<PAGE>

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

                                    FORM 10-K

MARK ONE
|X|    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
       ACT OF 1934

                   For the fiscal year ended December 31, 2001

                                       or

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

              For the transition period from _________ to _________
                         Commission File Number 0-18217

                            TRANSCEND SERVICES, INC.
             (Exact name of registrant as specified in its charter)

                  Delaware                               33-0378756
(State or other jurisdiction of incorporation) (IRS Employer Identification No.)

       945 East Paces Ferry Road, N.E., Suite 1475, Atlanta, Georgia 30326
              (Address of principal executive offices and zip code)

                                 (404) 836-8000
              (Registrant's telephone number, including area code)
        Securities registered pursuant to Section 12(b) of the Act: None
           Securities registered pursuant to Section 12(g) of the Act:
                          Common Stock, $.05 par value
                                (Title of Class)

       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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Parts III of this Form 10-K or any
amendment to this Form 10-K. |X|

       Aggregate market value of the voting stock held by non-affiliates of the
Registrant, computed using the last sale price as reported for the Registrant's
common stock by the Nasdaq SmallCap Market on February 28, 2002 was $4,383,689.
For purposes of this response, officers, directors and holders of more than 5%
of the Registrant's common stock are considered the affiliates of the Registrant
at that date.

       Indicate the number of shares outstanding of the Registrant's common
stock as of the latest practicable date.

            Class                      Outstanding at February 28, 2002
            -----                      --------------------------------
Common Stock, $.05 par value                       4,513,143
                                                   =========

                       DOCUMENTS INCORPORATED BY REFERENCE

       Portions of the registrant's proxy statement to be filed in connection
with the 2002 Annual Meeting of Stockholders to be held May 7, 2002, are
incorporated by reference herein in response to Part III of this report.



<PAGE>

                            TRANSCEND SERVICES, INC.

                                    FORM 10-K

                                     INDEX

<TABLE>
<CAPTION>
<S>                                                                                                    <C>
PART I ..........................................................................................      3
    ITEM 1.       BUSINESS ......................................................................      3
    ITEM 2.       PROPERTIES ....................................................................      7
    ITEM 3.       LEGAL PROCEEDINGS .............................................................      7
    ITEM 4.       SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ...........................      8
PART II .........................................................................................      8
    ITEM 5.       MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS ........      8
    ITEM 6.       SELECTED FINANCIAL DATA .......................................................      8
    ITEM 7.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                  OPERATIONS ....................................................................      9
    ITEM 7A.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ....................     13
    ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ...................................     13
    ITEM 9.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                  DISCLOSURE. ...................................................................     28
PART III ........................................................................................     29
   ITEM 10.       DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ............................     29
   ITEM 11.       EXECUTIVE COMPENSATION ........................................................     29
   ITEM 12.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ................     29
   ITEM 13.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ................................     29
PART IV .........................................................................................     29
   ITEM 14.       EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K ...............     29

SIGNATURES ......................................................................................     32
</TABLE>

                                       2

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                                     PART I

ITEM 1.   BUSINESS

     Certain statements related to financial results and plans for future
business development activities contained in this filing are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. 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. Potential risks
and uncertainties include, but are not limited to, competitive pressures, the
mix of service revenue, changes in pricing policies, delays in sales revenue
recognition, lower-than-expected demand for the Company's products and services,
business conditions in the integrated health care delivery network market,
general economic conditions, and the risk factors detailed from time to time in
the Company's filings with the Securities and Exchange Commission.

GENERAL

     Transcend Services, Inc. (the "Company" or "Transcend") provides medical
transcription services and coding and abstracting software to the healthcare
industry. Powered by its web-based voice and data distribution technology, the
Company's home-based medical transcription professionals document patient care
by converting physicians' voice recordings into electronic medical record
documents. The Company's wholly owned subsidiary, Cascade Health Information
Software, Inc. ("Cascade"), provides state-of-the-art software for the coding
and abstracting of patient medical records.

     On October 13, 2000, the Company sold both its remote coding business
("CodeRemote"), which helped healthcare providers code their medical records,
and its facility management business ("Co-Sourcing"), which provided on-site
management of hospital medical records operations, to Provider HealthNet
Services, Inc.

     The markets for the Company's medical transcription services and software
products are sizable. Management estimates the total market potential exceeds $6
billion in medical transcription and $375 million in medical coding and
abstracting software and related services. While competition is significant with
over 1,000 transcription services companies nationally, the Company believes
that it is among the four largest transcription service providers and one of
only several national companies that operates on a single, Internet-based
technology. Competition for medical coding and abstracting software is also
significant. The Company's strongest competition traditionally has been from
local and national companies who provide coding and classification software,
off-site coding services and on-site coding services.

     Government regulation, managed care and labor resource constraints are
shaping new opportunities for the Company and other healthcare service and
software providers. Breakthroughs in telecommunications technologies and the
growing acceptance of the Internet are enabling home-based professionals to
provide more and more services to meet the needs of healthcare. New
applications, such as voice recognition and digital imaging, are also emerging
which allows for increased productivity, capacity and quality. In addition,
compliance requirements have increased the demand for coding, classification and
abstracting of patient medical records at all levels of the healthcare industry.
Most recently, the Health Insurance Portability and Accountability Act ("HIPAA")
has provided the Company with both a challenge to comply with HIPAA's evolving
security and confidentiality requirements and the opportunity to differentiate
itself, in particular with its foreign competitors. As a result of these factors
and trends, specialized healthcare service and software companies, like
Transcend Services, Inc., are leveraging technology to increase their value to
healthcare providers.

INDUSTRY OVERVIEW

     The healthcare industry continues to undergo rapid change. Government
regulation and managed care have increased the focus on quality of care, quality
of data, billing compliance and patient privacy. Healthcare providers have come
under increased scrutiny from regulators and third-party payors. Reimbursement
pressures from managed-care growth have fueled industry consolidation and the
formation of various forms of healthcare integration from integrated delivery
networks to managed service organizations. Documentation requirements have
significantly increased resulting in an increase in the need for dictation and
transcription of medical notes. Compliance requirements have increased the
demand for the coding, classification and abstracting of patient medical records
in a timely and accurate manner. As a result of breakthroughs in technology,
telecommunications, the growing acceptance of the Internet, and new
applications, such as digital imaging systems and voice recognition systems,
healthcare providers are relying on new technologies and outsourcing, as well as
specialized software applications, to help them be competitive.

     Advances in telecommunications, Internet technologies, and voice
recognition capabilities are emerging, thereby creating opportunities to apply
these technological advances to outsource certain medical record functions, such
as medical transcription.


                                        3

<PAGE>

     These technologies enable the digital movement of voice, images and data
that allows for the cost-effective, off-site completion of the medical
transcription function. The ability to process transcription services off-site
allows for faster turnaround times, increased availability of scarce skilled
professionals, improved quality and lower costs. In addition, the continuing
demand for timely and accurate patient medical records creates a market need for
specialized software applications, such as coding, classification and
abstracting software.

HISTORY OF THE COMPANY

     The Company was incorporated in California in 1976 and was reorganized as a
Delaware corporation in 1988. On January 10, 1995, the Company, formerly known
as TriCare, Inc., acquired Transcend Services, Inc., then a Georgia corporation,
by the merger of Transcend Services, Inc. into First Western Health Corporation
("First Western"), a subsidiary of the Company (the "Merger"). On May 31, 1995,
Transcend Services, Inc. and Veritas Healthcare Management ("Veritas"), another
subsidiary of the Company, merged into the Company, whose name was then changed
to Transcend Services, Inc. The Merger was treated for financial accounting
purposes as the acquisition of TriCare, Inc. by Transcend Services, Inc. The
historical financial statements of the former Transcend Services, Inc. became
the financial statements of the Company and include the businesses of both
companies as of the effective date of the Merger.

     Prior to the Merger, Transcend Services, Inc., which was originally
organized in 1984, provided consulting services for medical records management,
quality and utilization management and records coding. In 1992, the former
Transcend Services, Inc. developed, tested and marketed new lines of business
intended to capitalize on the increasing need for the outsourcing of medical
records, and by the end of 1992 had entered into its first long-term agreement
for the management of a hospital's medical records department.

     On March 16, 1998, Transcend sold the net assets of Transcend Case
Management, Inc., its wholly owned subsidiary, to TCM Services, Inc., a wholly
owned subsidiary of CORE, Inc. ("CORE"), a publicly traded company. On December
23, 1998, the Company re-acquired TCM from CORE and filed an arbitration claim
against CORE after learning of CORE's intent to discontinue the business. In
February 2000, an arbitrator ruled that CORE breached its purchase contract with
Transcend and ordered CORE to compensate Transcend for damages. The Company
ceased TCM's operations effective December 31, 1999.

     On June 1, 1998, Transcend completed the acquisition of Health Care
Information Systems, Inc. ("HCIS"). The acquisition was accounted for under the
pooling of interests method of accounting. Transcend has merged HCIS into a
wholly owned subsidiary, Cascade Health Information Software, Inc. ("Cascade"),
the product name formerly used by HCIS which is widely recognized in the
industry.

     On November 11, 1999, the Company's Board of Directors approved
management's plan to restructure the business to focus on medical transcription
using the Company's Internet-based transcription technology. In November and
December 1999, the Company sold its Utah and Northeast-based transcription
operations and certain of its transcription contracts that did not operate using
the Company's Internet-based transcription technology. On October 13, 2000, the
Company sold its CodeRemote business, which provided remote coding services, and
its Co-Sourcing business, which provided on-site management of hospital medical
records operations, to Provider HealthNet Services, Inc. On March 13, 2001, the
Company announced the termination of its efforts to sell Cascade. Accordingly,
the Company now provides medical transcription services and coding and
abstracting software to the healthcare industry.

BUSINESS STRATEGY

     The Company intends to focus on two major lines of business by providing
medical transcription services and coding and abstracting software to the
healthcare industry. A key factor in executing its medical transcription
services strategy will be to add new customers to efficiently utilize the
capacity of the Company's proprietary Internet-based transcription platform (the
"Platform") and its established customer-oriented support organization. A key
factor in executing its coding and abstracting software strategy will be to
web-enable Cascade's application software, which would enable Cascade to become
an Application Service Provider ("ASP") as a means of enhancing market
penetration.

                           Increase Market Penetration

     The Company believes that it has a tested and proven infrastructure which
will allow it to expand it business to serve substantially more customers. While
continuing to focus on day-to-day customer satisfaction, the Company intends to
focus on adding new accounts to its existing customer base. The Company has
hired an experienced sales team to focus exclusively on new account sales of
medical transcription services. The Company's established account management
organization will continue to sell


                                       4

<PAGE>

additional services to the existing customers. Cascade has an established team
of sales professionals focused on both new account and additional sales to
existing accounts. Cascade believes that its state-of-the-art, 32-bit Windows
coding and abstracting software positions it as the technological leader in its
market. To further enhance market penetration, Cascade intends to web-enable its
products for delivery as an ASP thereby making its product more affordable to a
broader market.

                   Maintain and Enhance Customer Satisfaction

     The Company believes that its best sales force is its customers, who
provide sales leads and references. Accordingly, the Company has an ongoing
program to monitor customer satisfaction. This program includes continuous
monitoring of transcription production statistics relative to contracted
standards, periodic transcription customer surveys and, most importantly,
dedicated customer support organizations who maintain regular, oftentimes daily,
contact with both transcription and Cascade customers.

                   Maintain Technological Leadership Positions

     The Company intends to utilize the most effective technology available to
improve the medical transcription process and the features and functionality of
coding and abstracting application software. The Company believes the
application of advanced technology will reshape the way patient information is
managed across the healthcare delivery system in the future and provide margin
expansion. The Company has converted all of its transcription operations to its
Internet-based platform that is expected to provide significant advantages in
recruiting, workflow management, and production control. The Company will
continue to invest in improving its technology to yield faster turnaround times,
better workflow management, and increased productivity by evaluating new
technologies such as voice recognition and natural language processing for its
medical transcription business. The Company has also made a concerted effort to
ensure that its information remains confidential and secure. Cascade believes
that it is currently well positioned with its Windows-based products, but
intends to enhance its technological leadership position with an ASP offering.

                      Attract and Retain Professional Staff

     One of the Company's critical success factors is the recruitment and
retention of the industry's best knowledge workers (medical transcriptionists,
software developers and service and sales professionals). The Company believes
that there will be a shortage of qualified professionals in the future. The
solution to this shortage will be to attract and retain a core group of
knowledge workers by offering excellent pay and benefits and, in the case of
medical transcriptionists, the opportunity to work from home. This core group of
knowledge workers may support less skilled production employees and may complete
documents that have been translated using voice recognition software.

                              Rapid Internal Growth

     The Company intends to grow internally through its direct sales force
focused on new accounts and its account manager organization focused on the
existing customer base. The Company intends to add sales resources and personnel
as necessary to concentrate on revenue growth.

               Maximize Value of Patient Documentation Information

     The Company believes the patient information it captures and documents has
the potential to create value many times the current value of its services.
Current processes capture patient information in the form of free-flow
electronic text documents. These electronic documents require human intervention
to interpret the patient information. The Company has been storing these
electronic documents in a data repository but has not yet offered data
extraction and analysis services. The Company does offer secure Internet access
to documents. The Company believes that data extraction and analysis services
may provide tremendous value to its customers and potentially create new revenue
channels for the Company. In addition, the Company may offer decision support
solutions to its customers to provide them information, which may assist in
evaluating physician practice patterns, physician utilization, and in improving
control of their medical transcription costs. The Company has no definitive
plans to offer data extraction and analysis services or decision support
solutions at this time.

SERVICES AND PRODUCTS

     Medical Transcription Services. Powered by its web-enabled voice and data
distribution technology, the Company's home-based professionals convert
physicians' voice recordings into electronic medical record documents.
Physicians may access the Company's technology from any phone where they can
dictate patient medical records information. The information is captured
digitally in the Company's central voice hub in Atlanta, Georgia. The digital
voice files are then compressed, encrypted and stored. The Company's home-based
medical transcriptionists access these files over the Internet, play back the
voice recordings using

                                       5

<PAGE>

headsets and footpedals, and transcribe the recorded voice to create electronic
documents. The completed electronic documents are then returned to the Atlanta
hub over the Internet. The documents may then be accessed by remote quality
assurance personnel, if necessary, and delivered electronically to the
healthcare provider. Typically, documents are produced and delivered within 24
hours of the physicians' dictation. Documents requiring faster turnaround times,
as quickly as four hours for STAT requests, are priced at a premium. The
Company's transcription operations run around the clock, every day of the year.

     Cascade. The Company's wholly owned subsidiary, Cascade Health Information
Software, Inc., provides state-of-the-art software for the coding, abstracting
and reporting of patient information. Cascade offers perpetual software licenses
with recurring annual support and upgrade fees. Cascade also offers annual
software licenses which include support and software upgrades. Cascade
differentiates itself by its product usability, its powerful and flexible
reporting capabilities, and its reputation for customer service.

CUSTOMERS

     The Company currently delivers dictation and transcription services to over
40 hospitals and clinics with recurring revenue under long-term contracts or
other arrangements. The typical medical transcription customer generates
approximately $600,000 in annual revenue. Cascade has approximately 250 active
licenses of its coding and abstracting software operational in 84 customer
sites.

     Based on revenue for the fiscal years ended December 31, 2001, 2000 and
1999, no single customer paid fees to the Company that amounted to or exceeded
10% of the Company's revenue in the respective periods.

SALES AND MARKETING

     The Company currently employs five full-time sales professionals focused on
transcription and three full-time sales professionals focused on coding and
abstracting software. The Company's prospects and sales have emerged principally
from personal contacts by the Company's sales professionals with senior hospital
executives as well as referrals from its clients.

     The Company's marketing strategy includes targeted advertising in industry
trade publications, direct mailings, hosting regionally-based sales events,
exhibiting in key industry shows, exploiting its web site presence, leveraging
business partnership relationships, as well as utilizing customer testimonials
to generate new sales leads. The Company also intends to offer incentives to
Cascade's customers for use of the Company's transcription services.

COMPETITION

     The Company experiences competition from many local, and several regional
and national businesses. The medical transcription services market, estimated to
be over $6 billion, is highly fragmented, with over 1,000 transcription
companies nationally. Recently, the medical transcription industry in the United
States has experienced overseas competition, primarily from India due to its
low-wage workforce. The Company believes that its top three domestic competitors
are MedQuist, Inc., the EDiX division of IDX Systems Corporation and
HealthScribe, Inc. Over the past several years, the medical transcription
industry has been undergoing consolidation by MedQuist, Inc. and others.

     The outsourcing decision in transcription is influenced by shortages of
qualified medical transcriptionists, by the unique management challenges of
managing a 7 by 24 operation and by technology advances which allow
transcription companies to leverage technology and eliminate capital
expenditures for their customers. The Company believes the principal historical
competitive factors of price and quality (timeliness and accuracy) will expand
as major transcription companies use technology to increase the value of
transcription services. Management believes the ability to recruit personnel
nationally and internationally, coupled with the use of Internet communications,
will lead to further outsourcing and only those competitors prepared to compete
using resources outside the local market will prosper.

     Competition for Cascade's software products comes primarily from the market
leader, 3M's Health Care division, HSS, Inc. and QuadraMed Corporation.
Competition for transcription software comes largely from SoftMed Systems, Inc.
with their Chartscript product.

GOVERNMENT REGULATION

     Virtually all aspects of the practice of medicine and the provision of
healthcare services are regulated by federal or state

                                       6

<PAGE>

statutes and regulations, by rules and regulations of state medical boards and
state and local boards of health, and by codes established by various medical
associations. The Company has attempted to structure its operations to comply
with these regulations. The Company is not presently subject to direct
regulation as an outsourcing services and software provider. Future government
regulation of the practice of medicine and the provision of healthcare services
and software may impact the Company and required restructuring of its operations
in order to comply with such regulations.

EMPLOYEES

     As of December 31, 2001, the Company had 239 full-time and 53 part-time
employees, including 211 full-time and 50 part-time employees dedicated to the
medical transcription business; 21 full-time and 2 part-time Cascade employees;
and 7 full-time and 1 part-time executive, accounting and administrative
employees at its headquarters office in Atlanta, Georgia. Neither the Company
nor any of its employees is currently a party to any collective bargaining
agreement. The Company has not experienced any strikes or work stoppages, and
believes that its relations with its employees are good.

ITEM 2.  PROPERTIES.

     The Company leases the space for its principal offices in Atlanta, Georgia.
Cascade Health Information Software, Inc. leases space for its principal office
in Beaverton, Oregon. The Company also leases space in Chicago, Illinois where
it has closed and consolidated its transcription operations into the Atlanta
hub. The leased space in Chicago, Illinois is subleased through its expiration
date in September 2002.

ITEM 3.  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 19/th/ Judicial
District Court, Parish of East, 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. OLOL is seeking an unspecified amount of monetary
damages. 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. OLOL has subsequently added Transcend's insurance
carrier as defendants to the lawsuit.

     The Company intends to vigorously defend all claims made by OLOL. The
lawsuit is in a very early procedural stage, however, and therefore it is not
possible at this time to determine the outcome of the actions or the effect, if
any, that their 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 adverse effect on the Company's results of operations and
financial condition.

     On July 9, 2001, Provider HealthNet Services, Inc. ("PHNS") made a written
demand for payment from Transcend in the amount of approximately $750,000. The
demand was based on allegations that Transcend had breached certain
representations and warranties contained in an Asset Purchase Agreement between
PHNS and Transcend entered into on October 13, 2000. Thereafter, Transcend made
a counter-demand against PHNS for payment of approximately $93,000 owed under
that same Asset Purchase Agreement. The parties have subsequently submitted all
disputes in this matter to binding arbitration, which was held on January 23 and
24, 2002. The results of this arbitration have not been finalized and it is not
possible at this time to determine the outcome of this arbitration 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 adverse effect on the Company's results of operations and
financial condition.

     On September 14, 2001, the Company filed a lawsuit against Palmer & Cay
Consulting Group, Inc. ("P&C"), the Company's former insurance broker. The
lawsuit, styled "Transcend Services, Inc. v. Palmer & Cay Consulting Group,
Inc." was filed in the Superior Court of Fulton County, State of Georgia, Civil
Action File No.: 2001-CV-42725. The lawsuit alleges that P&C negligently failed
to advise Transcend of, or otherwise failed to make arrangements to cover,
Transcend's potential liability for certain health care claims submitted by
Transcend's employees. Transcend is seeking damages of $450,000 plus attorneys'
fees and interest. The case is in the preliminary stages of discovery and it is
not possible at this time to determine an outcome of the lawsuit or the effect,
if any, that the outcome may have on the Company's results of operations and
financial condition.

     In addition, the Company is a party to various lawsuits encountered in the
normal course of business and believes that it has meritorious defenses to the
related claims and assertions, however, there can be no assurance that the
Company will be successful in defending such claims and assertions.

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ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matters were submitted to a vote of the security holders during the
quarter ended December 31, 2001.

                                     PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

       Transcend Common Stock is quoted on the Nasdaq SmallCap Market under the
symbol "TRCR". As of February 15, 2002 there were approximately 182 holders of
record of Transcend Common Stock. The table below sets forth for the fiscal
periods indicated the high and low closing sales price per share of Transcend
Common Stock as reported on the Nasdaq SmallCap Market for the periods
indicated. The prices have been adjusted, as appropriate, to give effect to the
1-for-5 reverse stock split that was effected on January 14, 2000. These
quotations also reflect inter-dealer prices without retail mark-ups, mark-downs,
or commissions, and may not necessarily represent actual transactions.

                                                    Price Per Share of
                                                       Common Stock
                                                       ------------
                                                    High          Low
                                                    ----          ---
Year Ended December 31, 2001
    First Quarter ..............................   $2.813       $1.344
    Second Quarter .............................   $2.820       $2.063
    Third Quarter ..............................   $2.650       $1.300
    Fourth Quarter .............................   $1.810       $1.100

Year Ended December 31, 2000
    First Quarter ..............................   $ 4.813      $ 2.313
    Second Quarter .............................   $ 3.500      $ 2.313
    Third Quarter ..............................   $ 4.188      $ 2.703
    Fourth Quarter .............................   $ 3.813      $ 1.344

DIVIDEND POLICY

       The policy of the Board of Directors (the "Board") of the Company is to
retain earnings for the expansion and development of the Company's business and
the Board does not anticipate paying cash dividends on the Common Stock in the
foreseeable future. Future dividend policy and the payment of dividends, if any,
will be determined by the Board in light of circumstances in existence,
including among other things, future earnings, operations, capital requirements,
contractual restrictions, the general financial condition of the Company,
general business conditions and other factors deemed relevant by the Board.

RECENT SALES OF UNREGISTERED SECURITIES

       On December 28, 2001, the Company sold 100,000 shares of its unregistered
common stock to certain of the Company's officers at market value of $126,000 as
determined by the closing price reported on the Nasdaq SmallCap Market System on
that date. As consideration for the sale, the officers issued interest-bearing,
secured promissory notes payable to the Company with a maturity date of January
15, 2003. The issuance of securities described above was made in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act of
1933 as a transaction by an issuer not involving a public offering. The
securities were acquired by the recipients thereof for investment and with no
view toward the resale or distribution thereof. The offers and sales of the
above securities were made without any public solicitation and the stock
certificates bear restrictive legends. No underwriting was involved in the
transaction and no commissions were paid.

ITEM 6.   SELECTED FINANCIAL DATA

       The following table sets forth selected consolidated financial data of
the Company for the periods indicated, which data has been derived from the
Company's consolidated financial statements. The report of Miller Ray & Houser,
independent public accountants, with respect to such consolidated financial
statements as of December 31, 2001 and for the year ended December 31, 2001 is
included in Item 8. In addition, the report of Arthur Andersen LLP, independent
public accountants, with respect to such consolidated financial statements as of
December 31, 2000 and for the two years ended December 31, 2000 is also included
in Item 8. This selected financial data should be read in conjunction with the
consolidated financial statements, related notes, and other financial
information included and incorporated by reference herein.

                                       8

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Selected Financial Data
(in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                  1997         1998          1999           2000          2001
-----------------------------------------------------------------------------------------------------------------------------------
Results of Operations: (1) (2) (3)
<S>                                                               <C>          <C>           <C>            <C>          <C>
Revenue                                                           $41,552      $53,314       $ 49,515       $26,262      $13,785
-----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations                                        (189)         964         (7,975)         (840)        (663)
-----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before discontinued operations                         (622)         382         (3,056)         (710)        (588)
-----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before discontinued operations per common           $ (0.17)     $ (0.03)      $  (0.81)      $ (0.27)     $ (0.24)
share
Basic and diluted weighted average shares of common stock
(3)                                                                 4,056        4,224          4,386         4,341        4,404

Financial Position At Year End:
Total assets                                                      $20,294      $22,896       $ 17,892       $ 5,679      $ 3,591
Total debt                                                        $ 7,091      $ 8,536       $  7,026       $   614      $    --
Stockholder's equity                                              $ 7,913      $ 7,512       $  2,568       $ 2,176      $ 2,009
----------
</TABLE>

(1)  The Company has completed several acquisitions and divestitures that could
     affect the comparability of the information reflected in the table. See
     Note 11 of Notes to Consolidated Financial Statements.
(2)  Certain prior year results have been reclassified both to income (loss)
     from discontinued operations and from income (loss) from discontinued
     operations, as appropriate, for comparative purposes. See Notes 1 and 2 of
     Notes to Consolidated Financial Statements.
(3)  Basic and diluted weighted average shares of common stock have been
     restated to show the effects of the 1-for-5 reverse stock split effected on
     January 14, 2000.

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

       This Report contains forward-looking statements that involve a number of
risks and uncertainties. Among the important factors that could cause actual
results to differ materially from those indicated by such forward-looking
statements are competitive pressures, the mix of service revenue, changes in
pricing policies, delays in sales revenue recognition, lower-than-expected
demand for the Company's products and services, business conditions in the
integrated health care delivery network market, general economic conditions, and
the risk factors detailed from time to time in the Company's periodic reports
and registration statements filed with the Securities and Exchange Commission.

       The following discussion should be read in conjunction with the
consolidated financial statements of the Company, including the notes thereto,
contained elsewhere in this Report.

OVERVIEW

       Transcend Services, Inc. ("the Company") provides medical transcription
services and coding and abstracting software to the healthcare industry. Powered
by its web-based voice and data distribution technology, the Company's
home-based medical transcription professionals document patient care by
converting physician's voice recordings into electronic medical record
documents. The Company's wholly owned subsidiary, Cascade Health Information
Software, Inc. ("Cascade"), provides state-of-the-art software for the coding
and abstracting of patient medical records. On October 13, 2000, the Company
sold both its remote coding business ("CodeRemote"), which helped healthcare
providers code their medical records, and its facility management business
("Co-Sourcing"), which provided on-site management of hospital medical records
operations. Transcend Case Management, Inc. ("TCM"), a wholly owned subsidiary
that provided case management services to insurance carriers and others, ceased
operations and is presented as discontinued operations in 1999.

RESULTS OF OPERATIONS

       The results of operations include the operations of Transcend Services,
Inc. and its subsidiaries. The information for 1999 is presented both including
and excluding the effect of certain non-recurring charges ("NRC") incurred in
December 1999 pursuant to a restructuring of operations. The Co-Sourcing and
CodeRemote businesses were sold on October 13, 2000 and the results of their
operations are not included in the information presented below after that date.

                                       9

<PAGE>

<TABLE>
<CAPTION>

            (in 000's)                                                                                             Percent Change
                                                                                        1999                       --------------
                                                                    ----------------------------------------------
                                                                    Including         Effect of       Excluding               2000
                                     2001            2000              NRC               NRC             NRC       2001      w/o NRC
                                     ----            ----              ---               ---             ---       ----      -------
<S>                                  <C>             <C>            <C>               <C>             <C>          <C>       <C>
Revenue:
    Transcription Services             $11,817         $13,666         $24,085                        $24,085       -14%       -43%
    Cascade                              1,968           2,255           2,234                          2,234       -13%         1%
    Co-Sourcing                                          9,678          22,868            (76)         22,792      -100%       -58%
    Code-Remote                                            663             328                            328      -100%       102%
                                    --------------------------------------------------------------------------
                      Total revenue    $13,785          26,262          49,515            (76)         49,439       -48%       -47%
                                    --------------------------------------------------------------------------
Gross profit:
    Transcription Services               2,939           2,128             599          1,310           1,909        38%        11%
    Cascade                              1,000           1,416           1,431                          1,431       -29%        -1%
    Co-Sourcing                                          1,179           1,377          1,120           2,497      -100%       -53%
    Code-Remote                                             54               0                              0      -100%        N/A
                                    --------------------------------------------------------------------------
                 Total gross profit      3,939           4,777           3,407          2,430           5,837       -18%       -18%
                                    --------------------------------------------------------------------------
Operating expenses:
    Marketing and sales                    852             936           2,107            (17)          2,090        -9%       -55%
    Research and development               870           1,152           1,733         (1,025)            708       -24%        63%
    General and administrative           2,880           3,470           7,369         (2,072)          5,297       -17%       -34%
    Amortization                                            59             173                            173      -100%       -66%
                                    --------------------------------------------------------------------------
           Total operating expenses      4,602           5,617          11,382         (3,114)          8,268       -18%       -32%
                                    --------------------------------------------------------------------------
Loss from operations                   $  (663)        $  (840)        $(7,975)        $5,544         $(2,431)      -21%       -65%
                                    ==========================================================================
</TABLE>

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

       Revenue decreased $12.5 million, or 48%, from $26.3 million in 2000 to
$13.8 million in 2001. This decrease is attributable to several factors: (1) The
Co-Sourcing and CodeRemote businesses that were sold on October 13, 2000
contributed revenue of $10.3 million in 2000. (2) Transcription Services revenue
declined $1.8 million, or 14%, to $11.8 million in 2001 compared to 2000 as a
result of the Company's restructuring activities in late 1999 and 2000. At that
time, the Company determined that it was not prudent to convert certain
transcription customer accounts to its T2K technology. The Transcription
Services revenue of $13.7 million in 2000 includes revenue of $2.3 million from
11 transcription service agreements that were terminated by the Company during
2000. Accordingly, Transcription Services revenue attributable to current
customers increased approximately $500,000 in 2001. (3) Cascade's revenue
decreased $287,000, or 13%, to $2.0 million in 2001 compared to 2000 due
primarily to relatively low software revenue generated from new customer
accounts during 2001.

       While gross profit decreased $838,000, or 18%, from $4.8 million in 2000
to $3.9 million in 2001, gross profit as a percentage of revenue increased from
18% in 2000 to 29% in 2001. The decrease in the dollar amount of gross profit is
primarily attributable to the sale of the Co-Sourcing and CodeRemote business
units, which contributed gross profit of $1.2 million in 2000. In addition,
Cascade's gross profit decreased by $416,000 in 2001 compared to 2000 due
primarily to the lower level of high-gross margin software revenue in 2001
compared to 2000. Partially offsetting the reduced gross profit contributions by
these three business units was an increase in Transcription Services' gross
profit by $811,000 due in large part to the restructuring activity referred to
above. Accordingly, as a percentage of revenue, while Cascade's gross profit
margin dropped from 63% in 2000 to 51% in 2001, Transcription Services' gross
profit margin increased from 16% in 2000 to 25% in 2001. A software business,
like Cascade, typically has a higher gross profit margin as a percentage of
revenue, than a service business, like Transcription Services.

       Marketing and sales expenses decreased $84,000, or 9%, from $936,000 in
2000 to $852,000 in 2001, but increased as a percentage of revenue from 4% in
2000 to 6% in 2001. The Company revamped and reduced the size of its
Transcription Services' sales force following the sale of the Co-Sourcing and
CodeRemote business units. The size of Cascade's sales force was substantially
the same between years.

       Research and development expenses decreased $282,000, or 24%, from $1.2
million in 2000 to $870,000 in 2001, but increased as a percentage of revenue
from 4% in 2000 to 6% in 2001. As a result of the completion of the T2K
development project and the sale of the Co-Sourcing and CodeRemote business
units, the Company revamped and reduced the size of its research and development
staff in Transcription Services during 2000. The size of Cascade's research and
development staff was substantially

                                       10

<PAGE>

the same between years. The Company believes that the current size of its
research and development staff is sufficient to accomplish its planned research
and development activities for the foreseeable future.

       General and administrative expenses decreased $590,000, or 17%, from $3.5
million in 2000 to $2.9 million in 2001 as the Company substantially reduced its
infrastructure expense required to handle its lower level of operating activity
and revenue.

       Amortization expense was reduced from $59,000 in 2000 to zero in 2001 as
a result of the write-off of the remaining net book value of goodwill and other
intangible assets pursuant to the sale of the Company's Co-Sourcing and
CodeRemote business units in 2000.

       Net interest expense decreased from $420,000 in 2000 to $18,000 in 2001
due to: (1) the reduction of debt using a portion of the proceeds from the sale
the Co-Sourcing and CodeRemote business units during October 2000; (2) the
reduction of debt using a portion of the proceeds from the sale of the
short-term investment during April 2001 (see Note 1 in "Notes to Consolidated
Financial Statements"); (3) the elimination of debt using a portion of the
proceeds received during December 2001 from the collection of a note receivable
and an earn-out payment both of which related to an asset sale in 1999; (4) the
recognition of interest income of approximately $43,000 during the third quarter
of 2001 upon the Company's determination of its ultimate collectibility; (5) the
nationwide reduction in the prime interest rate; and (6) the below-prime
borrowing rate on the Company's line of credit made possible by the personal
guarantees of the Company's Chief Executive Officer and one of its Directors.

       Both the loss and gain on legal settlement in 2001 and 2000,
respectively, relate to a legal settlement on TCM. The Company ceased TCM's
operations effective December 31, 1999. The reported gain on legal settlement of
$461,000 in 2000 represents the excess of the $1.7 million arbitration award
over the Company's cost incurred related to the reacquisition and subsequent
closing of the Company's TCM operations. The reported loss on legal settlement
of $576,000 in 2001 represents the realized loss on the sale of the unregistered
common stock received in this legal settlement.

       The gain on sale of assets represents an earn-out payment related to the
sale of the Company's Utah and Northeast-based medical transcription services
operations and certain other contracts for transcription services in December
1999.

       The Company reported an income tax benefit of $116,000 in 2001 due to the
elimination of deferred income tax liabilities of $121,000 established in prior
years that are no longer required, offset slightly by state income taxes of
$5,000. The Company has available net operating loss carry-forwards in excess of
approximately $21 million.

       In November 1997, the Company issued 212,800 shares of Series A
Convertible Preferred Stock with a dividend of 9%. The net loss to common
stockholders includes preferred stock dividends of $479,000 and $478,000 in 2001
and 2000, respectively.

Year Ended December 31, 2000 Compared to Year Ended December 31, 1999

        Revenue decreased $23.2 million, or 47%, from $49.5 million in 1999 to
$26.3 million in 2000. This decrease is attributable to several factors: (1) The
Co-Sourcing and CodeRemote business units were sold on October 13, 2000. The
combined monthly revenue of these business units averaged approximately $2.2
million in 2000 prior to the sale. Based on this average combined monthly
revenue, approximately $5.5 million of the revenue decrease in 2000 is
attributable to this sale. (2) The remainder of the total $13 million decrease
in Co-Sourcing revenue is primarily attributable to the Company terminating
certain unprofitable and marginally profitable contracts and converting some
Co-Sourcing contracts to "transcription only" services during 1999 and 2000. (3)
During the fourth quarter of 1999, the Company terminated 21 transcription
contracts with annual revenue of approximately $3.3 million after determining
that the conversion of those accounts to the Company's new technology was not
prudent. (4) In November 1999, the Company sold four transcription contracts
with annual revenue of approximately $1.4 million. (5) Effective December 1,
1999, the Company sold its Utah and Northeast transcription operations with
combined annual revenue of approximately $6.1 million.

       All of the Company's transcription operations were converted to the
Company's standard technology platform as of December 31, 1999.

       Cascade's revenue increased slightly to $2.3 million in 2000 from $2.2
million in 1999, however approximately $150,000 of contracted business was
deferred for revenue recognition purposes until 2001.

       CodeRemote's revenue increased 102% in 2000, which represents an increase
of $335,000 relative to 1999, when it commenced operations during April 1999.


                                       11

<PAGE>

     As a result of the Company's restructuring efforts in the latter part of
1999, all of the business units, except Cascade, reported improved gross profit
as a percentage of revenue in 2000. The gross profit as a percentage of revenue
for the transcription business improved to 16% in 2000 from 2% (including the
NRC) and 8% (excluding the NRC) in 1999. Cascade's gross profit as a percentage
of revenue dropped slightly to 63% in 2000 from 64% in 1999. The gross profit as
a percentage of revenue for Co-Sourcing improved to 12% in 2000 from 6%
(including the NRC) and 11% (excluding the NRC) in 1999. As discussed above,
CodeRemote was a start-up operation in 1999. CodeRemote improved its gross
profit as a percentage of revenue to 8% in 2000 from breakeven in 1999.

     Marketing and sales expenses decreased $1.2 million, or 56%, from $2.1
million in 1999 to $936,000 in 2000. This decrease is due to the reduction in
sales staffing associated with the Company's restructuring of its operations to
focus on medical transcription services and coding and abstracting software.

     Research and development expenses decreased $581,000, or 34%, from $1.7
million in 1999 to $1.2 million in 2000 primarily due to the overall
restructuring efforts by the Company in the latter part of 1999, which resulted
in a non-recurring charge related to research and development activities of
approximately $1.0 million in 1999.

     General and administrative expenses decreased $3.9 million, or 53%, from
$7.4 million in 1999 to $3.5 million in 2000 due primarily to the overall
restructuring efforts by the Company in the latter part of 1999, which resulted
in a non-recurring charge related to general and administrative activities of
approximately $2.1 million in 1999.

     Amortization expense decreased to from $173,000 in 1999 to $59,000 in 2000
reflecting the effect of the sale of the Utah and Northeast transcription
operations in December 1999.

     Net interest expense decreased from $855,000 in 1999 to $420,000 in 2000
primarily due to the reduced level of borrowing made possible by the issuance of
the Series B Convertible Preferred Stock, which eliminated $1.5 million of debt
bearing interest at 10% per annum, and the retirement of certain debt with a
portion of the proceeds from the sale of certain transcription operations in
late 1999 and from the sale of the Co-Sourcing and CodeRemote business units
during October 2000.

     The gain on legal settlement of $461,000 in 2000 represents the excess of
the $1.7 million arbitration award over the Company's costs incurred related to
the reacquisition and subsequent closing of the Company's TCM operations.

     The gain on sale of assets of $89,000 in 2000 represents the gain on the
sale of the Co-Sourcing and CodeRemote business units to Provider HealthNet
Services, Inc. ("PHNS") on October 13, 2000. The gain on sale of assets of $5.8
million in 1999 resulted from the sale of net assets and contracts of the Utah
and Northeast-based transcription services.

     The Company reported a loss before income taxes and discontinued operations
of $710,000 in 2000 compared to a loss of $3.1 million in 1999. This improvement
of $2.3 million reflects the results of the Company's restructuring efforts
during the latter part of 1999 that are manifested in higher gross profit
margins and reduced operating expenses.

     The loss from discontinued operations of $1.5 million in 1999 was primarily
due to non-recurring charges of $1.3 million in connection with the settlement
of the civil lawsuit against certain insurance companies in the state of
California that was settled in December 1999.

     In November 1997, the Company issued 212,800 shares of Series A Convertible
Preferred Stock with a dividend of 9%. The net loss to common stockholders
includes preferred stock dividends of $478,000 and $480,000 in 2000 and 1999,
respectively.

LIQUIDITY AND CAPITAL RESOURCES

     As of December 31, 2001, the Company has cash and cash equivalents of
$304,000, working capital of $221,000, no long-term debt outstanding and no
borrowings under its $1.5 million line of credit, which expires on March 31,
2002, but is expected to be renewed.

     Net cash provided by continuing operations totaled approximately $1.5
million in 2001 due primarily to the receipt of approximately $1.2 million from
the sale of the common stock of CORE, Inc. that was received in a legal
settlement related to TCM in 2000. In addition, the Company operated on an
EBITDA positive basis and effectively managing its working capital, especially
the collection of accounts receivable.

     Net cash used in investing activities of $110,000 in 2001 includes the
budgeted level of capital expenditures to support

                                       12

<PAGE>

operations offset somewhat by the proceeds of an earn-out payment related to an
asset sale in 1999.

     Net cash used in financing activities of $1.1 million in 2001 is primarily
due to the elimination of debt and the scheduled quarterly payments of Preferred
Stock dividends.

     The Company is a defendant in separate litigation matters with PHNS and
OLOL. See "Item 3. Legal Proceedings". The outcome of the binding arbitration in
the PHNS matter should be determined during the first quarter of 2002. It is
unlikely that the outcome of the OLOL matter will be known in 2002. Further, if
the OLOL outcome were unfavorable, the Company would most likely appeal the
verdict. Nonetheless, the PHNS and the OLOL legal actions could have a material
adverse effect on the Company's results of operations and financial condition in
the future.

     The Company anticipates that cash on hand, together with internally
generated funds and cash available under its line of credit should be sufficient
to finance operations, make capital investments in the normal and ordinary
course of business, meet its Series A Preferred Stock dividend payment
requirements and fund any award, if any, resulting from the arbitration with
PHNS during 2002.

IMPACT OF INFLATION

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     The Company has no material exposure to market risk from derivatives or
other financial instruments as of December 31, 2001.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The following financial statements are filed with this report:

     Reports of Independent Public Accountants

     Consolidated Balance Sheets as of December 31, 2001 and 2000

     Consolidated Statements of Operations for the years ended December 31,
2001, 2000 and 1999

     Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2001, 2000 and 1999

     Consolidated Statements of Cash Flows for the years ended December 31,
2001, 2000 and 1999

     Notes to Consolidated Financial Statements

                                       13

<PAGE>

REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS

To Transcend Services, Inc.:

We have audited the accompanying consolidated balance sheet of Transcend
Services, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2001
and the related consolidated statements of operations, stockholders' equity, and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Transcend Services, Inc. and
subsidiaries as of December 31, 2001 and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States.


/s/ Miller Ray & Houser LLP

Atlanta, Georgia
January 24, 2002




To Transcend Services, Inc.:

We have audited the accompanying consolidated balance sheet of Transcend
Services, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2000
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the two years in the period ended December 31, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Transcend Services, Inc. and
subsidiaries as of December 31, 2000 and the results of their operations and
their cash flows for each of the two years in the period ended December 31, 2000
in conformity with accounting principles generally accepted in the United
States.


/s/ Arthur Andersen LLP

Atlanta, Georgia
February 27, 2001, except with respect to
                   Note 4, as to which the
                   date is March 30, 2001

                                       14

<PAGE>

                            TRANSCEND SERVICES, INC.

                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                                         December 31,
                                                                                            ---------------------------------------
                                          ASSETS                                                   2001                2000
                                                                                                   ----                ----
<S>                                                                                         <C>                   <C>
Current assets:
    Cash and cash equivalents                                                                        $    304,000      $      6,000
    Short-term investment                                                                                      --           870,000
    Accounts receivable, net of allowances for doubtful accounts of $89,000 and $542,000
        at December 31, 2001 and 2000, respectively                                                     1,351,000         1,974,000
    Prepaid expenses and other current assets                                                             148,000           165,000
                                                                                                     ------------      ------------
Total current assets                                                                                    1,803,000         3,015,000
                                                                                                     ------------      ------------

Property and equipment:
    Computer equipment                                                                                  3,346,000         2,975,000
    Software development                                                                                1,787,000         1,550,000
    Furniture and fixtures                                                                                275,000           220,000
                                                                                                     ------------      ------------
            Total property and equipment                                                                5,408,000         4,745,000
    Accumulated depreciation                                                                           (3,667,000)       (2,487,000)
                                                                                                     ------------      ------------
        Property and equipment, net                                                                     1,741,000         2,258,000
                                                                                                     ------------      ------------

Notes receivable and other assets                                                                          47,000           406,000
                                                                                                     ------------      ------------
Total assets                                                                                         $  3,591,000      $  5,679,000
                                                                                                     ============      ============

                           LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Accounts payable                                                                                 $    180,000      $  1,059,000
    Accrued compensation and benefits                                                                     350,000           399,000
    Other accrued liabilities                                                                           1,052,000         1,310,000
    Deferred income taxes                                                                                      --           121,000
                                                                                                     ------------      ------------
Total current liabilities                                                                               1,582,000         2,889,000
                                                                                                     ------------      ------------

Borrowings under line of credit                                                                                --           614,000
                                                                                                     ------------      ------------

Commitments and contingencies (Note 5)

Stockholders' equity:
    Preferred stock, $.01 par value; 21,000,000 shares authorized:
         Series A Convertible Preferred Stock, 212,800 shares issued and outstanding at
              December 31, 2001 and 2000                                                                    2,000             2,000
         Series B Convertible Preferred Stock, 60,000 shares issued and outstanding at
              December 31, 2001 and 2000                                                                    1,000             1,000
    Common stock, $.05 par value, 6,000,000 shares authorized, 4,513,000 and 4,383,000
         shares issued and outstanding at December 31, 2001 and 2000, respectively                        230,000           224,000
    Additional paid-in capital                                                                         28,136,000        28,602,000
    Less - Subscription receivable for the purchase of 100,000 shares of common stock                    (126,000)               --
    Less - Treasury stock, at cost, 100,000 shares                                                             --          (620,000)
    Unrealized loss on short-term investment                                                                   --          (866,000)
    Accumulated deficit                                                                               (26,234,000)      (25,167,000)
                                                                                                     ------------      ------------
            Total stockholders' equity                                                                  2,009,000         2,176,000
                                                                                                     ------------      ------------
Total liabilities and stockholders' equity                                                           $  3,591,000      $  5,679,000
                                                                                                     ============      ============
</TABLE>

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

                                       15

<PAGE>

                            TRANSCEND SERVICES, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>

                                                                                              YEARS ENDED DECEMBER 31,
                                                                                 ---------------------------------------------------
                                                                                       2001              2000               1999
                                                                                       ----              ----               ----
<S>                                                                              <C>                <C>                <C>
Revenue                                                                          $ 13,785,000       $ 26,262,000       $ 49,515,000
Direct costs                                                                        9,846,000         21,485,000         46,108,000
                                                                                 --------------------------------------------------
      Gross profit                                                                  3,939,000          4,777,000          3,407,000
                                                                                 --------------------------------------------------

Operating expenses:
      Marketing and sales                                                             852,000            936,000          2,107,000
      Research and development                                                        870,000          1,152,000          1,733,000
      General and administrative                                                    2,880,000          3,529,000          7,542,000
                                                                                 --------------------------------------------------
         Total operating expenses                                                   4,602,000          5,617,000         11,382,000
                                                                                 --------------------------------------------------

Loss from operations                                                                 (663,000)          (840,000)        (7,975,000)
                                                                                 --------------------------------------------------

Other (expense) income:
      Interest expense, net                                                           (18,000)          (420,000)          (855,000)
      (Loss) gain on legal settlement                                                (576,000)           461,000                 --
      Gain on sale of assets                                                          553,000             89,000          5,774,000
                                                                                 --------------------------------------------------
         Total other (expense) income                                                 (41,000)           130,000          4,919,000
                                                                                 --------------------------------------------------

Loss before income taxes and discontinued operations                                 (704,000)          (710,000)        (3,056,000)
Income tax benefit                                                                    116,000                 --                 --
                                                                                 --------------------------------------------------
Loss before discontinued operations                                                  (588,000)          (710,000)        (3,056,000)
Loss from discontinued operations                                                          --                 --         (1,452,000)
                                                                                 --------------------------------------------------
Net loss                                                                             (588,000)          (710,000)        (4,508,000)
Dividends on preferred stock                                                         (479,000)          (478,000)          (480,000)
                                                                                 --------------------------------------------------
Net loss attributable to common stockholders                                     $ (1,067,000)      $ (1,188,000)      $ (4,988,000)
                                                                                 ==================================================

Basic and diluted net loss per share:
      From continuing operations                                                 $      (0.24)      $      (0.27)      $      (0.81)
      From discontinued operations
                                                                                         0.00               0.00              (0.33)
                                                                                 --------------------------------------------------
            Net loss per share attributable to common stockholders               $      (0.24)      $      (0.27)      $      (1.14)
                                                                                 ==================================================

Weighted average common shares outstanding                                          4,404,000          4,341,000          4,386,000
                                                                                 ==================================================
</TABLE>

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


                                       16

<PAGE>

                            TRANSCEND SERVICES, INC.

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                                          UNREALIZED
                                                                               ADDITIONAL                   LOSS ON
                                   PREFERRED STOCK      COMMON     TREASURY     PAID-IN    SUBSCRIPTION   SHORT-TERM
                                ---------------------
                                 SERIES A   SERIES B    STOCK       STOCK       CAPITAL     RECEIVABLE    INVESTMENT
                                 --------   --------    -----       -----       -------     ----------    ----------
<S>                             <C>         <C>        <C>        <C>         <C>           <C>           <C>
Balance, December 31, 1998        $2,000      $   --   $215,000   $      --   $26,286,000   $      --     $      --
Issuance of 100,000 shares of
   Common Stock in private
   placement                          --          --      5,000          --       620,000    (620,000)           --
Treasury Stock purchases              --          --         --    (620,000)           --     620,000            --
Issuance of 11,670 shares of
   Common Stock from exercise
   of options and other
   issuances                          --          --         --          --        39,000          --            --
Net loss attributable to common
   stockholders                       --          --         --          --            --          --            --
                                ---------------------------------------------------------------------------------------
Balance, December 31, 1999         2,000          --    220,000    (620,000)   26,945,000          --            --
Comprehensive loss:
   Net loss attributable to
   common stockholders                --          --         --          --            --          --            --
   Unrealized loss on
   short-term investment              --          --         --          --            --          --      (866,000)

       Comprehensive loss             --          --         --          --            --          --            --

Conversion of convertible debt
   to Preferred Stock                 --       1,000         --          --     1,499,000          --            --
Issuance of 27,900 shares
   of Common Stock from
   exercise of options                --          --      4,000          --       158,000          --            --
                                ---------------------------------------------------------------------------------------
Balance, December 31, 2000         2,000       1,000    224,000    (620,000)   28,602,000          --      (866,000)
Comprehensive loss:
   Net loss attributable
   to common stockholders             --          --         --          --            --          --            --
   Reverse valuation reserve
   on short-term investment           --          --         --          --            --          --       866,000

       Comprehensive loss             --          --         --          --            --          --            --

Issuance of 100,000 shares of
   Common Stock in private
   placement                          --          --      5,000          --       121,000    (126,000)           --
Issuance of 40,000 shares of
   Common Stock from exercise
   of options and other issuance      --          --      1,000          --        33,000          --            --
Retirement of Treasury Stock          --          --         --     620,000      (620,000)         --            --
                                ---------------------------------------------------------------------------------------
Balance, December 31, 2001        $2,000      $1,000   $230,000   $      --   $28,136,000   $(126,000)    $      --
                                =======================================================================================

<CAPTION>
                                 ACCUMULATED   STOCKHOLDERS'    COMPREHENSIVE
                                   DEFICIT        EQUITY             LOSS
                                   -------        ------             ----
<S>                             <C>            <C>              <C>
Balance, December 31, 1998      $(18,991,000)   $ 7,512,000
Issuance of 100,000 shares of
   Common Stock in private
   placement                              --          5,000
Treasury Stock purchases                  --             --
Issuance of 11,670 shares of
   Common Stock from exercise
   of options and other
   issuances                              --         39,000
Net loss attributable to common
   stockholders                   (4,988,000)    (4,988,000)
                                ---------------------------
Balance, December 31, 1999       (23,979,000)     2,568,000
Comprehensive loss:
   Net loss attributable to
   common stockholders            (1,188,000)    (1,188,000)        $(1,188,000)
   Unrealized loss on
   short-term investment                  --       (866,000)           (866,000)
                                                              -----------------
       Comprehensive loss                 --             --         $(2,054,000)
                                                              =================
Conversion of convertible debt
   to Preferred Stock                     --      1,500,000
Issuance of 27,900 shares
   of Common Stock from
   exercise of options                    --        162,000
                                ---------------------------
Balance, December 31, 2000       (25,167,000)     2,176,000
Comprehensive loss:
   Net loss attributable
   to common stockholders         (1,067,000)    (1,067,000)        $(1,067,000)
   Reverse valuation reserve
   on short-term investment               --        866,000             866,000
                                                              -----------------
       Comprehensive loss                 --             --         $  (201,000)
                                                              =================
Issuance of 100,000 shares of
   Common Stock in private
   placement                              --             --
Issuance of 10,000 shares of
   Common Stock from exercise
   of options                             --         34,000
Retirement of Treasury Stock              --             --
                                ---------------------------
Balance, December 31, 2001      $(26,234,000)   $ 2,009,000
                                ===========================
</TABLE>

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

                                       17

<PAGE>

                            TRANSCEND SERVICES, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                                 YEARS ENDED DECEMBER 31,
                                                                                ----------------------------------------------------
                                                                                          2001              2000             1999
                                                                                          ----              ----             ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                                     <C>             <C>             <C>
Net loss attributable to common shareholders                                            $(1,067,000)    $(1,188,000)    $(4,988,000)
                                                                                ----------------------------------------------------
Adjustments to reconcile net loss to net cash provided by (used in) operating
   activities:
     Depreciation and amortization                                                        1,180,000       1,972,000       5,155,000
     Loss related to discontinued operations                                                     --              --       1,452,000
     Loss (gain) on legal settlement                                                        576,000        (461,000)             --
     Gain on sale of assets                                                                (553,000)        (89,000)     (5,774,000)
     Preferred Stock dividends                                                              479,000         478,000         480,000
Changes in assets and liabilities:
     Short-term investment                                                                1,160,000              --              --
     Accounts receivable, net                                                               623,000       2,687,000       1,670,000
     Prepaid expenses                                                                        17,000         108,000         632,000
     Notes receivable and other assets                                                      359,000         317,000         116,000
     Accounts payable                                                                      (879,000)     (1,118,000)       (449,000)
     Accrued liabilities                                                                   (428,000)     (5,566,000)      2,321,000
                                                                                        -------------------------------------------
Total adjustments                                                                         2,534,000      (1,672,000)      5,603,000
                                                                                        -------------------------------------------
Net cash provided by (used in) continuing operations                                      1,467,000      (2,860,000)        615,000
Net cash provided by discontinued operations                                                     --              --         914,000
                                                                                        -------------------------------------------
Net cash provided by (used in) operating activities                                       1,467,000      (2,860,000)      1,529,000
                                                                                        -------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
     Capital expenditures                                                                  (663,000)       (994,000)     (3,593,000)
     Proceeds from disposition of assets                                                    553,000       4,700,000       7,378,000
                                                                                        -------------------------------------------
Net cash (used in) provided by investing activities                                        (110,000)      3,706,000       3,785,000
                                                                                        -------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
     Borrowings from short-term debt                                                             --              --       1,500,000
     Repayments (borrowings) under line of credit agreement                                (614,000)        614,000      (2,740,000)
     Borrowings from long-term debt                                                              --              --         400,000
     Principal payments on long-term debt                                                        --      (5,526,000)       (100,000)
     Preferred Stock dividends                                                             (479,000)       (478,000)       (480,000)
     Proceeds from stock options and other issuances                                         34,000         162,000          44,000
                                                                                        -------------------------------------------
Net cash used in financing activities                                                    (1,059,000)     (5,228,000)     (1,376,000)
                                                                                        -------------------------------------------

Net change in cash and cash equivalents                                                     298,000      (4,382,000)      3,938,000
Cash and cash equivalents, at beginning of year                                               6,000       4,388,000         450,000
                                                                                        -------------------------------------------

Cash and cash equivalents, at end of year                                               $   304,000     $     6,000     $ 4,388,000
                                                                                        ===========================================

Supplemental cash flow information:
Cash paid for interest expense                                                          $    60,000     $   420,000     $   721,000
                                                                                        ===========================================

Noncash investing and financing activities:
       Receipt of secured promissory notes receivable for the issuance of
             Common Stock                                                               $   126,000     $        --     $        --
                                                                                        ===========================================
       Receipt of short-term investment in legal settlement                             $        --     $ 1,736,000     $        --
                                                                                        ===========================================
       Conversion of convertible notes payable to a related party to Series B
             Preferred Stock                                                            $        --     $ 1,500,000     $        --
                                                                                        ===========================================
</TABLE>

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


                                       18

<PAGE>

                            TRANSCEND SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2001, 2000 AND 1999

1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS

     Transcend Services, Inc. ("the Company") provides medical transcription
services and coding and abstracting software to the healthcare industry. Powered
by its web-based voice and data distribution technology, the Company's
home-based professionals document patient care by converting physician's voice
recordings into electronic medical record documents. The Company's subsidiary,
Cascade Health Information Software, Inc. ("Cascade"), provides state-of-the-art
software for the management of patient medical records.

     The Company has experienced operating losses as a result of decreasing
revenue over the past few years. The Company has divested certain business lines
(see Note 11) in an effort to return to profitability. Although the Company has
been able to arrange debt and equity financing to date, there can be no
assurance that sufficient debt or equity financing will continue to be available
in the future or that it will be available on terms acceptable to the Company.
Management believes that the Company is now positioned to achieve and sustain
profitability and positive cash flow.

BASIS OF PRESENTATION

     The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, Transcend Case Management, Inc. ("TCM") and
Cascade. The results of operations include the Company's Co-Sourcing and
CodeRemote businesses until their sale on October 13, 2000 (see Note 11). TCM is
presented as discontinued operations (see Note 2). On March 13, 2001, the
Company announced the termination of its efforts to sell Cascade, which had
previously been reported as discontinued operations in the Company's
consolidated financial statements, due to market conditions. All information
presented has been restated to show the reclassification of Cascade from
discontinued to continuing operations. All significant intercompany accounts and
transactions have been eliminated in consolidation. Common shares and per share
data have been restated to include the 1-for-5 reverse stock split effected by
the Company on January 14, 2000.

ACCOUNTING ESTIMATES

     The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the Company's financial statements and accompanying notes. Actual results could
differ from those estimates.

CASH AND CASH EQUIVALENTS

     All highly liquid investments purchased with an original maturity of three
months or less are classified as cash equivalents.

SHORT-TERM INVESTMENT

     The Company follows Financial Accounting Standards Board ("FASB") Statement
of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain
Investments in Debt and Equity Securities. SFAS No. 115 mandates that a
determination be made of the appropriate classification for debt and equity
securities with readily determinable fair value at the time of purchase and a
reevaluation of such designation as of each balance sheet date. The Company
considered its short-term investment, which consisted of unregistered common
stock of a publicly traded company acquired in a legal settlement effective
March 31, 2000, as "available for sale". The cost basis of this short-term
investment was approximately $1,736,000 and its fair market value was $870,000
as of December 31, 2000 resulting in an unrealized loss of $866,000 in 2000,
which is presented as a reduction of stockholders' equity in the accompanying
consolidated balance sheet as of that date. On April 2, 2001, the Company sold
this short-term investment for approximately $1,160,000, net of commission
expense of $10,000, resulting in a realized loss of approximately $576,000,
which is presented as the loss on legal settlement in the accompanying
consolidated statement of operations for the year ended December 31, 2001. The
valuation reserve of $866,000 that was established for this short-term
investment as of December 31, 2000 was reversed at the time of the sale
resulting in a net increase in stockholders' equity of approximately $290,000
during 2001 due to this sale.

                                       19

<PAGE>

ACCOUNTS RECEIVABLE

     Accounts receivable are recorded net of an allowance for doubtful accounts
established to provide for losses on uncollectible accounts based on
management's estimates and historical collection. The provisions for doubtful
accounts were $28,000, $67,000 and $1,018,000 in 2001, 2000 and 1999,
respectively. Charges for bad debts were $481,000, $244,000 and $608,000 in
2001, 2000 and 1999, respectively.

REVENUE AND COST RECOGNITION

     Service revenue includes system implementation, software support and
software maintenance fees. Implementation fee revenue is recognized as the work
is performed. Software support and maintenance revenue is recognized monthly
over the service period. Software license fee revenue is recognized in
accordance with Statement of Position ("SOP") 97-2, Software Revenue
Recognition, SOP 98-9, Software Revenue Recognition with Respect to Certain
Transactions and Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements. Accordingly, the Company recognizes software license fee
revenue when: (1) a software license agreement exists; (2) delivery and
installation have occurred; (3) the fee is fixed or determinable; and (4)
collectibility is probable. All service-related costs are expensed as incurred.

PROPERTY AND EQUIPMENT

     Property and equipment is stated at cost, less accumulated depreciation.
Charges for depreciation of capital assets are computed using the straight-line
method over their estimated useful lives, which range from three to five years,
and are included in direct costs and general and administrative expenses in the
accompanying consolidated statements of operations.

     All costs in the software development process that are classified as
research and development are expensed as incurred until technological
feasibility has been established. Once technological feasibility has been
established, such costs are considered for capitalization. The Company's policy
is to amortize these costs using the straight-line method over the remaining
estimated economic life of the product, not to exceed five years.

NOTES RECEIVABLE AND OTHER ASSETS

     Notes receivable relate to the sale of transcription services. Notes
receivable were approximately $357,000 at December 31, 2000. These notes
receivable and 7% accrued interest of approximately $43,000 thereon were
collected when due during December 2001. Other assets consist of deposits for
rented facilities in the approximate amounts of $47,000 and $49,000 at December
31, 2001 and 2000, respectively.

GOODWILL AND OTHER INTANGIBLE ASSETS

     Prior to 2000, goodwill and other intangible assets were amortized over
periods ranging from three to eighteen years. As a result of the sale of the
Company's Co-Sourcing and CodeRemote business units in 2000 (see Note 11), the
remaining net book value of such goodwill and other intangible assets were
written-off as the goodwill related to entities that were sold.

IMPAIRMENT

     The Company accounts for long-lived assets under the provisions of SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of. This Statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
cost to sell. In management's opinion, the long-lived assets are appropriately
valued in the accompanying balance sheets.

FAIR VALUE OF DEBT

     In accordance with SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments", the fair value of short-term debt is estimated to approximate its
carrying value. The fair value of long-term debt is estimated based on
approximate market interest rates for similar issues. The estimated fair value
of long-term debt at December 31, 2000 was equal to the carrying amount included
in the accompanying consolidated balance sheet.

                                       20

<PAGE>

STOCK BASED COMPENSATION

     In accordance with the provisions of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, the Company measures
stock-based compensation expense as the excess of the market price on date of
grant over the amount of the grant. Since the Company grants all stock-based
compensation at the market price on the date of grant, no compensation expense
is recognized. As permitted, the Company has elected to adopt only the
disclosure provisions of SFAS No. 123, Accounting for Stock-based Compensation
(see Note 9).

INCOME TAXES

     The Company accounts for its income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109. Deferred tax assets and
liabilities are recognized for the expected tax consequences of temporary
differences between the tax basis of assets and liabilities and their reported
amounts and for operating loss and tax credit carry-forwards.

NET INCOME (LOSS) PER SHARE

     The Company follows SFAS No. 128, "Earnings per Share." That statement
requires the disclosure of basic net income (loss) per share and diluted net
income (loss) per share. Basic net income (loss) per share is computed by
dividing net income (loss) available to common shareholders by the
weighted-average number of common shares outstanding during the period and does
not include any other potentially dilutive securities. Diluted net income (loss)
per share gives effect to all potentially dilutive securities. The Company's
convertible debentures, convertible preferred stock, stock options and stock
purchase warrants are potentially dilutive securities. All potentially dilutive
securities were antidilutive and therefore are not included in diluted net loss
per share calculations in 2001, 2000 and 1999.

COMPREHENSIVE LOSS

     The Company accounts for comprehensive loss under the provisions of SFAS
No. 130, Reporting Comprehensive Income. This statement establishes standards
for reporting and display of comprehensive loss and its components in a full set
of general purpose financial statements. The Company has chosen to disclose
comprehensive loss, which consists of an unrealized loss and a reversal of a
valuation reserve on a short-term investment, in the consolidated statements of
stockholders' equity.

CREDIT RISK

     The Company's accounts receivable potentially subject the Company to credit
risk, as collateral is generally not required. The Company's risk of loss is
limited due to the ability to terminate access on delinquent accounts. The
carrying amount of the Company's receivables approximates their fair values.

RECENT ACCOUNTING PRONOUNCEMENTS

     The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standard No. 141 ("SFAS 141"), regarding "Business
Combinations" in June 2001, SFAS 142 regarding "Goodwill and Other Intangible
Assets" in June 2001, SFAS 143 regarding "Accounting for Asset Retirement
Obligations" in June 2001 and SFAS 144 regarding "Accounting for the Impairment
or Disposal of Long-Lived Assets" in August 2001 (collectively, the
"Statements"). The provisions of the Statements became, or will become,
effective at various times in 2001 through 2003 and were, or will be, considered
and adopted, where and when applicable, by the Company at the appropriate time.
None of the applicable Statements had an effect on the results of operations or
financial position of the Company reported in the accompanying consolidated
financial statements as a result of said adoption.

2. DISCONTINUED OPERATIONS

     The net loss from discontinued operations of $1,452,000 in 1999 relates to
the operations of TCM and the Company's former subsidiaries, First Western
Health Corporation and Veritas Health Management ("Tricare Ops"), which ceased
operations as of April 30, 1993. The Company sold and reacquired TCM in 1998 and
reported revenue of $783,000 and a net loss of $32,000 for TCM in 1999 before
ceasing TCM's operations effective December 31, 1999. The net loss from Tricare
Ops of $1,420,000 in 1999 represents the net costs for legal proceedings
associated with the civil lawsuit filed by the Company against certain workers'
compensation insurance carriers. This lawsuit was settled for approximately $1.2
million on December 30, 1999.

                                       21

<PAGE>

3. NON-RECURRING ITEMS

     In December 1999, the Company recorded gains on the sale of certain
transcription operations and contracts of approximately $5.8 million (see Note
11), and charges from the restructuring of its operations, the write-off of
obsolete fixed assets, and other unusual charges totaling approximately $5.5
million, which are included in the appropriate operating expense accounts in the
consolidated statements of operations.

4. BORROWING ARRANGEMENTS

     Long-term debt of $614,000 as of December 31, 2000 represents borrowings
under the Company's current line of credit described below. There were no
borrowings under this line of credit as of December 31, 2001.

     In February 1999, the Company amended its credit facility agreement with
Coast Business Credit ("Coast"), a division of Southern Pacific Thrift and Loan
Association, to $10.0 million and extended the maturity date to May 31, 2001.
The agreement provided the Company with a $9.7 million working capital facility
and a $300,000 capital expenditure facility secured by substantially all of the
Company's assets. On November 21, 2000, this credit facility was terminated and
the then-current outstanding balance of approximately $1.8 million was paid in
full with a portion of the proceeds from the sale of the Co-Sourcing and
CodeRemote business units (see Note 11).

     On August 14, 2000, the Company entered into a bridge loan agreement with
each of the Company's Chief Executive Officer and one of the Company's Directors
to provide short-term capital to retire its convertible debentures, which
matured on August 15, 2000. The unsecured loans totaled $1,600,000, bore
interest at 10.75%, which approximated the Coast interest rate, and matured upon
the earlier of November 15, 2000 or upon closing of the proposed sale of the
Co-Sourcing and CodeRemote business units (see Note 11). The Company also
obtained agreements with certain debenture holders to extend the maturity date
of their debentures, which totaled $350,000, until the earlier of November 15,
2000 or upon the closing of the proposed sale of the Co-Sourcing and CodeRemote
business units. These bridge loans and extended-maturity debentures were repaid
and retired, respectively, on October 13, 2000 with a portion of the proceeds
received from the sale of the Co-Sourcing and CodeRemote business units.

     On November 17, 2000, the Company signed a one-year promissory note due
November 20, 2001 that established a $750,000 line of credit (the "LOC") with
Bank of America, N.A. ("B of A"). Borrowings under this LOC bear interest at B
of A's prime rate less one-half percent (4.25% at December 31, 2001). Repayment
of such borrowings is personally guaranteed by the Company's Chief Executive
Officer and one of its Directors (the "Guarantors"). The balance outstanding
under this LOC was $614,000 at December 31, 2000. On January 31, 2001, the
Company and the Guarantors increased the LOC to $1.5 million under the same
terms and conditions as the original promissory note. On March 30, 2001, the
Company and the Guarantors extended the due date of the LOC to March 31, 2002.
There was no balance outstanding under this LOC at December 31, 2001 and the
entire $1.5 million was available for borrowing at that date.

5. COMMITMENTS AND CONTINGENCIES

Lease Commitments

     Future minimum annual rental obligations under operating leases as of
December 31, 2001 are as follows:

               2002 ........................   $  274,000
               2003 ........................      251,000
               2004 ........................      256,000
               2005 ........................      269,000
               2006 ........................      275,000
               Thereafter ..................      210,000
                                            ---------------
                                               $1,535,000
                                            ===============

     Rental expense was $301,000, $398,000 and $665,000 for the years ended
December 31, 2001, 2000 and 1999, respectively.

Litigation

     On September 17, 1993, the Company and its former subsidiaries, Tricare
Ops, and the physician-owned medical groups, FWHC Medical Group, Inc. and
Veritas Medical Group, Inc., which had contracts with the healthcare
subsidiaries, initiated a lawsuit in the Superior Court of the State of
California, County of Los Angeles, against 22 of the largest California workers'


                                       22

<PAGE>

compensation insurance carriers. The lawsuit was subsequently amended to name 13
defendant insurance groups including State Compensation Insurance Fund,
Continental Casualty Company, California Compensation Insurance Company, Zenith
National Insurance Corporation, and Pacific Rim Assurance Company. The action
sought compensatory damages plus punitive damages. The plaintiffs claimed abuse
of process, intentional interference with contractual and prospective business
relations, negligent interference and unlawful or unfair business practices
which led to the discontinuation in April 1993 of the former business of the
Company's subsidiaries and their contracting associated medical groups. Nine
defendants in the lawsuit filed cross complaints against the plaintiffs seeking
restitution, accounting from the plaintiffs for monies previously paid by the
defendants, disgorgement of profits, injunctive relief, attorneys' fees and
punitive damages, based upon allegations of illegal corporate practice of
medicine, illegal referral arrangements, specific statutory violations and
related improper conduct. All parties released all claims upon settlement of the
lawsuit for approximately $1.2 million on December 30, 1999. The Company
expensed approximately $91,000 of legal expenses connected with the Lawsuit in
1999.

     On June 18, 1999, Paul and Linda Greiner (the "Greiners") filed a demand
for Arbitration with the American Arbitration Association, seeking unspecified
amounts of compensatory damages, punitive damages, interest, arbitration costs,
and attorney's fees, based on unspecified theories of fraud, fraudulent
inducement to contract, and breach of contract. The demand alleged
misrepresentation by the Company in connection with an agreement between the
parties to register the Greiners' shares for resale under federal securities
laws. The Company settled this claim at a cost of $50,000 cash plus the
forgiveness of indebtedness in the amount of $150,000 during June 2000.

     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, 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. OLOL is seeking an unspecified amount of monetary
damages. 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. OLOL has subsequently added Transcend's insurance
carrier as defendants to the lawsuit.

     The Company intends to vigorously defend all claims made by OLOL. The
lawsuit is in a very early procedural stage, however, and therefore it is not
possible at this time to determine the outcome of the actions or the effect, if
any, that their 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 adverse effect on the Company's results of operations and
financial condition.

     On July 9, 2001, Provider HealthNet Services, Inc. ("PHNS") made a written
demand for payment from Transcend in the amount of approximately $750,000. The
demand was based on allegations that Transcend had breached certain
representations and warranties contained in an Asset Purchase Agreement between
PHNS and Transcend entered into on October 13, 2000. Thereafter, Transcend made
a counter-demand against PHNS for payment of approximately $93,000 owed under
that same Asset Purchase Agreement. The parties have subsequently submitted all
disputes in this matter to binding arbitration, which was held on January 23 and
24, 2002. The results of this arbitration have not been finalized and it is not
possible at this time to determine the outcome of this arbitration 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 adverse effect on the Company's results of operations and
financial condition.

     On September 14, 2001, the Company filed a lawsuit against Palmer & Cay
Consulting Group, Inc. ("P&C"), the Company's former insurance broker. The
lawsuit, styled "Transcend Services, Inc. v. Palmer & Cay Consulting Group,
Inc." was filed in the Superior Court of Fulton County, State of Georgia, Civil
Action File No.: 2001-CV-42725. The lawsuit alleges that P&C negligently failed
to advise Transcend of, or otherwise failed to make arrangements to cover,
Transcend's potential liability for certain health care claims submitted by
Transcend's employees. Transcend is seeking damages of $450,000, attorneys' fees
and interest. The case is in the preliminary stages of discovery and it is not
possible at this time to determine an outcome of the lawsuit or the effect, if
any, that the outcome may have on the Company's results of operations and
financial condition.

     The Company is party to various lawsuits encountered in the normal course
of business and is involved in a dispute with the Internal Revenue Service
regarding the timely payment of payroll taxes in prior years. The Company
believes that it has meritorious defenses to the related claims and assertions,
however, there can be no assurance that the Company will be successful in
defending such claims and assertions.

                                       23

<PAGE>

6. RETIREMENT PLAN

     The Company maintains a 401(k) retirement plan that covers substantially
all eligible employees. Employees are eligible to contribute amounts to the plan
subject to certain minimum and maximum limitations. The Company matches employee
contributions on a discretionary basis as determined by the Company's Board of
Directors. There have been no Company matching contributions for 2001, 2000 and
1999.

7. TRANSACTIONS WITH RELATED PARTIES

     On March 23, 1999, the Company sold unregistered shares of its common stock
to certain executive officers at market value of $620,000. In connection with
the sale, the executive officers issued promissory notes payable to the Company.
In December 1999, the Company exchanged the promissory notes for the
unregistered shares, which are held in Treasury at December 31, 2000 and 1999.
These shares held in Treasury were retired in 2001.

     In August 1999, certain directors and accredited investors of the Company
loaned an aggregate $1.5 million to the Company for the purpose of interim
financing. The related unsecured promissory notes provided for interest at the
rate of 10% annually and a maturity date of January 15, 2000. On November 10,
1999, the Company executed an agreement with these directors and investors
providing that, at the option of the Company, the promissory notes may be
converted to a new class of convertible preferred stock at any time prior to the
maturity date. The Shareholders approved the conversion on December 30, 1999,
which was effected on January 14, 2000. The new class of preferred stock, the
Series B Convertible Preferred Stock, does not pay dividends, and will have
voting rights with the common stockholders equal to the number of shares of
common stock into which the preferred stock may be converted from time to time.
The preferred stock is convertible to common stock at a price of $3.625 per
share of common stock.

     On December 28, 2001, the Company sold 100,000 shares of its unregistered
common stock to certain Company officers at market value of $126,000 as
determined by the closing sales price reported on the Nasdaq SmallCap Market
System on that date. As consideration for the sale, the officers issued
interest-bearing, secured promissory notes payable to the Company with a
maturity date of January 15, 2003.

8. STOCKHOLDERS' EQUITY

     The Company has authorized 6,000,000 shares of common stock at $.05 par
value, and 21,000,000 shares of preferred stock, at $.01 par value.

     On November 14, 1997, the Company raised approximately $5.3 million in cash
through a private placement of 212,800 shares of newly issued Series A
Convertible Preferred Stock (the "Series A Preferred Stock"). The Series A
Preferred Stock has a $.01 par value, $25.00 stated value, and a dividend of 9%
payable quarterly. The shares of Series A Preferred Stock are convertible into
shares of common stock at any time at the option of the holder at a conversion
price of $16.875 per share. Under certain circumstances the Company may, at its
option, redeem the Series A Preferred Stock, in whole or in part, at 100% of its
stated value together with all accrued and unpaid dividends to the redemption
date.

     The holders of the Series A Preferred Stock may convert the Series A
Preferred Stock into shares of Common Stock within 60 days following the
Company's notice of redemption.

     Effective January 14, 2000, the Company issued 60,000 shares Series B
Convertible Preferred Stock with a stated value of $25.00 per share pursuant to
the conversion of $1.5 million of unsecured promissory notes held by certain
related parties (see Note 7).

     On January 14, 2000, the Company effected a 1-for-5 reverse stock split of
its common stock. All Common shares and per share amounts have been restated to
reflect the effects of the transaction.

9. STOCK OPTIONS AND WARRANTS

     The Company has established two stock option plans for its employees and
Directors. The plans provide for the issuance of incentive stock options and
non-statutory options. Under this plan, options are granted for the Company's
common stock at the approximate fair value, as defined in the option agreement.

                                       24

<PAGE>

The following is a summary of stock option transactions:



<TABLE>
<CAPTION>
                                                                                                          WEIGHTED
                                                                                                          AVERAGE
                                                                                 AVERAGE PRICE             PRICE
                                                             OPTIONS               PER SHARE             PER SHARE
                                                             -------               ---------             ---------
<S>                                                      <C>                  <C>                        <C>
Options outstanding at December 31, 1998                      302,000         $0.25 to $56.25              $14.80
Granted                                                       278,000         $1.72 to $11.88               $3.14
Forfeited                                                   (239,000)         $0.25 to $27.50              $12.71
Exercised                                                         --                 --                       $--
                                                         -----------------
Options outstanding at December 31, 1999                      341,000         $0.25 to $56.25               $7.95
Granted                                                       180,000          $1.34 to $3.50               $2.32
Forfeited                                                   (138,000)         $0.25 to $56.25              $10.78
Exercised                                                    (28,000)          $2.63 to $3.00               $3.00
                                                         -----------------
Options outstanding at December 31, 2000                      355,000         $1.34 to $27.50               $3.55
Granted                                                       162,000          $1.10 to $2.50               $1.63
Forfeited                                                    (99,000)         $1.34 to $27.50               $4.65
Exercised                                                    (10,000)             $1.72                     $1.72
                                                         -----------------
Options outstanding at December 31, 2001                      408,000         $1.10 to $18.13               $2.56
                                                         =================

Options eligible for exercise at December 31, 2001            176,000
                                                         =================
</TABLE>

       At December 31, 2001 there were a total of 350,000 common stock options
available to be granted under the plans.

       The Company has elected to account for its stock-based compensation plans
under Accounting Principles Board Opinion No. 25, under which no compensation
cost has been recognized by the Company. However, the Company has computed, for
pro forma disclosure purposes, the value of all options for shares of the
Company's common stock granted during 2001, 2000 and 1999 to employees and
Directors of the Company using the Black-Scholes option-pricing model and the
following weighted average assumptions:

<TABLE>
<CAPTION>
                                                                2001                   2000                   1999
---------------------------------------------------------------------------------------------------------------------------
          <S>                                               <C>                      <C>                   <C>
          Risk-free interest rate                                4.25%               5.65% - 6.65%          4.84% - 6.07%
          Expected dividend yield                               --                     --                          --
          Expected life                                      Four years              Four years            Four years
          Expected volatility                                      63%                 88%                    93%
</TABLE>

       The total fair value of the options granted during the years ended
December 31, 2001, 2000 and 1999 was computed to be approximately $128,000,
$124,000 and $295,000, respectively, which would be amortized over the vesting
period of the options. If the Company had accounted for these plans in
accordance with SFAS No. 123, the Company's reported pro forma net loss for the
years ended December 31, 2001, 2000 and 1999 would have been as follows:


<TABLE>
<CAPTION>

                                                                                    2001               2000               1999
                                                                                    ----               ----               ----
<S>                                                                             <C>                <C>               <C>
Net loss attributable to common stockholders:
     As reported                                                                ($1,067,000)       ($1,188,000)      ($4,988,000)
     Pro forma                                                                  ($1,184,000)       ($1,662,000)       (5,528,000)
Basic and diluted net loss per share attributable to common stockholders:
     As reported                                                                     ($0.24)            ($0.27)           ($1.14)
     Pro forma                                                                       ($0.27)            ($0.38)           ($1.26)
</TABLE>

                                       25

<PAGE>

       The following table sets forth the exercise price range, number of
shares, weighted average exercise price, and remaining contractual lives by
groups of similar price and grant date:


<TABLE>
<CAPTION>
                                                        Options Outstanding                           Options Exercisable
                                                        -------------------                           -------------------
                                          Outstanding          Average           Weighted         Exercisable         Weighted
                        Actual                at              Remaining          Average               at             Average
                       Range of          December 31,        Contractual         Exercise         December 31,        Exercise
                    Exercise Price           2001                Life             Price               2001             Price
---------------------------------------------------------------------------------------------------------------------------------
                    <S>               <C>                    <C>                 <C>           <C>                    <C>
                       $1.10 - $1.50         147,000          9.4 years            $1.28              17,000           $1.34
                       $1.51 - $2.00         127,000          8.8 years            $1.74              87,000           $1.72
                       $2.01 - $5.00         110,000          8.5 years            $2.77              53,000           $2.77
                      $5.01 - $18.13          25,000          6.8 years           $13.34              19,000          $14.13
                                      --------------------                                     -------------------
                      $1.10 - $18.13         408,000          8.6 years            $2.56             176,000           $3.35
                                      ====================                                     ===================
</TABLE>

10. INCOME TAXES

     For the years ended December 31, 2001, 2000 and 1999, the Company generated
a net loss for income tax purposes; therefore, no income tax provision has been
recorded. The Company reported an income tax benefit of $116,000 in 2001 due to
the elimination of deferred income tax liabilities of $121,000 established in
prior years that are no longer required, offset slightly by state income taxes
of $5,000.

     The tax effects of temporary differences between the carrying amounts of
assets and liabilities in the financial statements and their respective tax
bases, which give rise to deferred tax assets and liabilities as of December 31,
2001 and 2000, were as follows:

<TABLE>
<CAPTION>
                                                                             2001               2000
                                                                             ----               ----
<S>                                                                    <C>                  <C>
Deferred tax liabilities:
Equipment and leasehold ..............................................            $--        $(30,000)
Intangibles assets ...................................................             --         (10,000)
Exercise of stock options ............................................      (358,000)        (358,000)
                                                                       ---------------------------------
                                                                            (358,000)        (398,000)

Deferred tax assets:
Net operating loss carry-forwards ....................................     8,366,000        7,962,000
Cash-basis deferral ..................................................        24,000           24,000
Accrued liabilities ..................................................        15,000          139,000
Valuation allowance ..................................................    (8,047,000)      (7,848,000)
                                                                       ---------------------------------
Net deferred tax (liabilities) .......................................         $--          $(121,000)
                                                                       =================================
</TABLE>

     At December 31, 2001, the Company had net operating loss carry-forwards of
approximately $21,450,000 that may be used to reduce future income taxes. If not
     utilized these carry-forwards will begin to expire in 2009. The Company has
established a valuation allowance of $8,047,000 and $7,848,000 at December 31,
2001 and 2000, respectively, due to the uncertainty regarding the realizability
of certain deferred tax assets, including its net operating loss carry-forwards.


<TABLE>
<CAPTION>

Reconciliation of Tax Rates:                                              2001        2000         1999
                                                                          ----        ----         ----
<S>                                                                    <C>            <C>          <C>
Federal ..............................................................      34%         34%           34%
State ................................................................       5%          5%            5%
Net operating loss carry-forwards ....................................       0%          0%            0%
Valuation allowance ..................................................     (55%)       (39%)         (39%)
                                                                       -----------------------------------
Effective tax rate.                                                       (16%)          0%            0%
                                                                       ===================================
</TABLE>

11. ACQUISITIONS AND DIVESTITURES

     On March 16, 1998 Transcend sold the net assets of Transcend Case
Management, Inc., its wholly owned subsidiary, to TCM Services, Inc., a wholly
owned subsidiary of CORE, Inc. ("CORE"). On December 23, 1998 the Company
reacquired TCM from CORE and filed an arbitration claim against CORE after
learning of CORE's intent to discontinue the business. The reacquisition of TCM
was accounted for under the purchase method of accounting. On February 8, 2000,
an arbitrator ruled that CORE had breached its purchase contract with Transcend
and awarded approximately $1.7 million, plus attorney's fees and arbitration
costs, to Transcend. On March 31, 2000, CORE issued 248,703 shares of its
unregistered common stock to Transcend in full and complete settlement of the
arbitrator's award to Transcend. The Company reported a $461,000 gain on this
legal settlement in 2000 and a $576,000 loss on the sale of the CORE stock in
2001. The Company ceased TCM's operations effective December 31, 1999 (see

                                       26

<PAGE>

Note 2).

     In December 1999, the Company sold the net assets of its Utah and
Northeast-based medical transcription services operations and certain contracts
for an aggregate purchase price of approximately $7.7 million, consisting of
$7.3 million in cash, and the remainder in promissory notes paid in December
2001. In addition, the Company received a one-time earn-out payment of $553,000
in December 2001 related to these sold operations and contracts, which is
presented as a gain on sale of assets in the accompanying consolidated
statements of operations.

     On October 13, 2000, the Company completed the sale of its Co-Sourcing and
CodeRemote business units (the "Businesses") to Provider HealthNet Services,
Inc. ("PHNS") pursuant to an Asset Purchase Agreement (the "Agreement") with
PHNS. Transcend received approximately $4.7 million in cash with the potential
to receive additional consideration payable over the subsequent five years. The
amount of future consideration, if any, will be based on a fixed percentage of
certain defined future revenue recognized by PHNS from the Businesses. The
Company reported an $89,000 gain on the disposition in 2000. The Company did not
recognize additional consideration of approximately $93,000 due from PHNS in
2001 pending a favorable resolution of an unrelated dispute with PHNS. See Note
5.

     The following unaudited pro forma financial information presents
consolidated revenue and gross profit for the continuing operations in 2000 and
1999 as if the dispositions had taken place on January 1, 1999. Management
evaluated the performance of its transcription operations and certain business
segments, including Co-Sourcing and CodeRemote, on the basis of revenue and
gross profit. Since many of the assets and operating expenses of these sold
operations and segments are not separately identifiable, these divestitures are
not reported as discontinued operations. Such pro forma amounts are not
necessarily indicative of what actual results of operations might have been if
the disposition had been effective on January 1, 1999.

              (in 000's, except for per share data)      2000       1999
                                                         ----       ----
              Revenue                                   $15,921    $17,642
              Gross Profit                              $ 3,544    $ 2,158

12.  Segment Information

     The Company's reportable segments are strategic business units that offer
different services and products. The Company operated in four segments (hospital
medical records management, remote coding of medical records, medical
transcription and coding software) during 1999 and for the ten-month and
thirteen-day period ended October 13, 2000 and in two segments for the remainder
of 2000 and 2001 (medical transcription and coding software). These four
segments are referred to by the Company as Co-Sourcing, CodeRemote,
Transcription Services and Cascade, respectively. In 1999 and 2000 the Company
evaluated the performance of Co-Sourcing, CodeRemote and Transcription Services
based on revenue and gross profit and Cascade based on revenue, gross profit and
operating income. In 2001 Transcription Services and Cascade are each evaluated
based on revenue, gross profit and operating income. In 1999 the revenue and
gross profit derived from transcription services performed for Co-Sourcing
customers was reclassified from Co-Sourcing to Transcription Services for the
purpose of evaluating the performance of the transcription business. Since many
of the assets and operating expenses of these segments are not separately
identifiable, management believes that allocating such shared assets and
expenses in not only impractical, but also meaningless.

                                       27

<PAGE>

<TABLE>
<CAPTION>
                               (in 000's)                   2001          2000           1999
                 <S>                                 <C>           <C>           <C>
                 Revenue:
                    Transcription Services                $11,817       $13,666        $24,085
                    Cascade                                 1,968         2,255          2,234
                    Co-Sourcing                               N/A         9,678         22,868
                    CodeRemote                                N/A           663            328
                                                     ------------------------------------------
                         Total revenue                    $13,785       $26,262        $49,515
                                                     ==========================================

                 Gross profit:
                    Transcription Services                $ 2,939       $ 2,128        $   599
                    Cascade                                 1,001         1,416          1,431
                    Co-Sourcing                               N/A         1,179          1,377
                    CodeRemote                                N/A            54              0
                                                     ------------------------------------------
                         Total gross profit               $ 3,940       $ 4,777        $ 3,407
                                                     ==========================================

                 Operating loss:
                    Transcription Services                  ($214)          N/A            N/A
                    Cascade                                  (449)        ($477)         ($600)
                                                     --------------============================
                         Total operating loss               ($663)
                                                     =============
</TABLE>

     13.  Selected Quarterly Financial Data (unaudited)

<TABLE>
<CAPTION>
                                                                      First Quarter  Second Quarter   Third Quarter  Fourth Quarter
<S>                                                                   <C>            <C>              <C>            <C>
2001
Revenue                                                                  $3,559,000     $ 3,263,000      $3,425,000     $ 3,538,000
Gross profit                                                             $1,186,000     $   810,000      $  899,000     $ 1,044,000
Net income (loss) attributable to common shareholders (2)                $   69,000     $(1,016,000)     $ (122,000)    $     2,000
Basic and diluted net income (loss) per share attributable to common     $     0.02     $     (0.23)     $    (0.03)    $      0.00
stockholders

2000
Revenue (1)                                                              $8,127,000     $ 8,127,000      $6,235,000     $ 3,773,000
Gross profit                                                             $1,457,000     $ 1,726,000      $1,211,000     $   383,000
Net income (loss) attributable to common shareholders (2)                $   79,000     $     4,000      $  (40,000)    $(1,231,000)
Basic and diluted net income (loss) per share attributable to common     $     0.02     $      0.00      $    (0.01)    $     (0.29)
stockholders
</TABLE>

(1)  The decrease in revenue in the third quarter of 2000 is primarily
     attributable to the Company terminating certain unprofitable and marginally
     profitable Co-Sourcing contracts. The decrease in revenue in the fourth
     quarter of 2000 is primarily attributable to the loss of revenue from the
     sale of the Co-Sourcing and CodeRemote business units during October 2000
     (see Note 11).
(2)  The following unusual items are included in the determination of net income
     (loss) attributable to common stockholders: (a) (loss) gain on legal
     settlement of $272,000 in the first quarter of 2000, $231,000 in the third
     quarter of 2000, $(42,000) in the fourth quarter of 2000 and $(576,000) in
     the second quarter of 2001, all primarily related to TCM (see Note 11); (b)
     gain on sale of assets of $89,000 in the fourth quarter of 2000 related to
     the sale of the Co-Sourcing and CodeRemote business units in October 2000
     (see Note 11); (c) income tax benefit of $121,000 in the first quarter of
     2001 due to the elimination of deferred tax liabilities established in
     prior years that are no longer required (see Note 10); and (d) gain on sale
     of assets of $200,000 and $353,000 in the third and fourth quarters of
     2001, respectively, related to an earn-out payment from the sale of certain
     medical transcription services operations and certain contracts in 1999
     (see Note 11).

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

     On September 6, 2001, the Audit Committee of the Company's Board of
Directors dismissed Arthur Andersen LLP ("AA") and appointed Miller Ray & Houser
LLP ("MR&H") as the Company's independent auditors for the year ended December
31, 2001. AA's report on the Company's consolidated financial statements for the
years ended December 31, 2000 and 1999 contained no adverse opinion or
disclaimer of opinion, and was not qualified or modified as to uncertainty,
audit scope or accounting principles. There were no disagreements between the
Company and AA on matters of accounting principles or practices, financial
statement disclosure or auditing scope or procedure at any time. AA confirmed
the Company's representations in a letter to the Securities and Exchange
Commission filed with the Company's Current Report on Form 8-K dated September
6, 2001 regarding the change in the Company's certifying accountant.

                                       28

<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The disclosures required herein are incorporated by reference from the
Company's proxy statement to be filed in connection with the 2002 Annual Meeting
of Stockholders to be held May 7, 2002.

ITEM 11. EXECUTIVE COMPENSATION

     The disclosures required herein are incorporated by reference from the
Company's proxy statement to be filed in connection with the 2002 Annual Meeting
of Stockholders to be held May 7, 2002.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The disclosures required herein are incorporated by reference from the
Company's proxy statement to be filed in connection with the 2002 Annual Meeting
of Stockholders to be held May 7, 2002.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The disclosures required herein are incorporated by reference from the
Company's proxy statement to be filed in connection with the 2002 Annual Meeting
of Stockholders to be held May 7, 2002.

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

     (a) The following documents are filed as a part of this Annual Report for
Transcend Services, Inc.:

     1. Financial Statements

     The Consolidated Financial Statements, the Notes to Consolidated Financial
Statements and the Reports of Independent Public Accountants listed below are
included in Item 8.

     Reports of Independent Public Accountants.

     Consolidated Balance Sheets as of December 31, 2001 and 2000

     Consolidated Statements of Operations for the years ended December 31,
2001, 2000 and 1999

     Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2001, 2000 and 1999

     Consolidated Statements of Cash Flows for the years ended December 31,
2001, 2000 and 1999

     Notes to Consolidated Financial Statements

     Financial Statement Schedules are not required

     (b) Reports on Form 8-K.

     The Company did not file any reports of Form 8-K during the quarter ended
December 31, 2001.

(c). Exhibits.
     --------

The following exhibits are filed with or incorporated by reference into this
report. The exhibits which are denoted by an asterisk (*) were previously filed
as a part of, and are hereby incorporated by reference from, either (i) a
Registration Statement on Form S-3 under the Securities Act of 1933 for the
Company, Registration No. 333-19177, filed on January 2, 1997 (referred to as
"S-3"); (ii) a Registration Statement on Form S-8 under the Securities Act of
1933 for the Company, Registration No. 33-37685, filed on November 8, 1990
(referred to as "1990 S-8"); (iii) a Registration Statement on Form S-8 under
the Securities Act of 1933 for the Company, Registration No. 33-57072, filed on
January 15, 1993 (referred to as "1993 S-8"); (iv) a Registration Statement on
Form S-8 under the Securities Act of 1933 for the Company, Registration No.
333-16213, filed on November 15, 1996 (referred to as "1996 S-8"); (v) the
Company's Annual Report on form 10-K for the year ended May 31, 1993 (referred
to as "1993 10-K"); (vi) the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995 (referred to as "6/30/95 10-Q"); (vii) Amendment No.
1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1996 (referred to as "9/30/96

                                       29

<PAGE>

10-Q/A No. 1"); (viii) the Company's Annual Report on Form 10-K for the year
ended December 31, 1998 (referred to as 12/31/98 10-K); (ix) the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 (referred to
as 3/31/98 10-Q); (x) the Company's Current Report on Form 8-K relating to an
event which occurred April 28, 1998 (referred to as 4/28/98 8-K); (xi) the
Company's Current Report on Form 8-K/A relating to an event which occurred
December 23, 1998 (referred to as 12/23/98 8-K/A); (xii) the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1997 (referred to as
"3/31/97" 10-Q"); (xiii) the Company's Current Report on Form 8-K filed December
27, 1999 (referred to as "12/27/99 8-K"); (xiv) the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2000 (referred to as "6/30/00 10-Q);
(xv) the Company's Current Report on Form 8-K filed October 30, 2000 (referred
to as "10/30/00 8-K"); (xvi) the Company's Annual Report on Form 10-K for the
year ended December 31, 2000 (referred to as "2000 10-K"); or (xvii) the
Company's Current Report on Form 8-K filed on September 6, 2001 (referred to as
"9/6/01 8-K").

EXHIBIT
NO.         DESCRIPTION
---         ------------

   *2.1  -  Merger Agreement dated April 16, 1997 for acquisition of DocuMedX
            (3-31-97 10-Q, Exhibit 2.6)

   *2.2  -  Purchase and Sale agreement dated March 16, 1998 with CORE, INC.
            for the sale of the net assets of Transcend Case Management, Inc.
            (12/31/98 10-K)

   *2.3  -  Merger and Reorganization Agreement dated April 28, 1998 for
            acquisition of Health Care Information Systems, Inc. (4/28/98 8-K,
            Exhibit 2(a))

   *2.4  -  Assignment and Assumption agreement dated December 23, 1998 with
            TCM Services, Inc. (12/23/98 8-K/A, Exhibit 2(a))

   *2.5  -  Asset Purchase Agreement dated December 9, 1999 with Medquist
            Transcriptions, Ltd. for the sale of net assets and contracts of
            Transcend Services, Inc. (12/27/99 8-K, Exhibit 2(a))

   *2.6  -  Asset Purchase Agreement dated December 16, 1999 with Medquist
            Transcriptions, Ltd. for the sale of net assets and contracts of
            Transcend Services, Inc. (12/27/99 8-K, Exhibit 2(d))

   *2.7  -  Asset Purchase Agreement dated October 13, 2000 with Provider
            HealthNet Services, Inc. (10/30/00 8-K, Exhibit 2.7)

 *3.1.1  -  Certificate of Incorporation (6/30/95 10-Q, Exhibit 3)

 *3.1.2  -  Certificate of Designation of Series A Convertible Preferred Stock
            (12/31/98 10-K)

 *3.1.3  -  Certificate of Designation of Series B Convertible Preferred Stock
            (2000 10-K)

 *3.1.4  -  Certificate of Amendment of the Certificate of Incorporation (2000
            10-K)

   *3.2  -  Bylaws (as restated) (1993 10-K, Exhibit 3(a))

   *4.1  -  1990 Employee Stock Purchase Plan (1990 S-8, Exhibit 4)

   *4.2  -  1992 Stock Option Plan, as amended (1993 S-8, Exhibit 4(a))

   *4.3  -  1992 Stock Option Plan, as Amended and Restated (1996 S-8, Exhibit
            4.1)

   *4.9  -  Warrant to Purchase Common Stock Granted to Silicon Valley Bank
            (9/30/96 10-Q/A No. 1, Exhibit 4.4)

   4.10  -  Silicon Valley Bank Antidilution Agreement (9/30/96 10-Q/A No. 1,
            Exhibit 4.5)

  *4.11  -  Silicon Valley Registration Rights Agreement (9/30/96 10-Q/ No. 1,
            Exhibit 4.6)

  *4.12  -  DVI Financial Services Inc. Loan and Security Agreement (3/31/98
            10- Q, Exhibit 10.14.1))

  *4.13  -  Promissory Note between the Company and Walter S. Huff, Jr.
            (6/30/00 10-Q, Exhibit 4.13)

                                       30

<PAGE>

EXHIBIT
NO.         DESCRIPTION
---         ------------

  *4.14  -  Promissory Note between the Company and Larry G. Gerdes (6/30/00
            10-Q, Exhibit 4.14)

   4.15  -  2001 Stock Option Plan

  *10.3  -  Form of Incentive Stock Option Agreement under 1992 Stock Option
            Plan, as Amended and Restated (1996 S-8, Exhibit 4.2)

  *10.9  -  Form of indemnification agreement (1993 10-K, Exhibit 10(a))

 *10.10  -  Letter Agreement dated December 5, 1996 by and between the Company
            and VHA, Inc. (S-3, Exhibit 10.1)

 *10.11  -  Services Agreement dated December 5, 1996 by and between the
            Company and VHA, Inc. (S-3, Exhibit 10.2)

  *16.1  -  Letter from Arthur Andersen re: Change in Certifying Accountant
            (9/6/01 8-K)

  *21.1  -  Subsidiaries of the Registrant

   23.1  -  Consent of Miller Ray & Houser LLP

   23.2  -  Consent of Arthur Andersen LLP

                                       31

<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) 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 Service, Inc.



                                By:      /s/ Larry G. Gerdes
                                    ---------------------------
                                    Larry G. Gerdes
                                    President, Chief Executive Officer,
                                    Chief Financial Officer and
                                    Chief Accounting Officer
                                    (Principal Executive, Financial
                                    and Accounting Officer)

Dated: February 28, 2002

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature                      Title                                                                Date
---------                      -----                                                                ----
<S>                            <C>                                                           <C>
/s/ Larry G. Gerdes            Director, President, Chief Executive Officer,                 February 28, 2002
--------------------
Larry G. Gerdes                Chief Financial Officer and Chief Accounting Officer
                               (Principal Executive, Financial and Accounting Officer)



/s/ Joseph P. Clayton          Director                                                      February 28, 2002
---------------------
Joseph P. Clayton



/s/ Walter S. Huff, Jr.        Director                                                      February 28, 2002
-----------------------
Walter S. Huff, Jr.



/s/ Charles E. Thoele          Director                                                      February 28, 2002
---------------------
Charles E. Thoele
</TABLE>

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