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