<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 March 31, 1999

                                      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.)


                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 May 11, 1999
              -----                            ---------------------------
     Common Stock, $.01 par value                       22,064,835


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


<TABLE> 
<CAPTION> 
                                                                                                          PAGE 
                                                                                                          ----
<S>                                                                                                       <C>  
PART  I. FINANCIAL INFORMATION

Item 1.           Financial Statements

                      Consolidated Balance Sheets as of
                      March 31, 1999 and December 31, 1998.......................................           3

                      Consolidated Statements of Operations for the
                      Three Months Ended March 31, 1999 and 1998.................................           4

                      Consolidated Statements of Cash Flows for the
                      Three Months Ended March 31, 1999 and 1998.................................           5

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


Item 2.           Management's Discussion and Analysis of
                      Financial Condition and Results of Operations..............................           7

Item 3.           Quantitative and Qualitative Disclosures about Market Risk.....................          10

PART II.          OTHER INFORMATION

Item 1.           Legal Proceedings .............................................................          11
                                                                                                            
Item 2.           Changes in Securities..........................................................          12
                                                                                                            
Item 6.           Exhibits and Reports on Form 8-K...............................................          12
                                                                                                            
SIGNATURES        ...............................................................................          13
</TABLE> 

<PAGE>
 
PART I.    FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS

                           TRANSCEND SERVICES, INC.
                          CONSOLIDATED BALANCE SHEETS
                                  (UNAUDITED)


<TABLE> 
<CAPTION> 
                                                                              MARCH 31, 1999                DECEMBER 31, 1998
                                                                           ----------------------          ---------------------
                                    ASSETS
                                    ------
<S>                                                                        <C>                             <C> 
Current assets:
Cash and cash equivalents                                                       $        358,000              $         450,000
Accounts receivable, net of allowance for doubtful accounts
  of $378,000 in 1999 and $389,000 in 1998                                             7,300,000                      8,231,000
Prepaid expenses and other current assets                                              1,023,000                        915,000
                                                                           ----------------------          ---------------------
Total current assets                                                                   8,681,000                      9,596,000
                                                                           ----------------------          ---------------------

Property and equipment:
  Computer equipment                                                                  10,029,000                      9,527,000
  Software development                                                                 2,069,000                      1,862,000
  Furniture and fixtures                                                                 217,000                        217,000
                                                                           ----------------------          ---------------------
  Property and equipment                                                              12,315,000                     11,606,000
  Accumulated depreciation                                                            (4,815,000)                    (4,304,000)
                                                                           ----------------------          ---------------------
Property and equipment, net                                                            7,500,000                      7,302,000
Deposits and other assets                                                                404,000                        482,000
Goodwill and other intangible assets:
     Goodwill and other intangible assets                                              4,596,000                      4,596,000
     Accumulated amortization                                                         (1,828,000)                    (1,731,000)
                                                                           ----------------------          ---------------------
Goodwill and other intangible assets, net                                              2,768,000                      2,865,000
Net assets from discontinued operations                                                2,758,000                      2,726,000
                                                                           ======================          =====================
Total assets                                                                    $     22,111,000              $      22,971,000
                                                                           ======================          =====================
                     LIABILITIES AND STOCKHOLDERS' EQUITY
                     ------------------------------------
Current liabilities:
Current maturities of long-term debt                                            $        479,000              $         458,000
Accounts payable                                                                       2,543,000                      2,657,000
Accrued compensation and benefits                                                      2,068,000                      1,933,000
Other accrued liabilities                                                              1,578,000                      2,211,000
Deferred income taxes                                                                    113,000                        113,000
                                                                           ----------------------          ---------------------
Total current liabilities                                                              6,781,000                      7,372,000

Long term debt, net of current maturities                                              5,812,000                      5,547,000
Deferred income taxes                                                                    539,000                        540,000
Convertible debentures                                                                 2,000,000                      2,000,000
Commitments and contingencies

Stockholders' equity:
Preferred stock, $.01 par value; 21,000,000 shares authorized Series A
  convertible preferred stock, 212,800
  shares issued at September  30, 1998 and December 31, 1997                               2,000                          2,000
Common Stock, $.01 par value; 30,000,000 shares authorized
  22,000,000 issued at March 31, 1999  and 21,500,000 at December 31, 1998               220,000                        215,000
Additional paid-in capital                                                            26,906,000                     26,286,000
Subscription receivable, stockholder                                                    (620,000)                             -
Retained deficit                                                                     (19,529,000)                   (18,991,000)
                                                                           ----------------------          ---------------------
Total stockholders' equity                                                             6,979,000                      7,512,000
                                                                           ----------------------          ---------------------
Total liabilities and stockholders' equity                                      $     22,111,000              $      22,971,000
                                                                           ======================          =====================
</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 MARCH 31
                                                                -----------------------------------------------

                                                                      1999                         1998
                                                                ------------------           ------------------
<S>                                                             <C>                          <C> 
Net revenues                                                          $13,569,000                  $12,374,000
Direct costs                                                           11,635,000                   10,305,000
                                                                ------------------           ------------------
     Gross profit                                                       1,934,000                    2,069,000

Marketing and sales expenses                                              551,000                      479,000
General and administrative expenses                                     1,330,000                    1,107,000
Research and development expenses                                         194,000                            -
Amortization expenses                                                      63,000                       72,000
                                                                ------------------           ------------------
    Income (loss) from operations                                        (204,000)                     411,000
                                                                ------------------           ------------------

Interest expense, net                                                     191,000                      104,000
                                                                ------------------           ------------------

Income (loss) before taxes and discontinued operations                   (395,000)                     307,000
Income taxes                                                                    -                            -
                                                                ------------------           ------------------
Income (loss) before discontinued operations                             (395,000)                     307,000

Loss from discontinued operations                                         (23,000)                     (15,000)
                                                                ------------------           ------------------
Net income (loss)                                                     $  (418,000)                 $   292,000
                                                                ==================           ==================

Dividends on preferred stock                                              120,000                      119,000
                                                                ==================           ==================
Net income (loss) to common stockholders                              $  (538,000)                 $   173,000
                                                                ==================           ==================

Basic income (loss) per share:
    From continuing operations                                        $     (0.02)                 $      0.01
    From discontinued operations                                            (0.00)                       (0.00)
                                                                ==================           ==================
Net income (loss)                                                     $     (0.02)                 $      0.01
                                                                ==================           ==================

Weighted average shares outstanding                                    21,606,000                   20,568,000
                                                                ==================           ==================

Diluted income (loss) per share
    From continuing operations                                        $     (0.02)                 $      0.01
    From discontinued operations                                            (0.00)                       (0.00)
                                                                ==================           ==================
Net income (loss)                                                     $     (0.02)                 $      0.01
                                                                ==================           ==================

Weighted average shares outstanding                                    21,606,000                   20,778,000
                                                                ==================           ==================
</TABLE> 

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

                                       4
<PAGE>
 
                           TRANSCEND SERVICES, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)

<TABLE> 
<CAPTION> 
                                                                                            THREE MONTHS ENDED MARCH 31
                                                                                     -------------------------------------------

                                                                                          1999                       1998
                                                                                     ----------------           ----------------
<S>                                                                                  <C>                        <C> 
Cash flows from operating activities:
Net Income (Loss)                                                                        $  (538,000)               $   173,000
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
     Depreciation and amortization                                                           607,000                    398,000 
                                                                                                                               
     Loss related to discontinued operations                                                  23,000                     15,000
                                                                                                                               
     Preferred stock dividends                                                               120,000                    119,000 
                                                                                             
Changes in assets and liabilities:
     Accounts receivable, net                                                                931,000                   (332,000)
                                                                                                                                
     Prepaid expenses                                                                       (108,000)                  (554,000)
                                                                                                                                
     Deposits and other assets                                                                78,000                   (311,000)
                                                                                                                                
     Accounts payable                                                                       (114,000)                  (531,000)
                                                                                                                                
     Accrued liabilities                                                                    (497,000)                  (833,000) 
                                                                                            
                                                                                     ----------------           ----------------
     Total adjustments                                                                     1,040,000                 (2,029,000)
                                                                                     ----------------           ----------------
Net cash provided by (used in) continuing operations                                         502,000                 (1,856,000) 
                                                                                                                                
Net cash used in discontinued operations                                                     (55,000)                   (19,000) 
                                                                                     ----------------           ----------------
Net cash provided by (used in) operating activities                                          447,000                 (1,875,000) 
                                                                                     ----------------           ----------------

Cash flows from investing activities:
Capital expenditures                                                                        (709,000)                  (845,000) 
                                                                                     ----------------           ----------------
Net cash used in investing activities                                                       (709,000)                  (845,000)
                                                                                     ----------------           ----------------

Cash flows from financing activities:
     Borrowings under line of credit agreement                                               405,000                          -
                                                                                             
     Repayments on line of credit agreement                                                        -                   (193,000)
                                                                                                                      
     Principle payments on long-term debt                                                   (120,000)                   (28,000) 
                                                                                                                                
     Preferred stock dividends                                                              (120,000)                  (119,000)
                                                                                                                                
     Net Proceeds-stock options and other issuances                                            5,000                          -  
                                                                                     ----------------           ----------------
Net cash provided by (used in) financing activities                                          170,000                   (340,000) 
                                                                                     ----------------           ----------------

Net decrease in cash and cash equivalents                                                    (92,000)                (3,060,000)
                                                                                                                               
Cash and cash equivalents, at beginning of period                                            450,000                  5,541,000 
                                                                                     ----------------          ---------------- 
Cash and cash equivalents at end of period                                               $   358,000                 $2,481,000
                                                                                     ================           ================

Supplemental cash flow information:
Cash paid for interest expense                                                           $   179,000                 $  170,000

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

</TABLE> 

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

                                       5
<PAGE>
 
                           TRANSCEND SERVICES, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                            MARCH 31, 1999 AND 1998
                                  (UNAUDITED)

(1) The accompanying consolidated financial statements are unaudited and have
been prepared by management of Transcend Services, Inc. (the "Company") in
accordance with the rules and regulations of the Securities and Exchange
Commission. The unaudited financial information furnished herein in the opinion
of management reflects all adjustments, which were of a normal recurring nature,
which are necessary to fairly state the Company's financial position, the
results of its operations and its cash flows. 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, 1998. Footnote disclosure
which would substantially duplicate the disclosure contained in those documents
has been omitted.

(2) In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which establishes standards for reporting and
display of comprehensive income that includes all changes in equity during a
period from transactions and events from nonowner sources. The Company has no
components of comprehensive income other than net income for the three month
periods ended March 31, 1999 and 1998.

(3) Segment Reporting

   The Company's identifiable business segments are patient information
services, patient information software (Cascade), and case management services
(TCM). Below sets forth the results (in thousands) of the identifiable business
segments of the Company, such results do not reflect allocations for income
taxes, interest expense, amortization expense, and corporate expense to the
business segments.

                        FOR THREE MONTHS ENDED MARCH 31
                        -------------------------------

<TABLE> 
<CAPTION> 
                                     PATIENT        PATIENT         CASE           SALES
                                    INFORMATION   INFORMATION     MANAGEMENT        AND
(in thousands)                       SERVICES      SOFTWARE        SERVICES      CORPORATE      CONSOLIDATED
-------------------------------------------------------------------------------------------------------------------------
<S>                                 <C>           <C>             <C>            <C>            <C>                      
REVENUES:                                                                                                                
1999                                 $ 12,751       $  549         $  269        $      0        $  13,569               
1998                                 $ 12,028       $    0         $  346        $      0        $  12,374               
-------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:                                                                                           
1999                                 $  1,168       $    7         $   35        $ (1,628)       $    (418)              
1998                                 $  1,770       $    0         $   22        $ (1,500)       $     292               
-------------------------------------------------------------------------------------------------------------------------
DEPRECIATION AND AMORTIZATION:                                                                                           
1999                                 $    417       $    3         $    3        $    184        $     607               
1998                                 $    225       $    0         $    4        $    169        $     398               
-------------------------------------------------------------------------------------------------------------------------
CAPITAL EXPENDITURES:
1999                                 $    562       $   52         $    0        $     95        $     709
1998                                 $    781       $    0         $    0        $     64        $     845
</TABLE> 

(4) On March 23, 1999 the Company sold 500,000 unregistered shares of Transcend 
Common Stock to certain executive officers at the then current market value. In 
connection with the sales, the executive officers issued promissory notes to the
Company totaling $620,000. The issuances of the promissory notes were noncash 
transactions.

                                       6
<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.

THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998

   Net revenues for the Company increased from $12,374,000 for the three months
ended March 31, 1998, to $13,569,000 for the three months ended March 31, 1999,
an increase of 9.7 PERCENT. Patient information management services including
medical record department management, transcription, coding and compliance, and
systems implementation, accounted for 94 PERCENT of the Company's net revenues
for the three months ended March 31, 1999, and 97 PERCENT of net revenues for
the three months ended March 31, 1998, growing 6 percent year over year. The
increase in service revenues resulted primarily from new contracts, net of
terminations. Patient information software revenues represented 4 PERCENT of
revenues for the three months ended March 31, 1999, as a result of the
acquisition of Cascade in June 1998. Case management services accounted for 2
PERCENT of total revenues for the three months ended March 31, 1999, down from 3
PERCENT of revenues for the three months ended March 31, 1998.

   Co-Sourcing revenues increased 2 PERCENT year over year and represented 56
PERCENT of service revenues for the three months ended March 31, 1999, and 58
PERCENT for the three months ended March 31, 1998. Medical transcription
revenues increased 18 PERCENT year over year and represented 50 PERCENT of
service revenues for the three months ended March 31, 1999, and 41 PERCENT for
the same period the prior year. Coding and compliance revenues increased 21.5
PERCENT year over year and represented 2 PERCENT of service revenues in the
three months ended March 31, 1999, and 1 PERCENT in 1998. Systems implementation
services revenues represented less than 1 PERCENT of service revenues in the
three months ended March 31, 1999, down from 3 PERCENT in the three months ended
March 31, 1998.

                                       7
<PAGE>
 
   Gross profit decreased 6.5 PERCENT to $1,934,000 for the three months ended
March 31, 1999, from $2,069,000 for the same three months in the prior year.
Gross profit margins decreased to 14.3 PERCENT for the three months ended March
31, 1999, from 16.7 PERCENT for the same three months in the prior year. The
year over year decline was attributable to start up losses in the Company's
national transcription hub and lower gross profit margins from Co-Sourcing.
Services produced blended margins of 11.7 PERCENT for the three months ended
March 31, 1999, compared to 16.5 PERCENT for the three months ended March 31,
1998. Software gross profit margins were 73.1 PERCENT for the three months ended
March 31, 1999. Case management gross profit margins were 17.4 PERCENT for the
three months ended March 31, 1999, and 25.1 PERCENT for the three months ended
March 31, 1998.

   Marketing and sales expenses increased 15.0 PERCENT to $551,000 for the three
months ended March 31, 1999, from $479,000 for the same three months in the
prior year and as a percentage of revenues was 4 PERCENT for both periods. 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 $1,330,000 for the three months ended
March 31, 1999, increased 20.1 PERCENT over the $1,107,000 expended in the same
prior year period. The increase in general and administrative expenses year over
year is attributable to the acquisition of Cascade.

   Amortization expenses decreased to $63,000, for the three months ended March
31, 1999, from $72,000 for the three months ended March 31, 1998.

   Net interest expense increased to $191,000 for the three months ended March
31, 1999, as compared to $104,000 for the three months ended March 31, 1998,
primarily due to increased borrowings.

   The Company reported losses before discontinued operations of $395,000 for
the three months ended March 31, 1999, compared to income of $307,000 for the
same three months in 1998. The year over year decline from continuing operations
was attributable to start up losses in the Company's national transcription hub
and lower gross profit margins from Co-Sourcing.

   The loss from discontinued operations increased slightly to $23,000 for the
three months ended March 31, 1999, from $15,000 for the three months ended March
31, 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> 
-----------------------------------------------------------------------------------------------
                                                         THREE MONTHS ENDED MARCH 31
-----------------------------------------------------------------------------------------------
                                                1999       1998        CHANGE       % CHANGE
-----------------------------------------------------------------------------------------------
<S>                                             <C>        <C>         <C>          <C> 
Net revenues                                    $13,569    $12,374         $1,195         9.7%
-----------------------------------------------------------------------------------------------
Gross profit                                      1,934      2,069           (135)       (6.5%)
-----------------------------------------------------------------------------------------------
Gross margin                                      14.3%     16.7%                       
-----------------------------------------------------------------------------------------------
Marketing and sales expenses                        551        479             72        15.0%
-----------------------------------------------------------------------------------------------
General and administrative expenses               1,330      1,107            223        20.1%
-----------------------------------------------------------------------------------------------
Amortization expenses                                63         72             (9)      (12.5%)
-----------------------------------------------------------------------------------------------
Research and development expenses                   194          0            194         N/A
-----------------------------------------------------------------------------------------------
Income (loss) from operations                   $  (204)   $   411         $ (615)     (149.6%)
-----------------------------------------------------------------------------------------------

<CAPTION> 
-----------------------------------------------------------------------------------------------
                                                         THREE MONTHS ENDED MARCH 31
-----------------------------------------------------------------------------------------------
                                                   1999             1998            CHANGE
-----------------------------------------------------------------------------------------------
Net revenues                                           100.0%            100.0%           --
-----------------------------------------------------------------------------------------------
Direct costs                                            85.7%             83.3%           2.4%
-----------------------------------------------------------------------------------------------
Gross profit                                            14.3%             16.7%          (2.4%)
-----------------------------------------------------------------------------------------------
Marketing and sales expenses                             4.1%              3.9%           0.2%
-----------------------------------------------------------------------------------------------
General and administrative expenses                      9.8%              9.0%           0.8%
-----------------------------------------------------------------------------------------------
Research and development                                 0.5%              0.6%          (0.1%)
-----------------------------------------------------------------------------------------------
Amortization expense                                     1.4%              0.0%           1.4%
-----------------------------------------------------------------------------------------------
Income (loss) from operations                           (1.5%)             3.3%          (4.8%)
-----------------------------------------------------------------------------------------------
</TABLE> 

                                       8
<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES

    The Company's cash flows from continuing operations provided cash of
$502,000 for the three months ended March 31, 1999. Discontinued operations used
cash of $55,000 for the three months ended March 31, 1999. The Company's net
working capital decreased to $1,900,000 during the three months ended March 31,
1999, from $2,224,000 at December 31, 1998.

   The Company's cash flows from investing activities used cash of $709,000 for
the three months ended March 31, 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 $170,000 for the three months
ended March 31, 1999, primarily from borrowings under the Company's working
capital credit facility. The Company also used $120,000 for principal payments
on long-term debt associated with prior acquisitions and $120,000 to pay
preferred stock dividends.

   On April 3, 1997, the Company entered into a $5.0 MILLION credit agreement
with 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 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 March 31, 1999, the
capacity of the credit line based on the funding formula was $5,846,000 with
$1,074,000 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 March 31, 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 March 31, 1999, were
$579,000.

                                       9
<PAGE>
 
   The Company anticipates that cash on hand, together with internally generated
funds, cash collected from discontinued operations, anticipated reductions in
outstanding accounts receivable and cash available under its new working capital
facility and leasing facilities described above should be sufficient to finance
continuing operations, make capital investments in the normal and ordinary
course of its business, and fund the expenses of its civil litigation action
against certain insurance carriers during 1999.

   If the Company is unsuccessful in reducing its outstanding account
receivables on a timely basis, additional capital of up to $2 MILLION may be
required to finance the Company's growth plans.

YEAR 2000 COMPLIANCE

   The Company has performed an assessment of the year 2000 readiness of its
operations and its corporate financial systems and has begun to implement its
plan to become year 2000 compliant.

   In 1998, the Company launched its newly developed national transcription
platform, which is year 2000 compliant. The Company plans to install the
national transcription platform in substantially all of the Company's new
contracts and is assessing a plan to convert its existing operations. The
Company expects to invest up to $1.5 MILLION in year 2000 compliant dictation
and transcription systems during 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 in the process of making written
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 June 30, 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 contracted to upgrade its corporate financial systems to be
year 2000 compliant. The cost to be incurred for the upgrade is estimated to be
less than $50,000.


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has no material exposure to market risk from derivatives or other
financial instruments.

                                       10
<PAGE>
 
PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

   The Company is subject to certain claims in the ordinary course of business
which are not material.

   On September 17, 1993, the Company and its former subsidiaries, First Western
Health Corporation and Veritas Healthcare Management, and the physician-owned
medical groups, FWHC Medical Group, Inc. and Veritas Medical Group, Inc., which
had contracts with the healthcare subsidiaries, initiated a lawsuit in the
Superior Court of the State of California, County of Los Angeles, against 22 of
the largest California workers' compensation insurance carriers (the "Lawsuit".)
The Lawsuit was subsequently amended to name 13 defendant insurance groups
including State Compensation Insurance Fund, Continental Casualty Company,
California Compensation Insurance Company, Zenith National Insurance Corporation
and Pacific Rim Assurance Company. The action seeks $115 million in compensatory
damages plus punitive damages. The plaintiffs claim abuse of process,
intentional interference with contractual and prospective business relations,
negligent interference and unlawful or unfair business practices which led to
the discontinuation in April 1993 of the former business of the Company's
subsidiaries and their contracting associated medical groups. Nine defendants in
the Lawsuit have filed cross complaints against the plaintiffs seeking
restitution, accounting from the plaintiffs for moneys previously paid by the
defendants, disgorgement of profits, injunctive relief, attorneys' fees and
punitive damages, based upon allegations of illegal corporate practice of
medicine, illegal referral arrangements, specific statutory violations and
related improper conduct. The Company and its counsel do not believe that it is
likely that the Company will be held liable on any of the cross complaints;
however, there can be no assurance that the Company will be successful in the
defense of the cross complaints. In addition, there can be no assurance as to
the recovery by the Company of the damages sought in its complaint against the
defendants. The costs associated with the conduct of the Lawsuit cannot be
ascertained with certainty but are expected to be substantial.

   On March 21, 1997, the Los Angeles County Superior Court sustained the
defendant insurance companies' demurrer to the Third Amended and Supplemental
Complaint of the Company and certain of its subsidiaries, without leave to
further amend the complaint. The Court determined in such ruling that exclusive
jurisdiction with respect to the claims contained in the Lawsuit resides with
the California Workers' Compensation Appeals Board and that the Superior Court
of the State of California is an improper forum. The Company has been advised by
counsel that there is no remedy for the damages claimed in the Lawsuit from the
California Workers' Compensation Appeals Board. A final order dismissing the
Lawsuit was issued by the Court on June 18, 1997. On June 25, 1998, the
California Court of Appeals affirmed the Superior Court of the State of
California's decision dismissing the case.

   Transcend then filed a Petition for Review with the California Supreme Court
in July 1998. On September 25, 1998, the Supreme Court of the State of
California agreed to review the decision of the California Court of Appeals.
There can be no assurance that the Supreme Court of the State of California will
overturn the decision of the California Court of Appeals.

   By stipulation, the carriers' cross-complaints against the plaintiffs were
stayed pending resolution of the plaintiffs' appeal. The Company believes that
the trial court's ruling, if not overturned by the California Supreme Court,
also would result in dismissal of the cross-complaints. There can be no
assurance, however, that such cross complaints would be dismissed. The cross
complaints expose the Company to risk of liability which, if the Company is
unsuccessful in the defense of such cross complaints, could have a materially
adverse impact on the Company's results of operations for a particular period.
The Company believes it has adequate defenses to the cross complaints.

   For the three months ended March 31, 1999, the Company expensed approximately
$23,000 of legal expenses connected with the lawsuit. Under the original
agreement with the Company's counsel of record in the Lawsuit, there was a cap
on legal expenses and after December 1996, with respect to expenses incurred at
the trial court level, the Company would only be responsible for out-of-pocket
expenses and the payment to counsel of a percentage of any recovery of damages
by the Company. However, in May 1997, the Company was notified that the partner
principally responsible for the case was leaving the firm with which the Company
contracted to handle the case. The Company has moved the representation to new
counsel, which resulted in negotiation of a new fee arrangement requiring the
Company to pay additional legal expenses incurred in connection with the appeal.

                                       11
<PAGE>
 
ITEM 2.  CHANGES IN SECURITIES

On March 23, 1999 the Company sold 500,000 unregistered shares of Transcend
Common Stock to certain executive officers at the then current market value. In
connection with the sales, the executive officers issued promissory notes to the
Company totaling $620,000. The notes have an interest rate of 5%. Interest is
payable annually with the principal due on March 31, 2004. The loans are secured
by pledges of Transcend Common Stock. The exemption from registration was
claimed under section 4(2) of the Securities Act of 1933. The executive officers
who purchased the shares are accredited investors under section 2(a) (15) (ii)
of the Securities Act of 1993.


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.

   The following exhibits are filed herewith:

                     11       Computation of Per Share Earnings

                     27       Financial Data Schedule 1999  (for SEC use only)

               Reports on Form 8-K: There were no filings on Form 8-K during the
               -------------------
               the quarter ended March 31, 1999.

                                       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.



May 14, 1999                         By: /s/ Larry G. Gerdes     
                                        --------------------------
                                        Larry G. Gerdes,
                                        President and Chief Executive Officer
                                        (Principal Executive Officer)



May 14, 1999                         By: /s/ Doug Shamon          
                                        --------------------------
                                        Doug Shamon
                                        Executive Vice President,
                                        Chief Financial Officer
                                        (Principal Financial and Accounting 
                                         Officer)

                                       13