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

                                  FORM 10-Q/A
                                AMENDMENT NO. 2
                                       TO


      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
                             EXCHANGE ACT OF 1934
 
 
                  For the quarterly period ended June 30, 1996

                         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

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

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, 1996: (List all such items, financial
statements, exhibits or other portions amended)


                         Part I - Financial Information


Item 1.  Financial Statements.

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


                          Part II - Other Information


Item 1.  Legal Proceedings

Item 6.  Exhibits and Reports on Form 8-K

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<PAGE>
 
                        PART 1 - FINANCIAL INFORMATION
                         ITEM 1 - FINANCIAL STATEMENTS

 
                            TRANSCEND SERVICES, INC.
                          CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
 
 
                                                      December 31,      June 30,
                                                           1995          1996
                                                      --------------  ------------
                                                                      (Unaudited)
<S>                                                     <C>             <C> 
   ASSETS
 
CURRENT ASSETS:
 
 Cash and cash equivalents...........................    $1,117,000    $  458,000
 Accounts receivable, net of allowance for
   doubtful accounts of $42,000 and
   $48,000 respectively..............................     3,165,000     3,980,000
 Prepaid expenses, supplies and other................       309,000       882,000
                                                         ----------  ------------
   Total current assets..............................     4,591,000     5,320,000
 
NET ASSETS RELATED TO DISCONTINUED
  OPERATIONS.........................................     2,414,000     2,368,000
SECURITIES FROM SALE OF OCCU-CARE....................     2,050,000     2,050,000
EQUIPMENT AND LEASEHOLD IMPROVEMENTS,
 at cost net of accumulated depreciation
 and amortization....................................     1,767,000     2,359,000
OTHER ASSETS.........................................       408,000       203,000
GOODWILL AND OTHER INTANGIBLE ASSETS,
 net of accumulated amortization.....................     5,363,000     5,086,000
                                                         ----------  ------------
 Total assets........................................   $16,593,000   $17,386,000
                                                         ==========  ============ 
     LIABILITIES AND STOCKHOLDERS' EQUITY
 
CURRENT LIABILITIES:
 
     Current portion of long-term debt and
          financing leases...........................   $   208,000   $    98,000
     Accounts payable................................     1,268,000     1,328,000
     Accrued compensation and employee benefits......     1,570,000     1,229,000
     Other accrued liabilities.......................       808,000     1,285,000
     Bank line of credit.............................             -     1,673,000
     Note Payable....................................             -        83,000
          Deferred income taxes......................       133,000       103,000
                                                        -----------   -----------
               Total current liabilities.............     3,987,000     5,799,000
 
CONVERTIBLE DEBENTURES...............................     2,000,000     2,000,000
LONG TERM DEBT.......................................       431,000       344,000
DEFERRED INCOME TAXES................................       543,000       541,000
 
STOCKHOLDERS' EQUITY:
 Preferred Stock, $.01 par value:                                                  
      Authorized - 21,000,000 shares                                                      
      No shares outstanding                                                               
 Common Stock, $.01 par value:                                                            
      Authorized - 31,000,000 shares                                                      
      Issued and outstanding 18,113,000 shares at                                         
           December 31, 1995 and 18,771,679  shares                                       
           at June 30, 1996..........................      183,000        188,000          
 Additional paid-in capital..........................   16,642,000     17,444,000          
 Retained earnings (deficit).........................   (7,193,000)    (8,930,000)         
                                                       -----------    -----------          
      Total stockholders' equity.....................    9,632,000      8,702,000          
                                                       -----------    -----------          
      Total liabilities and stockholders' equity.....  $16,593,000    $17,386,000          
                                                       ===========    ===========       
 
</TABLE>

                                       1
<PAGE>
 
                            TRANSCEND SERVICES, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)
<TABLE> 
<CAPTION> 
                                        
                                 Three Months Ended            Six Months Ended
                                      June 30,                     June 30,
                                 1995          1996           1995           1996
                             ------------   -----------   ------------   ------------
<S>                          <C>            <C>           <C>            <C> 
SALES......................  $  5,640,000   $10,580,000   $ 10,657,000   $ 19,268,000
DIRECT EXPENSES............     4,986,000     9,184,000      9,398,000     16,444,000
                             ------------   -----------   ------------   ------------
     GROSS PROFIT..........       654,000     1,396,000      1,259,000      2,824,000
 
MARKETING AND SALES EXPENSE       587,000       594,000      1,024,000      1,235,000
GENERAL AND ADMINISTRATIVE
 EXPENSES..................     1,288,000     1,310,000      2,449,000      2,432,000
AMORTIZATION EXPENSE.......       167,000       132,000        312,000        277,000
                             ------------   -----------   ------------   ------------
OPERATING LOSS.............    (1,388,000)     (640,000)    (2,526,000)    (1,120,000)
OTHER INCOME (EXPENSES):
     Interest Expense......        (9,000)      (69,000)        (9,000)      (121,000)
     Interest Income.......        10,000        17,000         47,000         26,000  
        Other..............             -             -              -              -
                             ------------   -----------   ------------   ------------
 
TOTAL  OTHER INCOME
 (EXPENSE).................         1,000       (52,000)        38,000        (95,000)
 
LOSS FROM CONTINUING       
 OPERATIONS................   ($1,387,000)     (692,000)   ($2,488,000)   ($1,215,000)
LOSS FROM DISCONTINUED
 OPERATIONS................      (120,000)     (271,000)      (240,000)      (400,000)
                             ------------   -----------   ------------   ------------
NET LOSS...................   ($1,507,000)    ($963,000)   ($2,728,000)   ($1,615,000)
                             ============   ===========   ============   ============

LOSS PER COMMON SHARE AND 
   COMMON SHARE EQUIVALENT:
   CONTINUING OPERATIONS...        ($0.08)       ($0.04)        ($0.14)        ($0.07)
   DISCONTINUED OPERATIONS.         (0.01)        (0.01)         (0.01)         (0.02)
                             ------------   -----------   ------------   ------------
NET LOSS...................        ($0.09)       ($0.05)        ($0.15)        ($0.09)
                             ============   ===========   ============   ============

WEIGHTED AVERAGE COMMON SHARES
  OUTSTANDING...............   17,835,000    18,639,000     17,835,000     18,517,000
                             ============   ===========   ============   ============
 
</TABLE> 

                                       2
<PAGE>
                    TRANSCEND SERVICES, INC. AND AFFILIATES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
<TABLE> 
<CAPTION> 
                                                            Six Months Ended
                                                                June 30,

                                                            1995         1996
                                                            ----         ----
 
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                      <C>            <C>
Net Loss................................................ ($2,728,000)   ($1,615,000)
 
Adjustments to reconcile net loss to
     net cash provided by (used in)
     operating activities:
 
Depreciation and amortization...........................     565,000        690,000

Loss from discontinued operations.......................     240,000        400,000
Changes in assets and liabilities, net of acquisitions:
     Accounts receivable................................    (258,000)      (648,000)
     Prepaid expenses...................................    (152,000)      (569,000)
     Deposits and other assets..........................      18,000        210,000
     Accounts payable...................................    (511,000)        45,000
     Accrued compensation and benefits..................     296,000       (380,000)
     Accrued expenses...................................    (483,000)       477,000
     Other..............................................     (15,000)             -
     Deferred income taxes..............................     (35,000)       (30,000)
                                                        ------------   ------------
     Total adjustments..................................    (335,000)      (195,000)
                                                        ------------   ------------
Net Cash provided by (used in)
     continuing operations..............................  (3,063,000)    (1,420,000)
                                                        ------------   ------------
Net Cash provided by (used in)
     discontinued operations............................     107,000       (354,000)
                                                        ------------   ------------
 
Net Cash provided by (used in)
     operating activities...............................  (2,956,000)    (1,774,000)
                                                        ------------   ------------
 
CASH FLOWS FROM INVESTING ACTIVITIES:
     Capital expenditures...............................    (649,000)      (778,000)
     Disposal and transfer of property..................      59,000              -
     Cash acquired from acquisitions....................   7,560,000         37,000
     Distribution of retained earnings (by EMT owners 
       prior to merger).................................                   (121,000)
     Acquisitions.......................................  (2,339,000)             -
                                                        ------------   ------------
Net Cash provided by (used in) investing activities.....   4,631,000       (862,000)
 
NET CASH FROM FINANCING ACTIVITIES:
     Borrowing from debt................................     648,000      1,684,000
     Payments on debt...................................  (2,040,000)      (198,000)
     Payments under line of credit agreement............
     Proceeds - Common Stock, net.......................     173,000
     Proceeds - Stock Options, net......................      35,000        491,000
                                                        ------------   ------------
Net Cash provided by (used in) financing activities.....  (1,184,000)     1,977,000
 
NET INCREASE (DECREASE) IN CASH AND
     CASH EQUIVALENTS...................................     491,000       (659,000)
CASH AND CASH EQUIVALENTS, at
     beginning of period................................     150,000      1,117,000
                                                        ------------   ------------
 
CASH AND CASH EQUIVALENTS, at end of period.............$    641,000   $    458,000
                                                        ============   ============
</TABLE>
                                       3
<PAGE>
 
                    TRANSCEND SERVICES, INC. AND AFFILIATES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1995 AND 1996


(1)  The unaudited financial information furnished herein in the opinion of
     management reflects all adjustments (which are 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,
     1995.  Footnote disclosure which would substantially duplicate the
     disclosure contained in those documents have been omitted.

(2)  On January 10, 1995, the Company  acquired a Georgia Corporation then known
     as "Transcend Services, Inc." by the merger of Transcend Services into
     First Western Health Corporation (the "Merger").  The Merger was  treated
     for financial accounting purposes as the acquisition of the Company  by the
     former Transcend Services and  the historical financial statements of the
     former Transcend Services have become the financial statements of the
     Company and include the businesses of both companies after the effective
     date of the merger.   On May 31, 1995, Transcend Services, Inc., a
     California corporation following its January 10, 1995 merger into TriCare,
     and Veritas Healthcare Management, a California corporation owned by
     TriCare, merged into the TriCare corporation, whose name was then changed
     to "Transcend Services, Inc."

(3)  Net loss per common share has been computed based on the weighted number of
     the Company's common shares and common share equivalents (dilutive stock
     options) outstanding.  The common stock equivalents related to stock
     options were not included in the computation due to their anti-dilutive
     effect.

(4)  On June 19, 1996, Transcend Services, Inc. acquired the stock of Greiner's
     Medical Transcription, Inc. ("GMT"), a California corporation, under the
     pooling of interests method of accounting.  Historical financial statements
     have not been restated to reflect the combined operations of Transcend and
     GMT because the impact of such restatement is considered to be immaterial
     by the Company.  The consolidated Balance Sheet as of June 30, 1996,
     however,  does include the consolidated assets of Transcend and GMT.

(5)  On June 28, 1996, Transcend Services, Inc. acquired the stock of Express
     Medical Transcription, Inc. ("EMT"), a Utah corporation, under the pooling
     of interests method of accounting.  Financial statements  have been
     restated to reflect the combined operations of Transcend and EMT.

                                       4
<PAGE>
 
                                    ITEM 2.

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


Transcend Services, Inc. (the "Company" or "Transcend") is a healthcare services
company focused on the emerging field of healthcare information management
("HIM") services to hospitals and other associated healthcare providers.  The
Company provides a range of HIM services, including: (i) contract management
("outsourcing") of the healthcare information or medical records function, as
well as the admissions function; (ii) transcription of physician dictated
medical notes; and (iii) consulting services relating to medical records and
reimbursement coding.  As of June 30, 1996,  the Company operated, on a contract
management basis, the medical records and certain other HIM functions of 18
general acute care hospitals located in 11 states and the District of Columbia.
The Company also provides case management and disability management services to
insurance carriers, third party administrators and self-insured employers.

The Company intends to expand the range of its contract management services to
include management of other functional areas of hospitals, such as management of
patient access (admissions), utilization review, quality assurance and the
business office.  The Company presently provides full contract management
outsourcing services in the admissions departments for five of the 18  hospitals
it manages.  The Company is actively seeking to provide this expanded range of
services to its current and future hospital customers.  The Company also
provides, through outsourcing as well as other contracts, medical records
transcription services through computer and telephone links from centralized
facilities to approximately 130 hospital customers.

Approximately 3,000 hospitals in the United States have more than 100 beds and
constitute the Company's first tier of market opportunity.  The Company
currently has contract management contracts covering the medical records
departments of 18 hospitals ranging in bed size form 56 beds to 541 beds, with
an average contract size of approximately $1.3 million  per annum.  The initial
terms of the Company's current contracts range from two to five years and are
generally terminable without cause upon expiration of the initial term or for
cause at any time during the initial term thereof.  The Company's existing
contracts currently have remaining terms ranging from approximately one to five
years.  Due to its limited operating history in medical records management, the
Company is unable at the present time to assess or predict its contract renewal
rate.

The Company negotiates its contract management fees on a fixed installment basis
which represent, at contract inception, an immediate savings to the contracting
hospital as compared to its historical costs.  In the early term of such
contracts, the Company's expenses in providing the contract services remain
relatively high (as a percentage of contract revenue received), as set-up and
training costs are incurred, new procedures are implemented and departmental
reorganizations are initiated.  Completion of such steps should result in lower
operating expenses, which in turn should increase the profit margin on  a
constant revenue stream over time. Due to the Company's limited operating
history in the contract management business, however, there can be no assurances
that operating expenses will sufficiently decrease over the life of such
contracts to achieve profitability.

The Company is considering an alternative volume-based pricing structure based
upon a hospital's activity levels such as weighted average number of annual
patient discharges, or a "per member per month" ("PMPM") capitated pricing
option similar to current pricing mechanisms used by managed healthcare groups.
The

                                       5
<PAGE>
 
Company has signed one contract based on a volume oriented pricing structure
tied to weighted annual patient discharges.  There is an opportunity to realize
higher margins on an activity-based pricing structure.  The principal advantage
of a volume based pricing mechanism is that as a hospital's volume of business
increases, the Company's revenues will increase at a faster rate than operating
expenses.  However, if a customer's business volume decreases, the Company's
revenues will also decrease at a faster rate than its operating expenses.

The Company is typically paid for its transcription services on a production
basis at rates determined on a per-line or per character transcribed basis.
Where transcription services are included as part of the services provided in
the Company's outsourcing contracts, however, the services are provided by the
Company as part of a set contract fee.  The Company is paid for its consulting
and coding services on a negotiated fee for service basis. In addition, the
Company is paid for its healthcare case management services primarily on an
hourly basis.

On January 10, 1995, TriCare acquired a Georgia corporation then known as
"Transcend Services, Inc."  by the merger of Transcend Services into a
subsidiary of the Company (the "Merger").   The  Merger was treated for
financial accounting purposes as the acquisition of the Company by the former
Transcend Services  and the historical financial statements of the former
Transcend Services have become the financial statements of the Company and
include the business of both companies after the effective date of the Merger.

RESULTS OF OPERATIONS

The Company's net loss for the quarter and six months ended June 30, 1996 were
$963,000 and $1,615,000, respectively.  Management believes that the Company's
losses are primarily attributable to the significant expenses incurred by the
Company to build a  sales and management organization of a size necessary to
support an increased number of outsourcing contracts and the expansion of the
Company's services to healthcare institutions.  For the quarter and six months
ended June 30, 1996, the Company's marketing and sales expenses were $594,000
and $1,235,000 , respectively, and the Company's general and administrative
expenses amounted to $1,310,000 and $2,432,000, respectively.  The build-up of
the Company's management infrastructure has been necessary in order for the
Company to manage the planned growth in its outsourcing business and will allow
it to grow revenues significantly from current levels without increasing
selling, general and administrative costs by the same proportion, as is
illustrated in the 1996 quarterly and six month comparisons detailed below. At
the present time, the Company's revenues are not sufficient to support these
expenses and generate profits. The Company will be required to increase its
revenues from contract management and other services and effectively manage its
costs to achieve profitability.  In addition, the Company's pricing mechanism on
most of its outsourcing contracts requires the Company to increase operating
efficiencies over the life of the contract in order to increase profit margins.
The Company will also be required to procure a critical mass of such contracts
and be able to renew such outsourcing contracts to the level needed to become
profitable.

QUARTER ENDED JUNE 30, 1996 COMPARED TO QUARTER ENDED JUNE 30, 1995

Total revenues for the Company increased from $5,640,000 for the quarter ended
June 30, 1995 to $10,580,000 for the quarter ended June 30, 1996, an increase of
87.6%.  Contract management revenues were the largest single service class
revenue source for the Company in each of these three month periods representing
48.8% of  total revenues in the 1995 quarter and 56.6% in the 1996 quarter.
Contract management revenues increased from $2,751,000 in the quarter ended June
30, 1995 to $5,986,000 in the quarter ended June 30, 1996, an increase of
117.6%.  Medical transcription revenues were the second largest source of
revenues for the Company

                                       6
<PAGE>
 
for the quarters ended June 30, 1995 and 1996, representing 33.2% of  total
revenues in the 1995 quarter and 26.1% in the 1996 quarter.  Medical
transcription revenues grew from $1,873,000 in the quarter ended June 30, 1995
to $2,766,000 in the quarter ended June 30, 1996, an increase of 47.7%.
Consulting and coding  revenues represented 2.5% of  the Company's total
revenues for the quarter ended June 30, 1995 and 2.1% of the Company's total
revenues for the quarter ended June 30, 1996.  Consulting and coding revenues
increased 48.9% from $143,000 in  the quarter ended June 30, 1995 to $213,000 in
the quarter ended June 30, 1996.  Case management revenues represented 15.5% of
the Company's total revenues in the quarter ended June 30, 1995 as compared to
8.9% in the quarter ended June 30, 1996. Case management revenues grew from
$873,000 in the quarter ended June 30, 1995 to $937,000 in the quarter ended
June 30, 1996, an increase of 7.3%.  The Company also realized revenue of
$678,000, or 6.4% of the quarter's total revenue, from the sale of its
TransChart imaging system to a hospital customer.  There were no revenues in the
1995 quarter from this source.

The increase in total revenues for the quarter ending June 30, 1996, as compared
to the quarter ended June 30, 1995, is primarily attributable to (i) contract
management outsourcing revenues of approximately $2,649,000 related to six
contract management contracts signed in the quarter ended September 30, 1995;
revenues of approximately $938,000 related to  two contracts which were  signed
in the quarter ended March 31, 1996, and revenues of approximately $141,000
related to contracts signed in the quarter ended June 30, 1996; (ii) increased
medical transcription revenues primarily as a result of strong internal growth
in existing offices; and (iii) the revenue recognition of $678,000 from the
Company's sale of its TransChart imaging product to a hospital customer.

Gross profit increased 113.5% to $1,396,000 for  the quarter ended June 30, 1996
from $654,000 in the second quarter of the prior year.  Gross profit as a
percentage of revenues increased to 13.2% for the three months ended June 30,
1996 from 11.6% in the same prior year period.  This increase was primarily
attributable to the contract management outsourcing division which expanded its
gross margin from 13.5% in 1995 to 15.8% in 1996, as a result of increased
efficiencies and lower operating costs following the Company's re-engineering
efforts, and the medical transcription business which expanded its  gross
margins  from 11.1% in the quarter ended June 30, 1995, to 12.1% in the quarter
ended June 30, 1996.  The margin improvement in transcription is a result of
increased efficiencies and lower operating costs following the continued
deployment of digital technology and the improved productivity of the Company's
transcriptionists.  The Company's overall gross margin was further enhanced in
the 1995 to 1996 quarter comparison by the increase in case management's gross
profit margin from 18.0% for the quarter ended June 30, 1995 to 19.9% for the
quarter ended June 30, 1996.  This gain in case management gross margin is the
result of increased operating efficiencies and lower direct costs across a
larger customer base.

Marketing and sales expenses increased 1.2% to $594,000 in the three months
ended June 30, 1996 from $587,000 in the prior year period and decreased  as a
percentage of revenues to 5.6% for the quarter ended June 30, 1996 from 10.4%
for the quarter ended June 30, 1995.  The decrease in sales and marketing
expenditures as a percentage of revenues is attributable to  the Company's
investment in a national sales force and marketing program in 1995 which has led
to a significant increase in sales without a meaningful increase  in marketing
and sales expenditures.   As revenues increase, marketing and sales expenses, as
a percentage of revenues, should continue to decline.

General and administrative expenses of $1,310,000 for the three months ended
June 30, 1996 represented an increase of 1.7% over the $1,288,000 expended in
the same prior year period, but these expenditures significantly decreased as a
percentage of revenues.  The decline in general and administrative expenses from

                                       7
<PAGE>
 
22.8% to 12.4% of  revenues (in the quarter-to-quarter comparison) is a result
of the Company maintaining a stable management structure  that was built to
accommodate considerable growth.  As revenues increase, general and
administrative expenses, as a percentage of revenues,  should continue to
decline.

The Company's loss from operations decreased to $640,000 for the quarter ended
June 30, 1996 from $1,388,000 in the second quarter of the prior year period.

Other expenses increased to $52,000 for the quarter ended June 30, 1996 as
compared to other income of $1,000 for the quarter ended June 30, 1995,
primarily due to the impact of interest expense incurred in connection with the
August 15, 1995 private placement of 8% Subordinated Convertible Debentures.

The loss from discontinued operations relates to legal expenses incurred in 
connection with the Lawsuit. See "Part II Other Information -- Item 1. Legal 
Proceedings."

SIX MONTHS  ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995

Total revenues for the Company increased from $10,657,000 for the six months
ended June 1995 to $19,268,000 for the six months ended June 30, 1996, an
increase of 80.8%.  Contract management revenues were the largest single service
class revenue source for the Company in each of these six month periods
representing 52.1% of total revenues in the 1995 period  and 58.6% in the 1996
period.  Contract management revenues increased from $5,557,000 in the six
months ended June 30, 1995 to $11,283,000 in the six months ended June 30, 1996,
an increase of 103.0%.  Medical transcription revenues were the second largest
source of revenues for the Company for the six months ended June 30, 1995 and
1996, representing 30.0% of  total revenues in the six month period ended June
30, 1995 and 24.7% in the six month period ended June 30, 1996. Medical
transcription revenues grew from $3,201,000 in the six months ended June 30,
1995 to $4,767,000 in the six months ended June 30, 1996, an increase of 48.9%.
Consulting and coding  revenues represented 2.9% of  the Company's total
revenues for the six months ended June 30, 1995 and 2.2% of  the Company's total
revenues for the six months ended June 30, 1996.  Consulting and coding revenues
increased 43.0% from $302,000 in  the six months ended June 30, 1995 to $432,000
in the six months ended June 30, 1996.  Case management revenues represented
15.0% of the Company's total revenues in the six months ended June 30, 1995 as
compared to 10.9% in the six months ended June 30, 1996. Case management
revenues grew from $1,597,000 in the six months ended June 30, 1995 to
$2,108,000 in the six months ended June 30, 1996, an increase of 32.0%.   The
Company also realized revenues of $678,000, or 3.5% of the six months ended June
30, 1996  total revenues, from the sale of its TransChart imaging system to a
hospital customer.  There were no revenues in the comparable six months ended
June 30, 1995 period from this source.

The increase in total revenues for the six months ended June 30, 1996, is
primarily attributable to (i) contract management outsourcing revenues of
approximately $5,257,000 related to six contract management contracts signed in
the second half of fiscal year 1995 and revenues of approximately $1,349,000
related to three contracts which were signed in the six months ended June 30,
1996;  (ii) increased medical transcription revenues primarily as a result of
strong internal growth in existing offices, as well as having Medical
Transcription of Atlanta, Inc.'s ("MTA") results included for the full six month
period ended June 30, 1996 versus approximately half of the six month period
ended June 30, 1995; and (iii) the revenue recognition of $678,000 from the
Company's sale of its TransChart imaging product to a hospital customer.

Gross profit increased 124.0% to $2,824,000 for  the six months ended June 30,
1996 from $1,259,000 in the first  six months of the prior year.  Gross profit
as a percentage of revenues increased to 14.7% for the six months ended June 30,
1996 from 11.8 % in the same prior year period.   This increase was primarily
attributable to the contract management outsourcing division which expanded its
gross margin from 13.5% in 1995 to 16.1% in 1996 as a result of increased
efficiencies and lower operating costs following the Company's

                                       8
<PAGE>
 
re-engineering efforts, and the medical transcription business which expanded
its  gross margins  from 13.8% in the six months ended June 30, 1995, to 14.3%
in the six months ended June 30, 1996.  The margin improvement in transcription
is a result of increased efficiencies and lower operating costs following the
continued deployment of digital technology and the improved productivity of the
Company's  transcriptionists. The Company's overall gross margin was further
enhanced in the 1995 to 1996 six months comparison by the increase in case
management's gross profit margin from 16.0% for the six months ended June 30,
1995 to 24.0% for the six months ended June 30, 1996.  This gain in case
management gross margin is the result of increased operating efficiencies and
lower direct costs across a larger customer base.

Marketing and sales expenses increased 20.6% to $1,235,000 in the six months
ended June 30, 1996 from $1,024,000 in the prior year period  and decreased  as
a percentage of revenues to 6.4% for the six months ended June 30, 1996 from
9.6% for the six months ended June 30, 1995.  The decrease in sales and
marketing expenditures as a percentage of revenues is attributable to  the
Company's  investment in a national sales force and marketing program in 1995
which has led to a significant increase in sales without a meaningful increase
in marketing and sales expenditures.   As revenues increase, marketing and sales
expense, as a percentage of revenues, should decline.

General and administrative expenses of $2,432,000 for the six  months ended June
30, 1996 were  approximately equal to the $2,449,000 expended in the same prior
year period, representing a significant decrease in these expenditures as a
percentage of revenues.  The decline in general and administrative expenses from
22.9% to 12.6% of  revenues (in the June 30, 1995 to June 30, 1996 comparison)
is a result of the Company's investment over the past 18 to 24 months in
building the corporate structure necessary to support the Company's growth needs
for the reasonably foreseeable future.  As revenues increase, general and
administrative expenses, as a percentage of revenues, should decline.

The Company's loss from operations decreased to $1,120,000 for the six months
ended June 30, 1996 from $2,526,000 in the first six months of the prior year
period.

Other expenses increased to $95,000 for the six months ended June 30, 1996 as
compared to other income of $38,000 for the six months ended June 30, 1995,
primarily due to the impact of interest expense incurred in connection with the
August 15, 1995 private placement of 8% Subordinated Convertible Debentures.

The loss from discontinued operations relates to legal expenses incurred in 
connection with the Lawsuit. See "Part II Other Information -- Item 1. Legal 
Proceedings."

DISCONTINUED OPERATIONS

At June 30, 1996, the net assets of the discontinued operations of the Company's
healthcare subsidiaries, First Western and Veritas, both of which ceased
operations as of April 30, 1993, were $2,368,000 in net accounts receivable. The
collection liabilities of First Western and Veritas have been deducted in
determining net accounts receivable. In October, 1995, the Company sold
approximately 38% of the gross accounts receivable to a third party with which
the Company has also contracted with to service and manage the remaining
accounts receivable balance for a set fee. The net accounts receivable from the
discontinued operations represent reimbursements that are owed the Company by
certain insurance companies for applicant medical/legal evaluation services
provided by FWHC Medical Group, Inc. and Veritas Medical Group, Inc., two
managed medical groups associated with the Company's former subsidiaries, First
Western Health Corporation and Veritas Healthcare Management. The Company
expects to collect the accounts receivable from discontinued operations over the
next several years under the provisions

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<PAGE>
 
of the sale and service agreement that the Company has entered into with the
third party for servicing and managing the remaining accounts receivable
balance.  Payment of a portion of the remaining gross receivables, however, is
contested by the insurance companies.  The collection of these contested
accounts receivable is therefore subject to resolution by the California Workers
Compensation Appeals Board, an administrative body charged with determining an
insurance company's liability for the payment of medical/legal evaluation
services. In estimating net accounts receivable, the Company believes that it
has made adequate  provisions as to the estimated amount of gross receivables
that the Company can expect to collect upon resolution by the California Workers
Compensation Appeals Board of the collectibility of the disputed portion of the
receivables.  The Company will continue to re-evaluate the net realizability of
the net assets related to discontinued operations on an on-going basis.  Any
such re-evaluation could result in an adjustment that may potentially be
material to the carrying value of the asset.

In September 1994, the Company sold substantially all the assets and liabilities
of its wholly-owned subsidiary, Occu-Care, which operated industrial medical
clinics, to AmHealth, Inc. ("AmHealth") for a price of $4,000,000.  The purchase
price included $1,500,000 in cash paid at closing and the issuance of two
promissory notes bearing interest at 8% per annum.  AmHealth defaulted on the
first interest payments on the two notes. In conjunction with the Merger on
January 30, 1995, the Company recorded these notes as one due for $2,050,000,
which was the Company's estimate of fair market value (using a discounted cash
flow approach). AmHealth defaulted on a December 1, 1995 mandatory redemption of
a portion of this obligation.

On May 10, 1996, AmHealth  executed a definitive agreement with CORE, Inc., a
public company, pursuant to which CORE would purchase for cash substantially all
the assets of AmHealth in a transaction expected to close by July, 1996. In
anticipation of the consummation of the foregoing transaction, on June 17, 1996,
the Company executed a definitive settlement agreement pursuant to which
AmHealth has agreed to pay the Company the sum of $2,050,000 (the carrying value
of  the asset) and $5,287 in attorney's fees in full satisfaction of AmHealth's
obligation to the Company arising out of the sale of all of the assets and
liabilities of Occu-Care, Inc.  Under the terms of the settlement agreement, the
Company agreed to extend the maturity of the note through July 31, 1996 and to
accept payment under the note simultaneously with the closing of the acquisition
of AmHealth by CORE.  The Company dismissed its lawsuit against AmHealth, filed
on June 5, 1996 for breach of AmHealth's mandatory redemptive obligation on the
$2.5 million owed to the Company, without prejudice on June 26,1996.  The
consummation of the settlement will not represent a gain or loss to the Company.

On or about July 23, 1996, CORE announced that it had terminated its agreement
to purchase, for cash, substantially  all of the assets of AmHealth, citing
market conditions related to a public offering of stock by CORE.  Since CORE's
decision to terminate the AmHealth Agreement, the Company has been investigating
several different means by which to ultimately collect its monies due, as an
unsecured creditor, from AmHealth. AmHealth officials report that AmHealth is
running cash flow positive, prior to debt service, and that it is currently
negotiating with some of its secured creditors to determine future actions.  The
Company continues to assess the probability of ultimately collecting the
AmHealth debt as it receives more information from AmHealth officials and there
can be no assurance that the Company will be paid all, or in part, of the
obligation due from AmHealth.

                                       10
<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES

For the six months ended June 30, 1996, continuing operations produced negative
cash flows of $1,420,000, compared to negative cash flows of $3,063,000 for the
six months ended June 30, 1995.  In 1996, cash has been used primarily to (i)
continue funding the Company's operating losses; (ii) make capital expenditures,
primarily in the Company's transcription division; and (iii) continue to fund
the Company's civil litigation action against certain insurance carriers.  In
1995, cash was also used to finance the Company's two acquisitions, made in
January and April of 1995.

Discontinued operations provided cash of $107,000 for the six months ended June
30, 1995 and required cash of $354,000 in the first six months of 1996. The
primary reason for this use of cash, in the first six months of 1996, is due to
the increase in payments of legal expenses related to the lawsuit of the Company
against certain insurance companies, which is accounted for as an increase in
net assets related to discontinued operations in the first six months of 1996.
The net accounts receivable from the discontinued operations represent
reimbursements that are owed the Company by certain insurance companies for
applicant medical/legal evaluation services provided by FWHC Medical Group, Inc.
and Veritas Medical Group, Inc., two managed medical groups associated with the
Company's former subsidiaries, First Western Health Corporation and Veritas
Healthcare Management.    The Company expects to collect the accounts receivable
from discontinued operations over the next several years under the provisions of
the sale and service agreement that the Company has entered into with a third
party for servicing and managing the remaining accounts receivable balance.  See
"Discontinued Operations."

The Company's working capital position decreased during the six months ended
June 30, 1996 from $604,000 at December 31, 1995 to a deficit of ($479,000) at
June 30, 1996.  This decrease in the Company's working capital arises from a
combination of several factors including the financing from current cash sources
of capital expenditures for equipment of $778,000 during the first six months of
1996 and the continued funding of losses from the Company's operations.  The
Company has established two credit facilities, described below, to help fund its
operations.  Although the Company has negative cash flow, the Company's accounts
receivable turn faster than related payables, allowing the Company to operate
and grow its business.  Under the terms of its contract management fixed-fee
pricing schedules, the Company receives the annual fee in advance monthly
payments (due on the first day of the month), prior to actually incurring any of
the month's fixed and/or variable operating expenses.  This results in accounts
receivable for contract management turning in approximately seven days.  The
Company also receives an up-front implementation fee prior to incurring any
costs associated with actual start-up of a contract management site.

The Company's  investing activities led to a use of cash of $2,929,000 in the
first six months of 1995 compared to $862,000 in the first six months of 1996.
The Company's principal uses of cash for investment purposes are for capital
expenditures and acquisitions.  The Company does not currently have any material
commitments for capital expenditures.

In 1995, the Company expended $1,232,000 in cash to acquire the two medical
transcription businesses, International Dictating Services, Inc. ("IDS") and
MTA.  In connection with these acquisitions, on August 15, 1995, the Company
raised $2 million in cash through the private placement of 8% Subordinated
Convertible Debentures.  The Debentures are unsecured and are subordinated to
all other debt of the Company.  The interest rate on the Debentures is 8%,
payable semi-annually, and the principal amount is due in full on August 15,
2000. The Debentures are convertible into Common Stock by the holder at any time
prior to August 15, 2000 at a rate of 286 shares of Common Stock for each $1,000
in principal and are convertible by the Company at any time

                                       11
<PAGE>
 
when the Common Stock trades at $10.50 per share for 30 consecutive trading
days.  The Company may redeem the Debentures at any time upon a minimum of a 30
day but no more than 60 day notice to the holder of the Debenture.

For the six months ended June 30, 1996, financing activities provided
$1,977,000, primarily from the proceeds on the exercise  of incentive stock
options, $491,000,  and the utilization of credit facilities (as described in
detail in the following paragraph) in the amount of $1,486,000.

On April 30, 1996, the Company established two separate credit-facilities with
Silicon Valley East (Wellesley, Massachusetts) a division of Silicon Valley
Bank, a California-chartered bank (Santa Clara, CA).  The aggregate credit
available (under both facilities) is $5.75 million.  The banking facilities are
secured by all of the Company's assets.  One of the facilities is a $5.0 million
working capital credit line under which the Company may borrow a certain
percentage of its accounts receivable balance, subject to an initial cap of $3.0
million that was to be removed if the Company realized net income of at least
$50,000 in the quarter ended June 30, 1996. Because the Company recognized a
loss in the second quarter, this facility remains capped at $3.0 million.  The
second facility is a $750,000 term facility set up to help the Company meet any
of its capital investment requirements in the near term which include the
purchase of computers and transcription related equipment. This term note is
subject to an initial cap of $250,000, with the cap being removed during such
periods that the Company maintains a debt service ratio of 1.5 to 1.0, where
debt service is defined as earnings before interest and taxes plus depreciation
and amortization, divided by total interest plus current portion of long-term
debt. As of June 30, 1996 the Company was not maintaining the required debt
service ratio.  As of June 30, 1996  total borrowings under both facilities
totaled $1,673,044.  The stated interest rate on the working capital facility is
prime plus 0.5 percent and the stated interest rate on the term loan is prime
plus 1.0%.   Both of these facilities will mature on April 30, 1997.

The Company anticipates that cash on hand, together with internally generated
funds and cash collected from discontinued operations, will not be sufficient to
finance continuing operations, make capital investments, and fund its civil
litigation action against certain insurance carriers over the next six months.
Therefore, the Company is currently pursuing various alternatives to provide
additional cash resources to allow the Company to (i) continue its rapid growth,
(ii) achieve profitability during the second half of 1996, and (iii) continue to
fund its civil litigation against certain insurance carriers.


IMPACT OF INFLATION

Inflation has not had a material effect on the Company to date.  However, the
effects of inflation on future operating results will depend in part, on the
Company's ability to increase prices and/or lower expenses in amounts offsetting
inflationary cost increases.

                                       12
<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 healthcare 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 twenty-two of the largest California workers' compensation insurance
carriers, which lawsuit was subsequently amended to name 16 defendants
(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 economic
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 healthcare subsidiaries and their contracting associated medical
groups  (the "Lawsuit").  The claims arise out of the Company's former business,
which prior to the merger with Transcend Services, Inc., included the business
of providing medical/legal evaluations and medical treatment services (in
association with managed medical groups) in the workers' compensation industry
in California.  Seven defendants in the Lawsuit have filed cross complaints
against the plaintiffs seeking restitution, accounting from the plaintiffs for
monies previously paid by the defendants, disgorgement of profits, injunctive
relief, attorney's fees and punitive damages, based upon allegations of illegal
corporate practice of medicine, illegal referral arrangements, specific
statutory violations and related improper conduct.  The case is presently in the
early stages of discovery.  The defendants have filed various motions to dismiss
and other motions seeking the failure of the plaintiffs' cause of action, none
of which have been successful.  The Company and its council 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.
Based upon facts and circumstances known to date, in the opinion of management,
final resolution of the Lawsuit will not have a material adverse effect on the
Company's financial condition, results of operations or liquidity.

On June 22, 1995, an action was filed by Timothy S. Priest in his capacity as
administrator of the estate of Robert V. Taylor against Carol Brown, Debbie
Ostwald, the Company's subsidiary Sullivan, and Fireman's Fund Insurance
Company, in the Circuit Court of Franklin County, Tennessee, alleging breach of
duty to provide reasonably competent nursing care to an injured individual.  The
plaintiff demands compensatory damages in the amount of $1 million and punitive
damages in the amount of $2 million, plus costs. Management of the Company
believes that the Company has meritorious defenses to the allegations and
intends to vigorously contest liability in this matter.  At the present time,
management of the Company cannot predict the outcome of this litigation, but it
does not believe that the litigation will have a material adverse effect on the
Company's financial condition, results of operations or liquidity.

                                       13
<PAGE>


                                     ITEM 6
                        EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits:

     4.1*    Loan and Security Agreement, $5,000,000 Working Capital Line and
             $750,000 Equipment Line, provided by Silicon Valley Bank to
             Transcend Services, Inc.
     4.2*    Working Capital Note
     4.3*    Equipment Term Note
     4.4*    Warrant to Purchase Common Stock
     4.5*    Silicon Valley Bank Antidilution Agreement
     4.6*    Silicon Valley Bank Registration Rights Agreement
    +11      Statement Re Computation of Per Share Earnings
    +27.1    Financial Data Schedule

     *       Previously filed.                              
     +       Amended hereby.

(b)  The following reports on Form 8-K were filed during the quarter ended June
     30, 1996:

     1.   Amendment No. 2 on Form 8-K/A dated May 30, 1996 to Current Report on
          Form 8-K dated May 2, 1995, filing certain financial statements
          related to 1995 acquisitions 

                                       14
<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 thereunto duly authorized.



Date: February 20, 1997        By:/S/ David W. Murphy
                                  --------------------------------           
                                  David W. Murphy
                                  Chief Financial Officer
                                  (Principal Financial and
                                  Accounting Officer)

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