The following discussion and analysis presents our consolidated financial condition at September 30, 2009 and the results of operations for the three and six months ended September 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 25 of this quarterly report.

Overview

We consider our core business to be the ownership and operation of ambulatory surgery centers (ASCs). As of September 30, 2009, we owned and operated 37 ASCs, of which 35 were jointly owned with physician-partners. 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 11.0% to $116.6 million. Surgical facilities net revenue increased 13.0% to $97.4 million (same-facility surgical net revenue decreased 2.5% to $82.7 million).
† Operating income increased 8.5% to $28.9 million.
† Income from continuing operations attributable to NovaMed, Inc. increased 5.2% to $5.7 million.
† Cash flow from operations of $19.2 million.
† Amended our credit facility (see Liquidity and Capital Resources for further details).

Results of Operations


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



                                     Three months ended        Nine months ended
                                       September 30,             September 30,
                                     2009         2008         2009         2008
Net Revenue:
Surgical facilities                     83.7 %       82.3 %       83.5 %       82.0 %
Product sales and other                 16.3         17.7         16.5         18.0
Total net revenue                      100.0        100.0        100.0        100.0

Operating expenses:
Salaries, wages and benefits            30.6         30.0         30.6         30.3
Cost of sales and medical
supplies                                23.0         23.1         22.6         23.3
Selling, general and
administrative                          18.1         18.4         18.2         18.0
Depreciation and amortization            3.9          3.0          3.8          3.0
Total operating expenses                75.6         74.5         75.2         74.6

Operating income                        24.4         25.5         24.8         25.4

Interest expense (income), net           5.5          5.7          5.5          5.7
Other (income) expense, net              0.1            -            -            -
Income before income taxes              18.8         19.8         19.3         19.7
Income tax provision                     3.1          3.2          3.1          3.2
Income from continuing
operations                              15.7         16.6         16.2         16.5
Income from discontinued
operations                                 -          0.7            -          0.2
Net income                              15.7         17.3         16.2         16.7

Net income attributable to
noncontrolling interests                10.9         11.6         11.2         11.6

Net income attributable to
NovaMed, Inc.                            4.8 %        5.7 %        5.0 %        5.1 %

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

Net Revenue

Consolidated. Total net revenue increased 7.5% from $36.1 million to $38.8 million. Net revenue by segment is discussed below.

Surgical Facilities. The table below summarizes surgical facilities net revenue and procedures performed for the third 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 9.3% from $29.7 million to $32.4 million. This increase was primarily the result of $3.2 million of net revenue from ASCs acquired or developed after July 1, 2008 ("new ASCs") offset by a $0.4 million, or 1.4%, 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 3.6% decrease in the number of same-facility procedures performed offset by a 2.2% increase in the net revenue per procedure due to a change in procedure and payor mix.

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

Surgical Facilities:
Same-facility:
Net revenue            $    29,269   $ 29,680   $      (411 )
# of procedures             35,369     36,656        (1,287 )

New ASCs:
Net revenue            $     3,177   $      -   $     3,177
# of procedures              4,176          -         4,176

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 third quarter of 2009 decreased 0.7% from $6.4 million to $6.3 million. Net revenue at our optical products and services business decreased by $0.2 million due to a decrease in existing customer orders. Net revenue from our marketing products and services businesses increased by $0.3 million primarily due the acquisition of a call center and marketing solutions business during the third quarter of 2008. Net revenue at our optical laboratory business decreased by $0.1 million due to a decrease in existing customer orders.

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

Product Sales:
Optical laboratories                        $    1,387    $  1,469   $        (82 )
Optical products purchasing organization         1,254       1,450           (196 )
Marketing products and services                  1,262       1,010            252
Optometric practice/retail store                   464         470             (6 )
                                                 4,367       4,399            (32 )
Other:
Ophthalmology practice                           1,955       1,971            (16 )

Total Net Product Sales and Other Revenue   $    6,322    $  6,370   $        (48 )

Salaries, Wages and Benefits

Consolidated. Salaries, wages and benefits expense increased 9.6% from $10.8 million to $11.8 million. As a percentage of net revenue, salaries, wages and benefits expense increased from 30.0% 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 14.4% from $6.3 million to $7.2 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 19.8% from $2.3 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 14.2% from $2.2 million to $1.9 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 7.1% from $8.3 million to $8.9 million. As a percentage of net revenue, cost of sales and medical supplies expense decreased from 23.1% to 23.0%. 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 11.1% from $6.8 million to $7.5 million. As a percentage of net revenue, cost of sales and medical supplies expense decreased from 24.0% to 23.2%. 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 5.5% from $1.5 million to $1.4 million primarily due to decreased revenue at our optical laboratories business.

Selling, General and Administrative

Consolidated. Selling, general and administrative expense increased 5.6% from $6.6 million to $7.0 million. As a percentage of net revenue, selling, general and administrative expense decreased from 18.4% to 18.1%. Selling, general and administrative expense by segment is discussed below.

Surgical Facilities. Selling, general and administrative expense in our surgical facilities segment increased 8.2% from $5.9 million to $6.4 million. The increase is due to costs associated with our new ASCs and an increase of $0.1 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 remained flat at $1.1 million.

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 38.5% from $1.1 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 on January 1, 2009 of a new accounting standard included in Accounting Standards Codification ("ASC") 470-20, Debt with Conversion and Other Options, formerly FASB Staff Position No. APB 14-1 ("FSP APB 14-1"), Accounting for Convertible Debt Instruments that May be settled in Cash Upon Conversion. ASC 470-20 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 the new accounting standard, we recorded additional non-cash interest expense during the third quarter of 2009 and 2008 of $1.1 million and $1.0 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. We continued to incur costs associated with our Laredo, Texas ASC during the third quarter of 2008. On August 7, 2008, our Laredo, Texas ASC sold substantially all of its assets for $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 $0.2 million in the third quarter of 2008.

Net Income Attributable to Noncontrolling Interests. Noncontrolling interests in the earnings of our ASCs were $4.2 million in the third quarter of 2009 as compared to $4.2 million in 2008.

Nine Months Ended September 30, 2009 Compared to the Nine Months Ended September 30, 2008

Net Revenue

Consolidated. Total net revenue increased 11.0% from $105.0 million to $116.6 million. Net revenue by segment is discussed below.

Surgical Facilities. The table below summarizes surgical facilities net revenue and procedures performed for the first nine months of 2009 and 2008. Net surgical facilities revenue increased 13.0% from $86.2 million to $97.4 million. This increase was primarily the result of a $13.3 million increase from ASCs acquired or developed after January 1, 2008 ("new ASCs") offset by a $2.1 million, or 2.5%, 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 4.0% decrease in the number of same-facility procedures performed offset by a 1.5% increase in the net revenue per procedure due to a change in procedure and payor mix.

                         Nine Months Ended
                           September 30,         Increase
Dollars in thousands      2009        2008      (Decrease)

Surgical Facilities:
Same-facility:
Net revenue            $   82,710   $ 84,806   $     (2,096 )
# of procedures            96,035    100,040         (4,005 )

New ASCs:
Net revenue            $   14,651   $  1,361   $     13,290
# of procedures            23,065      3,671         19,394

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 nine months of 2009 increased 2.1% from $18.9 million to $19.3 million. Net revenue at our optical products and services business decreased by $0.5 million due to a decrease in existing customer orders. Net revenue from our marketing products and services businesses increased by $1.0 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 $0.5 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.

                                              Nine Months Ended
                                                September 30,        Increase
Dollars in thousands                           2009        2008     (Decrease)

Product Sales:
Optical laboratories                        $    4,103   $  4,625   $      (522 )
Optical products purchasing organization         3,997      4,487          (490 )
Marketing products and services                  3,669      2,694           975
Optometric practice/retail store                 1,393      1,463           (70 )
                                                13,162     13,269          (107 )
Other:
Ophthalmology practice                           6,111      5,607           504

Total Net Product Sales and Other Revenue   $   19,273   $ 18,876   $       397

Salaries, Wages and Benefits

Consolidated. Salaries, wages and benefits expense increased 12.4% from $31.8 million to $35.7 million. As a percentage of net revenue, salaries, wages and benefits expense increased from 30.3% 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 16.5% from $18.5 million to $21.5 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 22.4% from $6.6 million to $8.1 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 8.9% from $6.7 million to $6.1 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 7.7% from $24.5 million to $26.4 million. As a percentage of net revenue, cost of sales and medical supplies expense decreased from 23.3% to 22.6%. 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 10.5% from $20.0 million to $22.2 million. As a percentage of net revenue, cost of sales and medical supplies expense decreased from 23.6% to 22.8%. 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 4.7% from $4.5 million to $4.2 million primarily due to decreased revenue at our optical laboratories business and marketing products and services businesses which was partially offset by increased expenses at our ophthalmology practice due to increased net revenue.

Selling, General and Administrative

Consolidated. Selling, general and administrative expense increased 11.7% from $19.0 million to $21.2 million. As a percentage of net revenue, selling, general and administrative expense increased from 18.0% 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 14.5% from $16.7 million to $19.1 million. The increase is due to costs associated with our new ASCs and an increase of $0.6 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 17.1% from $3.0 million to $3.5 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 $0.7 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 41.4% from $3.1 million to $4.4 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 $0.4 million due to increased borrowings under our revolving credit facility and our adoption of a new accounting standard included in ASC 470-20. As a result of the adoption of the new accounting standard, we recorded additional non-cash interest expense during the first nine months of 2009 and 2008 of $3.1 million and $2.9 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. We continued to incur costs associated with our Laredo, Texas ASC during the first nine months of 2008. On August 7, 2008, our Laredo, Texas ASC sold substantially all of its assets for $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 $0.2 million in the third quarter of 2008. 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 $13.1 million in 2009 as compared to $12.2 million in 2008. All of this increase is attributable to new ASCs.

Liquidity and Capital Resources

Operating activities during the first nine months of 2009 generated $19.2 million in cash flow compared to $17.0 million in the comparable 2008 period. The $2.2 million increase in cash flow from operating activities was primarily due to $3.4 million of 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. This increase was partially offset by $2.1 million of higher distributions to noncontrolling interests. Changes in operating assets and liabilities resulted in additional cash flow of $0.9 million during the first nine months of 2009 as compared to 2008. Changes in accounts receivable resulted in additional cash flow of $3.0 million during the first nine months of 2009 as compared to 2008 due to improvements in the collection of accounts receivable. Changes in accounts payable and accrued expenses resulted in reduced cash flow of $2.1 million during the first nine months of 2009 as compared to 2008 due to incentive compensation payments and the timing of vendor payments.

Cash flows used in investing activities were $3.7 million during the first nine months of 2009 compared to $16.1 million during the first nine months of 2008. Investing activities during the first nine months of 2009 included the purchase of property and equipment for $3.3 million, the payment of additional purchase price consideration of $0.7 million for one of our ASCs and proceeds of $0.3 million relating to the sale of noncontrolling interests in one of our ASCs. Investing activities during the first nine months of 2008 included the acquisition of one ASC and a marketing solutions business for $11.6 million, purchase of property and equipment for $3.9 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 $0.4 million relating to the sale of our Thibodaux, Louisiana and Laredo, Texas ASCs.

Cash flows from financing activities during the first nine months of 2009 included net payments of $13.1 million under our credit facility, payments of $1.1 million relating to the repurchase of our common stock, $3.6 million of capital lease and other debt obligation payments and proceeds of $0.2 million from the exercise of stock options and issuance of stock to employees as part of our employee stock purchase plan. Cash flows from financing activities during the first nine 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 $2.6 million relating to the development and relocation of an ASC. These proceeds were offset by net payments of $4.0 million under our credit facility, $1.1 million of capital lease and other debt obligation payments and payments of $0.4 million relating to the repurchase of our common stock.

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 September 30, 2009, we had $60.3 million in convertible subordinated debt outstanding, net of debt discount. As of September 30, 2009, the fair value of the $75.0 million Convertible Notes was approximately $64.9 million, based on the level 2 valuation hierarchy under ASC 820 (formerly SFAS No. 157). Effective January 1, 2009, we adopted a new accounting standard included in ASC 470-20 (formerly FSP APB 14-1). ASC 470-20 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 ASC 815 (formerly FAS 133). ASC 470-20 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. ASC 470-20 requires retrospective application and, accordingly, the prior periods' financial statements included herein have been adjusted. In accordance with the provisions of ASC 470-20, 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.

Effective August 31, 2009, we amended our credit facility, decreasing the maximum commitment available under the facility from $125 million to $80 million, consisting of a $50 million revolving credit facility and a $30 million term loan facility. The expiration date of the credit facility was extended to December 15, 2011, however, if we repay or refinance our Convertible Notes prior to this date, the expiration date will be extended to August 31, 2012. The maximum commitment available under the revolving credit facility is $50 million . . .