<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, 2000
                                      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 March 21, 2001 was $6,529,258. 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 March 21, 2001
                 -----                       -----------------------------
       Common Stock, $.05 par value                    4,383,143
                                                       =========

                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the registrant's proxy statement to be filed in connection with
the 2001 Annual Meeting of Stockholders to be held May 8, 2001, are incorporated
by reference herein in response to Part III of this report.
<PAGE>

                           TRANSCEND SERVICES, INC.

                                   FORM 10-K

                                     INDEX

<TABLE>
<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......................................................     7
PART II................................................................................................................     7
    ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS...................................     7
    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...............................................    12
    ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..............................................................    13
    ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
              DISCLOSURE...............................................................................................    28
PART III...............................................................................................................    28
   ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......................................................    28
   ITEM 11.   EXECUTIVE COMPENSATION...................................................................................    28
   ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...........................................    28
   ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...........................................................    28
   PART IV.............................................................................................................    29
   ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K..........................................    29

SIGNATURES.............................................................................................................    31
</TABLE>
<PAGE>

                                     PART I

ITEM 1.   BUSINESS

     Certain statements contained in this filing are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, such as statements relating to financial results and plans for future
business development activities, and are thus prospective. Such forward-looking
statements are subject to risks, uncertainties and other factors which could
cause actual results to differ materially from future results expressed or
implied by such forward-looking statements. Potential risks and uncertainties
include, but are not limited to, economic conditions, competition and other
uncertainties 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 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 $5
billion in medical transcription and $275 million in medical coding. While
competition is significant with over 1,000 transcription services companies
nationally, the Company believes that it is among the six 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 that create
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 healthcare. As a result,
specialized healthcare service and software companies like Transcend Services,
Inc. are leveraging technology thereby increasing 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 increases in 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. These technologies enable digital movement of voice,
images, and data, allowing for 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.

                                       3
<PAGE>

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. have
become 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 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 providing medical transcription services
and providing 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 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 add-
on services to the existing customers. Cascade has an established team of sales
professionals focused on both new account and add-on 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.

                                       4
<PAGE>

                  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 on-going
program to monitor customer satisfaction. This program includes continual
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 now 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 information is 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, perhaps from
attractive labor markets outside the United States, and may complete documents
which 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
customer base. The Company intends to add sales resources 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 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.

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 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 are then
accessed by remote quality assurance personnel, if necessary, and delivered
electronically to the healthcare provider. Typically documents are produced
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.

                                       5
<PAGE>

     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
30 large acute-care and physician clinics with recurring revenue under long-term
contracts or other arrangements. The average medical transcription customer
generates approximately $600,000 in annual revenue with an average remaining
contract life of 3.2 years. Cascade has approximately 250 active licenses of its
coding and abstracting software operational in 80 customer sites.

     Based on revenue for the fiscal years ended December 31, 2000, 1999 and
1998, no single customer paid fees to the Company which amounted to or exceeded
10% of the Company's revenue in the respective periods.

SALES AND MARKETING

     The Company currently employs two full-time sales professionals focused on
transcription and four 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 $5 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 two domestic competitors
are MedQuist, Inc. and the EDiX division of IDX Systems Corporation. 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, 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 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, 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 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.

                                       6
<PAGE>

EMPLOYEES

     As of December 31, 2000, the Company had 241 full-time and 51 part-time
employees, including 209 full-time and 47 part-time employees dedicated to the
medical transcription business; 25 full-time and 2 part-time Cascade employees;
and 7 full-time and 2 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 and for its sales office in Sacramento, California. The
Company also leases space in Chicago, Illinois; Tacoma, Washington; Kennesaw,
Georgia; and Portland, Oregon; where it has closed and consolidated its
transcription operations into the Atlanta hub. The Company subleased its space
in Chicago, Illinois; Kennesaw, Georgia; and Portland, Oregon. The Tacoma,
Washington lease expires in November 2001.

ITEM 3.  LEGAL PROCEEDINGS.

     As of the date hereof, there are no material legal proceedings pending
against Transcend Services, Inc. From time to time, Transcend Services, Inc. is
involved in legal proceedings and litigation arising in the ordinary course of
business.

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, 2000.

                                    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 March 21, 2001 there were approximately 537 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, 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

Year Ended December 31, 1999
    First Quarter......................................  $ 9.688      $ 6.250
    Second Quarter.....................................  $ 9.844      $ 5.625
    Third Quarter......................................  $ 6.563      $ 4.063
    Fourth Quarter.....................................  $ 4.688      $ 1.250


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.
Pursuant to the terms of certain financing agreements, the Company is currently
restricted from paying dividends to its common stockholders.

                                       7
<PAGE>

RECENT SALES OF UNREGISTERED SECURITIES

     The Company had no sales of unregistered securities during the fourth
quarter period ended December 31, 2000.

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 Arthur Andersen LLP,
independent public accountants, with respect to such consolidated financial
statements as of December 31, 2000 and 1999 and for the three years in the
period ended December 31, 2000 is included at 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.


<TABLE>
<CAPTION>
Selected Financial Data
(in thousands, except per share data)

                                                                    1996         1997          1998           1999         2000
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>          <C>            <C>           <C>           <C>
Results of Operations: (1) (2) (3)

Revenue                                                           $36,171      $41,552        $53,314       $49,515       $26,262
-----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations                                      (2,772)        (189)           964        (7,975)         (840)
-----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before discontinued operations                       (3,234)        (622)           382        (3,056)         (710)
-----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before discontinued operations per common share     $ (0.83)     $ (0.17)       $ (0.03)      $ (0.81)      $ (0.27)
Basic and diluted weighted average shares of common stock (3)       3,903        4,056          4,224         4,386         4,341

Financial Position At Year End:
Total assets                                                      $15,827      $20,294        $22,896       $17,892       $ 5,679
Total debt                                                        $ 4,749      $ 7,091        $ 8,536       $ 7,026       $   614
Stockholder's equity                                              $ 5,961      $ 7,913        $ 7,512       $ 2,568       $ 2,176
</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.

                                       8
<PAGE>

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 solutions, 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. All information presented has been restated to show
the reclassification of Cascade from discontinued to continuing operations. The
following 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.

<TABLE>
<CAPTION>
                                                                                                         Change (2000 compared
            (in 000's)                                                   1999                               to 1999 w/o NRC)
                                                    -----------------------------------------------    ---------------------------
                                                        Including          Effect of      Excluding
                                          2000             NRC                NRC            NRC            $'s            %
                                          ----             ---                ---            ---            ---            -
<S>                                       <C>           <C>                <C>            <C>             <C>            <C>
Revenue:
   Transcription                           $13,666         $24,085                         $24,085         $(10,419)     (43)%
   Cascade                                   2,255           2,234                           2,234               21        1%
   Co-Sourcing                               9,678          22,868            (76)          22,792          (13,114)     (58)%
   Code-Remote                                 663             328                             328              335      102%
                                     --------------------------------------------------------------    -------------
                      Total revenue         26,262          49,515            (76)          49,439          (23,177)     (47)%
                                     --------------------------------------------------------------    -------------
Gross profit:
   Transcription                             2,128             599          1,310            1,909              219       11%
   Cascade                                   1,416           1,431                           1,431              (15)      (1)%
   Co-Sourcing                               1,179           1,377          1,120            2,497           (1,318)     (53)%
   Code-Remote                                  54               0                               0               54      N/A
                                     --------------------------------------------------------------    -------------
                 Total gross profit          4,777           3,407          2,430            5,837           (1,060)     (18)%
                                     --------------------------------------------------------------    -------------
Operating expenses:
   Marketing and sales                         936           2,107            (17)           2,090           (1,154)     (55)%
   Research and development                  1,152           1,733         (1,025)             708              444       63%
   General and administrative                3,470           7,369         (2,072)           5,297           (1,827)     (34)%
   Amortization                                 59             173                             173             (114)     (66)%
                                     --------------------------------------------------------------    -------------
           Total operating expenses          5,617          11,382         (3,114)           8,268           (2,651)     (32)%
                                     --------------------------------------------------------------    -------------
Loss from operations                       $  (840)        $(7,975)        $5,544          $(2,431)        $ (1,591)     (65)%
                                     ==============================================================    =============
</TABLE>

                                       9
<PAGE>

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

     Revenue decreased $23.2 million or 47% to $26.3 million in 2000 from $49.5
million in 1999. This decrease is attributable to several factors: (1) The Co-
Sourcing and CodeRemote businesses were sold on October 13, 2000. The combined
monthly revenue of these businesses 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 in 2000 relative to 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.

     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% to $936,000 in
2000 from $2.1 million in 1999. 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% to $1.2 million
in 2000 from $1.7 million in 1999 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.

     General and administrative expenses decreased $3.9 million or 53% to $3.5
million in 2000 from $7.4 million in 1999 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.

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

     Net interest expense decreased to $420,000 in 2000 from $855,000 in 1999
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 businesses during
October 2000.

     The gain on sale of assets represents the gain on the sale of the Co-
Sourcing and CodeRemote businesses to Provider HealthNet Services, Inc. ("PHNS")
on October 13, 2000.

     The other income of $461,000 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 Company reported a loss before 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

                                       10
<PAGE>

manifested in higher gross profit margins and reduced operating expenses.

     There were no discontinued operations at December 31, 2000. The reported
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.

Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

     Revenue decreased $3.8 million or 7% to $49.5 million in 1999 from $53.3
million in 1998. This decrease is attributable primarily to a $6.5 million
reduction in Co-Sourcing revenue that was only partially offset by a $1.5
million increase in transcription revenue. The reduction in Co-Sourcing revenue
was attributable to the termination of 12 unprofitable or marginally profitable
contracts during 1999. The increase in transcription revenue was due to a normal
level of new sales activity.

     Gross profit decreased 60% to $3.4 million for 1999 from $8.6 million in
1998. Gross profit as a percentage of revenue decreased to 7% in 1999 from 16%
in 1998. The decrease was primarily attributable to non-recurring charges and
start-up losses in the Company's national transcription hub. In addition, the
Company's Co-Sourcing operations suffered increased costs at several Co-Sourcing
sites that did not attain performance deliverables, thereby requiring additional
resources.

     Non-recurring charges included in direct costs were $2.4 million, comprised
of write-offs of obsolete fixed assets of $1.0 million, restructuring costs of
$300,000, and adjustments to unbilled receivables, prepaid expenses, and
accruals of $1.1 million. Excluding non-recurring charges, gross profit
decreased 32% to $5.8 million in 1999, which is 12% of revenue compared to the
16% gross profit as a percentage of revenue in 1998.

     Marketing and sales expenses decreased $131,000 or 6% to $2.1 million in
1999 from $2.2 million in 1998 and remained relatively constant as a percentage
of revenue at 4%.

     Research and development expenses increased $1.5 million to $1.7 million in
1999 from $260,000 in 1998 primarily as a result of the write-down of
capitalized software of $1.0 million related to the development of the Company's
Information Development Center.

     General and administrative expenses increased $2.5 million or 51% to $7.4
million in 1999 from $4.9 million in 1998. Non-recurring costs of $2.1 million
included charges for obsolete assets of $900,000, bad debt reserves of $700,000
and other charges of $500,000. Excluding the non-recurring charges of $2.1
million, general and administrative costs increased $406,000 or 8% to $5.3
million in 1999. This $406,000 increase is due primarily to a $350,000 charge to
write-off receivables related to a 1998 sale by Cascade. During the second half
of 1999, the Company restructured its general and administrative expenses,
thereby significantly reducing annual costs.

     Amortization expenses decreased to $173,000 in 1999 from $213,000 in 1998
reflecting the impact of the sale of TCM in March 1998.

     Net interest expense increased to $855,000 in 1999 from $521,000 for 1998,
primarily due to the impact of interest expense incurred in connection the
Company's increased borrowings.

     Gain on sale of assets of $5.8 million resulted from the sale of net assets
and contracts of the Utah and Northeast-based transcription services.

     The Company reported a loss before discontinued operations of $3.1 million
in 1999 compared to income of $382,000 in 1998. The loss was due to the
Company's overall efforts to restructure its business, convert to its new
technology, and pursue its new strategy. The Company experienced start-up losses
in the national transcription hub, and several Co-Sourcing sites did not meet
performance deliverables and therefore required additional resources.

     The reported loss from discontinued operations increased to $1.5 million in
1999 compared to a loss of $100,000 in 1998. The loss 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.

                                       11
<PAGE>

     In November 1997, the Company issued 212,800 shares of series A convertible
preferred stock with a dividend of 9%. Net loss to common stockholders includes
preferred stock dividends of $480,000 in 1999 compared to $479,000 in 1998.

LIQUIDITY AND CAPITAL RESOURCES

     The Company used $2.9 million cash in operating activities in 2000
primarily due to reductions of accrued liabilities and accounts payable. The
Company's working capital increased to $126,000 as of December 31, 2000.

     The Company's cash flows from investing activities provided cash of $3.7
million in 2000 due to the sale of the Co-Sourcing and CodeRemote businesses,
net of $1.0 million incurred for the purchase of capital equipment. Capital
expenditures were primarily for electronic patient record systems in connection
with new contracts and investments in workstations, servers, dictation equipment
and software to convert all transcription operations to the Company's national
transcription platform.

     Cash flows from financing activities used cash of $5.2 million in 2000
primarily due to debt reductions using the proceeds of $4.7 million from the
sale of the Co-Sourcing and CodeRemote businesses. In addition, the Company
established a new line of credit during November 2000 and borrowed $614,000
under this line of credit during 2000, which is the balance as of December 31,
2000. This $1.5 million line of credit matures on March 31, 2002.

     In February 2000, the Company was awarded damages of $1.7 million plus
attorney's fees and costs in its arbitration involving the sale and repurchase
of its case management operation transactions with CORE, Inc. ("CORE") in 1998.
Damages were paid in the form of 248,703 unregistered shares of common stock in
CORE, a publicly traded company. Based on the closing price as of December 31,
2000, the CORE common stock had a market value of approximately $870,000. These
unregistered shares are eligible for sale pursuant to Rule 144 of the Securities
Act of 1933, as amended, beginning April 1, 2001.

     Other sources of non-operational cash flow in 2001 include: (1) an
undetermined amount of potential earn-out payments, if any, from PHNS based on a
fixed percentage of certain defined future revenue recognized by PHNS from the
Co-Sourcing and Code-Remote businesses sold to PHNS in October 2000; (2) an
undetermined amount of potential earn-out payments, if any, from MedQuist, Inc.
("MedQuist") based on the renewal of certain medical transcription contracts
sold to MedQuist in December 1999; and (3) payment of the note receivable
approximating $350,000 from MedQuist, which is due in December 2001.

     The Company anticipates that cash on hand, together with internally
generated funds, cash available under its line of credit, proceeds from the sale
of the CORE stock, cash collected from the MedQuist note receivable and
potential cash from the PHNS and MedQuist earn-out agreements, if any, should be
sufficient to finance continuing operations, make capital investments in the
normal and ordinary course of its business and meet its Series B Convertible
Preferred Stock dividend payment requirements during 2001.

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, other than equity price risk with respect to a
short-term investment in the unregistered common stock of a publicly traded
company held for sale at December 31, 2000. The market value of said investment
was approximately $1.7 million when acquired on March 31, 2000 and $870,000 as
of December 31, 2000.

                                       12
<PAGE>

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The following financial statements are filed with this report:

     Report of Independent Public Accountants

     Consolidated Balance Sheets as of December 31, 2000 and 1999

     Consolidated Statements of Operations for the years ended December 31,
     2000, 1999 and 1998

     Consolidated Statements of Stockholders' Equity for the years ended
     December 31, 2000, 1999 and 1998

     Consolidated Statements of Cash Flows for the years ended December 31,
     2000, 1999 and 1998

     Notes to Consolidated Financial Statements

                                       13
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Transcend Services, Inc.:

We have audited the accompanying consolidated balance sheets of Transcend
Services, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2000
and 1999 and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three 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 1999 and the results of their
operations and their cash flows for each of the three 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 13, as to which the
                   date is March 30, 2001

                                       14
<PAGE>

                           TRANSCEND SERVICES, INC.

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                                         December 31,
                                                                                            ---------------------------------------
                                          ASSETS                                                    2000                1999
                                                                                                    ----                ----
<S>                                                                                         <C>                   <C>
Current assets:
    Cash and cash equivalents                                                                  $      6,000       $   4,388,000

    Short-term investments                                                                          870,000                  --
    Accounts receivable, net of allowance for doubtful accounts of $542,000 in 2000
        and $719,000 in 1999                                                                      1,974,000           5,691,000
    Prepaid expenses and other current assets
                                                                                                    165,000             273,000
                                                                                            -----------------------------------
Total current assets                                                                              3,015,000          10,352,000
                                                                                            -----------------------------------
Property and equipment:
    Computer equipment                                                                            2,975,000           5,328,000
    Software development                                                                          1,550,000           1,537,000
    Furniture and fixtures                                                                          220,000             175,000
                                                                                            -----------------------------------

Property and equipment                                                                            4,745,000           7,040,000
    Accumulated depreciation                                                                     (2,487,000)         (1,915,000)
                                                                                            -----------------------------------
        Property and equipment, net                                                               2,258,000           5,125,000
Notes receivable and other assets                                                                   406,000             723,000
Goodwill and other intangible assets, net of accumulated amortization of $637,000
   in 1999                                                                                               --             606,000
Net assets from discontinued operations                                                                  --           1,086,000
                                                                                            -----------------------------------
Total assets                                                                                   $  5,679,000       $  17,892,000
                                                                                            ===================================

                           LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Current maturities of long-term debt and borrowings under line of credit                   $         --       $   2,403,000
    Accounts payable                                                                              1,059,000           2,177,000
    Accrued compensation and benefits                                                               399,000           2,075,000
    Other accrued liabilities                                                                     1,310,000           3,925,000
    Deferred income taxes                                                                           121,000             121,000
                                                                                            -----------------------------------
Total current liabilities                                                                         2,889,000          10,701,000
                                                                                            -----------------------------------

Long-term debt, net of current maturities                                                                --           3,123,000
Convertible notes to related parties                                                                     --           1,500,000
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, 2000 and 1999                                                              2,000               2,000
         Series B Convertible Preferred Stock, 60,000 shares issued and outstanding at
              December 31, 2000                                                                       1,000                  --
    Common stock, $.05 par value, 6,000,000 shares authorized, 4,400,000
        shares issued and outstanding at December 31, 2000 and 1999                                 224,000             220,000
    Additional paid-in capital                                                                   28,602,000          26,945,000
    Unrealized loss on short-term investment                                                       (866,000)                 --
    Accumulated deficit                                                                         (25,167,000)        (23,979,000)
Less Treasury Stock, at cost, 100,000 shares                                                       (620,000)           (620,000)
                                                                                            -----------------------------------
Total stockholders' equity                                                                        2,176,000           2,568,000
                                                                                            -----------------------------------
Total liabilities and stockholders' equity                                                     $  5,679,000       $  17,892,000
                                                                                            ===================================
</TABLE>
   The accompanying notes are an integral part of these consolidated balance
                                    sheets.

                                       15
<PAGE>

                           TRANSCEND SERVICES, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>

                                                                                            YEARS ENDED DECEMBER 31,
                                                                                 ------------------------------------------------
                                                                                      2000            1999              1998
                                                                                      ----            ----              ----
<S>                                                                               <C>             <C>              <C>
Revenue                                                                           $26,262,000     $49,515,000      $ 53,314,000
Direct costs                                                                       21,485,000      46,108,000        44,748,000
                                                                                 ----------------------------------------------
    Gross profit                                                                    4,777,000       3,407,000         8,566,000
                                                                                 ----------------------------------------------

Operating expenses:
      Marketing and sales                                                             936,000       2,107,000         2,238,000
      Research and development                                                      1,152,000       1,733,000           260,000
      General and administrative                                                    3,470,000       7,369,000         4,891,000
      Amortization                                                                     59,000         173,000           213,000
                                                                                 ----------------------------------------------
         Total operating expenses                                                   5,617,000      11,382,000         7,602,000
                                                                                 ----------------------------------------------

Income (loss) from operations                                                        (840,000)     (7,975,000)          964,000
                                                                                 ----------------------------------------------

Other income (expense):
    Interest expense, net                                                            (420,000)       (855,000)         (521,000)
    Gain on sale of assets                                                             89,000       5,774,000                --
    Other                                                                             461,000              --           (61,000)
                                                                                 ----------------------------------------------
           Total other income (expense)                                               130,000       4,919,000          (582,000)
                                                                                 ----------------------------------------------

Income (loss) before income taxes and discontinued operations                        (710,000)     (3,056,000)          382,000
Income taxes                                                                               --              --                --
                                                                                 ----------------------------------------------
Income (loss) before discontinued operations                                         (710,000)     (3,056,000)          382,000
Loss from discontinued operations                                                          --      (1,452,000)         (100,000)
                                                                                 ----------------------------------------------
Net income (loss)                                                                    (710,000)     (4,508,000)          282,000
Dividends on preferred stock                                                         (478,000)       (480,000)         (479,000)
                                                                                 ----------------------------------------------
Net loss attributable to common stockholders                                      $(1,188,000)    $(4,988,000)     $   (197,000)
                                                                                 ==============================================

Basic and diluted net loss per share:

From continuing operations                                                        $     (0.27)    $     (0.81)     $      (0.03)
From discontinued operations                                                            (0.00)          (0.33)            (0.02)
                                                                                 ----------------------------------------------
Net loss per share attributable to common stockholders                            $     (0.27)    $     (1.14)     $      (0.05)
                                                                                 ==============================================

Weighted average common shares outstanding                                          4,341,000       4,386,000         4,224,000
                                                                                 ==============================================
</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>

                                                     PREFERRED STOCK                             ADDITIONAL
                                                   -------------------     COMMON    TREASURY      PAID-IN      SUBSCRIPTION
                                                   SERIES A   SERIES B     STOCK       STOCK       CAPITAL       RECEIVABLE
                                                   ---------  --------     -----       -----       -------       ----------
<S>                                                <C>        <C>       <C>        <C>           <C>             <C>
Balance, December 31, 1997                            $2,000  $     --  $ 205,000  $      --     $26,208,000     $       --
Issuance of 184,000 shares of
   Common Stock in acquisitions                           --        --      9,000         --          (9,000)            --
Issuance of 11,230 shares of
   Common Stock from exercise of
   options and other issuances                            --        --      1,000         --         100,000             --
Net loss attributable to common
   stockholders                                           --        --         --         --              --             --
Adjustment for issuance of costs
   for Preferred Stock in 1997                            --        --         --         --         (13,000)            --
                                                   ------------------------------------------------------------------------
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                                          --        --         --         --              --             --
           Comprehensive loss                             --        --         --                         --             --
Conversion of convertible debt to
    Preferred Stock
Issuance of 27,900 shares of                              --     1,000         --         --       1,499,000             --
   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     $       --
                                                   ========================================================================

<CAPTION>

                                            UNREALIZED
                                             LOSS ON
                                            SHORT-TERM      ACCUMULATED      STOCKHOLDERS'      COMPREHENSIVE
                                            INVESTMENT        DEFICIT           EQUITY               LOSS
                                            ----------        -------           ------               ----
<S>                                        <C>           <C>                 <C>                <C>
Balance, December 31, 1997                 $      --     $(18,502,000)        $7,913,000
Issuance of 184,000 shares of
   Common Stock in acquisitions                   --         (292,000)          (292,000)
Issuance of 11,230 shares of
   Common Stock from exercise of
   options and other issuances                    --               --            101,000
Net loss attributable to common
   stockholders                                   --         (197,000)          (197,000)
Adjustment for issuance of costs
   for Preferred Stock in 1997                    --               --            (13,000)
                                           ---------------------------------------------
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)           (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                 $(866,000)    $(25,167,000)        $2,176,000
                                           =============================================


</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,
                                                                               ----------------------------------------------------
                                                                                      2000              1999             1998
                                                                                      ----              ----             ----
<S>                                                                               <C>               <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss attributable to common shareholders                                       $(1,188,000)      $(4,988,000)       $(197,000)
                                                                               ----------------------------------------------------
     Adjustments to reconcile net loss to net cash provided by (used in)
         operating activities:

     Depreciation and amortization                                                   1,972,000         5,155,000        1,790,000
     Loss related to discontinued operations                                                --         1,452,000          100,000
     Gain on legal settlement                                                         (461,000)               --               --
     Gain on sale of assets                                                            (89,000)       (5,774,000)              --
     Preferred Stock dividends                                                         478,000           480,000          479,000
Changes in assets and liabilities:
     Accounts receivable, net                                                        2,687,000         1,670,000       (2,962,000)
     Prepaid expenses                                                                  108,000           632,000         (137,000)
     Notes receivable and other assets                                                 317,000           116,000          (61,000)
     Accounts payable                                                               (1,118,000)         (449,000)       1,651,000
     Accrued liabilities                                                            (5,566,000)        2,321,000         (674,000)
                                                                               ----------------------------------------------------
Total adjustments                                                                   (1,672,000)        5,603,000          186,000
                                                                               ----------------------------------------------------
Net cash (used in) provided by continuing operations                                (2,860,000)          615,000          (11,000)
Net cash provided by (used in) discontinued operations                                      --           914,000         (180,000)
                                                                               ----------------------------------------------------
Net cash (used in) provided by operating activities                                 (2,860,000)        1,529,000         (191,000)
                                                                               ----------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Capital expenditures                                                             (994,000)       (3,593,000)      (5,362,000)
     Cash acquired from acquisitions                                                        --                --           31,000
     Proceeds from disposition of assets                                             4,700,000         7,378,000               --
                                                                               ----------------------------------------------------
Net cash provided by (used in) investing activities                                  3,706,000         3,785,000       (5,331,000)
                                                                               ----------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Borrowings from short-term debt                                                        --         1,500,000               --
     Borrowings (repayments) under line of credit agreement                            614,000        (2,740,000)         343,000
     Borrowings from long-term debt                                                         --           400,000          702,000
     Principal payments on long-term debt                                           (5,526,000)         (100,000)        (236,000)
     Preferred Stock dividends                                                        (478,000)         (480,000)        (479,000)
     Proceeds from stock options and other issuances                                   162,000            44,000          101,000
                                                                               ----------------------------------------------------
Net cash (used in) provided by financing activities                                 (5,228,000)       (1,376,000)         431,000
                                                                               ----------------------------------------------------

Net change in cash and cash equivalents                                             (4,382,000)        3,938,000       (5,091,000)
Cash and cash equivalents, at beginning of year                                      4,388,000           450,000        5,541,000
                                                                               ----------------------------------------------------

Cash and cash equivalents, at end of year                                          $     6,000       $ 4,388,000        $ 450,000
                                                                               ====================================================

Supplemental cash flow information:
Cash paid for interest expense                                                     $   420,000       $   721,000        $ 505,000
                                                                               ====================================================

Noncash investing and financing activities:
       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, 2000, 1999 AND 1998

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
considers the short-term investment as available for sale. At December 31, 2000,
the short-term investment consisted of unregistered common stock of a publicly
traded company that is not available-for-sale until April 1, 2001. The cost
basis of this short-term investment is $1,736,000 and the unrealized loss was
$866,000 in 2000. The fair market value of this short-term investment is
$870,000 as of December 31, 2000.

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 $67,000, $1,018,000 and $152,000 in 2000, 1999 and 1998,
respectively. Charges for bad debts were $244,000, $608,000 and $6,000 in 2000,
1999 and 1998, respectively.

                                       19
<PAGE>

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 related to the sale of transcription services. Net notes
receivable were approximately $357,000 and $607,000 at December 31, 2000 and
1999, respectively. The notes have a weighted average annual interest rate of
7.1% and mature at various dates through September 2002. Other assets consist of
deposits for rented facilities in the approximate amounts of $49,000 and
$116,000 at December 31, 2000 and 1999, 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 businesses 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 and 1999 was equal to the
carrying amount included in the accompanying consolidated balance sheets.

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

                                       20
<PAGE>

grant; therefore 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
income (loss) per share calculations in 2000, 1999 and 1998.

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 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

       In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No.133 ("SFAS 133"), "Accounting For Derivative Instruments and Hedging
Activities," which establishes standards for accounting for derivatives and
hedging activities, and requires fair value reporting for derivatives and
formalizes hedge criteria. To date, the Company has not invested in derivative
instruments nor participated in hedging activities and, therefore, does not
anticipate that there will be a material impact on the results of operations or
financial position from the adoption of SFAS 133, as amended.

       In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements and amended it in March and June 2000. SAB 101 summarizes existing
guidance on revenue recognition. The Company adopted the provisions of SAB 101
in the third quarter of 2000, and there was not a material effect on the results
of operations or financial position as a result of the adoption.

       In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation - an
Interpretation of Accounting Principles Board Opinion No. 25 ("APB 25"). FIN 44
provides guidance for certain issues that arose in applying APB 25. The
provisions were effective on July 1, 2000, and, generally, are applied
prospectively. Adoption of FIN 44 has not materially affected the Company's
financial results.

2. DISCONTINUED OPERATIONS

       The net loss and net assets from discontinued operations relate 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
ceased TCM's operations effective December 31, 1999 (see Note 11). The reported
net assets from discontinued operations as of December 31, 1999 relate to TCM.
The net losses from Tricare Ops represent 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>

       Revenue and net loss from discontinued operations were as follows for the
years ended December 31, 1999 and 1998 (amounts in thousands).

                                                  1999             1998
                                                  ----             ----
          Revenue

               TCM                               $   783            $ 346
               Tricare Ops                            --               --
                                                 ------------------------
                   Total revenue                 $   783            $ 346
                                                 ========================

          Net Income (loss)
               TCM                                  $(32)           $  --
               Tricare Ops                        (1,420)            (100)
                                                 ------------------------
                   Total net loss                $(1,452)           $(100)
                                                 ========================

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 is summarized as follows at December 31, 2000 and 1999:

<TABLE>
<CAPTION>
                                                                                             2000             1999

<S>                                                                                         <C>          <C>
$1,500,000 line of credit, interest at prime rate less 0.5%, maturing on March 31,
    2002...............................................................................     $ 614,000    $         --
Notes payable, interest at 8.5%, monthly payments of $11,284
   in principal and interest through maturity on May 19, 2000..........................            --          55,000
$180,000 revolving line of credit for Cascade, interest at prime plus 1.75% paid in
   full during January 2000............................................................            --         123,000
$10,000,000 equipment loan facility, interest at 30-month treasury notes plus 5.5%,
   monthly payments of $17,898 in principal and interest through November 2003,
   prepaid upon the sale of underlying financed equipment during June 2000.............            --         627,000
$10,000,000 revolving line of credit, interest at prime plus 2.25 percent,
   maturing on  May 31, 2001, terminated on November 21, 2000..........................            --       2,721,000
8% convertible debentures, due August 14, 2000.........................................            --       2,000,000
                                                                                            ---------    ------------
Total debt.............................................................................       614,000       5,526,000
Less: Current maturities of long-term debt.............................................            --      (2,403,000)
                                                                                            ---------    ------------
                                                                                            $ 614,000    $  3,123,000
                                                                                            =========    ============
</TABLE>

       During 1998, the Company signed a $10.0 million equipment loan facility
with DVI Financial Services, Inc. This facility provides additional financing
for transcription systems required for new contracts. The facility requires
monthly payments that amortize the cost of the equipment over the life of the
customer contract, not to exceed 60 months, at fixed interest rates based on the
treasury bill rates in effect at the time of the loan advance.

       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 businesses (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,

                                       22
<PAGE>

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
businesses (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 businesses. 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 businesses.

       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 (9% at December 31, 2000). 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 (see Note 13).

5.   COMMITMENTS AND CONTINGENCIES

Lease Commitments

       Future minimum annual rental obligations under operating leases as of
December 31, 2000 are as follows:

                  2001...........................   $   301,000
                  2002...........................       210,000
                  2003...........................       174,000
                  2004...........................       180,000
                  2005...........................       185,000
                  Thereafter.....................       353,000
                                                    -----------
                                                    $ 1,403,000
                                                    ===========

       Rental expense was $398,000, $665,000 and $643,000 for the years ended
December 31, 2000, 1999 and 1998, 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'
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 claim abuse of
process, intentional interference with contractual and prospective business
relations, negligent interference and unlawful or unfair business practices
which led to the discontinuation in April 1993 of the former business of the
Company's subsidiaries and their contracting associated medical groups. Nine
defendants in the Lawsuit 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.

       The Company is 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.

                                       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 2000, 1999 and
1998.

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 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.

       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.

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 on or after November 15, 1998, in
whole or in part, at the redemption prices set forth below together with all
accrued and unpaid dividends to the redemption date.

                        Redemption Dates                   Redemption Prices
--------------------------------------------------------------------------------
            November 15, 2000 through November 14, 2001          103%
            November 15, 2001 and after                          100%

       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 a stock option plan for its employees. The
plan provides 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, 1997                                 247,000                                      $ 15.55
Granted                                                                  108,000       $ 10.00 to $19.40              $ 14.40
Forfeited                                                               (51,000)       $   .25 to $56.90              $ 19.95
Exercised                                                                (2,000)       $   .25 to $13.75              $ 12.25
                                                                      ---------
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
                                                                      =========

Options eligible for exercise at December 31, 2000                      186,000
                                                                      =========
</TABLE>

       At December 31, 2000 there were a total of 36,000 common stock options
available for grant.

       On April 30, 1996, the Company granted a warrant to purchase shares of
its Common Stock to Silicon Valley Bank, a California-chartered bank, in
connection with two credit facilities the Company established with Silicon
Valley East, a division of Silicon Valley Bank. The warrant which expires April
30, 2001, entitles the holder to purchase an aggregate of 5,000 shares of the
Company's Common Stock, subject to certain adjustments, at an exercise price of
$56.25 per share.

       On April 3, 1997, the Company granted a warrant to purchase shares of its
Common Stock to Coast Business Credit. The warrant which expires April 30, 2001
entitles the holder to purchase an aggregate of 3,000 shares of the Company's
Common Stock, subject to certain adjustments, at an exercise price of $23.125
per share.

       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 2000, 1999 and 1998 to employees and
non-employee directors of the Company using the Black-Scholes option-pricing
model and the following weighted average assumptions:

<TABLE>
<CAPTION>
                                              2000             1999                   1998
----------------------------------------------------------------------------------------------------
<S>                                       <C>              <C>                    <C>
          Risk-free interest rate         5.65% - 6.65%    4.84% - 6.07%          4.60% - 5.91%
          Expected dividend yield               --               --                     --
          Expected life                     Four years       Four years             Four years
          Expected volatility                   88%              93%                    70%
</TABLE>

       The total fair value of the options granted during the years ended
December 31, 2000, 1999 and 1998 was computed as approximately $124,000,
$295,000 and $701,000, 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, 2000, 1999, and 1998 would have been as follows:

<TABLE>
<CAPTION>
                                                                                    2000               1999              1998
                                                                                    ----               ----              ----
<S>                                                                             <C>                <C>               <C>
Net loss attributable to common stockholders:
     As reported                                                                ($1,188,000)       ($4,988,000)      ($197,000)
     Pro forma                                                                  ($1,662,000)        (5,528,000)       (714,000)
Basic and diluted net loss per share attributable to common stockholders:
     As reported                                                                     ($0.27)            ($1.14)         ($0.05)
     Pro forma                                                                       ($0.38)            ($1.26)         ($0.17)
</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           2000                Life             Price               2000             Price
----------------------------------------------------------------------------------------------------------------------------------
<S>                 <C>                  <C>                 <C>                 <C>              <C>                 <C>
                   $1.34 - $ 1.50           82,000           9.9 years            $1.34                --                --
                   $1.51 - $ 2.00          128,000           8.8 years            $1.72             128,000             $1.72
                   $2.01 - $ 5.00           99,000           8.9 years            $3.15              24,000             $2.72
                   $5.01 - $27.50           46,000           7.2 years            $13.38             34,000             $14.05
                                      ------------------                                       -------------------
                   $1.34 - $27.50          355,000           8.9 years            $ 3.55            186,000             $4.11
                                      ==================                                       ===================
</TABLE>

10.   INCOME TAXES

       For the years ended December 31, 2000, 1999 and 1998, the Company
generated a net loss for income tax purposes; therefore, no income tax provision
has been recorded.

       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,
2000 and 1999, were as follows:

<TABLE>
<CAPTION>
                                                                             2000               1999
                                                                             ----               ----
<S>                                                                         <C>                 <C>
Deferred tax liabilities:
Equipment and leasehold..........................................        $   (30,000)        $   (162,000)
Intangibles assets...............................................            (10,000)             (46,000)
Exercise of stock options........................................           (358,000)            (325,000)
                                                                       ------------------------------------
                                                                            (398,000)            (533,000)
Deferred tax assets:
Net operating loss carry-forwards................................          7,962,000            7,685,000
Cash-basis deferral..............................................             24,000               24,000
Accrued liabilities..............................................            139,000              416,000
Valuation allowance..............................................         (7,848,000)          (7,713,000)
                                                                       ------------------------------------
Net deferred tax (liabilities)...................................        $  (121,000)        $   (121,000)
                                                                       ====================================
</TABLE>

       At December 31, 2000, the Company had net operating loss carry-forwards
of approximately $20,627,000 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 $7,848,000 and $7,713,000 at December 31,
2000 and 1999, 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:                                              2000        1999         1998
                                                                          ----        ----         ----
<S>                                                                       <C>         <C>          <C>
Federal..........................................................          34%         34%           34%
State............................................................           5%          5%            5%
Net operating loss carry-forwards................................           0%          0%            0%
Valuation allowance..............................................         (39%)       (39%)         (39%)
                                                                       ----------------------------------
Effective tax rate...............................................           0%          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. The Company ceased TCM's operations effective December 31,
1999.

       On June 1, 1998 the Company completed the acquisition of Health Care
Information Systems, Inc. ("HCIS"). The acquisition

                                       26
<PAGE>

was accounted for under the pooling of interests method of accounting. The
Company has merged HCIS into a newly formed wholly owned subsidiary, Cascade
Health Information Software ("Cascade"), the product name formerly used by HCIS
which is widely recognized in the industry.

       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 due in December
2001.

       On October 13, 2000, the Company completed the sale of its Co-Sourcing
and CodeRemote businesses (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.

       The following unaudited pro forma financial information presents
consolidated revenue and gross profit for the continuing operations 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 1998, 1999 and for the ten-month and
thirteen-day period ended October 13, 2000 and in two segments for the remainder
of 2000 (medical transcription and coding software). These four segments are
referred to by the Company as Co-Sourcing, CodeRemote, Transcription and
Cascade, respectively. The Company evaluates the performance of Co-Sourcing,
CodeRemote and Transcription based on revenue and gross profit. Cascade is
evaluated based on revenue, gross profit and operating income. In 1999 and 1998
the revenue and gross profit derived from transcription services performed for
Co-Sourcing customers was reclassified from Co-Sourcing to Transcription 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.

<TABLE>
<CAPTION>
                                    (in 000's)                      2000          1999           1998
                    <S>                                             <C>           <C>            <C>
                    Revenue:
                         Transcription                               $13,666       $24,085         $22,593
                         Cascade                                       2,255         2,234           1,360
                         Co-Sourcing                                   9,678        22,868          29,361
                         CodeRemote                                      663           328               0
                                                                -------------------------------------------
                              Total revenue                          $26,262       $49,515         $53,314
                                                                ===========================================

                    Gross profit:
                         Transcription                               $ 2,128       $   599         $ 3,003
                         Cascade                                       1,416         1,431           1,104
                         Co-Sourcing                                   1,179         1,377           4,459
                         CodeRemote                                       54             0               0
                                                                -------------------------------------------
                              Total gross profit                     $ 4,777       $ 3,407         $ 8,566
                                                                ===========================================

                    Cascade operating income (loss)                    ($477)        ($600)        $   293
                                                                ===========================================
</TABLE>

13.   Subsequent Events

       On March 30, 2001, the Company and the Guarantors extended the due date
of its line of credit to March 31, 2002 (see Note 4).

                                       27
<PAGE>

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

    There has been no occurrence requiring a response to this item.

                                   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 2001 Annual Meeting
of Stockholders to be held May 8, 2001.

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 2001 Annual Meeting
of Stockholders to be held May 8, 2001.

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 2001 Annual Meeting
of Stockholders to be held May 8, 2001.

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 2001 Annual Meeting
of Stockholders to be held May 8, 2001.

                                       28
<PAGE>

                                    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 Report of Independent Public Accountants listed below are
included in Item 8.

     Report of Independent Public Accountants.

     Consolidated Balance Sheets as of December 31, 2000 and 1999

     Consolidated Statements of Operations for the years ended December 31,
     2000, 1999 and 1998

     Consolidated Statements of Stockholders' Equity for the years ended
     December 31, 2000, 1999 and 1998

     Consolidated Statements of Cash Flows for the years ended December 31,
     2000, 1999 and 1998

     Notes to Consolidated Financial Statements

     Financial Statement Schedules are not required

     (b)  Reports on Form 8-K.

On October 30, 2000, Transcend Services, Inc. filed a Current Report on Form 8-K
regarding the sale of its Co-Sourcing and CodeRemote businesses on October 13,
2000 for a purchase price of approximately $4.7 million.

(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 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); or (xv) the Company's Current Report on Form 8-K filed
October 30, 2000 (referred to as "10/30/00 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-KA, Exhibit 2(a))

                                       29
<PAGE>

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

    3.1.4  -   Certificate of Amendment of the Certificate of Incorporation

     *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)

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

    *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)

    *21.1  -   Subsidiaries of the Registrant

     23.1  -   Consent of Arthur Andersen LLP

                                       30
<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 Financial Officer
                              (Principal Executive, Financial
                              and Accounting Officer)

Dated: March 30, 2001

     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/ Donald L. Lucas            Chairman of the Board of Directors                              March 30, 2001
-------------------
Donald L. Lucas

/s/ Larry G. Gerdes
-------------------
Larry G. Gerdes                Director, President, Chief Executive Officer,                   March 30, 2001
                               Chief Financial Officer and Chief Accounting Officer
                               (Principal Executive, Financial and Accounting Officer)

/s/ B. Frederick Becker
-----------------------
B. Frederick Becker            Director                                                        March 30, 2001


/s/ George B. Caldwell
----------------------
George B. Caldwell             Director                                                        March 30, 2001


/s/ Walter S. Huff, Jr.
-----------------------
Walter S. Huff, Jr.            Director                                                        March 30, 2001


/s/ Charles E. Thoele          Director                                                        March 30, 2001
---------------------
Charles E. Thoele
</TABLE>

                                       31