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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, 2010

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 000-18217





TRANSCEND SERVICES, INC.

(Exact name of registrant as specified in its charter)







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

One Glenlake Parkway, Suite 1325, Atlanta, GA 30328

(Address of principal executive offices and zip code)

Registrants telephone number, including area code: (678) 808-0600



(Former name, former address, and former fiscal year, if changed
since last report)





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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.
See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.



|                        |  |   |  |                           |  |  
|----------------------- |  | - |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈ |  | Accelerated filer         |  | x
|                        |  |   | 
|Non-accelerated filer   |  |  ̈ |  | Smaller reporting company |  |  ̈

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

Indicate the number of shares outstanding of the registrants common stock as of the latest practicable date.



|                              |  |                              
|----------------------------- |  | -----------------------------
|Class                         |  | Outstanding at April 30,
2010
|Common Stock, $0.05 par value |  | 10,491,182                   









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INDEX



|              |  |                                                                                          |  |           
|------------- |  | ---------------------------------------------------------------------------------------- |  | ----------
|              |  |                                                                                          |  | PageNumber
|              |  |                                                                                         
|PART I.       |  | FINANCIAL INFORMATION                                                                    |  | 3         
|              |  |                                                                                         
|Item 1.       |  | Financial Statements                                                                     |  | 3         
|              |  | Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009                   |  | 3         
|              |  | Consolidated Statements of Operations for the Three Months Ended March 31, 2010 and 2009 |  | 4         
|              |  | Consolidated Statement of Stockholders Equity for the Three Months Ended March 31, 2010 |  | 5         
|              |  | Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009 |  | 6         
|              |  | Notes to Consolidated Financial Statements                                               |  | 7         
|              |  |                                                                                         
|Item 2        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations    |  | 14        
|              |  |                                                                                         
|Item 3.       |  | Quantitative and Qualitative Disclosures About Market Risk                               |  | 19        
|              |  |                                                                                         
|Item 4.       |  | Controls and Procedures                                                                  |  | 19        
|              |  |                                                                                         
|PART II.      |  | OTHER INFORMATION                                                                        |  | 19        
|              |  |                                                                                         
|Item 1.       |  | Legal Proceedings                                                                        |  | 19        
|              |  |                                                                                         
|Item 1A.      |  | Risk Factors                                                                             |  | 20        
|              |  |                                                                                         
|Item 6.       |  | Exhibits                                                                                 |  | 20        
|              | 
|SIGNATURES    |  | 21                                                                                      
|              | 
|EXHIBIT INDEX |  | 22                                                                                      



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

TRANSCEND SERVICES, INC.

CONSOLIDATED BALANCE SHEETS

(Rounded to the nearest thousand)



|                                                                                                                                                                                                                   |  |                          |            |   |                  |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------ | ---------- | - | ---------------- | - | ---------- | -
|                                                                                                                                                                                                                   |  | March 31,2010(unaudited) |            |   | December 31,2009 |  
|ASSETS                                                                                                                                                                                                             |  |                          |            |   |                  |   |            |  
|Current assets:                                                                                                                                                                                                    |  |                          |            |   |                  |   |            |  
|Cash and cash equivalents                                                                                                                                                                                          |  | $                        | 17,498,000 |   |                  | $ | 25,732,000 |  
|Short-term investments                                                                                                                                                                                             |  |                          | 11,287,000 |   |                  |   | 2,000,000  |  
|Accounts receivable, net of allowance for doubtful accounts of $96,000 at March 31, 2010 and December 31,
2009                                                                                                     |  |                          | 9,513,000  |   |                  |   | 9,500,000  |  
|Deferred income tax, net                                                                                                                                                                                           |  |                          | 43,000     |   |                  |   | 317,000    |  
|Prepaid expenses and other current assets                                                                                                                                                                          |  |                          | 312,000    |   |                  |   | 316,000    |  
|                                                                                                                                                                                                                   |  |                          |            |   |                  |   |            |  
|Total current assets                                                                                                                                                                                               |  |                          | 38,653,000 |   |                  |   | 37,865,000 |  
|Property and equipment:                                                                                                                                                                                            |  |                          |            |   |                  |   |            |  
|Computer equipment                                                                                                                                                                                                 |  |                          | 3,155,000  |   |                  |   | 3,095,000  |  
|Software                                                                                                                                                                                                           |  |                          | 3,595,000  |   |                  |   | 2,990,000  |  
|Furniture and fixtures                                                                                                                                                                                             |  |                          | 684,000    |   |                  |   | 611,000    |  
|                                                                                                                                                                                                                   |  |                          |            |   |                  |   |            |  
|Total property and equipment                                                                                                                                                                                       |  |                          | 7,434,000  |   |                  |   | 6,696,000  |  
|Accumulated depreciation and amortization                                                                                                                                                                          |  |                          | (5,132,000 | ) |                  |   | (4,857,000 | )
|                                                                                                                                                                                                                   |  |                          |            |   |                  |   |            |  
|Property and equipment, net                                                                                                                                                                                        |  |                          | 2,302,000  |   |                  |   | 1,839,000  |  
|Capitalized software, net                                                                                                                                                                                          |  |                          | 812,000    |   |                  |   | 176,000    |  
|Intangible assets:                                                                                                                                                                                                 |  |                          |            |   |                  |   |            |  
|Goodwill                                                                                                                                                                                                           |  |                          | 23,650,000 |   |                  |   | 23,650,000 |  
|Other intangible assets                                                                                                                                                                                            |  |                          | 6,699,000  |   |                  |   | 6,699,000  |  
|                                                                                                                                                                                                                   |  |                          |            |   |                  |   |            |  
|Total intangible assets                                                                                                                                                                                            |  |                          | 30,349,000 |   |                  |   | 30,349,000 |  
|Accumulated amortization                                                                                                                                                                                           |  |                          | (1,187,000 | ) |                  |   | (1,014,000 | )
|                                                                                                                                                                                                                   |  |                          |            |   |                  |   |            |  
|Intangible assets, net                                                                                                                                                                                             |  |                          | 29,162,000 |   |                  |   | 29,335,000 |  
|Other assets                                                                                                                                                                                                       |  |                          | 164,000    |   |                  |   | 173,000    |  
|                                                                                                                                                                                                                   |  |                          |            |   |                  |   |            |  
|Total assets                                                                                                                                                                                                       |  | $                        | 71,093,000 |   |                  | $ | 69,388,000 |  
|                                                                                                                                                                                                                   |  |                          |            |   |                  |   |            |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                               |  |                          |            |   |                  |   |            |  
|Current liabilities:                                                                                                                                                                                               |  |                          |            |   |                  |   |            |  
|Accounts payable                                                                                                                                                                                                   |  | $                        | 1,652,000  |   |                  | $ | 1,384,000  |  
|Accrued compensation and benefits                                                                                                                                                                                  |  |                          | 2,990,000  |   |                  |   | 2,296,000  |  
|Promissory note payable to related party                                                                                                                                                                           |  |                          | 2,000,000  |   |                  |   | 2,000,000  |  
|Promissory notes payable                                                                                                                                                                                           |  |                          | 378,000    |   |                  |   | 899,000    |  
|Other accrued liabilities                                                                                                                                                                                          |  |                          | 1,782,000  |   |                  |   | 2,210,000  |  
|                                                                                                                                                                                                                   |  |                          |            |   |                  |   |            |  
|Total current liabilities                                                                                                                                                                                          |  |                          | 8,802,000  |   |                  |   | 8,789,000  |  
|Long term liabilities:                                                                                                                                                                                             |  |                          |            |   |                  |   |            |  
|Deferred income tax, net                                                                                                                                                                                           |  |                          | 855,000    |   |                  |   | 1,083,000  |  
|Other liabilities                                                                                                                                                                                                  |  |                          | 151,000    |   |                  |   | 159,000    |  
|                                                                                                                                                                                                                   |  |                          |            |   |                  |   |            |  
|Total long term liabilities                                                                                                                                                                                        |  |                          | 1,006,000  |   |                  |   | 1,242,000  |  
|Commitments and contingencies                                                                                                                                                                                      |  |                          |            |   |                  |   |            |  
|Stockholders equity:                                                                                                                                                                                              |  |                          |            |   |                  |   |            |  
|Preferred stock, $0.01 par value; 2,000,000 shares authorized and no shares outstanding at March 31, 2010 and
December 31, 2009                                                                                    |  |                          |           |   |                  |   |           |  
|Common stock, $0.05 par value; 15,000,000 shares authorized at March 31, 2010 and December 31, 2009; 10,489,000 and
10,477,000 shares issued and outstanding at March 31, 2010 and December 31, 2009, respectively |  |                          | 525,000    |   |                  |   | 524,000    |  
|Additional paid-in capital                                                                                                                                                                                         |  |                          | 61,381,000 |   |                  |   | 61,086,000 |  
|Retained deficit                                                                                                                                                                                                   |  |                          | (621,000   | ) |                  |   | (2,253,000 | )
|                                                                                                                                                                                                                   |  |                          |            |   |                  |   |            |  
|Total stockholders equity                                                                                                                                                                                         |  |                          | 61,285,000 |   |                  |   | 59,357,000 |  
|                                                                                                                                                                                                                   |  |                          |            |   |                  |   |            |  
|Total liabilities and stockholders equity                                                                                                                                                                         |  | $                        | 71,093,000 |   |                  | $ | 69,388,000 |  
|                                                                                                                                                                                                                   |  |                          |            |   |                  |   |            |  

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



3



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TRANSCEND SERVICES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited and rounded to the nearest thousand,

except earnings per share)



|                                                                        |  |                             |            |   |      |   |            |  
|----------------------------------------------------------------------- |  | --------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                        |  | Three months endedMarch 31, |           
|                                                                        |  | 2010                        |            |   | 2009 |  
|Revenue                                                                 |  | $                           | 22,206,000 |   |      | $ | 14,930,000 |  
|Direct costs (exclusive of depreciation and amortization)               |  |                             | 14,726,000 |   |      |   | 9,587,000  |  
|                                                                        |  |                             |            |   |      |   |            |  
|Gross profit                                                            |  |                             | 7,480,000  |   |      |   | 5,343,000  |  
|Operating expenses:                                                     |  |                             |            |   |      |   |            |  
|Sales and marketing (exclusive of depreciation and amortization)        |  |                             | 403,000    |   |      |   | 407,000    |  
|Research and development (exclusive of depreciation and amortization)   |  |                             | 426,000    |   |      |   | 369,000    |  
|General and administrative (exclusive of depreciation and amortization) |  |                             | 3,528,000  |   |      |   | 1,766,000  |  
|Depreciation and amortization                                           |  |                             | 448,000    |   |      |   | 255,000    |  
|                                                                        |  |                             |            |   |      |   |            |  
|Total operating expenses                                                |  |                             | 4,805,000  |   |      |   | 2,797,000  |  
|                                                                        |  |                             |            |   |      |   |            |  
|Operating income                                                        |  |                             | 2,675,000  |   |      |   | 2,546,000  |  
|Other income and expense:                                               |  |                             |            |   |      |   |            |  
|Interest income                                                         |  |                             | 14,000     |   |      |   | 11,000     |  
|Interest expense                                                        |  |                             | (41,000    | ) |      |   | (42,000    | )
|                                                                        |  |                             |            |   |      |   |            |  
|Net other income and (expense)                                          |  |                             | (27,000    | ) |      |   | (31,000    | )
|                                                                        |  |                             |            |   |      |   |            |  
|Income before income taxes                                              |  |                             | 2,648,000  |   |      |   | 2,515,000  |  
|Income tax provision                                                    |  |                             | 1,016,000  |   |      |   | 937,000    |  
|                                                                        |  |                             |            |   |      |   |            |  
|Net income                                                              |  | $                           | 1,632,000  |   |      | $ | 1,578,000  |  
|                                                                        |  |                             |            |   |      |   |            |  
|Basic earnings per share:                                               |  |                             |            |   |      |   |            |  
|Net earnings per share                                                  |  | $                           | 0.16       |   |      | $ | 0.19       |  
|                                                                        |  |                             |            |   |      |   |            |  
|Weighted average shares outstanding                                     |  |                             | 10,483,000 |   |      |   | 8,470,000  |  
|                                                                        |  |                             |            |   |      |   |            |  
|Diluted earnings per share:                                             |  |                             |            |   |      |   |            |  
|Net earnings per share                                                  |  | $                           | 0.15       |   |      | $ | 0.18       |  
|                                                                        |  |                             |            |   |      |   |            |  
|Weighted average shares outstanding                                     |  |                             | 10,913,000 |   |      |   | 8,797,000  |  
|                                                                        |  |                             |            |   |      |   |            |  

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



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TRANSCEND SERVICES, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2010

(Unaudited and rounded to the nearest thousand)



|                                                                          |  |                                          |  |                        |   |                               |            |             |   |                          |  |                 |            |  |                     |            |   |  |   |           
|------------------------------------------------------------------------- |  | ---------------------------------------- |  | ---------------------- | - | ----------------------------- | ---------- | ----------- | - | ------------------------ |  | --------------- | ---------- |  | ------------------- | ---------- | - |  | - | ----------
|                                                                          |  | Number ofShares ofSeries APreferredStock |  | Series APreferredStock |   | Number ofShares ofCommonStock |            | CommonStock |   | AdditionalPaid-inCapital |  | RetainedDeficit |            |  | StockholdersEquity
|Balance, December 31, 2009                                                |  |                                         |  | $                      |  |                               | 10,477,000 |             | $ | 524,000                  |  | $               | 61,086,000 |  | $                   | (2,253,000 | ) |  | $ | 59,357,000
|Net income                                                                |  |                                          |  |                        |   |                               |            |             |   |                          |  |                 |            |  |                     | 1,632,000  |   |  |   | 1,632,000 
|Issuance of common stock from stock incentive plans                       |  |                                          |  |                        |   |                               | 12,000     |             |   | 1,000                    |  |                 | 6,000      |  |                     |            |   |  |   | 7,000     
|Share-based compensation expense                                          |  |                                          |  |                        |   |                               |            |             |   |                          |  |                 | 214,000    |  |                     |            |   |  |   | 214,000   
|Revision of estimate for capitalized expenses of stock offering           |  |                                          |  |                        |   |                               |            |             |   |                          |  |                 | 55,000     |  |                     |            |   |  |   | 55,000    
|Tax benefit from disqualifying dispositions of stock options and warrants |  |                                          |  |                        |   |                               |            |             |   |                          |  |                 | 20,000     |  |                     |            |   |  |   | 20,000    
|                                                                          |  |                                          |  |                        |   |                               |            |             |   |                          |  |                 |            |  |                     |            |   |  |   |           
|Balance, March 31, 2010                                                   |  |                                         |  | $                      |  |                               | 10,489,000 |             | $ | 525,000                  |  | $               | 61,381,000 |  | $                   | (621,000   | ) |  | $ | 61,285,000
|                                                                          |  |                                          |  |                        |   |                               |            |             |   |                          |  |                 |            |  |                     |            |   |  |   |           

The accompanying notes are an integral part of this
consolidated financial statement.



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TRANSCEND SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and rounded to the nearest thousand)



|                                                                                  |  |                              |             |   |      |   |            |  
|--------------------------------------------------------------------------------- |  | ---------------------------- | ----------- | - | ---- | - | ---------- | -
|                                                                                  |  | Three months ended March 31, |            
|                                                                                  |  | 2010                         |             |   | 2009 |  
|Cash flows from operating activities:                                             |  |                              |             |   |      |   |            |  
|Net income                                                                        |  | $                            | 1,632,000   |   |      | $ | 1,578,000  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                              |             |   |      |   |            |  
|Deferred income taxes                                                             |  |                              | 46,000      |   |      |   | 938,000    |  
|Depreciation and amortization                                                     |  |                              | 448,000     |   |      |   | 255,000    |  
|Share-based compensation                                                          |  |                              | 214,000     |   |      |   | 110,000    |  
|Changes in assets and liabilities:                                                |  |                              |             |   |      |   |            |  
|Accounts receivable, net                                                          |  |                              | (13,000     | ) |      |   | (428,000   | )
|Prepaid income taxes, excluding tax benefit for share based payments              |  |                              | 84,000      |   |      |   |           |  
|Tax benefit for share based payments                                              |  |                              | (20,000     | ) |      |   |           |  
|Prepaid expenses and other current assets                                         |  |                              | (60,000     | ) |      |   | 41,000     |  
|Other assets                                                                      |  |                              | 9,000       |   |      |   | 14,000     |  
|Accounts payable                                                                  |  |                              | 268,000     |   |      |   | (273,000   | )
|Accrued and other liabilities                                                     |  |                              | 258,000     |   |      |   | (320,000   | )
|                                                                                  |  |                              |             |   |      |   |            |  
|Total adjustments                                                                 |  |                              | 1,234,000   |   |      |   | 337,000    |  
|                                                                                  |  |                              |             |   |      |   |            |  
|Net cash provided by operating activities                                         |  |                              | 2,866,000   |   |      |   | 1,915,000  |  
|Cash flows from investing activities:                                             |  |                              |             |   |      |   |            |  
|Capital expenditures                                                              |  |                              | (738,000    | ) |      |   | (170,000   | )
|Capitalized software development costs                                            |  |                              | (636,000    | ) |      |   |           |  
|Purchase of investments                                                           |  |                              | (9,287,000  | ) |      |   |           |  
|Purchase of businesses, net of cash acquired                                      |  |                              |            |   |      |   | (4,250,000 | )
|                                                                                  |  |                              |             |   |      |   |            |  
|Net cash used in investing activities                                             |  |                              | (10,661,000 | ) |      |   | (4,420,000 | )
|Cash flows from financing activities:                                             |  |                              |             |   |      |   |            |  
|Proceeds from stock options and other issuances of stock                          |  |                              | 7,000       |   |      |   | 74,000     |  
|Revision of estimate for capitalized expenses of stock offering                   |  |                              | 55,000      |   |      |   |           |  
|Tax benefit for share based payments                                              |  |                              | 20,000      |   |      |   |           |  
|Repayment of promissory notes payable                                             |  |                              | (521,000    | ) |      |   | (146,000   | )
|Repayment of revolving promissory note                                            |  |                              |            |   |      |   | (4,000     | )
|                                                                                  |  |                              |             |   |      |   |            |  
|Net cash used in financing activities                                             |  |                              | (439,000    | ) |      |   | (76,000    | )
|                                                                                  |  |                              |             |   |      |   |            |  
|Net change in cash and cash equivalents                                           |  |                              | (8,234,000  | ) |      |   | (2,581,000 | )
|Cash and cash equivalents at beginning of period                                  |  |                              | 25,732,000  |   |      |   | 12,282,000 |  
|                                                                                  |  |                              |             |   |      |   |            |  
|Cash and cash equivalents at end of period                                        |  | $                            | 17,498,000  |   |      | $ | 9,701,000  |  
|                                                                                  |  |                              |             |   |      |   |            |  
|                                                                                  |  |                             
|Supplemental cash flow information:                                               |  |                              |             |   |      |   |            |  
|Cash paid for interest                                                            |  | $                            | 17,000      |   |      | $ | 14,000     |  
|Cash paid for income taxes                                                        |  | $                            | 741,000     |   |      | $ | 382,000    |  
|                                                                                  |  |                             
|Non-cash investing and financing activities:                                      |  |                              |             |   |      |   |            |  
|Additional contingent consideration accrued for previous acquisition              |  |                              |            |   |      | $ | 151,000    |  

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



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TRANSCEND SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements include the accounts of Transcend Services, Inc. (the Company or Transcend) and
for the periods after August 31, 2009, our wholly-owned subsidiary, Medical Dictation Services, Inc. (MDSI). All intercompany accounts and transactions have been eliminated in consolidation.

The accompanying consolidated financial statements are unaudited and have been prepared by our management in accordance with the rules and regulations of
the Securities and Exchange Commission (the SEC). In the opinion of management, all adjustments, consisting of normal recurring accruals, necessary for the fair presentation of the consolidated financial position, results of operations
and cash flows, have been included. For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2009. Footnote disclosure that
substantially duplicates the disclosure contained in that document has been omitted.

Capitalized Software

We account for computer software development costs for products to be licensed or otherwise marketed to third parties in accordance with ASC Topic
985  Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. As such, all costs incurred prior to the product achieving technological feasibility are expensed as research and development costs.
Technological feasibility is established upon completion of all planning, designing, and testing activities that are necessary to establish that the product can be produced to meet its design specifications including functions, features, and
technical performance requirements. Upon achieving technological feasibility, programming costs are capitalized until the product is made available for general release to customers. The capitalized costs are amortized over the economic useful life
of the product. At the end of 2009 we began to capitalize costs associated with the development of our next generation transcription platform. The product which we intend to license or otherwise market to third parties is still in development and
thus amortization of capitalized costs has not begun. All additional capitalized software is reported in property and equipment since the software is for internal use only.

2. RECENT ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Pronouncements

In January 2010, the FASB issued update 2010-06 to Topic 820  Fair Value Measurements and Disclosures. This update provided
requirements of new disclosures of significant transfers in and out of Levels 1 and 2, and expanded disclosure of activity in Level 3. This update also clarified existing disclosures around the level of disaggregation of each class of assets and
liabilities, and about fair value inputs and valuation techniques for Level 2 and Level 3. This update was effective for interim and annual reporting periods beginning after December 15, 2009. Adoption of this update did not have a material
impact on our financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

None

3. ACQUISITIONS

On January 1, 2009, we completed the acquisition of DeVenture Global Partners, Inc. (DeVenture) in accordance with the Asset Purchase
Agreement entered into on December 26, 2008. We purchased substantially all of the assets and assumed certain liabilities of DeVenture to expand our market share, capitalize on the potential for the acquired business to grow and leverage our
fixed overhead costs across a larger revenue base. DeVentures debt was not assumed. Including the contingent payment, the total purchase price was $4,375,000. Goodwill of $3,049,000 was recorded for the DeVenture acquisition. Goodwill
consisted primarily of the synergies



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and economies of scale expected from combining the operations of Transcend and DeVenture and the value of the DeVenture assembled workforce.

On April 1, 2009, we completed the acquisition of the domestic medical transcription business of Transcription Relief Services, Inc.
(TRS) in accordance with the Asset Purchase Agreement entered into on March 26, 2009. We purchased the TRS assets and assumed certain liabilities of TRS to expand our market share, capitalize on the potential for the acquired
business to grow and leverage our fixed overhead costs across a larger revenue base. TRSs debt was not assumed. A contingent payment in the amount of $1,123,000 was paid in February 2010 (see Note 11 of the Notes to Consolidated Financial
Statements). Including the contingent payment, the purchase price was $5,623,000. Goodwill of $2,773,000 was recorded for the TRS acquisition. This consisted primarily of the synergies and economies of scale expected from combining the operations of
Transcend and TRS and the value of the TRS assembled workforce.

On August 31, 2009 we purchased from the selling shareholder, Dorothy K.
Fitzgerald, all issued and outstanding shares of common stock of MDSI. Headquartered in Gaithersburg, Maryland, MDSI was a leading medical transcription company with approximately 450 transcriptionists and employees providing service to
approximately 30 customers located predominantly in the mid-Atlantic region of the United States. We purchased MDSI to capitalize on the potential for the acquired business to grow, leverage our fixed overhead costs across a larger revenue base and
increase our presence in the Mid-Atlantic region of the United States. The total purchase price was $15,487,000. Goodwill of $13.1 million was recorded for the MDSI acquisition. This consisted primarily of the synergies and economies of scale
expected from combining the operations of Transcend and MDSI and the value of the MDSI assembled workforce.

4. MAJOR CUSTOMERS

In September 2009, we announced that we had entered into a five-year single-source contract to provide medical transcription services to
hospitals that are members of Health Management Associates (HMA) effective October 1, 2009. Prior to signing this agreement, we had individual contracts with approximately 45 of HMAs 54 hospitals. The new agreement expanded
the existing relationship between Transcend and HMA to include the HMA hospitals which were using other transcription service providers. As of March 31, 2010, we have transitioned all but two of the existing HMA hospitals. In addition, pursuant
to the terms of the agreement, any future hospitals acquired or managed by HMA will transition to us as soon as practicable.

Revenue
attributable to our contract with HMA comprised 18.5% and 19.6% of our total revenue for the three months ended March 31, 2010 and 2009, respectively. The decrease in the percentage in 2010 from 2009 is due primarily to the additional revenue
from the businesses acquired in 2009.

Our top 10 customers (a customer is an individual hospital) accounted for approximately 14.7% of our
transcription revenue for the three months ended March 31, 2010, averaging $1.3 million of annualized revenue per customer, with no one customer accounting for greater than 10% of revenue. Our average annual revenue per customer was
approximately $349,000 in 2009 and $348,000 for the first quarter of 2010.

5. INVESTMENTS

Short-term investments consist of government notes and fully insured certificates of deposit with original maturities of 91 to 227 days. These
investments are classified as available-for-sale.



|                             |  |                |            |                   |   |          
|---------------------------- |  | -------------- | ---------- | ----------------- | - | ---------
|Description                  |  | March 31, 2010 |            | December 31, 2009
|Available-for-sale           |  |                |            |                   |   |          
|Certificates of deposit      |  | $              | 7,289,000  |                   | $ | 2,000,000
|U.S. Treasury Securities     |  |                | 3,998,000  |                   |   |         
|                             |  |                |            |                   |   |          
|Total short-term investments |  | $              | 11,287,000 |                   | $ | 2,000,000
|                             |  |                |            |                   |   |          

6. GOODWILL AND OTHER INTANGIBLE ASSETS

We account for goodwill and other intangible assets in accordance with the provisions of FASB ASC Topic 350  Intangibles-Goodwill and
Other. Under this Topic, goodwill and intangible assets that have indefinite useful lives are tested at least annually for impairment rather than being amortized like intangible assets with finite useful lives, which are amortized over their
useful lives. A portion of the respective purchase prices of the acquisitions of Medical Dictation, Inc. (MDI) and PracticeXpert, acquired in 2005,



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OTP Technologies, Inc. (OTP), acquired in 2007 and DeVenture, TRS and MDSI, all acquired in 2009, were attributed to goodwill and other intangible assets.

Other Intangible Assets

(Rounded to the nearest thousand)



|                             |  |                     |  |                           |           |                            |   |           |  |             |           |                         |   |           |  |   |           |  |   |          
|---------------------------- |  | ------------------- |  | ------------------------- | --------- | -------------------------- | - | --------- |  | ----------- | --------- | ----------------------- | - | --------- |  | - | --------- |  | - | ---------
|                             |  |                     |  | March 31, 2010(unaudited) |           | December 31, 2009(audited)
|                             |  | Useful Lifein Years |  | GrossAssets               |           | AccumulatedAmortization    |   | NetAssets |  | GrossAssets |           | AccumulatedAmortization |   | NetAssets
|Amortized intangible assets: |  |                     |  |                           |           |                            |   |           |  |             |           |                         |   |           |  |   |           |  |   |          
|Covenants not to compete     |  | 5                   |  | $                         | 218,000   |                            | $ | 76,000    |  | $           | 142,000   |                         | $ | 218,000   |  | $ | 67,000    |  | $ | 151,000  
|Customer relationships       |  | 5-10                |  |                           | 6,481,000 |                            |   | 1,111,000 |  |             | 5,370,000 |                         |   | 6,481,000 |  |   | 947,000   |  |   | 5,534,000
|                             |  |                     |  |                           |           |                            |   |           |  |             |           |                         |   |           |  |   |           |  |   |          
|Total intangible assets      |  |                     |  | $                         | 6,699,000 |                            | $ | 1,187,000 |  | $           | 5,512,000 |                         | $ | 6,699,000 |  | $ | 1,014,000 |  | $ | 5,685,000
|                             |  |                     |  |                           |           |                            |   |           |  |             |           |                         |   |           |  |   |           |  |   |          

7. FAIR VALUE OF FINANCIAL INSTRUMENTS

FASB ASC Topic 820  Fair Value Measurements and Disclosures, establishes a framework for measuring fair value and expands financial
statement disclosures about fair value measurements. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This topic requires
that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

Level
1: Quoted market prices in active markets for identical assets or liabilities

Level 2: Observable market based inputs or
unobservable inputs that are corroborated by market data

Level 3: Unobservable inputs that are not corroborated by market data

In accordance with FASB ASC Topic 825  Financial Instruments, the carrying value of short-term debt, which totaled
$2,378,000 as of March 31, 2010 and $2,899,000 as of December 31, 2009, was estimated to approximate its fair value. The fair value of debt is estimated based on approximate market interest rates for similar issues. Our other financial
instruments, including cash and cash equivalents, accounts receivable and accounts payable, approximate fair value due to the short-term nature of those assets and liabilities.

At December 31, 2009 our short-term investments consisted of fully-insured certificates of deposits with maturities of less than four months. These
investments were valued using Level 1 inputs and carrying value approximated fair value.

At March 31, 2010 our short-term investments
consisted of government notes and fully-insured certificates of deposits. These investments are classified as available-for-sale and valued using Level 1 inputs (quoted prices in active markets) and carrying value approximates fair value. The
following table summarizes the carrying amounts and fair values of short-term investments at March 31, 2010:



|                             |  |               |            |                                                             |   |                                             |  |                                         |   |  |   |  
|---------------------------- |  | ------------- | ---------- | ----------------------------------------------------------- | - | ------------------------------------------- |  | --------------------------------------- | - |  | - | -
|Description                  |  | March 31,2010 |            | Quoted Prices inActive Markets forIdentical Assets(Level 1) |   | Significant 
OtherObservableInputs(Level 2) |  | SignificantUnobservableInputs(Level
 3)
|Available-for-sale           |  |               |            |                                                             |   |                                             |  |                                         |   |  |   |  
|Certificates of deposit      |  | $             | 7,289,000  |                                                             | $ | 7,289,000                                   |  | $                                       |  |  | $ | 
|U.S. Treasury Securities     |  |               | 3,998,000  |                                                             |   | 3,998,000                                   |  |                                         |  |  |   | 
|                             |  |               |            |                                                             |   |                                             |  |                                         |   |  |   |  
|Total short-term investments |  | $             | 11,287,000 |                                                             | $ | 11,287,000                                  |  | $                                       |  |  | $ | 
|                             |  |               |            |                                                             |   |                                             |  |                                         |   |  |   |  



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8. BORROWING ARRANGEMENTS

Credit Facility

We maintained a four
year credit facility with Healthcare Finance Group (HFG) through August 31, 2009. The HFG facility was due to mature on December 31, 2009 and was initially comprised of up to $3.6 million on an accounts receivable-based
revolving promissory note and up to $2.0 million of term loans to fund acquisitions. The term loan portion expired on December 31, 2007. On August 31, 2009, we terminated our credit facility with HFG in order to secure new financing from
Regions Bank. In the third quarter of 2009, we wrote off the unamortized financing costs related to the HFG facility and incurred an early termination fee of $10,000 that was paid to HFG upon termination. HFG released all claims to our assets held
as security for the facility.

On August 31, 2009, Transcend and MDSI entered into a loan and security agreement with Regions Bank.
Transcend and MDSI are both borrowers under the loan and security agreement, which replaced our previous credit facility with HFG. The loan and security agreement includes a one-time term loan of $7.0 million for the costs and expenses
of, and, to the extent necessary, a portion of the purchase price for MDSI. The loan and security agreement also provides for up to $5.0 million in a revolving loan commitment based on eligible accounts receivable. We may use proceeds of the
revolving loan only for working capital, general corporate purposes, and for specified acquisitions. The maximum amount of the revolving loan may be increased at the discretion of Regions Bank to $8.0 million. The term loan became payable in monthly
installments of $155,556 beginning December 1, 2009 and ending August 1, 2013. We used $4.0 million of the proceeds from the follow-on offering completed in the fourth quarter of 2009 to pay down the term loan. By making the stated monthly
payments, the remainder of the term loan will be paid-off in 2010. The revolving loan commitment expires in August, 2010. Borrowings bear interest at a rate based on the current LIBOR, and are secured by substantially all of our assets. The
outstanding balance on the term loan was $378,000 and the balance on the revolver was $0 as of March 31, 2010.

The loan and security
agreement contains representations and warranties, as well as affirmative, reporting and negative covenants customary for financings of this type. Among other things, the loan and security agreement restricts us from incurring certain additional
debt, prohibits us from creating, permitting or allowing certain liens on our property, restricts the payment of dividends, distributions and other specified equity related transactions, and prohibits certain borrowings and specified transactions
with affiliates. The loan and security agreement also requires the maintenance of a specified minimum fixed charge coverage ratio, tangible net worth, and cash flow leverage, as defined in the agreement. As of March 31, 2010, we were in
compliance with all covenants of the agreement.

On April 8, 2010, Transcend and MDSI entered into a commitment letter for a senior
secured credit facility in an aggregate principal amount of up to $65,000,000 with Regions Business Capital, Regions Capital Markets and Regions Bank (collectively, Regions). The credit facility consists of a $20,000,000, four-year
revolving credit facility and a $45,000,000, four-year term loan facility. Transcend and MDSI are both Borrowers under the commitment letter. The commitment will terminate on May 28, 2010 unless the definitive credit agreement and
other legal documents related to the senior credit facility have been executed. Under the terms of the commitment letter, Regions agreed to: (i) serve as the sole and exclusive administrative agent for the credit facility; (ii) provide a
commitment to lend all of the credit facility; and (iii) serve as sole lead arranger and book runner for the credit facility, and in such capacities to form a syndicate of financial institutions reasonably acceptable to the Borrowers for the
credit facility. The principal terms and conditions of the credit facility to be provided by the commitment letter include representations and warranties, as well as affirmative, reporting and negative covenants customary for financings of this
type. Among other things, the credit facility would place restrictions on the Borrowers incurring certain additional debt, having certain liens on their property, paying dividends and making distributions, and entering into specified transactions
with affiliates. The terms of the credit facility would also require us to maintain a specified minimum fixed charge coverage ratio, total leverage ratio, and net worth, each as defined in the commitment letter.

We intended to use part of the proceeds from the above credit facility to fund our bid for substantially all of the assets of Spheris, Inc.
(Spheris) and the stock of its subsidiary, Spheris India Private Limited (Spheris India). Spheris declared bankruptcy under Chapter 11 and an auction under Section 363 of the United States Bankruptcy Code was held for
substantially all of the assets of Spheris and the stock of Spheris India, subject to the terms of a stock and asset purchase agreement. The United States Bankruptcy Court for the District of Delaware established a bid process whereby interested
parties, including us, submitted qualified bids on April 8, 2010. Qualified bidders participated in the auction held on April 13, 2010. We were not the successful bidder in the auction and we do not intend to close the new credit facility.
We expect that our existing credit facility will remain in place. We expensed approximately $300,000 of costs related to the credit facility in the first quarter of 2010 that would have been capitalized if the credit facility had closed. In addition
to these credit facility costs in the first quarter of 2010, we also expensed $378,000 of attorney and advisor costs related to the bid for Spheris.

DCOA Promissory Note

On April 6,
2005, we fulfilled the prerequisites for receiving the proceeds under a promissory note dated March 1, 2005 payable to the Development Corporation of Abilene, Inc. (DCOA) in the principal amount of $1.0 million (the Promissory
Note). The Promissory Note was initially secured by a $150,000 letter of credit from a bank and certain furniture and equipment. The letter of credit was released December 7, 2005 and the remaining collateral was released as the principal
balance of the Promissory Note was



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reduced. The Promissory Note relates to the Agreement for Financial Assistance by and between DCOA and Transcend effective as of March 1, 2005 that was approved by DCOA on March 4, 2005
and amended on June 6, 2006 (collectively, the Agreement).

Under the terms of the Agreement, DCOA agreed to provide up to $2
million of interest-free, secured loans to Transcend (the Loans). In return, Transcend agreed to recruit, hire and train up to 208 medical transcription professionals in the Abilene area. DCOA offered the Loans to Transcend in two
increments of $1 million each. The Promissory Note is the first such Loan. During 2007, the Company was informed by the DCOA that the second $1 million loan was no longer available. As defined in the Agreement, principal reductions of the Promissory
Note were effected through quarterly training credits and annual earned job creation incentive credits, not cash, totaling $349,000 through November 30, 2008.

On December 1, 2008, Transcend entered into a new agreement with the DCOA whereby the DCOA reduced the loan principal by $101,000 in exchange for
agreement by Transcend to retire the debt three years earlier than agreed and the cancellation of potential future credits earned through training and job creation. Transcend agreed to pay DCOA six quarterly payments of $92,000 commencing
January 1, 2009 with the final payment due April 1, 2010 to satisfy the remaining principal amount. The note continued to carry a zero interest rate. The note was paid off in advance in August 2009.

OTP Promissory Note

On January 16,
2007, we entered into a three year, $330,000 unsecured promissory note in conjunction with the purchase of OTP. The note bore interest at 5.0% and the principal was to be repaid as follows: $110,000 on January 16, 2008; $55,000 on July 16,
2008; $55,000 on January 16, 2009; $55,000 on July 16, 2009 and $55,000 on January 16, 2010. The final payment on this note was made in January 2010.

MDSI Promissory Note

On August 31,
2009, we entered into a one year $2,000,000 unsecured promissory note at 5% interest, payable to Dorothy Fitzgerald, in conjunction with the purchase of MDSI. All principal and interest are due and payable at maturity on August 31, 2010.

9. TRANSACTIONS WITH RELATED PARTIES

We acquired all issued and outstanding shares of MDSI common stock from Dorothy Fitzgerald for an estimated purchase price of $15,487,000. Payment of the
purchase price included a $2,000,000 payment due at the delivery of audited financial statements and a $2,000,000 promissory note payable to Ms. Fitzgerald, the terms of which are described in Note 7 Borrowing Arrangements. In
addition, we entered into a registration rights agreement dated August 31, 2009, providing Ms. Fitzgerald with piggyback registration rights. Ms. Fitzgerald is currently employed by us.

10. STOCK-BASED COMPENSATION

We have
six stockholder-approved stock incentive plans (Plans), for our key employees, directors and key consultants. The Plans provide for the grant of incentive stock options, nonqualified stock options, restricted stock awards, and, in the
case of the plans approved by the shareholders on May 10, 2007 and May 19, 2009, restricted stock units and stock appreciation rights. We intend to grant new awards under only the 2009 Stock Incentive Plan (the 2009 Plan). The
options are granted at fair market value, as defined in the option agreement, on the date of grant. There are 250,924 shares available for issuance at March 31, 2010.

Our stock-based awards are accounted for under the provisions of FASB ASC Topic 718 Stock Compensation. We measure and recognize
stock-based compensation expense based on the fair value measurement for all stock-based payment awards made to our employees and directors over the service period for which the awards are expected to vest. We calculated the fair value of each
restricted stock award based on our stock price on the date of grant. We calculated the fair value of each stock option award on the date of grant using the Black-Scholes-Merton option pricing model. The determination of fair value of stock option
awards on the date of grant using an option-pricing model is affected by our stock price as well as a number of complex assumptions including expected life, expected volatility, risk free interest rate and dividend yield. As a result, the future
stock-based compensation expense may differ from our historical amounts.

The fair value of each option grant is estimated on the date of
grant using the Black-Scholes-Merton option pricing model that uses the assumptions or range of assumptions. The weighted average grant date fair value of options granted in the first quarter of 2010 was $6.08. The risk-free interest rate for the
period matching the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. The dividend yield is the calculated yield on our stock at the time of grant. The expected term of the options represents
the period of time that options granted are expected to be outstanding and is derived by analyzing historic exercise behavior. The maximum contractual term of these options is ten years. Expected volatilities are based on historical volatility of
the stock in 2010, 2009, 2008 and the historical volatility of the NASDAQ Health Services Stock Index in 2007. The expected



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forfeiture rates are based on historical forfeiture rates. The following assumptions were used for all options granted during the quarter ending March 31, 2010:



|                                 |  |                   
|-------------------------------- |  | ------------------
|Risk-free interest rate          |  | 2.09%             
|Expected dividend yield          |  | 0%                
|Expected term                    |  | 1.96 to 4.00 years
|Expected volatility              |  | 74.24% to 115.76% 
|Expected forfeiture rate         |  | 50%               
|Exercise price of options issued |  | $20.72            

Transactions involving the
Companys stock options for the three months ended March 31, 2010 were as follows:



|                                 |  |                                        |   |  |                               |       |                                         |           |                          |   |          
|-------------------------------- |  | -------------------------------------- | - |  | ----------------------------- | ----- | --------------------------------------- | --------- | ------------------------ | - | ---------
|                                 |  | Number ofSharesSubject toStock Options |   |  | WeightedAverageExercise Price |       | WeightedAverageRemainingContractualLife |           | AggregateIntrinsicValue*
|Outstanding at December 31, 2009 |  | 863,517                                |   |  | $                             | 7.75  |                                         | 7.0 years |                          |   |          
|Granted                          |  | 20,000                                 |   |  | $                             | 20.72 |                                         |           |                          |   |          
|Forfeited                        |  | (5,000                                 | ) |  | $                             | 4.67  |                                         |           |                          |   |          
|Exercised                        |  | (2,000                                 | ) |  | $                             | 3.23  |                                         |           |                          |   |          
|Outstanding at March 31, 2010    |  | 876,517                                |   |  | $                             | 8.07  |                                         | 6.8 years |                          | $ | 7,169,909



|* | The aggregate intrinsic value is based on a closing stock price of $16.25 as of March 31, 2010.
|- | -----------------------------------------------------------------------------------------------

In the current quarter, we issued restricted stock to certain participants under the 2009 Plan. These shares are performance based and vest at the end of
2010. We use the average of the grant date high and low stock price along with an expected forfeiture rate of 50%, to calculate fair value. Transactions involving the Companys restricted stock for the three months ended March 31, 2010
were as follows:



|                                                  |  |                 |   |  |                                     |      
|------------------------------------------------- |  | --------------- | - |  | ----------------------------------- | -----
|                                                  |  | Number ofShares |   |  | WeightedAverageGrant DateFair Value
|Non-vested stock outstanding at December 31, 2009 |  | 87,000          |   |  | $                                   | 8.17 
|Granted                                           |  | 10,000          |   |  |                                     | 10.36
|Forfeited                                         |  |                |   |  |                                     |      
|Vested                                            |  | (21,750         | ) |  |                                     | 8.17 
|Non-vested stock outstanding at March 31, 2010    |  | 75,250          |   |  |                                     | 8.46 

We recognized equity-based
compensation expense under FASB ASC Topic 718Compensation-Stock Compensation of approximately $214,000 and $110,000 for the three months ended March 31, 2010 and 2009, respectively. As of March 31, 2010, we had approximately
$1,690,000 of future equity-based compensation expense which we expect to record in our statements of operations through 2014.



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11. CONTINGENCIES

From time to time in the normal course of business, we are involved in legal proceedings. We evaluate the need for loss accruals under the requirements of
ASC 450 Contingencies. We record an estimated loss for any claim, lawsuit, investigation or proceeding when it is probable that a liability has been incurred and the amount of the loss can reasonably be estimated. If the reasonable estimate
of a probable loss is a range, and no amount within the range is a better estimate, then we record the minimum amount in the range as our loss accrual. If a loss is not probable or a probable loss cannot be reasonably estimated, no liability is
recorded.

On June 10, 2005, Transcend entered into a master equipment lease agreement with Farnam Street Financial, Inc. (Farnam
Street). On April 22, 2009, Transcend filed a complaint in the United States District Court for the District of Minnesota against Farnam Street, alleging breach of contract, fraud and violation of the Deceptive Trade Practices Act, among
other things. Farnam Street answered the complaint and filed a counter-claim against Transcend, alleging breach of contract, among other things. The dispute centers around lease renewal, lease termination and lease buy-out provisions. The
lawsuit is in the early procedural stages. We have determined that the probability of a gain is remote, the probability of a loss is reasonably possible but not probable and that the amount of loss cannot be reasonably estimated at this time.

A contingent consideration payment was part of the agreement in connection with the acquisition of TRS. We estimated the fair value of this
payable as of the purchase date of the acquisition. FASB ASC, Topic 805Business Combinationsrequires that this estimate be re-measured to fair value at each reporting date until the contingency is resolved. These interim changes in
estimated fair value, along with any differences in the final settlement, are recognized in operating expense. The purchase date fair value of the TRS contingent consideration was $353,000. As of December 31, 2009, the value was calculated as
$1,123,000. The $770,000 difference was recognized as operating expense in the fourth quarter of 2009 and the total amount of $1,123,000 was paid in February 2010. Under the terms of the TRS asset purchase agreement, TRS had until February 28,
2010 to accept or dispute our calculation of the contingent consideration payment. On February 26, 2010, we received notice that TRS disputed our calculation and claimed an additional payment of $1,877,000. We responded on March 10, 2010
stating that TRSs objections were without merit and asking that the dispute be postponed pending delivery of the backlog contingent payment calculation. TRS agreed to the postponement. On March 30, 2010, we delivered the backlog
contingent payment calculation to TRS showing an amount payable of $0. TRS objected to our backlog contingent payment calculation. Per the asset purchase agreement the next step is for the parties to select an independent auditor to review the
calculation of the entire contingent payment. On May 6, 2010, TRS filed a civil action against Transcend in the United States District Court for the Middle District of North Carolina. TRS generally alleges that we frustrated their ability to
maximize the contingent payment. TRS seeks compensatory damages of approximately $1,877,000, unspecified damages, attorneys fees, interest and costs. We have evaluated this claim and the civil action and believe that no additional payments are
due under the calculations outlined in the asset purchase agreement.

12. INCOME TAXES

We determine our periodic income tax provision based upon the current period taxable income and our annual estimated tax rate adjusted for any change to
prior period estimates. The estimated tax rate is revised, if necessary, as of the end of each successive interim period during the fiscal year to our current annual estimated tax rate.

Our pre-2009 federal net operating loss carryforwards have been fully utilized in 2009. We acquired federal net operating loss carryforwards in the
acquisition of MDSI of $994,000, which we expect to utilize by the end of 2011. These losses are subject to Internal Revenue Code Section 382, Limitation On Net Operating Loss Carryforwards and Certain Built-in Losses Following Ownership
Change. The carryforwards would be forfeited if the subsidiary is merged into Transcend, but we currently expect to continue to operate the subsidiary until all carryforwards can be utilized.

Our effective income tax rate was approximately 38.4% and 37.3% for the three months ended March 31, 2010 and 2009, respectively.

13. SUBSEQUENT EVENT

In accordance with
FASB ASC Topic 855-Subsequent Events, the Company evaluated all events or transactions that occurred after March 31, 2010 up through the date these financial statements were issued. One of our major competitors, Spheris, declared
bankruptcy under Chapter 11 and an auction under Section 363 of the United States Bankruptcy Code was held for substantially all of the assets of Spheris and the stock of its subsidiary Spheris India, subject to the terms of a stock and asset
purchase agreement. The United States Bankruptcy Court for the District of Delaware established a bid process whereby interested parties, including us, submitted qualified bids on April 8, 2010. Qualified bidders participated in the auction
held on April 13, 2010. We intended to use part of the proceeds from the new credit facility to be provided pursuant to our commitment letter with Regions (see Note 8 of Notes to Consolidated Financial Statements) to fund our bid for
substantially all of the assets of Spheris and the stock of Spheris India. We were not the successful bidder in the auction and we do not intend to close the new credit facility. We expensed approximately $300,000 of costs related to the credit
facility in the first quarter of 2010 that would have been capitalized if the credit facility had



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closed. In addition to the credit facility costs in the first quarter of 2010, we also expensed $378,000 of attorney and advisor costs related to the bid for Spheris for a total of $678,000 in
acquisition-related costs.



|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that represent our expectations, anticipations or beliefs about future events, including our operating results, financial condition, liquidity,
expenditures, and compliance with legal and regulatory requirements. For this purpose, any statements that are not statements of historical fact may be deemed to be forward-looking statements made under the provisions of the Private Securities
Litigation Reform Act of 1995. These statements involve risks and uncertainties that could cause actual results to differ materially depending on a variety of important factors. Factors that might cause or contribute to such differences include, but
are not limited to, competitive pressures, loss of significant customers, the mix of revenue, changes in pricing policies, delays in revenue recognition, lower-than-expected demand for the Companys products and services, business conditions in
the integrated health care delivery network market, general economic conditions, and the risks and uncertainties described in greater detail under the caption Risk Factors in Item 1A of Part I of our Annual Report on Form 10-K for
the year ended December 31, 2009, in subsequently filed Quarterly Reports on Form 10-Q and in other filings that we make with the Securities Exchange Commission (SEC). Our SEC filings are available from us and are also available at
the SECs website at http://www.sec.gov. In addition, factors that we are not currently aware of could harm our future operating results. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the
date of this Quarterly Report on Form 10-Q. We undertake no obligation to make any revisions to the forward-looking statements or to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q, except as required by
applicable law.

Overview

We are the second largest medical transcription company in the United States based on revenues. We serve approximately 250 customers nationwide. We
estimate that our primary target market is approximately $2.5 billion, comprised primarily of approximately 5,000 community-based hospitals (hospitals accessible by the general public) in the United States. Our mission is to provide accurate and
timely documentation of the patient/ medical provider encounter at a competitive price. Customer service is crucial to our success, and we have consistently been ranked among the top medical transcription service organizations in the industry. Our
approximately 1,950 home-based domestic medical language specialists, supplemented by our offshore partners, provide high quality medical documents and fast turnaround times, resulting in high customer retention rates, which have averaged more than
94% (measured by revenues) over the last three years. We develop and utilize an array of technology solutions to support the transcription process, including robust voice capture systems, state-of-the-art speech recognition technology, our
proprietary BeyondTXT transcription platform and various customer-specific systems. We believe we are well-positioned to benefit from the increasing adoption and use of electronic medical record, or EMR, solutions because the data and narrative
content we create comprise key portions of EMRs.

Hospitals have the flexibility of choosing between our two primary service delivery options.
Customers with in-house transcription platforms can partner with us to provide medical transcription services directly on their platform. Customers deciding to outsource this function can outsource the entire transcription process to us, in which
case we provide our services using our BeyondTXT transcription workflow platform.

Our revenue is recurring in nature, which we believe
results from our customers ongoing, mission-critical need to document each doctor-patient encounter and our consistently high service levels, resulting in high customer retention rates. Since we are paid directly by hospitals and other
providers, we have no insurance-related reimbursement risk.

Outlook

The U.S. economy has deteriorated significantly since the fall of 2008, stemming primarily from disruption in the global credit markets. If the economy
were to further deteriorate, we could see deterioration in the financial condition of our customers and collection of our accounts receivable. The decrease in availability of consumer credit resulting from the financial crisis, as well as general
unfavorable economic conditions, could cause consumers to reduce their discretionary spending, including spending for medical care. Job losses and the resulting losses of healthcare benefits could further reduce demand for healthcare services. We
have not experienced any noticeable deterioration in accounts receivable or transcription volume to date. It is also uncertain what effect the credit crisis may have on the security of the U.S. banking system, and specifically the bank where our
cash and cash equivalents are deposited. This could impact our access to and cost of capital. In addition, FDIC insurance does not fully insure deposits, and it is estimated that $13.0 million of our cash and cash equivalents were not insured at
March 31, 2010. In addition to the impact of the overall economic environment, the following trends and uncertainties could have a material future impact on our financial results:



| |  |  | The aging of the baby boomers will create increased demand for healthcare services, which should in turn create increased demand for
medical transcription services. Over the next 20 years, the U.S. population over the age of 65 is
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | expected to increase from roughly 40 million to 70 million, according to the U.S. Census Bureau.
| | ------------------------------------------------------------------------------------------------



| |  |  | Increased adoption of EMR solutions could result in greater demand for electronic documentation, including transcription of reports that are currently
hand-written. Alternatively, EMR solutions could reduce the demand for traditional transcription since physicians could be required to point and click to complete a template rather than dictate to document portions of their patient
encounters. Management believes that dictation is more efficient and produces a more robust record than using only templates, and we anticipate that in the future, hybrid solutions will become more common. We believe that the pace of change in the
healthcare industry has increased, particularly as it relates to adoption of the EMR, and we expect this trend to continue. We are addressing this opportunity and risk by exploring opportunities to make the data in our reports more useful to
hospitals and by exploring the opportunity to partner with firms to more deeply integrate our service offering into total documentation solutions for hospitals.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Increased use of speech recognition technology and offshore resources in the future could result in higher profitability for us. At the same time,
competition within the medical transcription industry, combined with use of offshore resources and speech recognition technology by our competitors, could create downward pricing pressure in the industry. The potential net impact of these two trends
is difficult to predict with certainty.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In March 2010, U.S. federal legislation was enacted which is likely to have a significant impact on, among other things, access to and the cost of
healthcare in the United States. The legislation provides for extensive health insurance reforms and expands coverage to approximately 32 million Americans which will result in expanded access to healthcare. In addition, the legislation
eliminates patient cost-sharing for certain prevention and wellness benefits. We believe these changes will benefit our industry by leading to increased utilization of our services. These benefits are expected to be partially offset by provisions of
the legislation aimed at reducing the overall cost of healthcare. It is uncertain at this time what additional healthcare reform initiatives, if any, will be implemented, or whether there will be other changes in the administration of governmental
healthcare programs or interpretations of governmental policies or other changes affecting the healthcare system. The ultimate content or timing of any future legislation, and its impact on us, is impossible to predict. If significant reforms are
made to the healthcare system in the United States, or in other jurisdictions, those reforms may have an adverse effect on our financial condition and results of operations.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Historically, our new customer sales have predominantly come from replacing incumbent medical transcription firms. A significant portion of medical
transcription work in hospitals is still performed by hospital employees. Management sees a trend toward outsourcing medical transcription services that could have a positive impact on our financial results if the trend accelerates and we are able
to successfully compete for the business.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We have not historically had difficulty in staffing to meet demand as we have grown. However, looking at the industry as a whole, we do not expect the
domestic labor market for medical transcriptionists to grow fast enough to meet increased demand. We are addressing this challenge by increasing employee productivity through the use of speech recognition technology, utilizing offshore resources and
by attempting to develop a reputation as one of the best places to work in the industry. It is possible that in the future a tightening labor market could result in upward pressure on wages, but to date we have not seen evidence of this and we do
not anticipate this occurring in the short-term.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We completed three acquisitions in 2009, which have had a material impact on our financial statements. Acquisitions involve significant risk, including
integration risk, and it is possible that we will not realize the anticipated benefits of the acquisitions we have made.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We have experienced annual operating losses in prior years, the most recent occurring in 2005. While we have increased our level of net income in
recent years, there can be no assurance that operating losses will not occur in the future. Over the short term, excluding the impact of acquisitions, the variability in our earnings and cash flow is mitigated by the fact that our revenue is
recurring in nature and our largest expense, the cost of the transcriptionists, is variable in relation to revenue.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For a
more complete understanding of trends and uncertainties relevant to Transcend, please see Item 1 Business of our Annual Report on Form 10-K for the fiscal year ending December 31, 2009, including the section titled
Industry Overview and Item 1A Risk Factors to the Annual Report on Form 10-K and this Quarterly report on Form 10-Q, as well as risk factors detailed in our other reports filed with the SEC.

Critical Accounting Estimates which are Material to Registrant

A critical accounting estimate meets two criteria: (1) it requires assumptions about highly uncertain matters; and (2) there would be a material
effect on the financial statements from either using a different, also reasonable, amount within the range of the estimate in the current period or from reasonably likely period-to-period changes in the estimate. The preparation of consolidated
financial statements requires that management make estimates and assumptions based on knowledge of current events and actions; however, actual results may ultimately differ from estimates and assumptions. Our critical accounting estimates are as
follows:



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Goodwill and Intangible Assets. We account for goodwill and other intangible assets in accordance
with the provisions of FASB ASC Topic 350  Intangibles-Goodwill and Other. Under the provisions of this topic, goodwill and intangible assets that have indefinite useful lives are tested at least annually for impairment rather
than being amortized like intangible assets with finite useful lives, which are amortized over their useful lives. We had goodwill of $23.7 million at March 31, 2010 and December 31, 2009 and net intangible assets related to acquisitions
of $5.5 million and $5.7 million at March 31, 2010 and December 31, 2009, respectively. Management reviews goodwill and intangibles for impairment annually and whenever events or changes in circumstances indicate that the carrying value
may not be recoverable. In testing for impairment, management calculates the fair value of the reporting units to which the goodwill and intangibles relate based on market capitalization of the company as a whole. We have concluded that we operate
in one reporting unitmedical transcription servicessince all of our revenue is derived from medical transcription services and since we have one organization dedicated to the provision of our service.

In connection with certain of our acquisitions, we allocated a portion of the purchase price to acquired customer relationships and
covenants-not-to-compete using appraisals based on discounted cash flow analysis. The estimated fair values attributed to the relationships and covenants are being amortized over a period of five to ten years, which represented the estimated average
remaining lives of the contracts and relationships.

We account for long-lived assets such as purchased intangible assets with finite lives
under The Impairment or Disposal of Long-Lived Assets Subsections of Topic 360  Property, Plant and Equipment. This Subtopic requires that such long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets based on a discounted cash flow
approach or, when available and appropriate, to comparable market values. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell.

There were no impairments recognized to goodwill or intangible assets in the first quarter of 2010.

Contingent Consideration Payable.A contingent consideration payment was part of the agreement in connection with the acquisition of TRS. We
estimated the fair value of this payable as of the purchase date of the acquisition. FASB ASC, Topic 805Business Combinationsrequires that this estimate is re-measured to fair value at each reporting date until the contingency is
resolved. These interim changes in estimated fair value, along with any differences in the final settlement, are recognized in operating expense. The purchase date fair value of the TRS contingent consideration was $353,000. As of December 31,
2009, the value was calculated as $1,123,000. The $770,000 difference was recognized as operating expense in the fourth quarter of 2009 and the total amount of $1,123,000 was paid in February 2010. Under the terms of the TRS asset purchase
agreement, the seller had until February 28, 2010 to accept or dispute our calculation of the contingent consideration payment. On February 26, 2010, we received notice that the seller disputed our calculation and claimed an additional
payment of $1,877,000. We responded on March 10, 2010 stating that their objections were without merit and asking that the dispute be postponed pending delivery of the backlog contingent payment calculation. TRS agreed to the postponement. On
March 30, 2010, we delivered the backlog contingent payment calculation to TRS showing an amount payable of $0. TRS objected to our backlog contingent payment calculation. Per the asset purchase agreement the next step is for the parties to
select an independent auditor to review the calculation of the entire contingent payment. On May 6, 2010, TRS filed a civil action against Transcend in the United States District Court for the Middle District of North Carolina. TRS generally
alleges that we frustrated their ability to maximize the contingent payment. TRS seeks compensatory damages of approximately $1,877,000, unspecified damages, attorneys fees, interest and costs. We have evaluated this claim and the civil action
and believe that no additional payments are due under the calculations outlined in the asset purchase agreement.

Deferred Tax Assets and
Liabilities. We account for our income taxes in accordance with FASB ASC Topic 740  Income Taxes. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the
tax basis of assets and liabilities and their reported amounts for financial reporting purposes. As of March 31, 2010, we had net current deferred tax assets of $43,000 and net non-current deferred tax liabilities of $855,000. Deferred tax
assets represent future tax benefits we expect to realize. Our ability to utilize the deferred tax benefits is dependent upon our ability to generate future taxable income. FASB ASC Topic 740  Income Taxes, requires us to
record a valuation allowance against any deferred income tax benefits that we believe may not be realized. We estimate future taxable income to determine whether a valuation allowance is needed. Projecting our future taxable income requires us to
use significant judgment regarding expected future revenues and expenses. In addition, we must assume that tax laws will not change sufficiently to materially impact the expected tax liability associated with our expected taxable income. We have
valuation allowances against net operating loss carryforwards in certain states in which future taxable income in those states may not be sufficient to utilize the net operating loss carryforwards in those states prior to their expiration.

Stock-Based Compensation. Our stock-based awards are accounted for under the provisions of FASB ASC Topic
718  Stock Compensation. We measure and recognize stock-based compensation expense based on the fair value measurement for all stock-based payment awards made to our employees and directors, including stock options and
restricted stock awards over the service



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period for which the awards are expected to vest. We calculated the fair value of each restricted stock award based on our stock price on the date of grant. We calculated the fair value of each
stock option award on the date of grant using the Black-Scholes-Merton option pricing model. The determination of fair value of stock option awards on the date of grant using an option-pricing model is affected by our stock price as well as a number
of complex assumptions including expected life, expected volatility, risk-free interest rate and dividend yield. As a result, the future stock-based compensation expense may differ from our historical amounts.

Legal Proceedings.From time to time in the normal course of business, we are involved in legal proceedings. We evaluate the need for loss
accruals under the requirements of ASC 450 Contingencies. We record an estimated loss for any claim, lawsuit, investigation or proceeding when it is probable that a liability has been incurred and the amount of the loss can reasonably be
estimated. If the reasonable estimate of a probable loss is a range, and no amount within the range is a better estimate, then we record the minimum amount in the range as our loss accrual. If a loss is not probable or a probable loss cannot be
reasonably estimated, no liability is recorded.

Three Months Ended March 31, 2010 Compared to Three Months Ended March 31,
2009

Revenue increased $7,276,000, or 49%, to $22,206,000 in the quarter ended March 31, 2010 compared to revenue of $14,930,000
in the same period in 2009. The $7,276,000 increase in revenue is attributable to revenue from new customers of $2,182,000, revenue contributed by the acquisition of TRS of $1,497,000, revenue contributed by the acquisition of MDSI of $3,870,000 and
increased revenue from existing customers of $265,000, offset by a decrease in revenue of $538,000 from customers who terminated their contracts since the first quarter of 2009.

Direct costs increased $5,139,000, or 54%, to $14,726,000 in the quarter ended March 31, 2010 compared to $9,587,000 in the same period in 2009.
Direct costs attributable to MDSI contributed $3,001,000 of this increase. Direct costs include costs attributable to compensation for transcriptionists, fees paid for speech recognition processing, telephone expenses, recruiting, management,
customer service, technical support for operations, and implementation of transcription services. Transcription compensation is a variable cost based on lines transcribed or edited multiplied by specified per-line pay rates that vary by individual
as well as type of work. Speech recognition processing is a variable cost based on the minutes of dictation processed. All other direct costs referred to above are semi-variable operations infrastructure costs that periodically change in
anticipation of or in response to the overall level of production activity.

As a percentage of revenue, direct costs increased to 66% in the
quarter ended March 31, 2010 from 64% in the same period of 2009. The increase in costs as a percentage of revenue was due primarily to a decrease in the percentage of work processed on the Companys BeyondTXT transcription platform versus
other platforms from 62% in the first quarter of 2009 to 50% in the first quarter of 2010. Work processed on BeyondTXT has lower costs due to the use of speech recognition technology to produce drafts of reports which are then edited by our medical
language specialists. The decrease in the percentage of BeyondTXT work is due primarily to the impact of additional non-BeyondTXT work processed for customers from the MDSI acquisition completed in 2009. Excluding the impact of MDSI, direct costs
were stable at 64% of revenue for the quarter ended March 31, 2010 compared to the same period of 2009. In addition, direct costs as a percentage of revenue were higher for the acquired businesses and implementation and support costs have grown
in order to manage conversion of some acquired customers onto BeyondTXT and to support the larger customer base.

Gross profit increased
$2,137,000, or 40%, to $7,480,000 in the quarter ended March 31, 2010 compared to $5,343,000 in the same period in 2009. Gross profit as a percentage of revenue decreased to 34% in the quarter ended March 31, 2010 compared to 36% in the
same period in 2009 (see direct costs discussion).

Sales and marketing expenses decreased $4,000, or 1%, to $403,000 in the quarter ended
March 31, 2010, compared to $407,000 in the same period in 2009. Sales and marketing expense as a percentage of revenue was 2% in the quarter ended March 31, 2010 compared to 3% in the first quarter of 2009. The decrease in sales and
marketing expense, and such expense as a percent of revenue, was primarily due to maintaining the size of the sales force while revenue has grown.

Research and development expenses increased $57,000, or 15%, to $426,000 in the quarter ended March 31, 2010, compared to $369,000 in the same
period in 2009. Research and development expense as a percentage of revenue was 2% in both the quarters ended March 31, 2010 and 2009. The increase in expense was primarily due to an increase in compensation-related expenses and telephone
expense, partially offset by increased capitalization of software development costs related to the development of our next generation transcription workflow platform.

General and administrative expenses increased $1,762,000, or 100%, to $3,528,000 in the quarter ended March 31, 2010, compared to $1,766,000 in the
same period in 2009. Included in the $1.8 million increase are acquisition-related costs of $678,000 in 2010 related to our unsuccessful bid to acquire substantially all of the assets of Spheris and the stock of Spheris India. We expect to incur and
expense approximately $300,000 to $400,000 of additional costs related to our unsuccessful bid in the second quarter of 2010. These costs mostly consist of financing, attorney and advisor fees. Excluding these acquisition-related costs, general and



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administrative expenses increased $1,084,000, or 61% in the quarter ended March 31, 2010, compared to the same period in 2009. General and administrative expenses for MDSI contributed
$305,000 of the increase. The balance of the increase was due primarily to increased compensation, contract services, employee benefits costs, legal and accounting expense and stock-based compensation expense. Excluding one-time acquisition-related
costs, general and administrative expenses as a percentage of revenue were 13% and 12% in the quarters ended March 31, 2010, and 2009, respectively.

Depreciation and amortization expense was $448,000 in the quarter ended March 31, 2010, compared to $255,000 in the same period in 2009, an increase
of $193,000. Amortization of intangible assets resulting from the acquisitions of TRS and MDSI contributed $128,000 of the increase. The remainder was due to growth in depreciable assets.

Interest and other expenses decreased $4,000 to $27,000 of net expense in the quarter ended March 31, 2010 compared to $31,000 of net expense in the
same period in 2009.

The income tax provision increased $79,000 to $1,016,000 for the three months ended March 31, 2010, compared to
$937,000 for the same period in 2009. The provision increased primarily due to higher pre-tax income and a higher effective tax rate of 38.4% for the quarter ended March 31, 2010 compared to 37.3% for the quarter ended March 31, 2009.

Liquidity and Capital Resources

As of March 31, 2010, we had cash, cash equivalents and short-term investments of $28,785,000, working capital of $29,851,000, and availability of
approximately $5,000,000 on our revolving line of credit based on eligible accounts receivable (see Note 8 of the Notes to Consolidated Financial Statements). We had $2,378,000 of debt outstanding as of March 31, 2010 and did not utilize our
available line of credit in the first quarter of 2010.

Cash provided by operating activities was $2,866,000 for the three months ended
March 31, 2010, compared to $1,915,000 for the three months ended March 31, 2009. The increase was due primarily to higher net income (adjusted for depreciation, amortization and stock based compensation), changes in working capital and
deferred taxes.

Cash used in investing activities was $10,661,000 for the three months ended March 31, 2010, compared to $4,420,000 for
the three months ended March 31, 2009. In 2010, we purchased $738,000 of equipment and software, capitalized $636,000 of software development costs and invested $9,287,000 in certificates of deposit and other short-term investments. We are
investing significant resources in the next generation of our transcription platform and expect this level of capitalization will continue through the remainder of 2010. In 2009, investing activities were related primarily to the acquisition of
DeVenture in the first quarter.

Cash used in financing activities was $439,000 for the three months ended March 31, 2010, compared to
$76,000 in the same period in 2009. Cash used in financing activities during 2010 was due primarily to the repayment of debt.

We maintained a
four year credit facility with Healthcare Finance Group, or HFG, that was due to mature on December 31, 2009 and was initially comprised of up to $3.6 million on an accounts receivable-based revolving promissory note and up to $2.0 million of
term loans to fund acquisitions. The term loan portion expired on December 31, 2007. On August 31, 2009, we terminated our credit facility with HFG in order to secure new financing from Regions Bank.

On August 31, 2009, Transcend and MDSI entered into a loan and security agreement with Regions Bank. Transcend and MDSI are both
borrowers under the loan and security agreement, which replaced our credit facility with HFG. The loan and security agreement with Regions Bank includes a one-time term loan of $7.0 million for the costs and expenses of, and to the
extent necessary a portion of the purchase price for MDSI. The loan and security agreement also provides for up to $5.0 million in a revolving loan commitment based on eligible accounts receivable. We may use proceeds of the revolving loan only for
working capital, general corporate purposes, and for specified acquisitions. The maximum amount of the revolving loan may be increased at the discretion of Regions Bank to $8.0 million. The term loan became payable in monthly installments of
$155,556 beginning December 1, 2009 and ending August 1, 2013. The revolving loan commitment expires in August, 2010. Borrowings bear interest at a rate based on the current LIBOR, and are secured by substantially all of the
borrowers assets. The outstanding balance on the term loan was $378,000 as of March 31, 2010 and the balance on the revolver was $0 as of March 31, 2010.

The loan and security agreement contains representations and warranties, as well as affirmative, reporting and negative covenants customary for
financings of this type. Among other things, the loan and security agreement restricts the borrowers from incurring certain additional debt, prohibits the borrowers from creating, permitting or allowing certain liens on their property, restricts the
payment of dividends, distributions and other specified equity related transactions by us, and prohibits certain borrowings and specified transactions with affiliates. The loan and security agreement also requires the maintenance of a specified
minimum fixed charge coverage ratio, tangible net worth, and cash flow leverage, as defined in the agreement. As of March 31, 2010, we were in compliance with all covenants of the agreement



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We anticipate that cash on hand, together with cash flow from operations, should be sufficient for the next
twelve months to finance operations, make capital investments in the ordinary course of business and pay indebtedness when due.

Part of our
growth strategy is the completion of acquisitions. Management believes that available cash and our credit facility together with other acquisition options, such as seller financing, are only sufficient to complete small to medium-sized acquisitions.
Additional financing will be required for larger acquisitions.



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

The Company had no material exposure to market risk from derivatives or other financial instruments as of March 31, 2010.



|Item 4. | Controls and Procedures
|------- | -----------------------



| | a) | Evaluation of disclosure controls and procedures
| | -- | ------------------------------------------------

As of the end of the period covered by this quarterly report, our management, with the participation of our Chief Executive Officer (CEO) and
Chief Financial Officer (CFO), conducted an evaluation of the effectiveness of our disclosure controls and procedures in accordance with Rule 13a-15(e) under the Exchange Act. Based on the evaluation of our disclosure controls and
procedures as of the end of the period covered by this quarterly report, our CEO and CFO concluded that, as of such date, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports
that we file or submit under the Exchange Act is (a) accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure, and (b) recorded, processed, summarized
and reported within the time periods specified in the SECs rules and forms

Management believes, however, that a controls system, no
matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all controls are working as designed and that instances of
fraud, if any, within a company have been detected.



| | b) | Changes in internal control over financial reporting
| | -- | ----------------------------------------------------

Internal control over financial reporting consists of control processes designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles. To the extent that components of our internal control over financial reporting are included in our
disclosure controls, they are included in the scope of the evaluation by our principal executive officer and principal financial officer referenced above. The financial operations of our recent acquisition of MDSI have been substantially, but not
fully, integrated into our internal control over financial reporting. The operations of MDSI will be fully integrated in 2010.

There were no
changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

From time to time in
the normal course of business, we are involved in legal proceedings. We evaluate the need for loss accruals under the requirements of ASC 450 Contingencies. We record an estimated loss for any claim, lawsuit, investigation or proceeding when
it is probable that a liability has been incurred and the amount of the loss can reasonably be estimated. If the reasonable estimate of a probable loss is a range, and no amount within the range is a better estimate, then we record the minimum
amount in the range as our loss accrual. If a loss is not probable or a probable loss cannot be reasonably estimated, no liability is recorded.

On June 10, 2005, Transcend entered into a master equipment lease agreement with Farnam Street Financial, Inc. (Farnam Street). On
April 22, 2009, Transcend filed a complaint in the United States District Court for the District of Minnesota against Farnam Street, alleging breach of contract, fraud and violation of the Deceptive Trade Practices Act, among other things.
Farnam Street answered the complaint and filed a counter-claim against Transcend, alleging breach of contract, among other things. The dispute centers around lease renewal, lease termination and lease buy-out provisions. The lawsuit is in
the early procedural stages. We have determined that the probability of a gain is remote, the probability of a loss is reasonably possible but not probable and that the amount of loss cannot be reasonably estimated at this time.



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|Item 1A. | Risk Factors
|-------- | ------------

All of the risk factors
previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2009 still apply to the Company with the following material changes and additions:

Recently enacted health care reform legislation could adversely impact us.

The recently enacted Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act completely reform the U.S. healthcare
system. Among other things, the legislation significantly increases governmental involvement in healthcare, requires most Americans to carry health insurance coverage, with federal subsidies to help many afford the premiums (insurance companies
would be barred from denying coverage to people with medical problems or charging them more); and completely overhauls the environment in which healthcare industry constituents operate. This legislation impacts most employers, virtually all tax
payers and all segments of the healthcare industry. It is impossible to predict the ultimate impact that this new legislation will have on the healthcare industry. Possible outcomes may be that healthcare industry constituents may reduce
their expenditures or postpone expenditure decisions, including expenditures for our service offerings. Such a response, and others that we cannot predict or foresee at this time, could have a significant and material adverse impact on our
current and future business operations and, thus, our financial condition and results of operations.



|Item 6. | Exhibits
|------- | --------

The exhibits listed in the
accompanying exhibit index are filed as part of this quarterly report.



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SIGNATURES

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



|            |  |                          |  |                                      
|----------- |  | ------------------------ |  | -------------------------------------
|            |  | TRANSCEND SERVICES, INC.
|            |  |                         
|May 7, 2010 |  | By:                      |  | /s/ Larry G. Gerdes                  
|            |  |                          |  | Larry G. Gerdes,                     
|            |  |                          |  | President and Chief Executive Officer
|            |  |                          |  | (Principal Executive Officer)        
|            |  |                         
|            |  | By:                      |  | /s/ Lance Cornell                    
|            |  |                          |  | Lance Cornell,                       
|            |  |                          |  | Chief Financial Officer              
|            |  |                          |  | (Principal Financial Officer)        



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EXHIBIT INDEX



|              |  |                                                                                                                                                                                                    |  |                            |  |           |  |         |  |                  
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- |  | --------- |  | ------- |  | -----------------
|              |  |                                                                                                                                                                                                    |  | Incorporation by Reference
|ExhibitNumber |  | Exhibit Description                                                                                                                                                                                |  | Form                       |  | File No.  |  | Exhibit |  | Filing Date      
|10.1          |  | Commitment Letter, dated as of April 12, 2010, by and between Transcend Services, Inc. and Medical Dictation Services, Inc. and Regions Business Capital, Regions Bank and Regions
Capital Markets |  |                            |  |           |  |         |  |                  
|              |  |                                                                                                                                                                                                    |  |                            | 
|10.2          |  | Amendment to Loan and Security Agreement and Waiver, by and between Transcend Services, Inc., Medical Dictation Services, Inc. and Regions Bank, dated February 15, 2010                           |  | 8-K                        |  | 000-18217 |  | 10.1    |  | February 19, 2010
|              |  |                                                                                                                                                                                                    |  |                            | 
|31.1          |  | Certification of Chief Executive Officer of the Registrant Pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as
amended                        |  |                            |  |           |  |         |  |                  
|              |  |                                                                                                                                                                                                    |  |                            | 
|31.2          |  | Certification of Chief Financial Officer of the Registrant Pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as
amended                        |  |                            |  |           |  |         |  |                  
|              |  |                                                                                                                                                                                                    |  |                            | 
|*32.1         |  | Certification of Chief Executive Officer of the Registrant Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                               |  |                            |  |           |  |         |  |                  
|              |  |                                                                                                                                                                                                    |  |                            | 
|*32.2         |  | Certification of Chief Financial Officer of the Registrant Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                               |  |                            |  |           |  |         |  |                  



|* | This certification is furnished to, but not filed with, the Commission. This certification shall not be deemed to be incorporated by reference into any filing under the
Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Registrant specifically incorporates it by reference.
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