The following discussion and analysis presents our consolidated financial condition at June 30, 2009 and the results of operations for the three and six months ended June 30, 2009 and 2008. You should read the following discussion together with our consolidated financial statements and the related notes contained elsewhere in this quarterly report. In addition to the historical information provided below, we have made certain estimates and forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated or implied by these estimates and forward-looking statements as a result of certain factors, including those discussed in the CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS on page 23 of this quarterly report.

Overview

We consider our core business to be the ownership and operation of ambulatory surgery centers (ASCs). As of June 30, 2009, we owned and operated 37 ASCs, of which 35 were jointly owned with physician-partners. We also own a 25% equity interest in an ASC that we plan to divest. We also own other businesses including an optical laboratory, an optical products purchasing organization, and marketing products and services businesses. In addition, we provide management services to two eye care practices.

Year-to-Date Financial Highlights:

† Consolidated net revenue increased 12.9% to $77.9 million. Surgical facilities net revenue increased 14.9% to $64.9 million (same-facility surgical net revenue decreased 2.8% to $54.9 million).

† Operating income increased 11.2% to $19.4 million.

† Income from continuing operations attributable to NovaMed, Inc. increased 14.0% to $3.9 million.

† Cash flow from operations of $12.1 million.

Results of Operations



The following table summarizes our operating results as a percentage of net
revenue:



                                          Three months ended        Six months ended
                                               June 30,                 June 30,
                                          2009         2008         2009        2008
Net Revenue:
Surgical facilities                          83.5 %       82.6 %      83.4 %      81.9 %
Product sales and other                      16.5         17.4        16.6        18.1
Total net revenue                           100.0        100.0       100.0       100.0

Operating expenses:
Salaries, wages and benefits                 29.9         30.5        30.6        30.4
Cost of sales and medical supplies           22.5         23.3        22.4        23.4
Selling, general and administrative          18.3         17.2        18.2        17.9
Depreciation and amortization                 3.8          2.9         3.8         3.0
Total operating expenses                     74.5         73.9        75.0        74.7

Operating income                             25.5         26.1        25.0        25.3

Interest expense (income), net                5.2          5.7         5.5         5.7
Other (income) expense, net                     -            -           -           -
Income before income taxes                   20.3         20.4        19.5        19.6
Income tax provision                          3.4          3.3         3.2         3.1
Income from continuing operations            16.9         17.1        16.3        16.5
Income from discontinued operations             -         (0.1 )         -           -
Net income                                   16.9         17.0        16.3        16.5

Net income attributable to
noncontrolling interests                     11.5         12.0        11.4        11.6

Net income attributable to
NovaMed, Inc.                                 5.4 %        5.0 %       4.9 %       4.9 %

Three Months Ended June 30, 2009 Compared to the Three Months Ended June 30, 2008

Net Revenue

Consolidated. Total net revenue increased 12.5% from $35.2 million to $39.6 million. Net revenue by segment is discussed below.

Surgical Facilities. The table below summarizes surgical facilities net revenue and procedures performed for the second quarter of 2009 and 2008. Revenues generated from surgical facilities are derived from the fees charged for the procedures performed in our ASCs and through our laser services agreements. Our procedure volume is directly impacted by the number of ASCs we operate, the number of excimer lasers in service, and their respective utilization rates. Net surgical facilities revenue increased 13.6% from $29.1 million to $33.0 million. This increase was primarily the result of $5.1 million of net revenue from ASCs acquired or developed after April 1, 2008 ("new ASCs") offset by a $1.1 million, or 3.8%, decrease from ASCs that we owned for the entire comparable reporting periods ("same-facility"). The decrease in same-facility net revenue was primarily the result of a 4.9% decrease in the number of same-facility procedures performed offset by a 1.1% increase in the net revenue per procedure due to a change in procedure and payor mix.

                         Three Months Ended
                              June 30,            Increase
Dollars in thousands      2009         2008      (Decrease)

Surgical Facilities:
Same-facility:
Net revenue            $    27,956   $ 29,072   $     (1,116 )
# of procedures             32,522     34,200         (1,678 )

New ASCs:
Net revenue            $     5,068   $      -   $      5,068
# of procedures              8,089          -          8,089

Product Sales and Other. The table below summarizes net product sales and other revenue by significant business component. Product sales and other revenue for the second quarter of 2009 increased 7.2% from $6.1 million to $6.5 million. Net revenue at our optical products and services business decreased by $0.1 million due to a decrease in existing customer orders. Net revenue from our marketing products and services businesses increased by $0.5 million primarily due the acquisition of a call center and marketing solutions business during the third quarter of 2008 partially offset by a reduction in sales of marketing products to medical device manufacturers. Net revenue at our optical laboratory business decreased by $0.2 million due to a decrease in existing customer orders. Net revenue at our ophthalmology practice increased by $0.3 million due to an increase in the number of patient visits.

                                                 Three Months Ended June 30,          Increase
Dollars in thousands                              2009                2008           (Decrease)

Product Sales:
Optical laboratories                         $         1,349     $         1,551    $        (202 )
Optical products purchasing organization               1,353               1,519             (166 )
Marketing products and services                        1,258                 756              502
Optometric practice/retail store                         440                 481              (41 )
                                                       4,400               4,307               93
Other:
Ophthalmology practice                                 2,148               1,801              347

Total Net Product Sales and Other Revenue    $         6,548     $         6,108    $         440

Salaries, Wages and Benefits

Consolidated. Salaries, wages and benefits expense increased 10.3% from $10.7 million to $11.8 million. As a percentage of net revenue, salaries, wages and benefits expense decreased from 30.5% to 29.9%. Salaries, wages and benefits expense by segment is discussed below.

Surgical Facilities. Salaries, wages and benefits expense in our surgical facilities segment increased 18.3% from $6.0 million to $7.1 million. The increase was primarily the result of staff costs associated with new ASCs and a shift of some personnel from our Corporate segment to our Surgical Facilities segment.

Product Sales and Other. Salaries, wages and benefits expense in our product sales and other segments increased 26.7% from $2.1 million to $2.7 million primarily due to our acquisition of a call center and marketing solutions business during the third quarter of 2008.

Corporate. Salaries, wages and benefits expense decreased 22.0% from $2.6 million to $2.0 million. The decrease was primarily due to a shift of some personnel from our Corporate segment to our Surgical Facilities segment and lower health benefit costs.

Cost of Sales and Medical Supplies

Consolidated. Cost of sales and medical supplies expense increased 8.7% from $8.2 million to $8.9 million. As a percentage of net revenue, cost of sales and medical supplies expense decreased from 23.3% to 22.5%. Cost of sales and medical supplies expense by segment is discussed below.

Surgical Facilities. Cost of sales and medical supplies expense in our surgical facilities segment increased 10.4% from $6.8 million to $7.5 million. As a percentage of net revenue, cost of sales and medical supplies expense decreased from 23.3% to 22.6%. The expense increase was primarily the result of costs associated with our new ASCs.

Product Sales and Other. Cost of sales and medical supplies expense in our product sales and other segments remained flat at $1.4 million.

Selling, General and Administrative

Consolidated. Selling, general and administrative expense increased 19.7% from $6.0 million to $7.2 million. As a percentage of net revenue, selling, general and administrative expense increased from 17.2% to 18.3%. Selling, general and administrative expense by segment is discussed below.

Surgical Facilities. Selling, general and administrative expense in our surgical facilities segment increased 18.0% from $5.4 million to $6.4 million. The increase is due to costs associated with our new ASCs and an increase of $0.3 million in management and billing/collections fees charged to the ASCs for services rendered by our corporate personnel.

Product Sales and Other. Selling, general and administrative expense in our product sales and other segments increased 32.2% from $1.0 million to $1.3 million primarily due to our acquisition of a call center and marketing solutions business during the third quarter of 2008.

Corporate. Corporate selling, general and administrative expense decreased by $0.1 million due to an increase in management and billing/collections fees charged to the operating segments for services rendered by certain corporate personnel.

Depreciation and Amortization. Depreciation and amortization expense increased 46.2% from $1.0 million to $1.5 million due to increases in depreciation associated with our new ASCs and amortization of intangible assets acquired in conjunction with our acquisition of a call center and marketing solutions business during the third quarter of 2008.

Interest (Income) Expense, net. Interest (income) expense, net increased by $0.1 million due to increased borrowings under our revolving credit facility and our adoption of FASB Staff Position No. APB 14-1 ("FSP APB 14-1"), Accounting for Convertible Debt Instruments that May be settled in Cash Upon Conversion, on January 1, 2009. FSP APB 14-1 requires that the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) be separately accounted for in a manner that reflects an issuer's nonconvertible debt

borrowing rate. The resulting debt discount is amortized over the period the convertible debt is expected to be outstanding as additional non-cash interest expense. As a result of the adoption of FSP APB 14-1, we recorded additional non-cash interest expense during the second quarter of 2009 and 2008 of $1.0 million.

Provision for Income Taxes. Our effective tax rate was unchanged at 39.0%. Our effective tax rate is affected by expenses that are deducted from operations in arriving at pre-tax income that are not allowed as a deduction on our federal income tax return.

Net Income Attributable to Noncontrolling Interests. Noncontrolling interests in the earnings of our ASCs were $4.5 million in the second quarter of 2009 as compared to $4.2 million in 2008. All of this increase is attributable to new ASCs.

Six Months Ended June 30, 2009 Compared to the Six Months Ended June 30, 2008

Net Revenue

Consolidated. Total net revenue increased 12.9% from $69.0 million to $77.9 million. Net revenue by segment is discussed below.

Surgical Facilities. The table below summarizes surgical facilities net revenue and procedures performed for the first six months of 2009 and 2008. Net surgical facilities revenue increased 14.9% from $56.5 million to $64.9 million. This increase was primarily the result of $10.0 million of net revenue from ASCs acquired or developed after January 1, 2008 ("new ASCs") offset by a $1.6 million, or 2.8%, decrease from ASCs that we owned for the entire comparable reporting periods ("same-facility"). The decrease in same-facility net revenue was primarily the result of a 5.2% decrease in the number of same-facility procedures performed offset by a 2.5% increase in the net revenue per procedure due to a change in procedure and payor mix.

                         Six Months Ended
                             June 30,           Increase
Dollars in thousands     2009        2008      (Decrease)

Surgical Facilities:
Same-facility:
Net revenue            $  54,922   $ 56,487   $     (1,565 )
# of procedures           63,549     67,035         (3,486 )

New ASCs:
Net revenue            $   9,993   $      -   $      9,993
# of procedures           16,006          -         16,006

Product Sales and Other. The table below summarizes net product sales and other revenue by significant business component. Product sales and other revenue for the first six months of 2009 increased 3.6% from $12.5 million to $12.9 million compared to the first six months of 2008. Net revenue at our optical products and services business decreased by $0.3 million due to a decrease in existing customer orders. Net revenue from our marketing products and services businesses increased by $0.7 million primarily due to the acquisition of a call center and marketing solutions business during the third quarter of 2008 partially offset by a reduction in sales of marketing products to medical device manufacturers. Net revenue at our optical laboratory business decreased by $0.4 million due to a decrease in existing customer orders. Net revenue at our ophthalmology practice increased by $0.5 million due to an increase in the number of patient visits.

                                                 Six Months Ended June 30,         Increase
Dollars in thousands                               2009             2008          (Decrease)

Product Sales:
Optical laboratories                           $       2,716    $       3,155    $       (439 )
Optical products purchasing organization               2,742            3,037            (295 )
Marketing products and services                        2,408            1,684             724
Optometric practice/retail store                         928              993             (65 )
                                                       8,794            8,869             (75 )
Other:
Ophthalmology practice                                 4,157            3,637             520

Total Net Product Sales and Other Revenue      $      12,951    $      12,506    $        445

Salaries, Wages and Benefits

Consolidated. Salaries, wages and benefits expense increased 13.8% from $21.0 million to $23.9 million. As a percentage of net revenue, salaries, wages and benefits expense increased from 30.4% to 30.6%. Salaries, wages and benefits expense by segment is discussed below.

Surgical Facilities. Salaries, wages and benefits expense in our surgical facilities segment increased 17.6% from $12.1 million to $14.3 million. The increase was primarily the result of staff costs associated with new ASCs and a shift of some personnel from our Corporate segment to our Surgical Facilities segment.

Product Sales and Other. Salaries, wages and benefits expense in our product sales and other segments increased 23.7% from $4.4 million to $5.4 million primarily due to our acquisition of a call center and marketing solutions business during the third quarter of 2008.

Corporate. Salaries, wages and benefits expense decreased 6.3% from $4.4 million to $4.2 million. The decrease was primarily due to a shift of some personnel from our Corporate segment to our Surgical Facilities segment and lower health benefit costs.

Cost of Sales and Medical Supplies

Consolidated. Cost of sales and medical supplies expense increased 8.0% from $16.2 million to $17.5 million. As a percentage of net revenue, cost of sales and medical supplies expense decreased from 23.4% to 22.4%. Cost of sales and medical supplies expense by segment is discussed below.

Surgical Facilities. Cost of sales and medical supplies expense in our surgical facilities segment increased 10.9% from $13.2 million to $14.6 million. As a percentage of net revenue, cost of sales and medical supplies expense decreased from 23.3% to 22.5%. The expense increase was primarily the result of costs associated with our new ASCs.

Product Sales and Other. Cost of sales and medical supplies expense in our product sales and other segments decreased 4.3% from $3.0 million to $2.9 million primarily due to decreased revenue at our optical laboratories business and marketing products and services businesses.

Selling, General and Administrative

Consolidated. Selling, general and administrative expense increased 15.0% from $12.3 million to $14.2 million. As a percentage of net revenue, selling, general and administrative expense increased from 17.9% to 18.2%. Selling, general and administrative expense by segment is discussed below.

Surgical Facilities. Selling, general and administrative expense in our surgical facilities segment increased 17.9% from $10.8 million to $12.7 million. The increase is due to costs associated with our new ASCs and an increase of $0.5 million in management and billing/collections fees charged to the ASCs for services rendered by our corporate personnel.

Product Sales and Other. Selling, general and administrative expense in our product sales and other segments increased 25.5% from $1.9 million to $2.4 million primarily due to our acquisition of a call center and marketing solutions business during the third quarter of 2008.

Corporate. Corporate selling, general and administrative expense decreased by $0.6 million due to an increase in management and billing/collections fees charged to the operating segments for services rendered by certain corporate personnel.

Depreciation and Amortization. Depreciation and amortization expense increased 42.9% from $2.0 million to $2.9 million due to increases in depreciation associated with our new ASCs, the relocation of one of our ASCs and amortization of intangible assets acquired in conjunction with our acquisition of a call center and marketing solutions business during the third quarter of 2008.

Interest (Income) Expense, net. Interest (income) expense, net increased by $0.3 million due to increased borrowings under our revolving credit facility and our adoption of FSP APB 14-1. As a result of the adoption of FSP APB 14-1, we recorded additional non-cash interest expense during the first six months of 2009 and 2008 of $2.0 million and $1.9 million, respectively.

Provision for Income Taxes. Our effective tax rate was unchanged at 39.0%. Our effective tax rate is affected by expenses that are deducted from operations in arriving at pre-tax income that are not allowed as a deduction on our federal income tax return.

Discontinued Operations. As part of our discontinued operations plan announced in the fourth quarter of 2007, we completed the sale of our 70% interest in our Thibodaux, Louisiana ASC in February 2008. We received proceeds of $0.2 million. As a result, we adjusted our previously recorded loss on the sale of the ASC and recorded a pre-tax gain of $0.1 million in the first quarter of 2008.

Net Income Attributable to Noncontrolling Interests. Noncontrolling interests in the earnings of our ASCs were $8.8 million in 2009 as compared to $8.0 million in 2008. All of this increase is attributable to new ASCs.

Liquidity and Capital Resources

Operating activities during the first six months of 2009 generated $12.1 million in cash flow compared to $10.8 million in the comparable 2008 period. The $1.3 million increase in cash flow from operating activities was due to higher net income after adding back the following non-cash items: depreciation and amortization, amortization of subordinated debt fees, stock-based compensation expense, gain on sale of ASC, deferred income taxes, asset impairment charge and non-cash subordinated debt interest. Changes in operating assets and liabilities resulted in positive cash flow of $0.3 million during the first six months of 2009 and 2008. Changes in accounts receivable resulted in positive cash flow of $2.0 million due to improvements in the collection of accounts receivable. Changes in accounts payable and accrued expenses resulted in negative cash flow of $2.0 million due to incentive compensation payments and the timing of vendor payments.

Cash flows used in investing activities was $2.3 million during the first six months of 2009 compared to $3.8 million during the first six months of 2008. Investing activities during the first six months of 2009 included the purchase of property and equipment for $2.6 million and proceeds of $0.3 million relating to the sale of noncontrolling interests in one of our ASCs. Investing activities during the first six months of 2008 included the purchase of property and equipment for $2.8 million, the payment of additional purchase price consideration of $0.9 million for one of our ASCs, the payment of additional purchase price consideration of $0.3 million for our optical products purchasing organization and proceeds of $0.2 million relating to the sale of our Thibodaux, Louisiana ASC.

Cash flows from financing activities during the first six months of 2009 included net payments of $9.1 million under our credit facility, payments of $1.1 million relating to the repurchase of our common stock and $1.7 million of capital lease and other debt obligation payments. Cash flows from financing activities during the first six months of 2008 included proceeds of $0.4 million from the exercise of stock options and issuance of stock to employees as part of our employee stock purchase plan and borrowings of $1.8 million relating to the development and relocation of an ASC. These proceeds were offset by $0.7 million of capital lease and other debt obligation payments.

In June 2007, we issued $75.0 million aggregate principal amount of 1.0% convertible senior subordinated notes due June 15, 2012 (the "Convertible Notes"). At June 30, 2009, we had $59.1 million in convertible subordinated debt outstanding, net of debt discount. As of June 30, 2009, the fair value of the $75.0 million Convertible Notes was approximately $55.9 million, based on the level 2 valuation hierarchy under SFAS No. 157. Effective January 1, 2009, we adopted FSP APB 14-1. FSP APB 14-1 applies to convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement, when the conversion option does not need to be bifurcated and accounted for separately as a derivative instrument in accordance with FAS 133. FSP APB 14-1 requires that issuers of convertible debt instruments that, upon conversion, may be settled fully or partially in cash, must separately account for the liability and equity components in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. Additionally, debt issuance costs are required to be allocated in proportion to the allocation of the liability and equity components and accounted for as debt issuance costs and equity issuance costs, respectively. FSP APB 14-1 requires retrospective application and, accordingly, the prior periods' financial statements included herein have been adjusted. In accordance with the provisions of FSP APB 14-1, we determined that the fair value of our Convertible Notes at issuance in 2007 was approximately $52.1 million, and we designated the residual value of approximately $22.9 million as the equity component. Additionally, we allocated approximately $1.8 million of the $2.6 million original Convertible Notes issuance cost as debt issuance cost and the remaining $0.8 million as equity issuance cost. For further discussion about the Convertible Notes, see Note 11 in the Notes to Consolidated Financial Statements in our Annual Report filed on Form 10-K on March 16, 2009.

At June 30, 2009, we had $48.0 million of borrowings outstanding under our revolving credit facility with a weighted average interest rate of 2.6% and were in compliance with all of our covenants. Our credit facility expires in February 2010 and we are currently in discussion with our banks to extend the term. The maximum commitment available under the facility is the lesser of $125 million or the maximum allowed under the calculated ratio limitations. At June 30, 2009, we had approximately $76.1 million of potential borrowing availability under our credit facility. The credit agreement also includes an option allowing us to increase the maximum commitment available to $150 million under certain conditions. Interest on borrowings under the facility is payable at an annual rate equal to our lender's published base rate plus the applicable borrowing margin ranging from 0.0% to 0.5% or LIBOR plus a range from 1.25% to 2.50%, varying depending upon our ratios and ability to meet other financial covenants. In addition, a fee ranging from .20% to .25% is charged on the unused portion of the commitment. The maximum borrowing availability and applicable interest rates under the credit facility are calculated based on a ratio of total indebtedness to earnings before interest, taxes, depreciation and amortization, all as more fully defined in our credit facility. The credit agreement contains customary covenants that include limitations on indebtedness, liens, capital expenditures, acquisitions, investments and share repurchases, as well as restrictions on the payment of dividends. Under the terms of the credit agreement, we are required to obtain the consent of our lenders for any acquisition exceeding $20.0 million individually under certain conditions. The weighted average interest rate on credit line borrowings during the three and six months ended June 30, 2009 was 3.0% and 3.4%, respectively.

During 2006, we entered into two interest rate swap agreements. The interest . . .