10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_____________________________________________

FORM 10-Q

_____________________________________________

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

OR

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

For the transition period from              to             

Commission File Number 000-18217

_____________________________________________

TRANSCEND SERVICES, INC.

(Exact name of registrant as specified in its charter)

_____________________________________________

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

One Glenlake Parkway, Suite 1325, Atlanta, GA 30328

(Address of principal executive offices and zip code)

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

_____________________________________________

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  o

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

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

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

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

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

Class	Outstanding at July 31, 2011
Common Stock, $0.05 par value	10,671,598

INDEX
		Page Number
PART I.	FINANCIAL INFORMATION	3
Item 1.	Financial Statements (unaudited)	3
	Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010	3
	Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2011 and 2010	5
	Consolidated Statement of Stockholders’ Equity for the Six Months Ended June 30, 2011	6
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
Item 4.	Controls and Procedures	26
PART II.	OTHER INFORMATION	26
Item 1A.	Risk Factors	26
Item 6.	Exhibits	26
SIGNATURES		27
EXHIBIT INDEX		28

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TRANSCEND SERVICES, INC.

CONSOLIDATED BALANCE SHEETS

(Rounded to the nearest thousand)

	June 30, 2011			December 31, 2010
ASSETS	(unaudited)
Current assets:
Cash and cash equivalents	$	4,114,000		$	6,207,000
Short-term investments	18,279,000			20,454,000
Accounts receivable, net of allowance for doubtful accounts of $145,000 at June 30, 2011 and $124,000 at December 31, 2010	14,259,000			12,037,000
Deferred income tax, net	343,000			482,000
Prepaid expenses and other current assets	1,320,000			688,000
Total current assets	38,315,000			39,868,000
Property and equipment:
Computer equipment	4,727,000			4,113,000
Software	4,631,000			4,263,000
Furniture and fixtures	670,000			652,000
Total property and equipment	10,028,000			9,028,000
Accumulated depreciation and amortization	(6,892,000		)	(6,052,000		)
Property and equipment, net	3,136,000			2,976,000
Capitalized software development costs, net	5,087,000			3,188,000
Goodwill and Intangible assets:
Goodwill	38,087,000			28,246,000
Other intangible assets	11,859,000			8,789,000
Total intangible assets	49,946,000			37,035,000
Accumulated amortization	(2,265,000		)	(1,734,000		)
Intangible assets, net	47,681,000			35,301,000
Deferred income tax, net - noncurrent	2,190,000			470,000
Other assets	371,000			414,000
Total assets	$	96,780,000		$	82,217,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,008,000		$	1,653,000
Accrued compensation and benefits	3,955,000			3,666,000
Promissory notes payable	—			67,000
Income tax payable	847,000			1,193,000
Other accrued liabilities	2,556,000			2,180,000
Total current liabilities	9,366,000			8,759,000
Long term liabilities:
Uncertain tax position	7,982,000			2,606,000
Other liabilities	585,000			689,000
Total long term liabilities	8,567,000			3,295,000
Commitments and contingencies (Note 10)
Stockholders’ equity:
Preferred stock, $0.01 par value; 2,000,000 shares authorized and no shares outstanding at June 30, 2011 and December 31, 2010	—			—

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Common stock, $0.05 par value; 30,000,000 shares authorized at June 30, 2011 and December 31, 2010; 10,671,000 and 10,566,000 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively	533,000		528,000
Additional paid-in capital	64,662,000		63,368,000
Retained earnings	13,652,000		6,267,000
Total stockholders’ equity	78,847,000		70,163,000
Total liabilities and stockholders’ equity	$	96,780,000	$	82,217,000

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

4

TRANSCEND SERVICES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited and rounded to the nearest thousand,

except earnings per share)

	Three months ended June 30,						Six months ended June 30,
	2011			2010			2011			2010
Revenue	$	30,662,000		$	22,209,000		$	59,960,000		$	44,415,000
Direct costs (1)	18,349,000			14,178,000			35,483,000			28,904,000
Gross profit	12,313,000			8,031,000			24,477,000			15,511,000
Operating expenses:
Sales and marketing (1)	638,000			535,000			1,052,000			938,000
Information Technology (1)	1,010,000			408,000			1,906,000			834,000
General and administrative (1)	3,979,000			3,936,000			7,872,000			7,695,000
Depreciation and amortization	752,000			460,000			1,428,000			908,000
Total operating expenses	6,379,000			5,339,000			12,258,000			10,375,000
Operating income	5,934,000			2,692,000			12,219,000			5,136,000
Interest and other income	(39,000		)	(17,000		)	(68,000		)	(31,000		)
Interest and other expense	3,000			40,000			111,000			81,000
(Gain) on foreign currency transactions	(38,000		)	—			(95,000		)	—
Net other (income) expense	(74,000		)	23,000			(52,000		)	50,000
Income before income taxes	6,008,000			2,669,000			12,271,000			5,086,000
Income tax provision	2,384,000			1,101,000			4,886,000			2,039,000
Net income	$	3,624,000		$	1,568,000		$	7,385,000		$	3,047,000
Basic earnings per share:
Net earnings per share	$	0.34		$	0.15		$	0.70		$	0.29
Weighted average shares outstanding	10,651,000			10,489,000			10,625,000			10,486,000
Diluted earnings per share:
Net earnings per share	$	0.33		$	0.15		$	0.67		$	0.28
Weighted average shares outstanding	11,063,000			10,793,000			11,025,000			10,839,000

(1) Amounts shown exclusive of depreciation and amortization

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

5

TRANSCEND SERVICES, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2011

(Unaudited and rounded to the nearest thousand)

	Number of Shares of Series A Preferred Stock	Series A Preferred Stock		Number of Shares of Common Stock	Common Stock		Additional Paid-in Capital		Retained Earnings		Total Stockholders’ Equity
Balance, December 31, 2010	—	$	—	10,566,000	$	528,000	$	63,368,000	$	6,267,000	$	70,163,000
Net income	—	—		—	—		—		7,385,000		7,385,000
Issuance of common stock from stock incentive plans	—	—		105,000	5,000		600,000		—		605,000
Share-based compensation expense	—	—		—	—		575,000		—		575,000
Tax benefit for share based payments	—	—		—	—		119,000		—		119,000
Balance, June 30, 2011	—	$	—	10,671,000	$	533,000	$	64,662,000	$	13,652,000	$	78,847,000

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

6

TRANSCEND SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and rounded to the nearest thousand)

	Six months ended June 30,
	2011			2010
Cash flows from operating activities:
Net income	$	7,385,000		$	3,047,000
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes	(395,000		)	126,000
Depreciation and amortization	1,428,000			908,000
Share-based compensation	575,000			1,085,000
Tax benefit for share based payments	(119,000		)	32,000
Changes in assets and liabilities:
Accounts receivable, net	(1,043,000		)	(117,000		)
Prepaid income taxes, excluding tax benefit for share-based payments	119,000			(317,000		)
Prepaid expenses and other current assets	(621,000		)	(244,000		)
Other assets	54,000			73,000
Accounts payable	19,000			(826,000		)
Accrued and other liabilities	(793,000		)	(252,000		)
Total adjustments	(776,000		)	468,000
Net cash provided by operating activities	6,609,000			3,515,000
Cash flows from investing activities:
Capital expenditures	(854,000		)	(1,112,000		)
Capitalized software development costs	(1,899,000		)	(1,635,000		)
Purchase of investments	(12,435,000		)	(20,587,000		)
Sale and maturity of investments	14,610,000			5,655,000
Purchase of business, net of cash acquired	(8,781,000		)	—
Net cash used in investing activities	(9,359,000		)	(17,679,000		)
Cash flows from financing activities:
Proceeds from stock options and other issuances of stock	605,000			43,000
Revision of estimate for capitalized expenses of stock offering	—			56,000
Tax benefit for share-based payments	119,000			(32,000		)
Repayment of promissory notes payable	(67,000		)	(832,000		)
Net cash provided by (used in) financing activities	657,000			(765,000		)
Net change in cash and cash equivalents	(2,093,000		)	(14,929,000		)
Cash and cash equivalents at beginning of period	6,207,000			25,732,000
Cash and cash equivalents at end of period	$	4,114,000		$	10,803,000
Supplemental cash flow information:
Cash paid for interest	$	1,000		$	19,000
Cash paid for income taxes	$	5,625,000		$	2,245,000

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

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TRANSCEND SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements include the accounts of Transcend Services, Inc. and its subsidiary companies (the “Company” or “Transcend”). All intercompany accounts and transactions have been eliminated in consolidation.

The accompanying consolidated financial statements are unaudited and have been prepared by our management in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of management, all adjustments, consisting of normal recurring accruals, necessary for the fair presentation of the consolidated financial position, results of operations and cash flows, have been included. For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010. Footnote disclosure that substantially duplicates the disclosure contained in that document has been omitted.

During the second quarter of 2010, we determined that $231,000 of stock-based compensation expense should have been recorded in the first quarter of 2010. We evaluated the materiality of the error and determined that a restatement of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 was unnecessary. The amounts in our consolidated statement of operations for the six months ended June 30, 2010 presented in this report reflect this adjustment to the first quarter of 2010 (see Note 9).

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

None.

Recently Issued Accounting Pronouncements Not Yet Adopted

In May 2011, the Financial Accounting Standard Board ("FASB") issued Accounting Standards Update, ("ASU") 2011-04 to Topic 820 - Fair Value Measurements and Disclosures. The update, entitled Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, amends current fair value measurement and disclosure guidance to include increased transparency around valuation inputs and investment categorization.  The update results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. Generally Accepted Accounting Principles ("GAAP") and International Financial Reporting Standards ("IFRS") and also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. The update is effective prospectively for interim and annual periods beginning after December 15, 2011. We do not expect that the adoption of this update will have a material impact on our financial statements.

In June 2011, the FASB issued ASU No. 2011-05 to Topic 220 - Comprehensive Income. The update, entitled Comprehensive Income (Topic 220): Presentation of Comprehensive Income requires comprehensive income to be reported in either a single statement or in two consecutive statements reporting net income and other comprehensive income. The amendment does not change what items are reported in other comprehensive income or the U.S. GAAP requirement to report reclassification of items from other comprehensive income to net income. The update is effective for interim and annual periods beginning after December 15, 2011. We do not expect that the adoption of this update will have a material impact on our financial statements.

Net Earnings Per Share

We account for earnings per share in accordance with FASB ASC Topic 260 – Earnings per Share. Topic 260 requires the disclosure of basic net earnings per share and diluted net earnings per share. Basic net earnings per share is computed by dividing net income 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 per share gives effect to all potentially dilutive securities. Our stock options are potentially dilutive securities. Stock options with exercise prices that are

8

greater than the average market price are excluded from the calculation of diluted earnings per share because their effect would be anti-dilutive.

The reconciliation of the numerators and denominators of the basic and diluted earnings per share calculations are presented below:

	Three months ended June 30,				Six months ended June 30,
	2011		2010		2011		2010
Numerator:
Net income	$	3,624,000	$	1,568,000	$	7,385,000	$	3,047,000
Denominator:
Weighted average shares outstanding	10,651,000		10,489,000		10,625,000		10,486,000
Effect of dilutive securities
Common stock options	412,000		304,000		400,000		353,000
Denominator for diluted calculation	11,063,000		10,793,000		11,025,000		10,839,000
Basic earnings per share	$	0.34	$	0.15	$	0.70	$	0.29
Diluted earnings per share	$	0.33	$	0.15	$	0.67	$	0.28
Weighted-average outstanding stock options not included in diluted net income per share calculation as they had an anti-dilutive effect	46,000		238,000		123,000		74,000

2. ACQUISITIONS

In the second quarter of 2011 we continued our evaluation of our tax positions related to the purchase price allocation of the October 2010 acquisition of Heartland. During this examination, we identified a possible uncertain tax position of approximately $5.3 million related to pre-acquisition tax returns filed by Heartland. In accordance with FASB ASC 740, we have established a liability of $5.3 million for this uncertain tax position which increases goodwill by $6.7 million and reduces the acquired deferred tax assets by $1.4 million. See Note 11 for further discussion.

On April 29, 2011, we entered into an Agreement and Plan of Merger with DTS America, Inc. ("DTS") and certain principal stockholders and acquired DTS America, Inc. through a merger of DTS Acquisition Corporation (a wholly-owned subsidiary of Transcend Services, Inc.) into DTS America, Inc. The aggregate consideration was $9,500,000, consisting of cash at closing of $8,900,000, $200,000 payable after receipt of financial statements and $400,000 payable one year after closing. As of June 30, 2011, none of the remaining $600,000 has been paid and is included in Other Accrued Liabilities on the Balance Sheet. There is no earn-out provision in the purchase agreement and no debt was assumed.

Founded in 1995, DTS was a medical transcription company that served approximately 30 hospitals plus a number of clinics and surgery centers in 13 states and generated approximately $12 million of annual revenue at the date of acquisition. We purchased DTS to capitalize on the potential for the acquired business to grow and leverage our fixed overhead costs across a larger revenue base.

We allocated the purchase price between goodwill, customer relationships and related deferred tax liability, covenant not to compete and net identifiable assets. We have included the results of DTS operations in our financial statements from the close date forward.

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The following is a detailed list of the fair value of identifiable assets acquired and liabilities assumed in the DTS acquisition:

Cash	$	119,000
Accounts receivable	1,179,000
Fixed assets	203,000
Deferred tax asset	3,721,000
Other assets	22,000
Total identifiable assets	5,244,000
Accounts payable	336,000
Benefits payable	377,000
Other liabilities	108,000
Total identifiable liabilities	821,000
Net identifiable assets	$	4,423,000

The fair value of accounts receivable acquired approximated gross contractual amounts receivable. There were no assets arising from contingencies that were acquired in the transaction.

Goodwill of $3.1 million was recorded for the DTS acquisition. This consisted primarily of the synergies and economies of scale expected from combining the operations of Transcend and DTS and the value of the DTS assembled workforce. We have initially allocated the purchase price between goodwill, customer relationships and related deferred tax liability and net identifiable assets. Since this transaction was a stock purchase, goodwill and intangibles will not be deductible for income tax purposes. As permitted, we expect to finalize the purchase price allocation within one year of the purchase date. We do not expect any changes to the purchase price allocation to materially increase or decrease amortization expenses, but there could be an impact on the allocation between goodwill and other intangible assets. As of June 30, 2011, the purchase price was allocated as follows:

Net identifiable assets	$	4,423,000
Customer list	3,000,000
Covenant not to compete	70,000
Goodwill	3,141,000
Deferred tax liability	(1,134,000		)
Total purchase price	$	9,500,000

Intangible assets, except for goodwill, are amortized over their useful lives. The customer list is being amortized over ten years and the covenant not to compete over five years.

DTS revenue and net income of $2,043,000 and $85,000 respectively, are included in our Consolidated Statement of Operations for the three and six months ended June 30, 2011.

Unaudited pro forma revenue and net income of the combined entity had the DTS acquisitions been completed at the beginning of each period presented are as follows:

	SUPPLEMENTAL PRO FORMA INFORMATION
	Three months ended June 30,				Six months ended June 30,
	2011		2010		2011		2010
Revenue	$	31,677,000	$	25,771,000	$	64,038,000	$	51,487,000
Net Income	$	3,568,000	$	1,616,000	$	7,322,000	$	3,116,000

3. MAJOR CUSTOMERS

In September 2009, we announced that we had entered into a five-year single-source contract to provide medical transcription services to hospitals that are members of Health Management Associates (“HMA”) effective October 1, 2009. The agreement expanded our existing relationship with HMA to include the HMA hospitals which were using other transcription service providers. As of June 30, 2011, we have transitioned all of the existing HMA hospitals. In addition, pursuant to the terms of the agreement, any future hospitals acquired or managed by HMA will transition to us as soon as practicable.

10

Revenue attributable to our contract with HMA comprised 14.0% and 18.0% of our total revenue for the three months ended June 30, 2011 and 2010, respectively, and 14.7% and 18.2% for the six months ended June 30, 2011 and 2010. The decrease in the percentages is due to our growth in non-HMA revenue, particularly from acquisitions.

Our top 10 customers (a customer is an individual hospital) accounted for approximately 14.4 % of our transcription revenue for the three and six months ended June 30, 2011 and 16.4% of revenue for the three and six months ended June 30, 2010. These customers averaged $1.8 million of annualized revenue each in 2011 and $1.5 million in 2010. Our average annual revenue per customer was approximately $326,000 for the first six months of 2011 and $349,000 for the first six months of 2010.

4. INVESTMENTS

Short-term investments consist of government notes in the United States and uninsured fixed rate bank deposits in India. These investments, which have a contractual maturity of less than one year, are carried at fair value based on quoted market prices (level 1 inputs).

Description	June 30, 2011		December 31, 2010
Available-for-sale
Fixed rate bank deposits	$	2,024,000	$	848,000
U.S. Treasury Securities	16,255,000		19,606,000
Total short-term investments	$	18,279,000	$	20,454,000

5. GOODWILL AND OTHER INTANGIBLE ASSETS

We account for goodwill and other intangible assets in accordance with the provisions of FASB ASC Topic 350 – Intangibles-Goodwill and Other. Under this Topic, goodwill and intangible assets that have indefinite useful lives are tested at least annually for impairment rather than being amortized like intangible assets with finite useful lives, which are amortized over their useful lives. A portion of the respective purchase prices of the acquisitions of Medical Dictation, Inc. ("MDI") and PracticeXpert in 2005, OTP Technologies, Inc. ("OTP") in 2007, DeVenture Global Partners, Inc. ("DeVenture"), Transcription Relief Services, Inc. ("TRS") and Medical Dictation Services, Inc. ("MDSI") in 2009, Spryance, Inc. ("Heartland") in 2010 and DTS in 2011 were attributed to goodwill and other intangible assets.

Goodwill and Other Intangible Assets (Rounded to the nearest thousand)
		June 30, 2011						December 31, 2010
	Useful Life in Years	Gross Assets		Accumulated Amortization		Net Assets		Gross Assets		Accumulated Amortization		Net Assets
Goodwill		$	38,087,000	$	—	$	38,087,000	$	28,246,000	$	—	$	28,246,000
Amortized intangible assets:
Covenants not to compete	5	288,000		120,000		168,000		218,000		101,000		117,000
Technology	2	190,000		66,000		124,000		190,000		19,000		171,000
Customer relationships	5-10	11,381,000		2,079,000		9,302,000		8,381,000		1,614,000		6,767,000
Total goodwill and intangible assets		$	49,946,000	$	2,265,000	$	47,681,000	$	37,035,000	$	1,734,000	$	35,301,000

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Amortization expense was $297,000 for the quarter ended June 30, 2011 and $531,000 for the six months ended June 30, 2011. Estimated amortization expense for the next five fiscal years is as follows:

Fiscal Year	Amount
Remainder of 2011	$	658,000
2012	$	1,252,000
2013	$	1,173,000
2014	$	1,159,000
2015	$	1,141,000
2016	$	1,133,000

6. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

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

In accordance with FASB ASC Topic 825 – Financial Instruments, the carrying value of short-term debt, which totaled $0 as of June 30, 2011 and $67,000 at December 31, 2010, was estimated to approximate its fair value. The fair value of debt is estimated based on approximate market interest rates for similar issues. Our other financial instruments, including cash and cash equivalents, accounts receivable and accounts payable, approximate fair value due to the short-term nature of those assets and liabilities.

At June 30, 2011 and December 31, 2010, our short-term investments consisted of government notes in the United States and uninsured fixed rate bank deposits in India. These investments are classified as available-for-sale and valued using Level 1 inputs (quoted prices in active markets) and carrying value approximates fair value.

The following table summarizes the carrying amounts and fair values of short-term investments at June 30, 2011:

Description	June 30, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale
Fixed rate bank deposits	$	2,024,000	$	2,024,000	$	—	$	—
U.S. Treasury Securities	16,255,000		16,255,000		—		—
Total short-term investments	$	18,279,000	$	18,279,000	$	—	$	—

The following table summarizes the carrying amounts and fair values of short-term investments at December 31, 2010:

Description	December 31, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale
Fixed rate bank deposits	$	848,000	$	848,000	$	—	$	—
U.S. Treasury Securities	19,606,000		19,606,000		—		—
Total short-term investments	$	20,454,000	$	20,454,000	$	—	$	—

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7. BORROWING ARRANGEMENTS

Credit Facility

On August 31, 2009, Transcend and MDSI entered into a loan and security agreement with Regions Bank. Transcend and MDSI are both “borrowers” under the loan and security agreement, which replaced our previous credit facility. The loan and security agreement includes a one-time, four-year term loan of $7.0 million for the costs and expenses of, and, to the extent necessary, a portion of the purchase price for MDSI. The loan and security agreement also provides for up to $5.0 million in a revolving loan commitment based on eligible accounts receivable. We may use proceeds of the revolving loan only for working capital, general corporate purposes, and for specified acquisitions. The maximum amount of the revolving loan may be increased at the discretion of Regions Bank to $8.0 million. We used $4.0 million of the proceeds from the follow-on offering of our common stock completed in the fourth quarter of 2009 to pay down the term loan. The original revolving loan commitment expired and was renewed for another year, in August, 2010. Borrowings bear interest at a rate based on the current LIBOR (3.75% as of June 30, 2011 and December 31, 2010), and are secured by substantially all of our assets. The outstanding balance on the term loan of $67,000 was paid off in June, 2011 and the balance at June 30, 2011 was $0. The balance on the revolver was $0 as of June 30, 2011 and December 31, 2010. We did not borrow on the revolving loan during the six months ended June 30, 2011.

The loan and security agreement contains representations and warranties, as well as affirmative, reporting and negative covenants customary for financings of this type. Among other things, the loan and security agreement restricts us from incurring certain additional debt, prohibits us from creating, permitting or allowing certain liens on our property, restricts the payment of dividends, distributions and other specified equity related transactions, and prohibits certain borrowings and specified transactions with affiliates. The loan and security agreement also requires the maintenance of a specified minimum fixed charge coverage ratio, tangible net worth, and cash flow leverage, as defined in the agreement. As of June 30, 2011, we were in compliance with all covenants of the agreement.

On April 8, 2010, Transcend and MDSI entered into a commitment letter for a senior secured credit facility in an aggregate principal amount of up to $65,000,000 with Regions Business Capital, Regions Capital Markets and Regions Bank (collectively, “Regions”). We intended to use part of the proceeds from the credit facility to fund our bid for substantially all of the assets of Spheris, Inc. (“Spheris”) and the stock of its subsidiary, Spheris India Private Limited (“Spheris India”). Spheris declared bankruptcy under Chapter 11 and an auction under Section 363 of the United States Bankruptcy Code was held for substantially all of the assets of Spheris and the stock of Spheris India, subject to the terms of a stock and asset purchase agreement. The United States Bankruptcy Court for the District of Delaware established a bid process whereby interested parties, including us, submitted qualified bids on April 8, 2010. Qualified bidders participated in the auction held on April 13, 2010. We were not the successful bidder in the auction and did not enter into the new credit facility. In accordance with the commitment letter, the commitment terminated on May 28, 2010 because the definitive credit agreement and other legal documents related to the senior credit facility were not executed by that date. We expensed approximately $300,000 and $61,000 of costs related to the credit facility in the first quarter and second quarter of 2010, respectively, that would have been capitalized if the credit facility had closed.

OTP Promissory Note

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

MDSI Promissory Note

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

8. TRANSACTIONS WITH RELATED PARTIES

On August 31, 2009, we acquired all issued and outstanding shares of MDSI common stock from Dorothy Fitzgerald for an estimated purchase price of $15,487,000. Payment of the purchase price included a $2,000,000 payment due at the delivery of audited financial statements and a $2,000,000 promissory note payable to Ms. Fitzgerald, the terms of which are described in

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Note 7 “Borrowing Arrangements.” In addition, we entered into a registration rights agreement, dated August 31, 2009, providing Ms. Fitzgerald with “piggyback” registration rights. Ms. Fitzgerald is currently employed by us.

9. SHARE-BASED COMPENSATION

General

We have six stockholder-approved stock incentive plans (“Plans”), for our key employees, directors and key consultants. The Plans provide for the grant of incentive stock options, nonqualified stock options, restricted stock awards, and, in the case of the plans approved by the shareholders on May 10, 2007 and May 19, 2009, restricted stock units and stock appreciation rights. We intend to grant new awards under only the 2009 Stock Incentive Plan (“2009 Plan”). The 2009 Plan was amended on June 1, 2011 to increase the number of shares available for grant by 500,000 and to require shareholder approval to reprice awards under the 2009 Plan. No such repricing has ever been done nor is it anticipated to be done in the future. The options are granted at fair market value, as defined in the option agreement, on the date of grant. There were 651,846 shares available for issuance at June 30, 2011.

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

In June 2010, we implemented an equity tracking software system. In the course of that implementation, it came to our attention that we had three issues with our historical expense calculations that we broke into two categories: (1) cumulative adjustments and (2) first quarter 2010 restricted stock vesting. We concluded that these adjustments should be considered “correction of errors” as opposed to “changes in estimates” based on the definitions set out in FASB ASC Topic 250 – Accounting Changes and Error Corrections. We performed an analysis under SAB108 – Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements (SAB108), and used the materiality guidance of SAB99 – Materiality (SAB99) to determine whether or not the impact to any one period or the cumulative impact on a given period was material enough to require a restatement to previously filed financial statements.

The cumulative adjustment is the result of netting two offsetting issues. The first issue involved the use of estimated forfeiture rates and the required true-up to actual forfeiture rates for all awards issued between 2006 and 2010, and the second issue was a mathematical error in the calculation of the volatility rate used to establish the grant date fair value of awards issued from 2008 to 2010. Since both adjustments impact the same financial statement item, stock-based compensation expense, we determined that they could be combined into one net adjustment of additional expense of $445,000 ($308,000 of which related to periods prior to 2010). Based on our analysis and an evaluation of materiality, which required us to assess both qualitative and quantitative factors, it was determined that the adjustment was not material to any prior reporting periods or to the expected annual results for 2010; therefore, the entire adjustment was recorded in the second quarter of 2010.

The second category relates to the vesting of certain restricted stock awards in the first quarter of 2010. At the time of vesting in the first quarter of 2010, only $124,000 of the total stock-based compensation expense of $355,000 had been recorded. The difference of $231,000 should have been recorded as additional compensation expense in the first quarter of 2010. Based on our analysis, it was determined that the adjustment was not material to the first quarter and did not require a restatement of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2010. In accordance with SAB108, the entry was recorded as a first quarter of 2010 adjustment in the Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 and has been and will be reflected in any future filing of the financial information for the period ending March 31, 2010 and the year ended December 31, 2010.

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The following table shows the impact of the adjustment and the revised financial information for the quarter ended March 31, 2010.

	Quarter ended March 31, 2010 as reported		Adjustment		Quarter ended March 31, 2010 as revised
Revenue	$	22,206,000			$	22,206,000
Gross profit	7,480,000				7,480,000
General and administrative expense	3,528,000		231,000		3,759,000
Operating expense	4,805,000		231,000		5,036,000
Operating income	2,675,000		(231,000	)	2,444,000
Income tax provision	1,016,000		(78,000	)	938,000
Net income	1,632,000		(153,000	)	1,479,000
Earnings per share - basic	0.16		(0.02	)	0.14
Earnings per share - diluted	0.15		(0.01	)	0.14

The fair value of each option grant is estimated on the date of grant using the Black-Scholes-Merton option pricing model that uses the assumptions or range of assumptions. The risk-free interest rate for the period matching the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. The dividend yield is the calculated yield on our stock at the time of grant. The expected term of the options represents the period of time that options granted are expected to be outstanding and is derived by analyzing historic exercise behavior along with currently outstanding options. Expected volatilities are based on historical volatility of our common stock. The expected forfeiture rates are based on historical forfeiture rates. There were 19,500 options granted in the quarter ended June 30, 2011. The weighted average grant date fair value of options granted in the quarter ended June 30, 2011 was $13.45, and the assumptions used were as follows:

Risk-free interest rate	1.78% to 2.37%
Expected dividend yield	0	%
Expected term	5.58 to 5.66 years
Expected volatility	57.86% to 58.23%
Expected forfieture rate	18.4	%
Exercise price of options issued	$21.98 -$26.09

Transactions involving our stock options for the six months ended June 30, 2011 were as follows:

	Number of Shares Subject to Stock Options		Weighted Average Exercise Price		Weighted Average Remaining Contract Life	Aggregate Intrinsic Value*
Outstanding at December 31, 2010	872,767		$	8.91	6.6 years
Granted	19,500		$	25.14
Forfeited	(36,250	)	$	15.79
Exercised	(62,586	)	$	9.52		$	1,244,000
Outstanding at June 30, 2011	793,431		$	8.95	6.1 years	$	16,218,000

*The aggregate intrinsic value is based on a closing stock price of $29.39 as of June 30, 2011.

In the first six months of 2011, we issued 24,580 shares of restricted stock to certain participants under the 2009 plan. Our Directors were issued 9,580 of these shares which vest over three years. The remaining 15,000 shares were issued to employees and are performance based vesting in quarterly increments each March in 2012 through 2015. We use the average of the grant date high and low stock price along with expected forfeiture rates of 0% to 25.55% to calculate fair value of restricted stock awards issued. During the first quarter of 2011, 18,000 shares of performance based restricted stock were forfeited due to the failure to meet 2010 performance measures required for the vesting of these shares.

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Transactions involving our restricted stock for the six months ended June 30, 2011 were as follows:

	Number of Shares		Weighted Average Grant Date Fair Value
Non-vested stock outstanding at December 31, 2010	99,500		$	16.25
Granted	24,580		$	25.25
Forfeited	(18,000	)	$	16.34
Vested	—
Non-vested stock outstanding at June 30, 2011	106,080		$	18.32

We recognized stock-based compensation expense under FASB ASC Topic 718 – Compensation-Stock Compensation of approximately $306,000 and $640,000 for the three months ended June 30, 2011 and June 30, 2010 and $575,000 and 1,085,000 for the six months ended June 30, 2011 and 2010, respectively. These totals include the adjustment to stock-based compensation expense in the first quarter of 2010 discussed above. As of June 30, 2011, we had approximately $2,800,000 of future equity-based compensation expense which we expect to record in our statements of operations through 2015.

10. CONTINGENCIES

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

On June 10, 2005, we entered into a master equipment lease agreement with Farnam Street Financial, Inc. (“Farnam Street”). On April 22, 2009, we filed a complaint in the United States District Court for the District of Minnesota against Farnam Street, alleging breach of contract, fraud and violation of the Deceptive Trade Practices Act, among other things. Farnam Street answered the complaint and filed a counter-claim against us, alleging breach of contract, among other things. The dispute centered on lease renewal, lease termination and lease buy-out provisions. On May 12, 2010, we finalized a settlement with Farnam Street and paid $720,000 to buy out the equipment leases. The settlement was allocated as $540,000 against amounts previously expensed and $180,000 was set up as a fixed asset with a useful life of one year, as of June 30, 2011 this asset is fully depreciated.

The TRS asset purchase agreement provided for a contingent consideration payment of up to $3.0 million based on TRS fourth quarter 2009 revenue and TRS December 31, 2009 backlog. We calculated a fourth quarter 2009 revenue contingent consideration payment of $1,123,000, which was paid in February 2010. On February 26, 2010, we received notice that TRS disputed our calculation and claimed an additional payment of $1,877,000. We responded on March 10, 2010, stating that TRS’s objections were without merit and asking that the dispute be postponed pending delivery of the backlog contingent payment calculation. TRS agreed to the postponement. On March 30, 2010, we delivered the backlog contingent payment calculation to TRS showing an amount payable of $0. TRS objected to our backlog contingent payment calculation. Under the terms of the asset purchase agreement, in the case of a disagreement over the calculation of the contingent payment, the parties were to select an independent auditor to review the calculation. On May 6, 2010, TRS filed a civil action against us in the United States District Court for the Middle District of North Carolina. TRS generally alleges that we frustrated their ability to maximize the contingent payment. TRS seeks compensatory damages of approximately $1,877,000, unspecified damages, attorneys’ fees, interest and costs. The lawsuit is in the early procedural stages and the ultimate outcome cannot be determined at this time. We have evaluated this claim and the civil action and believe that no additional payments are due under the calculations outlined in the asset purchase agreement.

11. INCOME TAXES

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

Since our October 21, 2010 acquisition of Heartland, we have been conducting business operations in India. The Indian operations are conducted through both flow-through entities and foreign corporations. We have included the Indian results from

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operations conducted through the flow-through entities in our U.S. current and deferred income tax provision calculation. We have undistributed foreign earnings in the foreign corporations, which we intend to permanently reinvest overseas. We also intend to reinvest future foreign earnings overseas. Therefore, no U.S. corporate income taxes have been provided on undistributed foreign earnings of the foreign corporations.

A valuation allowance is required to be recorded against deferred tax assets if, based on the available evidence, it is more likely than not that such assets will not be realized. When assessing the need for a valuation allowance, appropriate consideration should be given to all positive and negative evidence related to the realization of the deferred tax assets. This evidence includes, among other things, the existence of current and cumulative losses, forecasts of future profitability, the length of statutory carry-forward periods, our experience with loss carry-forwards expiring unused, and available tax planning strategies. At June 30, 2011 and December 31, 2010, we have recorded a valuation allowance of $310,000 related to expected future utilization of state net operating loss carry-forwards resulting from recent acquisitions. The conclusion to record the valuation allowance is based on the inability to predict, with any degree of certainty, whether we will generate apportionable income to the states in which it has these net operating loss carry-forwards.

With the 2010 acquisition of Heartland and the 2011 acquisition of DTS, we recorded deferred tax assets for federal net operating loss carry-forwards of approximately $6.7 million and $3.2 million, respectively, which relate to losses incurred prior to their acquisition by Transcend. These net operating loss carry-forwards will begin to expire in 2025. As a result of the acquisitions, future utilization of these net operating loss carry-forwards is subject to the provisions of Section 382 of the Internal Revenue Code of 1986, as amended. Total pre-acquisition net operating loss carry-forwards were approximately $16.7 million for Heartland and $23.4 million, for DTS, of which we expect $10 million and $14.1 million, respectively, to expire unused as a result of Section 382 limitations. Accordingly, we have not established a deferred tax asset for those net operating loss carry-forwards which are expected to expire unused. An initial analysis of Section 382 limitations was performed and any change to this estimate as this analysis is refined, would adjust the amount of goodwill recorded. Further, based on historical earnings and expected future taxable income, we believe all of the net operating loss carry-forwards recorded as a deferred tax asset will be fully utilized before expiration. As a result, no valuation allowance has been recorded with respect to these federal net operating loss carry-forwards.

We account for all potentially uncertain tax positions in accordance with the provisions in FASB ASC Topic 740-Income Taxes which prescribes a recognition threshold of more-likely-than-not to be sustained upon examination. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax rules and the potential for future adjustment of our uncertain tax positions by the United States Internal Revenue Service or other taxing jurisdictions.

The initial evaluation of uncertain tax positions resulting from the 2010 acquisition of Heartland was related to intercompany transfer pricing, a liability was established at acquisition and had a balance of $4,681,000 at December 31, 2010. In the second quarter of 2011, we received a final order from the India taxation authority for the year 2006 resulting in a $212,000 reduction in this portion of the liability that was recognized as a reduction of current tax expense. At June 30, 2011, the remaining balance is $4,150,000.

During the second quarter of 2011, we identified an uncertain tax position pursuant to ASC 740 that resulted in recording a liability of approximately $5,300,000. This uncertain tax position relates to prior tax returns filed by Heartland prior to the 2010 acquisition. We believe there is currently an uncertain tax position with respect to the deduction of certain dual consolidated losses generated from Heartland's India operations. We are currently in the process of pursuing administrative relief from the Internal Revenue Service which, based on our understanding of the relevant facts, although there can be no assurance of relief, we believe such relief will likely be granted no later than the fourth quarter of 2011. Based on the standards under ASC 740, however, we are required to estimate the potential impact of this uncertain tax position since such administrative relief is not a widely understood administrative practice. It is important to note that the purchase agreement contains indemnification provisions that we believe would potentially entitle us to reimbursement of actual tax and interest expense incurred if administrative relief is not obtained.

As of June 30, 2011 and December 31, 2010, the total amount of unrecognized tax benefits was $9,450,000 and $4,681,000, respectively, all of which would affect the effective tax rate if recognized.

Our effective income tax rate was approximately 39.7% and 41.2% for the three months ended June 30, 2011 and 2010, respectively, and 39.8% and 40.1% for the six months ended June 30, 2011 and June 30, 2010.

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12. SUBSEQUENT EVENT

On July 29, 2011, we entered into an Agreement and Plan of Merger with Salar, Inc., a Maryland corporation ("Salar"), Salar Acquisition Corporation, a wholly-owned subsidiary of Transcend Services, Inc. ("Salar Acquisition Corporation") and certain principalstockholders of Salar, pursuant to which Salar Acquisition Corporation merged with and into Salar, with Salar surviving such merger as a wholly-owned subsidiary of Transcend Services, Inc.). The aggregate consideration was $11,000,000 in cash. There is no earn-out provision in the purchase agreement and no debt was as assumed.

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

This Quarterly Report on Form 10-Q contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that represent our expectations, anticipations or beliefs about future events, including our operating results, financial condition, liquidity, expenditures, and compliance with legal and regulatory requirements. For this purpose, any statements that are not statements of historical fact may be deemed to be forward-looking statements made under the provisions of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that could cause actual results to differ materially depending on a variety of important factors. Factors that might cause or contribute to such differences include, but are not limited to, competitive pressures, loss of significant customers, the mix of revenue, changes in pricing policies, delays in revenue recognition, lower-than-expected demand for the Company’s products and services, business conditions in the integrated health care delivery network market, general economic conditions, and the risks and uncertainties described in greater detail under the caption “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2010, in subsequently filed Quarterly Reports on Form 10-Q and in other filings that we make with the Securities Exchange Commission (“SEC”). Our SEC filings are available from us and are also available at the SEC’s website at http://www.sec.gov. In addition, factors that we are not currently aware of could harm our future operating results. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to make any revisions to the forward-looking statements or to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q, except as required by applicable law.

Overview

We believe we are the second largest medical transcription services company in the United States based on revenue. We serve approximately 375 hospital customers nationwide plus a number of clinics and physician's offices. We estimate that our primary target market is approximately $2.5 billion, comprised primarily of approximately 5,000 community-based hospitals (hospitals accessible by the general public) in the United States. Our mission is to provide accurate and timely documentation of the patient/medical provider encounter at a competitive price. Customer service is crucial to our success, and we have consistently been ranked among the top medical transcription service organizations in the industry. Our approximately 2,700 medical language specialists, including 840 based in India, supplemented by our offshore partners, provide high quality medical documents and fast turnaround times, resulting in high customer retention rates, which have averaged more than 95% (measured by revenue) over the last four years. We develop and utilize an array of technology solutions to support the transcription process, including robust voice capture systems, state-of-the-art speech recognition technology, our proprietary transcription platforms and various customer-specific systems. We believe we are well-positioned to benefit from the increasing adoption and use of electronic medical records or EMRs because the data and narrative content we create comprise key portions of EMRs.

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

On June 27, 2010, we announced the general availability of Encore, our new SaaS-enabled transcription workflow platform. Hospitals who wish to retain their in-house transcription staff but desire a platform to take advantage of the efficiencies inherent in the use of speech recognition technology can choose Encore to meet their transcription needs.

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

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Outlook

The U.S. economy deteriorated significantly in 2008 and 2009, stemming primarily from disruption in the global credit markets. Although there was a degree of recovery in 2010, if the economy were to further deteriorate, we could see deterioration in the financial condition of our customers and collection of our accounts receivable. The decrease in availability of consumer credit as well as general unfavorable economic conditions, has caused consumers to reduce their discretionary spending, including spending for medical care. Job losses and the resulting losses of healthcare benefits could further reduce demand for healthcare services. We have not experienced any noticeable deterioration in accounts receivable or transcription volume to date. It is also uncertain what effect the credit crisis may have on the security of the U.S. banking system, and specifically the bank where our cash and cash equivalents are deposited. This could impact our access to and cost of capital. In addition, Federal Deposit Insurance Corporation ("FDIC") insurance does not fully insure our deposits. At June 30, 2011, approximately $1,253,000 of our cash balances exceeded the current FDIC or Securities Investor Protection Corporation ("SIPC") insurance limits of which, $1,067,000 of these balances were held in overseas banks for our India operations. In addition to the impact of the overall economic environment, the following trends and uncertainties could have a material future impact on our financial results:

• The aging of the “baby boomers” will create increased demand for healthcare services, which should in turn create increased demand for medical transcription services. Over the next 20 years, the U.S. population over the age of 65 is expected to increase from roughly 40 million to 70 million, according to the U.S. Census Bureau.

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

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

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

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

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

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• We completed three acquisitions in 2009, one in October 2010 and two thus far in 2011, which have had, or with respect to our acquisition in July 2011, will have a material impact on our financial statements. Acquisitions involve significant risk, including integration risk, and it is possible that we will not realize the anticipated benefits of the acquisitions we have made.

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

• Our largest competitor, MedQuist, recently announced that it had entered into a definitive agreement to acquire Multimodal Technologies (“M*Modal”). M*Modal provides speech recognition-related technology and services to us. While we have been assured that our business relationship will continue and while we are reasonably confident that our contract, which expires on August 31, 2011, will be renewed prior to expiration, it is possible that if the transaction closes, the new relationship could pose challenges to us.

For a more complete understanding of trends and uncertainties relevant to Transcend, please see Item 1 “Business” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, including the section titled “Industry Overview” and Item 1A “Risk Factors” to the Annual Report on Form 10-K and this Quarterly Report on Form 10-Q, as well as risk factors detailed in our other reports filed with the SEC.

Critical Accounting Estimates which are Material to Registrant

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

Allowance for Doubtful Accounts. Accounts receivable are recorded net of an allowance for doubtful accounts established to provide for losses on uncollectible accounts based on management’s evaluation of each account and historical collection experience. We reserve specific accounts once collection appears unlikely and record a general reserve on remaining outstanding receivables. We evaluate the adequacy of the allowance for doubtful accounts quarterly. Accounts outstanding longer than contractual payment terms are considered past due and are reviewed individually for collectability. Management considers the age of the receivable, the financial health of the customer and payment history to evaluate the collectability of accounts receivable. Accounts receivable are written off once all collection efforts are exhausted.

Goodwill and Intangible Assets. We account for goodwill and other intangible assets in accordance with the provisions of FASB ASC Topic 350 – Intangibles-Goodwill and Other. Under the provisions of this Topic, goodwill and intangible assets that have indefinite useful lives are tested at least annually for impairment rather than being amortized like intangible assets with finite useful lives, which are amortized over their useful lives. We had goodwill of 38,087,000 at June 30, 2011 and $28,246,000 at December 31, 2010 and net intangible assets related to acquisitions of $9,594,000 and $7,055,000 at June 30, 2011 and December 31, 2010, respectively. Management reviews goodwill and other intangible assets for impairment annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In testing for impairment, management calculates the fair value of the reporting units to which the goodwill and intangibles relate based on market capitalization of the company as a whole. We have concluded that we operate in one reporting unit—medical transcription services—since all of our revenue is derived from medical transcription services and since we have one organization dedicated to the provision of our service.

In connection with certain of our acquisitions, we allocated a portion of the purchase price to acquired customer relationships, acquired technology and covenants-not-to-compete using appraisals based on discounted cash flow analysis. The estimated fair values attributed to the relationships and covenants are being amortized over a period of five to ten years, which represented the estimated average remaining lives of the contracts and relationships. The estimated fair value attributed to acquired technology is being amortized over a period of two years, which represented the estimated remaining life of the technology. We account for long-lived assets such as purchased intangible assets with finite lives under The Impairment or Disposal of Long-Lived Assets Subsections of FASB ASC Topic 360 – Property, Plant and Equipment. This Subtopic requires that such long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset

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may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets based on a discounted cash flow approach or, when available and appropriate, to comparable market values. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell.

There were no impairments recognized to goodwill or intangible assets in the six months ended June 30, 2011 or 2010.

Contingent Consideration Payable. A contingent consideration payment was part of the asset purchase agreement for our acquisition of TRS. We estimated the fair value of this payable as of the purchase date of the acquisition. FASB ASC Topic 805 –Business Combinations requires that this estimate is re-measured to fair value at each reporting date until the contingency is resolved. These interim changes in estimated fair value, along with any differences in the final settlement, are recognized in operating expense. The purchase date fair value of the TRS contingent consideration was $353,000. As of December 31, 2009, the value was calculated as $1,123,000. The $770,000 difference was recognized as operating expense in the fourth quarter of 2009 and the total amount of $1,123,000 was paid in February 2010.

Deferred Tax Assets and Liabilities. We account for our income taxes in accordance with FASB ASC Topic 740 – Income Taxes. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts for financial reporting purposes. As of June 30, 2011, we had net current deferred tax assets of $343,000 and net non-current deferred tax assets of $2,190,000. Deferred tax assets represent future tax benefits we expect to realize. Our ability to utilize the deferred tax benefits is dependent upon our ability to generate future taxable income. FASB ASC Topic 740 – Income Taxes requires us to record a valuation allowance against any deferred income tax benefits that we believe may not be realized. We estimate future taxable income to determine whether a valuation allowance is needed. Projecting our future taxable income requires us to use significant judgment regarding expected future revenues and expenses. In addition, we must assume that tax laws will not change sufficiently to materially impact the expected tax liability associated with our expected taxable income. We have valuation allowances against net operating loss carry-forwards in certain states in which future taxable income in those states may not be sufficient to utilize the net operating loss carry-forwards in those states prior to their expiration.

With the acquisition of Heartland, we are now subject to income taxes in India. Significant judgment is required in determining our consolidated provision for income taxes and recording the related assets and liabilities. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. Although we believe we have appropriate support for the positions taken on our tax returns, we have recorded a liability of $9,450,000 for our best estimate of the probable loss on certain of these positions. We believe that our accruals for tax liabilities are adequate for all open years, based on our assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter, which matters result from intercompany transfer pricing and the tax return treatment of certain dual consolidated losses generated from the India operations. Although we believe our recorded assets and liabilities are reasonable, tax regulations are subject to interpretation and tax litigation is inherently uncertain; therefore our assessments can involve both a series of complex judgments about future events and rely heavily on estimates and assumptions. The final determination of tax audits and any related litigation could be materially different than that which is reflected in historical income tax provisions and recorded assets and liabilities. Based on the results of an audit or litigation, a material effect on our income tax provision, net income, or cash flows in the period or periods for which that determination is made could result.

Self-funded Medical Insurance. In 2010, we moved to a self-funded medical insurance plan for our U.S. based employees. We contracted with a separate administrative service company to supervise and administer the program and act as our representative. We have reduced the risk under this self-funded plan by purchasing stop-loss insurance coverage for individual and aggregate claims in excess of prescribed limits. We record estimates for our claim liability based on information provided by the third-party plan administrators, historical claims experience, the life cycle of claims, expected costs of claims incurred but not paid, and expected costs to settle unpaid claims. We monitor our estimated insurance-related liabilities on a monthly basis. As facts change, it may become necessary to make adjustments that could be material to our results of operations and financial condition. This liability is subject to a total limitation that varies based on employee enrollment and factors that are established at each annual contract renewal. Actual claims experience may differ from our estimates. Costs related to the administration of the plan and related claims are expensed as incurred.

Stock-Based Compensation. Our stock-based awards are accounted for under the provisions of FASB ASC Topic 718 – Stock Compensation. We measure and recognize stock-based compensation expense based on the fair value measurement for all stock-based payment awards made to our employees and directors, including stock options and restricted stock awards over the service period for which the awards are expected to vest. We calculate the fair value of each restricted stock award based on our stock price on the date of grant. We calculate the fair value of each stock option award on the date of grant using the Black-

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Scholes-Merton option pricing model. The determination of fair value of stock option awards on the date of grant using an option-pricing model is affected by our stock price as well as a number of assumptions including expected term, expected volatility, risk-free interest rate and dividend yield. As a result, the future stock-based compensation expense may differ from our historical amounts.

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

Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010

Revenue increased $8,453,000, or 38%, to $30,662,000 in the quarter ended June 30, 2011 compared to revenue of $22,209,000 in the same period in 2010. The $8,453,000 increase in revenue was attributable to increased revenue contributed by the acquisition of Heartland of $4,686,000, increased revenue contributed by the acquisition of DTS of $2,043,000, revenue from new customers of $1,567,000 and increased revenue from existing customers of $351,000, offset by a decrease in revenue of $207,000 from customers who terminated their contracts since the second quarter of 2010. Revenue also increased by $13,000 from the sale of hardware and professional services related to implementations.

Direct costs increased $4,171,000, or 29%, to $18,349,000 in the quarter ended June 30, 2011 compared to $14,178,000 in the same period in 2010. Direct costs attributable to Heartland contributed $2,067,000 of this increase and direct costs attributable to DTS contributed $1,410,000. Direct costs include costs attributable to compensation for transcriptionists, fees paid for speech recognition processing, telephone expenses, recruiting, management, customer service, technical support for operations, and implementation of transcription services. Transcription compensation is a variable cost based on lines transcribed or edited multiplied by specified per-line pay rates that vary by individual as well as type of work. Speech recognition processing is a variable cost based on the minutes of dictation processed. All other direct costs referred to above are semi-variable operations infrastructure costs that periodically change in anticipation of or in response to the overall level of production activity.

As a percentage of revenue, direct costs were 60% for the quarter ended June 30, 2011 and 64% for the quarter ended June 30, 2010. The decrease in costs as a percentage of revenue was due primarily to increased utilization of speech recognition technology on our BeyondTXT platform, increased usage of offshore resources and the acquisition of Heartland. The percentage of BeyondTXT volume that was edited using speech recognition technology increased from 72% in the second quarter of 2010 to 85% in the second quarter of 2011. Work processed on BeyondTXT has lower costs due to the use of speech recognition technology to produce drafts of reports which are then edited by our medical language specialists. The percentage of work processed offshore increased from 17% in the second quarter of 2010 to 37% (24% excluding work performed by our acquired India operations) in the second quarter of 2011. Excluding the impact of the Heartland acquisition and the DTS acquisition, direct costs decreased to 62% of revenue for the quarter ended June 30, 2011 compared to 64% for the same period of 2010.

Gross profit increased $4,282,000, or 53%, to $12,313,000 in the quarter ended June 30, 2011 compared to $8,031,000 in the same period in 2010. Gross profit as a percentage of revenue increased to 40% in the quarter ended June 30, 2011 compared to 36% in the same period in 2010 (see direct costs discussion).

Sales and marketing expenses increased $103,000, or 19%, to $638,000 in the quarter ended June 30, 2011, compared to $535,000 in the same period in 2010. Sales and marketing expense as a percentage of revenue was 2% in both the quarters ended June 30, 2011 and June 30, 2010, respectively. The increase is primarily due to increased advertising and marketing expenditures, and increased participation in industry trade shows in 2011.

Information Technology ("IT") expenses increased $ 602,000, or 148%, to $1,010,000 in the quarter ended June 30, 2011, compared to $408,000 in the same period in 2010. IT expense as a percentage of revenue was 3% and 2 % in the quarters ended June 30, 2011 and June 30, 2010, respectively. The increase in expense was primarily due to an increase in compensation-related and infrastructure expenses (including new data centers) related to the acquisition of Heartland and DTS.

General and administrative expenses increased $43,000, or 1%, to $3,979,000 in the quarter ended June 30, 2011, compared to$3,936,000 in the same period in 2010. The increase was due primarily to increased salaries and benefits, travel expense and the acquisition of Heartland and DTS, partially offset by decreases in acquisition expense, legal and accounting expense and stock option compensation expense. Excluding acquisition costs of $139,000 in 2011 and $601,000 in 2010, General and

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Administrative expense increased $505,000, or 15%, in the quarter ended June 30, 2011 compared to the same period in 2010. General and administrative expenses as a percentage of revenue were 13% and 18 % in the quarters ended June 30, 2011 and 2010, respectively, and excluding acquisition costs were 13% and 15% in the quarters ended June 30, 2011 and 2010, respectively. These increases were mainly due to the addition of Heartland and DTS expenses.

Depreciation and amortization expense was $752,000 in the quarter ended June 30, 2011, compared to $460,000 in the same period in 2010, an increase of $292,000 or 63%. Amortization of intangible assets resulting from the acquisition of Heartland and DTS contributed $134,000 of the increase and depreciation of Heartland and DTS fixed assets contributed $102,000 of the increase. The remainder of the increase was due to higher capital expenditures resulting in increased depreciable assets.

Operating income increased $3,242,000, or 120%, to $5,934,000 in the quarter ended June 30, 2011, compared to $2,692,000 in the same period in 2010. This increase is primarily the result of the increase of 53% in gross profit as a percent of revenue while operating expenses decreased 3% as a percent of revenue.

Net other income increase to net other income of $74,000 in the quarter ended June 30, 2011 compared to $23,000 of net other expense in the same period in 2010. The increase was primarily due to a decrease in financing costs, increased interest income and net gains on foreign currency transactions.

The income tax provision increased $1,283,000 to $2,384,000 for the three months ended June 30, 2011, compared to $1,101,000 for the same period in 2010. The provision increased primarily due to higher pretax income partially offset by a lower effective tax rate of 39.7% for the quarter ended June 30, 2011 compared to 41.2% for the quarter ended June 30, 2010.

Net income increased $2,056,000, or 131%, to $3,624,000 in the quarter ended June 30, 2011, compared to $1,568,000 in the same period in 2010. Fully diluted earnings per share increased to $0.33 for the quarter ended June 30, 2011, compared to $0.15 for the same period in 2010.

Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010

Revenue increased $15,545,000, or 35%, to $59,960,000 in the six months ended June 30, 2011 compared to revenue of $44,415,000 in the same period in 2010. The $15,545,000 increase in revenue was attributable to increased revenue contributed by the acquisition of Heartland of $9,626,000, revenue from new customers of $3,659,000, increased revenue from the acquisition of DTS of $2,043,000, increased revenue from existing customers of $772,000 and increased other revenue of $26,000, offset by a decrease in revenue of $589,000 from customers who terminated their contracts since the second quarter of 2010.

Direct costs increased $6,579,000, or 23%, to $35,483,000 in the six months ended June 30, 2011 compared to $28,904,000 in the same period in 2010. Direct costs attributable to Heartland contributed $4,475,000 of this increase and direct costs attributable to DTS contributed $1,410,000. Direct costs include costs attributable to compensation for transcriptionists, fees paid for speech recognition processing, telephone expenses, recruiting, management, customer service, technical support for operations, and implementation of transcription services. Transcription compensation is a variable cost based on lines transcribed or edited multiplied by specified per-line pay rates that vary by individual as well as type of work. Speech recognition processing is a variable cost based on the minutes of dictation processed. All other direct costs referred to above are semi-variable operations infrastructure costs that periodically change in anticipation of or in response to the overall level of production activity.

As a percentage of revenue, direct costs were 59% for the six months ended June 30, 2011 compared to 65% for the six months ended June 30, 2010. The decrease in costs as a percentage of revenue was due primarily to increased utilization of speech recognition technology on our BeyondTXT platform, increased usage of offshore resources and the acquisition of Heartland. The percentage of BeyondTXT volume that was edited using speech recognition technology increased from 70% in the first six months of 2010 to 85% in the first six months of 2011. Work processed on BeyondTXT has lower costs due to the use of speech recognition technology to produce drafts of reports which are then edited by our medical language specialists. The percentage of work processed offshore increased from 17% in the first six months of 2010 to 36% (24% excluding work performed by our India operations) in the first six months of 2011. Excluding the impact of the Heartland acquisition and the DTS acquisition, direct costs decreased to 61% of revenue for the six months ended June 30, 2011 compared to 65% for the same period of 2010.

Gross profit increased $8,966,000, or 58%, to $24,477,000 in the six months ended June 30, 2011 compared to $15,511,000 in the same period in 2010. Gross profit as a percentage of revenue increased to 41% in the six months ended June 30, 2011 compared to 35% for the same period in 2010 (see direct costs discussion).

Sales and marketing expenses increased $114,000, or 12%, to $1,052,000 in the six months ended June 30, 2011, compared to

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$938,000 in the same period of 2010. Sales and marketing expenses as a percentage of revenue were 2% in both the six months ended June 30, 2011 and June 30, 2010, respectively. The increase is primarily due to increased advertising and marketing expenditures, and increased participation in industry trade shows in 2011.

Information Technology expense increased $1,072,000, or 129%, to $1,906,000 in the six months ended June 30, 2011compared to $834,000 in the same period in 2010. Information Technology expenses as a percentage of revenue were 3% in the six-month period ended June 30, 2011 and 2% in the six month period ended June 30, 2010. The increase in expense was primarily due to an increase in compensation-related and infrastructure expenses (including new data centers) related to the acquisition of Heartland and DTS.

General and administrative expenses increased $177,000, or 2%, to $7,872,000 in the six months ended June 30, 2011, compared to $7,695,000 in the same period in 2010. Included in 2011 and 2010 are acquisition-related costs of $221,000 and $1,279,000, respectively. The costs in 2010 were related to our unsuccessful bid to acquire Spheris. Also included in 2010 is a $676,000 cumulative adjustment for stock-based compensation expense. Excluding these items, general and administrative expenses increased $1,911,000, or 33% in the six months ended June 30, 2011 compared to the same period in 2010. The balance of the increase was due primarily to increased costs related to the Heartland India operations and the acquisition of DTS, partially offset by decreases in contract services and employee benefits costs. Excluding one-time acquisition-related costs and the stock-based compensation adjustment, general and administrative expenses as a percentage of revenue were 13% in both the six months ended June 30, 2011, and 2010.

Depreciation and amortization expense increased $520,000, or 57%, to $1,428,000 in the six months ended June 30, 2011 compared to $908,000 in the same period in 2010. Amortization of intangible assets resulting from the acquisition of Heartland and DTS contributed $205,000 of the increase and depreciation of Heartland and DTS fixed assets contributed $187,000 of the increase. The remainder of the increase was due to higher capital expenditures resulting in increased depreciable assets.

Operating income increased $7,083,000, or 138%, to $12,219,000 in the six months ended June 30, 2011, compared to $5,136,000 in the same period in 2010.

Net other income increased $102,000 to net other income of $52,000 in the six months ended June 30, 2011 compared to net other expense of $50,000 in the same period in 2010. The increase was primarily due to a decrease in financing costs, increased interest income and net gains on foreign currency transactions.

The income tax provision increased $2,847,000 to $4,886,000 for the six months ended June 30, 2011 compared to $2,039,000 in the same period in 2010. The provision increased primarily due to higher pre-tax income partially offset by a lower effective tax rate of 39.8% for the six months ended June 30, 2011 compared to 40.1% for the six months ended June 30, 2010.

Net income increased $4,338,000, or 142%, to $7,385,000 in the six months ended June 30, 2011, compared to $3,047,000 in the same period in 2010. Fully diluted earnings per share increased $0.39, to $0.67 for the six months ended June 30, 2011, compared to $0.28 for the same period in 2010.

Liquidity and Capital Resources

As of June 30, 2011, we had cash, cash equivalents and short-term investments of $22,393,000, working capital of $28,949,000, and availability of approximately $5,000,000 on our revolving line of credit based on eligible accounts receivable (see Note 7 of the Notes to Consolidated Financial Statements). We had no debt outstanding as of June 30, 2011 and did not utilize our available line of credit in the first six months of 2011.

Cash provided by operating activities was $6,609,000 for the six months ended June 30, 2011, compared to $3,515,000 for the six months ended June 30, 2010. The increase was due primarily to higher net income (adjusted for non-cash depreciation, amortization and stock-based compensation) and other working capital changes.

Cash used by investing activities was $9,359,000 for the six months ended June 30, 2011, compared to cash used in investing activities of $17,679,000 for the six months ended June 30, 2010. During the first six months of 2011, we had net investment maturities of $2,175,000 partially offset by purchases of $854,000 of equipment and software, and the capitalization of $1,899,000 in software development costs. We are investing significant resources in the next generation of our transcription platform and expect this level of capitalization will continue through the remainder of 2011. For the first six months of 2010, investing activities were related primarily to the net purchase of $14,932,000 of investments with the proceeds from our 2009 stock offering, $1,112,000 of capital expenditures and $1,635,000 of capitalized software development costs.

Cash provided by financing activities was $657,000 for the six months ended June 30, 2011, compared to cash used in financing activities of $765,000 in the same period in 2010. Cash provided by financing activities during the first six months of 2011 was primarily from the proceeds from stock option exercises while cash used in financing activities in 2010 was due

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primarily the repayment of debt.

On August 31, 2009, Transcend and MDSI entered into a loan and security agreement with Regions Bank. Transcend and MDSI are both “borrowers” under the loan and security agreement. The loan and security agreement with Regions Bank includes a one-time term loan of $7.0 million for the costs and expenses of, and to the extent necessary a portion of the purchase price for MDSI. The loan and security agreement also provides for up to $5.0 million in a revolving loan commitment based on eligible accounts receivable. We may use proceeds of the revolving loan only for working capital, general corporate purposes, and for specified acquisitions. The maximum amount of the revolving loan may be increased at the discretion of Regions Bank to $8.0 million. We used $4.0 million of the proceeds from the follow-on offering of our common stock completed in the fourth quarter of 2009 to pay down the term loan. The original revolving loan commitment expired and was renewed for another year in August 2010. We expect to either renew this commitment or enter into a new commitment by August 2011. Borrowings bear interest at a rate based on the current LIBOR (3.75% as of June 30, 2011), and are secured by substantially all of our assets. The outstanding balance on the four-year term loan was $0 as of June 30, 2011 and the balance on the revolver was $0 as of June 30, 2011. We did not draw on the revolver at any time during the six months ended June 30, 2011.

The loan and security agreement contains representations and warranties, as well as affirmative, reporting and negative covenants customary for financings of this type. Among other things, the loan and security agreement restricts the borrowers from incurring certain additional debt, prohibits the borrowers from creating, permitting or allowing certain liens on their property, restricts the payment of dividends, distributions and other specified equity related transactions by us, and prohibits certain borrowings and specified transactions with affiliates. The loan and security agreement also requires the maintenance of a specified minimum fixed charge coverage ratio, tangible net worth, and cash flow leverage, as defined in the agreement. As of June 30, 2011, we were in compliance with all covenants of the agreement.

We anticipate that cash on hand, availability under our revolving line of credit agreement, together with anticipated cash flows from operations, should be sufficient for at least the next twelve months to finance operations, make capital investments in the ordinary course of business and pay indebtedness when due.

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

We have a floating rate of interest on our credit facility. As of June 30, 2011, there was no balance on our term loan under our credit facility.

Foreign Currency Exchange Rate Risk

We are exposed to foreign currency exchange rate risk in the ordinary course of doing business as we transact or hold a portion of our funds in the Indian rupee. Accordingly, we periodically evaluate the need for hedging strategies, including the use of derivative financial instruments, to mitigate the effect of foreign currency exchange rate fluctuations and expect to continue to use such instruments in the future to reduce foreign currency exposure to appreciation or depreciation in the value of certain foreign currencies. All hedging transactions are authorized and executed pursuant to regularly reviewed policies and procedures.

We have entered into a series of foreign exchange forward contracts that are designated as cash flow hedges of expense payments in India. India converts U.S. dollar receipts from intercompany billings to Indian rupees to fund local expenses, including salaries. Our U.S. dollar / Indian rupee hedges are intended to partially offset the impact of movement of exchange rates on future operating costs. We limit the forward contracts operational period to 12 months or less, and we do not enter into foreign exchange forward contracts for trading purposes. As of June 30, 2011, the notional value of these contracts was $5,051,000. The outstanding contracts as of June 30, 2011 are scheduled to mature within one year. The fair value of our foreign exchange forward contracts is marked to market at each reporting period. As of June 30, 2011, the net unrealized gain on our outstanding foreign exchange forward contracts was $146,000, compared to $238,000 as of December 31, 2010. The change in value of $92,000 is reflected as a decrease in pre-tax income in the first six months of 2011. Based upon a sensitivity analysis of our foreign exchange forward contracts at June 30, 2011, which estimates the fair value of the contracts based upon market exchange rate fluctuations, a 10% change in the foreign currency exchange rate against the U.S. dollar with all other

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variables held constant would have resulted in a change in the fair value of approximately $29,000. Our hedges of our foreign currency exposure are not designed to, and, therefore, cannot entirely eliminate the effect of changes in foreign exchange rates on our consolidated financial position, results of operations and cash flows.

Item 4. Controls and Procedures

a) Evaluation of disclosure controls and procedures

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

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

b) Changes in internal control over financial reporting

Internal control over financial reporting is a process designed by, or under the supervision of the principal executive officer and principal financial officers and effected by the board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with GAAP.

To the extent that components of our internal control over financial reporting are included in our disclosure controls, they are included in the scope of the evaluation by our principal executive officer and principal financial officer referenced above.

No change in our internal control over financial reporting occurred during the quarter ended June 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1A. Risk Factors

In addition to the other information set forth in this report and in our other reports and statements that we file with the SEC, including our quarterly reports on Form 10-Q, careful consideration should be given to the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 6. Exhibits

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

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SIGNATURES

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

	TRANSCEND SERVICES, INC.
August 9, 2011	By:	/s/ Larry G. Gerdes
		Larry G. Gerdes,
		Chief Executive Officer
		(Principal Executive Officer)
August 9, 2011	By:	/s/ Lance Cornell
		Lance Cornell,
		Chief Financial Officer
		(Principal Financial Officer)

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EXHIBIT INDEX
Exhibit Number	Exhibit Description
2.1	Agreement and Plan of Merger by and among DTS America, Inc., the principal stockholders, the stockholder representative, Transcend Services, Inc. and DTS Acquisition Corporation dated April 30, 2011 (incorporated by reference to Exhibit 2.1 to the Company's Form 8-K filed on May 5, 2011)
31.1	Certification of Chief Executive Officer of the Registrant Pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended
31.2	Certification of Chief Financial Officer of the Registrant Pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended
*32.1	Certification of Chief Executive Officer of the Registrant Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*32.2	Certification of Chief Financial Officer of the Registrant Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS**	XBRL Instance Document
101.SCH**	XBRL Taxonomy Extension Schema Document
101.CAL**	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB**	XBRL Taxonomy Extension Label Linkbase Docuement
101.PRE**	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF**	XBRL Taxonomy Extension Definition Linkbase Document

____________________

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

**    The following materials from our Quarterly Report on Form 10-Q for the quarter and six months ended June 30, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010; (ii) the Condensed Consolidated Income Statements for the three and six months ended June 30, 2011 and 2010; (iii) the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010; and (iv) the Notes to the Condensed Consolidated Financial Statements, tagged as blocks of text. Pursuant to Rule 406T of Regulation S-T the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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EX-31.1

Exhibit 31.1

CERTIFICATION

I, Larry G. Gerdes, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Transcend Services, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 9, 2011

/s/ Larry G. Gerdes

Larry G. Gerdes

Chief Executive Officer

(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Lance Cornell, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Transcend Services, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 9, 2011

/s/ Lance Cornell

Lance Cornell

Chief Financial Officer

(Principal Financial Officer)

EX-32.1

Exhibit 32.1

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

The undersigned, as Chief Executive Officer of Transcend Services, Inc. (the "Company"), certifies that to the undersigned's knowledge, the Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 (the "Report"), which accompanies this certification fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated. The foregoing certification is made solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code.

/s/ Larry G. Gerdes

Larry G. Gerdes

Chief Executive Officer

Date: August 9, 2011

EX-32.2

Exhibit 32.2

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

The undersigned, as Chief Financial Officer of Transcend Services, Inc. (the "Company"), certifies that to the undersigned's knowledge, the Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 (the "Report"), which accompanies this certification fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated. The foregoing certification is made solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code.

/s/ Lance Cornell

Lance Cornell

Chief Financial Officer

Date: August 9, 2011

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Consolidated Balance Sheets Parentheticals (USD $) In Thousands, except Share data	Jun. 30, 2011	Dec. 31, 2010
Current assets:
Allowance for doubtful accounts	$ 145,000	$ 124,000
Stockholders’ equity:
Common stock, par value	$ 0.05	$ 0.05
Common stock, shares authorized	30,000,000	30,000,000
Common stock, shares issued	10,671,000	10,566,000
Common stock, shares outstanding	10,671,000	10,566,000
Preferred stock, par value	$ 0.01	$ 0.01
Preferred stock, shares authorized	2,000,000	2,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0

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Consolidated Statements of Operations (USD $)	3 Months Ended				6 Months Ended
	Jun. 30, 2011		Jun. 30, 2010		Jun. 30, 2011		Jun. 30, 2010
Revenue	$ 30,662,000		$ 22,209,000		$ 59,960,000		$ 44,415,000
Direct costs (1)	18,349,000	[1]	14,178,000	[1]	35,483,000	[1]	28,904,000	[1]
Gross profit	12,313,000		8,031,000		24,477,000		15,511,000
Operating expenses:
Sales and marketing (1)	638,000	[1]	535,000	[1]	1,052,000	[1]	938,000	[1]
Information Technology(1)	1,010,000	[1]	408,000	[1]	1,906,000	[1]	834,000	[1]
General and administrative (1)	3,979,000	[1]	3,936,000	[1]	7,872,000	[1]	7,695,000	[1]
Depreciation and amortization	752,000		460,000		1,428,000		908,000
Total operating expenses	6,379,000		5,339,000		12,258,000		10,375,000
Operating income	5,934,000		2,692,000		12,219,000		5,136,000
Interest and other income	(39,000)		(17,000)		(68,000)		(31,000)
Interest and other expense	3,000		40,000		111,000		81,000
(Gain) on foreign currency transactions	(38,000)		0		(95,000)		0
Net other (income) and expense	(74,000)		23,000		(52,000)		50,000
Income before income taxes	6,008,000		2,669,000		12,271,000		5,086,000
Income tax provision	2,384,000		1,101,000		4,886,000		2,039,000
Net income	$ 3,624,000		$ 1,568,000		$ 7,385,000		$ 3,047,000
Basic earnings per share:
Net earnings per share	$ 0.34		$ 0.15		$ 0.7		$ 0.29
Weighted average shares outstanding	10,651,000		10,489,000		10,625,000		10,486,000
Diluted earnings per share:
Net earnings per share	$ 0.33		$ 0.15		$ 0.67		$ 0.28
Weighted average shares outstanding	11,063,000		10,793,000		11,025,000		10,839,000

[1] (1) Amounts shown exclusive of depreciation and amortization

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Document and Entity Information	6 Months Ended
	Jun. 30, 2011	Jul. 31, 2011
Document Information [Line Items]
Entity Registrant Name	TRANSCEND SERVICES INC
Entity Central Index Key	0000858452
Current Fiscal Year End Date	--12-31
Entity Filer Category	Accelerated Filer
Document Type	10-Q
Document Period End Date	Jun. 30, 2011
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	Q2
Amendment Flag	false
Entity Common Stock, Shares Outstanding		10,671,598
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes

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Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2011

FAIR VALUE OF FINANCIAL INSTRUMENTS [Abstract]

Fair Value Disclosures [Text Block]

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

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

In accordance with FASB ASC Topic 825 – Financial Instruments, the carrying value of short-term debt, which totaled $0 as of June 30, 2011 and $67,000 at December 31, 2010, was estimated to approximate its fair value. The fair value of debt is estimated based on approximate market interest rates for similar issues. Our other financial instruments, including cash and cash equivalents, accounts receivable and accounts payable, approximate fair value due to the short-term nature of those assets and liabilities.

At June 30, 2011 and December 31, 2010, our short-term investments consisted of government notes in the United States and uninsured fixed rate bank deposits in India. These investments are classified as available-for-sale and valued using Level 1 inputs (quoted prices in active markets) and carrying value approximates fair value.

The following table summarizes the carrying amounts and fair values of short-term investments at June 30, 2011:

Description	June 30, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale
Fixed rate bank deposits	$	2,024,000	$	2,024,000	$	—	$	—
U.S. Treasury Securities	16,255,000		16,255,000		—		—
Total short-term investments	$	18,279,000	$	18,279,000	$	—	$	—

The following table summarizes the carrying amounts and fair values of short-term investments at December 31, 2010:

Description	December 31, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale
Fixed rate bank deposits	$	848,000	$	848,000	$	—	$	—
U.S. Treasury Securities	19,606,000		19,606,000		—		—
Total short-term investments	$	20,454,000	$	20,454,000	$	—	$	—

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Income Taxes

6 Months Ended

Jun. 30, 2011

INCOME TAXES [Abstract]

Income Tax Disclosure [Text Block]

INCOME TAXES

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

Since our October 21, 2010 acquisition of Heartland, we have been conducting business operations in India. The Indian operations are conducted through both flow-through entities and foreign corporations. We have included the Indian results from operations conducted through the flow-through entities in our U.S. current and deferred income tax provision calculation. We have undistributed foreign earnings in the foreign corporations, which we intend to permanently reinvest overseas. We also intend to reinvest future foreign earnings overseas. Therefore, no U.S. corporate income taxes have been provided on undistributed foreign earnings of the foreign corporations.

A valuation allowance is required to be recorded against deferred tax assets if, based on the available evidence, it is more likely than not that such assets will not be realized. When assessing the need for a valuation allowance, appropriate consideration should be given to all positive and negative evidence related to the realization of the deferred tax assets. This evidence includes, among other things, the existence of current and cumulative losses, forecasts of future profitability, the length of statutory carry-forward periods, our experience with loss carry-forwards expiring unused, and available tax planning strategies. At June 30, 2011 and December 31, 2010, we have recorded a valuation allowance of $310,000 related to expected future utilization of state net operating loss carry-forwards resulting from recent acquisitions. The conclusion to record the valuation allowance is based on the inability to predict, with any degree of certainty, whether we will generate apportionable income to the states in which it has these net operating loss carry-forwards.

With the 2010 acquisition of Heartland and the 2011 acquisition of DTS, we recorded deferred tax assets for federal net operating loss carry-forwards of approximately $6.7 million and $3.2 million, respectively, which relate to losses incurred prior to their acquisition by Transcend. These net operating loss carry-forwards will begin to expire in 2025. As a result of the acquisitions, future utilization of these net operating loss carry-forwards is subject to the provisions of Section 382 of the Internal Revenue Code of 1986, as amended. Total pre-acquisition net operating loss carry-forwards were approximately $16.7 million for Heartland and $23.4 million, for DTS, of which we expect $10 million and $14.1 million, respectively, to expire unused as a result of Section 382 limitations. Accordingly, we have not established a deferred tax asset for those net operating loss carry-forwards which are expected to expire unused. An initial analysis of Section 382 limitations was performed and any change to this estimate as this analysis is refined, would adjust the amount of goodwill recorded. Further, based on historical earnings and expected future taxable income, we believe all of the net operating loss carry-forwards recorded as a deferred tax asset will be fully utilized before expiration. As a result, no valuation allowance has been recorded with respect to these federal net operating loss carry-forwards.

We account for all potentially uncertain tax positions in accordance with the provisions in FASB ASC Topic 740-Income Taxes which prescribes a recognition threshold of more-likely-than-not to be sustained upon examination. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax rules and the potential for future adjustment of our uncertain tax positions by the United States Internal Revenue Service or other taxing jurisdictions.

The initial evaluation of uncertain tax positions resulting from the 2010 acquisition of Heartland was related to intercompany transfer pricing, a liability was established at acquisition and had a balance of $4,681,000 at December 31, 2010. In the second quarter of 2011, we received a final order from the India taxation authority for the year 2006 resulting in a $212,000 reduction in this portion of the liability that was recognized as a reduction of current tax expense. At June 30, 2011, the remaining balance is $4,150,000.

During the second quarter of 2011, we identified an uncertain tax position pursuant to ASC 740 that resulted in recording a liability of approximately $5,300,000. This uncertain tax position relates to prior tax returns filed by Heartland prior to the 2010 acquisition. We believe there is currently an uncertain tax position with respect to the deduction of certain dual consolidated losses generated from Heartland's India operations. We are currently in the process of pursuing administrative relief from the Internal Revenue Service which, based on our understanding of the relevant facts, although there can be no assurance of relief, we believe such relief will likely be granted no later than the fourth quarter of 2011. Based on the standards under ASC 740, however, we are required to estimate the potential impact of this uncertain tax position since such administrative relief is not a widely understood administrative practice. It is important to note that the purchase agreement contains indemnification provisions that we believe would potentially entitle us to reimbursement of actual tax and interest expense incurred if administrative relief is not obtained.

As of June 30, 2011 and December 31, 2010, the total amount of unrecognized tax benefits was $9,450,000 and $4,681,000, respectively, all of which would affect the effective tax rate if recognized.

Our effective income tax rate was approximately 39.7% and 41.2% for the three months ended June 30, 2011 and 2010, respectively, and 39.8% and 40.1% for the six months ended June 30, 2011 and June 30, 2010.

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Aquisitions

6 Months Ended

Jun. 30, 2011

ACQUISITIONS [Abstract]

Schedule of Business Acquisitions, by Acquisition [Table Text Block]

ACQUISITIONS

In the second quarter of 2011 we continued our evaluation of our tax positions related to the purchase price allocation of the October 2010 acquisition of Heartland. During this examination, we identified a possible uncertain tax position of approximately $5.3 million related to pre-acquisition tax returns filed by Heartland. In accordance with FASB ASC 740, we have established a liability of $5.3 million for this uncertain tax position which increases goodwill by $6.7 million and reduces the acquired deferred tax assets by $1.4 million. See Note 11 for further discussion.

On April 29, 2011, we entered into an Agreement and Plan of Merger with DTS America, Inc. ("DTS") and certain principal stockholders and acquired DTS America, Inc. through a merger of DTS Acquisition Corporation (a wholly-owned subsidiary of Transcend Services, Inc.) into DTS America, Inc. The aggregate consideration was $9,500,000, consisting of cash at closing of $8,900,000, $200,000 payable after receipt of financial statements and $400,000 payable one year after closing. As of June 30, 2011, none of the remaining $600,000 has been paid and is included in Other Accrued Liabilities on the Balance Sheet. There is no earn-out provision in the purchase agreement and no debt was assumed.

Founded in 1995, DTS was a medical transcription company that served approximately 30 hospitals plus a number of clinics and surgery centers in 13 states and generated approximately $12 million of annual revenue at the date of acquisition. We purchased DTS to capitalize on the potential for the acquired business to grow and leverage our fixed overhead costs across a larger revenue base.

We allocated the purchase price between goodwill, customer relationships and related deferred tax liability, covenant not to compete and net identifiable assets. We have included the results of DTS operations in our financial statements from the close date forward.

The following is a detailed list of the fair value of identifiable assets acquired and liabilities assumed in the DTS acquisition:

Cash	$	119,000
Accounts receivable	1,179,000
Fixed assets	203,000
Deferred tax asset	3,721,000
Other assets	22,000
Total identifiable assets	5,244,000
Accounts payable	336,000
Benefits payable	377,000
Other liabilities	108,000
Total identifiable liabilities	821,000
Net identifiable assets	$	4,423,000

The fair value of accounts receivable acquired approximated gross contractual amounts receivable. There were no assets arising from contingencies that were acquired in the transaction.

Goodwill of $3.1 million was recorded for the DTS acquisition. This consisted primarily of the synergies and economies of scale expected from combining the operations of Transcend and DTS and the value of the DTS assembled workforce. We have initially allocated the purchase price between goodwill, customer relationships and related deferred tax liability and net identifiable assets. Since this transaction was a stock purchase, goodwill and intangibles will not be deductible for income tax purposes. As permitted, we expect to finalize the purchase price allocation within one year of the purchase date. We do not expect any changes to the purchase price allocation to materially increase or decrease amortization expenses, but there could be an impact on the allocation between goodwill and other intangible assets. As of June 30, 2011, the purchase price was allocated as follows:

Net identifiable assets	$	4,423,000
Customer list	3,000,000
Covenant not to compete	70,000
Goodwill	3,141,000
Deferred tax liability	(1,134,000		)
Total purchase price	$	9,500,000

Intangible assets, except for goodwill, are amortized over their useful lives. The customer list is being amortized over ten years and the covenant not to compete over five years.

DTS revenue and net income of $2,043,000 and $85,000 respectively, are included in our Consolidated Statement of Operations for the three and six months ended June 30, 2011.

Unaudited pro forma revenue and net income of the combined entity had the DTS acquisitions been completed at the beginning of each period presented are as follows:

	SUPPLEMENTAL PRO FORMA INFORMATION
	Three months ended June 30,				Six months ended June 30,
	2011		2010		2011		2010
Revenue	$	31,677,000	$	25,771,000	$	64,038,000	$	51,487,000
Net Income	$	3,568,000	$	1,616,000	$	7,322,000	$	3,116,000

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Transactions with Related Parties

6 Months Ended

Jun. 30, 2011

TRANSACTIONS WITH RELATED PARTIES [Abstract]

Related Party Transactions Disclosure [Text Block]

TRANSACTIONS WITH RELATED PARTIES

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

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Share Based Compensation

6 Months Ended

Jun. 30, 2011

Share-based Compensation [Abstract]

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

9. SHARE-BASED COMPENSATION

General

We have six stockholder-approved stock incentive plans (“Plans”), for our key employees, directors and key consultants. The Plans provide for the grant of incentive stock options, nonqualified stock options, restricted stock awards, and, in the case of the plans approved by the shareholders on May 10, 2007 and May 19, 2009, restricted stock units and stock appreciation rights. We intend to grant new awards under only the 2009 Stock Incentive Plan (“2009 Plan”). The 2009 Plan was amended on June 1, 2011 to increase the number of shares available for grant by 500,000 and to require shareholder approval to reprice awards under the 2009 Plan. No such repricing has ever been done nor is it anticipated to be done in the future. The options are granted at fair market value, as defined in the option agreement, on the date of grant. There were 651,846 shares available for issuance at June 30, 2011.

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

In June 2010, we implemented an equity tracking software system. In the course of that implementation, it came to our attention that we had three issues with our historical expense calculations that we broke into two categories: (1) cumulative adjustments and (2) first quarter 2010 restricted stock vesting. We concluded that these adjustments should be considered “correction of errors” as opposed to “changes in estimates” based on the definitions set out in FASB ASC Topic 250 – Accounting Changes and Error Corrections. We performed an analysis under SAB108 – Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements (SAB108), and used the materiality guidance of SAB99 – Materiality (SAB99) to determine whether or not the impact to any one period or the cumulative impact on a given period was material enough to require a restatement to previously filed financial statements.

The cumulative adjustment is the result of netting two offsetting issues. The first issue involved the use of estimated forfeiture rates and the required true-up to actual forfeiture rates for all awards issued between 2006 and 2010, and the second issue was a mathematical error in the calculation of the volatility rate used to establish the grant date fair value of awards issued from 2008 to 2010. Since both adjustments impact the same financial statement item, stock-based compensation expense, we determined that they could be combined into one net adjustment of additional expense of $445,000 ($308,000 of which related to periods prior to 2010). Based on our analysis and an evaluation of materiality, which required us to assess both qualitative and quantitative factors, it was determined that the adjustment was not material to any prior reporting periods or to the expected annual results for 2010; therefore, the entire adjustment was recorded in the second quarter of 2010.

The second category relates to the vesting of certain restricted stock awards in the first quarter of 2010. At the time of vesting in the first quarter of 2010, only $124,000 of the total stock-based compensation expense of $355,000 had been recorded. The difference of $231,000 should have been recorded as additional compensation expense in the first quarter of 2010. Based on our analysis, it was determined that the adjustment was not material to the first quarter and did not require a restatement of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2010. In accordance with SAB108, the entry was recorded as a first quarter of 2010 adjustment in the Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 and has been and will be reflected in any future filing of the financial information for the period ending March 31, 2010 and the year ended December 31, 2010.

The following table shows the impact of the adjustment and the revised financial information for the quarter ended March 31, 2010.

	Quarter ended March 31, 2010 as reported		Adjustment		Quarter ended March 31, 2010 as revised
Revenue	$	22,206,000			$	22,206,000
Gross profit	7,480,000				7,480,000
General and administrative expense	3,528,000		231,000		3,759,000
Operating expense	4,805,000		231,000		5,036,000
Operating income	2,675,000		(231,000	)	2,444,000
Income tax provision	1,016,000		(78,000	)	938,000
Net income	1,632,000		(153,000	)	1,479,000
Earnings per share - basic	0.16		(0.02	)	0.14
Earnings per share - diluted	0.15		(0.01	)	0.14

The fair value of each option grant is estimated on the date of grant using the Black-Scholes-Merton option pricing model that uses the assumptions or range of assumptions. The risk-free interest rate for the period matching the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. The dividend yield is the calculated yield on our stock at the time of grant. The expected term of the options represents the period of time that options granted are expected to be outstanding and is derived by analyzing historic exercise behavior along with currently outstanding options. Expected volatilities are based on historical volatility of our common stock. The expected forfeiture rates are based on historical forfeiture rates. There were 19,500 options granted in the quarter ended June 30, 2011. The weighted average grant date fair value of options granted in the quarter ended June 30, 2011 was $13.45, and the assumptions used were as follows:

Risk-free interest rate	1.78% to 2.37%
Expected dividend yield	0	%
Expected term	5.58 to 5.66 years
Expected volatility	57.86% to 58.23%
Expected forfieture rate	18.4	%
Exercise price of options issued	$21.98 -$26.09

Transactions involving our stock options for the six months ended June 30, 2011 were as follows:

	Number of Shares Subject to Stock Options		Weighted Average Exercise Price		Weighted Average Remaining Contract Life	Aggregate Intrinsic Value*
Outstanding at December 31, 2010	872,767		$	8.91	6.6 years
Granted	19,500		$	25.14
Forfeited	(36,250	)	$	15.79
Exercised	(62,586	)	$	9.52		$	1,244,000
Outstanding at June 30, 2011	793,431		$	8.95	6.1 years	$	16,218,000

*The aggregate intrinsic value is based on a closing stock price of $29.39 as of June 30, 2011.

In the first six months of 2011, we issued 24,580 shares of restricted stock to certain participants under the 2009 plan. Our Directors were issued 9,580 of these shares which vest over three years. The remaining 15,000 shares were issued to employees and are performance based vesting in quarterly increments each March in 2012 through 2015. We use the average of the grant date high and low stock price along with expected forfeiture rates of 0% to 25.55% to calculate fair value of restricted stock awards issued. During the first quarter of 2011, 18,000 shares of performance based restricted stock were forfeited due to the failure to meet 2010 performance measures required for the vesting of these shares.

Transactions involving our restricted stock for the six months ended June 30, 2011 were as follows:

	Number of Shares		Weighted Average Grant Date Fair Value
Non-vested stock outstanding at December 31, 2010	99,500		$	16.25
Granted	24,580		$	25.25
Forfeited	(18,000	)	$	16.34
Vested	—
Non-vested stock outstanding at June 30, 2011	106,080		$	18.32

We recognized stock-based compensation expense under FASB ASC Topic 718 – Compensation-Stock Compensation of approximately $306,000 and $640,000 for the three months ended June 30, 2011 and June 30, 2010 and $575,000 and 1,085,000 for the six months ended June 30, 2011 and 2010, respectively. These totals include the adjustment to stock-based compensation expense in the first quarter of 2010 discussed above. As of June 30, 2011, we had approximately $2,800,000 of future equity-based compensation expense which we expect to record in our statements of operations through 2015.

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Borrowing Arrangements

6 Months Ended

Jun. 30, 2011

BORROWING ARRANGEMENTS [Abstract]

Debt Disclosure [Text Block]

BORROWING ARRANGEMENTS

Credit Facility

On August 31, 2009, Transcend and MDSI entered into a loan and security agreement with Regions Bank. Transcend and MDSI are both “borrowers” under the loan and security agreement, which replaced our previous credit facility. The loan and security agreement includes a one-time, four-year term loan of $7.0 million for the costs and expenses of, and, to the extent necessary, a portion of the purchase price for MDSI. The loan and security agreement also provides for up to $5.0 million in a revolving loan commitment based on eligible accounts receivable. We may use proceeds of the revolving loan only for working capital, general corporate purposes, and for specified acquisitions. The maximum amount of the revolving loan may be increased at the discretion of Regions Bank to $8.0 million. We used $4.0 million of the proceeds from the follow-on offering of our common stock completed in the fourth quarter of 2009 to pay down the term loan. The original revolving loan commitment expired and was renewed for another year, in August, 2010. Borrowings bear interest at a rate based on the current LIBOR (3.75% as of June 30, 2011 and December 31, 2010), and are secured by substantially all of our assets. The outstanding balance on the term loan of $67,000 was paid off in June, 2011 and the balance at June 30, 2011 was $0. The balance on the revolver was $0 as of June 30, 2011 and December 31, 2010. We did not borrow on the revolving loan during the six months ended June 30, 2011.

The loan and security agreement contains representations and warranties, as well as affirmative, reporting and negative covenants customary for financings of this type. Among other things, the loan and security agreement restricts us from incurring certain additional debt, prohibits us from creating, permitting or allowing certain liens on our property, restricts the payment of dividends, distributions and other specified equity related transactions, and prohibits certain borrowings and specified transactions with affiliates. The loan and security agreement also requires the maintenance of a specified minimum fixed charge coverage ratio, tangible net worth, and cash flow leverage, as defined in the agreement. As of June 30, 2011, we were in compliance with all covenants of the agreement.

On April 8, 2010, Transcend and MDSI entered into a commitment letter for a senior secured credit facility in an aggregate principal amount of up to $65,000,000 with Regions Business Capital, Regions Capital Markets and Regions Bank (collectively, “Regions”). We intended to use part of the proceeds from the credit facility to fund our bid for substantially all of the assets of Spheris, Inc. (“Spheris”) and the stock of its subsidiary, Spheris India Private Limited (“Spheris India”). Spheris declared bankruptcy under Chapter 11 and an auction under Section 363 of the United States Bankruptcy Code was held for substantially all of the assets of Spheris and the stock of Spheris India, subject to the terms of a stock and asset purchase agreement. The United States Bankruptcy Court for the District of Delaware established a bid process whereby interested parties, including us, submitted qualified bids on April 8, 2010. Qualified bidders participated in the auction held on April 13, 2010. We were not the successful bidder in the auction and did not enter into the new credit facility. In accordance with the commitment letter, the commitment terminated on May 28, 2010 because the definitive credit agreement and other legal documents related to the senior credit facility were not executed by that date. We expensed approximately $300,000 and $61,000 of costs related to the credit facility in the first quarter and second quarter of 2010, respectively, that would have been capitalized if the credit facility had closed.

OTP Promissory Note

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

MDSI Promissory Note

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

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Consolidated Statements of Cash Flows (USD $)	6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010
Cash flows from operating activities:
Net income	$ 7,385,000	$ 3,047,000
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes	(395,000)	126,000
Depreciation and amortization	1,428,000	908,000
Share-based compensation	575,000	1,085,000
Tax benefit for share-based payments	(119,000)	32,000
Changes in assets and liabilities:
Accounts receivable, net	(1,043,000)	(117,000)
Prepaid income taxes, excluding tax benefit for share-based payments	119,000	(317,000)
Prepaid expenses and other current assets	(621,000)	(244,000)
Other assets	54,000	73,000
Accounts payable	19,000	(826,000)
Accrued and other liabilities	(793,000)	(252,000)
Total adjustments	(776,000)	468,000
Net cash provided by operating activities	6,609,000	3,515,000
Cash flows from investing activities:
Capital expenditures	(854,000)	(1,112,000)
Capitalized software development costs	(1,899,000)	(1,635,000)
Purchase of investments	(12,435,000)	(20,587,000)
Sale and maturity of investments	14,610,000	5,655,000
Purchase of business, net of cash acquired	(8,781,000)	0
Net cash provided by (used in) investing activities	(9,359,000)	(17,679,000)
Cash flows from financing activities:
Proceeds from stock options and other issuances of stock	605,000	43,000
Revision of estimate for capitalized expenses of stock offering	0	56,000
Tax benefit for share-based payments	119,000	(32,000)
Repayment of promissory notes payable	(67,000)	(832,000)
Net cash provided by (used in) financing activities	657,000	(765,000)
Net change in cash and cash equivalents	(2,093,000)	(14,929,000)
Cash and cash equivalents at beginning of period	6,207,000	25,732,000
Cash and cash equivalents at end of period	4,114,000	10,803,000
Supplemental cash flow information:
Cash paid for interest	1,000	19,000
Cash paid for income taxes	$ 5,625,000	$ 2,245,000

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Major Customers

6 Months Ended

Jun. 30, 2011

MAJOR CUSTOMERS [Abstract]

Concentration Risk Disclosure [Text Block]

MAJOR CUSTOMERS

In September 2009, we announced that we had entered into a five-year single-source contract to provide medical transcription services to hospitals that are members of Health Management Associates (“HMA”) effective October 1, 2009. The agreement expanded our existing relationship with HMA to include the HMA hospitals which were using other transcription service providers. As of June 30, 2011, we have transitioned all of the existing HMA hospitals. In addition, pursuant to the terms of the agreement, any future hospitals acquired or managed by HMA will transition to us as soon as practicable.

Revenue attributable to our contract with HMA comprised 14.0% and 18.0% of our total revenue for the three months ended June 30, 2011 and 2010, respectively, and 14.7% and 18.2% for the six months ended June 30, 2011 and 2010. The decrease in the percentages is due to our growth in non-HMA revenue, particularly from acquisitions.

Our top 10 customers (a customer is an individual hospital) accounted for approximately 14.4 % of our transcription revenue for the three and six months ended June 30, 2011 and 16.4% of revenue for the three and six months ended June 30, 2010. These customers averaged $1.8 million of annualized revenue each in 2011 and $1.5 million in 2010. Our average annual revenue per customer was approximately $326,000 for the first six months of 2011 and $349,000 for the first six months of 2010.

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Investments

6 Months Ended

Jun. 30, 2011

Investments [Abstract]

Investments in Debt and Marketable Equity Securities (and Certain Trading Assets) Disclosure [Text Block]

INVESTMENTS

Short-term investments consist of government notes in the United States and uninsured fixed rate bank deposits in India. These investments, which have a contractual maturity of less than one year, are carried at fair value based on quoted market prices (level 1 inputs).

Description	June 30, 2011		December 31, 2010
Available-for-sale
Fixed rate bank deposits	$	2,024,000	$	848,000
U.S. Treasury Securities	16,255,000		19,606,000
Total short-term investments	$	18,279,000	$	20,454,000

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Subsequent Event

6 Months Ended

Jun. 30, 2011

SUBSEQUENT EVENT [Abstract]

Subsequent Events [Text Block]

SUBSEQUENT EVENT

On July 29, 2011, we entered into an Agreement and Plan of Merger with Salar, Inc., a Maryland corporation ("Salar"), Salar Acquisition Corporation, a wholly-owned subsidiary of Transcend Services, Inc. ("Salar Acquisition Corporation") and certain principalstockholders of Salar, pursuant to which Salar Acquisition Corporation merged with and into Salar, with Salar surviving such merger as a wholly-owned subsidiary of Transcend Services, Inc.). The aggregate consideration was $11,000,000 in cash. There is no earn-out provision in the purchase agreement and no debt was as assumed.

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Goodwill and Other Intangible Assets

6 Months Ended

Jun. 30, 2011

GOODWILL AND OTHER INTANGIBLE ASSETS [Abstract]

Goodwill and Intangible Assets Disclosure [Text Block]

GOODWILL AND OTHER INTANGIBLE ASSETS

We account for goodwill and other intangible assets in accordance with the provisions of FASB ASC Topic 350 – Intangibles-Goodwill and Other. Under this Topic, goodwill and intangible assets that have indefinite useful lives are tested at least annually for impairment rather than being amortized like intangible assets with finite useful lives, which are amortized over their useful lives. A portion of the respective purchase prices of the acquisitions of Medical Dictation, Inc. ("MDI") and PracticeXpert in 2005, OTP Technologies, Inc. ("OTP") in 2007, DeVenture Global Partners, Inc. ("DeVenture"), Transcription Relief Services, Inc. ("TRS") and Medical Dictation Services, Inc. ("MDSI") in 2009, Spryance, Inc. ("Heartland") in 2010 and DTS in 2011 were attributed to goodwill and other intangible assets.

Goodwill and Other Intangible Assets (Rounded to the nearest thousand)
		June 30, 2011						December 31, 2010
	Useful Life in Years	Gross Assets		Accumulated Amortization		Net Assets		Gross Assets		Accumulated Amortization		Net Assets
Goodwill		$	38,087,000	$	—	$	38,087,000	$	28,246,000	$	—	$	28,246,000
Amortized intangible assets:
Covenants not to compete	5	288,000		120,000		168,000		218,000		101,000		117,000
Technology	2	190,000		66,000		124,000		190,000		19,000		171,000
Customer relationships	5-10	11,381,000		2,079,000		9,302,000		8,381,000		1,614,000		6,767,000
Total goodwill and intangible assets		$	49,946,000	$	2,265,000	$	47,681,000	$	37,035,000	$	1,734,000	$	35,301,000

Amortization expense was $297,000 for the quarter ended June 30, 2011 and $531,000 for the six months ended June 30, 2011. Estimated amortization expense for the next five fiscal years is as follows:

Fiscal Year	Amount
Remainder of 2011	$	658,000
2012	$	1,252,000
2013	$	1,173,000
2014	$	1,159,000
2015	$	1,141,000
2016	$	1,133,000

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Consolidated Statement of Stockholders' Equity (USD $)	Total	Preferred Stock [Member]	Common Stock [Member]	Additional Paid-in Capital [Member]	Retained Earnings [Member]
Balance at Dec. 31, 2010	$ 70,163,000	$ 0	$ 528,000	$ 63,368,000	$ 6,267,000
Preferred Stock Balance at Dec. 31, 2010	0	0.00
Common Stock Balance at Dec. 31, 2010	10,566,000		10,566,000
Issuance of shares of common stock from stock incentive plans			105,000
Issuance of common stock from stock incentive plans	605,000		5,000	600,000	0
Share based compensation expense	575,000			575,000	0
Tax benefit for share based payments	119,000			119,000
Balance at Jun. 30, 2011	$ 78,847,000	$ 0	$ 533,000	$ 64,662,000	$ 13,652,000
Preferred Stock Balance at Jun. 30, 2011	0	0.00
Common Stock Balance at Jun. 30, 2011	10,671,000		10,671,000

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Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2011

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Abstract]

Significant Accounting Policies [Text Block]

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements include the accounts of Transcend Services, Inc. and its subsidiary companies (the “Company” or “Transcend”). All intercompany accounts and transactions have been eliminated in consolidation.

The accompanying consolidated financial statements are unaudited and have been prepared by our management in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of management, all adjustments, consisting of normal recurring accruals, necessary for the fair presentation of the consolidated financial position, results of operations and cash flows, have been included. For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010. Footnote disclosure that substantially duplicates the disclosure contained in that document has been omitted.

During the second quarter of 2010, we determined that $231,000 of stock-based compensation expense should have been recorded in the first quarter of 2010. We evaluated the materiality of the error and determined that a restatement of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 was unnecessary. The amounts in our consolidated statement of operations for the six months ended June 30, 2010 presented in this report reflect this adjustment to the first quarter of 2010 (see Note 9).

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

None.

Recently Issued Accounting Pronouncements Not Yet Adopted

In May 2011, the Financial Accounting Standard Board ("FASB") issued Accounting Standards Update, ("ASU") 2011-04 to Topic 820 - Fair Value Measurements and Disclosures. The update, entitled Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, amends current fair value measurement and disclosure guidance to include increased transparency around valuation inputs and investment categorization.  The update results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. Generally Accepted Accounting Principles ("GAAP") and International Financial Reporting Standards ("IFRS") and also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. The update is effective prospectively for interim and annual periods beginning after December 15, 2011. We do not expect that the adoption of this update will have a material impact on our financial statements.

In June 2011, the FASB issued ASU No. 2011-05 to Topic 220 - Comprehensive Income. The update, entitled Comprehensive Income (Topic 220): Presentation of Comprehensive Income requires comprehensive income to be reported in either a single statement or in two consecutive statements reporting net income and other comprehensive income. The amendment does not change what items are reported in other comprehensive income or the U.S. GAAP requirement to report reclassification of items from other comprehensive income to net income. The update is effective for interim and annual periods beginning after December 15, 2011. We do not expect that the adoption of this update will have a material impact on our financial statements.

Net Earnings Per Share

We account for earnings per share in accordance with FASB ASC Topic 260 – Earnings per Share. Topic 260 requires the disclosure of basic net earnings per share and diluted net earnings per share. Basic net earnings per share is computed by dividing net income 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 per share gives effect to all potentially dilutive securities. Our stock options are potentially dilutive securities. Stock options with exercise prices that are

greater than the average market price are excluded from the calculation of diluted earnings per share because their effect would be anti-dilutive.

The reconciliation of the numerators and denominators of the basic and diluted earnings per share calculations are presented below:

	Three months ended June 30,				Six months ended June 30,
	2011		2010		2011		2010
Numerator:
Net income	$	3,624,000	$	1,568,000	$	7,385,000	$	3,047,000
Denominator:
Weighted average shares outstanding	10,651,000		10,489,000		10,625,000		10,486,000
Effect of dilutive securities
Common stock options	412,000		304,000		400,000		353,000
Denominator for diluted calculation	11,063,000		10,793,000		11,025,000		10,839,000
Basic earnings per share	$	0.34	$	0.15	$	0.70	$	0.29
Diluted earnings per share	$	0.33	$	0.15	$	0.67	$	0.28
Weighted-average outstanding stock options not included in diluted net income per share calculation as they had an anti-dilutive effect	46,000		238,000		123,000		74,000

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Contingencies

6 Months Ended

Jun. 30, 2011

CONTINGENCIES [Abstract]

Commitments and Contingencies Disclosure [Text Block]

CONTINGENCIES

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

On June 10, 2005, we entered into a master equipment lease agreement with Farnam Street Financial, Inc. (“Farnam Street”). On April 22, 2009, we filed a complaint in the United States District Court for the District of Minnesota against Farnam Street, alleging breach of contract, fraud and violation of the Deceptive Trade Practices Act, among other things. Farnam Street answered the complaint and filed a counter-claim against us, alleging breach of contract, among other things. The dispute centered on lease renewal, lease termination and lease buy-out provisions. On May 12, 2010, we finalized a settlement with Farnam Street and paid $720,000 to buy out the equipment leases. The settlement was allocated as $540,000 against amounts previously expensed and $180,000 was set up as a fixed asset with a useful life of one year, as of June 30, 2011 this asset is fully depreciated.

The TRS asset purchase agreement provided for a contingent consideration payment of up to $3.0 million based on TRS fourth quarter 2009 revenue and TRS December 31, 2009 backlog. We calculated a fourth quarter 2009 revenue contingent consideration payment of $1,123,000, which was paid in February 2010. On February 26, 2010, we received notice that TRS disputed our calculation and claimed an additional payment of $1,877,000. We responded on March 10, 2010, stating that TRS’s objections were without merit and asking that the dispute be postponed pending delivery of the backlog contingent payment calculation. TRS agreed to the postponement. On March 30, 2010, we delivered the backlog contingent payment calculation to TRS showing an amount payable of $0. TRS objected to our backlog contingent payment calculation. Under the terms of the asset purchase agreement, in the case of a disagreement over the calculation of the contingent payment, the parties were to select an independent auditor to review the calculation. On May 6, 2010, TRS filed a civil action against us in the United States District Court for the Middle District of North Carolina. TRS generally alleges that we frustrated their ability to maximize the contingent payment. TRS seeks compensatory damages of approximately $1,877,000, unspecified damages, attorneys’ fees, interest and costs. The lawsuit is in the early procedural stages and the ultimate outcome cannot be determined at this time. We have evaluated this claim and the civil action and believe that no additional payments are due under the calculations outlined in the asset purchase agreement.

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Consolidated Balance Sheets (USD $)	Jun. 30, 2011	Dec. 31, 2010
Current assets:
Cash and cash equivalents	$ 4,114,000	$ 6,207,000
Short-term investments	18,279,000	20,454,000
Accounts receivable, net of allowance for doubtful accounts of $145,000 at June 30, 2011 and $124,000 at December 31, 2010	14,259,000	12,037,000
Deferred income tax, net	343,000	482,000
Prepaid expenses and other current assets	1,320,000	688,000
Total current assets	38,315,000	39,868,000
Property and equipment:
Computer equipment	4,727,000	4,113,000
Software	4,631,000	4,263,000
Furniture and fixtures	670,000	652,000
Total property and equipment	10,028,000	9,028,000
Accumulated depreciation and amortization	(6,892,000)	(6,052,000)
Property and equipment, net	3,136,000	2,976,000
Capitalized software development costs, net	5,087,000	3,188,000
Goodwill and Intangible assets:
Goodwill	38,087,000	28,246,000
Other intangible assets	11,859,000	8,789,000
Total intangible assets	49,946,000	37,035,000
Accumulated amortization	(2,265,000)	(1,734,000)
Intangible assets, net	47,681,000	35,301,000
Deferred income tax, net- noncurrent	2,190,000	470,000
Other assets	371,000	414,000
ASSETS	96,780,000	82,217,000
Current liabilities:
Accounts payable	2,008,000	1,653,000
Accrued compensation and benefits	3,955,000	3,666,000
Promissory notes payable	0	67,000
Income tax payable	847,000	1,193,000
Other accrued liabilities	2,556,000	2,180,000
Total current liabilities	9,366,000	8,759,000
Long term liabilities:
Income tax contingent liability	7,982,000	2,606,000
Other liabilities	585,000	689,000
Total long term liabilities	8,567,000	3,295,000
Stockholders’ equity:
Stockholders' Equity, Including Portion Attributable to Noncontrolling Interest	78,847,000	70,163,000
Preferred stock, $0.01 par value; 2,000,000 shares authorized and no shares outstanding at June 30, 2011 and December 31, 2010	0	0
Common stock, $0.05 par value; 30,000,000 shares authorized at June 30, 2011 and December 31, 2010; 10,671,000 and 10,566,000 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively	533,000	528,000
Additional paid-in capital	64,662,000	63,368,000
Retained earnings	13,652,000	6,267,000
Stockholders’ equity:	78,847,000	70,163,000
Total liabilities and stockholders’ equity	$ 96,780,000	$ 82,217,000