profit                                  11.3%                      17.1%                (5.8%)
------------------------------------------------------------------------------------------------------
Marketing and sales expenses                   4.7%                       3.9%                 0.8%
------------------------------------------------------------------------------------------------------
General and administrative expenses           14.5%                       8.2%                 6.3%
------------------------------------------------------------------------------------------------------
Amortization expenses                          0.5%                       0.4%                 0.1%
------------------------------------------------------------------------------------------------------
Research and development expenses              1.4%                       0.2%                 1.2%
------------------------------------------------------------------------------------------------------
Net Income  (loss)                           (11.6%)                      2.9%               (14.5%)
------------------------------------------------------------------------------------------------------
</TABLE>

Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998



  Net revenues for the Company increased from $25,205,000 for the six months
ended June 30, 1998, to $26,866,000 for the six months ended June 30, 1999, an
increase of 6.6 percent. Patient information management services ("Services")
including medical record department management, transcription, coding and
compliance, and systems implementation, accounted for 93 percent of the
Company's net revenues for the six months ended June 30, 1999, and 98 percent of
net revenues for the six months ended June 30, 1998.  Co-Sourcing revenues
decreased 5.4 percent year over year and represented 56 percent of Services
revenues for the six months ended June 30, 1999, and 60 percent for the six
months ended June 30, 1998. The reduced revenues are a result of three full Co-
Sourcing contracts that converted to transcription services only contracts.
Medical transcription revenues increased 12.3 percent year over year and
represented 44 percent of Services revenues for the six months ended June 30,
1999, and 40 percent for the same period the prior year. The increase in
transcription revenues resulted primarily from new contracts, net of
terminations. Coding and compliance revenues decreased 62.8 percent year over
year and represented less than 1 percent of Services revenues in the six months
ended June 30, 1999, and 1 percent in 1998.

  Patient information software revenues represented 5 percent of revenues for
the six months ended June 30, 1999 and less than 1 percent of revenues for the
six months ended June 30, 1998.  Case management services accounted for 2
percent of total revenues for the six months ended June 30, 1999 and 1 percent
for the six months ended June 30, 1998.

  Gross profit decreased 19.4 percent to $3,435,000 for the six months ended
June 30, 1999, from $4,264,000 for the same six months in the prior year. Gross
profit margins decreased to 12.8 percent for the six months ended June 30, 1999,
from 16.9 percent for the same six months in the prior year.  Services produced
margins of 9.3 percent for the six months ended June 30, 1999, compared to 15.8
percent for the six months ended June 30, 1998. The year over year decline was
attributable to start up losses in the Company's national transcription hub,
unexpected telecommunication issues that impaired transcription services
performance, and several Co-Sourcing sites that were failing to meet their
contract performance deliverables and required additional resources resulting in
lower gross profit margins.  In addition, there were non-recurring charges of
$50,000 from exit costs related to the termination of a Co-Sourcing contract.
Software gross profit margins were 73.5 percent for the six months ended June
30, 1999, compared to 76.2 percent for the six months ended June 30, 1998. Case
management gross profit margins were 6.0 percent for the six months ended June
30,1999 and 24.0 percent for the six months ended June 30,1998.

                                       4
<PAGE>

  Marketing and sales expenses increased 19.3 percent to $1,170,000 for the six
months ended June 30, 1999, from $981,000 for the same six months in the prior
year and as a percentage of revenues was 4.4 percent for the six months ended
June 30, 1999 and 3.9 percent for the six months ended June 30, 1998. The year
over year increase in marketing and sales expenses is the result of the addition
of Cascade, net of the reduction from the sale of TCM.

  General and administrative expenses of $3,260,000 for the six months ended
June 30, 1999, increased 50.6 percent over the $2,165,000 expended in the same
prior year period. The increase in general and administrative expenses year over
year is attributable to the acquisition of Cascade, an increase of approximately
$200,000 in health benefit claims reserves, and a non-recurring adjustment of
$500,000 made to the receivables reserve due to the recent bankruptcy filing of
a former Co-Sourcing client.

  Amortization expenses increased to $127,000, for the six months ended June 30,
1999, from $122,000 for the six months ended June 30, 1998.

  Net interest expense increased to $408,000 for the six months ended June 30,
1999, as compared to $205,000 for the six months ended June 30, 1998, primarily
due to increased borrowings.

  The Company reported losses before discontinued operations of $1,916,000 for
the six months ended June 30, 1999, compared to income of  $702,000 for the same
six months in 1998. The year over year decline was attributable to start up
losses in the Company's national transcription hub, unexpected telecommunication
issues that impaired transcription services performance, and several Co-Sourcing
sites that were failing to meet their contract performance deliverables and
required additional resources resulting in lower profit margins.  In addition,
there were non-recurring charges of $750,000, including $500,000 in accounts
receivable reserves due to the recent bankruptcy filing of a former client,
$200,000 in health benefit claims reserves, and $50,000 in exit costs related to
the termination of a Co-Sourcing contract.

  The loss from discontinued operations increased slightly to $46,000 for the
six months ended June 30, 1999, from $32,000 for the six months ended June 30,
1998, representing charges for legal fees incurred in connection with the
Company's civil lawsuit against certain insurance companies in the state of
California discussed in item 1 of part II of this report.



<TABLE>
<CAPTION>

                                                                              Six Months Ended June 30
--------------------------------------------------------------------------------------------------------------------------
                                                               1999          1998                Change         % Change
<S>                                                          <C>           <C>                  <C>             <C>
--------------------------------------------------------------------------------------------------------------------------
Net revenues                                                 $26,866       $25,205              $ 1,661             6.6%
--------------------------------------------------------------------------------------------------------------------------
Gross profit                                                   3,435         4,264                 (829)          (19.4%)
--------------------------------------------------------------------------------------------------------------------------
Gross margin                                                    12.8%         16.9%
--------------------------------------------------------------------------------------------------------------------------
Marketing and sales expenses                                   1,170           981                  189            19.3%
--------------------------------------------------------------------------------------------------------------------------
General and administrative expenses                            3,260         2,165                1,095            50.6%
--------------------------------------------------------------------------------------------------------------------------
Amortization expenses                                            127           122                    5             4.1%
--------------------------------------------------------------------------------------------------------------------------
Research and development expenses                                386            29                  357        (1,231.0%)
--------------------------------------------------------------------------------------------------------------------------
Net Income (loss)                                            $(1,962)      $   670              $(2,632)         (392.8%)
--------------------------------------------------------------------------------------------------------------------------

                                                                                   Six Months Ended June 30
--------------------------------------------------------------------------------------------------------------------------
                                                                        1999                    1998               Change
--------------------------------------------------------------------------------------------------------------------------
Net revenues                                                           100.0%                  100.0%                 --
--------------------------------------------------------------------------------------------------------------------------
Direct costs                                                            87.2%                   83.1%                4.1%
--------------------------------------------------------------------------------------------------------------------------
Gross profit                                                            12.8%                   16.9%               (4.1%)
--------------------------------------------------------------------------------------------------------------------------
Marketing and sales expenses                                             4.4%                    3.9%                0.5%
--------------------------------------------------------------------------------------------------------------------------
General and administrative expenses                                     12.1%                    8.6%                3.5%
--------------------------------------------------------------------------------------------------------------------------
Amortization expenses                                                    0.5%                    0.5%                0.0%
--------------------------------------------------------------------------------------------------------------------------
Research and development expenses                                        1.4%                    0.1%                1.3%
--------------------------------------------------------------------------------------------------------------------------
Net Income (loss)                                                       (7.3%)                   2.7%              (10.0%)
--------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       5
<PAGE>

Liquidity and Capital Resources


  The Company's cash flows from continuing operations provided cash of
$1,329,000 for the six months ended June 30, 1999. Discontinued operations used
cash of $38,000 for the six months ended June 30, 1999. The Company's net
working capital decreased to $872,000 during the six months ended June 30, 1999,
from $2,224,000 at December 31, 1998.

  The Company's cash flows from investing activities used cash of $1,115,000 for
the six months ended June 30, 1999 for capital expenditures, primarily for
electronic patient record systems in connection with new contracts, digital
dictation equipment and continued investment in software development of the
Company's national transcription platform.

  Cash flows from financing activities provided $604,000 for the six months
ended June 30, 1999, primarily from borrowings under the Company's working
capital credit facility.  The Company also used $179,000 for principal payments
on long-term debt associated with prior acquisitions and $240,000 to pay
preferred stock dividends.

  On April 3, 1997, the Company entered into a $5.0 million credit agreement
with Coast Business Credit ("Coast"), an asset based lender (and a division of
Southern Pacific Thrift and Loan Association). The agreement provides the
Company with a $4.7 million working capital facility and a $300,000 capital
expenditure facility secured by substantially all of the Company's assets. The
working capital facility has been used to pay off the previous credit
relationship with Silicon Valley Bank in full. These Coast facilities do not
contain any financial covenants but contain restrictions from paying dividends
and entering into financing arrangements without consent. Coast has consented to
the payment of dividends related to the preferred stock and the master lease
agreement and equipment loan facility discussed below.

  Funding limits under the agreement are determined by a funding formula. Under
the original terms of the agreement, the funding formula is based on 1.5 times
monthly contractual contract management revenues, plus 80 percent of all medical
transcription receivables under 90 days (aging) under the working capital
facility and up to $300,000 on new capital expenditures under the capital
expenditure facility.

  On August 8, 1997, the Company agreed to amend its credit facility with Coast.
Under the terms of the amendment, the term of the agreement was extended to May
31, 2000, and the funding formula modified to provide additional liquidity to
the Company by providing funding of 1.5 times average monthly receipts under
long term transcription contracts. The amendment also provides for an increase
in the funding formula from 1.5 times to 2.0 times monthly contract revenues if
the Company's tangible net worth exceeds $5.0 million for five consecutive
business days.

  In February 1999, the Company again amended its working capital credit
facility agreement with Coast to increase the facility to $10 million and extend
the maturity date to May 31, 2001.

  These facilities are priced at prime plus 2.25 percent declining to prime plus
1.75 percent upon two consecutive quarters of achievement and ongoing
maintenance of a debt service coverage ratio of not less than 1.5 measured on an
earnings before interest, taxes, and amortization ("ebita") basis. EBITA is used
by Coast as an indicator of a company's ability to incur and service debt. EBITA
should not be considered an alternative to operating income, net income, cash
flows, or any other measure of performance as determined in accordance with
generally accepted accounting principles, as an indicator of operating
performance, or as a measure of liquidity. These facilities are secured by a
first security interest on all Company assets.  As of June 30, 1999, the
capacity of the credit line based on the funding formula was $6,090,000 with
$87,000 unused.

  On February 19, 1998, the Company signed a master lease agreement providing up
to $5.0 million in lease financing with Information Leasing Corporation, a
subsidiary of Provident Bank, Cincinnati, Ohio, at interest rates equal to
Provident Bank prime rate plus 2 percent. Subject to a review of the underlying
customer contract, the master lease agreement calls for equal monthly payments
over the term of the lease, typically the life of the underlying contract, not
to exceed five years. The facility is intended to provide financing for new
electronic document management systems and transcription systems required for
new contracts. There were no borrowings outstanding under this master lease
agreement at June 30, 1999.

  On April 13, 1998, the Company signed a $10 million equipment loan facility
with DVI Financial Services, Inc. This facility provides additional financing
for electronic patient record systems and transcription systems required for new
contracts. The facility calls for monthly payments which amortize the cost of
the equipment over the life of the customer contract, not to exceed 60 months,
at interest rates fixed at the time over the loan advance based on then current
treasury bill rates.  The total borrowings outstanding at June 30, 1999, were
$540,000.

                                       6
<PAGE>



  The Company does not believe that its cash resources are adequate to finance
continuing operations, make capital investments in the normal and ordinary
course of its business, fund the expenses of its civil litigation action against
certain insurance carriers, and fund its year 2000 related capital investments
during 1999.  The Company estimates its capital requirements for the remainder
of 1999 to be between $1,500,000 and $3,000,000.  Accordingly, on August 16,
1999, the Company received bridge financing of $1,500,000 predominantly from
certain Directors of the Company in exchange for unsecured promissory notes,
with interest at 10% per annum, which mature January 15, 2000.  The Company has
also engaged an investment banking firm to assist it in securing additional
financing.  Although there can be no assurances given that the Company will
secure the additional financing needed for the remainder of 1999 and to repay
the bridge financing, the Company plans to secure additional capital through a
possible private placement of securities to accredited investors, some or all of
whom may be related parties to the Company, or through the possible sale of
certain of its operations.  If the Company is unable to raise the additional
capital required for the remainder of 1999, the Company would be required to
adjust its business plans and operations accordingly.


Year 2000 Compliance

  The Company has performed an assessment of the year 2000 readiness of its
operations and its corporate financial systems and is nearing the completion of
its implementation plan to become year 2000 compliant.

  In 1998, the Company launched its national transcription platform, which is
year 2000 compliant. The Company has installed the national transcription
platform in substantially all of the Company's new contracts and is implementing
its plan to convert its existing operations that are not already year 2000
compliant. The Company has invested approximately $400,000 in year 2000
compliant dictation and transcription systems to date.  The Company expects
additional investments of up to $1 million for the remainder of 1999 and to have
its systems year 2000 compliant by November 30, 1999.

  The Company's Co-Sourcing operations and software systems are dependent upon
the hospital's systems. The Company is continuing its process of accumulating
inquiries to its existing Co-Sourcing customers to determine their readiness and
their plans to become year 2000 compliant and expects to complete its assessment
by August 31, 1999. The majority of the Company's Co-Sourcing contracts require
that the hospital provide certain services, including access to electronic
information, in order for Transcend to provide the services that the Company is
contractually obligated to supply. If such services are not provided by the
hospital, the Company has the contractual ability to receive reimbursement from
the hospital for any additional expenses incurred due to the inability of the
hospital to provide a functional software system.

  Cascade's new software product is year 2000 compliant. The software for
existing customers has been modified to be year 2000 compliant. Cascade plans to
upgrade or convert all of its customers to be year 2000 compliant by October 31,
1999. The cost to be incurred for the upgrades is immaterial.

  The Company has upgraded its corporate financial systems and believes them to
be year 2000 compliant.

  The Company is in the process of refining its contingency plans and expects to
have alternative solutions available by November 30, 1999, if needed.

                                       7
<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 17, 1999                 By: /s/ Doug Shamon
                                    -----------------------------------
                                    Doug Shamon
                                    Executive Vice President,
                                    Chief Financial Officer
                                    (Principal Financial and Accounting Officer)

                                       8