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