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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 June 30, 2007

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.)

945 East Paces Ferry Rd, Suite 1475, Atlanta, Georgia 30326

(Address of principal executive offices and zip code)

Registrants telephone number, including area code: (404) 364-8000

N/A

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. (See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated
filer ̈Accelerated filer ̈Non-accelerated filer  x

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 July 31, 2007
|Common Stock, $.05 par value |  | 8,363,917                   



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INDEX



|           |  |                                                                                                 |  |           
|---------- |  | ----------------------------------------------------------------------------------------------- |  | ----------
|           |  |                                                                                                 |  | PageNumber
|PART I.    |  | FINANCIAL INFORMATION                                                                           |  | 3         
|           |  |                                                                                                
|Item 1.    |  | Financial Statements                                                                            |  | 3         
|           |  | Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006                           |  | 3         
|           |  | Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2007 and 2006 |  | 4         
|           |  | Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and 2006           |  | 5         
|           |  | Notes to Consolidated Financial Statements                                                      |  | 6         
|           |  |                                                                                                
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations           |  | 10        
|           |  |                                                                                                
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                      |  | 14        
|           |  |                                                                                                
|Item 4.    |  | Controls and Procedures                                                                         |  | 14        
|           |  |                                                                                                
|PART II.   |  | OTHER INFORMATION                                                                               |  | 14        
|           |  |                                                                                                
|Item 1.    |  | Legal Proceedings                                                                               |  | 14        
|           |  |                                                                                                
|Item 1A.   |  | Risk Factors                                                                                    |  | 14        
|           |  |                                                                                                
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                             |  | 14        
|           |  |                                                                                                
|Item 6.    |  | Exhibits                                                                                        |  | 15        
|           | 
|SIGNATURES |  | 16                                                                                             



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##### Table of Contents

PART I. FINANCIAL INFORMATION



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

TRANSCEND SERVICES, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited and rounded to the nearest thousand)



|                                                                                                                                                                                                               |  |               |             |   |                   |   |             |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ----------- | - | ----------------- | - | ----------- | -
|                                                                                                                                                                                                               |  | June 30, 2007 |             |   | December 31, 2006 |  
|ASSETS                                                                                                                                                                                                         |  |               |             |   |                   |   |             |  
|Current assets:                                                                                                                                                                                                |  |               |             |   |                   |   |             |  
|Cash and cash equivalents                                                                                                                                                                                      |  | $             | 1,194,000   |   |                   | $ | 215,000     |  
|Accounts receivable, net of allowance for doubtful accounts of $157,000 and $115,000 at June 30, 2007 and December 31, 2006,
respectively                                                                      |  |               | 4,738,000   |   |                   |   | 4,578,000   |  
|Prepaid expenses and other current assets                                                                                                                                                                      |  |               | 350,000     |   |                   |   | 78,000      |  
|                                                                                                                                                                                                               |  |               |             |   |                   |   |             |  
|Total current assets                                                                                                                                                                                           |  |               | 6,282,000   |   |                   |   | 4,871,000   |  
|Property and equipment:                                                                                                                                                                                        |  |               |             |   |                   |   |             |  
|Computer equipment                                                                                                                                                                                             |  |               | 3,434,000   |   |                   |   | 3,371,000   |  
|Software                                                                                                                                                                                                       |  |               | 3,148,000   |   |                   |   | 2,907,000   |  
|Furniture and fixtures                                                                                                                                                                                         |  |               | 291,000     |   |                   |   | 291,000     |  
|                                                                                                                                                                                                               |  |               |             |   |                   |   |             |  
|Total property and equipment                                                                                                                                                                                   |  |               | 6,873,000   |   |                   |   | 6,569,000   |  
|Accumulated depreciation and amortization                                                                                                                                                                      |  |               | (5,559,000  | ) |                   |   | (5,235,000  | )
|                                                                                                                                                                                                               |  |               |             |   |                   |   |             |  
|Property and equipment, net                                                                                                                                                                                    |  |               | 1,314,000   |   |                   |   | 1,334,000   |  
|Intangible assets:                                                                                                                                                                                             |  |               |             |   |                   |   |             |  
|Goodwill                                                                                                                                                                                                       |  |               | 4,574,000   |   |                   |   | 3,686,000   |  
|Other intangible assets                                                                                                                                                                                        |  |               | 855,000     |   |                   |   | 575,000     |  
|                                                                                                                                                                                                               |  |               |             |   |                   |   |             |  
|Total intangible assets                                                                                                                                                                                        |  |               | 5,429,000   |   |                   |   | 4,261,000   |  
|Accumulated amortization                                                                                                                                                                                       |  |               | (297,000    | ) |                   |   | (216,000    | )
|                                                                                                                                                                                                               |  |               |             |   |                   |   |             |  
|Intangible assets, net                                                                                                                                                                                         |  |               | 5,132,000   |   |                   |   | 4,045,000   |  
|Other assets                                                                                                                                                                                                   |  |               | 342,000     |   |                   |   | 370,000     |  
|                                                                                                                                                                                                               |  |               |             |   |                   |   |             |  
|Total assets                                                                                                                                                                                                   |  | $             | 13,070,000  |   |                   | $ | 10,620,000  |  
|                                                                                                                                                                                                               |  |               |             |   |                   |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                           |  |               |             |   |                   |   |             |  
|Current liabilities:                                                                                                                                                                                           |  |               |             |   |                   |   |             |  
|Promissory notes payable to related parties                                                                                                                                                                    |  | $             | 1,315,000   |   |                   | $ | 1,209,000   |  
|Accounts payable                                                                                                                                                                                               |  |               | 443,000     |   |                   |   | 250,000     |  
|Accrued compensation and benefits                                                                                                                                                                              |  |               | 1,543,000   |   |                   |   | 1,233,000   |  
|Other accrued liabilities                                                                                                                                                                                      |  |               | 552,000     |   |                   |   | 518,000     |  
|                                                                                                                                                                                                               |  |               |             |   |                   |   |             |  
|Total current liabilities                                                                                                                                                                                      |  |               | 3,853,000   |   |                   |   | 3,210,000   |  
|Long term liabilities:                                                                                                                                                                                         |  |               |             |   |                   |   |             |  
|Line of credit                                                                                                                                                                                                 |  |               |            |   |                   |   | 1,163,000   |  
|Promissory notes payable to related parties                                                                                                                                                                    |  |               | 220,000     |   |                   |   | 1,167,000   |  
|Promissory note payable                                                                                                                                                                                        |  |               | 703,000     |   |                   |   | 751,000     |  
|Other liabilities                                                                                                                                                                                              |  |               | 16,000      |   |                   |   | 22,000      |  
|                                                                                                                                                                                                               |  |               |             |   |                   |   |             |  
|Total long term liabilities                                                                                                                                                                                    |  |               | 939,000     |   |                   |   | 3,103,000   |  
|Commitments and contingencies                                                                                                                                                                                  |  |               |             |   |                   |   |             |  
|Stockholders equity:                                                                                                                                                                                          |  |               |             |   |                   |   |             |  
|Preferred stock, $0.01 par value; 2,000,000 shares authorized and no shares outstanding at June 30, 2007 and December 31,
2006                                                                                 |  |               |            |   |                   |   |            |  
|Common Stock, $0.05 par value; 15,000,000 shares authorized at June 30, 2007 and December 31, 2006; 8,359,000 and 7,842,000 shares
issued and outstanding at June 30, 2007 and December 31, 2006, respectively |  |               | 418,000     |   |                   |   | 392,000     |  
|Additional paid-in capital                                                                                                                                                                                     |  |               | 29,630,000  |   |                   |   | 28,355,000  |  
|Retained deficit                                                                                                                                                                                               |  |               | (21,770,000 | ) |                   |   | (24,440,000 | )
|                                                                                                                                                                                                               |  |               |             |   |                   |   |             |  
|Total stockholders equity                                                                                                                                                                                     |  |               | 8,278,000   |   |                   |   | 4,307,000   |  
|                                                                                                                                                                                                               |  |               |             |   |                   |   |             |  
|Total liabilities and stockholders equity                                                                                                                                                                     |  | $             | 13,070,000  |   |                   | $ | 10,620,000  |  
|                                                                                                                                                                                                               |  |               |             |   |                   |   |             |  

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



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TRANSCEND SERVICES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited and rounded to the nearest thousand)



|                                    |  |                             |            |                           |   |           |  |      |            |  |   |           
|----------------------------------- |  | --------------------------- | ---------- | ------------------------- | - | --------- |  | ---- | ---------- |  | - | ----------
|                                    |  | Three months ended June 30, |            | Six months ended June 30,
|                                    |  | 2007                        |            | 2006                      |   | 2007      |  | 2006
|Revenue                             |  | $                           | 10,519,000 |                           | $ | 7,991,000 |  | $    | 20,941,000 |  | $ | 16,002,000
|Direct costs                        |  |                             | 7,302,000  |                           |   | 6,072,000 |  |      | 14,540,000 |  |   | 12,328,000
|                                    |  |                             |            |                           |   |           |  |      |            |  |   |           
|Gross profit                        |  |                             | 3,217,000  |                           |   | 1,919,000 |  |      | 6,401,000  |  |   | 3,674,000 
|                                    |  |                             |            |                           |   |           |  |      |            |  |   |           
|Operating expenses:                 |  |                             |            |                           |   |           |  |      |            |  |   |           
|Sales and marketing                 |  |                             | 164,000    |                           |   | 123,000   |  |      | 296,000    |  |   | 228,000   
|Research and development            |  |                             | 182,000    |                           |   | 95,000    |  |      | 323,000    |  |   | 184,000   
|General and administrative          |  |                             | 1,212,000  |                           |   | 1,099,000 |  |      | 2,494,000  |  |   | 2,170,000 
|Depreciation and amortization       |  |                             | 206,000    |                           |   | 213,000   |  |      | 406,000    |  |   | 412,000   
|                                    |  |                             |            |                           |   |           |  |      |            |  |   |           
|Total operating expenses            |  |                             | 1,764,000  |                           |   | 1,530,000 |  |      | 3,519,000  |  |   | 2,994,000 
|                                    |  |                             |            |                           |   |           |  |      |            |  |   |           
|Operating income                    |  |                             | 1,453,000  |                           |   | 389,000   |  |      | 2,882,000  |  |   | 680,000   
|Interest expense, net               |  |                             | 58,000     |                           |   | 97,000    |  |      | 151,000    |  |   | 189,000   
|Interest expense to related parties |  |                             | 17,000     |                           |   | 29,000    |  |      | 39,000     |  |   | 57,000    
|Other expense                       |  |                             |           |                           |   | 28,000    |  |      |           |  |   | 42,000    
|                                    |  |                             |            |                           |   |           |  |      |            |  |   |           
|Total interest and other expense    |  |                             | 75,000     |                           |   | 154,000   |  |      | 190,000    |  |   | 288,000   
|                                    |  |                             |            |                           |   |           |  |      |            |  |   |           
|Income before income taxes          |  |                             | 1,378,000  |                           |   | 235,000   |  |      | 2,692,000  |  |   | 392,000   
|Income taxes                        |  |                             | 5,000      |                           |   | 10,000    |  |      | 22,000     |  |   | 17,000    
|                                    |  |                             |            |                           |   |           |  |      |            |  |   |           
|Net income                          |  | $                           | 1,373,000  |                           | $ | 225,000   |  | $    | 2,670,000  |  | $ | 375,000   
|                                    |  |                             |            |                           |   |           |  |      |            |  |   |           
|Basic earnings per share:           |  |                             |            |                           |   |           |  |      |            |  |   |           
|Net earnings per share              |  | $                           | 0.17       |                           | $ | 0.03      |  | $    | 0.33       |  | $ | 0.05      
|                                    |  |                             |            |                           |   |           |  |      |            |  |   |           
|Weighted average shares outstanding |  |                             | 8,203,000  |                           |   | 7,908,000 |  |      | 8,129,000  |  |   | 7,907,000 
|                                    |  |                             |            |                           |   |           |  |      |            |  |   |           
|Diluted earnings per share:         |  |                             |            |                           |   |           |  |      |            |  |   |           
|Net earnings per share              |  | $                           | 0.16       |                           | $ | 0.03      |  | $    | 0.31       |  | $ | 0.05      
|                                    |  |                             |            |                           |   |           |  |      |            |  |   |           
|Weighted average shares outstanding |  |                             | 8,729,000  |                           |   | 7,971,000 |  |      | 8,606,000  |  |   | 7,955,000 
|                                    |  |                             |            |                           |   |           |  |      |            |  |   |           

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



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TRANSCEND SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and rounded to the nearest thousand)



|                                                                                            |  |                           |            |   |      |   |          |  
|------------------------------------------------------------------------------------------- |  | ------------------------- | ---------- | - | ---- | - | -------- | -
|                                                                                            |  | Six months ended June 30, |           
|                                                                                            |  | 2007                      |            |   | 2006 |  
|Cash flows from operating activities:                                                       |  |                           |            |   |      |   |          |  
|Net income attributable to common stockholders                                              |  | $                         | 2,670,000  |   |      | $ | 375,000  |  
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |  |                           |            |   |      |   |          |  
|Depreciation and amortization                                                               |  |                           | 406,000    |   |      |   | 419,000  |  
|Equity-based compensation                                                                   |  |                           | 140,000    |   |      |   | 116,000  |  
|Non-cash income                                                                             |  |                           | (48,000    | ) |      |   | (93,000  | )
|Changes in assets and liabilities                                                           |  |                           |            |   |      |   |          |  
|Accounts receivable, net                                                                    |  |                           | (220,000   | ) |      |   | (570,000 | )
|Prepaid expenses and other current assets                                                   |  |                           | (272,000   | ) |      |   | (20,000  | )
|Other assets                                                                                |  |                           | 27,000     |   |      |   | (31,000  | )
|Accounts payable                                                                            |  |                           | 155,000    |   |      |   | (51,000  | )
|Accrued liabilities                                                                         |  |                           | 378,000    |   |      |   | (240,000 | )
|                                                                                            |  |                           |            |   |      |   |          |  
|Total adjustments                                                                           |  |                           | 566,000    |   |      |   | (470,000 | )
|                                                                                            |  |                           |            |   |      |   |          |  
|Net cash provided by (used in) operating activities                                         |  |                           | 3,236,000  |   |      |   | (95,000  | )
|Cash flows from investing activities:                                                       |  |                           |            |   |      |   |          |  
|Capital expenditures, net                                                                   |  |                           | (305,000   | ) |      |   | (216,000 | )
|Purchase of business, net of cash acquired                                                  |  |                           | (558,000   | ) |      |   |         |  
|Adjustment to purchase price for previous acquisition                                       |  |                           |           |   |      |   | 8,000    |  
|                                                                                            |  |                           |            |   |      |   |          |  
|Net cash used in investing activities                                                       |  |                           | (863,000   | ) |      |   | (208,000 | )
|Cash flows from financing activities:                                                       |  |                           |            |   |      |   |          |  
|Proceeds from stock options and other issuances                                             |  |                           | 941,000    |   |      |   | 4,000    |  
|Repayment of promissory notes to related parties                                            |  |                           | (1,172,000 | ) |      |   | (829,000 | )
|Net (repayments) borrowings on line of credit                                               |  |                           | (1,163,000 | ) |      |   | 633,000  |  
|                                                                                            |  |                           |            |   |      |   |          |  
|Net cash used in financing activities                                                       |  |                           | (1,394,000 | ) |      |   | (192,000 | )
|                                                                                            |  |                           |            |   |      |   |          |  
|Net increase (decrease) in cash and cash equivalents                                        |  |                           | 979,000    |   |      |   | (495,000 | )
|Cash and cash equivalents at beginning of period                                            |  |                           | 215,000    |   |      |   | 762,000  |  
|                                                                                            |  |                           |            |   |      |   |          |  
|Cash and cash equivalents at end of period                                                  |  | $                         | 1,194,000  |   |      | $ | 267,000  |  
|                                                                                            |  |                           |            |   |      |   |          |  
|Supplemental cash flow information:                                                         |  |                           |            |   |      |   |          |  
|Cash paid for interest                                                                      |  | $                         | 121,000    |   |      | $ | 149,000  |  
|Cash paid for interest to related parties                                                   |  | $                         | 114,000    |   |      | $ | 171,000  |  
|Cash paid for income taxes                                                                  |  | $                         | 56,000     |   |      | $ | 7,000    |  
|Non-cash investing and financing activities:                                                |  |                           |            |   |      |   |          |  
|Promissory note issued in connection with acquisition of OTP                                |  | $                         | 330,000    |   |      | $ |         |  
|Common stock issued in connection with the acquisition of OTP                               |  |                           | 220,000    |   |      |   |         |  
|                                                                                            |  |                           |            |   |      |   |          |  
|Non-cash capital expenditures                                                               |  | $                         | 550,000    |   |      | $ |         |  
|                                                                                            |  |                           |            |   |      |   |          |  

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



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TRANSCEND SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2007 and 2006

(Unaudited)

1. BASIS OF PRESENTATION

The accompanying consolidated financial statements are unaudited and have been prepared by the management of Transcend Services, Inc. (the Company or Transcend) in accordance with the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, all adjustments, consisting of normal recurring accruals, necessary for the fair presentation of the consolidated financial position, results of operations and cash flows, have been
included. For further information, refer to the consolidated financial statements and footnotes thereto included in the Companys Form 10-K for the year ended December 31, 2006. Footnote disclosure that substantially duplicates the
disclosure contained in that document has been omitted. Certain items previously reported in specific financial statement captions have been reclassified to conform to this presentation.

New Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of SFAS No. 115. This statement, which is effective January 1, 2008, permits
companies to measure financial instruments and certain other items at fair value and provides the opportunity to mitigate volatility in earnings caused by measuring related assets and liabilities without having to apply complex hedge accounting
provisions. The Company believes that the adoption of this statement in 2008 will not have a material effect on its financial statements or results of operations.

2. ACQUISITIONS

Transcend purchased certain assets of OTP Technologies, Inc. (OTP), a Chicago area medical transcription
company, on January 16, 2007. Transcend purchased the assets to expand its medical transcription business in the Midwest, capitalize on the potential for the acquired business to grow and leverage Transcends fixed overhead costs across a
larger revenue base. Transcend paid $1.07 million, consisting of $520,000 in cash, a $330,000 promissory note and $220,000 (60,274 shares) of Transcend common stock. In addition, Transcend may pay up to $100,000 in additional consideration in
January 2008 based on revenue achieved in 2007. The promissory note bears interest at 5% and is payable in five installments, with the first installment due on February 28, 2008 and final installment due on January 16, 2010. The purchase
price was allocated between goodwill, customer relationships, covenants not to compete and property and equipment. All goodwill and intangible asset amortization related to the acquisition of the OTP assets are expected to be deductible for income
tax purposes. The results of operations of the OTP business have been included in Transcends financial statements from January 16, 2007 forward.

3. MAJOR CUSTOMERS

No single customer accounted for greater than 10% of total revenue for the three and six months ended June 30, 2007
and June 30, 2006. The Company provides medical transcription services under individual contracts to customers that are members of a group of hospitals. Revenue attributable to members of this group comprised 23% of the Companys total
revenue for both the three and six months ended June 30, 2007 and 26% for both the three and six months ended June 30, 2006.

4. GOODWILL AND
OTHER INTANGIBLE ASSETS

The Company accounts for goodwill and other intangible assets in accordance with the provisions of SFAS No. 142,
Goodwill and Other Intangible Assets.Under the provisions of this Statement, 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 purchase price of the OTP acquisition was attributed to goodwill and other intangible assets. (See Note 2.)



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Goodwill and Other Intangible Assets

(rounded to the nearest thousand)



|                             |  |                     |             |               |                         |               |            |         |             |   |                         |  |            |         |  |   |         |  |   |        
|---------------------------- |  | ------------------- | ----------- | ------------- | ----------------------- | ------------- | ---------- | ------- | ----------- | - | ----------------------- |  | ---------- | ------- |  | - | ------- |  | - | -------
|                             |  | Useful Lifein Years |             | June 30, 2007 |                         | June 30, 2006
|                             |  |                     | GrossAssets |               | AccumulatedAmortization |               | Net Assets |         | GrossAssets |   | AccumulatedAmortization |  | Net Assets
|Amortized intangible assets: |  |                     |             |               |                         |               |            |         |             |   |                         |  |            |         |  |   |         |  |   |        
|Covenants-not-to-compete     |  | 5                   |             | $             | 50,000                  |               | $          | 24,000  |             | $ | 26,000                  |  | $          | 50,000  |  | $ | 14,000  |  | $ | 36,000 
|Customer relationships       |  | 5                   |             |               | 805,000                 |               |            | 273,000 |             |   | 532,000                 |  |            | 525,000 |  |   | 144,000 |  |   | 381,000
|                             |  |                     |             |               |                         |               |            |         |             |   |                         |  |            |         |  |   |         |  |   |        
|Total intangible assets      |  |                     |             | $             | 855,000                 |               | $          | 297,000 |             | $ | 558,000                 |  | $          | 575,000 |  | $ | 158,000 |  | $ | 417,000
|                             |  |                     |             |               |                         |               |            |         |             |   |                         |  |            |         |  |   |         |  |   |        

5. BORROWING ARRANGEMENTS

Line of Credit and Term Loan

On December 30, 2005, the Company entered into a four year, $5.6 million credit
facility with Healthcare Finance Group (HFG). The HFG facility matures on December 30, 2009 and is comprised of up to $3.6 million on a revolving accounts receivable-based line of credit and up to $2.0 million of term loans to fund
acquisitions. Borrowings on the line of credit and the term loan bear interest at LIBOR plus 4% (9.32% as of June 30, 2007), are secured by accounts receivable and certain other Company assets and require that the Company maintain certain
financial and other covenants. As of June 30, 2007, the Company was in compliance with all debt covenants. The HFG agreement requires the Company to set aside a portion of its line of credit availability to fund the next installment of the
Medical Dictation, Inc. (MDI) Promissory Note due January 31, 2008 (see below). This set aside accumulates at the rate of $100,000 per month. As of June 30, 2007, $600,000 of the line of credit availability has been set aside
to pay the MDI Promissory Note. There was no balance outstanding on the line of credit or term loan as of June 30, 2007.

As a part of the agreement
with HFG, the Company issued a warrant to HFG granting HFG the right to purchase 100,000 shares of Transcend common stock at an exercise price of $2.25 per share. On June 26, 2007 HFG exercised the warrant, receiving 89,008 unregistered shares
of Transcend common stock. The value of the warrant is being amortized into interest expense over the life of the credit facility.

On January 16,
2007, the Company borrowed $520,000 from HFG against its term loan availability to fund the cash portion of the OTP acquisition. The term loan requires the principal to be repaid in 36 equal monthly installments beginning May 1, 2007. On
May 22, 2007, the Company prepaid the balance of the term loan in full.

As of June 30, 2007, $2.0 million was available for borrowing under the
HFG term loan and $3.0 million was available under the HFG line of credit after setting aside $600,000 toward the January 31, 2008 installment on the MDI Promissory Note.

MDI Promissory Note

On January 31, 2005, the Company entered into a three year, $3.5 million promissory note in
conjunction with the purchase of MDI. The note was secured by the common stock of MDI and bears interest at 5.0%. The note was to be repaid as follows:



| |  |  | On January 31, 2006, one-third of the principal payable together with all accrued but unpaid interest.
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | On January 31, 2007, one-half of the remaining principal together with all accrued but unpaid interest.
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | On January 31, 2008, the remaining principal together with all accrued but unpaid interest.
| | - |  | -------------------------------------------------------------------------------------------

On August 15, 2005, the holder of the $3.5 million promissory note reduced the principal amount of the note by $100,000 in consideration for 35,971 unregistered
shares of Transcends common stock issued at $2.78 per share, or 110% of fair market value. On December 26, 2005, the holder of the promissory note reduced the principal amount of the note by an additional $300,000 in consideration for
140,815 unregistered shares of Transcends common stock issued at $2.13 per share, or 105% of fair market value. On January 31, 2006 the Company paid $828,000 plus interest as the first installment of the promissory note. A portion of this
principal payment, $61,000, was applied toward the second installment due on January 31, 2007. The Company paid $1.1 million plus interest as the second installment on January 31, 2007. As of June 30, 2007, the principal balance of
the note was $1.2 million, which is due on January 31, 2008.



7



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DCOA Promissory Note

On April 6, 2005, the Company 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). Transcend received $850,000 under the Promissory Note on April 7, 2005 and was pre-funded $150,000 under the Promissory Note on March 31, 2005. 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 shall be released as the principal balance of the Promissory Note is 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 shall provide up to $2 million of interest-free, secured loans to Transcend (the Loans). In return,
Transcend established and operated a medical transcription training center and regional office in Abilene, Texas. In addition, Transcend shall recruit, hire and train up to 208 medical transcription professionals, the majority of whom shall be
recruited from Abilene or the area surrounding Abilene, as defined in the Agreement. DCOA shall offer the Loans to Transcend in two increments of $1 million each in return for Transcend recruiting, hiring and training up to 104 medical transcription
professionals for each Loan. The Promissory Note is the first such Loan. Through December 31, 2006, the latest date for which data has been certified by DCOA, Transcend has trained and hired 51 medical transcription professionals.

Transcend and DCOA intend for the Promissory Note to be paid by Transcend using quarterly training credits and annual job creation/retention incentive credits
provided to Transcend by DCOA as defined in the Agreement. Principal reductions of the Promissory Note shall be effected through quarterly training credits and annual earned job creation incentive credits, not cash, as follows: (1) $25,000 per
month for the first six months of the Agreement provided that 15 employees are hired by Transcend during that period; (2) a quarterly training credit equal to 50% of the total wages paid to newly hired Medical Language Specialists
(MLS) during their probationary period (not to exceed $4,000 per MLS); and (3) an annual job creation incentive credit of between 10% and 12% of compensation for the year for each full time equivalent employee (FTE), with cumulative
per FTE credits capped at 30% to 35% of the FTEs annual compensation (depending on the FTEs compensation band) for FTEs hired on or before March 31, 2010 including compensation paid through March 31, 2012.

Transcend has earned credits of $297,000 to date, of which $48,000 was earned in the six months ending June 30, 2007, reducing the principal balance on the
Promissory Note to $703,000. In 2007, these credits are reported as reductions of direct operating costs. The principal balance of the Promissory Note, if any, remaining on March 1, 2013 is payable in cash by Transcend unless said balance is
forgiven by DCOA.

In July of 2007, the Company modified its training program to allow trainees to work from home, thereby reducing and possibly
eliminating the need for a physical office presence in Abilene.

OTP Promissory Note

On January 16, 2007, the Company entered into a three year, $330,000 unsecured promissory note in conjunction with the purchase of OTP. The note bears interest at 5.0% and the principal is 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
| | - |  | ------------------------



| |  |  | $55,000 on January 16, 2010
| | - |  | ---------------------------

6. COMMITMENTS
AND CONTINGENCIES

Litigation

See Part II
Other Information, Item I Legal Proceedings.

Operating Lease Commitments

See the Contractual Obligations section under Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations.



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7. TRANSACTIONS WITH RELATED PARTIES

The Company purchased the assets of OTP on January 16, 2007. The purchase was financed with $520,000 in cash, a $330,000 promissory note and $220,000 (60,274 shares) of Transcend common stock. In addition,
Transcend may pay up to $100,000 in additional consideration in January 2008 based on revenue achieved in 2007. The promissory note is payable to OTP. Since the date of purchase, the owners of OTP, James Vonderhaar and Sharon Vonderhaar, have worked
with Transcend to facilitate the transition and Sharon Vanderhaar was an employee of the Company as of June 30, 2007.

Susan McGrogan is the
Companys Chief Operating Officer. Ms. McGrogan is also the co-founder of MDI, which was purchased by Transcend on January 31, 2005. In conjunction with the purchase of MDI, the Company entered into a $3.5 million promissory note
payable to Ms. McGrogan, the terms of which are described in Note 5, Borrowing Arrangements. On January 31, 2007 the Company paid $1.1 million as the second installment on the note and $113,000 of accrued interest.

8. STOCK-BASED COMPENSATION

The Company has five
stockholder-approved stock incentive plans (the Plans) for its 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 plan approved by the shareholders on May 10, 2007, restricted stock units and stock appreciation rights. As of June 30, 2007, new awards are granted under the 2007 stock incentive plan only. The options are granted at fair
market value, as defined in the option agreement, on the date of grant.

As of June 30, 2007, the total number of options issued and outstanding, the
weighted average exercise price and number of options available for future issuance under approved equity compensation plans was as follows:



|                                                |  |   |        
|----------------------------------------------- |  | - | -------
|Number of securities to be issued upon exercise |  |   | 662,679
|Weighted average exercise price                 |  | $ | 3.97   
|Number of options available for future issuance |  |   | 332,176

In addition, 10,000 shares of restricted stock awards were granted and outstanding under the Plans as of
June 30, 2007.

On January 1, 2006, the Company adopted, using a modified version of prospective application, SFAS No. 123(R), Share
Based Payment (SFAS 123(R)). This statement requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values at the date of grant.
SFAS 123(R) did not change the accounting guidance for share-based payment transactions with parties other than employees provided in SFAS 123, Accounting for Stock Based Compensation (SFAS 123), as originally issued and Emerging
Issues Task Force (EITF) 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for all options
granted during the quarter ending June 30, 2007: dividend yield of 0%; volatility of 40.48%; risk-free interest rate of 4.72%; expected forfeiture rate of 25%; a weighted average exercise price of $13.97; and expected life of four years.

The Company recognized equity-based compensation expense under SFAS 123(R) of approximately $61,000 and $101,000 for the three and six months ended
June 30, 2007, respectively, and $52,000 and $88,000 for the three and six months ended June 30, 2006, respectively. As of June 30, 2007, the Company had approximately $411,000 of future compensation expense which it expects to record
in its statements of operations through 2011.

9. STOCKHOLDERS EQUITY

On January 16, 2007, as part of the OTP acquisition, the Company issued $220,000 of unregistered common stock (60,274 shares) to OTP.

During the quarter ended June 30, 2007, 113,187 options were exercised at a weighted average price of $2.39 per share. The exercise of these options increased common stock outstanding and additional paid in
capital by $6,000 and $264,000, respectively.

On June 26, 2007, HFG exercised warrants received in conjunction with the closing of the HFG credit
facility described in Note 5, Borrowing Arrangements. HFG received 89,008 shares of unregistered common stock upon the cashless exercise of the warrants.



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The Company had 8,358,915 shares of Common Stock and no shares of Preferred Stock outstanding as of June 30, 2007.

10. INCOME TAXES

As of June 30, 2007 and
June 30, 2006, the Company had net operating loss carryforwards of approximately $16.8 million and $19.8 million, respectively, available to offset future taxable income and net deferred tax assets of approximately $6.0 million and $7.7
million, respectively. The Company has recorded a valuation allowance of approximately $6.0 million and $7.7 million as of June 30, 2007 and June 30, 2006, respectively, against these net deferred tax assets based upon our determination
that the realization of the net operating losses in the future was not sufficiently predictable. If we determine in the future that it is more likely than not that the net operating loss carryforwards will be utilized, the valuation allowance would
be reduced, resulting in a reduction to income tax expense in that period. Without the valuation allowance, the Companys effective income tax rate would be approximately 39%, although the cash actually expended for income taxes would be
nominal until the net operating loss carryforwards are fully utilized. The Company is subject to income taxes in certain states where net operating loss carryforwards are not available.

11. SUBSEQUENT EVENT

On July 9, 2007, the Company finalized a lease for new corporate office space in Atlanta,
Georgia. The lease is expected to commence October 1, 2007 and expires January 31, 2015. The Company will occupy approximately the same amount of space occupied under its current lease (approximately 10,000 square feet), but expects the
overall occupancy cost, including base rent, rent inducements and tenant improvements, to decline slightly relative to the current lease.



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

Certain information included in this Quarterly Report on Form 10-Q contains, and other reports or materials filed or to be filed by the Company with the Securities and Exchange Commission (as well as information
included in oral statements or other written statements made or to be made by the Company or its management) contain or will contain, forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, Section 27A of the Securities Act of 1933, as amended and pursuant to the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may relate to financial results and plans for future business
activities, and are thus prospective. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from future results expressed or implied by such forward-looking
statements. Among the important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are competitive pricing 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, difficulties in implementing the Companys
offshore outsourcing objectives, the effect of future acquisitions, if any, and the risk factors detailed from time to time in the Companys periodic reports and registration statements filed with the Securities and Exchange Commission. Any
forward-looking statements are made pursuant to the Private Securities Litigation Reform Act of 1995 and as such speak only as of the date made.

Overview

The Company utilizes a combination of its proprietary internet-based voice and data distribution technology, customer-based
technology and home-based medical language specialists to convert physicians voice recordings into electronic documents.

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. Our critical accounting estimates are as follows:

Goodwill and Intangible Assets.As of June 30, 2007, we had
goodwill and intangible assets at carrying amounts of $4.6 million and $558,000, respectively. The total of $5.1 million represents approximately 39% of total assets as of June 30, 2007. Our intangible assets are amortized over their estimated
useful lives.

We review 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, we calculate the fair value of the reporting units to which the goodwill and intangibles relate based on the present value of estimated future cash flows. The approach utilized is dependent on a



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number of factors including estimates of future revenues and costs, appropriate discount rates and other variables. We base our estimates on assumptions that
we believe to be reasonable, but which are unpredictable and inherently uncertain. Therefore, future impairments could result if actual results differ from those estimates.

Deferred Tax Assets.As of June 30, 2007, we have net deferred tax assets of $6.0 million resulting primarily from net operating loss carryforwards of approximately $16.8
million. Deferred income tax assets represent future tax benefits we expect to be able to apply against future taxable income. Our ability to utilize the deferred tax benefits is dependent upon our ability to generate future taxable income.
SFAS 109, Accounting for Income Taxes requires us to record a valuation allowance against any deferred income tax benefits that we believe may expire before we generate sufficient taxable income to use them. We use current estimates
of 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. As of June 30, 2007, we have determined that it is likely that we will be able to utilize $35,000 of our deferred tax
benefits in the future and accordingly, we have established a valuation allowance of approximately $6.0 million. We adjust the asset and allowance each quarter. If we determine in the future that it is more likely than not that the net operating
loss carryforwards will be utilized, the valuation allowance would be reduced, resulting in a reduction to income tax expense in that period. Without the valuation allowance, the Companys effective income tax rate would be approximately 39% of
pre-tax income, although the cash actually expended for income taxes would be nominal until the net operating loss carryforwards are fully utilized.

Three Months Ended June 30, 2007 Compared to Three Months Ended June 30, 2006

Revenue increased $2.5 million, or 32%, to
$10.5 million in the quarter ended June 30, 2007 compared to revenue of $8.0 million in the same period in 2006. The $2.5 million increase in revenue consisted of revenue from new customers of $1,840,000, increased revenue from existing
customers of $585,000 and revenue from the acquisition of OTP of $415,000, partially offset by a decrease in revenue of $203,000 from customers who terminated their contracts in 2006 and a reduction in other revenue of $108,000.

Direct costs increased $1.2 million, or 20%, to $7.3 million in the quarter ended June 30, 2007 compared to $6.1 million in the same period in 2006. Direct costs
include costs attributable to compensation for transcriptionists, recruiting, production management, customer service, technical support for production operations, fees paid for speech recognition processing, telephone expenses 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 production 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 decreased to 69% in the quarter ended June 30, 2007 from 76% in the same period of 2006. The decrease in
costs as a percentage of revenue is due primarily to cost savings that resulted from the rollout of the Companys speech recognition-enabled BeyondTXT platform, growth of semi-variable direct costs of operations at a slower rate than the rate
of revenue growth and the use of offshore transcription resources.

Gross profit increased $1.3 million, or 68%, to $3.2 million in the quarter ended
June 30, 2007 compared to $1.9 million in the same period in 2006. Gross profit as a percentage of revenue increased to 31% in the quarter ended June 30, 2007 compared to 24% in the same period in 2006 (see direct costs discussion). The
increase is due primarily to cost savings that resulted from the rollout of the Companys speech recognition-enabled BeyondTXT platform, growth of semi-variable direct costs of operations expenses at a slower rate than the rate of revenue
growth and the use of offshore transcription resources.

Sales and marketing expenses increased $41,000, or 33%, to $164,000 in the quarter ended
June 30, 2007, compared to $123,000 in the same period in 2006. Sales and marketing expenses as a percentage of revenue were 2% in the quarters ended June 30, 2007 and 2006. The increase in sales and marketing expense is primarily due to
the use of a lead-generating telemarketing firm in the quarter ended June 30, 2007, with no corresponding expense in the same quarter of 2006, and an increase in compensation-related expenses.

Research and development expenses increased $87,000, or 92%, to $182,000 in the quarter ended June 30, 2007 compared to $95,000 in the same period in 2006. Research
and development expenses as a percentage of revenue were 2% in the quarter ended June 30, 2007 and 1% in the quarter ended June 30, 2006. The increase is primarily due to an increase in compensation-related expenses.

General and administrative expenses increased $113,000, or 10%, to $1.2 million in the quarter ended June 30, 2007 compared to $1.1 million in the same period in
2006. General and administrative expenses as a percentage of revenue were 12% and 14% in the quarters ended June 30, 2007 and June 30, 2006, respectively. The increase was due primarily to an increase in legal fees, Sarbanes-Oxley Act
compliance costs and an increase in compensation-related expenses, partially offset by reductions in bad debt expense and non-income based taxes and licenses.



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Interest and other expenses decreased $79,000, or 51%, to $75,000 in the quarter ended June 30, 2007 compared to
$154,000 in the same period in 2006. The decrease is due primarily to a reduction in the amount of debt outstanding during the three months ended June 30, 2007 compared to the same period of 2006.

As of June 30, 2007 and 2006, the Company has net operating loss carryforwards of $16.8 and $19.8 million, respectively, that are the primary components of deferred
tax assets of approximately $6.0 million and $7.7 million, respectively . Because the Company has not determined that it is more likely than not that the net operating loss carryforwards will be utilized, the provisions for income taxes were almost
completely offset by reductions in the valuation allowance that has been established against the deferred tax assets. The net income tax provisions of $5,000 for the three months ended June 30, 2007 and $10,000 for the same period in 2006
result primarily from state income tax provisions for states in which net operating loss carryforwards are not available.

Six Months Ended
June 30, 2007 Compared to Six Months Ended June 30, 2006

Revenue increased $4.9 million, or 31%, to $20.9 million for the six months
ended June 30, 2007 compared to revenue of $16.0 million in the same period in 2006. The $4.9 million increase in revenue consisted of revenue from new customers of $3,451,000, increased revenue from existing customers of $1,378,000 and revenue
from the acquisition of OTP of $755,000, partially offset by decreases in revenue of $524,000 from customers who cancelled their contracts and $121,000 of other revenue.

Direct costs increased $2.2 million, or 18%, to $14.5 million for the six months ended June 30, 2007 compared to $12.3 million in the same period in 2006. Direct costs include costs attributable to compensation
for transcriptionists, recruiting, production management, customer service, technical support for production operations, fees paid for speech recognition processing, telephone expenses 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 production 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 decreased to 69% for the six months ended June 30, 2007 from 77% in the same period of 2006. The net decrease in costs as a
percentage of revenue is due primarily to cost savings that resulted from the rollout of the Companys speech recognition-enabled BeyondTXT platform, growth of semi-variable direct costs of operations at a slower rate than the rate of revenue
growth and the use of offshore transcription resources.

Gross profit increased $2.7 million, or 74%, to $6.4 million for the six months ended
June 30, 2007 compared to $3.7 million in the same period in 2006. Gross profit as a percentage of revenue increased to 31% for the six months ended June 30, 2007 compared to 23% in the same period in 2006 (see direct costs discussion).
The increase is due primarily to cost savings that resulted from the rollout of the Companys speech recognition-enabled BeyondTXT platform, growth of semi-variable direct costs of operations at a slower rate than the rate of revenue growth and
the use of offshore transcription resources.

Sales and marketing expenses increased $68,000, or 30%, to $296,000 for the six months ended June 30,
2007, compared to $228,000 in the same period in 2006. Sales and marketing expenses as a percentage of revenue were 1% for both the six months ended June 30, 2007 and June 30, 2006. The net increase in sales and marketing expense is
primarily due to the use of a lead-generating telemarketing firm in the six months ended June 30, 2007 with no corresponding expense in the same quarter of 2006, and an increase in compensation-related expenses.

Research and development expenses increased $139,000, or 76%, to $323,000 for the six months ended June 30, 2007 compared to $184,000 in the same period in 2006.
Research and development expenses as a percentage of revenue were 2% and 1% for the six months ended June 30, 2007 and 2006, respectively. The increase is primarily due to an increase in compensation-related expenses.

General and administrative expenses increased $324,000, or 15%, to $2.5 million for the six months ended June 30, 2007 compared to $2.2 million in the same period
in 2006. General and administrative expenses as a percentage of revenue were 12% and 14% for the six months ended June 30, 2007 and June 30, 2006, respectively. The increase was due primarily to an increase in legal fees, Sarbanes-Oxley
Act compliance costs, 401(k) retirement plan contributions and compensation-related expenses, partially offset by reductions in bad debt expense and taxes.

Interest and other expenses decreased $98,000, or 34%, to $190,000 in the quarter ended June 30, 2007 compared to $288,000 in the same period in 2006. The decrease is due primarily to a reduction in the amount of debt outstanding in
the six months ended June 30, 2007 compared to the same period in 2006.



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As of June 30, 2007 and June 30, 2006, the Company has net operating loss carryforwards of $16.8 million and
$19.8 million, respectively, that are the primary components of deferred tax assets of approximately $6.0 million and $7.7 million, respectively. Because the Company has not determined that it is more likely than not that the net operating loss
carryforwards will be utilized, the provisions for income taxes were almost completely offset by reductions in the valuation allowance that has been established against the deferred tax assets. The net income tax provisions of $22,000 for the six
months ended June 30, 2007 and $17,000 for the same period in 2006 result primarily from state income tax provisions for states in which net operating loss carryforwards are not available.

Contractual Obligations

The Company has leases for the rental
of office space and operating leases related to the purchase of computer and other equipment. The equipment operating leases contain renewal options at lease termination and purchase options at amounts approximating fair market value at lease
termination. The table below summarizes the total lease obligations and other obligations outstanding as of June 30, 2007 and the payments due by period. In July 2007, the Company finalized a new lease for its corporate headquarters. This
lease is included in the operating lease obligations in the table below.



|                            |  |                                                          |           |                 |   |             |  |            |           |                  |   |         |  |   |        
|--------------------------- |  | -------------------------------------------------------- | --------- | --------------- | - | ----------- |  | ---------- | --------- | ---------------- | - | ------- |  | - | -------
|                            |  | Payments due by period (rounded to the nearest thousand)
|Contractual Obligations     |  | Total                                                    |           | Less than 1Year |   | 1  3 Years |  | 3  5Years |           | More than5 Years
|Long-Term Debt Obligations  |  | $                                                        | 2,200,000 |                 | $ | 1,277,000   |  | $          | 220,000   |                  | $ | 0       |  | $ | 703,000
|Capital Lease Obligations   |  |                                                          |          |                 |   |            |  |            |          |                  |   |        |  |   |       
|Operating Lease Obligations |  |                                                          | 2,855,000 |                 |   | 1,037,000   |  |            | 985,000   |                  |   | 691,000 |  |   | 142,000
|Purchase Obligations        |  |                                                          |          |                 |   |            |  |            |          |                  |   |        |  |   |       
|Other Long-Term Liabilities |  |                                                          |          |                 |   |            |  |            |          |                  |   |        |  |   |       
|                            |  |                                                          |           |                 |   |             |  |            |           |                  |   |         |  |   |        
|Total                       |  | $                                                        | 5,055,000 |                 | $ | 2,314,000   |  | $          | 1,205,000 |                  | $ | 691,000 |  | $ | 845,000
|                            |  |                                                          |           |                 |   |             |  |            |           |                  |   |         |  |   |        

Liquidity and Capital Resources

As of June 30, 2007, the Company had cash and cash equivalents of $1.2 million, working capital of $2.4 million, availability of approximately $3.0 million on its line of credit based on eligible accounts
receivable (after setting aside $600,000 toward the January 2008 installment on the MDI promissory note), and $2.0 million available on its acquisition term loan facility, both of which expire on December 30, 2009. See Note 5 to the
Consolidated Financial Statements.

Cash provided by operating activities was $3.2 million for the six months ended June 30, 2007 compared to cash
used in operating activities of $95,000 for the six months ended June 30, 2006. The improvement was due primarily to an increase in net income, accrued liabilities and accounts payable, partially offset by an increase in accounts receivable and
prepaid expenses.

Cash used in investing activities was $863,000 for the six months ended June 30 2007, compared to $208,000 for the six months ended
June 30, 2006. The increase was due primarily to the incremental cash used to acquire the assets of OTP and an increase in the amount of computer related equipment purchased during the six months ended June 30, 2007 as compared to the six
months ended June 30, 2006.

Cash used in financing activities was $1.4 million for the six months ended June 30, 2007, consisting of net
repayments on the HFG credit facility of $1.2 million and a $1.2 million repayment on the MDI promissory note, offset by proceeds of $941,000 from the exercise of stock options. For the six months ended June 30, 2006, cash used in financing
activities was $192,000, consisting primarily of net borrowings of $633,000 on the line of credit offset by an $829,000 principal repayment on the MDI promissory note.

The Company anticipates that cash on hand, together with cash flow from operations and cash available under its credit facility 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 the growth strategy for Transcend is the completion of
acquisitions. Management believes sources of acquisition financing, including cash on hand, the $5.0 million available on the HFG credit facility and the ability to issue Company stock, are sufficient to complete smaller acquisitions. Additional
financing would be required for larger acquisitions. The Company has engaged an investment banker to help locate potential acquisition candidates and financing for these acquisitions either through debt or equity or a combination thereof.



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##### Table of Contents

|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 June 30, 2007.



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

The SEC defines the term disclosure
controls and procedures to mean a companys controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported, within the time periods specified in the SECs rules and forms. The Companys principal executive officer and principal financial officer, based on their evaluation of the Companys disclosure
controls and procedures as of the end of the quarterly period covered by this report, have concluded that the Companys disclosure controls and procedures were effective for this purpose.

Internal control over financial reporting consists of control processes designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of the Companys financial statements for external purposes in accordance with GAAP. To the extent that components of the Companys internal control over financial reporting are included in the Companys disclosure
controls, they are included in the scope of the evaluation by the Companys principal executive officer and principal financial officer referenced above. There were no changes in the Companys internal control over financial reporting
during the Companys last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.

PART II. OTHER INFORMATION



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

On April 5, 2001, Our Lady of the Lakes
Hospital, Inc. (OLOL) filed a lawsuit against the Company. The lawsuit, styled Our Lady of the Lakes Hospital, Inc. v. Transcend Services, Inc., was filed in the 19th Judicial District Court, Parish of East Baton Rouge, State
of Louisiana, Civil Case Number 482775, Div. A. The lawsuit alleges, among other things, that the Company breached certain contracts entered into between OLOL and the Company, including a staffing and management servicing contract, a transcription
platform agreement and a marketing agreement. On May 30, 2001, the Company filed a timely Answer that generally denied all liability, and the Company filed a counterclaim against OLOL primarily seeking fees owed by OLOL for services performed
by the Company and interest on unpaid invoices. All unpaid invoices were charged off against the allowance for doubtful accounts in 2001. OLOL subsequently added Transcends insurance carriers as defendants to the lawsuit and later lost a court
decision and related appeal in that regard. During June 2006, OLOL amended its lawsuit to add a claim for misrepresentation and an additional breach of contract claim. On June 26, 2006, the Company responded by denying the allegations, and
reasserting Transcends counterclaim against OLOL. On July 20, 2007, the Company and OLOL participated in a mediation session which did not result in resolution of the matter. The Company anticipates that additional discussions will
take place with a view toward settlement. If a settlement is not reached, Transcend will vigorously defend all of the claims asserted by OLOL. The lawsuit is in an early procedural stage and therefore it is not possible at this time
to determine the outcome of the actions or the effect, if any, that the outcome may have on the Companys results of operations and financial condition. There can be no assurances that this litigation will not have a material effect on the
Companys results of operations and financial condition.



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

There have been no material changes in the risk
factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2006.



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

The Company
held its Annual Meeting of Shareholders on May 10, 2007. The stockholders voted on the following proposals and the results of the voting are presented below.



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



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|                   |  |           |  |              
|------------------ |  | --------- |  | -------------
|Nominee            |  | Votes For |  | VotesWithheld
|Joseph G. Bleser   |  | 7,903,019 |  | 5,231        
|Joseph P. Clayton  |  | 7,887,889 |  | 20,361       
|James D. Edwards   |  | 7,888,729 |  | 19,521       
|Larry G. Gerdes    |  | 7,901,799 |  | 6,451        
|Walter S. Huff Jr. |  | 7,901,889 |  | 6,361        
|Sidney V. Sack     |  | 7,889,019 |  | 19,231       
|Charles E. Thoele  |  | 7,888,819 |  | 19,431       



| | 2. | To approve the 2007 Stock Incentive Plan. The stockholders approved the plan with 4,227,643 votes FOR, 229,783 votes AGAINST, 10,719 ABSTAINING and 3,440,105 BROKER NON-VOTES.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | To ratify the appointment of Miller Ray Houser & Stewart LLP as independent public accountants to audit the accounts of the Company for the year ending December 31,
2007. The stockholders ratified said appointment with 7,822,306 votes FOR, 77,432 votes AGAINST and 8,512 ABSTAINING.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

The following exhibits are filed with or incorporated by
reference into this report.



|              |  |                                                                                                                                                                            |  |                            |  |            |  |         |     |  |                
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- |  | ---------- |  | ------- | --- |  | ---------------
|              |  |                                                                                                                                                                            |  | Incorporation by Reference
|ExhibitNumber |  | Exhibit Description                                                                                                                                                        |  | Form                       |  | File No.   |  | Exhibit |     |  | Filing Date    
|              |  |                                                                                                                                                                            |  |                            | 
|3.1           |  | Certificate of Incorporation                                                                                                                                               |  | S-3                        |  | 333-106446 |  | 4.1     |     |  | June 25, 2003  
|              |  |                                                                                                                                                                            |  |                            | 
|3.2           |  | Restated Bylaws                                                                                                                                                            |  | 10-K                       |  | 0-18217    |  | 3       | (a) |  | August 27, 1993
|              |  |                                                                                                                                                                            |  |                            | 
|10.17         |  | Clinical documentation solution agreement between the Company and Multimodal Technologies, Inc.                                                                            |  | 8-K/A                      |  | 0-18217    |  | 10.1    |     |  | March 1, 2007  
|              |  |                                                                                                                                                                            |  |                            | 
|10.18         |  | Sublease agreement between the Company and Oracle USA, Inc.                                                                                                                |  | 10-Q                       |  | 0-18217    |  | 10.18   |     |  | August 9, 2007 
|              |  |                                                                                                                                                                            |  |                            | 
|31.1          |  | Certification of Chief Executive Officer of the Registrant Pursuant to Rule 13a-14(a) or 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) or 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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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.
|               |  |  | 
|August 9, 2007 |  |  |  | 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)              



16