TRANSCEND SERVICES INC, S-3/A, 1996-07-11

TRANSCEND SERVICES INC
S-3/A, 1996-07-11
OFFICES & CLINICS OF DOCTORS OF MEDICINE

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 11, 1996
REGISTRATION NO. 333-04777
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- -------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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PRE-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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TRANSCEND SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 33-0378756
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)

3353 PEACHTREE ROAD, N.E.
SUITE 1000
ATLANTA, GEORGIA 30326
(404) 364-8000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

LARRY G. GERDES
PRESIDENT AND CHIEF EXECUTIVE OFFICER
3353 PEACHTREE ROAD, N.E., SUITE 1000
ATLANTA, GEORGIA 30326
(404) 364-8000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

COPIES TO:

HELEN T. FERRARO, ESQ. FREDERICK W. KANNER, ESQ.
SMITH, GAMBRELL & RUSSELL DEWEY BALLANTINE
3343 PEACHTREE ROAD, N.E., SUITE 1301 AVENUE OF THE AMERICAS
1800 NEW YORK, NEW YORK 10019
ATLANTA, GEORGIA 30326 (212) 259-8000
(404) 264-2620

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.

If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]

If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

---------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.

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<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

SUBJECT TO COMPLETION, DATED JULY 11, 1996

PROSPECTUS

3,000,000 Shares

LOGO

Common Stock

---------

All of the shares of Common Stock offered hereby are being offered by
Transcend Services, Inc., (the "Company" or "Transcend").

The Common Stock of the Company is listed on The Nasdaq Stock Market's
National Market under the symbol "TRCR." On July 10, 1996, the last sale price
of the Common Stock as reported by Nasdaq was $8.75.

SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.

---------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.

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<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- ----------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
- ----------------------------------------------
Total(3) $ $ $
</TABLE>
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting."
(2) Before deducting expenses of the offering estimated at $ payable by
the Company.
(3) The Company has granted to the Underwriters a 30-day option to purchase
up to 450,000 additional shares of Common Stock on the same terms as set
forth above to cover over-allotments, if any. If the Underwriters
exercise such option in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."

---------

The shares of Common Stock are offered by the several Underwriters named
herein, subject to prior sale, when, as and if accepted by them and subject to
certain conditions. It is expected that certificates for the shares of Common
Stock offered hereby will be available for delivery on or about , 1996 at the
offices of Smith Barney Inc., 333 West 34th Street, New York, New York 10001.

---------

Smith Barney Inc. Dain Bosworth
Incorporated

, 1996
<PAGE>

Map depicting the Company's Office locations.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE
"UNDERWRITING."

2
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PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information, including the consolidated financial statements and notes thereto,
appearing elsewhere in this Prospectus.

THE COMPANY

Transcend is a healthcare services company focused on the emerging field of
healthcare information management ("HIM") services to hospitals and other
associated healthcare providers. The Company provides a range of HIM services,
including: (i) contract management ("outsourcing") of the healthcare
information or medical records function, as well as the admissions function;
(ii) transcription of physicians' dictated medical notes; and (iii) consulting
services relating to medical records and reimbursement coding. The Company
currently operates, on a contract management basis, the medical records and
certain other HIM functions of 16 general acute care hospitals located in ten
states and the District of Columbia. The Company also provides case management
and disability management services to insurance carriers, third party
administrators and self-insured employers.

The healthcare industry is undergoing significant and rapid change. Hospitals
and other healthcare providers have come under increased scrutiny from
regulators and third party payors. As a result, hospitals are now looking to
outsource to third parties certain costly or complicated functions that are not
directly related to core competencies or where they are unable to achieve
economies of scale. In particular, patient information, and the delivery of
such information in a timely fashion, have become critical to improving
productivity, efficiency and cost containment, while maintaining a high level
of patient care. For instance, many hospitals are finding that their medical
records departments are inadequate, and to remedy the inadequacies of these
functions, they are beginning to turn to third party service providers which
have expertise in managing medical records, admissions and other affiliated
departments.

With over 5,000 hospitals in the United States, the market for outsourcing
the management of medical records departments and other affiliated departments
is sizable. Approximately 3,000 hospitals in the United States have more than
100 beds and constitute the Company's first tier of market opportunity.
American Hospital Publishing, Inc. has reported that in 1995 two out of three
U.S. hospitals were outsourcing one or more departments. According to Modern
Healthcare magazine's 17th Annual Contract Management Survey, published in
September 1995, the total number of hospital management contracts increased by
nearly 12% from the end of 1993 to the end of 1994, from approximately 7,800 to
approximately 8,770.

The healthcare industry has recognized the need for improvement in the
processing of healthcare information, and to achieve this improvement, there
has been a dramatic increase in the development of technological solutions
offered by third party vendors of computer hardware and software. Although
there have been significant advances in the management of medical information
in general, little progress has been made introducing technology to the
management of the medical records departments, patient admissions or other
affiliated departments of hospitals that handle the flow of patient
information. The Company believes that there is a need, and therefore an
emerging market, for third party service providers to assist hospitals and
other healthcare providers in (i) the effective implementation of the available
technological tools for healthcare information management, (ii) the process of
managing healthcare information across the pre-admission to post-discharge
continuum of the healthcare delivery system and (iii) the management and
training of personnel in healthcare information departments. By managing the
entire flow of patient information through the hospital, errors, inefficiencies
and their associated costs can be minimized.

The Company's business strategy focuses on the application of advanced
technological tools and healthcare information management expertise to improve
the efficiency and productivity of HIM services from pre-admission of the
patient through post-discharge. Key elements of the Company's business strategy
include: (i) the expansion of the Company's core outsourcing business; (ii) the
application of emerging technology to HIM; (iii) the development of Information
Service Centers as a business model for the provision of future outsourcing
services designed to consolidate all of the functional and technological
aspects of HIM into one centralized center; (iv) the expansion of contract
management services offered to include patient admitting and the business
office; and (v) the use of strategic acquisitions and alliances to complement,
expand and diversify the Company's services portfolio and to accelerate growth.
See "The Company."

3
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THE OFFERING

Common Stock offered.............. 3,000,000 shares

Common Stock to be outstanding
after the offering............... 21,739,208 shares(1)

Use of proceeds................... General corporate purposes and for working
capital. See "Use of Proceeds."

Nasdaq National Market symbol..... TRCR
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(1) Excludes (a) 1,278,275 shares of Common Stock issuable as of July 8, 1996
upon the exercise of outstanding stock options, 862,875 of which are
presently exercisable or become exercisable within the next 60 days, (b)
572,000 shares of Common Stock issuable upon conversion of the Company's
8% Subordinated Convertible Debentures, (c) 25,000 shares issuable upon
exercise of the outstanding Warrant to purchase Common Stock, (d) 519,875
shares reserved for future issuance under the Company's 1992 Stock Option
Plan, as amended and (e) 141,436 shares reserved for future issuance under
the Company's 1990 Employee Stock Purchase Plan, as amended.

SUMMARY CONSOLIDATED FINANCIAL DATA(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------- ----------------
1993 1994 1995 1995 1996
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues.................. $ 6,208 $ 12,393 $ 25,882 $ 4,897 $ 8,688
Direct costs.................. 5,125 10,787 22,334 4,346 7,260
------- -------- -------- ------- -------
Gross profit.................. 1,083 1,606 3,548 551 1,428
Marketing and sales expenses.. 378 929 2,186 437 641
General and administrative ex-
penses....................... 1,330 1,673 4,604 1,113 1,122
Amortization expense.......... 310 357 633 145 145
------- -------- -------- ------- -------
Operating loss................ (935) (1,353) (3,875) (1,144) (480)
Other, net ................... (31) (53) (21) 36 (43)
------- -------- -------- ------- -------
Net loss...................... $ (966) $ (1,406) $ (3,896) $(1,108) $ (523)
======= ======== ======== ======= =======
Net loss per share............ $ (0.11) $ (0.14) $ (0.22) $ (0.06) $ (0.03)
Weighted average shares out-
standing..................... 8,866 9,733 17,818 17,533 18,217
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------
AS
ACTUAL ADJUSTED(2)
------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital.......................................... $ (16) $41,101
Total assets............................................. 16,651 24,434
Long-term debt and capital lease obligations............. 2,368 2,368
Shareholders' equity..................................... $ 9,556 $34,006
</TABLE>
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(1) On January 10, 1995, the Company acquired a Georgia corporation then known
as "Transcend Services, Inc." by the merger of Transcend into a subsidiary
of the Company. The merger was treated for financial accounting purposes as
the acquisition of the Company by the former Transcend and the historical
financial statements of the former Transcend have become the financial
statements of the Company and include the business of both companies after
the effective date of the merger. See "The Company."

(2) Adjusted to give effect to the sale by the Company of 3,000,000 shares of
Common Stock at an assumed public offering price of $8.75 per share and the
application of the net proceeds therefrom as described under "Use of
Proceeds."

----------------

Unless otherwise indicated, the information in this Prospectus assumes the
Underwriters' over-allotment option is not exercised. The "fiscal year" when
used in this Prospectus shall mean the twelve-month period ended December 31 of
the calendar year indicated.

4
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RISK FACTORS

In addition to other information contained in this Prospectus, the following
factors should be considered carefully in evaluating the Company and its
business before purchasing any of the shares of Common Stock offered hereby.
This Prospectus contains, in addition to historical information, forward-
looking statements that involve risks and uncertainties. The Company's actual
results could differ materially. Factors that could cause or contribute to
such differences include, but are not limited to, those discussed below, as
well as those discussed elsewhere in this Prospectus.

OPERATING LOSSES

Although the Company has experienced revenue growth on an annual basis since
the fiscal year ended December 31, 1992, the Company has not operated
profitably during its last five fiscal years, and for the quarter ended March
31, 1996, it continued to experience losses. At March 31, 1996, the Company
had an accumulated deficit of $7,426,000. In addition, the costs incurred by
the Company early in the terms of its outsourcing contracts exceed the
revenues received by the Company under such contracts and therefore, to
achieve profitability, the Company must develop operating efficiencies. There
can be no assurance that the Company will be able to attain the required
operating efficiencies necessary to achieve profitability. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Results of Operations."

NEGATIVE CASH FLOWS

For the twelve months ended December 31, 1995, the Company had negative cash
flows from operations of $4,133,000, which included a payment of approximately
$500,000 of aged payables immediately following a merger of the Company which
occurred in January 1995 and $450,000 in merger costs. See "The Company."
There were also cash outlays for acquisitions totaling $1,232,000 and capital
expenditures of $1,221,000. Negative cash flows from operations was $438,000
for the quarter ended March 31, 1996, which included cash outlays of $313,000
for capital expenditures. There can be no assurance that the Company will
achieve positive cash flow. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."

MANAGEMENT OF GROWTH

The Company's business strategy includes an intention to grow through
acquisitions and strategic alliances with other companies. Such a strategy
involves significant risks. The process of integrating acquired businesses
into the Company's operations may result in unforeseen difficulties and may
require a disproportionate amount of resources and management's attention.
There can be no assurance that the Company will be able to expand its market
presence in its current locations or successfully enter other markets through
acquisitions or that any such expansion will be profitable. If the Company's
management is unable to manage growth effectively, the Company's business,
results of operations and financial condition could be materially and
adversely affected. See "Business--Strategy."

MARKET ACCEPTANCE OF OUTSOURCING STRATEGY

The success of the Company will require acceptance by hospitals and other
healthcare providers of the concept of outsourcing their information
management departments. Such acceptance will depend on the ability of the
Company to alleviate outsourcing concerns of hospital management, including
loss of control, information quality and integrity concerns and a bias against
outsourcing due to previous poor experiences. There can be no assurance that
the Company will be successful in alleviating these concerns and in marketing
its services. Failure of the Company to achieve market acceptance of its
services could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Competition."

5
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NATURE OF CONTRACTS

The Company derives a substantial portion of its revenues from 16
outsourcing contracts which have remaining terms ranging from one to five
years. Revenues from the Company's outsourcing contracts amounted to 55.3% of
total 1995 revenues and 61% of total revenues for the quarter ended March 31,
1996. At the end of each contract's duration, the Company must renegotiate a
new contract. Should the Company fail to retain an existing customer or fail
to adequately expand its base of contracts, the Company's future revenues
could be at substantial risk. There can be no assurance that the Company will
be able to renegotiate or renew its existing outsourcing contracts. With the
exception of one contract, the Company's existing outsourcing contracts are on
a fixed installment fee basis. In the early term of such a contract, the
Company's expenses in providing services frequently exceed the revenues
received. For such contracts to become profitable, the Company must be able to
lower operating expenses by achieving operating efficiencies and economies of
scale. There can be no assurance that the Company will be able to lower
operating expenses sufficiently to achieve profitability.

The Company is considering an alternative volume-based pricing structure for
pricing its contract management contracts based upon a hospital customer's
activity levels such as the weighted average number of annual patient
discharges or a "per member per month" capitated pricing option. Because these
pricing methods do not provide a fixed amount of contract revenues, they
introduce an additional element of risk to the Company. There can be no
assurance that these pricing alternatives will be successful or that they will
generate sufficient revenues to operate profitably. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Overview."

COMPETITION

The outsourcing or contract management of health information services
departments is still a relatively new concept in the hospital industry.
Management believes that the Company's greatest competition comes from
existing, internal medical records departments. To the Company's knowledge,
there is currently only one regional firm and one national firm engaged in the
same business. The Company expects that as the concept of outsourcing becomes
more widely accepted, it will encounter further competition from some or all
of the following sources: other traditional healthcare information management
consultants; coding consultants; multi-specialty healthcare services
businesses which currently provide contract management to clinical,
housekeeping, dietary or other non-medical services departments of hospitals;
management information services providers, particularly developers and vendors
of management software; and other parties in contract management businesses
(for example, business or financial management services) desiring to enter the
healthcare field. The Company expects that competitive factors will include
reputation for expertise in health information management, size and scope of
referenceable accounts, prior experience in outsourcing and pricing. Some of
its potential competitors are larger, better known and better capitalized than
the Company, and such factors could affect the Company's ability to withstand
such competition over the long term. There are also companies that operate in
other areas of the health information management spectrum, including
admissions and the business office. As the Company expands its scope of
business into these other areas of health information management, the Company
will confront other, sometimes more established competitors.

The Company also experiences significant competition with respect to its
transcription, consulting and case management businesses from a variety of
sources, including, in each case, both local and national businesses. The
markets both for medical transcription services and for medical records coding
and consultation services are highly fragmented, and no competitor or
identifiable group of competitors could be said to be dominant. See
"Business--Competition."

LITIGATION

On September 17, 1993, the Company and its healthcare subsidiaries and the
physician-owned medical groups which had contracts with the healthcare
subsidiaries, initiated a lawsuit against 22 insurance carriers

6
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seeking $115 million in compensatory damages plus punitive damages. The claims
arise out of the Company's former business, which prior to the merger with
Transcend Services, Inc., included the business of providing medical/legal
evaluations and medical treatment services (in association with managed
medical groups) in the workers' compensation industry in California. See "The
Company." In connection with this lawsuit, seven of the insurance carriers
have filed cross complaints seeking restitution for funds previously paid by
the defendants, disgorgement of profits and punitive damages, based primarily
upon allegations of illegal corporate practice of medicine, illegal referral
arrangements and related improper conduct. The costs associated with the
claims asserted against the insurance companies and the defense of the cross
complaints cannot be ascertained with any certainty, but are expected to be
substantial. Since the merger between the Company and the former Transcend
Services, Inc., the Company has deferred these costs until resolution of the
litigation, which costs amounted to $479,000 at December 31, 1995. There can
be no assurance as to the outcome of this litigation, including potential
recovery, if any, of the Company's claims or damages, if any. The cross
complaints expose the Company to risk of liability which, if the Company is
unsuccessful in the defense of such cross complaints, could have a materially
adverse impact on the Company's results of operations for a particular period.
The Company believes that the cross complaints against the Company are without
merit and that the final resolution of the cross complaints will not have a
material adverse effect on the Company's financial condition, results of
operations or liquidity; however, there can be no assurance that the Company
will be successful in the defense of such cross complaints. See "Business--
Legal Proceedings" and Note 2 of "Notes to Consolidated Financial Statements."

HEALTHCARE INDUSTRY AND UNCERTAINTY OF REFORM

The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the outsourcing practices and other
operational aspects of hospitals in the Company's target market. The levels of
revenues and profitability of the Company may be affected by the continuing
efforts of government and third party payors to contain or reduce the costs of
healthcare through various means. In the United States there have been, and
the Company expects that there will continue to be, a number of federal and
state proposals to control healthcare costs. Substantial restructuring of the
nation's healthcare system could have an adverse impact on the Company's
outsourcing services, although the impact of such changes cannot be predicted
with any certainty. During the past several years, the healthcare industry has
been subject to an increase in governmental regulation of, among other things,
reimbursement rates and certain capital expenditures, and future proposals may
increase governmental involvement in healthcare, lower reimbursement rates,
and otherwise change the operating environment for the Company's healthcare
provider customers. Cost containment measures instituted by healthcare
providers could have an adverse effect on the Company's business if the
Company is forced to reduce the fees it charges for its services. In addition,
the healthcare industry is currently undergoing significant consolidation,
resulting in a smaller number of larger healthcare providers. The changing
industry profile produced by this consolidation could have an adverse impact
on the Company's margins and profitability due to increased competition, and
could cause the Company to lose existing customers. The Company recently lost
one of its outsourcing contracts principally due to the merger of its customer
with another hospital. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Recent Developments."

DEPENDENCE ON KEY PERSONNEL

The success of the Company has been largely dependent on the skills,
experience and efforts of its senior management and especially its President
and Chief Executive Officer, Larry G. Gerdes, its Chief Operating Officer,
Julian L. Cohen, its Chief Financial Officer, David W. Murphy and its Chief
Development Officer, G. Scott Dillon. The Company does not have an employment
agreement with any of the foregoing persons. The loss of the services of
Messrs. Gerdes, Cohen, Murphy or Dillon or other members of the Company's
senior management could have a material adverse effect on the Company's
business and prospects. The Company believes that its future success will also
depend in part upon its ability to attract, retain and motivate qualified
personnel. Competition for such personnel is intense. There can be no
assurance that the Company will be successful in attracting and retaining such
personnel. The loss of key personnel, or inability to hire or retain

7
<PAGE>

qualified personnel, could have an adverse effect on the Company's business,
financial condition and results of operations. The Company does not carry any
"key-man" insurance on the life of any officer of the Company. See
"Management."

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, the Company will have 21,739,208 shares of
Common Stock outstanding. Of these shares, a total of 21,361,403, including
the 3,000,000 shares offered hereby, will be eligible for sale in the open
market without restriction under the Securities Act of 1933, as amended (the
"Securities Act"), except to the extent any shares are purchased by
"affiliates" (as that term is defined under the Securities Act) of the
Company. All of the remaining 377,805 shares of Common Stock are "restricted
securities" as that term is defined in Rule 144 promulgated under the
Securities Act, none of which are currently eligible for sale in the public
market. Additional shares of Common Stock, including shares issuable upon
exercise of options and the Warrant to purchase Common Stock and upon
conversion of the Company's 8% Convertible Debentures, will also become
eligible for sale in the public market from time to time. Certain of the
holders of these additional shares have registration rights obligating the
Company to register their shares under certain circumstances. See "Shares
Eligible for Future Sale--Registration Rights." The Company, the Company's
officers and directors and certain holders of the restricted securities have
agreed not to sell any of their shares of Common Stock for a period of 120
days from the date of this Prospectus without the prior written consent of
Smith Barney Inc. Following this offering, sales and potential sales of
substantial amounts of the Company's Common Stock in the public market
pursuant to Rule 144 or otherwise could adversely affect the prevailing market
prices for the Common Stock and impair the Company's ability to raise
additional capital through the sale of equity securities. See "Description of
Capital Stock," "Shares Eligible for Future Sale" and "Underwriting."

ANTI-TAKEOVER PROVISIONS

The Company's Certificate of Incorporation, as amended, authorizes the
issuance of up to 21,000,000 shares of Preferred Stock, issuable in series,
the relative rights and preferences of which may be designated by the Board of
Directors. The issuance of Preferred Stock could make it more difficult for a
third party to acquire a majority of the outstanding voting stock.
Accordingly, the issuance of Preferred Stock may be used as an "anti-takeover"
device without further action on the part of the stockholders of the Company.
No shares of Preferred Stock have been issued, and the Company has no present
plans to issue any shares of Preferred Stock. See "Description of Capital
Stock."

DILUTION; NO DIVIDENDS

The public offering price per share of Common Stock will exceed the net
tangible book value per share of the Common Stock. Purchasers of the Common
Stock in this offering will experience immediate and substantial dilution of
$7.43 per share (at an assumed public offering price of $8.75 per share). See
"Dilution." In addition, the Company has not previously paid any dividends on
its Common Stock and for the foreseeable future intends to retain earnings to
finance the development and expansion of its business. Pursuant to the terms
of certain financing agreements, the Company is restricted from paying
dividends to its shareholders. See "Dividend Policy."

POSSIBLE VOLATILITY OF STOCK PRICE

The market price of the Common Stock could be subject to significant
fluctuations in response to the Company's operating results and other factors,
and there can be no assurance that the market price of the Common Stock will
not decline below the public offering price herein. In addition, the stock
market has from time to time experienced extreme price and volume volatility.
These fluctuations may be unrelated to the operating performance of particular
companies whose shares are traded and may adversely affect the market price of
the Common Stock. See "Price Range of Common Stock."

8
<PAGE>

THE COMPANY

The Company was incorporated in California in 1976 and was reorganized as a
Delaware corporation in 1988. On January 10, 1995, the Company, formerly known
as "TriCare, Inc.," acquired Transcend Services, Inc., then a Georgia
corporation, by the merger of Transcend Services, Inc. into First Western
Health Corporation ("First Western"), a subsidiary of the Company (the
"Merger"). Prior to the Merger, Transcend Services, Inc., which was originally
organized in 1984, provided consulting services for medical records
management, quality and utilization management, records coding and records
management software. In 1992, the former Transcend Services, Inc. developed,
tested and marketed new lines of business intended to capitalize on the
increasing need for the outsourcing of medical records, and by the end of 1992
had entered into its first long-term agreement for the management of a
hospital's medical records department. On May 31, 1995, Transcend Services,
Inc. and Veritas Healthcare Management ("Veritas"), another subsidiary of the
Company, merged into the Company, whose name was then changed to "Transcend
Services, Inc." The Merger was treated for financial accounting purposes as
the acquisition of TriCare, Inc. by Transcend Services, Inc. and the
historical financial statements of the former Transcend Services, Inc. have
become the financial statements of the Company and include the businesses of
both companies after the effective date of the Merger. The Company has one
wholly-owned operating subsidiary, Sullivan Health and Rehabilitation
Services, Inc. ("Sullivan"). When used in this Prospectus, the term "Company"
or "Transcend" shall mean Transcend Services, Inc. and Sullivan unless
otherwise stated in this Prospectus or unless the context otherwise requires.

The Company's executive offices are located at 3353 Peachtree Road, N.E.,
Suite 1000, Atlanta, Georgia 30326. Its telephone number is (404) 364-8000.

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 3,000,000 shares
offered by the Company hereby (after deducting the underwriting discount and
estimated offering expenses payable by the Company) at an assumed public
offering price of $8.75 per share are estimated to be approximately $24.5
million ($28.2 million if the Underwriters' over-allotment option is exercised
in full).

The Company's current cash flow is not adequate to fund the planned
expansion of its business, and therefore the Company determined to conduct a
public offering of its Common Stock in order to raise needed capital as well
as to take advantage of favorable market conditions. The Company intends to
use the net proceeds for general corporate purposes and for working capital to
fund the Company's growth pursuant to its business strategy, which may include
the use of up to approximately $12 million of the net proceeds to finance the
installation and development of its Information Service Center concept if the
Company is successful in marketing the concept to certain of its customers.
The Company may also use up to approximately $5 million of net proceeds to
purchase computer hardware and optical imaging equipment in connection with
the application of better technologies in its contract management business.
The Company may also utilize a portion of the net proceeds to fund future
acquisitions, should suitable opportunities arise. See "Business--Strategy."
Pending such uses, the net proceeds will be invested in short-term, interest-
bearing obligations of investment grade.

9
<PAGE>

PRICE RANGE OF COMMON STOCK

The Common Stock is traded on the Nasdaq National Market under the symbol
"TRCR." The following table sets forth, for the Company's fiscal periods
indicated, the high and low sales prices per share for the Common Stock, as
reported on the Nasdaq National Market.

<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
1994
First Quarter................................................... $3.50 $2.00
Second Quarter.................................................. 3.25 2.38
Third Quarter................................................... 3.00 1.75
Fourth Quarter.................................................. 2.75 1.50
1995
First Quarter................................................... $4.13 $1.56
Second Quarter.................................................. 3.69 2.50
Third Quarter................................................... 7.50 2.50
Fourth Quarter.................................................. 7.13 4.75
1996
First Quarter................................................... $9.38 $4.88
Second Quarter.................................................. 12.13 7.75
Third Quarter (through July 10, 1996)........................... 10.75 7.50
</TABLE>

On July 10, 1996, the last sale price of the Common Stock as reported on the
Nasdaq National Market was $8.75 per share. As of July 10, 1996, there were
approximately 401 holders of record of the Common Stock.

10
<PAGE>

DILUTION

As of March 31, 1996, the Company had a net tangible book value of
$4,338,000, or $0.23 per share. Net tangible book value per share is
determined by dividing the net tangible book value (tangible assets less
liabilities) of the Company by the number of shares of Common Stock
outstanding at that date (giving effect to the conversion of 8% Convertible
Subordinated Debentures and the exercise of the outstanding Warrant to
purchase Common Stock, as if converted on March 31, 1996). Without taking into
account any changes in net tangible book value after March 31, 1996, other
than to give effect to the sale of the 3,000,000 shares of Common Stock
offered by the Company hereby (at an assumed public offering price of $8.75
per share) and the receipt of the net proceeds therefrom, the net tangible
book value of the Company as of March 31, 1996 would have been $28,788,000, or
$1.32 per share. This represents an immediate increase in net tangible book
value of $1.09 per share to existing shareholders and an immediate dilution of
$7.43 per share to new investors. The following table illustrates this
dilution per share.

<TABLE>
<S> <C> <C>
Assumed public offering price per share......................... $8.75
Net tangible book value per share as of March 31, 1996.......... $0.23
Pro forma increase in net tangible book value per share attrib-
utable to the offering(1)...................................... 1.09
-----
Adjusted net tangible book value per share after the offering... 1.32
-----
Dilution per share to new investors(2).......................... $7.43
=====
</TABLE>
- --------
(1) After deduction of underwriting discounts and commissions and estimated
offering expenses.
(2) Determined by subtracting the adjusted net tangible book value per share
after the offering from the amount of cash paid by a new investor for a
share of Common Stock.

DIVIDEND POLICY

The Company intends to retain its earnings to finance the growth and
development of its business and does not anticipate paying cash dividends on
the Common Stock in the foreseeable future. The payment of any future
dividends will be at the discretion of the Company's Board of Directors and
will depend upon, among other things, future earnings, operations, capital
requirements, contractual restrictions, the general financial condition of the
Company and general business conditions. Pursuant to the terms of certain
financing agreements, the Company is restricted from paying dividends to its
shareholders.

11
<PAGE>

CAPITALIZATION

The following table sets forth the capitalization of the Company at March
31, 1996 on an actual basis and as adjusted to give effect to the sale of the
3,000,000 shares of Common Stock, at an assumed public offering price of $8.75
per share, offered by the Company hereby and the application of the net
proceeds therefrom as described under "Use of Proceeds."

<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt and capital lease obligation............... $ 2,368 $ 2,368
Shareholders' equity:
Preferred stock--par value $.01 per share; 21,000,000
shares authorized; no shares issued and outstanding...... -- --
Common stock, par value $.01 per share; 30,000,000 shares
authorized; 18,291,000 and 21,291,000 shares issued and
outstanding on an actual and as adjusted basis, respec-
tively(1)................................................ 183 213
Paid-in capital........................................... 16,799 41,219
Accumulated deficit....................................... (7,426) (7,426)
------- -------
Total shareholders' equity................................ 9,556 34,006
------- -------
Total capitalization...................................... $11,924 $36,374
======= =======
</TABLE>
- --------

(1) Excludes (a) 1,278,275 shares of Common Stock issuable as of July 8, 1996
upon the exercise of outstanding stock options, 862,875 of which are
presently exercisable or become exercisable within the next 60 days, (b)
572,000 shares of Common Stock issuable upon conversion of the Company's
8% Subordinated Convertible Debentures, (c) 25,000 shares issuable upon
exercise of the outstanding Warrant to purchase Common Stock, (d) 519,875
shares reserved for future issuance under the Company's 1992 Stock Option
Plan, as amended and (e) 141,436 shares reserved for future issuance
under the Company's 1990 Employee Stock Purchase Plan, as amended.

12
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The following table sets forth selected consolidated financial data of the
Company for the periods indicated, which data has been derived from the
Company's consolidated financial statements as of December 31, 1994 and 1995
and the consolidated financial statements for the three years in the period
ended December 31, 1995. The report of Arthur Andersen LLP, independent public
accountants, with respect to such consolidated financial statements as of
December 31, 1994 and 1995 and for the three years in the period ended
December 31, 1995 is included on page F-2. The consolidated financial
statements of the Company for each of the years in the two-year period ended
December 31, 1992 were derived from financial statements audited by another
firm of independent certified public accountants. The selected financial data
for the three month periods ended March 31, 1995 and 1996 are derived from the
unaudited consolidated financial statements of the Company. The unaudited
consolidated financial statements include all adjustments, consisting of
normal recurring accruals, which the Company considers necessary for a fair
presentation of the consolidated financial condition and results of operations
for these periods. Operating results for the three months ended March 31, 1996
are not necessarily indicative of the results that may be expected for the
entire year ending December 31, 1996. This selected consolidated financial
data should be read in conjunction with the consolidated financial statements,
related notes and other financial information included and incorporated by
reference herein.

<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA(2):
Net revenues............ $1,854 $1,702 $6,208 $12,393 $25,882 $ 4,897 $ 8,688
Direct costs............ 1,074 893 5,125 10,787 22,334 4,346 7,260
------ ------ ------ ------- ------- ------- -------
Gross profit............ 780 809 1,083 1,606 3,548 551 1,428
Marketing and sales ex-
pense.................. 362 209 378 929 2,186 437 641
General and administra-
tive expense........... 538 715 1,330 1,673 4,604 1,113 1,122
Amortization expense of
intangible assets...... -- -- 310 357 633 145 145
------ ------ ------ ------- ------- ------- -------
Operating loss.......... (120) (115) (935) (1,353) (3,875) (1,144) (480)
Interest, net........... (40) (16) (132) (65) (21) 36 (43)
Other................... -- (2) 101 25 -- -- --
------ ------ ------ ------- ------- ------- -------
Total other income (ex-
penses)................ (40) (18) (31) (40) (21) 36 (43)
------ ------ ------ ------- ------- ------- -------
Pre-Tax loss............ (160) (133) (966) (1,393) (3,896) (1,108) (523)
Provision for income
tax.................... -- -- -- 13 -- -- --
------ ------ ------ ------- ------- ------- -------
Net loss................ $ (160) $ (133) $ (966) $(1,406) $(3,896) $(1,108) $ (523)
====== ====== ====== ======= ======= ======= =======
Net loss per share...... $ (.04) $ (.02) $ (.11) $ (.14) $ (.22) $ (0.06) $ (0.03)
Weighted average shares
outstanding............ 3,774 7,162 8,866 9,733 17,818 17,533 18,217
<CAPTION>
THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
---------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......... $ 384 $ 202 $ (552) $(3,001) $ 461 $ 1,109 $ (16)
Total assets............ $ 922 $ 790 $1,191 $ 2,680 $16,833 $16,018 $16,651
Long-term debt and capi-
tal lease obligations.. $ 355 $ 300 $ -- $ -- $ 2,392 $ -- $ 2,368
Shareholders' equity.... $ 411 $ 277 $ 162 $(1,233) $ 9,921 $12,270 $ 9,556
</TABLE>
- --------

(1) On January 10, 1995, the Company acquired a Georgia corporation then
known as "Transcend Services, Inc." by the merger of Transcend into a
subsidiary of the Company. The merger was treated for financial
accounting purposes as the acquisition of the Company by the former
Transcend and the historical financial statements of the former Transcend
have become the financial statements of the Company and include the
business of both companies after the effective date of the merger. See
"The Company" and Note 12 of "Notes to Consolidated Financial
Statements."

(2) The Company has completed several acquisitions that could affect the
comparability of the information reflected in the table. See Note 12 of
"Notes to Consolidated Financial Statements."

13
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

OVERVIEW

The Company intends to expand the range of its contract management services
to include management of other functional areas of hospitals, such as
management of patient access (admissions), utilization review, quality
assurance and the business office. The Company presently provides full
contract management outsourcing services in the admissions departments for
five of the 16 hospitals it manages. The Company is actively seeking to
provide this expanded range of services to its current and future hospital
customers. The Company also provides, through outsourcing as well as other
contracts, medical records transcription services through computer and
telephone links from centralized facilities to approximately 100 hospital
customers.

Approximately 3,000 hospitals in the United States have more than 100 beds
and constitute the Company's first tier of market opportunity. The Company
currently has contract management contracts covering the medical records
departments of 16 hospitals ranging in bed size from 56 beds to 541 beds, with
the average contract size of approximately $1.5 million. The initial contract
terms of the Company's current contracts range from two to five years and are
generally terminable without cause upon expiration of the initial term or for
cause at any time during the initial term thereof. The Company's existing
contracts currently have remaining terms ranging from approximately one to
five years. Although the Company has recently renewed one contract which
expired in June 1996, due to its limited operating history in medical records
management, the Company is unable at the present time to assess or predict its
contract renewal rate.

The Company negotiates its contract management fees on a fixed installment
basis which represents, at contract inception, an immediate savings to the
contracting hospital as compared to its historical costs. In the early term of
such a contract, the Company's expenses in providing the contract services
remain relatively high, as a percentage of contract revenues received, as set-
up and training costs are incurred, new procedures are implemented and
departmental reorganizations are initiated. Completion of such steps should
result in lower operating expenses, which in turn should increase the profit
margin of a constant revenue stream over time. Due to the Company's limited
operating history in the contract management business, however, there can be
no assurances that operating expenses will sufficiently decrease over the life
of such contracts to achieve profitability.

The Company is considering an alternative volume-based pricing structure,
based upon a hospital's activity levels such as weighted average number of
annual patient discharges, or a "per member per month" ("PMPM") capitated
pricing option similar to current pricing mechanisms used by managed
healthcare groups. The Company has signed one contract based on a volume
oriented pricing structure tied to weighted annual patient discharges. There
is an opportunity to realize higher margins on an activity-based pricing
structure. The principal advantage of a volume-based pricing mechanism is that
as a hospital's volume of business increases, the Company's revenues will
increase at a faster rate than operating expenses. However, if a customer's
business volume decreases, the Company's revenues will also decrease at a
faster rate than its operating expenses.

14
<PAGE>

The Company is typically paid for its transcription services on a production
basis at rates determined on a per-line-transcribed basis. Where transcription
services are included as part of the services provided in the Company's
outsourcing contracts, however, the services are provided by the Company as
part of a set contract fee. The Company is paid for its consulting and coding
services on a negotiated fee for services basis. In addition, the Company is
paid for its healthcare case management services primarily on an hourly basis.

On January 10, 1995, the Company acquired a Georgia corporation then known
as "Transcend Services, Inc." by the merger of Transcend Services into a
subsidiary of the Company. The merger was treated for financial accounting
purposes as the acquisition of the Company by the former Transcend Services
and the historical financial statements of the former Transcend Services have
become the financial statements of the Company and include the business of
both companies after the effective date of the merger. See "The Company."

RESULTS OF OPERATIONS

The following table presents for the periods indicated, as a percentage of
total net revenues, components of the Company's net revenues and categories
from the Company's consolidated statements of operations and the period-to-
period changes in the dollar amounts of the respective line items:

<TABLE>
<CAPTION>
PERIOD TO PERIOD PERCENTAGE
PERCENTAGE OF NET REVENUES INCREASE (DECREASE)
----------------------------------------- -----------------------------
THREE MONTHS THREE MONTHS
FISCAL YEAR ENDED MARCH 31, FISCAL YEAR ENDED MARCH 31,
--------------------- ----------------- ------------ ---------------
1994 1995 1996
VS VS VS
1993 1994 1995 1995 1996 1993 1994 1995
----- ----- ----- ------- ------- ----- ----- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Contract management..... 62.3% 74.6% 55.3% 57.3% 61.0% 139.1% 54.8% 88.7%
Medical transcription... 18.3 19.6 25.7 24.7 23.0 113.4 174.4 65.6
Consulting and coding... 19.4 5.8 3.0 3.2 2.5 (40.0) 6.2 38.6
Case management......... -- -- 16.0 14.8 13.5 -- -- 61.7
----- ----- ----- ------- ------- ----- ----- -----
Net revenues.......... 100.0% 100.0% 100.0% 100.0% 100.0% 99.6% 108.8% 77.4%
----- ----- ----- ------- ------- ----- ----- -----
Direct costs............ 82.6 87.0 86.3 88.8 83.6 110.5 107.0 67.1
Gross profit.......... 17.4 13.0 13.7 11.2 16.4 48.3 120.9 159.2
Marketing and sales ex-
pense.................. 6.1 7.5 8.4 8.9 7.4 145.8 135.3 46.7
General and
administrative expense. 21.4 13.5 17.8 22.7 12.9 25.8 175.2 0.8
Amortization expense.... 5.0 2.9 2.5 3.0 1.7 15.2 77.3 --
----- ----- ----- ------- ------- ----- ----- -----
Operating loss........ (15.1)% (10.9)% (15.0)% (23.4)% (5.5)% 44.7% 186.4% (58.0)%
</TABLE>

Management believes that the Company's operating losses are primarily
attributable to the significant expenses incurred by the Company to build a
larger sales and management organization to support an increased number of
outsourcing contracts and the expansion of the Company's services to
healthcare institutions. The buildup of the Company's management
infrastructure has been necessary in order for the Company to manage the
planned growth in its outsourcing business and will allow it to grow revenues
significantly from current levels without increasing selling, general and
administrative costs by the same proportion. At the present time, the
Company's revenues are not sufficient to support these expenses and generate
profits. The Company will be required to increase its revenues from contract
management and other services to achieve profitability. In addition, the
Company's pricing mechanism on most of its outsourcing contracts requires the
Company to increase operating efficiencies over the life of the contract in
order to become profitable. The Company will also be required to procure a
critical mass of such contracts and be able to renew such contracts on
favorable terms. There can be no assurance that the Company will be able to
attain the required operating efficiencies or increase the number of
outsourcing contracts to the level needed to become profitable, and there can
be no assurance that the losses which the Company is presently experiencing
will not worsen in the future. See "Risk Factors--Operating Losses."

15
<PAGE>

Three Months Ended March 31, 1996 Compared to Three Months Ended March 31,
1995

The increase in total revenues for the quarter ended March 31, 1996 is
primarily attributable to (i) the increased contract management outsourcing
revenues of approximately $2,608,000 attributable to six contract management
contracts signed in August and September 1995 and revenues of approximately
$270,000 attributable to two contracts signed in February and March 1996 (with
respect to which the Company began rendering services upon execution of the
contracts); (ii) increased medical transcription operations revenues of
approximately $793,000 resulting from the April 1995 acquisition of Medical
Transcription of Atlanta, Inc. ("MTA"); and (iii) the increase in case
management and rehabilitation revenues of approximately $447,000 resulting
from enhanced sales and marketing efforts in 1995 that resulted in new
customers as well as the expansion of case management services into Texas by
means of an acquisition made in July 1995.

Gross profit increased 159.2% to $1,428,000 for the quarter ended March 31,
1996 from $551,000 in the first quarter of the prior year. Gross profit as a
percentage of revenues increased to 16.4% for the quarter ended March 31, 1996
from 11.2% in the same prior year period. This increase was primarily
attributable to the contract management outsourcing division which expanded
its gross margin from 13.3% in 1995 to 16.6% in 1996, as a result of increased
efficiencies and lower operating costs following the Company's re-engineering
efforts, and the medical transcription business which expanded its gross
margin from 11.6% in the quarter ended March 31, 1995, to 17.3% in the quarter
ended March 31, 1996. The margin improvement in transcription is a result of
increased efficiencies and lower operating costs following the continued
deployment of digital technology and the improved productivity of the
Company's transcriptionists. The Company's overall gross margin was further
enhanced in the 1995 to 1996 quarter comparison by the increase in case
management's gross margin from 13.4% for the quarter ended March 31, 1995 to
27.1% for the quarter ended March 31, 1996. This gain in case management gross
margin is the result of increased operating efficiencies and lower direct
costs across a larger customer base.

Marketing and sales expenses increased 46.7% to $641,000 in the quarter
ended March 31, 1996 from $437,000 in the same prior year period and decreased
as a percentage of revenues to 7.4% for the quarter ended March 31, 1996 from
8.9% for the quarter ended March 31, 1995. The increase in sales and marketing
expenses from the first quarter 1995 to 1996 is primarily attributable to (i)
a larger national sales force (an increase of one person) in place in the 1996
quarter; (ii) increased expenditures of approximately $66,000 for
telemarketing and market analysis implemented to provide the Company better
sales lead qualification and more accurate target marketing opportunities; and
(iii) sales commissions of approximately $20,000 paid on two new sales in the
first quarter 1996 as compared to only one sale in the first quarter 1995. The
Company typically pays and expenses 100% of its sales commission upon contract
signing. With much of the Company's investment in a national sales force,
telemarketing and marketing/advertising now in place, the Company anticipates
that sales and marketing expenses, as a percentage of revenues, will decline,
as revenues increase.

General and administrative expenses remained relatively constant at
$1,122,000 for the quarter ended March 31, 1996 and $1,113,000 in the same
prior year period and decreased as a percentage of revenues to 12.9% for the
quarter ended March 31, 1995 from 22.7% in the first quarter of the prior
year. General and administrative expenses remained constant in the quarter-to-
quarter comparison and declined as a percentage of revenues due to the
Company's investment over the past 18 to 24 months in building the corporate
structure necessary to support the Company's growth for the foreseeable
future.

The Company's loss from operations decreased to $480,000 for the quarter
ended March 31, 1996 from $1,144,000 in the first quarter of the prior year
period. This $480,000 quarterly loss compares to an operating loss of $502,000
for the quarter ended December 31, 1995 and an operating loss of $834,000 for
the quarter ended September 30, 1995.

Other expenses increased to $43,000 for the quarter ended March 31, 1996
from other income of $36,000 in the first quarter of the prior year period,
primarily due to the impact of interest expense incurred in connection with
the August 15, 1995 private placement of 8% Subordinated Convertible
Debentures.

16
<PAGE>

Year Ended December 31, 1995 Compared with Year Ended December 31, 1994

Net revenues increased 109% to $25,882,000 in 1995 from $12,393,000 in 1994.
The increase in net revenues is primarily attributable to operations in the
Company's contract management outsourcing division, contributing $5,058,000 of
the overall increase due to the addition of six new outsourcing contracts.
Medical transcription revenues grew from $2,428,000 in 1994 to $6,662,000 for
1995, primarily due to the acquisition of International Dictating Services,
Inc. ("IDS") and MTA. Sullivan's 1994 revenues are not included as they were
prior to the Merger.

Gross profit increased 121% to $3,548,000 in 1995 from $1,606,000 in 1994.
Gross profit as a percentage of revenues increased to 13.7% in 1995 from 13.0%
in 1994. This increase was primarily attributable to the addition of
Sullivan's case management revenues reflecting an overall 21% gross margin.
Gross margins in contract management outsourcing increased to 14% from 11% in
1994. Average transcription margins decreased from 19% to 14% as a result of
the Script-Ease, Inc. and IDS acquisitions.

Marketing and sales expenses increased 135% to $2,186,000 in 1995 from
$929,000 in 1994 and increased as a percentage of revenues to 8.4% from 7.5%
in 1994. The increase is attributable to expenses of approximately $80,000
associated with the efforts to heighten market awareness of the Company and
contract outsourcing, the expansion of the Company's sales force by the
addition of one person, an increase in commission compensation of
approximately $156,000 relating to the six new contract management contracts
signed in the third quarter and the additional sales costs of approximately
$765,000 related to the case management division.

General and administrative expenses increased 175% to $4,604,000 in 1995
from $1,673,000 in 1994 and increased as a percentage of revenues to 17.8%
from 13.5%. The increase reflects additional expense of approximately $874,000
for expanded management and support staff incurred to position the Company for
future growth, as well as the additional overhead of approximately $761,000
attributable to the Merger.

Amortization expenses increased to $633,000 in 1995 from $357,000 in 1994
reflecting the full impact of the intangible assets associated with the
Company's acquisition of three medical transcription businesses and the
additional amortization expense related to the Merger.

The Company's loss from operations increased to $3,875,000 in 1995 from
$1,353,000 in 1994; however, beginning in the second quarter of 1995, the
Company realized an improving trend with regard to minimizing its loss from
operations. The Company's loss from operations was $1,393,000 in the second
quarter ending June 30, 1995. The loss from operations for the third quarter
ended September 30, 1995 was $867,000, while the fourth quarter ended December
31, 1995 loss from operations decreased to $527,000.

Other expense decreased to $21,000 in 1995 from $40,000 in 1994, primarily
as the result of the Company's recognition of higher interest income as
applied against interest expense.

Year Ended December 31, 1994 Compared With Year Ended December 31, 1993

Net revenues increased 99.6% to $12,393,000 in 1994 from $6,208,000 in 1993.
This increase in net revenues is primarily attributable to increased sales in
the contract management outsourcing division of $5,376,000, reflecting the
full year impact of five new outsourcing contracts entered into in 1993 and
one outsourcing contract entered into on June 1994. Other factors contributing
to the increase in net revenues include the acquisition of the transcription
business Script-Ease, Inc. in September 1994 and the full year impact of the
acquisition of dataLogix Transcription, Inc. ("dataLogix") in April 1993.

Gross profit increased 48.3% to $1,606,000 in 1994 from $1,083,000 in 1993.
Gross profit as a percentage of revenues declined to 13.0% in 1994 from 17.5%
in 1993. This decline was primarily attributable to higher costs associated
with the implementation of the six new outsourcing contracts entered into in
1993 and 1994, which the Company anticipates will decrease as a percentage of
revenues over the life of the contract. Transcription profit margins increased
from 12% in 1993 to 20% in 1994 due to reduced costs resulting from
efficiencies implemented in 1994 at the transcription office in Chicago,
Illinois. Consulting and coding margins declined in 1994 due to the Company's
increased focus on contract management outsourcing.

17
<PAGE>

Marketing and sales expenses increased 145.8% to $929,000 in 1994 from
$378,000 in 1993 and increased as a percentage of revenues to 7.5% from 6.1%
in 1993. This increase reflects increased expenses of approximately $551,000
associated with additional marketing efforts in the contract management
outsourcing division and expansion of the contract management sales force,
which resulted in additional salaries and sales commissions.

General and administrative expenses increased 25.8% to $1,673,000 in 1994
from $1,330,000 in 1993 but decreased as a percentage of revenues, to 13.5%
from 21.4%. The increase reflects additional expense of approximately $343,000
for expanded management and support staff incurred to support the Company's
present and future growth.

The increase in amortization expenses to $357,000 in 1994 from $310,000 in
1993 reflects the full impact of the intangible assets associated with the
dataLogix acquisition and the additional amortization expense related to the
acquisition of Script-Ease, Inc.

The Company's loss from operations increased to $1,353,000 in 1994 from
$953,000 in 1993.

Other expense increased to $40,000 in 1994 from $31,000 in 1993, primarily
as the result of the Company's recognition of a gain of $100,000 from the sale
of the software division in April 1993 as compared to the recognition of only
a $25,000 gain in 1994.

LIQUIDITY AND CAPITAL RESOURCES

The Company's cash flows from continuing operations provided net cash of
$437,000 in 1993 but required the use of cash of $579,000 and $3,445,000 in
1994 and 1995, respectively. For the quarter ended March 31, 1996, cash flows
from continuing operations used $36,000. Cash has been used to continue
funding the Company's operating losses and, in 1995, to finance the growth of
certain of the Company's acquisitions' working capital needs. See
"Consolidated Statements of Cash Flows."

Discontinued operations contributed cash of $202,000 for 1995 and used cash
of $122,000 in the first quarter of 1996. The primary reason for the increase
in net assets related to discontinued operations in the first quarter of 1996
was the payment of legal expenses related to the lawsuit of the Company
against certain insurance companies. See "Business--Legal Proceedings."

The Company's working capital position decreased during the quarter ended
March 31, 1996 from $461,000 at December 31, 1995 to $(16,000) at March 31,
1996. This decrease in the Company's working capital position arises from a
combination of several factors including the financing from current cash
sources of capital expenditures for equipment of $313,000 during the quarter
ended March 31, 1996 and the continued funding of losses from the Company's
operations. The Company established two credit facilities, described below, to
help fund its operations. Although the Company has a negative cash flow, the
Company's accounts receivable turn faster than related payables, allowing the
Company to operate and grow its business. Under the terms of its contract
management fixed-fee pricing schedules, the Company receives the annual fee in
monthly payments in advance (due on the first day of the month), prior to
actually incurring any of the month's fixed and/or variable operating
expenses. This results in accounts receivables for contract management turning
in approximately seven days. The Company also receives an up-front
implementation fee prior to incurring any costs associated with the actual
start-up of a contract management site.

The Company's cash flows from investing activities used cash of $1,043,000
and $1,438,000 in 1993 and 1994, respectively, and provided cash of $4,873,000
in 1995. The Company's principal uses of cash for investing purposes are for
capital expenditures and for acquisitions. The Company does not currently have
any material commitments for capital expenditures. In 1995, in connection with
the Company's acquisition of TriCare, it acquired approximately $7.5 million
of cash. For the quarter ended March 31, 1996, investing activities used
$313,000 of cash for the purchase of capital expenditures.

In 1995 the Company expended $1,232,000 in cash to acquire the medical
transcription businesses of IDS and MTA. In connection with these
acquisitions, on August 15, 1995, the Company raised $2 million in cash
through the private placement of 8% Subordinated Convertible Debentures. The
Debentures are unsecured and

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subordinated to all other debt of the Company. The interest rate on the
Debentures is 8%, payable semi-annually, and the principal amount is due in
full on August 15, 2000. The Debentures are convertible into Common Stock by
the holder at any time prior to August 15, 2000 at a rate of 286 shares of
Common Stock for each $1,000 in principal amount and are convertible by the
Company at any time when the Common Stock trades at $10.50 per share for 30
consecutive trading days. The Company may redeem the Debentures at any time
upon 30 to 60 days notice to the holder of a Debenture.

Cash flows from financing activities provided $446,000, $2,036,000, and
$183,000 in 1993, 1994, and 1995, respectively. For the quarter ended March
31, 1996, investing activities provided cash of $33,000. The Company's primary
sources of cash over the past several years have been proceeds from a line of
credit and pursuant to the exercise of stock options. In 1995, the Company
retired its line of credit and issued $2 million of convertible debentures as
discussed above.

On April 30, 1996, the Company established two separate credit-facilities
with Silicon Valley East (Wellesley, Massachusetts), a division of Silicon
Valley Bank, a California-chartered bank (Santa Clara, CA). The aggregate
credit available to the Company (under both facilities) is $5.75 million. The
banking facilities are secured by all of the Company's assets. One of the
facilities is a $5.0 million working capital credit line subject to an initial
cap of $3.0 million. The cap is removed subject to the Company's compliance
with several covenants going forward relating to certain minimum net income
and balance sheet requirements established by the bank. The second facility is
a $750,000 term facility set up to help the Company meet its capital
investment requirements in the near term which will include the purchase of
computers and transcription--related equipment. This term note is subject to
an initial cap of $250,000, with the cap being removed upon the Company's
compliance with covenants relating to certain minimum debt service obligations
established by the bank. Both facilities will mature on April 30, 1997.

The Company intends to use a portion of the net proceeds from this offering,
which are estimated to be approximately $24.5 million (at an assumed public
offering price of $8.75 per share), to finance the installation and
development of its Information Service Center concept and to purchase computer
hardware and optical imaging equipment in connection with the application of
better technologies in its contract management business. Although the amounts
to be expended for these purposes will depend upon the success of marketing
the Information Service Center concept, the Company estimates that it may use
up to approximately $12 million of the net proceeds to finance the
installation and development of the Information Service Centers and up to
approximately $5 million of net proceeds to purchase computer hardware and
optical imaging equipment.

The Company anticipates that cash on hand, together with internally
generated funds, cash collected from discontinued operations and the net
proceeds from this offering should be sufficient to finance continuing
operations for at least the next 24 months as well as the civil litigation
action against certain insurance carriers.

IMPACT OF INFLATION

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

RECENT DEVELOPMENTS

On June 25, 1996, the Company announced in a press release that, as a result
of a merger between Capitol Health System and Polyclinic Medical Center of
Harrisburg, it had agreed to the termination of its contract with the newly
merged entity, Pinnacle Health System, effective August 1, 1996. The Company's
revenues from the Pinnacle contract amounted to $1,278,000 in fiscal 1995 and
$1,095,000 for the quarter ended March 31, 1996.

On June 19, 1996, the Company completed a merger with Greiner's Medical
Transcription, Inc. ("GMT"), a transcription service company. The transaction
was treated as a tax-free exchange of stock under the pooling

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method of accounting, and the Company issued 87,805 shares of its Common Stock
in the transaction and entered into non-compete agreements with the GMT
shareholders. GMT generates current annual revenues of approximately $1.5
million.

On June 28, 1996, the Company completed a merger with Express Medical
Transcription, Inc. ("Express"), a transcription service company. This
transaction was also treated as a tax-free exchange of stock under the pooling
method of accounting, and the Company issued 230,000 shares of its Common
Stock in the transaction and entered into non-compete agreements with the
Express shareholders. Express generates current annual revenues of
approximately $1.35 million.

The Company has granted certain registration rights to the recipients of its
Common Stock in the foregoing merger transactions. See "Shares Eligible For
Future Sale--Registration Rights."

BUSINESS

GENERAL

The healthcare industry is undergoing significant and rapid change.
Hospitals and other healthcare providers have come under increased scrutiny
from regulators and third party payors. As a result, hospitals are now looking
to outsource to third parties certain costly or complicated functions that are
not directly related to core competencies or where they are unable to achieve
economies of scale. In particular, patient information, and the delivery of
such information in a timely fashion, have become critical to improving
productivity, efficiency and cost containment, while maintaining a high level
of patient care. For instance, many hospitals are finding that their medical
records departments are inadequate, and to remedy the inadequacies of these
functions, they are beginning to turn to third party service providers which
have expertise in managing medical records, admissions and other affiliated
departments.

The healthcare industry has recognized the need for improvement in the
processing of healthcare information, and to achieve this improvement, there
has been a dramatic increase in the development of technological solutions
offered by third party vendors of computer hardware and software. Although
there have been significant advances in the management of medical information
in general, little progress has been made introducing technology to the
management of the medical records departments, patient admissions or other
affiliated departments of hospitals that handle the flow of patient
information. The Company believes that there is a need, and therefore an
emerging market, for third party service providers to assist hospitals and
other healthcare providers in (i) the effective implementation of the
available technological tools for healthcare information management, (ii) the
process of managing healthcare information across the pre-admission to post-

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discharge continuum of the healthcare delivery system and (iii) the management
and training of personnel in healthcare information departments. By managing
the entire flow of patient information through the hospital, errors,
inefficiencies and their associated costs can be minimized.

INDUSTRY OVERVIEW

The healthcare industry is undergoing significant and rapid change.
Hospitals and other healthcare providers have come under increased scrutiny
from regulators and third party payors, which has forced the providers to
examine their cost structures and business practices. The industry has
recognized the need for improvement in the processing of healthcare
information, and to achieve this improvement, there has been a dramatic
increase in the development of technological solutions offered by third party
vendors of computer hardware and software. Although there have been
significant advances in the management of medical information in general,
little progress has been made introducing technology to the management of the
medical records departments, patient admissions or other affiliated
departments of hospitals that handle the flow of patient information.
Healthcare information technology vendors have focused on developing
information systems such as "electronic medical records" that promise to move
all patient information on-line, giving all constituents immediate access to
relevant information. However, the development of such systems and more
importantly the widespread adoption of such systems is still several years
away. The Company believes that transitioning the medical record from paper to
electronic format will require a higher level of service in the performance of
certain HIM functions, including coding, record analysis and completion,
transcription, as well as others.

Many hospitals are finding that their medical records departments are in
many respects inadequate and that outsourcing healthcare information functions
and related departments can result in competitive advantages by reducing costs
such as employee training and technology and equipment upgrades.

Hospitals have outsourced basic services including housekeeping, laundry and
food preparation for a number of years to reduce operating costs and ensure
quality of service and are now looking to outsource other costly or
complicated functions that are not directly related to core competencies or
where they are unable to achieve economies of scale. An increasing number of
healthcare providers are now outsourcing the pharmacy, emergency room staffing
and physical therapy staffing functions and have more recently started to
outsource critical administrative functions such as patient health information
management of medical records departments and related functions including
patient admission, utilization review, quality assurance and the business
office.

Many hospitals are now turning to third party providers to apply their
expertise in managing not only the medical records, but admissions and other
affiliated departments as well. This development is helping providers control
costs and allowing them to concentrate on the core business of providing high
quality patient care and at the same time creating a significant opportunity
for third party service providers to assist hospitals and other healthcare
providers in processing and managing healthcare information across the pre-
admission to post-discharge continuum.

BUSINESS STRATEGY

The Company's business strategy focuses on the application of advanced
technological tools and HIM expertise to improve the efficiency and
productivity of HIM services from pre-admission of the patient through post-
discharge. Key elements of the Company's business strategy consist of the
following:

Increase Penetration of Outsourcing Market. The Company is focused on
increasing its penetration of the healthcare information outsourcing market
through the implementation of an enhanced sales, marketing and lead generation
program. The Company's initial target market is comprised of the approximate
3,000 hospitals in the United States with more than 100 beds. The Company has
substantially expanded its marketing efforts, evidenced by the fact that the
Company conducted 49 onsite detailed consultations with potential customers
("operational assessments") through the four month period ended April 30, 1996
as compared to a total of 16 operational

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assessments during calendar 1995. Furthermore, the Company intends to continue
expanding its marketing efforts to include large clinics, sub-acute care
facilities, HMOs, skilled nursing facilities and other healthcare providers as
part of the integrated healthcare delivery system.

Apply Emerging Technology. Although the Company is a service company and
therefore does not intend to develop a proprietary software/hardware system,
the Company is technology oriented and intends to utilize the most effective
technology available to reshape the way information is managed across the
integrated healthcare delivery system to obtain new levels of cost
effectiveness. Through a strategic partnership with a small imaging company,
the Company has introduced an electronic document management ("EDM") product
in two of its contract management sites. However, the Company does not intend
to invest in the research and development of EDM systems, and to the extent
that more effective technological products become available, the Company will
use such technology, or partner with qualified technology companies, to
establish the most effective optical scanning or electronic imaging
capabilities at its sites.

Develop Information Service Centers. The Company has developed the concept
of an Information Service Center as a business model for the provision of
future outsourcing services in a format designed to further reduce hospital
costs and improve efficiencies by reducing and moving staff off-site and
taking advantage of economies of scale. Under the model, once the Company has
signed contracts with a group of healthcare provider customers which are under
common ownership and/or located in a given geographic area, the Company plans
to consolidate all of the functional and technological aspects of HIM services
into one centralized off-site service center. The Company believes that the
Information Service Center model offers several benefits, including the
ability to perform similar functions for multiple clients, to offer
outsourcing services to larger integrated delivery systems and to provide
geographically spaced healthcare providers with a central location for the
receipt of patient data.

Expand Range of Contract Management Services. Once the Company has
established itself in a hospital by successfully managing the medical records
department, the Company believes it is well positioned to manage other aspects
of the hospital's operations related to health information, including patient
admitting and the business office. The Company presently manages patient
admissions for five hospitals, but manages no business office functions for
any customers. The Company intends to pursue additional outsourcing business
from existing as well as new customers. The Company believes that additional
efficiencies in information management can be achieved through the management
of the record creation process at its point of beginning (pre-registration,
admitting) through post-discharge (the business office).

Pursue Acquisitions and Strategic Alliances. The Company has historically
used an acquisition strategy to fulfill part of its business plan, and will
continue to seek acquisition opportunities to complement, expand and diversify
its services portfolio. The Company will also pursue the formation of
strategic alliances in an effort to accelerate its growth through market
expansion. The Company is presently pursuing joint marketing efforts with
other companies to establish more comprehensive outsourcing relationships,
including the business office of the hospital, to be implemented over a larger
shared client base.

SERVICES

Contract Management (Outsourcing). Contract management, or outsourcing, of
health information involves the management by the Company of patient
information, both clinical and financial, throughout the healthcare delivery
system beginning before a patient is admitted and continuing after the patient
is discharged. The Company's principal source of revenues is currently from
long-term contracts for outsourcing, or contract management, of the healthcare
information, or medical records, departments of hospitals. Under the terms of
its outsourcing contracts, the Company provides the contracting medical
facility with complete day-to-day management and operation of the facility's
medical records department, including maintenance of patient records,
monitoring and reduction of backlog in record keeping and chart completion,
compliance with record keeping and record retention requirements of
governmental and other third-party payors, implementation of record coding
functions to optimize reimbursement, medical record abstracting and
maintenance of record storage and retrieval systems.

With respect to staffing requirements, the Company's outsourcing contracts
are of two types. The first is a "Management Only" contract by which the
Company provides a department director to supervise a hospital's

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medical records department and employs the departmental supervisory personnel,
while all other employees of the department remain on the hospital's payroll.
The second type is a full contract management services agreement by which the
Company provides not only a records-management director but also hires all the
employees of the department as the Company's employees. The Company generally
provides supplemental training to these employees once it takes over the
department. The Company prefers, whenever possible, to maintain the employment
of all of the employees of a hospital's outsourced department and is rarely
required to hire new employees.

A significant feature of the Company's contract management services is the
use of a Professional Services Team, made up of highly skilled and experienced
professionals, whose responsibility is to act as an internal consulting team
to its outsourced customers. This team is used during initial implementation
to reengineer the outsourced department's work processes, to support the
customer sites at any time and to develop "Best Practices," the Company's
quality standards that are continuously updated to represent the best in the
outsourcing marketplace.

The Company believes that the application of better technology in contract
management will reshape the way information is managed across the healthcare
delivery system in the future and provide additional cost savings. Although
the Company does not intend to directly invest in research and development of
electronic document management ("EDM") systems, it will use the most effective
technology available to the extent that its customers desire to implement such
systems. Such technology is designed to provide simultaneous access to the
medical record by multiple users. The Company has worked with a small imaging
company to develop and beta test an EDM product, trademarked "TransChart(TM),"
and has now installed this optical scanning product in two of its contract
management sites. The Company has a non-exclusive agreement with the imaging
company to use such company's hardware and software products, and obtain
maintenance and support services, pursuant to a set fee schedule, and such
company has agreed to make certain modifications to its products at the
request of the Company. The Company will continue to use this technology, or
partner with qualified providers, to establish the most effective optical
scanning capabilities at its sites. The application of more advanced
technologies is a key factor in the Company's planned implementation of its
Information Service Center concept. See "--Future Outsourcing Services--
Information Service Centers."

Management of the Company believes that through its services, it provides
immediate and long-term cost savings to its healthcare provider customers
which helps them compete in a managed care environment. The Company also
believes that healthcare providers have overlooked other services which are
attractive outsourcing candidates such as admissions, utilization review,
quality assurance and the business office. Because such services are essential
to the efficient flow of information along the pre-admission to post-discharge
continuum in the healthcare delivery system, the Company believes that these
services are suited to outsourcing and are a natural extension of the
outsourcing of the medical records department.

The Company believes that there is a significant outsourcing opportunity in
the healthcare industry to provide multiple information management and
processing functions on an integrated basis beginning before a patient is
admitted, through the creation and management of the medical record and
continuing after a patient is discharged, in the business office. It is the
intention of the Company to seek more outsourcing contracts providing fully-
integrated health information management across multiple departments of the
same institution for a single fee. Under the terms of five of the Company's
outsourcing contracts, the Company has undertaken to provide not only medical
records management services, but also to manage that hospital's patient access
(admissions) function. The Company also manages the social services,
utilization management and quality management functions for two hospitals.
Although the Company currently has no outsourcing contracts for the hospital
business office, the Company is exploring opportunities for contract
management of the business office. Better management of the business office
benefits the hospital by both reducing costs and increasing the turnover rate
of accounts receivable. The Company has demonstrated that by more effectively
managing medical records, it has significantly reduced the level of unbilled
accounts receivable and has created a more efficient and accurate flow of
information to the business office.

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Future Outsourcing Services--Information Service Centers. The Company has
developed the concept of an Information Service Center ("ISC") as a business
model for the provision of future outsourcing services in a format designed to
reduce hospital costs and improve efficiencies. The Company has hired an
outside consultant to assist the Company in the development of a design for
the work flow processes of the ISC and related equipment requirements. The
Company expects the consultant's assessment to be completed by the end of
August 1996. Under the model, once the Company has signed contracts with a
group of healthcare provider customers which are under common ownership and/or
located in a given geographic area, the Company plans to consolidate all of
the functional and technological aspects of HIM services into one centralized
service center. Specific areas of initial focus would include functions such
as chart assembly and analysis, coding, transcription and information
retrieval and storage. In order to streamline the flow of patient information
as much as possible, additional labor intensive services such as scheduling,
preregistration information assembly, benefit verification and procedure
precertification, and almost all patient accounting and billing functions,
could also be added. In contrast to the current model, under which most of the
personnel remains on site at the customer's facility, all of the staff
performing these functions would be relocated to the service center, with the
potential for a significant portion of the personnel to become home-based
"telecommuters." Fewer than ten individuals would remain at the client
hospital with responsibilities for document scanning and customer service
functions, as well as to provide an administrative liaison role in the
hospital, participate in hospital committee functions, oversee compliance
issues and other management functions. The Company believes that the ISC model
offers several benefits, including the ability to (i) perform similar
functions for multiple clients that are common throughout the pre-admission to
post-discharge healthcare continuum, thereby increasing efficiency and
reducing staffing needs, (ii) offer outsourcing services to larger integrated
delivery systems with multiple facilities and to provide geographically spaced
healthcare providers with a central location from which they receive patient
data, and (iii) increase the scope of potential clients to include larger
medical clinics, skilled nursing facilities, long-term care facilities and,
eventually, payors such as HMOs with complex information management
requirements.

The Company intends to use a portion of the net proceeds from this offering,
which are estimated to be approximately $24.5 million (at an assumed public
offering price of $8.75 per share), to finance the installation and
development of its ISC concept and to purchase computer hardware and optical
imaging equipment in connection with the application of better technologies in
its contract management business. Although the amounts to be expended for
these purposes will depend upon the success of marketing the ISC concept, the
Company estimates that it may use up to approximately $12 million of the net
proceeds to finance the installation and development of the ISC and up to
approximately $5 million of net proceeds to purchase computer hardware and
optical imaging equipment.

Medical Transcription Services. The Company entered the medical
transcription services business because it saw an opportunity to improve
accuracy, reduce turnaround time and improve margins for its contract
management customers, primarily through advances in technology. The market for
medical transcription is not formally tracked, but the Executive Director of
the Medical Transcription Industry Alliance has estimated that the total U.S.
market for medical transcription services is in excess of the one billion
dollar range, and that the market is continuing to experience growth as more
hospitals outsource their medical transcription needs. The medical
transcription services market is highly fragmented, with over 500
transcription companies nationally.

The Company's transcription business provides a computer-based service for
transcription of physician dictation for hospitals. While its service
arrangements vary from institution to institution, some of which require
transcription to be performed on-site or by hospital employees, the
transcription division's services are primarily defined as transcription of
dictation at remote locations, and transmission via modem or similar telephone
link into the computer data base of the contracting hospital. As a result,
while it currently provides services to over 100 different medical
institutions in the eastern half of the United States, the transcription
division is able to provide such services from a central office and therefore
many of its transcription employees are able to work as "telecommuters" using
networked computer terminals in their homes.

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The Company is typically paid for its transcription services on a production
basis at rates determined on a per-line-transcribed basis. The Company also
provides transcription services in connection with nine of its contract
management contracts. Where transcription services are included as part of the
services provided in the Company's outsourcing contracts, the services are
provided internally by the Company's transcription sites as part of the
overall services provided by the Company for a set contract fee. The Company
seeks wherever possible to cross-market its transcription services with its
outsourcing contract services, using the institutions with which it has
outsourcing contracts as a base for generation of additional transcription
business and using the institutions with which it has transcription contracts
as a basis for generating additional contract management business.

Consulting and Coding Services. The Company continues to offer independent
consulting services to hospitals on a case by case basis, and believes that
its consulting services comprise an additional services offering to its
existing customer base. The Company provides advice with respect to management
and operations of medical records departments and related healthcare
information functions, particularly reimbursement coding or "optimization"
services, as well as consultation services regarding the health information
aspects of hospitals' utilization management and quality management functions.
Such services, which can also include interim medical records department
management and related services, are provided on a negotiated fee for service
basis. The Company's consulting and coding department includes specialists in
various aspects of records coding and management. The Company recently added a
medical doctor to its staff of consultants, which will allow the Company to
offer consultation services to physicians who are interested in improving
their coding and reimbursement practices.

Healthcare Case Management. Medical case management provides assessment,
care planning, recommendations, and care coordination services for injured and
ill persons covered by insurance carriers or self-insured employers. The
Company employs or contracts with registered nurses who act as a coordinator
between the patient, the healthcare providers and the insurance carriers,
seeking to ensure the provision of optimal healthcare with an efficient use of
resources. Case management typically involves routine onsite visits to the
patient and monthly reporting to the insurance carriers. In addition, the
Company provides vocational evaluations and computerized skills assessments
for clients covered by insurance programs, workers' compensation, long-term
disability and Social Security disability. The Company faces a very
competitive market on a national, regional and local level, with all of the
competition offering the full continuum of cost containment products,
including field case management, telephonic case management, pre-certification
utilization review, PPO networks, bill repricing and managed care.

CUSTOMERS

The Company's current customer base consists primarily of hospitals for
which the Company provides contract management or outsourcing of the medical
records department, medical transcription services and/or consulting services.
However, the Company believes that the outsourcing concept can meet the needs
of many other healthcare providers, and the Company's marketing efforts are
designed to eventually expand its customer profile to include larger clinics,
sub-acute care facilities, HMOs, skilled nursing facilities and others.

With over 5,000 hospitals in the United States, the market for outsourcing
the management of medical records departments and other affiliated departments
is sizable. Approximately 3,000 of the hospitals in the United States have
more than 100 beds and constitute the Company's first tier opportunity. The
Company further screens potential hospitals through a variety of lead
generation methods, including a recently initiated telemarketing program,
which helps pinpoint those hospitals that may benefit most from outsourcing
their medical records department and focuses the Company's efforts on
approximately 2,000 target hospitals.

As the use of medical records management technology increases in the future,
the Company believes that three levels of healthcare provider customers will
emerge. The Company divides these customers into "No Tech," "Medium Tech," and
"High Tech" categories. The No Tech customer is one that has not embraced the
use of technology within the facility's medical records functions to enhance
productivity, quality and costs. This

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<PAGE>

customer will either lack the financial resources and/or vision to progress
past the paper record. For this customer, the Company will continue to
reengineer the paper processes and continue to guarantee the customer reduced
costs and improved quality, timeliness and service. The Medium Tech customer
will be ready to begin to leverage technology, primarily through the use of
optical scanning to reduce costs, improve quality and timeliness and provide
multiple users access to the same record simultaneously. This will also allow
for the electronic completion of the patient record by the physician,
providing a significant productivity tool for the physician as well. The High
Tech customer will likely initially be large for-profit systems or not-for-
profit multi-hospital groups, which will be committed to the complete change
of the medical record process as it is known today. The Company believes that
the High Tech customer group will be the initial market for its Information
Service Center concept.

Principal Customers. Based on its revenues for the fiscal year ended
December 31, 1993, fees paid by each of the following hospitals accounted for
10% or more of the Company's revenues in such period: Good Samaritan Hospital,
Downers Grove, Illinois (37%); Greater Southeast Community Hospital,
Washington, D.C. (including Fort Washington Medical Center, Fort Washington,
Maryland) (11%); Tulane University Hospital and Clinic, New Orleans, Louisiana
(10%). Based on its revenues for the fiscal year ended December 31, 1994, fees
paid by each of the following hospitals accounted for 10% or more of the
Company's revenues in such period: Good Samaritan Hospital, Downers Grove,
Illinois (14%); Greater Southeast Community Hospital, Washington, D.C.
(including Fort Washington Medical Center, Fort Washington, Maryland) (15%);
Tulane University Hospital and Clinic, New Orleans, Louisiana (16%); and
Memorial Medical Center of Jacksonville, Jacksonville, Florida (15%). Based on
revenues for the fiscal year ended December 31, 1995, no hospitals had fees
paid to the Company which amounted to or exceeded 10% of the Company's
revenues.

SALES AND MARKETING

The Company currently employs ten full-time sales personnel in the contract
management area of its business. Because the Company's outsourcing services
are relatively new in the industry, marketing of those services has proceeded
principally on the basis of personal contacts by the Company's sales personnel
with senior hospital executives as well as referrals from its consulting
clients. Beginning in early 1996, the Company has added a telemarketing
program, targeting hospital chief executive and chief financial officers, in
an effort to significantly improve qualified sales leads and shorten the
overall sales cycle. Having established its initial base of outsourcing
contract clientele, the Company's sales force provides coverage in virtually
every major hospital market in the country, with sales representatives in each
of the principal geographic regions of the country (Southwest, West, Midwest,
Southeast, Mid-Atlantic and Northeast). The Company's 1996 marketing strategy
also includes targeted advertising in industry trade publications, direct
mailings, trade shows, customer testimonials, seminars and other educational
literature that emphasizes the Company's market leadership position, its
management expertise and its track record with current clients.

The Company's transcription and consulting services have historically been
marketed primarily through personal contacts and referrals from existing
clients. While management believes that this is an appropriate marketing
strategy, particularly for consulting services, the Company has begun to
implement a broader marketing campaign for its transcription services,
particularly in those markets in which its transcription offices are located,
and has employed two national sales persons targeting this business.

COMPETITION

Management of the Company believes that the success of its outsourcing
business is dependant upon the acceptance by hospitals and other healthcare
providers of the concept of outsourcing medical records, admissions and other
affiliated departments. Because this is an emerging field in the healthcare
industry, the Company's greatest competition presently comes from existing,
internal medical records departments of hospitals, which often resist the
outsourcing concept. Acceptance by hospitals of the outsourcing of medical
records and related departments will depend in part on the ability of the
Company to alleviate concerns of hospital management related to outsourcing,
including loss of control of the outsourced function, information quality and
integrity

26
<PAGE>

concerns, and a bias against outsourcing due to previous poor experiences. See
"Risk Factors--Market Acceptance of Outsourcing Strategy." There is currently
one national firm, HealthTask, Inc. (a 50/50 joint venture between Ernst &
Young and Norrell) and one regional firm, Pyramid, Inc. (Southern California
based), engaged in the same business. The Company expects that as the concept
of outsourcing becomes more accepted, it will encounter further competition
from some or all of the following sources: other traditional healthcare
information management consultants; coding consultants; multi-specialty
healthcare services businesses which currently provide contract management to
clinical, housekeeping, dietary or other non-medical services departments of
hospitals; management information services providers, particularly developers
and vendors of management software; and other parties in contract management
businesses (for example, business or financial management services) desiring
to enter the healthcare field. The Company expects that competitive factors
will include reputation for expertise in health information management, size
and scope of referenceable accounts, prior experience in outsourcing, and
pricing. Additionally, there are companies that operate in other areas of the
health information management spectrum, including admissions, the business
office and transcription. As the Company expands its scope into these other
areas of health information management, the Company expects to confront other,
perhaps better established, better capitalized and larger competitors.

The Company experiences competition with respect to both its transcription
and consulting business from a variety of sources, including, in each case,
both local and national businesses. The markets both for medical transcription
services and for medical records coding and consultation services are highly
fragmented, and no competitor or identifiable group of competitors could be
said to be dominant. The Company believes the principal competitive factors in
each case include reputation and prior experience, and in the case of
transcription services, pricing, timeliness (i.e., turnaround times on
transcribed documents) and accuracy of performance. In both fields, the
Company, in some cases, competes with larger, better known and better
capitalized competitors. With respect to its case management business, the
Company competes with several large national vendors including Comprehensive
Rehabilitation Associates, CorVel, Intracorp and Genex, Inc., as well as many
regional and local competitors that have established a niche in the business.
Additionally, many insurance carriers and third party administrators have
developed case management programs of their own rather than outsourcing this
business.

GOVERNMENT REGULATION

Virtually all aspects of the practice of medicine and the provision of
healthcare services are regulated by federal or state statutes and
regulations, by rules and regulations of state medical boards and state and
local boards of health and by codes established by various medical
associations. The Company has attempted to structure its operations to comply
with these regulations. The Company is not presently subject to direct
regulation as an outsourcing services provider. Future government regulation
of the practice of medicine and the provision of healthcare services may
impact the Company and require it to restructure its operations in order to
comply with such regulations. In addition, in connection with its case
management business, certain of the Company's employees and independent
contractors are registered nurses. These individuals are subject to certain
licensing standards in the states in which they practice, and are responsible
for maintaining their licenses. The Company's case management division is not
subject to any material governmental regulation, although certain states in
which the Company provides case management services have established fee
schedules under their workers' compensation laws which apply to certain case
management services provided by the Company.

EMPLOYEES

As of July 1, 1996, the Company had approximately 717 full-time employees
and 165 part-time employees, including 27 administrative and executive
employees at its headquarters office in Atlanta, Georgia; 26 employees in
sales and marketing or consultative functions; and 536 employees at
outsourcing sites, includes 181 employees from Pinnacle Health System, a
contract which terminates on August 1, 1996, as well as 293 employees in its
medical transcription operations. As of that date, Sullivan had 46 full-time
employees, seven part-time employees and contracts with over 29 registered
nurses who are not employees of the Company. The Company also supervises an
additional 139 employees of contracting hospitals at outsourcing sites,
pursuant to the terms of its outsourcing agreements. Neither the Company nor
any of the employees it supervises is currently a party to any

27
<PAGE>

collective bargaining agreement; the hospital employees at one outsourcing
site have been solicited by union representatives, but no definitive action
toward representation has been taken. The Company has not experienced any
strikes or work stoppages, and believes that its relations with its employees
are good.

PROPERTIES

The Company leases the space for its principal offices in Atlanta, Georgia,
and space for satellite sales offices in Dallas, Texas and Newton,
Pennsylvania. It also leases space for its transcription offices in Chicago,
Illinois; Pittsburgh and Erie, Pennsylvania; Boston and Worcester,
Massachusetts; and Atlanta, Georgia. The Company leases space for its case
management business in Atlanta, Georgia; Orlando, Florida; and Dallas, Texas.

LEGAL PROCEEDINGS

The Company is subject to certain claims in the ordinary course of business
which are not material.

On September 17, 1993, the Company and its healthcare subsidiaries, First
Western Health Corporation and Veritas Healthcare Management, and the
physician-owned medical groups, FWHC Medical Group, Inc. and Veritas Medical
Group, Inc., which had contracts with the health care subsidiaries, initiated
a lawsuit in the Superior Court of the State of California, County of Los
Angeles, against 22 of the largest California workers' compensation insurance
carriers, which lawsuit was subsequently amended to name 16 defendants
(including State Compensation Insurance Fund, Continental Casualty Company,
California Compensation Insurance Company, Zenith National Insurance
Corporation and Pacific Rim Assurance Company). The action seeks $115 million
in compensatory damages plus punitive damages. The plaintiffs claim abuse of
process, intentional interference with contractual and prospective business
relations, negligent interference and unlawful or unfair business practices
which led to the discontinuation in April 1993 of the former business of the
Company's healthcare subsidiaries and their contracting associated medical
groups (the "Lawsuit"). The claims arise out of the Company's former business,
which prior to the merger with Transcend Services, Inc., included the business
of providing medical/legal evaluations and medical treatment services (in
association with managed medical groups) in the workers' compensation industry
in California. Seven defendants in the Lawsuit have filed cross complaints
against the plaintiffs seeking restitution, accounting from the plaintiffs for
monies previously paid by the defendants, disgorgement of profits, injunctive
relief, attorneys' fees and punitive damages, based upon allegations of
illegal corporate practice of medicine, illegal referral arrangements,
specific statutory violations and related improper conduct. The case is
presently in the early stages of discovery. The defendants have filed various
motions to dismiss and other motions seeking the failure of the plaintiffs'
cause of action, none of which have been successful. The Company and its
counsel do not believe that it is likely that the Company will be held liable
on any of the cross complaints; however, there can be no assurance that the
Company will be successful in the defense of the cross complaints. In
addition, there can be no assurance as to the recovery by the Company of the
damages sought in its complaint against the defendants. The costs associated
with the conduct of the Lawsuit cannot be ascertained with certainty but are
expected to be substantial, and the Company has to date deferred such costs
until resolution of the litigation. Based upon facts and circumstances known
to date, in the opinion of management, final resolution of the Lawsuit will
not have a material adverse effect on the Company's financial condition,
results of operations or liquidity. See "Risk Factors--Litigation" and Note 2
of "Notes to Consolidated Financial Statements."

On June 22, 1995, an action was filed by Timothy S. Priest in his capacity
as administrator of the estate of Robert V. Taylor against Carol Brown, Debbie
Ostwald, the Company's subsidiary Sullivan, and Fireman's Fund Insurance
Company, in the Circuit Court of Franklin County, Tennessee, alleging breach
of the duty to provide reasonably competent nursing care to an injured
individual. The plaintiff demands compensatory damages in the amount of $1
million and punitive damages in the amount of $2 million, plus costs.
Management of the Company believes that the Company has meritorious defenses
to the allegations and intends to vigorously contest liability in this matter.
At the present time, management of the Company cannot predict the outcome of
this litigation, but does not believe that the resolution of the litigation
will have a material adverse effect on the Company's financial condition,
results of operations or liquidity.

28
<PAGE>

DISCONTINUED OPERATIONS

At March 31, 1996, the net assets related to the discontinued operations of
the Company's healthcare subsidiaries, First Western and Veritas, both of
which ceased operations as of April 30, 1993, were $3,015,000, including
deferred legal costs related to the Lawsuit and $2,407,000 in net accounts
receivable. The collection liabilities of First Western and Veritas have been
deducted in determining net accounts receivable. The Company has contracted
with a third party to service and manage the remaining accounts receivable
balance for a set fee. The Company will continue to re-evaluate the net
realizability of the net assets related to discontinued operations on an
ongoing basis. Any such re-evaluation could result in an adjustment that may
potentially be material to the carrying value of the asset.

In September 1994, the Company sold substantially all of the assets and
liabilities of its wholly-owned subsidiary, Occu-Care, Inc., which operated
industrial medical clinics, to AmHealth, Inc. ("AmHealth") for a purchase
price of $4,000,000. The purchase price included $1,500,000 in cash paid at
closing and the issuance of two promissory notes bearing interest at 8% per
annum. AmHealth defaulted on the first interest payments on the two notes and
on December 30, 1994, the Company agreed to exchange the notes receivable of
$2,500,000 for 2,500,000 shares of convertible redeemable preferred stock with
a 6.5% cumulative dividend. In conjunction with the Merger on January 10,
1995, the Company recorded these securities at $2,050,000, which was the
Company's estimate of their fair value (using a discounted cash flow
approach). Although the Company and AmHealth executed written documents in
contemplation of the conversion of the notes receivable to preferred stock,
the conversion was never consummated and on June 6, 1996 the Company filed a
lawsuit in the Superior Court of Cobb County, Georgia against AmHealth seeking
payment of the $2,500,000 note plus accrued interest. AmHealth, however, has
executed a definitive agreement with CORE, Inc., a public company, pursuant to
which CORE would purchase for cash substantially all the assets of AmHealth in
a transaction expected to close by July 31, 1996. In anticipation of the
consummation of the foregoing transaction, on June 17, 1996, AmHealth and the
Company executed a definitive settlement agreement pursuant to which AmHealth
has agreed to pay the Company the sum of $2,050,000 (the current carrying
value of the asset) plus $5,287 in attorneys' fees in full satisfaction of
AmHealth's obligations to the Company arising out of the sale of all of the
assets and liabilities of Occu-Care, Inc. Under the terms of the settlement
agreement, the Company agreed to extend the maturity of the note through July
31, 1996 and to accept payment under the note simultaneously with the closing
of the acquisition of AmHealth by CORE. The Company dismissed its lawsuit
against AmHealth without prejudice on June 26, 1996. The consummation of the
settlement will not represent a gain or loss to the Company. There can be no
assurance that the CORE/AmHealth transaction will close and there can be no
assurance that the Company will be paid should the CORE/AmHealth transaction
fail to close. See Note 2 of "Notes to Consolidated Financial Statements."

29
<PAGE>

MANAGEMENT

The following table sets forth certain information regarding executive
officers and directors of the Company:

<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
<S> <C> <C>
Larry G. Gerdes............ 47 President, Chief Executive Officer and Director
Julian L. Cohen............ 40 Chief Operating Officer
G. Scott Dillon............ 46 Chief Development Officer
David W. Murphy............ 38 Chief Financial Officer, Secretary and Treasurer
Donald L. Lucas............ 66 Chairman of the Board
George B. Caldwell......... 65 Director
Walter S. Huff, Jr......... 61 Director
Charles E. Thoele.......... 60 Director
</TABLE>

DIRECTORS AND EXECUTIVE OFFICERS

The following persons serve as the directors and executive officers of the
Company:

Mr. Gerdes has served as a director of the Company since June 1985 and as
its President and Chief Executive Officer since May 1993. From 1991 to 1993,
Mr. Gerdes was a private investor and from May 1992 until the Merger Mr.
Gerdes was the Chairman of the Board of Directors of the former Transcend
Services, Inc. For the five years prior to 1991, Mr. Gerdes held various
executive positions with HBO & Company, a provider of information services to
the healthcare industry, including Chief Financial Officer and Executive Vice
President. Mr. Gerdes also serves as a director of Delphi Information Systems,
Inc. and Aksys, Ltd.

Mr. Cohen has served as the Company's Chief Operating Officer since October
1994. Mr. Cohen served in various capacities at MCC Behavioral Care, Inc., a
provider of managed behavioral health products and services from November 1987
to September 1994, including President from October 1992 to September 1994.
Mr. Cohen previously served as Administrator of Northwestern Memorial
Hospitals Institute of Psychiatry, Assistant Executive Director for
professional services at Menorah Hospital and Assistant Administrator at
University Hospital of New York at Stonybrook.

Mr. Dillon has served as the Company's Chief Development Officer since
September 1995. From September 1992 to August 1995, Mr. Dillon served as
Executive Vice President and Chief Development Officer for Coastal Physician
Services. Prior to Coastal Physician Services, Mr. Dillon served as Executive
Vice President and Chief Operating Officer of the Fisher Mangold Group from
January 1991 to September 1992. Mr. Dillon's 17 years in the healthcare
industry also includes his service in various senior sales and marketing
positions with ARAMARK, Inc., EmCare Holdings and the Patient Care Products
division of Proctor and Gamble. Mr. Dillon is active in various professional
organizations including, the American Hospital Association, the Healthcare
Financial Management Association and the Center for Health Information
Management.

Mr. Murphy has served as the Company's Chief Financial Officer since May
1995. Mr. Murphy joined the Company in September 1994 as Vice-President of
Acquisitions. Prior to joining the Company, Mr. Murphy was a founder and
General Partner of an investment company and served in various financial,
operating and mergers and acquisition positions with companies such as
Hutchinson SA (France), First Boston and International Paper Company.

Mr. Lucas has served as a director of the Company since December 1985 and
has served as Chairman since August 1989. Mr. Lucas has been a venture
capitalist for more than 25 years. Mr. Lucas also serves on the boards of
directors of Amati Communications Corporation; Cadence Design Systems, Inc.;
Delphi Information Systems, Inc.; Kahler Realty Corporation; Macromedia, Inc.;
Oracle Corporation; Quantum Health Resources, Inc.; Racotek, Inc. and Tricord
Systems, Inc.

30
<PAGE>

Mr. Caldwell has served as a director of the Company since May 1995. Mr.
Caldwell is the President Emeritus of Lutheran General HealthSystem in Park
Ridge, Illinois. Mr. Caldwell served as President and Chief Executive Officer
of Lutheran General Health Care System from 1979 to 1989. Prior to 1979, Mr.
Caldwell served as the President and Chief Executive Officer of The Greater
Southeast Community Hospital Foundation of Washington, D.C., and as President
and Chief Executive Officer of Lake Forest Hospital, Lake Forest, Illinois.
Mr. Caldwell is presently the Chairman of The Collier Company, a healthcare
consulting company in Chicago, Illinois. Mr. Caldwell is also the Chairman of
The Hunter Group and a Director of MMI Companies.

Mr. Huff has served as a director of the Company since October 1993. Mr.
Huff was the founder of HBO & Company, a provider of information services to
the healthcare industry and served as its Chairman from 1974 until 1990 and
Chief Executive Officer from 1974 to 1984 and 1986 until 1989. Since 1990, Mr.
Huff has been a private investor.

Mr. Thoele has served as a director of the Company since October 1993. Mr.
Thoele has been a consultant to Sisters of Mercy Health Systems since February
1991. From 1986 to February 1991, he served as a director and the Chief
Operating Officer of Sisters of Mercy Health Systems. Mr. Thoele is currently
Chairman of the Catholic Hospital Association. Mr. Thoele is also director of
HBO & Company.

BOARD OF DIRECTORS

The Board of Directors of the Company currently consists of five persons.
The Company's By-Laws provide that the Board of Directors shall consist of not
less than one person, the precise number to be determined from time to time by
the Board of Directors or shareholders of the Company. The directors are
elected annually by the shareholders of the Company and serve for a term of
one year, or until their earlier resignation, removal from office or death.
The executive officers of the Company are elected annually by the Board of
Directors and serve for a term of one year, or until their earlier
resignation, removal from office or death.

The Company's Board of Directors has two standing committees--the Audit and
Finance Committee and the Stock Option and Compensation Committee. The Audit
and Finance Committee, which is comprised of Messrs. Lucas and Huff, has been
assigned the principal functions of: (i) recommending the independent
auditors; (ii) reviewing and approving the annual report of the independent
auditors; (iii) approving the annual financial statements; and (iv) reviewing
and approving summary reports of the auditor's findings and recommendations.
The Stock Option and Compensation Committee, which is comprised of Messrs.
Huff and Thoele, has been assigned the functions of administering the
Company's 1992 Stock Option Plan, as amended and making recommendations
concerning the establishment of additional employee benefit plans and
compensation for the Company's executive officers.

31
<PAGE>

EXECUTIVE COMPENSATION

The following table provides certain summary information for the fiscal
years ended December 31, 1995 and 1994 and May 31, 1994 concerning
compensation paid or accrued by the Company to or on behalf of the Company's
Chief Executive Officer and the other executive officers of the Company (the
"Named Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------- ----------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION YEAR(1) SALARY($) BONUS($) OPTIONS/SAR'S(#)
- --------------------------- -------- --------- -------- ----------------
<S> <C> <C> <C> <C>
Larry G. Gerdes.................. 12/31/95 $205,376 $ -- --
President and Chief Executive
Officer 12/31/94 116,700 -- --
05/31/94 200,000 -- --
Julian L. Cohen.................. 12/31/95 $193,756 $ --
Chief Operating Officer 12/31/94 39,600 -- 145,000
05/31/94 -- --
David W. Murphy.................. 12/31/95 $100,130 $22,675 60,000
Chief Financial Officer, 12/31/94 28,385 --
Treasurer and Secretary 05/31/94 -- --
G. Scott Dillon.................. 12/31/95 $ 59,599 $ -- 60,000
Chief Development Officer 12/31/94 -- --
05/31/94 -- --
</TABLE>
- --------

(1) Information relates to the fiscal years ended May 31, 1994 and December
31, 1994 and 1995. The fiscal year ended December 31, 1994 was for a
seven month period.

COMPENSATION OF DIRECTORS

Directors of the Company who are compensated as officers of the Company
serve without compensation for their services as directors. Each director of
the Company who is not a compensated officer of the Company is paid a fee of
$8,000 per annum. Each person who first becomes a non-employee director is
granted, as of the date such person becomes a director of the Company, an
option to purchase 10,000 shares of Common Stock. Each non-employee director
will be granted an option to purchase 6,000 shares of the Common Stock, except
the Chairman who will be granted an option to purchase 9,000 shares, upon
election or reelection at the annual meeting of shareholders provided they
have served on the board a minimum of six months.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The following persons served as members of the Stock Option and Compensation
Committee of the Board of Directors during the year ended December 31, 1995:
Walter J. Huff, Jr. and Charles E. Thoele. None of the members of the Stock
Option and Compensation Committee has been an officer or employee of the
Company.

In August 1995, the Company raised $2 million in cash through the private
placement of 8% Subordinated Convertible Debentures. In connection with this
private placement, the Walter S. Huff, Jr. Charitable Foundation, of which
Walter S. Huff, Jr.'s children are trustees, purchased a Debenture in the
principal amount of $200,000 with respect to which Mr. Huff disclaims
beneficial ownership. The Debenture is secured and subordinated to all other
debt of the Company. The interest rate on the Debenture is 8%, payable semi-
annually, and the principal amount is due in full on August 15, 2000. As of
July 1, 1996, $200,000 remained outstanding under the Debenture. The Debenture
is convertible into Common Stock at any time prior to August 15, 2000, at a
rate of 286 shares of Common Stock for each $1,000 in principal amount and is
convertible by the Company at any

32
<PAGE>

time when the Common Stock trades at $10.50 per share for 30 consecutive
trading days. The Company may redeem the Debenture at any time upon 30 to 60
days' notice to the holder. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."

During fiscal 1993, the Company paid $91,000 in management fees to a
shareholder of the Company, Gerdes Huff Investments, a general partnership the
sole partners of which are Larry G. Gerdes, an executive officer and director
of the Company, and Walter S. Huff, Jr. These management fees were paid to the
partnership prior to the Merger in connection with consulting services
provided to the Company by Messrs. Gerdes and Huff.

During Fiscal 1993, the Company also issued warrants to purchase 146,000
shares of Common Stock to Gerdes Huff Investments. The warrants were issued in
consideration of Messrs. Gerdes' and Huff's personal guaranty of a loan made
to the Company in connection with the Company's purchase of dataLogix, a
supplier of medical record transcription services. The warrants were
exercisable at $.01 per warrant and were exercised during 1994. The difference
between the fair value and exercise price of these warrants of $104,000 was
expensed by the Company in 1993.

STOCK OPTION PLAN

The Company has adopted a 1992 Stock Option Plan, as amended (the "Plan")
for selected employees and directors who are not employed by the Company
("Non-Employee Directors"). The Plan is administered by the Stock Option and
Compensation Committee of the Board of Directors. The Plan was recently
amended at a special meeting of shareholders held on June 5, 1996, increasing
the number of shares reserved for issuance under the Plan by 400,000 shares
such that the Plan currently provides for the grant of incentive and non-
qualified stock options to purchase up to 2,000,000 shares of Common Stock.

Under the terms of the Plan, the Stock Option and Compensation Committee may
determine the employees to whom options will be granted, the time or times of
exercise, the number of shares subject to an option and the terms and
conditions of each stock option agreement. The Stock Option and Compensation
Committee also determines whether an option is an incentive stock option or a
non-qualified stock option. The price per share of stock subject to an
incentive stock option must equal 100% of the fair market value thereof on the
date of grant. The price per share of stock subject to a non-qualified stock
option is to be determined by the Stock Option and Compensation Committee and
may be less than fair market value. The exercise period for an incentive stock
option cannot exceed ten years, while there is no limitation with respect to
non-qualified stock options. In addition, the Stock Option and Compensation
Committee cannot grant an incentive stock option to any person who owns at
least 10% of the outstanding Common Stock unless the price is 110% of fair
market value and the option exercise period does not exceed five years.

The Plan also provides for non-discretionary or automatic grants of options
to Non-Employee Directors. See "Management--Compensation of Directors." The
price of Common Stock subject to a Non-Employee Director option is the fair
market value on the date of grant, except that the price of Common Stock
subject to options granted on March 16, 1992 was the fair market value on
October 14, 1992, the date the Plan was approved by the shareholders of the
Company. Each Non-Employee Director option must conform to the provisions of
the Plan. Non-Employee Director options become exercisable six months from the
date of grant and expire ten years from the date of grant. Moreover, in the
event a Non-Employee Director terminates membership on the Board for any
reason, an option held by him may be exercised until the earlier of the
expiration of the option or 12 months from the date of termination.

As of July 8, 1996, options to purchase a total of 1,256,500 shares of
Common Stock were outstanding at a weighted average exercise price of $2.70
per share. In addition, as of July 8, 1996, options to purchase a total of
21,775 shares of Common Stock were outstanding under the former Transcend
Services, Inc. stock option plan at a weighted average exercise price of $.19
per share.

The following table sets forth information regarding individual grants of
stock options under the Plan made during the year ended December 31, 1995 to
the Named Executive Officers.

33
<PAGE>

OPTION GRANTS IN FISCAL 1995

INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------- VALUE AT
% OF TOTAL ASSUMED ANNUAL RATES
NUMBER OF OPTIONS/SAR'S OF STOCK PRICE
SECURITIES GRANTED TO APPRECIATION
UNDERLYING EMPLOYEES EXERCISE OR FOR OPTION TERM(3)
OPTIONS/SAR'S IN FISCAL BASE PRICE EXPIRATION --------------------
NAME GRANTED(#)(1) YEAR(2) ($/SHARE) DATE 5% 10%
- ---- ------------- ------------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Larry G. Gerdes......... -- -- -- -- -- --
Julian L. Cohen(4)...... 25,000 16.5% $3.31 3/21/05 $ 52,000 $ 132,000
20,000 5.00 12/20/05 63,000 159,000
David W. Murphy(5)...... 30,000 14.6% 2.25 02/23/05 43,000 108,000
10,000 5.00 12/20/05 31,000 80,000
G. Scott Dillon(6)...... 60,000 21.6% 3.50 08/15/05 132,000 335,000
</TABLE>
- --------
(1) Stock options were granted with an exercise price equal to the fair
market value of the Company's Common Stock on the date of grant.
(2) The Company granted options to purchase 273,000 shares to employees in
the year ended December 31, 1995.
(3) The dollar amounts under these columns represent the potential realizable
value of each grant of options assuming that the market price of the
Company's Common Stock appreciates in value from the date of grant at the
5% and 10% annual rates prescribed by the Commission and therefore are
not intended to forecast possible future appreciation, if any, of the
price of the Company's Common Stock.

(4) Mr. Cohen was granted an option to purchase 25,000 shares on March 21,
1995 and an option to purchase 20,000 shares on December 20, 1995 which
vest annually in equal increments over the subsequent four years
beginning on the first anniversary of the date of grant.
(5) Mr. Murphy was granted an option to purchase 30,000 shares on February
23, 1995 and an option to purchase 10,000 shares on December 20, 1995
which vest annually in equal increments over the subsequent four years
beginning on the first anniversary of the date of grant.
(6) Mr. Dillon was granted an option to purchase 60,000 shares on August 15,
1995 which vests annually in equal increments over the subsequent four
years beginning on the first anniversary of the date of grant.

The following table sets forth certain information concerning the
unexercised stock options held by the Named Executive Officers. During the
year ended December 31, 1995, only one of the individuals listed below
exercised any options. Larry G. Gerdes exercised a Non-Qualified Stock Option
to purchase 50,000 shares of Common Stock on December 1, 1995. The exercise
price was $1.94 per share and the market value was $5.13 per share on the date
of exercise.

AGGREGATED OPTION EXERCISES IN FISCAL 1995 AND FISCAL YEAR END OPTION VALUES

<TABLE>
<CAPTION>
VALUE OF UNEXERCISED OPTIONS AT FISCAL YEAR END
---------------------------------------------------
NUMBER VALUE OF UNEXERCISED (1)
OF SECURITIES IN-THE-MONEY OPTIONS
SHARES UNDERLYING UNEXERCISED AT FY-END ($)
ACQUIRED VALUE OPTIONS AT FY-END IN-THE-MONEY
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ----------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Larry G. Gerdes......... 50,000 $159,350 549,333 / 166,666 $2,065,069 / $635,330
Julian L. Cohen......... -- -- 25,000 / 120,000 96,875 / 366,562
David W. Murphy......... -- -- 5,000 / 55,000 19,375 / 170,625
G. Scott Dillon......... -- -- -- / 60,000 -- / 135,000
</TABLE>
- --------

(1) Dollar values calculated by determining the difference between the fair
market value of the underlying securities at December 31, 1995 ($5.75 per
share) and the aggregate exercise price of the options. For a more recent
market price of the underlying securities see "Price Range of Common
Stock."

34
<PAGE>

EMPLOYEE RETIREMENT SAVINGS PLAN

The Company has established a savings and retirement plan that qualifies as
a tax-deferred savings plan under Section 401(k) of the Internal Revenue Code
(the "401(k) Plan") for its salaried, clerical and hourly employees. Under the
401(k) Plan, eligible employees may contribute up to $9,500 of their gross
salary to the 401(k) Plan in 1996. Each participating employee is fully vested
in contributions made by such employee. The Company presently matches 10% of
the amount contributed by an employee up to 6% of the employee's salary, but
the Company's policy regarding matching contributions may be changed annually
in the discretion of the Board of Directors. All amounts contributed under the
401(k) Plan are invested in one or more investment accounts administered by an
independent plan administrator.

EMPLOYEE STOCK PURCHASE PLAN

The Company has adopted a 1990 Employee Stock Purchase Plan, as amended (the
"Stock Purchase Plan"). The purpose of the Stock Purchase Plan is to provide
an incentive for employees of the Company and its subsidiaries to acquire or
increase their proprietary interests in the Company through the purchase of
shares of Common Stock of the Company. The Stock Purchase Plan is administered
by the Board of Directors of the Company, which has the authority to interpret
the Stock Purchase Plan, to prescribe, amend and rescind rules and regulations
relating to it and to establish the terms of each offering of Common Stock
under the Stock Purchase Plan. All employees of the Company are eligible to
participate in the Stock Purchase Plan with certain limited exceptions.

Participants may direct the deduction of a specified percentage, as set by
the Board of Directors, from their eligible compensation to be used to
purchase Common Stock under the Stock Purchase Plan. The terms of the Stock
Purchase Plan provide for two six month offering periods each calendar year in
which eligible employees may elect to participate. At the end of each offering
period, the Company uses the accumulated payroll deductions to purchase Common
Stock for the participant. The price of Common Stock purchased with such
payroll deductions during each offering period shall be the lesser of: (i) 85%
of the mean between the bid and asked prices of the Common Stock at the
beginning of each offering; or (ii) 85% of the mean between the bid and asked
prices of the Common Stock on the last day of such offering period.

The Company will not grant to any participant any right to purchase Common
Stock under the Stock Purchase Plan if the exercise of such right would cause
such participant to own 5% or more of the combined voting power or value of
all classes of the Company's capital stock. In addition, an employee may not
participate if such participation would permit the employee to purchase stock
under all employee stock purchase plans of the Company and its subsidiaries to
accrue at a rate which exceeds $25,000 of the fair market value of the stock
for each calendar year in which an option to purchase stock under the plan is
outstanding at any time.

An aggregate of 225,000 shares of Common Stock have been reserved for
issuance under the Stock Purchase Plan.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In September 1994, the Company loaned the sum of $80,000 to Julian L. Cohen,
the Chief Operating Officer of the Company, which was used by Mr. Cohen to
purchase his residence. The loan to Mr. Cohen was in the form of a promissory
note for the principal sum of $80,000, bearing interest at 7 3/4% per annum,
payable on each January 1, April 1, July 1 and October 1, commencing on
January 1, 1995, with the principal due in one lump sum on September 30, 1999.
As of July 1, 1996, $80,000 remained outstanding under the note. The note is
secured by Mr. Cohen's right to purchase shares of the Company's Common Stock
pursuant to the Company's 1992 Stock Option Plan, as amended, and the shares
of Common Stock underlying such rights.

In August 1995, the Company raised $2 million in cash through a private
placement of 8% Subordinated Convertible Debentures. In connection with this
private placement, the Richard M. Lucas Cancer Foundation, of

35
<PAGE>

which Donald L. Lucas, a director of the Company, is the Chairman, purchased a
Debenture in the principal amount of $250,000. The Debenture is unsecured and
subordinated to all other debt of the Company. The interest rate on the
Debenture is 8%, payable semi-annually, and the principal amount is due in
full on August 15, 2000. As of July 1, 1996, $250,000 remained outstanding
under the Debenture. The Debenture is convertible into Common Stock by the
holder at any time prior to August 15, 2000, at a rate of 286 shares of Common
Stock for each $1,000 in principal amount and is convertible by the Company at
any time when the Common Stock trades at $10.50 per share for 30 consecutive
trading days. The Company may redeem the Debenture at any time upon 30 to 60
days' notice to the holder of the Debenture. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."

See "Business--Compensation Committee Interlocks and Insider Participation"
which describes certain transactions between the Company and Walter S. Huff,
Jr., a director of the Company, and between the Company and Larry G. Gerdes,
an executive officer and director of the Company.

36
<PAGE>

DESCRIPTION OF CAPITAL STOCK

GENERAL

The Company is authorized to issue up to 30,000,000 shares of Common Stock,
$.01 par value per share, and up to 21,000,000 shares of Preferred Stock $.01
par value per share.

COMMON STOCK

Subject to the rights of any holder of Preferred Stock, each holder of
Common Stock is entitled to one vote per share for the election of directors
as well as on other matters, to dividends as and when declared by the
Company's Board of Directors, and upon liquidation to share in the net assets
of the Company pro rata in accordance with his holdings. The Common Stock has
no preemptive, redemption, conversion or subscription rights, and all
outstanding shares of Common Stock are, and the shares of Common Stock offered
by the Company hereby will be, fully paid and nonassessable.

PREFERRED STOCK

The Company is authorized to issue up to 21,000,000 shares of $.01 par value
Preferred Stock, none of which is outstanding. The Board of Directors has the
power, without further action by the stockholders, to divide any and all
shares of Preferred Stock into series and to fix and determine the relative
rights and preferences of the Preferred Stock, such as the designation of
series and the number of shares constituting such series, dividend rights,
redemption and sinking fund provisions, liquidating and dissolution
preferences, conversion or exchange rights and voting rights, if any.
Issuances of Preferred Stock by the Board of Directors may result in such
shares having senior dividend and/or liquidation preferences to the holders of
shares of Common Stock and may dilute the voting rights of such holders.
Issuances of Preferred Stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could,
among other things, adversely affect the voting rights of holders of the
Common Stock. In addition, the issuance of Preferred Stock could make it more
difficult for a third party to acquire a majority of the outstanding voting
stock. Accordingly, the issuance of Preferred Stock may be used as an "anti-
takeover" device without further action on the part of the shareholders of the
Company. No shares of Preferred Stock have been issued and the Company has no
present plans to issue any shares of Preferred Stock.

CERTAIN PROVISIONS OF CERTIFICATE OF INCORPORATION AND BYLAWS

The Company's Bylaws permit it to indemnify a director and officer who was
or is a party to any threatened, pending or completed action, suit or other
type of proceeding, whether civil, criminal, administrative or investigative
(other than an action by or any right of the Company) by reason of the fact
that he or she is or was a director or officer or is or was serving at the
request of the Company as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorney's fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit
or proceeding. These indemnification rights apply if the director or officer
acted in good faith and in a manner in which he or she reasonably believed to
be in or not opposed to the best interest of the Company and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his or
her conduct was unlawful. In addition, under the Bylaws, the Company may
indemnify and hold harmless an officer or director who is a party in an action
by or in the right of the Company against expenses (including attorney's fees)
actually and reasonably incurred in connection with the defense or settlement
of such proceeding. Such indemnification shall be authorized if the director
or officer has acted in good faith and in a manner in which he or she
reasonably believed to be in or not opposed to the best interest of the
Company, except indemnification is not authorized where there is an
adjudication of liability, unless the court in which such proceeding was
brought, or any other Court of Chancery, shall determine, in view of all the
circumstances, that such person is fairly and reasonably entitled to indemnity
for such expenses which such court shall deem proper.

37
<PAGE>

action of the type referred to in the immediately preceding paragraph. Except
with regard to the costs and expenses of successfully defending an action as
may be ordered by a court, indemnification as described in the previous
paragraph is only required to be made to a director or officer if a
determination is made that indemnification is proper under the circumstances.
Such determination shall be made: (i) by the Company's Board by a majority
vote of a quorum consisting of directors who were not parties to such action,
suit or proceeding; (ii) by independent legal counsel if such a quorum is not
obtainable, or, even if obtainable a quorum of disinterested directors so
directs; or (iii) by the affirmative vote of a majority of shares entitled to
vote.

The Bylaws of the Company also permit the Company to purchase and maintain
insurance on behalf of any director or officer of the corporation against any
liability asserted against the director or officer and incurred in such
capacity, whether or not the corporation would have the power to indemnify the
director or officer against such liability. The Bylaws of the Company further
provide that any expenses (including attorney's fees) incurred by any officer
or director in defending a civil or criminal action, suit or proceeding may be
paid by the Company in advance of the final disposition of such action upon
receipt of an undertaking by such director or officer to repay all amounts
advanced if it shall be determined that he or she is not entitled to be
indemnified by the Company.

Subject to certain limitations, the Company's executive officers and
directors are insured against losses arising from claims made against them for
wrongful acts which they may become obligated to pay or for which the Company
may be required to indemnify them.

Limitation of Liability. In addition, the Certificate of Incorporation also
provides that directors of the Company will not be personally liable for
monetary damages to the Company or its shareholders for certain breaches of
their fiduciary duty as directors, unless they violated their duty of loyalty
to the Company or its shareholders, acted in bad faith, knowingly or
intentionally violated the law, authorized illegal dividends or redemptions or
derived an improper personal benefit from their action as directors. This
provision would have no effect on the availability of equitable remedies or
non-monetary relief, such as an injunction or rescission for breach of the
duty of care. In addition, the provision applies only to claims against a
director arising out of his role as a director and not in any other capacity
(such as an officer or employee of the Company). Further, liability of a
director for violations of the federal securities laws will not be limited by
this provision.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Company's Common Stock is First
Interstate Bank of California.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, the Company will have outstanding
21,739,208 shares of Common Stock. Of these shares, a total of 21,361,403
shares, including all of the 3,000,000 shares of Common Stock sold in this
offering, will be freely transferable without restriction or limitation under
the Securities Act. The remaining 377,805 shares are "restricted" shares
within the meaning of Rule 144 adopted under the Securities Act (the
"Restricted Shares"). The Restricted Shares were issued and sold by the
Company in private transactions in reliance upon exemptions from registration
under the Securities Act and may not be sold except in compliance with the
registration requirements of the Securities Act or pursuant to an exemption
from registration, such as the exemption provided by Rule 144 under the
Securities Act.

None of the Restricted Shares are currently eligible for sale in the public
market pursuant to Rule 144. In general, under Rule 144 as currently in
effect, any person (or persons whose shares are aggregated), including an
affiliate of the Company, who has held shares for at least a two-year period
(as computed under Rule 144) is entitled to sell within any three-month period
a number of shares that does not exceed the greater of (i) 1% of the then
outstanding shares of the Company's Common Stock (approximately 187,392
shares) and (ii) the average weekly trading volume in the Company's Common
Stock during the four calendar weeks immediately

38
<PAGE>

preceding the date on which the notice of sale is filed with the Commission.
Sales under Rule 144 are also subject to certain provisions relating to the
manner of sale, the filing of a notice of sale and the availability of current
public information about the Company. A person (or persons whose shares are
aggregated) who is not deemed an affiliate of the Company at any time during
the 90 days immediately preceding a sale and who has held shares for at least
a three-year period (as computed under Rule 144), would be entitled to sell
such shares under Rule 144(k) without regard to the volume limitation and
other conditions described above.

No prediction can be made as to the effect, if any, that market sales or the
availability of such shares of sale will have on the market price of the
Common Stock. Nevertheless, sales of substantial amounts of Common Stock in
the public market may have an adverse impact on such market price.

As of July 8, 1996, outstanding options to purchase 1,278,275 shares of
Common Stock were held by certain officers, directors and employees of the
Company pursuant to the Company's 1992 Stock Option Plan, as amended, and
pursuant to the former Transcend Services, Inc. stock option plan, and an
aggregate of 519,875 shares were available for the grant of future options
under the Company's 1992 Stock Option Plan, as amended. The Company has filed
registration statements to register shares of Common Stock issuable upon the
exercise of stock options under the 1992 Stock Option Plan, as amended, and
under the former Transcend Services, Inc. stock option plan. Shares issued
upon the exercise of stock options will be available for sale in the open
market. In addition, as of May 24, 1996, the Company had 8% Convertible
Debentures outstanding which are convertible into an aggregate of 572,000
shares of Common Stock and one Warrant outstanding to purchase an aggregate of
25,000 shares of Common Stock. Shares issued upon the conversion of the
Debentures and exercise of the Warrant will be eligible for sale in the open
market in accordance with Rule 144 as described above.

The Company, the Company's officers and directors, who beneficially own in
the aggregate 6,257,174 shares of Common Stock (approximately 33.4% of the
outstanding Common Stock), and the holders of shares issued by the Company in
connection with its acquisition of Express and GMT have agreed that, for a
period of 120 days after the date of this Prospectus, they will not, without
the prior written consent of Smith Barney Inc., offer, sell, contract to sell
or otherwise dispose of any Common Stock (or any securities convertible into
or exercisable or exchangeable for shares of Common Stock) (the "Lock-up
Period"). Following the Lock-up Period, those shares will be eligible for sale
in the public market, subject to the conditions and restrictions of Rule 144,
as described above.

REGISTRATION RIGHTS

Holders of 60,000 shares of Common Stock, the Warrant to purchase 25,000
shares of Common Stock and the 8% Convertible Debentures which are convertible
into an aggregate of 572,000 shares of Common Stock have certain rights with
respect to the registration under the Securities Act of shares of Common Stock
owned by them from time to time (the "Registrable Shares"). Each holder of
Registrable Shares has "piggyback" registration rights, subject to certain
limitations, in the event the Company proposes to register the sale of any of
its securities for its own account or for the account of its shareholders. The
Company is obligated to bear all expenses in connection with the registration
of the Registrable Shares, except underwriting commissions and discounts and
fees and disbursements of legal counsel to holders thereof.

In connection with the Company's recent acquisitions of Express and GMT, the
Company issued 230,000 shares of Common Stock to the shareholders of Express
and 87,805 shares of Common Stock to the shareholders of GMT. Subject to
certain restrictions, the Company is required to file a registration statement
under the Securities Act to effect the registration of the 230,000 shares held
by the Express shareholders by November 30, 1996 and the 87,805 shares held by
the GMT shareholders by October 31, 1996. The Express and GMT shareholders,
however, are not permitted to sell such shares prior to the expiration of the
Lock-Up Period. See "--Shares Eligible for Future Sale."

39
<PAGE>

UNDERWRITING

Under the terms and subject to the conditions in the Underwriting Agreement
dated the date hereof, each Underwriter named below has severally agreed to
purchase, and the Company has agreed to sell to such Underwriter, shares of
Common Stock which shall equal the number of shares set forth opposite the
name of such Underwriter below.

<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ----------- ---------
<S> <C>
Smith Barney Inc......................................................
Dain Bosworth Incorporated............................................
---------
Total............................................................... 3,000,000
=========
</TABLE>

The Underwriters are obligated to take and pay for all shares of Common
Stock offered hereby (other than those covered by the over-allotment option
described below) if any such shares are taken.

The Underwriters, for whom Smith Barney Inc. and Dain Bosworth Incorporated
are acting as Representatives, propose initially to offer part of the shares
of the Common Stock directly to the public at the public offering price set
forth on the cover page hereof and part to certain dealers at a price that
represents a concession not in excess of $ per share under the public
offering price. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to other Underwriters or to certain
other dealers. After the initial offering, the public offering price and such
concessions may be changed by the Underwriters.

The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an additional 450,000
shares of Common Stock at the price to the public set forth on the cover page
hereof less underwriting discounts and commissions. The Underwriters may
exercise such option to purchase additional shares solely for the purpose of
covering over-allotments, if any, incurred in connection with the sale of the
shares of Common Stock offered hereby. To the extent such option is exercised,
the Underwriters will be obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number of
shares of Common Stock set forth opposite such Underwriter's name in the
preceding table bears to the total number of shares of Common Stock in such
table.

The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.

The rules of the Commission generally prohibit the Underwriters and other
members of the selling group from making a market in the Common Stock during
the two business days prior to commencement of sales in this offering (the
"Cooling Off Period"). The Commission has, however, adopted Rule 10b-6A, which
provides an exemption from such prohibition for certain passive market making
transactions. Such passive market making transactions must comply with
applicable price and volume limits and must be identified as passive market
making transactions. In general, pursuant to Rule 10b-6A, a passive market
maker must display its bid for a security at a price not in excess of the
highest independent bid for the security. If all independent bids are lowered
below the passive market maker's bid, however, such bid must then be lowered
when certain purchase limits are

40
<PAGE>

exceeded. Further, net purchases by a passive market maker on each day are
generally limited to a specified percentage of the passive market maker's
average daily trading volume in a security during a specified prior period and
must be discontinued when such limit is reached. Pursuant to the exemption
provided by Rule 10b-6A, certain of the Underwriters and selling group members
may engage in passive market making in the Common Stock during the Cooling Off
Period. Passive market making may stabilize the market price of the Common
Stock at a level above that which might otherwise prevail, and if commenced,
may be discontinued at any time.

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Smith, Gambrell & Russell, Atlanta, Georgia, and for the
Underwriters by Dewey Ballantine, New York, New York.

EXPERTS

The consolidated financial statements and schedule of Transcend Services,
Inc. and subsidiaries, included and/or incorporated by reference in this
Prospectus and elsewhere in the Registration Statement to the extent and for
the periods indicated in their reports, have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports thereto,
and are included herein in reliance upon the authority of said firm as experts
in giving said reports.

The financial statements of Medical Transcription of Atlanta, Inc.,
incorporated by reference in this Prospectus and elsewhere in the Registration
Statement to the extent and for the periods indicated in their report, have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report thereto and are included herein in reliance upon the
authority of said firm as experts in giving said reports.

AVAILABLE INFORMATION

The Company is subject to certain informational requirements of the
Securities Exchange Act of 1934 (the "1934 Act") and, in accordance therewith,
files reports and other information with the Securities and Exchange
Commission (the "Commission"). Such reports and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the Commission's regional offices located at 7 World Trade Center, 13th Floor,
New York, New York 10048 and Midwest Regional Office, Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can also be obtained at prescribed rates by writing to the Securities
and Exchange Commission, Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549.

The Company has filed a Registration Statement on Form S-3 (together with
all amendments and exhibits filed or to be filed in connection therewith, the
"Registration Statement") under the Securities Act of 1933, as amended, with
respect to the Common Stock offered hereby. This Prospectus does not contain
all the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. Statements contained herein concerning the provisions of documents
are necessarily summaries of such documents, and each statement is qualified
in its entirety by reference to the copy of the applicable document filed with
the Commission.

41
<PAGE>

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents previously filed with the Commission pursuant to the
1934 Act are hereby incorporated in this Prospectus by reference:

1. The Company's Annual Report on Form 10-K for the year ended December 31,
1995;

2. The Company's Amendment No. 1 on Form 10-K/A dated July , 1996 to its
Annual Report on Form 10-K for the year ended December 31, 1995.

3. The Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1996;

4. The Company's Amendment No. 1 on Form 10-Q/A dated July , 1996 to its
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996.

5. The Company's Current Report on Form 8-K dated May 2, 1995;

6. The Company's Amendment No. 1 on Form 8-K/A dated June 30, 1995 to its
Current Report on Form 8-K dated May 2, 1995;

7. The Company's Amendment No. 2 on Form 8-K/A dated May 30, 1996 to its
Current Report on Form 8-K dated May 2, 1995; and

8. The description of the Company's Common Stock contained in the
Company's Registration Statement on Form 8-A as filed with the
Commission on January 8, 1990.

All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the 1934 Act subsequent to the date of this Prospectus and prior to
the termination of this offering shall be deemed to be incorporated by
reference into this Prospectus and to be a part hereof from the respective
dates of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent
that a statement contained herein or in any other subsequently filed document
which also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified and superseded, to constitute a part of
this Prospectus.

The Company will provide without charge to each person to whom a Prospectus
is delivered, upon written or oral request of such person, a copy of any and
all of the information that has been incorporated by reference in this
Prospectus (excluding exhibits unless such exhibits are specifically
incorporated by reference into such documents). Please direct such requests to
the Secretary of Transcend Services, Inc. at the Company's principal offices
located at 3353 Peachtree Road, N.E., Suite 1000, Atlanta, Georgia 30326,
telephone number (404) 364-8000.

42
<PAGE>

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
TRANSCEND SERVICES, INC.
Report of Arthur Andersen LLP, Independent Public Accountants............ F-2
Consolidated Balance Sheets at December 31, 1995 and 1994 and March 31,
1996 (unaudited)........................................................ F-3
Consolidated Statements of Operations for the years ended December 31,
1995, 1994 and 1993 and for the three months ended March 31, 1996 and
1995 (unaudited)........................................................ F-4
Consolidated Statements of Stockholders' Equity for the years ended De-
cember 31, 1995, 1994 and 1993 for the three months ended March 31, 1996
(unaudited)............................................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1994 and 1993 and for the three months ended March 31, 1996 and
1995 (unaudited)........................................................ F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders of
Transcend Services, Inc.:

We have audited the accompanying consolidated balance sheets of Transcend
Services, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1994 and 1995 and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Transcend Services, Inc.
and subsidiaries as of December 31, 1994 and 1995 and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1995 in conformity with generally accepted accounting
principles.

Arthur Andersen LLP

Atlanta, Georgia
February 13, 1996

F-2
<PAGE>

TRANSCEND SERVICES, INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............. $ 150,000 $ 1,073,000 $ 635,000
Trade accounts receivable, net of al-
lowance for doubtful
accounts of $15,000, $42,000 and
$46,000 respectively................. 700,000 3,056,000 2,815,000
Prepaid expenses...................... 62,000 309,000 721,000
----------- ----------- -----------
Total current assets................ 912,000 4,438,000 4,171,000
NET ASSETS RELATED TO DISCONTINUED OPER-
ATIONS................................. -- 2,893,000 3,015,000
SECURITIES OF AMHEALTH.................. -- 2,050,000 2,050,000
OFFICE FURNITURE AND EQUIPMENT, at cost,
less accumulated depreciation of
$298,000, $1,059,000 and $1,235,000 re-
spectively............................. 558,000 1,681,000 1,816,000
DEPOSITS AND OTHER ASSETS............... 130,000 408,000 381,000
GOODWILL AND OTHER INTANGIBLE ASSETS,
less accumulated amortization of
$381,000, $1,301,000 and $1,446,000
respectively........................... 1,080,000 5,363,000 5,218,000
----------- ----------- -----------
$ 2,680,000 $16,833,000 $16,651,000
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long term debt..... 2,025,000 208,000 108,000
Accounts payable...................... 783,000 1,268,000 1,173,000
Accrued compensation and employee ben-
efits................................ 506,000 1,560,000 1,527,000
Other accrued liabilities............. 578,000 808,000 1,276,000
Current portion of capital lease obli-
gation............................... 21,000 -- --
Deferred income taxes................. -- 133,000 103,000
----------- ----------- -----------
Total current liabilities........... 3,913,000 3,977,000 4,187,000
----------- ----------- -----------
LONG TERM DEBT.......................... -- 392,000 368,000
CONVERTIBLE DEBENTURES:
Held by related parties............... -- 450,000 450,000
Held by others........................ -- 1,550,000 1,550,000
DEFERRED INCOME TAXES................... -- 543,000 540,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value;
21,000,000 shares authorized; none
outstanding.......................... -- -- --
Common stock, $.01 par value,
31,000,000 shares authorized,
9,733,000, 18,113,000 and 18,291,000
shares issued and outstanding as of
December 31, 1994 and 1995 and March
31, 1996 respectively................ 97,000 181,000 183,000
Additional paid in capital............ 1,677,000 16,643,000 16,799,000
Accumulated deficit................... (3,007,000) (6,903,000) (7,426,000)
----------- ----------- -----------
Total shareholders' equity.......... (1,233,000) 9,921,000 9,556,000
----------- ----------- -----------
$ 2,680,000 $16,833,000 $16,651,000
=========== =========== ===========
</TABLE>

The accompanying notes are an integral part of these consolidated balance
sheets.

F-3
<PAGE>

TRANSCEND SERVICES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ ------------------------
1993 1994 1995 1995 1996
---------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET REVENUE............. $6,208,000 $12,393,000 $25,882,000 $ 4,897,000 $ 8,688,000
DIRECT COSTS............ 5,125,000 10,787,000 22,334,000 4,346,000 7,260,000
---------- ----------- ----------- ----------- -----------
Gross profit........... 1,083,000 1,606,000 3,548,000 551,000 1,428,000
MARKETING AND SALES
EXPENSES............... 378,000 929,000 2,186,000 437,000 641,000
GENERAL AND
ADMINISTRATIVE
EXPENSES............... 1,330,000 1,673,000 4,604,000 1,113,000 1,122,000
AMORTIZATION EXPENSE.... 310,000 357,000 633,000 145,000 145,000
---------- ----------- ----------- ----------- -----------
Operating loss......... (935,000) (1,353,000) (3,875,000) (1,144,000) (480,000)
OTHER INCOME
(EXPENSES):
Interest expense....... (135,000) (66,000) (96,000) -- (52,000)
Interest income........ 3,000 1,000 75,000 36,000 9,000
Other.................. 101,000 25,000 -- -- --
---------- ----------- ----------- ----------- -----------
(31,000) (40,000) (21,000) 36,000 (43,000)
---------- ----------- ----------- ----------- -----------
LOSS BEFORE PROVISION
FOR INCOME TAXES....... (966,000) (1,393,000) (3,896,000) (1,108,000) (523,000)
PROVISION FOR INCOME
TAXES.................. -- 13,000 -- -- --
---------- ----------- ----------- ----------- -----------
NET LOSS................ $ (966,000) $(1,406,000) $(3,896,000) $(1,108,000) (523,000)
========== =========== =========== =========== ===========
Loss per common share.. $ (.11) $ (.14) $ (.22) $ (.06) $ (.03)
========== =========== =========== =========== ===========
Weighted average common
shares outstanding..... 8,866,000 9,733,000 17,818,000 17,533,000 18,217,000
========== =========== =========== =========== ===========
</TABLE>

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

F-4
<PAGE>

TRANSCEND SERVICES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN WARRANTS ACCUMULATED SHAREHOLDERS'
STOCK CAPITAL OUTSTANDING DEFICIT EQUITY
-------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31,
1992................... 72,000 840,000 -- (635,000) 277,000
Issuance of 2,103,847
shares of Common stock
in stock offering..... 21,000 714,000 -- -- 735,000
Other issuances of
common stock.......... 1,000 28,000 -- -- 29,000
Purchase of shares of
common stock.......... -- (17,000) -- -- (17,000)
Issuance of warrants... -- -- 104,000 -- 104,000
Net loss............... -- -- -- (966,000) (966,000)
-------- ----------- -------- ----------- -----------
BALANCE, December 31,
1993................... 94,000 1,565,000 104,000 (1,601,000) 162,000
-------- ----------- -------- ----------- -----------
Issuance of 341,546
shares of common stock
from exercise of
warrants.............. 3,000 101,000 (104,000) -- --
Other issuance of
common stock.......... -- 11,000 -- -- 11,000
Net loss............... -- -- -- (1,406,000) (1,406,000)
-------- ----------- -------- ----------- -----------
BALANCE, December 31,
1994................... 97,000 1,677,000 -- (3,007,000) (1,233,000)
-------- ----------- -------- ----------- -----------
Issuance of 7,792,446
shares of Common Stock
with Merger........... 78,000 14,533,000 -- -- 14,611,000
Issuance of 60,000
shares of Common Stock
in acquisition........ 1,000 171,000 -- -- 172,000
Issuance of 527,130
shares from exercise
of options and other
issuances............. 5,000 262,000 -- -- 267,000
Net loss............... -- -- -- (3,896,000) (3,896,000)
-------- ----------- -------- ----------- -----------
BALANCE, December 31,
1995................... $181,000 $16,643,000 $ -- $(6,903,000) $ 9,921,000
-------- ----------- -------- ----------- -----------
Issuance of 178,000
shares from exercise
of options and other
issuances............. 2,000 156,000 -- -- 158,000
Net loss............... -- -- -- (523,000) (523,000)
-------- ----------- -------- ----------- -----------
BALANCE, March 31, 1996
(unaudited)............ $183,000 $16,799,000 $ -- $(7,426,000) $ 9,556,000
======== =========== ======== =========== ===========
</TABLE>

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

F-5
<PAGE>

TRANSCEND SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ ----------------------
1993 1994 1995 1995 1996
---------- ----------- ----------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERAT-
ING ACTIVITIES:
Net loss............... $ (966,000) $(1,406,000) $(3,896,000) $(1,108,000) $(523,000)
Adjustments to
reconcile net loss to
net cash provided by
(used in) operating
activities:
Depreciation and amor-
tization.............. 396,000 530,000 1,134,000 255,000 322,000
Loss on disposal of as-
sets.................. 12,000 -- -- -- --
Loss on forgiveness of
note receivable....... 60,000 -- -- -- --
Gain on sale of soft-
ware division......... (100,000) -- -- -- --
Interest expense....... 104,000 -- -- -- --
Changes in assets and
liabilities, net of
acquisitions:
Receivables............ 166,000 (226,000) (1,412,000) (145,000) 242,000
Prepaid expenses....... 4,000 (51,000) (187,000) (111,000) (412,000)
Deposits and other as-
sets.................. (20,000) (101,000) (351,000) (17,000) 27,000
Accounts payable....... 109,000 539,000 (37,000) (929,000) (95,000)
Accounts compensation
and benefits.......... -- -- -- 359,000 (34,000)
Accrued expenses and
other liabilities..... 619,000 255,000 291,000 (189,000) 467,000
Other.................. 53,000 (119,000) 123,000 (36,000) (30,000)
---------- ----------- ----------- ----------- ---------
Total adjustments...... 1,403,000 827,000 (439,000) (813,000) 487,000
---------- ----------- ----------- ----------- ---------
Net cash provided by
(used in) continuing
operations............ 437,000 (579,000) (4,335,000) (1,921,000) (36,000)
---------- ----------- ----------- ----------- ---------
Net cash provided by
discontinued opera-
tions................. -- -- 202,000 79,000 (122,000)
---------- ----------- ----------- ----------- ---------
Net cash provided by
(used in) operating
activities............ 437,000 (579,000) (4,133,000) (1,842,000) (158,000)
---------- ----------- ----------- ----------- ---------
CASH FLOWS FROM INVEST-
ING ACTIVITIES:
Capital expenditures... (126,000) (440,000) (1,220,000) (472,000) (313,000)
Proceeds from sale of
assets................ 21,000 -- -- -- --
Proceeds from note re-
ceivable.............. 12,000 -- -- -- --
Proceeds from sale of
software division..... 100,000 -- -- -- --
Acquisitions........... (1,050,000) (1,000,000) (1,527,000) (966,000) --
Cash acquired from
acquisitions.......... -- 2,000 7,560,000 7,486,000 --
Disposal and transfer
of property........... -- -- 60,000 -- --
---------- ----------- ----------- ----------- ---------
Net cash used in in-
vesting activities.... (1,043,000) (1,438,000) (4,873,000) (6,048,000) (313,000)
---------- ----------- ----------- ----------- ---------
CASH FLOWS FROM FINANC-
ING ACTIVITIES:
Borrowing from short-
term debt............. 200,000 1,000,000 -- -- --
Borrowing under line of
credit agreement...... 401,000 1,025,000 -- -- --
Principal payments on
long-term debt........ (26,000) -- (60,000) -- (24,000)
Principal payments on
short-term debt....... (200,000) -- -- (1,007,000) (100,000)
Principal payment on
capital lease obliga-
tions................. (25,000) -- -- -- --
Repayments of line of
credit................ (651,000) -- (2,025,000) (1,020,000) --
Purchase of common
stock................. (17,000) -- -- -- --
Proceeds from Convert-
ible Debenture........ -- -- 2,000,000 -- --
Proceeds from stock op-
tions................. -- -- -- -- 157,000
Proceeds from common
stock issuance........ 764,000 11,000 268,000 -- --
---------- ----------- ----------- ----------- ---------
Net cash provided by fi-
nancing activities..... 446,000 2,036,000 183,000 (2,027,000) 33,000
---------- ----------- ----------- ----------- ---------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS............ (160,000) 19,000 (923,000) (2,179,000) (438,000)
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF PERIOD.... 291,000 131,000 150,000 150,000 1,073,000
---------- ----------- ----------- ----------- ---------
CASH AND CASH
EQUIVALENTS AT END OF
PERIOD................. $ 131,000 $ 150,000 $ 1,073,000 $ 2,329,000 $ 635,000
========== =========== =========== =========== =========
</TABLE>

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

F-6
<PAGE>

TRANSCEND SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994 AND 1995

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS

Transcend Services, Inc. (the "Company"), established in 1984, is engaged in
the field of contract outsourcing of the health information management/medical
records and patient access functions of hospitals. The Company offers
operations evaluation, consulting, reimbursement coding, transcription, and
other services generally resident in the medical records department of
hospitals. Currently, it emphasizes three- to five-year contractual
relationships for management of the entire hospital medical records and
patient access departments. The Company's three largest hospital contracts
accounted for approximately 58%, 46% and 25% of sales in 1993, 1994, and 1995,
respectively.

On January 10, 1995, TriCare, Inc., acquired Transcend Services, Inc., a
Georgia corporation by the merger of Transcend into First Western Health
Corporation ("Merger"). On May 31, 1995, Transcend Services, Inc., a
California corporation following its January 10, 1995 merger into TriCare, and
Veritas Healthcare Management, a California corporation owned by TriCare,
merged into the TriCare corporation, whose name was then changed to "Transcend
Services, Inc." Transcend Services, Inc. now operates as a Delaware
corporation. Inasmuch as the Merger is being treated for financial accounting
purposes as the acquisition of TriCare by Transcend, following the Merger, the
historical financial statements of Transcend have become the financial
statements of TriCare and include the businesses of both companies after the
effective date of the merger.

BASIS OF PRESENTATION

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.

CASH AND CASH EQUIVALENTS

The Company considers all highly-liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.

ACCOUNTS RECEIVABLE

An allowance for doubtful accounts has been established to provide for
losses on uncollectible accounts based on management's estimates and
historical collection. Bad debt expense amounted to $30,000, $9,000 and $0 in
1993, 1994 and 1995, respectively.

REVENUE AND COST RECOGNITION

Revenue is recognized monthly as the work is performed.

<TABLE>
<CAPTION>
SERVICE LINE REVENUE RECOGNITION
------------ -------------------
<C> <S>
Contract Management (Outsourcing): Monthly; 1/12th of annual fixed fee
received on the first day of the month
during which services are to be per-
formed.
Transcription: Monthly; revenue recognized on a per
line/per character basis for actual
dictation.
Consulting & Coding: Monthly; revenue recognized for work
incurred on time and material basis.
Case Management: Monthly; revenue recognized as work is
incurred; usually on fixed cost per
hour per case.
</TABLE>

F-7
<PAGE>

TRANSCEND SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995

One-time nonrefundable contract implementation fees have been amortized over
the first three months of a contract to match when the costs are incurred for
implementation. Direct costs are expensed as incurred. Gross margins vary by
contract. Direct costs include contract labor costs related to medical records
processing, transcription, coding costs and case management costs, as well as
purchased services, such as microfilming, record storage, software licenses,
etc.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization are computed using the straight-line method
over the estimated useful lives of the respective assets which range from
three to seven years.

INCOME TAXES

The Company follows Statement of Financial Accounting Standards No 109
("SFAS 109"). Under the asset and liability method of SFAS 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.

DEPOSITS AND OTHER ASSETS

Deposits and other assets includes $360,000 in restricted cash used as
collateral for a letter of credit related to a contract outsourcing agreement
which expires in September, 1996.

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangible assets are currently being amortized over
periods ranging from three to thirty years. The Company periodically evaluates
whether events and circumstances since acquisition have occurred that indicate
that the remaining estimated useful life of goodwill may warrant revision or
that the remaining balance of goodwill may not be recoverable. When factors
(such as a change in law or regulatory environment or forecasts showing
changing long-term profitability) indicate that goodwill should be evaluated
for possible impairment, the Company uses an estimate of the related business
unit's undiscounted net income over the remaining life of the goodwill to
measure whether the goodwill is recoverable.

FAIR VALUE OF DEBT

In accordance with SFAS No. 107, "Disclosures About Fair Value of Financial
Investments", the fair value of short-term debt is estimated to be its
carrying value. The fair value of long-term debt is estimated based on
approximate market interest rates for similar issues. The estimated fair value
of long-term debt at December 31, 1995 was equal to the carrying amount
included in the accompanying balance sheet.

NET LOSS PER COMMON SHARE AND COMMON SHARE EQUIVALENT

Net loss per common share has been computed based on the weighted average
number of the Company's common shares outstanding as of December 31, 1993,
1994, and 1995. The common stock equivalents related to stock options were not
included in the computation due to their antidilutive effect.

F-8
<PAGE>

TRANSCEND SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995

INTERIM FINANCIAL STATEMENTS

The Company has made all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the financial condition of the
Company at March 31, 1996, and the results of operations and cash flows for
the three months ended March 31, 1995 and 1996, as presented in the
accompanying unaudited financial statements.

RESTATEMENT OF PRIOR YEAR BALANCES

Certain prior year balances have been restated to conform with current year
presentation.

2. DISCONTINUED OPERATIONS

Legal Proceedings

On September 17, 1993, TriCare and its healthcare subsidiaries (now part of
Transcend) and the physician-owned medical groups that have contracts with the
healthcare subsidiaries initiated a lawsuit in the Superior Court of the State
of California, County of Los Angeles, against twenty-two insurance carriers
seeking $115 million in compensatory damages claiming abuse of process,
intentional interference with contractual and prospective economic relations
and unfair business practices which led to the discontinuation of the business
of TriCare's healthcare subsidiaries and their contracting associated medical
groups in April 1993 (the "Lawsuit"). Certain of the defendants in the Lawsuit
have filed cross complaints seeking restitution from TriCare, its healthcare
subsidiaries and their associated managed medical groups for funds previously
paid to the medical groups and other damages. The costs associated with the
above claims cannot be ascertained with any certainty but are expected to be
substantial. The Company intends to defer such costs until resolution of the
litigation and has $479,000 of deferred legal fees included in net assets from
discontinued operations at December 31, 1995. There can be no assurance as to
the outcome of this litigation, including potential recovery, if any, of the
Company's claims, or damages if any. Based upon facts and circumstances known
to date, in the opinion of management, final resolution of the cross complaint
will not have a material adverse effect on the Company's financial condition,
results of operations or liquidity.

First Western/Veritas

The net assets of the discontinued operations of Tricare's healthcare
subsidiaries, First Western and Veritas (now part of Transcend), both of which
ceased operations as of April 30, 1993, are shown on the consolidated balance
sheet and the related statement of cash flows as a separate line item. These
net assets were acquired in January 1995. See Note 12.

The net assets related to the discontinued operations at December 31, 1995
were $2,893,000. This amount consisted of $479,000 in deferred legal fees and
$2,414,000 in net accounts receivable. Collection liabilities of First Western
and Veritas have been deducted in determining net accounts receivable.

On October 14, 1995, the Company sold approximately 38% of its discontinued
operations' gross accounts receivable balance to Medical Receivables Finance,
LLC ("MRF"), a Delaware limited liability company for:

. Approximately $932,000 in cash ($882,000 in cash at closing; $50,000
held in escrow)

. An opportunity to share in future cash receipts based on MRF's
collection activity.

As a result, the Company closed its California-based collections operation.
The future costs associated with the collection of the accounts receivable
have been netted with the assets related to discontinued operations.

F-9
<PAGE>

TRANSCEND SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995

The sale agreement with MRF did not result in any gain or loss for the
Company. The Company will continue to re-evaluate the realizability of the net
assets related to its discontinued operations which were not sold. Any such
re-evaluation could result in an adjustment that may potentially be material
to the carrying value of this asset.

In addition to the above, the Company has contracted with MRF for the
servicing and managing of the remaining 62% of the accounts receivable
balance.

Securities of AmHealth

Prior to its acquisition by Transcend, TriCare sold substantially all of the
assets and liabilities of its wholly-owned subsidiary, Occu-Care to AmHealth,
Inc. ("AmHealth") for a purchase price of $4,000,000. The purchase price
included $1,500,000 in cash paid at closing; AmHealth's Series A Note in the
face amount of $1,500,000 bearing interest of 8% per annum commencing December
1, 1994, payable quarterly thereafter, with the principal payable on or prior
to December 1, 1995; and AmHealth's Series B Note in the face amount of
$1,000,000 bearing interest of 8% per annum commencing December 1, 1994,
payable quarterly thereafter, with the principal payable in equal quarterly
installments starting December 1, 1995 and continuing until September 1, 2000.
TriCare did not receive its first interest payment on its $2,500,000 note
receivable from its sale of the assets of Occu-Care, which constituted an
event of default and, therefore, TriCare deferred recognition of the gain from
the transaction in the amount of $450,000. On December 30, 1994, TriCare
entered into negotiations with AmHealth which resulted in an agreement to
exchange its note receivable of $2,500,000 for 2,500,000 shares of $1.00
convertible redeemable preferred stock which pay cumulative dividends at a
rate of 6.5% per annum. In conjunction with the Merger on January 10, 1995,
Transcend recorded these securities at their fair value of $2,050,000 (using a
discounted cash flow approach). Under certain circumstances and at the
Company's option, the preferred stock is convertible into common stock of
AmHealth. The preferred stock is subject to mandatory redemption as follows:
1,500,000 shares (less any shares previously converted) on December 1, 1995,
and the balance in nineteen quarterly installments commencing December 1, 1995
which was consistent with the payment schedule of the original notes. The
redemption on December 1, 1995 did not occur and discussions are underway with
AmHealth to determine a future course of action with regard to the redemption
of these securities.

In December, 1995, AmHealth signed a Letter of Intent with CORE, Inc.
(NASDAQ; CORE) for CORE to purchase substantially all the assets of AmHealth
primarily in exchange for CORE stock. The transaction is expected to close by
May, 1996. If the above transaction occurs, Transcend would likely settle
AmHealth's $2.5 million obligation to Transcend in exchange for CORE stock.
However, there can be no assurances that these transactions will take place.
The amount the Company will ultimately realize could differ materially from
the carrying value of the investments as reflected in the financial statements
due to changes in the financial condition of the purchaser and/or the ultimate
valuation of its obligation to Transcend in any purchase of AmHealth by Core,
Inc. or any other third party.

Unaudited Subsequent Event

On May 10, 1996, AmHealth executed a definitive agreement with CORE, Inc., a
public company, pursuant to which CORE would purchase for cash substantially
all the assets of AmHealth in a transaction expected to close by July 1996. In
anticipation of the consummation of the foregoing transaction, on June 17,
1996, AmHealth and the Company executed a definitive settlement agreement
pursuant to which AmHealth has agreed to pay the Company the sum of $2,050,000
(the current carrying value of the asset) plus $5,287 in attorneys' fees in
full satisfaction of AmHealth's obligations to the Company arising out of the
sale of all of the assets and liabilities of Occu-Care, Inc. Under the terms
of the settlement agreement, the Company agreed to extend the maturity of the
note through July 31, 1996 and to accept payment under the note simultaneously
with the closing of the acquisition of AmHealth by CORE. The Company dismissed
its lawsuit against AmHealth without prejudice on June 26, 1996. The
consummation of the settlement will not represent a gain or loss to the
Company. There can be no assurance that the CORE/AmHealth transaction will
close and there can be no assurance that the Company will be paid should the
CORE/AmHealth transaction fail to close.

F-10
<PAGE>

TRANSCEND SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995

3. OFFICE FURNITURE AND EQUIPMENT

The summary of office furniture and equipment at December 31, 1994 and 1995
is as follows:

<TABLE>
<CAPTION>
1994 1995
--------- -----------
<S> <C> <C>
Office furniture and equipment....................... $ 856,000 $ 2,740,000
Less accumulated depreciation........................ (298,000) (1,059,000)
--------- -----------
$ 558,000 $ 1,681,000
========= ===========
</TABLE>

4. INDEBTEDNESS

Long-term debt is summarized as follows at December 31, 1994 and 1995;

<TABLE>
<CAPTION>
1994 1995
---------- --------
<S> <C> <C>
$1,200,000 revolving line of credit, interest computed
at prime; repaid in 1995............................... $1,025,000 --
Promissory note, interest computed at prime; repaid in
1995................................................... 1,000,000 --
Note payable, interest computed at 8.5%; Note matures on
January 1, 1996........................................ -- 100,000
Note payable, interest computed at 8.5% monthly payments
of principal and interest at $11,284 beginning May 19,
1995; Note matures on May 19, 2000..................... -- 490,000
Other Notes payable..................................... -- 10,000
---------- --------
-- 600,000
Less: Current Portion of Long-Term Debt................. 2,025,000 208,000
---------- --------
$ -- $392,000
========== ========
</TABLE>

The revolving line of credit expired in January, 1995 and was not renewed.
The outstanding balance of both credit facilities at the time of the merger of
TriCare and Transcend was $2,200,000 and was paid off with cash received in
the Merger (Note 1).

The Company expended $1,232,000 in cash to acquire the medical transcription
businesses of IDS and MTA in 1995 and, as a result, the Company issued $2.0
million in Subordinated Convertible Debt, which took place on August 15, 1995.
Key terms of the debt are:

<TABLE>
<S> <C>
Interest Rate: 8%
Interest Paid: Semi-annually
Term: Five (5) Years, due in full at
maturity if not converted
Secured Status: Unsecured and subordinated to all
other indebtedness
Convertible Fea-
tures:
</TABLE>

. Convertible for five (5) years at $3.50 per share of Transcend's common
stock as recorded on August 15, 1995, the "Closing Price".

. Convertible by the Company if Transcend's common stock trades at three
(3) times the Closing Price for 30 consecutive trading days.

Unaudited Subsequent Event

On April 30, 1996, the Company established two separate credit facilities
with Silicon Valley East (Wellesley, Massachusetts), a division of Silicon
Valley Bank, a California-chartered bank (Santa Clara, CA). The aggregate
credit available to the Company (under both facilities) is $5.75 million. The
banking facilities are secured by all of the Company's assets. One of the
facilities is a $5.0 million working capital credit line subject to an initial
cap of $3.0 million. The cap is removed subject to the Company's compliance
with several covenants

F-11
<PAGE>

TRANSCEND SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
going forward. The second facility is a $750,000 term facility set up to help
the Company meet its capital investment requirements in the near term. This
term note is subject to an initial cap of $250,000, with the cap being removed
upon the Company's compliance with specific covenants. Both facilities will
mature on April 30, 1997.

5. SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid for interest was $31,000, $36,000 and $56,000 for 1993, 1994 and
1995, respectively.

6. LEASE COMMITMENTS AND CONTINGENCIES

Lease Commitments

The Company has entered into operating leases for certain office facilities.
At December 31, 1994, the minimum rental payments due under noncancelable
operating lease agreements are as follows:

<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31
- -----------
<S> <C>
1996................................................................ $ 517,000
1997................................................................ 471,000
1998................................................................ 325,000
1999................................................................ 271,000
2000................................................................ 178,000
Thereafter.......................................................... --
----------
$1,762,000
==========
</TABLE>

Rental expense for the operating leases amounted to approximately $97,000,
$150,000 and $443,000 for 1993, 1994 and 1995, respectively.

Litigation

On June 22, 1995, an action was filed by Timothy S. Priest in his capacity
as administrator of the estate of Robert V. Taylor against Carol Brown, Debbie
Ostwald, Sullivan Health & Rehabilitation Management, Inc. ("Sullivan") and
Fireman's Fund Insurance Company, in the Circuit Court of Franklin County,
Tennessee, alleging breach of the duty to provide reasonably competent nursing
care to an injured individual (now deceased). The Company's subsidiary,
Sullivan, and a former employee of Sullivan are defendants in the case. The
Plaintiff demands compensatory damages in the amount of $1 million and
punitive damages in the amount of $2 million, plus costs. Management of the
Company believes that Sullivan has meritorious defenses to the allegations and
intends to vigorously contest liability in this matter. At the present time,
management of the Company cannot predict the outcome of this litigation, but
does not believe that the resolution of the litigation will have a material
adverse effect on the Company's financial condition or results of operations.

See Note 2 for additional litigation discussion.

7. RETIREMENT PLAN

The Company sponsors a 401(k) retirement plan that covers substantially all
employees after satisfying certain requirements as to length of service.
Employees are eligible to contribute amounts to the plan subject to certain
minimum and maximum limitations. The Company matches employee contributions on
a discretionary basis as determined by the Company's board of directors. In
1993 and 1994, the Company matched employee contributions at a rate of 10% of
employee contributions up to 6% of salary. For 1993, 1994 and 1995, the
expense was approximately $6,000, $17,000 and $0 respectively.

F-12
<PAGE>

TRANSCEND SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995

8. TRANSACTIONS WITH RELATED PARTIES

Approximately 23% of the subordinated debt (Note 4) is held by parties
related to certain members of the board of directors.

During 1993, the Company paid $91,000 in management fees to a shareholder.

During 1993, the Company issued warrants to purchase 146,000 shares to the
controlling shareholders in consideration of such shareholders' personal
guarantee of the loan to purchase dataLogix (Note 12). The warrants are
exercisable at $.01 per warrant and were exercised during 1994. The difference
between fair value and exercise price of these warrants of $104,000 was
expensed in 1993.

9. SHAREHOLDERS' EQUITY

The historical shareholders' equity of Transcend prior to the merger has
been retroactively restated for the equivalent number of shares received in
the Merger (2.34 to 1). Earnings per share for the periods prior to the Merger
are restated to reflect the number of equivalent shares received.

In 1995, the Company increased the authorized common stock to 30,000,000
shares. The Company has authorized 21,000,000 shares of preferred stock, $.01
par value.

10. STOCK OPTIONS AND WARRANTS

The Company has established a stock option plan for the employees of the
Company. The plan authorizes the grant of "incentive stock options" and
"nonstatutory options." Under this plan, options are granted for the Company's
common stock at the approximate fair value, as defined in the option
agreement. The following is a summary of transactions:

<TABLE>
<CAPTION>
OPTIONS PRICE RANGE
--------- --------------
<S> <C> <C>
OPTIONS OUTSTANDING, December 31, 1992............ 1,083,000 $ .07 to $ .10
Options granted during the year.................. 294,000 $ .07 to $ .30
Options canceled during the year................. (589,000) $ .09
Options exercised during the year................ (64,000) $ .09
---------
OPTIONS OUTSTANDING, December 31, 1993............ 724,000 $ .07 to $ .30
Options canceled during the year................. (31,000) $ .07
Options exercised during the year................ (10,000) $ .07
---------
OPTIONS OUTSTANDING, December 31, 1994............ 683,000 $ .07 to $ .30
Options issued in Merger (Note 1)................ 1,158,000 $1.87 to $3.75
Options issued, other............................ 331,000 $1.87 to $5.62
Options canceled during the year................. (161,000) $.068 to $3.13
Options exercised during the year................ (511,000) $.068 to $3.13
---------
Options Outstanding, December 31, 1995........... 1,500,000
=========
Options eligible for exercise at December 31,
1995............................................ 576,000 $ .07 to $3.75
=========
</TABLE>

The directors who were not employees of the Company were granted non-
qualified stock options to purchase shares of the Company's common stock prior
to May 31, 1991. These options, which expire ten years

F-13
<PAGE>

TRANSCEND SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
from the date of grant, were granted at prices between $2.00 and $5.17 per
share, the fair market value on the date of grant, and are all exercisable.
During the twelve (12) months ended December 31, 1995, no options were
exercised and options to purchase 7,500 shares are still outstanding.

At December 31, 1995 there were a total of 159,000 shares of common stock
reserved for this plan.

11. INCOME TAXES

The components of the net deferred tax (liability) asset as of December 31,
1994 and 1995 were as follows:

<TABLE>
<CAPTION>
1994 1995
--------- -----------
<S> <C> <C>
Deferred tax liabilities:
Office furniture and equipment..................... $ -- $ (44,000)
Goodwill and other intangibles..................... -- (290,000)
Discontinued Operations............................ -- (1,128,000)
-----------
(1,462,000)
-----------
Deferred tax assets:
Tax net operating loss............................. 454,000 3,122,000
Cash-basis deferral................................ 453,000 330,000
Accrued Liabilities................................ -- 331,000
Other.............................................. 27,000 186,000
Valuation allowance................................ (934,000) (1,831,000)
--------- -----------
$ -- $ (676,000)
========= ===========
</TABLE>

At December 31, 1995, the Company had net operating loss carryforwards of
approximately $8,001,000 which can be used to reduce future income taxes. If
not utilized these carryforwards will expire in 2007. The tax benefit differed
from the amount computed using the statutory Federal income tax rate due
primarily to the increase in the valuation allowance for the past three years.
The Company has established a valuation allowance of $934,000 and $1,831,000
at December 31, 1994 and 1995, respectively due to the uncertainty regarding
the realizability of certain deferred tax assets, including its net operating
loss carryforward.

12. ACQUISITIONS

On April 29, 1993, the Company acquired dataLogix, a supplier of medical
record transcription services, for $1,100,000. The Company accounted for the
acquisition under the purchase method of accounting. The results of operations
for dataLogix are included in the statement of loss of the Company beginning
on the date of acquisition. The fair value of tangible assets acquired and
liabilities assumed was $315,000 and $37,000, respectively. The majority of
the excess purchase price over net tangible assets relate to non-compete
agreements and customer contracts which are being amortized over three years,
using an accelerated method of amortization.

On September 30, 1994, the Company acquired the assets of Script-Ease, Inc.,
a Pittsburgh-based medical transcription business for $1,000,000. The Company
accounted for the acquisition under the purchase method of accounting. The
results of operations for Script-Ease are included in the statement of loss of
the Company beginning on the date of the acquisition. The fair value of
tangible assets acquired and liabilities assumed was $259,000 and $161,000,
respectively. The majority of the excess purchase price over net tangible
assets related to customer lists, which is being amortized over seven years
and a non-compete agreement that is being amortized over a three year period.
The balance of the additional intangibles is goodwill which is being amortized
over thirty years.

F-14
<PAGE>

TRANSCEND SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
DECEMBER 31, 1993, 1994 AND 1995

On January 10, 1995, Transcend acquired TriCare, Inc. in a merger accounted
for as a reverse merger (Note 1). The acquisition was treated as a purchase.
There were approximately 7.7 million shares issued in the transaction
resulting in goodwill of approximately $3.2 million. This goodwill is being
amortized over twenty years. On June 15, 1994, TriCare had completed the
acquisition of Sullivan for an adjusted purchase price of $3,285,000.
Subsequent to the Merger, the Company issued a final payment of $285,000 in
lieu of the $1,260,000 obligation which was payable in stock in January 1995
and July 1995, to the former owners of Sullivan Health and Rehabilitation in
full satisfaction of its long-term obligation related to the acquisition of
Sullivan and gave the former owners a release from any and all further
liabilities in connection therewith.

On January 31, 1995, the Company acquired the assets of International
Dictating Services ("IDS"), a Boston based medical transcription business for
approximately $832,000, which consisted of approximately $682,000 paid in cash
at closing with the balance payable to the sellers over the next two years.
The Company accounted for the acquisition under the purchase method of
accounting. The results of operations for IDS are included in the statement of
loss of the Company beginning on the date of acquisition. The fair value of
tangible assets acquired and liabilities assumed was $245,000 and $86,000,
respectively. The intangible related to customer lists is being amortized over
seven years and a non-compete agreement is being amortized over a two year
period. The balance of the additional intangible asset is goodwill which is
being amortized over twenty years.

On April 19, 1995, the Company acquired the assets of Medical Transcription
of Atlanta, Inc. ("MTA") for $1,372,000, consisting of $550,000 paid in cash
at closing, promissory notes of $650,000, and 60,000 shares of Transcend
common stock valued at $172,000 at the time of the acquisition. The Company
accounted for the acquisition under the purchase method of accounting. The
results of operations for MTA are included in the statement of loss of the
Company beginning on the date of acquisition. The fair value of tangible
assets acquired and liabilities assumed was $363,000 and $27,000,
respectively. The intangible related to customer lists is being amortized over
seven years and a non-compete agreement is being amortized over a three-year
period. The balance of the additional intangible is goodwill which is being
amortized over twenty years.

The following pro-forma amounts presented below represent the results of
operations (excluding discontinued operations) of the Company adjusted to
include TriCare; Script-Ease, Inc.; MTA and IDS as if these transactions had
been consummated at the beginning of each period presented.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1994 1995
----------- -----------
(UNAUDITED)
<S> <C> <C>
Sales............................................. $20,705,000 $26,508,000
Net Income (Loss)................................. $(2,321,000) $(3,918,000)
Net Loss per common Share......................... $ (0.13) $ (0.22)
Weighted Average Shares Outstanding............... 17,743,000 17,836,000
</TABLE>

F-15
<PAGE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

NO DEALER, REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY THE
UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE
DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO
ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.

----------------

TABLE OF CONTENTS

----------------

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 5
The Company............................................................... 9
Use of Proceeds........................................................... 9
Price Range of Common Stock............................................... 10
Dilution.................................................................. 11
Dividend Policy........................................................... 11
Capitalization............................................................ 12
Selected Consolidated Financial Data...................................... 13
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 14
Business.................................................................. 20
Management................................................................ 30
Certain Relationships and Related Transactions............................ 35
Description of Capital Stock.............................................. 37
Shares Eligible For Future Sale........................................... 38
Underwriting.............................................................. 40
Legal Matters............................................................. 41
Experts................................................................... 41
Available Information..................................................... 41
Incorporation of Certain Documents by Reference........................... 42
Index to Consolidated Financial Statements................................ F-1
</TABLE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

3,000,000 Shares

LOGO

Common Stock

--------

PROSPECTUS

, 1996

--------

Smith Barney Inc.

Dain Bosworth
Incorporated

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The estimated expenses of issuance and distribution of the Common Stock,
other than underwriting discounts, are as follows:

<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee................ 12,417
National Association of Securities Dealers, Inc. Filing Fee........ 4,101
Legal Fees and Expenses............................................ 100,000
Accounting Fees and Expenses....................................... 40,000
Printing and Engraving............................................. 35,000
Blue Sky Fees and Expenses......................................... 20,000
Miscellaneous...................................................... 13,482
--------
TOTAL............................................................ $225,000
========
</TABLE>

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Company's Bylaws provide that indemnification of the costs and expenses
of defending any action is required to be made to any officer or director who
is successful (on the merits or otherwise) in defending an action of the type
referred to in the immediately preceding paragraph. Except with regard to the
costs and expenses of successfully defending an action as may be ordered by a
court, indemnification as described in the previous paragraph is only required
to be made to a director or officer if a determination is made that
indemnification is proper under the circumstances. Such determination shall be
made: (i) by the Company's Board by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or proceeding; (ii) by
independent legal counsel if such a quorum is not obtainable, or, even if
obtainable a quorum of disinterested directors so directs; or (iii) by the
affirmative vote of a majority of shares entitled to vote.

II-1
<PAGE>

by any officer or director in defending a civil or criminal action, suit or
proceeding may be paid by the Company in advance of the final disposition of
such action upon receipt of an undertaking by such director or officer to
repay all amounts advanced if it shall be determined that he or she is not
entitled to be indemnified by the Company.

The indemnification provisions contained in the Company's Bylaws are
substantially co-extensive with the provisions of Section 145 of the Delaware
General Corporation Law, which sets forth the applicable terms, conditions and
limitations governing the indemnification of officers, directors and other
persons.

Limitation of Liability. In addition, the Certificate of Incorporation
provides that directors of the Company will not be personally liable for
monetary damages to the Company or its shareholders for certain breaches of
their fiduciary duty as directors, unless they violated their duty of loyalty
to the Company or its shareholders, acted in bad faith, knowingly or
intentionally violated the law, authorized illegal dividends or redemptions or
derived an improper personal benefit from their action as directors. This
provision would have no effect on the availability of equitable remedies or
non-monetary relief, such as an injunction or rescission for breach of the
duty of care. In addition, the provision applies only to claims against a
director arising out of his role as a director and not in any other capacity
(such as an officer or employee of the Company). Further, liability of a
director for violations of the federal securities laws will not be limited by
this provision.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1* Form of Underwriting Agreement.
4* Specimen of Common Stock Certificate.
4.1 Subordinated Convertible Debenture Purchase Agreement, filed as
Exhibit 4 to the Registrant's Form 10-Q for the quarter ended
September 30, 1995, which exhibit is incorporated herein by reference.
5* Opinion of Smith, Gambrell & Russell.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Smith, Gambrell & Russell (contained in their opinion filed
as Exhibit 5).
24.1* Powers of Attorney.
</TABLE>
- --------

*Previously filed.

ITEM 17. UNDERTAKINGS

(1) The undersigned registrant hereby undertakes that, for purposes of
determining liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Act of 1934 (and, where applicable, each filing of an employee
benefit plan's annual report pursuant to Section 15(d) of the Securities
Exchange Act of 1934) that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to the
securities offering therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.

(2) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that, in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling

II-2
<PAGE>

precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.

(3) The undersigned registrant hereby undertakes that:

(a) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.

(b) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-3
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUND TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS PRE-EFFECTIVE
AMENDMENT NO. 2 TO ITS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY
THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF ATLANTA, STATE OF
GEORGIA, ON THIS 11TH DAY OF JULY, 1996.

Transcend Services, Inc.

/s/ Larry G. Gerdes
By: _________________________________
LARRY G. GERDES
PRESIDENT AND CHIEF EXECUTIVE
OFFICER

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.

SIGNATURES TITLE DATE

* Chairman of the
- ------------------------------------- Board of Directors July 11, 1996
DONALD L. LUCAS

/s/ Larry G. Gerdes President, Chief
- ------------------------------------- Executive Officer July 11, 1996
LARRY G. GERDES and Director
(Principal
Executive Officer)

/s/ David W. Murphy Chief Financial
- ------------------------------------- Officer, Secretary July 11, 1996
DAVID W. MURPHY and Treasurer
(Principal
Financial and
Accounting Officer)

* Director
- ------------------------------------- July 11, 1996
GEORGE B. CALDWELL

* Director
- ------------------------------------- July 11, 1996
WALTER S. HUFF, JR.

* Director
- ------------------------------------- July 11, 1996
CHARLES E. THOELE

/s/ Larry G. Gerdes
*By: ________________________________
LARRY G. GERDES, AS ATTORNEY-IN-FACT

II-4
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
S-K REFERENCE
NUMBER DESCRIPTION PAGE
------------- ----------- ----
<C> <S> <C>
23.1 Consent of Arthur Andersen LLP.
</TABLE>

<PAGE>

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our
reports and to all references to our firm included in or made a part of this
registration statement.

Arthur Andersen LLP

Atlanta, Georgia

July 10, 1996