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                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   FORM 10-K

              [X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
               OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the fiscal year ended December 31, 2001

                        Commission File Number: 0-26625

                             NOVAMED EYECARE, INC.
            (Exact name of registrant as specified in its charter)

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             <S>                               <C>
                         Delaware                  36-4116193
               (State or other jurisdiction     (I.R.S. Employer
             of incorporation or organization) Identification No.)
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        980 North Michigan Avenue, Suite 1620, Chicago, Illinois 60611
              (Address of principal executive offices) (zip code)

      Registrant's telephone number, including area code: (312) 664-4100

       Securities registered pursuant to Section 12(b) of the Act: None

          Securities registered pursuant to Section 12(g) of the Act:
                    Common Stock, par value $.01 per share
                               (Title of Class)

                        Preferred Stock Purchase Rights
                               (Title of Class)

   Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_  No

   Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

   The aggregate market value of the registrant's 21,045,600 shares of voting
stock held by non-affiliates of the registrant, based upon the last reported
sale price of the registrant's Common Stock on March 15, 2002 was $17,257,392.
The number of shares outstanding of the registrant's Common Stock, par value
$.01, as of March 15, 2002 was 24,835,108.

                      DOCUMENTS INCORPORATED BY REFERENCE

   Portions of the registrant's Definitive Proxy Statement in connection with
the registrant's 2002 Annual Meeting of Stockholders are incorporated by
reference into Part III of this Report on Form 10-K.

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                                    PART I

Item 1. Business

   Because we want to provide investors with more meaningful and useful
information, this Annual Report on Form 10-K (the "Form 10-K") contains, and
incorporates by reference, certain "forward-looking statements" (as such term
is defined in Section 21E of the Securities Exchange Act of 1934, as amended)
that reflect our current expectations regarding our future results of
operations, performance and achievements. These forward-looking statements are
made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. We have tried, wherever possible, to identify
these forward-looking statements by using words such as "anticipates,"
"believes," "estimates," "expects," "plans," "intends" and similar expressions.
These statements reflect our current beliefs and are based on information
currently available to us. Accordingly, these statements are subject to certain
risks, uncertainties and contingencies which could cause our actual results,
performance or achievements in 2002 and beyond to differ materially from those
expressed in, or implied by, such statements. These risks and uncertainties
include: our ability to acquire, develop or manage a sufficient number of
profitable surgical facilities; reduced prices and reimbursement rates for
surgical procedures; the continued acceptance of laser vision correction and
other refractive surgical procedures; demand for elective surgical procedures
generally and in response to a protracted economic downturn; our ability to
successfully implement our discontinued operations plan on terms acceptable to
us and consistent with the terms of our credit facility; the application of
existing or proposed government regulations, and the factors set forth under
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Risk Factors." You should not place undue reliance on
any forward-looking statements. We undertake no obligation to update or revise
any such forward-looking statements that may be made to reflect events or
circumstances after the date of this Form 10-K or to reflect the occurrence of
unanticipated events.

   Unless the context requires otherwise, you should understand all references
to "we," "us" and "our" to include NovaMed Eyecare, Inc. and its consolidated
subsidiaries.

General

   We are an eye care services company and one of the nation's leading owners
and operators of practice-based, single-specialty ambulatory surgery centers
(ASCs). We own and operate 15 practice-based, ophthalmic ASCs where eye care
professionals perform surgical procedures--primarily cataract and refractive
surgery (laser vision correction or LVC). We also operate eight laser vision
correction centers, or LVC centers, where eye care professionals perform laser
vision correction surgery, and we have entered into five fixed-site laser
agreements pursuant to which we provide excimer lasers and other services to
eye care professionals. In addition, we own and operate an optical products and
services organization that sells eye care products and accessories to eye care
professionals, corrective lenses and eyeglasses produced by our two wholesale
optical laboratories, eyeglass frames and contact lenses purchased from
manufacturers by our optical products purchasing organization, and marketing
products and services. As part of our optical products and services business,
we operate under service agreements with eye care practices retail optical
outlets where eye glasses, contact lenses and other optical products are sold.

   We were originally organized as a Delaware limited liability company in
March 1995, under the name, NovaMed Eyecare Management, LLC. In connection with
a capital infusion from venture capital investors in November 1996, NovaMed
Holdings Inc., an Illinois corporation, was formed to serve as a holding
company, responsible for overall strategic planning, with NovaMed Eyecare
Management, LLC as an operating subsidiary. In May 1999, NovaMed Holdings Inc.
reincorporated as a Delaware corporation and changed its name to NovaMed
Eyecare, Inc. In June 1999, we changed the name of our principal operating
subsidiary to NovaMed Eyecare Services, LLC. In August 1999, we consummated our
initial public offering of common stock.

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   In addition to our surgical facilities and optical products businesses, we
also continue to provide management services to eye care practices pursuant to
long-term service agreements (management services business). Under these
service agreements, we provide business, information technology, administrative
and financial services to our affiliated eye care professionals in exchange for
a management fee.

   In October 2001, we announced our intentions to discontinue our management
services business. In assessing our overall business, our Board of Directors
determined that we should focus our business strategy primarily on the
acquisition, growth and development of surgical facilities. Our surgical
facilities segment has historically been more efficient than our other business
segments, requiring relatively lower operating costs and producing our highest
operating margins. In reviewing our management services business, the Board
determined that, although the segment has been historically profitable, the
returns did not justify the high overhead and capital spending necessary to
operate the business. Consequently, at a meeting on September 27, 2001, the
Board approved a plan to discontinue our management services business.

   During the third quarter of 2001, we reflected the management services
business as discontinued operations in our financial statements and recorded a
net loss of $27.2 million to account for the contemplated disposal of this
business segment. In connection with this strategy, we also announced plans to
restructure selected operations outside of our management services business,
including corporate support functions and information technology, and to close
under-performing facilities. These restructuring charges taken in the 2001
third quarter totaled $10.9 million. We also recorded other related charges in
the 2001 third quarter of $3.7 million, including charges for an increase in
facility accounts receivable reserves, professional fees incurred in the
development of our restructuring plan, and severance costs.

   As part of our discontinued operations and restructuring plans, we have
closed four LVC centers and plan to close an additional three LVC centers in
2002. We will also be restructuring the manner in which we have historically
operated our remaining LVC centers, transitioning from a comprehensive
management agreement with our affiliated practices to an agreement where we
will be providing refractive surgical equipment and supplies, and in certain
instances, surgical staff.

   The plan to discontinue our management services business contemplates that
we pursue and/or negotiate approximately eighteen transactions in which we plan
to: (a) terminate or transfer the service agreement with each of our affiliated
practices; (b) terminate or transfer all employees providing services at these
practice locations, as well as our regional business offices; (c) close or
relocate our regional business offices; (d) sell all practice-based assets
including fixed assets, equipment and accounts receivable; and (e) terminate or
transfer our corporate-based and information technology employees who provide
services primarily to the management services business. We will continue to
perform our obligations under our service agreements until they are either
terminated through mutually agreed upon transactions or otherwise transferred.

   In November 2001, the Board established a special committee comprised of two
independent outside directors, C.A. Lance Piccolo and R. Judd Jessup. The Board
determined that the establishment of this special committee would be conducive
to objective, fully informed decision-making with regard to the divestiture
transactions and in the best interests of our stockholders. The Board
authorized the special committee to oversee our management team in all material
facets of the divestiture transactions, ranging from establishing the
procedures for preparing, evaluating, tendering and negotiating the divestiture
transactions, to approving the final terms and conditions of each divestiture
transaction. In this capacity, and with the assistance of independent advisors,
the special committee has established initial financial and contractual
parameters within which it believes the divestiture transactions would be fair
and reasonable to us, and in the best interests of our stockholders. The
special committee has also, on our behalf, retained a full-time consultant to
assist our management team in negotiating the terms of the divestiture
transactions. To the extent we believe a divestiture transaction warrants a
fairness opinion from an independent investment bank, we have retained an
investment bank to assist us with such efforts.

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   As of March 29, 2002, we have consummated five divestiture transactions.
From these transactions, we have received in the aggregate approximately $4
million in cash proceeds and approximately $1.1 million in seller financing,
plus the buyers are assuming various liabilities. As part of these
transactions, we have required our former affiliated physicians to enter into
multi-year restrictive covenants precluding them from owning and operating ASCs
and other surgical facilities. In addition, depending on the particular
characteristics of the divested practice, we are entering into multi-year
optical products and refractive supply agreements. Under these agreements, we
will continue to provide services to these practices from our two continuing
business segments. Under our refractive supply agreements, we contract with the
practices to be their exclusive provider of current and future refractive
technology. With our optical products supply agreements, our group purchasing
organization and optical laboratories will be the primary provider of optical
products and supplies to these entities.

Eye Care Industry

  General

   The eye care market consists of a large, diverse group of services and
products. The eye care services market includes routine eye examinations as
well as diagnostic and surgical procedures that address complex eye and vision
conditions. The most common conditions addressed by eye care professionals are
nearsightedness, farsightedness and astigmatism. Other frequently treated
conditions include cataracts, glaucoma, macular degeneration and diabetic
retinopathy. Eye and vision conditions are typically treated with surgery,
pharmaceuticals, prescription glasses, contact lenses or some combination of
these treatments. Additional services offered by eye care professionals include
research services for eye care devices or pharmaceuticals being developed or
tested in clinical trials. The optical products market consists of the
manufacture, distribution and sale of optical goods including corrective
lenses, eyeglasses, frames, contact lenses and other optical products and
accessories.

   Eye care represents one of the largest health care service and product
markets in the U.S. Projected annual spending in 2002 for health care costs
associated with eye and vision conditions is estimated to be $29 billion, while
annual spending on retail optical products is estimated to be an additional $16
billion, representing a total market of approximately $45 billion.

  Ambulatory Surgery Center Market

   The term "ambulatory surgery" refers to procedures performed on a
nonhospitalized patient who is able to return home the same day. Since the
inception of ambulatory surgery centers in the early 1970s, the ambulatory
surgery industry has grown consistently, with almost 3,200 ASCs currently in
business. The ASC market has capitalized on new medical technologies, including
improvements in surgical lasers, anesthesiology, endoscopy and arthroscopic
surgical instruments. An estimated 6.2 million surgeries were performed in ASCs
in 2000, up 17% from 1998. Ophthalmology is the largest single type of
outpatient surgery, with approximately 1.6 million outpatient surgeries in
2000, representing approximately 26% of all outpatient surgeries. Outpatient
surgical procedures are forecasted to grow 6% annually through 2006, when
approximately 9 million procedures are expected to be performed.

   Cataract Surgery. Cataract surgery is currently the most widely performed
surgical procedure in the U.S., with an estimated 2.7 million cataract
surgeries in 2001. Cataract procedures are forecast to grow 2.4% annually over
the next five years. A cataract occurs when the normally transparent lens of
the eye becomes cloudy as part of the aging process. In cataract surgery, the
ophthalmologist removes the clouded natural lens and replaces it with a
synthetic intraocular lens. Cataract surgery is typically performed on an
outpatient basis using local anesthesia, and the procedure time is typically
less than 30 minutes. More than 63% of people over the age of 60 have some
degree of cataract formation. Cataract procedures are expected to continue to
increase for many years, driven primarily by the aging of the population and
the introduction of improved technologies and surgical

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techniques. With the vast majority of cataract surgery patients being over the
age of 65, the Medicare program has been the primary source of reimbursement
for cataract surgery providers. In the U.S., approximately 35 million people
are age 65 or older, representing 12.4% of the population. By 2010, this group
is expected to increase 13.4% to 39.7 million and represent 13.2% of the
population.

   Vision Correction Surgery. Approximately 145 million people in the U.S.
require eyeglasses or contact lenses to correct refractive vision conditions
that result from the improper curvature of the cornea. If the cornea's
curvature is not correct, the cornea cannot properly focus the light passing
through it onto the retina, and the person will see a blurred image. The three
most common refractive conditions are:

   . myopia, commonly referred to as nearsightedness, which is caused by a
     steepening of the cornea, resulting in the blurring of distant objects

   . hyperopia, commonly referred to as farsightedness, which is caused by a
     flattening of the cornea, resulting in the blurring of close objects

   . astigmatism, in which images are not focused on any point due to the
     varying curvature of the eye along different axes, which results in a
     distorted view of images

   New surgical technologies and techniques have been developed over the years
to correct common vision conditions that result from the improper curvature of
the cornea. Laser In-Situ Keratomileusis, or LASIK, was introduced in 1996,
leading to a dramatic increase in the popularity of laser vision correction
surgery. The introduction of LASIK offered significant benefits to
ophthalmologists over preceding refractive surgical techniques such as Radial
Keratotomy, or RK, and the first vision correction surgery that used laser
technology, Photorefractive Keratectomy, or PRK. Relative to the earlier
refractive surgical techniques, the LASIK procedure provides significant
reductions in patient pain or discomfort, patient recovery times ranging from a
few hours after the procedure to two weeks, and reduced complication rates.

   In the LASIK procedure, an ophthalmologist uses an automated microsurgical
instrument to peel back a thin layer of corneal tissue that remains hinged to
the eye. A number of laser pulses are then applied to the cornea to remove
tissue and thereby correct the patient's vision by flattening the shape of the
cornea in nearsighted patients and steepening the shape of the cornea in
farsighted patients. After the surgeon replaces the layer of corneal tissue, no
bandages are required and most patients experience virtually no discomfort. A
LASIK procedure typically takes 10 to 15 minutes from set-up to completion,
with the length of time of the actual laser treatment lasting 15 to 90 seconds,
depending on the degree of correction required. LASIK is performed in an
outpatient setting, with only topical anesthesia. Only ophthalmologists are
licensed to perform LASIK, although optometrists are actively involved in
identifying appropriate candidates for the procedure and in providing pre- and
post-operative care.

   Although the number of vision correction procedures performed in the U.S.
has grown rapidly since 1996, the number of annual procedures declined in 2001
from 2000. In 2001, eye care professionals performed an estimated 1.34 million
laser vision correction surgery procedures in the U.S., representing a decrease
of approximately 5% over the approximately 1.41 million procedures performed in
2000.

  Optical Products and Services

   While the number of patient options for vision correction has increased with
improved surgical vision correction technologies and techniques, the market for
basic optical goods including corrective lenses, eyeglass frames, contact
lenses and other optical products and accessories, remains a significant
market, estimated to be approximately $16 billion annually. We believe the
increasing demand for premium products, along with the growing number of people
over the age of 40 (estimated to exceed 130 million people within the next five
years) will fuel the growth in this sector. Eyeglass frames are typically sold
through retail optical outlets located in optometrist and ophthalmologist
clinics, as well as through retail stores.

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  Our Business Model

   We have historically focused on building regional clusters of ASCs, LVC
centers and affiliated eye care professionals. With our decision to divest our
management services business, we will focus primarily on acquiring, developing
and operating single-speciality ASCs within new and existing markets. We
believe that our experience in operating ophthalmic, practice-based ASCs, when
coupled with our experience in working with and managing ophthalmologists, will
provide our surgeon-customers with an efficient operating environment to
maximize quality patient care.

  Single-specialty, practice-based ASCs and LVC Centers

   We own and operate 15 practice-based, single-specialty ASCs, each of which
is a state-licensed and Medicare-certified ASC focused exclusively on
ophthalmic procedures. Ophthalmologists perform cataract, laser vision
correction and other eye related surgical procedures in our ASCs. Currently, we
wholly own 14 of our 15 ASCs. We anticipate that the number of ASCs that we
wholly own will likely diminish over time. We may elect to sell minority equity
interests in our existing wholly owned ASCs to physicians or other entities or
individuals in the local market. These investors will likely include our
affiliated ophthalmologists. We may structure these minority interest sales as
part of our divestiture transaction with a particular doctor or group of
doctors. Alternatively, we may elect to continue to own 100% of the applicable
facility, but enter into an option agreement with our former affiliated
ophthalmologists where there will be corresponding put and call rights on a
minority equity interest in an ASC. The terms of our credit facility limit our
ability to sell minority interests in our existing ASCs to the extent any such
sales would reduce our EBITDA in any 12-month period by more than $1 million.
The definition of EBITDA in our credit facility is consistent with the EBITDA
definition in the Notes to Item 6--Selected Financial Data, except that our
credit facility definition includes EBITDA from discontinued operations.

   We will likely structure our future acquisitions of ASCs as purchases of a
majority interest in a limited liability company that owns and operates the
facility. The minority interests in these newly acquired facilities will likely
be owned by physicians who owned an equity interest in the facility prior to
our acquisition. We may also elect to sell additional equity interests in the
facility to other physicians or non-physicians in the local market.

   In addition to owning and operating ASCs, we also operate under service
agreements eight LVC centers where our affiliated eye care professionals
perform laser vision correction surgery. We also have five fixed-site laser
service agreements pursuant to which we provide excimer lasers and various
services to eye care providers. As we divest our management services business,
we will either terminate our relationships with these LVC centers altogether,
or transition them to fixed-site laser service agreements. As of March 15,
2002, we have 24 excimer lasers in service.

   Effective March 1, 2001, we entered into a five-year supply agreement with
Alcon Laboratories, Inc. setting forth the terms upon which we can procure and
utilize excimer lasers manufactured by Alcon. The agreement sets forth pricing
terms for our existing APEX/Infinity lasers, as well as the procurement and
pricing terms for Alcon's most technologically advanced laser, the LADARVision
System. During the five-year term, we will pay Alcon monthly based on the
number of procedures performed on each laser, with minimum annual procedure
requirements for each LADARVision System procured under the agreement. As of
March 15, 2002, we have twelve Apex/Infinity lasers and nine LADARVision
Systems covered by the agreement. Alcon may terminate the agreement if we fail,
after reasonable cure periods, to comply with the material terms of the
agreement. We may terminate the agreement if the FDA withdraws or materially
restricts its approval of the use of any laser covered by the agreement or if
patent issues or changes render the lasers unusable.

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  Optical Products and Services

   We own and operate two full-service wholesale optical laboratories that
specialize in surfacing, finishing and distributing corrective lenses and
eyeglasses. Our laboratories have in excess of 500 active customers, including
affiliated and non-affiliated ophthalmologists, optometrists, opticians and
optical retail chains. Our optical products purchasing organization allows
affiliated and non-affiliated eye care professionals to purchase optical
products through us from more than 100 leading suppliers with which we have
established strategic procurement relationships. We process consolidated
monthly billing for over 1,000 customers that utilize our purchasing
organization. In addition, our marketing services and products company provides
eye care professionals with a range of products and services including
brochures, videos, advertising and website design, education and training
programs, and consulting services. We also continue to provide management
services to eye care practices' retail optical outlets pursuant to long-term
management services agreements.

Our Growth Strategy

   We are focused on the large and rapidly growing U.S. market for eye care,
particularly the eye surgery segment. Our goal is to be one of the leading
owners and operators of single-specialty ASCs. Our growth strategy includes the
following specific components:

   Internal growth. We believe there are opportunities to increase the number
of procedures performed at our existing ASCs. We believe the efficiency and
convenience of single-specialty ASCs, and the opportunity to work in facilities
affiliated with a national ASC operator with significant management expertise,
are appealing to physicians and their patients thereby incentivizing physicians
to use our ASCs instead of hospitals and other institutional settings.

   External growth. External growth opportunities in our surgical facilities
segment are available through both the acquisition and development of ASCs.
Subject to the limits of our credit facility, we continue to pursue acquisition
and development opportunities in both our existing markets as well as new
markets. The acquisition of a well-established, single-specialty ASC is an
attractive means of entry into a new market, particularly in states that
require a certificate of need for development. Development of a new ASC can be
an attractive alternative in states that do not require a certificate of need
and where we have identified a physician partner. We believe that our
management team's experience in acquiring and developing ASCs will continue to
provide us with external growth opportunities.

   Optical Products and Services. We believe there are opportunities to grow
our optical products and services business by adding ophthalmologists and
optometrists as customers, as well as offering a broader range of products and
services to our existing customer base.

Competition

   Surgical Facilities. In acquiring and developing single specialty ASCs and
LVC centers, we compete with both corporations and eye care professionals.
There are several publicly-held and private companies actively engaged in the
acquisition, development and operation of ASCs and LVC centers. Some of these
companies may acquire and develop multi-specialty ASCs, practice-based ASCs
focusing on varying specialties, or a combination of the two. Moreover, some of
these companies have the acquisition and development of ASCs as their core
business, while other competitors are larger publicly held companies that have
subsidiaries or divisions engaged in this business. Other companies focus more
exclusively on the development and operation of LVC centers. Many of these
competitors have greater resources than us. Our primary competitors in
acquiring, owning and operating ophthalmic, single specialty ASCs are AmSurg
Corp., United Surgical Partners International, Inc., Laser Vision Centers, Inc.
and Symbion ARC.

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   The majority of practice-based, ophthalmic ASCs continue to be owned by eye
care professionals. Eye care professionals also own and operate LVC centers.
Our ASCs and LVC centers compete with these provider-owned centers. In
deploying excimer laser technology, eye care professionals either elect to own
or lease this technology on their own or enter into an arrangement with a
corporate entity that can provide the necessary capital, resources and
facilities support. For the third quarter 2001, industry sources estimate that
35.8% of total laser vision correction procedures in the U.S. were performed in
corporate-owned facilities, and 55.4% were performed in physician-owned
centers. Laser vision correction and other refractive surgery procedures also
compete with more traditional non-surgical treatments for refractive
conditions, including eyeglasses and contact lenses.

   Optical Products and Services. Our two wholesale optical laboratories face a
variety of national, regional and local competitors. We compete in the optical
laboratory market on the bases of quality of service, breadth of services,
reputation and price.

   In the market for providing optical group purchasing services, we primarily
compete with national and regional buying groups, as well as large vendors.
Competition in this market is based upon service, price, and the strength of
the purchasing organization, including the ability to negotiate discounts.

Employees

   As of March 15, 2002, we had 871 employees, 719 of whom are full-time
employees. We are not a party to any collective bargaining agreements. As part
of the divestiture transactions closed as of March 15, 2002, we have terminated
182 employees, the overwhelming majority of whom have been hired by our former
affiliated practices. To the extent we are successful in completing our
discontinued operations plan, we will likely terminate approximately 560
additional employees, most of whom we anticipate will be hired by the parties
to our divestiture transactions. Upon consummating all of our contemplated
divestiture transactions and completing our discontinued operations plan, we
anticipate employing approximately 300 employees in connection with our
continuing operations, approximately 230 of whom will be full-time employees.

   John D. Hunkeler, M.D., a member of our Board of Directors since 1997,
resigned from the Board effective March 19, 2002.

Trademarks

   We have registered the name, NovaMed Eyecare Management, as a U.S. Service
mark.

Governmental Regulation

   As a participant in the health care industry, our operations are subject to
extensive and increasing regulation by governmental entities at the Federal,
state and local levels. Many of these laws and regulations are subject to
varying interpretations, and we believe courts and regulatory authorities
generally have provided little clarification. Moreover, state and local laws
and interpretations vary from jurisdiction to jurisdiction. As a result, we may
not always be able to accurately predict interpretations of applicable law, and
some of our activities could be challenged.

   We cannot assure you that Federal or state regulatory authorities would not
challenge any of our business operations. If any of our activities are
challenged, we may have to divert substantial time, attention and resources
from running our business to defend against these challenges regardless of
their merit. If we do not successfully defend these challenges, we may face a
variety of adverse consequences including losing our eligibility to participate
in Medicare, Medicaid or other Federal or state health care programs, or losing
other contracting privileges and, in some instances, civil or criminal fines.
Any of these consequences could have a material adverse effect on our business,
financial condition and results of operations.

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   The regulatory environment in which we operate may change significantly in
the future. Numerous legislative proposals have been introduced in the U.S.
Congress and in various state legislatures over the past several years that
could cause major reforms of the U.S. health care system. In addition, several
sets of regulations have been recently adopted that may require substantial
changes in the way health care providers operate over the coming years. In
response to new or revised laws, regulations or interpretations, we could be
required to revise the structure of our legal arrangements or the structure of
our fees, incur substantial legal fees, fines or other costs, or curtail our
business activities, reducing the potential profit to us of some of our legal
arrangements, any of which may have a material adverse effect on our business,
financial condition and results of operations.

   The following is a summary of some of the health care regulatory issues
affecting our operations and us.

  Federal Law

   Anti-Kickback Statute. The Federal anti-kickback statute prohibits the
knowing and willful solicitation, receipt, offer or payment of any direct or
indirect remuneration in return for the referral of patients or the ordering or
purchasing of items or services payable under Medicare, Medicaid or other
Federal health care programs. Violations of this statute may result in criminal
penalties, including imprisonment or criminal fines of up to $25,000 per
violation, civil penalties of up to $50,000 per violation plus up to three
times the amount of the underlying remuneration, and exclusion from Federal or
state programs including Medicare or Medicaid.

   The Federal anti-kickback statute contains a number of exceptions. In order
to address the problems created by the broad language of the statute, Congress
directed the Department of Health and Human Services, or DHHS, to develop
regulatory exceptions, known as safe harbors, to the Federal anti-kickback
statute's referral prohibitions. When possible, we have attempted to structure
our business operations within a safe harbor. However, some aspects of our
business either do not meet the prescribed safe harbor standards, or relate to
practices for which no safe harbor standards have been proposed. Because there
is no legal requirement that relationships fit within a safe harbor, a business
arrangement that does not comply with the relevant safe harbor, or for which a
safe harbor does not exist, does not necessarily violate the anti-kickback
statute.

   Included among the safe harbors to the anti-kickback statute are certain
safe harbors for investment interests in general, and for investment interests
in ASCs. Generally, most of our competitors only own a portion of the ASCs,
with physicians owning the remaining portion. While we currently co-own only
one of our ASCs with a physician, we will likely co-own most of the ASCs that
we will acquire in the future. We will also likely be selling interests in our
existing wholly-owned ASCs to physicians in the near- to intermediate-term. It
is unlikely that our co-ownership will meet all of the parameters of the
general investment interest safe harbors or the ASC investment interest safe
harbors. As discussed above, however, an arrangement that does not fit squarely
within a safe harbor is not per se unlawful under the anti-kickback statute. It
is our intent to structure all such co-ownership arrangements in a manner that
complies with as many of the safe harbor components as possible, that meets the
objectives of the anti-kickback statute, and that follows the other available
regulatory guidance regarding ASC co-ownership arrangements.

   The applicable regulatory authorities have provided little guidance
regarding ASC ownership arrangements that are permissible under the
anti-kickback statute. Based on the limited guidance that is available, we
believe that if we pursue joint ownership of ASCs with physicians, our joint
ownership would comply with the anti-kickback law based on, among other things,
the following factors: all of the jointly owned ASCs would be Medicare
certified; patients referred to an ASC by an investor would be informed of the
referring physician's investment interest in the ASC; the terms on which an
investment interest in the ASC would be offered to an investor would not be
related to the previous or expected volume of referrals or services by, or
other business with, the investor; neither any of the investors (including us)
nor the ASC entity would loan money to any investors or guarantee debt of any
investors incurred to purchase the investment interest; the return on investment

                                      9

<PAGE>

in the ASC would be directly proportional to their investment interests; the
ASCs would treat Federal health program beneficiaries in a non-discriminatory
manner; and the ASCs would be an integral part of the investor-physicians'
practices and would account for a significant portion of the
investor-physicians' medical practice income.

   Self-Referral Law. Subject to limited exceptions, the Federal self-referral
law, known as the "Stark Law," prohibits physicians and optometrists from
referring their Medicare or Medicaid patients for the provision of "designated
health services" to any entity with which they or their immediate family
members have a financial relationship. "Financial relationships" include both
compensation and ownership relationships. "Designated health services" include
clinical laboratory services, radiology and ultrasound services, durable
medical equipment and supplies, and prosthetics, orthotics and prosthetic
devices, as well as seven other categories of services. Physicians do not
currently refer to our ASCs for the provision of "designated health services."

   The Stark law does not prohibit physician ownership or investment interests
in ASCs to which they refer patients. The Centers for Medicare and Medicaid
Services clarified this in the recently effective Phase I regulations
interpreting the Stark law by providing that services that would otherwise
constitute a "designated health service," but that are paid by Medicare as part
of bundled rate, will not be considered designated health services for purposes
of the Stark Law. Thus, when an intraocular lens, or IOL, used in cataract
surgery is included in an ASC bundled payment rate, the IOL will not be
considered to be a "designated health service."

   Violating the Stark Law may result in denial of payment for the designated
health services performed, civil fines of up to $15,000 for each service
provided pursuant to a prohibited referral, a fine of up to $100,000 for
participation in a circumvention scheme, and exclusion from the Medicare,
Medicaid and other Federal health care programs. The Stark Law is a strict
liability statute. Any referral made where a financial relationship exists that
fails to meet an exception constitutes a violation of the law.

   Civil False Claims Act. The Federal Civil False Claims Act prohibits
knowingly presenting or causing to be presented any false or fraudulent claim
for payment by the government, or using any false or fraudulent record in order
to have a false or fraudulent claim paid. Violations of the law may result in
repayment of three times the damages suffered by the government and penalties
from $5,000 to $10,000 per false claim. Collateral consequences of a violation
of the False Claims Act include administrative penalties and possible exclusion
from participation in Medicare, Medicaid and other Federal health care programs.

   Health Insurance Portability and Accountability Act. In August of 1996,
Congress enacted the Health Insurance Portability and Accountability Act of
1996 (HIPAA). Included within HIPAA's health care reform provisions are its
"administrative simplification" provisions, which require that health care
transactions be conducted in a standardized format, and that the privacy and
security of certain individually identifiable health information be protected.
Proposed rules for many of the administrative simplification subject areas have
been published. Final rules covering "Standards for Electronic Transactions and
Code Sets" were published on August 17, 2000, and set forth the standardized
billing codes and formats that we must use when conducting certain health care
transactions and activities. The effective date of these final rules was
October 16, 2000, and we have until October 16, 2002 to come into compliance
with these rules. By filing an extension plan by October 16, 2002, we can
extend this compliance date to October 16, 2003. On December 28, 2000, the DHHS
published final rules addressing "Standards for Privacy of Individually
Identifiable Health Information" under HIPAA's administrative simplification
provisions. Compliance with these rules is required by April 14, 2003. These
rules will create substantial new compliance issues for all "covered
entities"--which include health care providers, health plans, and health care
clearinghouses--that engage in regulated transactions and activities. Our
operations are covered by the final rules. Violations of HIPAA can result in
civil penalties of up to $25,000 per person per year for each violation and
criminal penalties of up to $250,000 and/or up to 10 years in prison per
violation.

  State Law

   Facility Licensure and Certificate of Need. We may be required to obtain
licenses from the state departments of health in states where we open or
acquire ASCs and LVC centers. We believe that we have obtained the necessary
licenses in states where licenses are required. However, we believe courts and
state

                                      10

<PAGE>

regulatory authorities generally have provided little clarification as to some
of the regulations governing licensure requirements. It is possible that a
state regulatory authority could challenge our position. With respect to future
expansion, we cannot assure you that we will be able to obtain the required
licenses. However, we have no reason to believe that, in states requiring
facility licenses, we will not be able to obtain this license without
unreasonable expense or delay.

   Some states require a Certificate of Need, or CON, prior to the construction
or modification of an ASC or the purchase of specified medical equipment in
excess of a dollar amount set by the state. We believe that we have obtained
the necessary CONs in states where a CON is required. However, we believe
courts and state regulatory authorities generally have provided little
clarification as to some of the regulations governing the need for CONs. It is
possible that a state regulatory authority could challenge our determination.
With respect to future expansion, we cannot assure you that we will be able to
acquire a CON in all states where a CON is required.

   Anti-Kickback Laws. In addition to the Federal anti-kickback law, a number
of states have enacted laws that prohibit the payment for referrals and other
types of kickback arrangements. Some of these state laws apply to all patients
regardless of their source of payment, while others limit their scope to
patients whose care is paid for by particular payors.

   Self-Referral Laws. In addition to the Federal Stark Law, a number of states
have enacted laws that require disclosure of or prohibit referrals by health
care providers to entities in which the providers have an investment interest
or compensation relationship. In some states, these restrictions apply
regardless of the patient's source of payment.

   Corporate Practice of Medicine. A number of states have enacted laws or have
common law that prohibit the corporate practice of medicine. These laws are
designed to prevent interference in the medical decision-making process by
anyone who is not a licensed physician. Application of the corporate practice
of medicine prohibition varies from state to state. Although we neither employ
physicians nor provide professional medical services, we continue to provide
services to physicians in connection with their performance of surgical
procedures through fixed-site laser agreements (although these ongoing services
will be much more limited in scope than the comprehensive management services
historically provided through our management services business). To the extent
any act or service to be performed by us is construed by a court or enforcement
agency to constitute the practice of medicine, we cannot be sure that a
particular state court or enforcement agency may not construe our arrangements
as violating that jurisdiction's corporate practice of medicine doctrine. In
such an event, we may be required to redesign or reformulate our relationships
with these eye care professionals and there is a possibility that some
provisions of our agreements may not be enforceable.
   Fee-Splitting Laws. The laws of some states prohibit providers from dividing
with anyone, other than providers who are part of the same group practice, any
fee, commission, rebate or other form of compensation for any services not
actually and personally rendered. Penalties for violating these fee-splitting
statutes or regulations may include revocation, suspension or probation of a
provider's license, or other disciplinary action. In addition, courts have
refused to enforce contracts found to violate state fee-splitting prohibitions.
The precise language and judicial interpretation of fee-splitting prohibitions
varies from state to state. Courts in some states have interpreted
fee-splitting statutes to prohibit all percentage of gross revenue and
percentage of net profit management fee arrangements. Other state statutes
apply only to prohibit fee splitting in return for referrals. To the extent any
of our contractual arrangements are construed by a court or enforcement agency
to violate the jurisdiction's fee-splitting laws, we may be required to
redesign or reformulate our arrangements and there is a possibility that some
provisions of our agreements may not be enforceable.

Excimer Laser Regulation

   Medical devices, including the excimer lasers used in our eye surgery and
laser centers, are subject to regulation by the U.S. Food and Drug
Administration, or the FDA. Medical devices may not be marketed for commercial
sale in the U.S. until the FDA grants pre-market approval for the device.

                                      11

<PAGE>

   Failure to comply with applicable FDA requirements could subject us or laser
manufacturers to enforcement action, product seizures, recalls, withdrawal of
approvals and civil and criminal penalties. Further, failure to comply with
regulatory requirements, or any adverse regulatory action, could result in a
limitation on or prohibition of our use of excimer lasers.

Discontinued Operations

  General--Management Services

   As of March 15, 2002, we have long-term service agreements in place with
professional entities covering 45 ophthalmologists and 35 optometrists, who
provide eye care services in one or more of our 43 eye care clinic locations.
Generally, we have sought to cluster eye care clinics within regional markets
that can support one or more ASCs and one or more LVC centers. Prior to
adopting our discontinued operations plan, our strategy involved affiliating
with leading eye care professionals within a regional market until we had
achieved a cluster of eye care clinics, affiliated eye care professionals, ASCs
and LVC centers in a hub and spoke configuration throughout the regional market.

   We provide services, facilities and equipment to our affiliated eye care
professionals under long-term service agreements. These service agreements are
generally for a 40-year term and require us to provide all of the business,
administrative and financial services necessary to operate the eye care
clinics. These services typically include:

  .  billing, collection and cash management services

  .  procuring and maintaining all office space, equipment and supplies

  .  subject to federal and state law, recruiting, employing, supervising and
     training all non-professional personnel

  .  assisting our affiliated eye care professionals in recruiting additional
     ophthalmologists and optometrists

  .  all administrative and support services

  .  information technology services

   Our affiliated eye care professionals provide a wide range of eye care
services to patients including basic eye examinations, the diagnosis and
treatment of complex eye conditions and eye surgery, primarily cataract and LVC
surgery. Our affiliated eye care professionals currently practice in eye care
clinics which are leased and staffed by us. We also own all of the non-medical
assets used by the clinics, including all equipment and working capital.

  Competition--Management Services

   Our management services are provided to eye care professionals through
long-term affiliations. The market for these management services is fragmented,
and we do not face any single, dominant U.S. national competitor. Eye care
professionals may seek a corporate partner to assist them in the growth and
development of their practices, as well as with the day-to-day management and
administration of their businesses. Factors that may influence an eye care
professional's decision to retain a corporate partner to provide management
services are the corporate partner's experience and scope and quality of
services offered, the eye care professional's need for these services, and the
price for such services.

  Government Regulation--Management Services

   Our management services business, and the operations of our affiliated
ophthalmologists and optometrists, are also subject to extensive and continuing
regulation by governmental entities at the Federal, state and local

                                      12

<PAGE>

levels. The following is a summary of the health care regulatory issues
affecting these discontinued operations, both with respect to our affiliated
eye care professionals and us:

  Federal Law

   Anti-Kickback Statute. As discussed above, there are safe harbor regulations
to the Federal anti-kickback statute. When possible, we have attempted to
structure our management services business and our relationships with our
affiliated providers within a safe harbor. Some aspects of our management
services business, the business of our affiliated providers, and our
relationships with our affiliated providers either do not meet the prescribed
safe harbor standards, or relate to practices for which no safe harbor
standards have been proposed. Because there is no legal requirement that
relationships fit within a safe harbor, a business arrangement that does not
comply with the relevant safe harbor, or for which a safe harbor does not
exist, does not necessarily violate the anti-kickback statute.

   Self-Referral Law. Our affiliated providers provide limited categories of
designated health services, specifically, diagnostic radiology services,
including A-scans and B-scans, and prosthetic devices, including eyeglasses and
contact lenses furnished to patients following cataract surgery. Compensation
arrangements between our affiliated providers and their employers have
historically been structured to comply with the Stark Law.

   Civil False Claims Act. The Federal Civil False Claims Act prohibits
knowingly presenting or causing to be presented any false or fraudulent claim
for payment by the government, or using any false or fraudulent record in order
to have a false or fraudulent claim paid.

   Health Insurance Portability and Accountability Act. The operations of our
affiliated providers are covered by HIPAA. Because of our discontinued
operations plan, we do not anticipate causing our affiliated providers to
become compliant by the various HIPAA-related deadlines, the first of which
occurs in October 2002 (unless extended to October 2003 by filing an extension
plan). To the extent we consummate divestiture transactions prior to such
deadlines, we anticipate that the affected providers will be responsible for
ensuring their compliance with HIPAA.

  State Law

   Corporate Practice of Medicine Laws. Although we neither employ doctors nor
provide professional medical services, to the extent any portion of the
comprehensive management services that we provide under our service agreements
is construed by a court or enforcement agency to constitute the practice of
medicine, our service agreements provide that our obligations to perform the
act or service is waived. We cannot be sure that a particular state court or
enforcement agency may not construe our arrangements as violating that
jurisdiction's corporate practice of medicine doctrine. In such an event, we
may be required to redesign or reformulate our relationships with our
affiliated eye care professionals and there is a possibility that some
provisions of our service agreements may not be enforceable.

   Fee-Splitting Laws. We believe our management fee arrangements differ from
those invalidated as unlawful fee splits because they establish a flat monthly
fee that is subject to adjustment based on the degree to which actual practice
revenues or expenses vary from budget. However, there is some risk that our
arrangements could be construed by a state court or enforcement agency to run
afoul of state fee-splitting prohibitions. Accordingly, all of our service
agreements contain either a reformation provision or a mechanism establishing
an alternative fee structure, or both.

Item 2. Properties

   We do not own any real property. We lease space for our corporate
headquarters in Chicago, our regional offices, our ASCs and our LVC centers,
and our optical services operations. As part of our management services
business, we also continue to lease the clinics of our affiliated eye care
professionals. In some cases, these

                                      13

<PAGE>

facilities are leased from our affiliated eye care professionals and other
related parties. See "Item 13--Certain Relationships and Related Transactions."
Our corporate offices in the Chicago metropolitan area consist of 12,824 square
feet in downtown Chicago, and 10,499 square feet in Des Plaines, Illinois.

   The terms and conditions of our real property leases vary. The forms of
lease range from "modified triple net" to "gross" leases, with terms generally
ranging from month-to-month to ten years, with certain leases having multiple
five-year renewal terms at our option. Generally, our ASCs, LVC centers, eye
care clinics and optical retail outlets are located in medical complexes,
office buildings or free-standing buildings. The square footage of these
offices range from 300 to 22,993 square feet, and the terms of these leases
have expiration dates ranging from April 30, 2002 to February 29, 2010.
Depending on state licensing and Certificate of Need issues, addressing
capacity constraints in any of our ASCs in a similar manner may require state
regulatory approval.

   The following tables list the locations of our surgical facilities:

                     Medicare-Certified and Licensed ASCs


<TABLE>
<CAPTION>
                                            Number of
                                            Operating
                          Location            Rooms
                          --------          ---------
                          <S>               <C>
                          Atlanta, GA......     2
                          Columbus, GA.....     3
                          Chicago, IL......     1
                          Maryville, IL....     1
                          River Forest, IL.     2
                          Hammond, IN......     2
                          Merrillville, IN.     2
                          New Albany, IN...     2
                          Overland Park, KS     3
                          Thibodaux, LA....     1
                          Florissant, MO...     1
                          Kansas City, MO..     2
                          St. Joseph, MO...     1
                          Chattanooga, TN..     1
                          Richmond, VA.....     1
</TABLE>

                  LVC Centers and Fixed-Site Laser Agreements


<TABLE>
                    <S>                   <C>
                    Athens, GA            Overland Park, KS
                    Columbus, GA          St. Louis, MO
                    Kennesaw, GA          Cincinnati, OH
                    Davenport, IA         Oklahoma City, OK
                    Arlington Heights, IL Richmond, VA
                    Peoria, IL            Chesapeake, VA
                    Evansville, IN
</TABLE>

Item 3. Legal Proceedings

   We are not a party to any lawsuits or administrative actions pending, or to
our knowledge, threatened, which we would expect to have a material adverse
effect upon our business, financial condition or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

   We did not submit any matter to a vote of our security holders during the
fourth quarter of 2001.

                                      14

<PAGE>

                                    PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

Price Range of Common Stock

   Since August 18, 1999, our common stock has been traded on the Nasdaq
National Market under the symbol NOVA. The following table sets forth, for the
periods indicated, the range of high and low sale prices for our common stock
on the Nasdaq National Market:

<TABLE>
<CAPTION>
                                                          High   Low
                                                         ------ -----
           <S>                                           <C>    <C>
           Fiscal year ending December 31, 2001:
              First Quarter............................. $ 3.63 $1.06
              Second Quarter............................ $ 3.42 $1.06
              Third Quarter............................. $ 2.49 $1.35
              Fourth Quarter............................ $ 2.07 $1.01
           Fiscal year ending December 31, 2000:
              First Quarter............................. $18.25 $6.81
              Second Quarter............................ $14.38 $5.81
              Third Quarter............................. $10.00 $2.50
              Fourth Quarter............................ $ 2.75 $0.88
           Fiscal year ending December 31, 1999:
              Third Quarter (beginning August 18, 1999). $15.63 $7.88
              Fourth Quarter............................ $11.69 $4.81
</TABLE>

   On March 15, 2002, the last reported sale price of our common stock was
$0.82, and there were approximately 350 holders of record of our common stock.
This figure does not consider the number of individual holders of securities
that are held in the "street name" of a securities dealer.

  Dividends

   We have never paid a cash dividend on our common stock. We plan to retain
all future earnings to finance the development and growth of our business.
Therefore, we do not currently anticipate paying any cash dividends on our
common stock. Any future determination as to the payment of dividends will be
at our board of directors' discretion and will depend on our results of
operations, financial condition, capital requirements and other factors our
board of directors considers relevant. Moreover, our credit agreement prohibits
the payment of dividends on our common stock.

                                      15

<PAGE>

Item 6. Selected Financial Data

   The consolidated statement of operations data set forth below for the years
ended December 31, 2001, 2000 and 1999 and the balance sheet data at December
31, 2001 and 2000, are derived from our respective audited consolidated
financial statements which are included elsewhere herein. The consolidated
statement of operations data set forth below with respect to the years ended
December 31, 1998 and 1997 and the consolidated balance sheet data at December
31, 1999, 1998 and 1997 are derived from our audited financial statements which
are not included in this Form 10-K.

   The data set forth below should be read in conjunction with the consolidated
financial statements and related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
herein.

<TABLE>
<CAPTION>
                                                                                               Year Ended December 31,
                                                                                    --------------------------------------------
                                                                                      2001     2000     1999     1998     1997
                                                                                    --------  -------  -------  -------  -------
                                                                                        (in thousands, except per share data)
Consolidated Statement of Operations Data:
<S>                                                                                 <C>       <C>      <C>      <C>      <C>
Net revenue........................................................................ $ 70,063  $67,848  $50,778  $31,103  $20,525
                                                                                    ========  =======  =======  =======  =======
Income (loss) from continuing operations before restructuring and other charges.... $  5,446  $ 6,876  $ 4,544  $   381  $(1,437)
Restructuring charges (a)..........................................................  (10,912)      --       --       --       --
Other charges (a) (b)..............................................................   (3,719)      --   (2,690)      --       --
                                                                                    --------  -------  -------  -------  -------
Income (loss) from continuing operations........................................... $ (9,185) $ 6,876  $ 1,854  $   381  $(1,437)
                                                                                    ========  =======  =======  =======  =======
Net income (loss) from continuing operations....................................... $ (6,179) $ 3,639  $  (346) $   (65) $  (843)
                                                                                    ========  =======  =======  =======  =======
Net income (loss) from continuing operations before restructuring and other charges
 per diluted share (a) (b)......................................................... $   0.11  $  0.14  $  0.11  $ (0.06) $ (0.05)
Restructuring and other charges per diluted share..................................    (0.36)      --    (0.34)      --       --
                                                                                    --------  -------  -------  -------  -------
Net income (loss) from continuing operations per dilutive share.................... $  (0.25) $  0.14  $ (0.23) $ (0.06) $ (0.05)
                                                                                    ========  =======  =======  =======  =======

                                                                                      2001     2000     1999     1998     1997
                                                                                    --------  -------  -------  -------  -------
Other Data:
EBITDA (c)......................................................................... $  9,958  $10,879  $ 6,963  $ 1,773  $  (422)
EBITDA as percentage of net revenue (c)............................................     14.2%    16.0%    13.7%     5.7%      --
Number of surgical facilities operated as of the end of period:
   ASCs............................................................................       15       15       12       10       10
   LVC centers and fixed-site laser agreements.....................................       13       19        7       --       --
Number of surgical procedures performed:
   Cataracts.......................................................................   20,809   17,252   15,877   13,681   10,816
   LVC.............................................................................   18,810   24,229   13,366    5,083    1,676
   Other eye surgery procedures....................................................   10,178    8,743    7,718    8,845    6,464
                                                                                    --------  -------  -------  -------  -------
      Total........................................................................   49,797   50,224   36,961   27,609   18,956
</TABLE>
<TABLE>
<CAPTION>

                                                  As of December 31,
                                       ----------------------------------------
                                        2001     2000    1999    1998    1997
                                       ------- -------- ------- ------- -------
<S>                                    <C>     <C>      <C>     <C>     <C>
Consolidated Balance Sheet Data:
Working capital....................... $14,170 $ 23,725 $11,972 $ 9,186 $10,353
Total assets..........................  81,973  116,657  84,658  60,270  50,846
Total debt, excluding current portion.  20,708   26,184     188  20,393  15,739
Redeemable convertible preferred stock      --       --      --  16,430  12,680
Total stockholders' equity............  50,579   82,864  74,781  16,954  18,149
</TABLE>
--------
Notes:
(a) In connection with our restructuring plan announced in October 2001, we
    recorded certain restructuring and other charges related to the closure of
    certain facilities and the reorganization and downsizing of our information
    technology function.
(b) In connection with our initial public offering consummated on August 18,
    1999 (IPO), we recorded noncash, nonrecurring charges for compensation
    expense related to stock options and a discount to the IPO offering price
    upon the exchange of subordinated notes for common stock in 1999 and 1998.
    In addition, we recorded accretion of Series C and Series D convertible
    preferred stock to increase the carrying value of such stock to its
    potentially redeemable value. Please see the notes to consolidated
    financial statements included elsewhere in this Form 10-K for more
    discussion.

                                      16

<PAGE>

(c) EBITDA represents the sum of income before income taxes, interest,
    depreciation and amortization, and in 2001 restructuring and other charges
    and in 1999 noncash stock based compensation and discounts upon exchange of
    subordinated notes for common stock. We understand that industry analysts
    generally consider EBITDA to be one measure of the financial performance of
    a company that investors find useful in analyzing the operating performance
    of a company and its ability to service debt. EBITDA, however, is not a
    measure of financial performance under generally accepted accounting
    principles and should not be considered an alternative to net income as a
    measure of operating performance or to cash flows from operating, investing
    or financing activities as a measure of liquidity. Given that EBITDA is not
    a measurement determined in accordance with generally accepted accounting
    principles and is thus susceptible to varying calculations, EBITDA, as
    presented, may not be comparable to other similarly titled measures of
    other companies.

Item 7. Management's Discussion and Analysis of Financial Condition and Results
      of Continuing Operations

   You should read the following discussion along with our consolidated
financial statements and related notes included elsewhere herein. Our actual
results, performance and achievements in 2002 and beyond may differ materially
from those expressed in or implied by forward-looking statements contained in
this discussion. Such forward-looking statements are made within the meaning of
the Private Securities Litigation Reform Act of 1995.

Critical Accounting Policies and Estimates

   Management's discussion and analysis of financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the U.S. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosures. On an ongoing
basis, we evaluate our estimates and judgments based on historical experience
and various other factors that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions.

   We annually review our financial reporting and disclosure practices and
accounting policies to ensure that our financial reporting and disclosures
provide accurate and transparent information relative to the current economic
and business environment. We believe that of our significant accounting
policies (see Note 2 in the Notes to the Consolidated Financial Statements
beginning on page F-6), the following policies involve a higher degree of
judgment and/or complexity.

   Revenue Recognition and Accounts Receivable, Net of Allowances. Revenue from
surgical procedures performed at our surgical facilities, net of contractual
allowances, is recognized at the time the procedure is performed. The
contractual allowance is the difference between the fee we charge for a
procedure performed at our surgical facility and the amount we expect to be
paid by the patient or the applicable third-party payor, which includes
Medicare and private insurance. We base our estimates for the contractual
allowance on the Medicare reimbursement rates for the applicable procedure when
Medicare is the payor, our contracted rate with other third party payors or our
historical experience when we do not have a specific contracted rate. Revenue
from product sales, net of an allowance for returns and discounts, is
recognized when the product is shipped to our customer. We base our estimates
for sales returns and discounts on historical experience and have not
experienced significant fluctuations between estimated and actual return
activity and discounts given. Surgical facilities and product sales revenue is
further adjusted by a provision for doubtful accounts. We base our estimate for
doubtful accounts on the aging category and our historical collection
experience. If we fail to accurately file for reimbursement on a timely basis
with third party payors there may be an adverse affect on our collection
results.

   Accounts receivable have been reduced by the reserves for contractual
allowances and doubtful accounts noted above.

   Property and equipment. Property and equipment are depreciated or amortized
over their useful lives based on management's estimates of the period over
which the assets will generate revenue. We periodically review these lives
relative to physical factors, economic factors and industry trends.

                                      17

<PAGE>

   Asset impairment. In assessing the recoverability of our fixed assets,
goodwill and other noncurrent assets, we consider changes in economic
conditions and make assumptions regarding estimated future cash flows and other
factors. If these estimates or their related assumptions change in the future,
we may be required to record impairment charges.

   Restructuring and discontinued operations reserves. In 2001, we recorded a
$10.9 million pretax charge related to our restructuring plan and a $27.2
million net loss to account for the contemplated disposal of our discontinued
operations. These estimated losses were based on the best information available
to management at the date the plan of discontinued operations and restructuring
was announced. The actual results could differ from our initial estimate and
those differences could be material to the financial statements. We evaluate
the estimates at least quarterly. If it is determined that the loss should be
adjusted based on changes in facts or circumstances, such adjustment will be
recorded at that time.

   Income taxes. We record a valuation allowance to reduce our deferred tax
assets if it is more likely than not that some portion or all of the deferred
tax assets will not be realized. While we have considered future taxable income
and ongoing feasible tax strategies in assessing the need for the valuation
allowance, if these estimates and assumptions change in the future, we may be
required to adjust our valuation allowance. This could result in a charge to,
or an increase in, income in the period such determination is made.

Results of Operations

  Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000

   Net Revenue. Net revenue increased 3.4% from $67.8 million to $70.1 million.
Surgical facilities revenue decreased 4.4% from $41.2 million to $39.4 million
primarily due to the decrease in surgical procedures performed as well as the
change in surgical procedure mix. In 2001, total surgical procedures performed
in our surgical facilities decreased 1% to 49,797. LVC procedures decreased
22.4%, cataract procedures increased 20.6% and other procedures increased
16.4%, compared to 2000. Management believes that the demand for elective LVC
surgery was negatively impacted by the general economic conditions in 2001. Due
to the decrease in demand, we closed four LVC centers in 2001. Product sales
and other revenue increased 15.4% from $26.6 million to $30.7 million,
primarily as a result of a 27.5% revenue increase at our optical products
purchasing organization offset by a 14.5% decrease in revenue at our optical
dispensaries (also referred to as retail optical outlets). The increase in
revenue at our optical products purchasing organization was primarily due to
the addition of new customers and increased sales to existing customers. The
decrease in revenue from our optical dispensaries was due to the closing of
optical dispensaries in 2001 as well as a decline in sales at some of our
existing optical dispensaries.

   Salaries, Wages and Benefits. Salaries, wages and benefits expense decreased
7.2% from $18.1 million to $16.8 million. As a percentage of revenue, salaries,
wages and benefits expense decreased from 26.6% to 24.0%. The decrease in
salaries, wages and benefits expense is a result of staff reductions at some
surgical facilities in response to the reduction in LVC procedures as well as
corporate staff reductions. In addition, corporate salaries were further
reduced in the fourth quarter as a result of our discontinued operations and
restructuring plan. Salaries, wages and benefits expense in 2001 includes
approximately $0.9 million of expense at surgical facilities acquired or
developed late in 2000 or during 2001.

   Cost of Sales and Medical Supplies. Cost of sales and medical supplies
expense increased 18.5% from $28.1 million to $33.3 million. As a percentage of
revenue, cost of sales and medical supplies expense increased from 41.4% to
47.5%. The absolute increase in cost of sales and medical supplies expense is
primarily a result of higher sales volumes at our optical products purchasing
organization. The increase in cost of sales and medical supplies as a
percentage of revenue is due to our lower profit margin product sales and other
segment revenue increasing to 43.8% of total revenue in 2001, up from 39.3% in
2000.

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<PAGE>

   Selling, General and Administrative. Selling, general and administrative
expense decreased 8.3% from $10.8 million to $9.9 million. As a percentage of
revenue, selling, general and administrative expense decreased from 15.9% to
14.1%. The decrease in selling, general and administrative expense was the
result of a $1.3 million reduction in administrative expenses related to the
corporate staff reductions as well as a decrease in marketing expense. This was
offset, in part, by a $0.4 million increase for expenses at surgical facilities
acquired or developed late in 2000 or during 2001.

   Restructuring and Other Charges. We recorded $10.9 million of charges in
connection with our announcement to restructure our corporate support
functions, including information technology, and to close under-performing
facilities. An additional $3.7 million of other related charges were recorded
which included an increase in facility accounts receivable reserves,
professional fees incurred in development of our discontinued operations and
restructuring plan and severance and other employee costs incurred prior to
approval of this plan.

   Depreciation and Amortization. Depreciation and amortization expense
increased 15.0% from $4.0 million to $4.6 million due to the full year impact
of significant capital expenditures in 2000 in both the surgical facilities and
product sales segments as well as the impact of surgical facilities
acquisitions and openings in 2000.

   Other Expense. Other expense increased to $1.0 million from $0.9 million in
2000. Interest expense remained even at $1.0 million, as average lower interest
rates in 2001 offset a higher average debt balance.

   Provision for Income Taxes. Our effective tax rate increased to 39.3% from
39.2%. 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, primarily goodwill amortization.

  Year Ended December 31, 2000 Compared to the Year Ended December 31, 1999

   Net Revenue. Net revenue increased 33.5% from $50.8 million to $67.8
million. Surgical facilities revenue increased 32.5% from $31.1 million to
$41.2 million, primarily as a result of owning and operating additional ASCs
and operating additional LVC centers, resulting in growth in the number of
surgical procedures performed. In 2000, total surgical procedures performed in
our surgical facilities increased 36% to 50,224. LVC procedures increased
81.3%, cataract procedures increased 8.7% and other procedures increased 13.3%,
compared to 1999. Surgical procedures in 2000 grew despite the adverse effects
of particularly bad winter weather in December 2000, when surgical procedures
in ASCs we owned and operated for one year or more declined 15% from December
1999. In those ASCs we owned for a year or more, our ASCs averaged 3,924
surgical procedures for the full year 2000, up from 3,860 in 1999. Product
sales and other revenue increased 35.0% from $19.7 million to $26.6 million,
primarily as a result of higher volumes at our optical products purchasing
organization, and to a lesser extent, the revenue associated with our
acquisition of a marketing products and services company in May 2000.

   Salaries, Wages and Benefits. Salaries, wages and benefits expense increased
30.2% from $13.9 million to $18.1 million. As a percentage of revenue,
salaries, wages and benefits expense decreased from 27.5% to 26.6%. The
absolute increase in salaries, wages and benefits expense primarily reflects
the additional payroll incurred as a result of new acquisitions and
affiliations. Also contributing to the increase was approximately $320,000 of
severance costs associated with the streamlining of our organizational
structure during the second half of the year.

   Cost of Sales and Medical Supplies. Cost of sales and medical supplies
expense increased 28.3% from $21.9 million to $28.1 million. As a percentage of
revenue, cost of sales and medical supplies expense decreased from 43.2% to
41.4%. The absolute increase in cost of sales and medical supplies expense is
primarily a result of higher sales volumes at our optical products purchasing
organization. Higher supply costs associated with the increase in laser vision
correction procedures also contributed to the absolute increase during the
period. The decrease in cost of sales and medical supplies as a percentage of
revenue reflects efforts during the year to negotiate corporate contracts with
selected strategic suppliers.

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<PAGE>

   Selling, General and Administrative. Selling, general and administrative
expense increased 35.0% from $8.0 million to $10.8 million. As a percentage of
revenue, selling, general and administrative expense increased from 15.7% to
15.9%. The absolute increase in selling, general and administrative expense was
the result of costs incurred at new acquisitions and affiliations, along with
increased marketing expenditures during the first half of 2000.

   Depreciation and Amortization. Depreciation and amortization expense
increased 66.7% from $2.4 million to $4.0 million. Acquisitions as well as
increased capital expenditures increased overall depreciation and amortization
expense.

   Compensation Expense Related to Stock Options. In 1999, we fully vested all
options granted from February 1, 1999 through July 23, 1999. We issued options
to acquire 1,050,800 shares of our common stock during this time period, which
were granted with exercise prices below the fair market value. Accordingly, we
recorded a noncash, pre-tax charge of $2.7 million as compensation expense
related to those options which became fully vested on the completion of our IPO.

   Other Expense. Other expense decreased from $2.9 million in 1999 to $0.9
million in 2000. The 1999 expense includes $2.4 million of discount recorded
upon the conversion of our subordinated exchangeable promissory notes into
common stock on the completion of our IPO. Interest expense increased 36.9%
from $711,000 to $973,000, the result of higher interest rates and higher
average outstanding balances when compared with the prior year period.

   Provision for Income Taxes. Our effective tax rate decreased to 39.2% from
44.8% (excluding the effect of the IPO-related items in 1999). 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, primarily goodwill amortization. The increase in income before income
taxes in 2000 better covered these nondeductible expenses, resulting in a lower
overall effective tax rate.

Liquidity and Capital Resources

   We generated cash from continuing operating activities for the year ended
December 31, 2001 of $6.0 million. We used $2.7 million in our investing
activities in 2001, which included the purchase of a 60% interest in an ASC in
Thibodaux, LA and the purchase of property and equipment. We decreased net bank
borrowings by $5.7 million to $20.7 million at December 31, 2001 with cash
provided by our continuing and discontinued operations. In the first quarter of
2002, net bank borrowings were further reduced by $8.3 million to $12.4 million
at March 29, 2002 with cash provided by our continuing and discontinued
operations and divestiture transactions. As of December 31, 2001 and 2000, we
had cash and cash equivalents of approximately $967,000 and $785,000,
respectively, and working capital of approximately $14.2 million and $23.7
million, respectively.

   We amended our revolving credit facility on August 29, 2001. The primary
purpose of this amendment was to revise the acquisition and affiliation
covenants to better conform to our surgical facilities focus. On October 23,
2001, we amended our revolving credit agreement to reflect implementation of
the discontinued operations plan. The amendment included an initial reduction
of the maximum commitment available under the facility from $50 million to $45
million. Beginning January 1, 2002, the maximum commitment available under the
facility will be reduced by $2.5 million per quarter, resulting in a maximum
commitment of $35 million as of October 1, 2002. The credit agreement expires
on June 30, 2003.

   Under the amended facility, interest on borrowings under the credit
agreement is payable at an annual rate equal to our lender's published base
rate plus the applicable borrowing margin ranging from 0% to 1.0% or LIBOR plus
a range from 1.5% to 3.0%, varying upon our ability to meet financial
covenants. The weighted average interest rate on credit line borrowings was
6.5% for the twelve months ended December 31, 2001 and

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<PAGE>

was 4.0% at December 31, 2001. The credit agreement contains covenants that
include limitations on indebtedness, liens, capital expenditures, acquisitions
and affiliations and ratios that define borrowing availability and restrictions
on the payment of dividends. As amended, the credit agreement requires that we
use 100% of the proceeds from our divestiture transactions to pay down our
outstanding debt.

   We further amended our credit agreement subsequent to December 31, 2001 to
include additional covenants. We will be in default under our credit agreement
if our cash expenditures incurred in connection with our discontinued
operations plan (including, without limitation, the costs of structuring and
negotiating our divestiture transactions, terminating employees and closing
facilities) exceeds by $10 million the sum of our EBITDA from our discontinued
management services operations plus the cash proceeds from these transactions.
As of December 31, 2001, we were in compliance with all our credit agreement
covenants.

   We expect our cash flow from operations and funds available under our
existing revolving credit facility will be sufficient to fund our operations
for at least 12 months. Our future capital requirements and the adequacy of our
available funds will depend on many factors, including the timing of our
acquisition activities, capital requirements associated with our surgical
facilities, expansion and the future cost of surgical equipment, and the cost
of completing our discontinued operations plan. We also expect the cash
proceeds from divestitures to supplement our cash flow.

   One of our former affiliated eye care professionals has the option,
exercisable beginning January 1, 2004 through January 1, 2006, to acquire up to
a 30% interest in one of our ASCs. We have also entered into an agreement,
subject to state licensure approvals, to sell a 20% interest in one of our ASCs
to two former affiliated eye care professionals.

   Effective March 1, 2001, we entered into a new five-year supply agreement
with Alcon Laboratories, Inc. setting forth the terms upon which we can procure
and utilize excimer lasers manufactured by Alcon. During the five-year term, we
will pay Alcon monthly based on the number of procedures performed on each of
our APEX/Infinity lasers and LADARVision Systems. We are required to pay for a
minimum number of annual procedures on each LADARVision System during the
five-year term, whether or not these procedures are performed. As of March 1,
2002, we have entered into commitments to pay Alcon up to approximately $1.4
million annually during the five-year term.

   On June 15, 2000, we entered into an agreement to acquire two ASCs,
contingent upon the resolution of certain requirements associated with the
seller. Certain of these contingencies were satisfied in 2000 with respect to
one of the ASCs, which we acquired in December 2000. We have terminated our
agreement to acquire the second ASC, and have sold back to the seller the ASC
acquired in December 2000.

New Accounting Pronouncements

   In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards, Goodwill and Other Intangible
Assets (SFAS 142). SFAS 142 addresses the financial accounting and reporting
for acquired goodwill and other intangible assets. Under the new rules, we are
no longer required to amortize goodwill and other intangible assets with
indefinite lives, but will be subject to periodic testing for impairment. Under
the new pronouncement, goodwill related to acquisitions after July 1, 2001 has
not been amortized. Effective January 1, 2002 we will adopt SFAS 142 and are
evaluating the effect that such adoption may have on our consolidated financial
statements. Any impact related to the required impairment testing will be
treated as a change in accounting method in the consolidated financial
statements. If no impairment losses require recognition, it is estimated that
our diluted earnings per share in 2002 will improve by approximately two cents,
due to the non-amortization of goodwill.

   In October 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS
144). This pronouncement establishes a single accounting model of the
impairment of disposal of long-lived assets, including discontinued operations.
SFAS

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<PAGE>

144 is required to be adopted January 1, 2002. Although SFAS 144 supercedes
SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of and APB Opinion 30, Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, the
accounting treatment related to our decision in September 2001 to discontinue
our management services segment under APB Opinion 30 is not impacted. We do not
anticipate that the adoption of this standard will have a material impact on
the consolidated financial statements.

Risk Factors

   The following factors should be considered in evaluating our company and our
business. These factors may have a significant impact on our business,
operating results and financial condition.

Risks relating to Our Discontinued Operations Plan

   Whether or not we are successful in completing our discontinued operations
   plan, we may lose revenue in our continuing operations if our former
   affiliated physicians elect to refrain from using our surgical facilities or
   purchasing optical products from our optical products and services business.

   During 2002, we are pursuing divestiture transactions with our affiliated
eye care professionals, many of whom are also customers using our ASCs and/or
purchasing products from our optical products division. In 2001, our affiliated
eye care professionals performed 86% of the surgical procedures performed in
our surgical facilities, and their purchases from our optical products division
comprised 25% of the division's total revenue. These eye care professionals may
not continue to use our surgical facilities or purchase our optical products
and services.

   Given the nature of the doctor services industry, particularly with respect
to the physician practice management model that we used to form the structure
of our relationships, some of our affiliated eye care professionals view
favorably the prospects of terminating our services agreements and regaining
the day-to-day control over their business operations. Despite their potential
desire to terminate our relationship, we may have difficulty reaching
agreements with our affiliated eye care professionals on terms and conditions
that are acceptable to us and our lenders. If we fail to reach an agreement, or
if the negotiations resulting in an agreement are long and difficult, the
future relationships with these doctors could be strained. These strained
relationships could deter a doctor from using our surgical facilities or
purchasing our optical products and services. For the year ended December 31,
2001, surgical procedures performed by one of our affiliated practices
accounted for approximately 32% of our surgical facilities revenue, and 18% of
our consolidated revenue. If some or all of the physicians from this affiliated
practice elect to refrain from using our surgical facilities, we could
experience reductions in our profitability and revenue growth.

   As part of the terms of applicable divestiture transactions, we are
attempting to negotiate multi-year supply agreements where we will continue to
be the primary supplier of optical products to our former affiliated eye care
professionals. We may not be successful in negotiating these agreements, or the
agreements may be challenged and rendered unenforceable. Thus, our discontinued
operations plan could limit or reduce our optical products division's
profitability and revenue growth.

   We currently own 100% of 14 of our 15 licensed ASCs and 60% of the other
ASC. Another potential term of our divestiture transactions could include
selling our former affiliated ophthalmologists a minority interest in an ASC
located within reasonable proximity of their office locations. Selling minority
interests in our existing ASCs may reduce our current profitability. The terms
of our credit facility limit our ability to sell minority interests in our
existing ASCs to the extent any such sales reduce EBITDA in any 12-month period
by more than $1 million. Co-owning ASCs with physicians may create additional
regulatory risk. See "Government Regulation--Federal Law--Anti-Kickback
Statute."

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<PAGE>

   Our failure to complete our plan to divest our management services business
   in a timely and orderly fashion could limit or reduce our profitability and
   revenue growth, and could result in further charges and/or changes in
   accounting presentation.

   Although we have closed five divestiture transactions as of March 29, 2002,
we have approximately thirteen more transactions to negotiate and close in
2002. The amount of time and resources necessary to negotiate and close these
transactions is significant, and this effort can distract our senior management
and employees from our continuing business operations. As a result, our
continuing business operations may suffer from our inability to devote all of
our time, effort and resources to them.

   In connection with our discontinued operations plan, we recorded a net loss
of $27.2 million in the 2001 third quarter. In taking this charge, we believe
we have established adequate reserves to cover the expenses of negotiating and
closing these transactions. We also believe that we have made reasonable
estimates on our gains and/or losses derived from these transactions. Because
we are relatively early in the process, however, it is possible that the actual
results will differ from our estimates and our reserves may not be sufficient
to fund the cost and expense of negotiating and closing these transactions.

   Our failure to complete our plan on terms acceptable to us and our lenders
   could result in our inability to decrease our outstanding debt under our
   credit facility and, to the extent costs incurred in connection with our
   pursuit of our discontinued operations plan far exceed our sales proceeds
   from these divestiture transactions, we could be in default under our loan
   agreement.

   The terms of our credit facility require that we use 100% of the proceeds
from our divestiture transactions to pay down our outstanding debt. The cash
proceeds that we realize from these transactions may not be as much as we may
have anticipated. Moreover, under the terms of our credit facility, we will be
in default if our cash expenditures incurred in connection with our
discontinued operations plan (including, without limitation, the costs of
structuring and negotiating our divestiture transactions, terminating employees
and closing facilities) exceeds by $10 million our EBITDA from our discontinued
management services operations and the cash proceeds from these transactions.

   Even if we successfully complete our discontinued operations plan, we may
   continue to have liabilities and expenses relating to our management
   services business.

   In negotiating and consummating divestiture transactions, we may not be
successful assigning or being released from various liabilities arising from
the operation of our management services business. For example, under our
service agreements we lease all of the office space where our affiliated eye
care professionals treat patients; third party landlords may refuse to release
us from our obligations under these leases. Although we will use reasonable
efforts to avoid remaining responsible under these and other similar
arrangements, and in any event may have indemnification rights against our
former affiliated eye care professionals or other transferees, our efforts to
be released may fail or our indemnification rights may prove worthless if our
transferees cannot satisfy their responsibilities to us. Consequently, our
payment of residual liabilities and expenses relating to our management
services business could limit or reduce our revenue and profitability.

Risks Relating to Our Business

   Our failure to operate, acquire or develop a sufficient number of profitable
   surgical facilities could limit our profitability and revenue growth.

   Our growth strategy is focused on growing our existing ASCs and acquiring or
developing new ASCs in a cost-effective manner. We may not experience an
increase in surgical procedures at our existing or future ASCs. We may not be
able to achieve the economies of scale and patient base, or provide the
business, administrative and financial services required to sustain
profitability in our existing and future ASCs. Newly acquired or

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<PAGE>

developed facilities may generate losses or suffer lower operating margins than
our more established facilities, or they may not generate returns that justify
our investment. In addition, if vision correction technology becomes available
to ophthalmologists that is less expensive than the medical equipment currently
required for laser vision correction, eye care professionals might have less
interest in using our ASCs or refractive surgical equipment for vision
correction procedures.

   We may not be able to identify suitable acquisition or development targets,
successfully negotiate the acquisition or development of these facilities on
satisfactory terms, or have the access to capital to finance these endeavors.
We anticipate that we will fund the acquisition and development of future ASCs
from borrowings under our credit facility. The maximum commitment available
under our facility decreases to $35 million on October 1, 2002. This limit
could reduce our ability to acquire and/or develop ASCs.

   In addition, we currently wholly own 14 of our 15 ASCs. The terms of our
credit facility limit our ability to sell minority interests in our existing
ASCs to the extent any such sales would reduce our EBITDA in any 12-month
period by more than $1 million. This limitation could affect the manner and
timing in which we may want to pursue co-ownership of our existing ASCs with
physicians and other investors in our existing local markets.

   If we are unable to successfully implement our growth strategy or manage our
growth effectively, our business, financial condition and results of
operations, including our ability to achieve and sustain profitability, could
be adversely affected.

   We may not compete effectively with other companies that have more resources
   and experience than us.

   Competitors with substantially greater financial, technical, managerial,
marketing and other resources and experience may compete more effectively than
us. We compete with other businesses, including ASC companies, refractive laser
center companies, hospitals, individual ophthalmologists, other ASCs, LVC
centers, eye care clinics and providers of retail optical products. Competitors
with substantially greater resources may be more successful in acquiring and
developing surgical facilities. Our wholesale optical laboratories and optical
products purchasing organization also face competition on national, regional
and local levels. Companies in other health care industry segments, including
managers of hospital-based medical specialties or large group medical
practices, may become competitors in providing ASCs and surgical equipment as
well as competitive eye care related services. Competition for retaining the
services of highly qualified medical, technical and managerial personnel is
significant.

   Reduced prices and reimbursement rates for surgical procedures as a result
   of competition or Medicare and private third party payor cost containment
   efforts could reduce our revenue, profitability and cash flow.

   Revenue from laser vision correction procedures comprised approximately 16%
of our consolidated revenue for the year ended December 31, 2001. The market
for providing laser vision correction and other refractive surgery procedures
continues to be highly competitive. This competitiveness has resulted in many
of our competitors offering laser vision correction or other refractive surgery
services at lower prices than the prices charged by us. If price competition
continues, however, we may choose or be forced to lower the facility fees we
charge in our surgical facilities. If we lower our fees, we could experience
reductions in our revenue, profitability and cash flow.

   Government sponsored health care programs, directly or indirectly, accounted
for approximately 22% of our consolidated revenue for the year ended December
31, 2001. This includes facility fees we receive directly for eye care
professionals' use of our ASCs, but does not include amounts derived from laser
vision correction, which is an elective procedure that patients pay for
out-of-pocket.

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<PAGE>

   The health care industry is continuing to experience a trend toward cost
containment as government and private third-party payors seek to impose lower
reimbursement and utilization rates and to negotiate reduced payment schedules
with health care providers. These trends may result in a reduction from
historical levels in per patient revenue received by our ASCs. Changes in
Medicare payment rates have in the past reduced payments to ASCs. Private
insurance payments also could be affected to the extent that these insurance
companies use payment methodologies based on Medicare rates.

   Reductions in payments to our ASCs and LVC centers, and through our
fixed-site service arrangements, or other changes in reimbursement for eye care
services could reduce our revenue, profitability and cash flow.

   If eye care professionals and the general population do not continue to
   accept laser vision correction and other refractive surgical procedures as
   alternatives to eyeglasses and contact lenses, an important source of our
   historical and future revenue and earnings growth will be limited.

   Our profitability and growth will depend, in part, upon continued acceptance
by eye care professionals and the general population of laser vision correction
and other refractive surgical procedures in the U.S. Eye care professionals and
the general population might not continue to accept laser vision correction
surgery because of the cost of the procedure that, to date, has primarily been
paid directly by patients, and concerns about the safety and effectiveness of
laser vision correction. If eye care professionals and the general population
do not continue to accept laser vision correction and other refractive surgical
procedures, an important source of our historical and future revenue and
earnings growth will be limited.

   Rapid technological advances may reduce our sources of revenue and our
   profitability.

   Adoption of new technologies that may be comparable or superior to existing
technologies for surgical equipment could reduce the amount of the facility
fees we receive from eye care professionals who use our surgical facilities.
Reduction of these sources of revenue could decrease our profitability. In this
case, we might have to expend significant capital resources to deploy new
technology and related equipment to remain competitive. Our inability to
provide access to new and improving technology could deter eye care
professionals from using our surgical facilities.

   Loss of the services of key management personnel could adversely affect our
   business.

   Our success depends, in part, on the services of key management personnel,
including Stephen J. Winjum, our Chairman of the Board, President and Chief
Executive Officer; Scott T. Macomber, our Executive Vice President and Chief
Financial Officer; and E. Michele Vickery, our Executive Vice President
Operations. We do not know of any reason why we might be likely to lose the
services of any of these officers. However, in light of the role that each of
these officers is expected to play in our future growth, if we lost the
services of any of these officers, we believe that our business could be
adversely affected.

   Lack of adequate financing could limit our growth.

   Successful implementation of our growth strategy will require continued
access to capital. If we do not have sufficient cash resources, our growth
could be limited unless we are able to obtain capital through additional equity
or debt financings. We intend to finance future acquisitions and development of
surgical facilities, as well as our other strategic initiatives, with cash.
Capital may not be available to us for acquisitions or other needs. Further, if
financing is available, it may not be on terms that are favorable to us or
sufficient for our needs.

   The nature of our business could subject us to potential malpractice,
   product liability and other claims.

   The provision of eye care services entails the potentially significant risk
of physical injury to patients and an inherent risk of potential malpractice,
product liability and other similar claims. Our insurance may not be adequate
to satisfy claims or protect us and this coverage may not continue to be
available at acceptable costs. A partially or completely uninsured claim
against us could reduce our earnings and working capital.

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<PAGE>

   If a change in events or circumstances causes us to write-off a large
   portion of intangible assets, our total assets would be reduced
   significantly and we could incur a substantial charge to earnings.

   Our assets include intangible assets primarily in the form of goodwill. At
December 31, 2001, intangible assets of our continuing operations represented
approximately 32% of total assets and 52% of stockholders' equity. The
intangible asset value represents the excess of cost over the fair value of the
separately identifiable net assets acquired in connection with our acquisitions
and affiliations. The value of these assets may not be realized. We regularly
evaluate whether events and circumstances have occurred that indicate all or a
portion of the carrying amount of the asset may no longer be recoverable, in
which case an additional charge to earnings may become necessary. If, during
our evaluation, we determine that the fair value of an ASC is less than the
unamortized intangible asset, we will reduce the unamortized balance to its
realizable amount and incur a corresponding charge to earnings. If, in the
future, we determine that our unamortized intangible assets have suffered an
impairment which requires us to write off a large portion of unamortized
intangible assets due to a change in events or circumstances, this write off
would significantly reduce our total assets and we could incur a substantial
charge to earnings, as well as be in default under one or more covenants in our
credit facility.

Risks Relating to Our Industry

   Application of existing or proposed government regulations could impair our
   sources of revenue and limit our ability to grow our business.

   We are subject to extensive government regulation and supervision, including:

  .  Federal and State:

     --anti-kickback statutes

     --self-referral laws

     --civil false claims acts

     --privacy laws

   . State:

     --facility license requirements and certificates of need

     --corporate practice of medicine restrictions

     --fee-splitting laws

   . Food and Drug Administration regulation of medical devices, including
     laser vision correction and other refractive surgery equipment

   Many of these laws and regulations are subject to varying interpretations,
and courts and regulatory authorities generally have provided little
clarification. Moreover, state and local laws and interpretations vary from
jurisdiction to jurisdiction. As a result, we may not always be able to
accurately predict interpretations of applicable law, and Federal and state
authorities could challenge some of our activities, including our co-ownership
of ASCs with physicians and other investors. If any of our activities are
challenged, we may have to divert substantial time, attention and resources
from running our business to defend our activities against these challenges,
regardless of their merit. If we do not successfully defend these challenges,
we may face a variety of adverse consequences, including:

   . loss of use of our ASCs and LVC centers

   . losing our eligibility to participate in Medicare or Medicaid or losing
     other contracting privileges

   . in some instances, civil or criminal fines

   Any of these results could impair our sources of revenue and our
profitability and limit our ability to grow our business.

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<PAGE>

   Becoming compliant with federal regulations enacted under the Health
   Insurance Portability and Accountability Act could require us to expend
   significant resources and capital, and could impair our profitability and
   limit our ability to grow our business.

   Federal regulations adopted under the Health Insurance Portability and
Accountability Act of 1996 (HIPAA) require that our affiliated eye care
professionals and we be capable of conducting certain standardized health care
transactions, including billing and other claims transactions, by October 16,
2002. In addition, on December 28, 2000, HIPAA regulations governing patient
privacy were released, and compliance with those regulations is required by
April 15, 2003. Due to efforts by the DHHS to refine and clarify these privacy
rules, their status is currently unclear. Depending on their ultimate form,
these privacy regulations will require substantial compliance efforts on behalf
of our affiliated eye care professionals and us. Although difficult to predict
at this time, the amount of time, effort and expense associated with becoming
compliant with existing and expected HIPAA regulations could require us to
divert time, attention and resources from our business operations, and/or
require us to spend substantial sums that could impair our profitability. HIPAA
violations could also expose us to civil penalties of up to $25,000 per person
per year for each violation and criminal penalties with fines of up to $250,000
and/or up to 10 years in prison per violation.

Risks Relating to our Common Stock

   If our common stock is delisted from the Nasdaq National Market, the
   liquidity, visibility and price of our common stock may decrease.

   Since our initial public offering, our common stock has been listed on the
Nasdaq National Market (NNM). Shares of our common stock could be delisted from
the NNM if we fail to satisfy the continued listing requirements of the NNM,
including a minimum closing bid price of $1.00. We will not be in compliance
with the NNM continued listing requirements if our minimum closing bid price is
below $1.00 for 30 consecutive trading days. As of March 28, 2002, our common
stock has not achieved a minimum closing bid price of $1.00 since February 20,
2002. If we become non-compliant, we would receive a written notice from
Nasdaq, after which we would then have 90 calendar days to become compliant. To
achieve compliance, our minimum closing bid price has to be above $1.00 for ten
consecutive trading days during this 90-day period. If we fail to achieve
compliance following this 90-day period, Nasdaq would issue us a delisting
letter, at which time we could appeal and request an opportunity for a hearing.
If we chose not to appeal, or if our appeal was unsuccessful, our common stock
would be delisted from the NNM.

   Alternatively, if we satisfy the requirements for inclusion in the Nasdaq
SmallCap Market and we apply for transfer from the NNM to the SmallCap Market
prior to the expiration of the above 90-day period, the Nasdaq proceedings will
be delayed pending review of our transfer application. If our transfer
application is approved, we will be eligible for an additional 90-day grace
period under the SmallCap Market rules. If we meet certain criteria, we may
also be eligible for an additional 180-day grace period beyond that initial
SmallCap Market 90-day period. If during these SmallCap Market grace periods
the minimum closing bid price of our common stock is $1.00 or more for 30
consecutive trading days, then we may be eligible for transfer back to the NNM.

   If our common stock is delisted from the NNM and SmallCap Market, we would
be forced to list our common stock on the OTC Bulletin Board or some other
quotation medium, depending on our ability to meet the specific listing
requirements of those quotation systems. If this happens, an investor might
find it more difficult to buy and sell, or to obtain accurate price quotations
for, shares of our common stock. This lack of visibility and liquidity could
further decrease the price of our common stock. In addition, delisting from the
NNM and/or SmallCap Market might negatively impact our reputation and, as a
consequence, our business.

   A significant percentage of our total outstanding shares is held by our
   affiliated eye care professionals and may be sold into the market, which
   could adversely affect our stock price and contribute to its volatility.

                                      27

<PAGE>

   We believe that our affiliated eye care professionals continue to own a
significant portion of our common stock. Other than the restrictions imposed by
the securities laws on those shares held by persons who are, or who have been
during the past 90 days, our affiliates as defined under Rule 144, there are no
longer any legal or contractual restrictions limiting these holders from
selling their shares. Our negotiations with our affiliated eye care
professionals as part of our plan to discontinue our management services
operations may place a strain on our relationships with these stockholders. If
these holders sell their shares, or if the market perceives that these holders
intend to sell their shares, our stock price could be adversely affected, and
this could contribute to volatility in our stock price. This could occur
without regard to the performance or prospects of our continuing operations.

   Any return on your investment in our stock will depend on your ability to
   sell our stock at a profit.

   We have never declared or paid any dividends and our credit agreement
prohibits payment of dividends on our common stock. We anticipate that we will
not declare dividends at any time in the foreseeable future. Instead we will
retain earnings for use in our business. As a result, your return on an
investment in our stock likely will depend on your ability to sell our stock at
a profit.

   In addition, the stock market has, from time to time, experienced extreme
price and volume fluctuations. These broad market fluctuations may adversely
affect the market price of our common stock.

   Fluctuations in our quarterly operating results may make it difficult to
   predict our future results of operations and may cause volatility in our
   stock price.

   During 2001, the market price of our common stock has been volatile,
fluctuating from a high trading price of $3.63 per share to a low trading price
of $1.01 per share. Our stock price has experienced further declines in 2002.
Our results of operations have varied and may continue to fluctuate from
quarter to quarter. We have a high level of fixed operating costs, including
compensation costs and minimum usage commitments on our excimer lasers. As a
result, our profitability depends to a large degree on the volume of surgical
procedures performed in, and on our ability to utilize the capacity of, our
surgical facilities.

   We experience some seasonality in our operating results during the first
calendar quarter. The timing and degree of fluctuations in our operating
results will depend on several factors, including:

   . general economic conditions

   . decreases in demand for non-emergency procedures due to severe weather

   . availability or sudden loss of the services of eye care professionals who
     utilize our surgical facilities

   . availability or shortages of laser and other vision correction
     surgery-related products and equipment

   . the timing and relative size of acquisitions

   These kinds of fluctuations in quarterly operating results may make it
difficult for you to assess our future results of operations and may cause a
decline or volatility in our stock price.

   Provisions of our charter and bylaws, Delaware law and our Rights Agreement
   could deter takeover attempts.

   Provisions of our Restated Certificate of Incorporation, our Bylaws,
Delaware law and our Rights Agreement may have the effect of delaying,
deterring or preventing a change in control, even if a change in control would
be beneficial to you. Members of our board of directors may have interests in a
change of control that differ from you. These interests could cause them to
resist a change in control that would help you better realize the value of your
investment.

                                      28

<PAGE>

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

   Our exposure to interest rate risk relates primarily to our debt obligations
and temporary cash investments. Interest rate risk is managed through variable
rate borrowings under our credit facility. On December 31, 2001, we had $20.7
million of debt outstanding under our credit facility. Our revolving line of
credit bears interest at an annual rate equal to our lender's published base
rate plus applicable borrowing margin ranging from 0 to 1.00% or LIBOR plus a
range from 1.5% to 3.00%, varying upon our ability to meet financial covenants.

   We do not use any derivative financial instruments relating to the risk
associated with changes in interest rates.

Item 8. Financial Statements and Supplementary Data

   The consolidated financial statements and financial statement schedules,
with the report of independent public accountants, listed in Item 14 are
included in this Form 10-K.

Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure

   None.

                                      29

<PAGE>

                                   PART III

Item 10. Directors and Executive Officers of the Registrant

   The information in response to this item is incorporated by reference from
the "Proposal No. 1--Election of Directors," "Other Directors" and "Executive
Officers" sections of the Definitive Proxy Statement to be filed with the
Securities and Exchange Commission in connection with our 2002 Annual Meeting
of Stockholders (the "2002 Proxy Statement").

Item 11. Executive Compensation

   The information in response to this item is incorporated by reference from
the "Executive Compensation" section of the 2002 Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management

   The information in response to this item is incorporated by reference from
the "Security Ownership of Certain Beneficial Owners and Management" section of
the 2002 Proxy Statement.

Item 13. Certain Relationships and Related Transactions

   The information in response to this item is incorporated by reference from
the "Certain Relationships and Related Transactions" section of the 2002 Proxy
Statement.

                                      30

<PAGE>

                                    PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

   (a) The following documents are filed as part of this Form 10-K:

       1. The following consolidated financial statements of the Company, with
          the report of independent public accountants, are filed as part of
          this Form 10-K:

          . Report of Independent Public Accountants

          . Consolidated Balance Sheets

          . Consolidated Statements of Operations

          . Consolidated Statements of Stockholders' Equity

          . Consolidated Statements of Cash Flows

          . Notes to Consolidated Financial Statements

       2. The following consolidated financial statement schedules of the
          Company are filed as part of this Form 10-K:

          Schedule I--Rule 12-09 Valuation Reserves

       3. The following exhibits are filed with this Form 10-K or incorporated
          by reference as set forth below.

<TABLE>
<CAPTION>
Exhibit
Number    Exhibit
-------   -------
<C>       <S>
 3.1+     Amended and Restated Certificate of Incorporation of the Registrant
 3.2++    Amended and Restated Bylaws of the Registrant
 4.1+     Specimen stock certificate representing Common Stock
 4.2+     Registrant's Rights Agreement
10.1++    Registrant's Amended and Restated Stock Incentive Plan
10.2+     Registrant's Amended and Restated 1999 Stock Purchase Plan
10.3+     Indemnification Agreement
10.4+     Registration Rights Agreement
10.5+     Subordinated Registration Rights Agreement
10.6+     Employment Agreement
10.12+*   Management Services Agreement (SureVision Eye Centers, L.L.C.)
10.13+*   Management Services Agreement (Hunkeler Eye Centers. P.C.)
10.15+    Registrant's 401(k) Plan
10.23+++* Alcon Laboratories, Inc. Agreement
10.24++++ Employment Agreement dated August 17, 2001 with Stephen J. Winjum
10.25++++ Employment Agreement dated August 17, 2001 with E. Michele Vickery
10.27     Employment Agreement dated October 16, 2001 with Scott T. Macomber
10.28*    Second Amended and Restated Credit Agreement dated as of October 23, 2001
21++++    Subsidiaries of the Registrant
23.1      Consent of Arthur Andersen LLP
99        Letter from the Company to the Securities and Exchange Commission, dated as of
          March 29, 2002, confirming receipt of Arthur Andersen LLP's representations
          concerning audit quality controls
</TABLE>

                                      31

<PAGE>

--------
+   Incorporated by reference to the corresponding Exhibit of the Registrant's
    Registration Statement on Form S-1 (Reg. No. 333-79271).
++  Incorporated by reference to the corresponding Exhibit of the Registrant's
    Form 10-K filed with the Securities and Exchange Commission on March 30,
    2001.
+++ Incorporated by reference to the corresponding Exhibit on the Registrant's
    Form 10-Q filed with the Securities and Exchange Commission on May 15, 2001.
++++ Incorporated by reference to the corresponding Exhibit on the Registrant's
     Form 10-Q filed with the Securities and Exchange Commission on November
     13, 2001.
*   Portions of this Exhibit have been omitted based upon a request for
    confidential treatment of this document; omitted portions have been
    separately filed with the Commission.

   (b) Reports on Form 8-K:

      We did not file any reports on Form 8-K during 2001.

                                      32

<PAGE>

                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board Directors of
NovaMed Eyecare, Inc.:

   We have audited the accompanying consolidated balance sheets of NOVAMED
EYECARE, INC. (a Delaware corporation) AND SUBSIDIARIES as of December 31, 2001
and 2000 and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2001. These consolidated financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated financial statements and schedule
based on our audits.

   We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 NovaMed Eyecare, Inc. and
Subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.

   Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Rule 12-09 Valuation Reserve
Schedule is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not a required part of the basic financial
statements. This information has been subjected to the auditing procedures
applied in our audit of the basic financial statements and, in our opinion, is
fairly stated in all material respects in relation to the basic financial
statements taken as a whole.

ARTHUR ANDERSEN LLP

Chicago, Illinois
February 20, 2002

                                      F-1

<PAGE>

                    NOVAMED EYECARE, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                            (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                     December 31, December 31,
                                      ASSETS                                             2001         2000
                                      ------                                         ------------ ------------
<S>                                                                                  <C>          <C>
Current assets:
   Cash and cash equivalents........................................................   $    967     $    785
   Accounts receivable, net of allowances of $6,529 and $2,748, respectively........      8,479       10,651
   Notes and amounts due from affiliated providers..................................      1,654        2,731
   Inventory........................................................................      1,314        2,379
   Current tax assets, net..........................................................      5,921          244
   Other current assets.............................................................        995        1,003
   Current assets of discontinued operations, net...................................      5,384       12,040
                                                                                       --------     --------
       Total current assets.........................................................     24,714       29,833
Property and equipment, net.........................................................      8,416       13,894
Intangible assets, net..............................................................     26,451       27,341
Noncurrent deferred tax assets, net.................................................     11,285           --
Other assets, net...................................................................        748        2,083
Noncurrent assets of discontinued operations, net...................................     10,359       43,506
                                                                                       --------     --------
       Total assets.................................................................   $ 81,973     $116,657
                                                                                       ========     ========
                       LIABILITIES AND STOCKHOLDERS' EQUITY
                       ------------------------------------
Current liabilities:
   Accounts payable.................................................................   $  2,846     $  3,686
   Accrued expenses.................................................................      2,271        2,204
   Restructuring reserves...........................................................      5,023           --
   Current maturities of long-term debt.............................................        404          218
                                                                                       --------     --------
       Total current liabilities....................................................     10,544        6,108
                                                                                       --------     --------
Long-term debt, net of current maturities...........................................     20,708       26,184
                                                                                       --------     --------
Deferred income tax liability.......................................................         --        1,501
                                                                                       --------     --------
Minority interest...................................................................        142           --
                                                                                       --------     --------
Commitments and contingencies
Stockholders' equity:
   Series E Junior Participating Preferred Stock, $0.01 par value, 1,912,000 shares
     authorized, none outstanding at December 31, 2001 and 2000, respectively.......         --           --
   Common stock, $0.01 par value, 81,761,465 shares authorized, 24,835,108 and
     24,679,357 shares issued and outstanding at December 31, 2001 and 2000,
     respectively...................................................................        248          247
   Additional paid-in-capital.......................................................     77,673       77,362
   Retained earnings (deficit)......................................................    (27,342)       5,255
                                                                                       --------     --------
       Total stockholders' equity...................................................     50,579       82,864
                                                                                       --------     --------
       Total liabilities and stockholders' equity...................................   $ 81,973     $116,657
                                                                                       ========     ========
</TABLE>

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

                                      F-2

<PAGE>

                    NOVAMED EYECARE, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                 (Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                 Years Ended December 31,
                                                                                --------------------------
                                                                                  2001     2000     1999
                                                                                --------  -------  -------
<S>                                                                             <C>       <C>      <C>
Net revenue:
   Surgical facilities......................................................... $ 39,363  $41,182  $31,042
   Product sales and other.....................................................   30,700   26,666   19,736
                                                                                --------  -------  -------
       Total net revenue.......................................................   70,063   67,848   50,778
                                                                                --------  -------  -------
Operating expenses:
   Salaries, wages and benefits................................................   16,827   18,071   13,946
   Cost of sales and medical supplies..........................................   33,296   28,062   21,930
   Selling, general and administrative.........................................    9,895   10,799    7,965
   Depreciation and amortization...............................................    4,599    4,040    2,393
   Restructuring charges.......................................................   10,912       --       --
   Other charges...............................................................    3,719       --       --
   Compensation expense related to stock options...............................       --       --    2,690
                                                                                --------  -------  -------
       Total operating expenses................................................   79,248   60,972   48,924
                                                                                --------  -------  -------
       Income (loss) from continuing operations................................   (9,185)   6,876    1,854
                                                                                --------  -------  -------
Other (income) expense:
   Interest expense............................................................      965      973      711
   Interest income.............................................................      (58)    (119)    (196)
   Minority interests in earnings of consolidated entities.....................       28       --       --
   Other.......................................................................       59       37      (26)
   Discount to initial public offering price upon the exchange of subordinated
     notes for common stock....................................................       --       --    2,425
                                                                                --------  -------  -------
       Total other expense.....................................................      994      891    2,914
                                                                                --------  -------  -------
Income (loss) from continuing operations before income taxes...................  (10,179)   5,985   (1,060)
Income tax provision (benefit).................................................   (4,000)   2,346     (714)
                                                                                --------  -------  -------
Net income (loss) from continuing operations...................................   (6,179)   3,639     (346)
Net income from discontinued operations........................................      795    1,705    1,220
Net loss on disposal of discontinued operations................................  (27,213)      --       --
                                                                                --------  -------  -------
Net income (loss)..............................................................  (32,597)   5,344      874
Less--Accretion of Series C and Series D convertible preferred stock...........       --       --   (2,035)
                                                                                --------  -------  -------
Income (loss) available to Series A and Series B convertible preferred and
  common stockholders.......................................................... $(32,597) $ 5,344  $(1,161)
                                                                                ========  =======  =======
Net earnings (loss) per common share from continuing operations:
   Basic....................................................................... $  (0.25) $  0.15  $ (0.23)
                                                                                ========  =======  =======
   Diluted..................................................................... $  (0.25) $  0.14  $ (0.23)
                                                                                ========  =======  =======
Net earnings (loss) per common share:
   Basic....................................................................... $  (1.32) $  0.22  $ (0.11)
                                                                                ========  =======  =======
   Diluted..................................................................... $  (1.32) $  0.21  $ (0.11)
                                                                                ========  =======  =======
</TABLE>

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

                                      F-3

<PAGE>

                    NOVAMED EYECARE, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                       (Dollars and shares in thousands)

<TABLE>
<CAPTION>
                                    Series A Preferred Series B Preferred   Common Stock   Additional              Retained
                                    -----------------  -----------------  ----------------  Paid-In     Deferred   Earnings
                                    Shares   Par Value Shares   Par Value Shares Par Value  Capital   Compensation (Deficit)
                                    -------  --------- ------   --------- ------ --------- ---------- ------------ ---------
<S>                                 <C>      <C>       <C>      <C>       <C>    <C>       <C>        <C>          <C>
Balance, December 31, 1998.........  11,740    $ 117     400      $  4     2,751   $ 28     $17,955     $    --    $  1,072
Common stock issuances, net........      --       --      --        --     3,202     32      22,257          --          --
Conversion of preferred stock to
 common stock...................... (11,740)    (117)   (400)       (4)   16,464    165      18,422          --          --
Conversion of subordinated notes
 to common stock...................      --       --      --        --     1,516     15      12,110          --          --
Common stock reacquired from
 affiliates........................      --       --      --        --        --     --          --          --          --
Deferred compensation expense......      --       --      --        --        --     --       2,690      (2,690)         --
Amortization of deferred
 compensation expense..............      --       --      --        --        --     --          --       2,690          --
Issuance of stock in conjunction
 with affiliations and acquisitions      --       --      --        --        60      1         656          --          --
Stock options exercised/sold.......      --       --      --        --       166      1         538          --          --
Accretion of Series C and Series D
 preferred stock...................      --       --      --        --        --     --          --          --      (2,035)
Net income.........................      --       --      --        --        --     --          --          --         874
                                    -------    -----    ----      ----    ------   ----     -------     -------    --------
Balance, December 31, 1999.........      --       --      --        --    24,159    242      74,628          --         (89)
Issuance of stock in conjunction
 with affiliations and acquisitions      --       --      --        --        88      1         596          --          --
Stock options exercised/sold.......      --       --      --        --       371      4       1,876          --          --
Shares issued--employee stock
 purchase plan.....................      --       --      --        --        61     --         262          --          --
Net income.........................      --       --      --        --        --     --          --          --       5,344
                                    -------    -----    ----      ----    ------   ----     -------     -------    --------
Balance, December 31, 2000.........      --       --      --        --    24,679    247      77,362          --       5,255
Stock options exercised/sold.......      --       --      --        --        79      1         193          --          --
Shares issued--employee stock
 purchase plan.....................      --       --      --        --        77     --         118          --          --
Net loss...........................      --       --      --        --        --     --          --          --     (32,597)
                                    -------    -----    ----      ----    ------   ----     -------     -------    --------
Balance, December 31, 2001.........      --    $  --      --      $ --    24,835   $248     $77,673     $    --    $(27,342)
                                    =======    =====    ====      ====    ======   ====     =======     =======    ========
</TABLE>
<TABLE>
<CAPTION>
                                    Treasury Stock      Total
                                    --------------  Stockholders'
                                    Shares At Cost     Equity
                                    ------ -------  -------------
<S>                                 <C>    <C>      <C>
Balance, December 31, 1998.........  (507) $(2,222)   $ 16,954
Common stock issuances, net........   398    2,017      24,306
Conversion of preferred stock to
 common stock......................    --       --      18,466
Conversion of subordinated notes
 to common stock...................    --       --      12,125
Common stock reacquired from
 affiliates........................  (437)  (2,179)     (2,179)
Deferred compensation expense......    --       --          --
Amortization of deferred
 compensation expense..............    --       --       2,690
Issuance of stock in conjunction
 with affiliations and acquisitions   345    1,511       2,168
Stock options exercised/sold.......   201      873       1,412
Accretion of Series C and Series D
 preferred stock...................    --       --      (2,035)
Net income.........................    --       --         874
                                     ----  -------    --------
Balance, December 31, 1999.........    --       --      74,781
Issuance of stock in conjunction
 with affiliations and acquisitions    --       --         597
Stock options exercised/sold.......    --       --       1,880
Shares issued--employee stock
 purchase plan.....................    --       --         262
Net income.........................    --       --       5,344
                                     ----  -------    --------
Balance, December 31, 2000.........    --       --      82,864
Stock options exercised/sold.......    --       --         194
Shares issued--employee stock
 purchase plan.....................    --       --         118
Net loss...........................    --       --     (32,597)
                                     ----  -------    --------
Balance, December 31, 2001.........    --  $    --    $ 50,579
                                     ====  =======    ========
</TABLE>

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

                                      F-4

<PAGE>

                    NOVAMED EYECARE, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                            (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                   Years Ended December 31,
                                                                                 ----------------------------
                                                                                   2001      2000      1999
                                                                                 --------  --------  --------
<S>                                                                              <C>       <C>       <C>
Cash flows from operating activities:
   Net income (loss) from continuing operations................................. $ (6,179) $  3,639  $   (346)
   Adjustments to reconcile net income (loss) to net cash provided by
     continuing operations, net of effects of purchase transactions:
       Depreciation and amortization............................................    4,599     4,040     2,393
       Restructuring and other charges..........................................   14,631        --        --
       Amortization of deferred compensation....................................       --        --     2,690
       Discount from conversion of subordinated exchangeable notes to
         common stock...........................................................       --        --     2,425
       Deferred taxes...........................................................   (5,357)      566      (631)
       Minority interests.......................................................       28        --        --
       Changes in working capital items--
          Accounts receivable...................................................      262    (2,789)   (1,156)
          Inventory.............................................................    1,029        79    (1,135)
          Other current assets..................................................       99       563      (827)
          Other noncurrent assets...............................................     (482)     (108)      221
          Accounts payable, accrued expenses and income taxes payable...........   (2,586)      859      (965)
                                                                                 --------  --------  --------
              Net cash provided by continuing operations........................    6,044     6,849     2,669
                                                                                 --------  --------  --------
Cash flows from investing activities:
   Purchases of property and equipment..........................................   (1,260)   (6,584)   (6,513)
   Acquisitions of and affiliations with entities, net..........................   (1,360)   (8,747)   (5,856)
   Receipt (Issuance) of notes receivable from (to) affiliated providers........     (122)   (3,218)      452
                                                                                 --------  --------  --------
              Net cash used in investing activities.............................   (2,742)  (18,549)  (11,917)
                                                                                 --------  --------  --------
Cash flows from financing activities:
   Borrowings under revolving credit agreement..................................   42,515    83,534    26,600
   Payments under revolving credit agreement....................................  (48,213)  (60,550)  (31,885)
   Payments of subordinated debt................................................       --        --    (2,200)
   Proceeds from the issuance of stock, net of issuance costs...................      236       972    25,718
   Other long-term debt and capital lease obligations...........................     (255)     (740)     (609)
                                                                                 --------  --------  --------
              Net cash provided by (used in) financing activities...............   (5,717)   23,216    17,624
                                                                                 --------  --------  --------
Cash flows from discontinued operations:
   Operating activities.........................................................    3,644     2,143    (1,669)
   Investing activities.........................................................   (1,015)  (14,702)   (6,680)
   Financing activities.........................................................      (32)       --       (74)
                                                                                 --------  --------  --------
              Net cash provided by (used in) discontinued operations............    2,597   (12,559)   (8,423)
                                                                                 --------  --------  --------
Net increase (decrease) in cash and cash equivalents............................      182    (1,043)      (47)
Cash and cash equivalents, beginning of year....................................      785     1,828     1,875
                                                                                 --------  --------  --------
Cash and cash equivalents, end of year.......................................... $    967  $    785  $  1,828
                                                                                 ========  ========  ========
</TABLE>

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

                                      F-5

<PAGE>

                    NOVAMED EYECARE, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL INFORMATION

Description of the Business

   NovaMed Eyecare, Inc. (NovaMed) along with its subsidiaries (collectively,
the Company), is an eye care services company engaged in the business of owning
and/or operating ambulatory surgery centers (ASCs), laser vision correction
(LVC) centers, optical dispensaries, wholesale optical laboratories, an optical
products purchasing organization and a marketing products and services company.
The Company also provides laser equipment and supplies through fixed-site laser
agreements. The Company operates its ambulatory surgery centers, laser vision
correction centers and optical dispensaries primarily in markets located in the
Southeast and Midwest. The wholesale optical laboratories are located in
Chicago, Illinois and Indianola, Iowa and the optical products purchasing
organization is based in Roseville, Illinois. The marketing products and
services company operates from Houston, Texas. The Company's additional
operations have been discontinued as discussed in Note 3.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Financial Statement Presentation and Principles of Consolidation

   The consolidated financial statements have been prepared on the accrual
basis of accounting and include the accounts of NovaMed and its subsidiaries.
Subsidiaries are consolidated when the Company has both majority ownership and
operational control. All major intercompany transactions have been eliminated.
Prior year amounts have been reclassified to conform to current year
discontinued operations presentation.

Cash and Cash Equivalents

   Cash and cash equivalents include all highly liquid instruments with an
original maturity of three months or less from the date of purchase.

Inventory

   Inventory consists primarily of optical products such as eyeglass frames,
optical lenses, contact lenses as well as surgical supplies used in connection
with the operation of the Company's ASCs and LVC centers. Inventory is valued
at the lower of cost or market, with cost determined using the first-in,
first-out (FIFO) method. The Company routinely reviews its inventory for
obsolete, slow moving or otherwise impaired inventory and records a related
expense in the period such impairment is known and quantifiable.

Property and Equipment

   Property and equipment are stated at cost or fair market value at the date
of acquisition. Depreciation of property and equipment is calculated using the
straight-line method over the estimated useful lives of the related assets,
generally three to seven years for equipment, computer software, furniture and
fixtures, and the lesser of the lease term or 10 years for leasehold
improvements. Routine maintenance and repairs are charged to expense as
incurred.

Intangible Assets

   The Company's acquisitions and affiliations involve the purchase of tangible
and intangible assets and the assumption of certain liabilities. As part of the
purchase price allocation, the Company allocates the purchase price to the
tangible assets acquired and liabilities assumed, based on estimated fair
market values, with the remainder of the purchase price allocated to
intangibles. These intangibles are amortized over periods ranging from 25 to 40
years.

                                      F-6

<PAGE>

                    NOVAMED EYECARE, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards, Goodwill and Other Intangible
Assets (SFAS 142). SFAS 142 addresses the financial accounting and reporting
for acquired goodwill and other intangible assets. Under the new rules, the
Company is no longer required to amortize goodwill and other intangible assets
with indefinite lives, but will be subject to periodic testing for impairment.
Under the new pronouncement, goodwill related to acquisitions after July 1,
2001 has not been amortized. Effective January 1, 2002 the Company will adopt
SFAS 142 and is evaluating the effect that such adoption may have on its
consolidated financial statements. Any impact related to the required
impairment testing will be treated as a change in accounting method in the
consolidated financial statements. If no impairment losses require recognition,
it is estimated that the Company's diluted earnings per share in 2002 will
improve by approximately two cents due to the non-amortization of goodwill.

Impairment of Long-Lived Assets

   The Company reviews the carrying value of the long-lived assets at least
quarterly on an entity-by-entity basis to determine if facts and circumstances
exist that would suggest that assets might be impaired or that the amortization
period needs to be modified. Among the factors the Company considers in making
the evaluation are changes in market position and profitability. If facts and
circumstances are present which may indicate impairment is probable, the
Company will prepare a projection of the undiscounted cash flows of the
specific business entity and determine if the long-lived assets are recoverable
based on these undiscounted cash flows. If impairment is indicated, then an
adjustment will be made to reduce the carrying amount of these assets to their
fair value. Any impairment incurred to date is discussed in Notes 3 and 9.

   In October 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS
144). This pronouncement establishes a single accounting model of the
impairment of disposal of long-lived assets, including discontinued operations.
SFAS 144 is required to be adopted January 1, 2002. Although SFAS 144
supercedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of and APB Opinion 30, Reporting the Results
of Operations--Reporting the Effects of Disposal of a Segment of Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, the
accounting treatment related to the Company's decision in September 2001 to
discontinue its management services segment under APB Opinion 30 is not
impacted. The Company does not anticipate that the adoption of this standard
will have a material impact on the consolidated financial statements.

Income Taxes

   The Company uses the liability method of accounting for income taxes in
accordance with SFAS No. 109, Accounting for Income Taxes. Deferred income
taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes, using enacted tax rates in effect for the
year in which the differences are expected to reverse. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.

Fair Value of Financial Instruments

   The carrying value of all financial instruments such as accounts receivable,
notes and amounts due from affiliated providers, accounts payable and accrued
expenses are reasonable estimates of their fair value because of the short
maturity of these items. The Company believes the current carrying amounts of
notes receivable from related parties, line of credit and obligations under
capital leases approximate fair value because the interest rates on these
instruments are subject to change with, or approximate, market interest rates.

                                      F-7

<PAGE>

                    NOVAMED EYECARE, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Minority Interests

   In November 2001, the Company purchased a 60% interest in an ASC in
Thibodaux, Louisiana. This entity is consolidated into the financial statements
and the 40% interest in the earnings and assets of that ASC are reflected in
the minority interest line of the consolidated financial statements.

   One of the Company's former affiliated eye care professionals has the
option, exercisable beginning January 1, 2004 through January 1, 2006, to
acquire up to a 30% interest in one of the Company's ASCs.

Revenue Recognition

  Surgical Facilities

   Revenue in the Company's ASCs and LVC centers is based on fees charged to
patients, third-party payors or others for use of the facilities and relate
primarily to cataract, laser vision correction and other surgery procedures and
is recorded at the time of the patient's procedure. Revenue from fixed-site
laser services installations is the fee charged to the doctor for use of the
laser placed in that doctor's facility. ASC and LVC center revenue is net of
contractual adjustments and a provision for doubtful accounts.

  Product Sales and Other

   The Company's optical products purchasing organization negotiates volume
buying discounts with optical products manufacturers. Products are sold to both
affiliated and non-affiliated ophthalmologists and optometrists. All sales to
affiliated ophthalmologists and optometrists are eliminated in consolidation.
Most of the products are shipped directly from the manufacturer to the
customer. Revenue is recognized, net of an allowance for returns, based on the
amount billed to the customer and is recorded upon receipt of the invoice from
the manufacturer or the shipping date if shipped from the organization. The
Company's wholesale optical laboratories manufacture and distribute corrective
lenses and eyeglasses to both affiliated and non-affiliated ophthalmologists
and optometrists. Revenue is recognized when product is shipped, net of an
allowance for returns. In May 2000, the Company acquired a producer of sales
and marketing products and services; revenue is recognized when the product is
shipped or service rendered.

   The Company acquired certain net operating assets and assumed certain
liabilities of affiliated eye care professionals' optical retail outlets by
signing service agreements (SAs). The Company provides services, facilities and
equipment to affiliated eye care professionals under SAs. Each of the SAs is
generally for a 40-year term and requires the Company to provide all of the
business, administrative and financial services necessary to operate the
optical dispensaries. The Company recognizes the revenue of the SAs based on
retail sales adjusted for allowances for what the payors are contracted to pay
for those services less the portion of the dispensaries' earnings which are
excluded from the management fee calculation.

Cost of Sales and Medical Supplies

   Cost of sales and medical supplies includes the cost of optical products
such as eyeglass frames, optical lenses, contact lenses and surgical supplies,
direct labor costs incurred in the preparation of optical lenses, and the per
procedure fees related to operating the equipment used in LVC procedures.

Stock Compensation

   SFAS No. 123, Accounting for Stock-Based Compensation, allows entities to
measure compensation costs related to awards of stock based compensation using
either the fair value method or the intrinsic value method. The Company has
elected to account for stock-based compensation programs using the intrinsic
value method.

                                      F-8

<PAGE>

                    NOVAMED EYECARE, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Concentration of Credit Risk

   For the years ended December 31, 2001, 2000 and 1999, approximately 22%, 21%
and 24%, respectively, of the Company's net revenue was received from Medicare
and other governmental programs, which reimburse providers based on fee
schedules determined by the related governmental agency. In the ordinary course
of business, providers receiving reimbursement from Medicare and other
governmental programs are potentially subject to a review by regulatory
agencies concerning the accuracy of billings and sufficiency of supporting
documentation.

Use of Estimates

   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 revenue and expenses during the
reporting period. Actual results could differ from those estimates.

3. DISCONTINUED OPERATIONS

   On September 27, 2001 the Company's Board of Directors approved a Plan of
Discontinued Operations and Restructuring (the "Plan"). The Plan involves the
divestiture of the management services segment, or physician practice
management ("PPM") business, over the next twelve months. The Plan contemplates
the Company pursuing and/or negotiating the following--(a) termination or
transfer of all management services agreements for all ophthalmology and
optometric practices (until such time, the Company intends to perform its
obligations under these agreements); (b) termination or transfer of all
employees providing services in practices and regional business offices; (c)
closure or transfer of all regional business operations locations; (d) sale of
all practice based assets including fixed assets, equipment and accounts
receivable; and (e) termination or transfer of corporate and information
technology employees providing services primarily to the management services
segment. As a result, the Company has restated its prior period financial
statements to reflect the appropriate accounting for these businesses as
discontinued operations.

   The operating results of these discontinued operations are summarized as
follows:

<TABLE>
<CAPTION>
                                                     Year ended December 31,
                                                    -------------------------
                                                      2001     2000    1999
                                                    --------  ------- -------
   <S>                                              <C>       <C>     <C>
   Net revenue..................................... $ 54,871  $67,790 $50,365
   Operating expenses..............................   52,653   64,098  45,852
   Interest and other expense, net.................      790      888     771
                                                    --------  ------- -------
   Income from operations before income taxes......    1,428    2,804   3,742
   Income tax provision............................      633    1,099   2,522
                                                    --------  ------- -------
   Net income from operations......................      795    1,705   1,220
   Estimated loss on disposal......................  (35,750)      --      --
   Estimated operating losses through disposal date   (4,741)      --      --
                                                    --------  ------- -------
   Estimated loss on disposal before tax benefit...  (40,491)      --      --
   Income tax benefit..............................  (13,278)      --      --
                                                    --------  ------- -------
   Net loss on disposal............................  (27,213)      --      --
                                                    --------  ------- -------
   Total income (loss) of discontinued operations.. $(26,418) $ 1,705 $ 1,220
                                                    ========  ======= =======
</TABLE>

                                      F-9

<PAGE>

                    NOVAMED EYECARE, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The balance sheet components of these discontinued operations are summarized
as follows:

<TABLE>
<CAPTION>
                                                    December 31, December 31,
                                                        2001         2000
                                                    ------------ ------------
  <S>                                               <C>          <C>
  Accounts and notes receivable....................   $12,413      $14,007
  Inventories......................................     1,052        1,272
  Other current assets.............................       727        1,017
  Accounts payable.................................    (1,135)      (1,746)
  Accrued expenses.................................    (2,549)      (2,476)
  Notes payable and capitalized lease obligations..       (78)         (34)
  Discontinued operations reserves.................    (5,046)          --
                                                      -------      -------
  Current assets of discontinued operations, net...   $ 5,384      $12,040
                                                      =======      =======
  Net property and equipment.......................   $ 4,825      $ 8,642
  Intangible assets................................     5,534       34,864
                                                      -------      -------
  Noncurrent assets of discontinued operations, net   $10,359      $43,506
                                                      =======      =======
</TABLE>

   The estimated loss on disposal includes $28.3 million for impairment of
goodwill, $3.8 million of asset impairments related to practice assets that
will be abandoned rather than sold, and $3.7 million for expected future cash
outlays to divest the PPM business.

   Net interest expense allocated to discontinued operations was $964,000,
$933,000 and $798,000 for the years ended December 31, 2001, 2000 and 1999,
respectively. Interest was allocated to discontinued operations based on the
proportion of net assets of discontinued operations to consolidated net assets
plus consolidated debt as prescribed by EITF 87-24--Allocation of Interest to
Discontinued Operations.

   The estimated loss on disposal was based on the best information available
to management at the date the Plan was announced. The actual results could
differ from management's initial estimate and those differences could be
material to the consolidated financial statements. Management evaluates the
estimate at least quarterly. If it is determined that the loss should be
adjusted based on changes in facts or circumstances, such adjustment will be
recorded at that time.

   Included in the balance sheet line "Discontinued operations reserves" at
December 31, 2001 are reserves of $1.3 million for estimated operating losses
to be incurred through the date of sale and $3.7 million for costs to exit the
PPM business.

   Deferred tax assets of $13.3 million (net of a valuation allowance of $3.4
million) were recorded as a result of these transactions. Management believes
that taxable income in prior carryback years, future reversals of existing
taxable temporary differences and expected future taxable earnings will be
available to utilize these tax assets.

4. EARNINGS (LOSS) PER COMMON SHARE

   Prior to the Company's initial public offering in August 1999 (IPO), the
Company had multiple classes of convertible preferred stock outstanding. Upon
the completion of the IPO, all outstanding classes of preferred stock converted
into common stock of the Company. In addition, $9.7 million of subordinated
exchangeable promissory notes were exchanged into 1,516,000 shares of common
stock. For the computation of earnings per share, the Series A and Series B
Preferred Stock was assumed to be outstanding through the IPO date of
August 18, 1999.

                                     F-10

<PAGE>

                    NOVAMED EYECARE, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Since the Series A and Series B Convertible Preferred Stock participated
along with the common stock in the Company's earnings, the Company used the two
class method for calculation of earnings per share (EPS). Under the two class
method, earnings or loss is allocated to the Series A and Series B convertible
preferred stock as one class, and to common stock as a second class. For each
class of stock, Basic EPS is calculated by dividing allocated earnings (loss)
allocable to the class by the weighted average number of shares outstanding of
that class during the period. Diluted EPS is calculated by dividing net income
(loss) by the weighted average number of common shares, including the dilutive
effect of potential common shares outstanding during the period. Potential
common shares consist of outstanding options, warrants, convertible debt and
preferred stock. The dilutive effect of options and warrants are calculated
using the treasury stock method. The dilutive effect of the Series A and Series
B convertible preferred shares are calculated using the if converted method.

   As the Company incurred a net loss in 1999, all losses were allocated to
common stock and the Series A and B convertible shares were excluded from the
calculation as they were anti-dilutive.

   Earnings (loss) per common share is calculated as follows (amounts in
thousands, except per share data):

<TABLE>
<CAPTION>
                                                                    Year Ended December 31,
                                                                   ------------------------
                                                                     2001     2000   1999
                                                                   --------  ------ -------
<S>                                                                <C>       <C>    <C>
Net income (loss) from continuing operations...................... $ (6,179) $3,639 $  (346)
Accretion of Series C and Series D convertible preferred stock....       --      --  (2,035)
                                                                   --------  ------ -------
Continuing income (loss) available to common stockholders--basic..   (6,179)  3,639  (2,381)
Discontinued income (loss) available to common stockholders.......  (26,418)  1,705   1,220
                                                                   --------  ------ -------
Net income (loss) available to common stockholders--basic......... $(32,597) $5,344 $(1,161)
                                                                   ========  ====== =======
Continuing income (loss) available to common stockholders--diluted $ (6,179) $3,639 $(2,381)
                                                                   ========  ====== =======
</TABLE>

<TABLE>
<CAPTION>
                                                            Year Ended December 31,
                                                           ------------------------
                                                            2001     2000    1999
                                                           -------  ------- -------
<S>                                                        <C>      <C>     <C>
Basic weighted average number of common shares outstanding  24,784   24,495  10,464
Effect of dilutive securities--stock options..............      --    1,544      --
                                                           -------  ------- -------
Diluted weighted average number of shares outstanding.....  24,784   26,039  10,464
                                                           =======  ======= =======
Basic earnings (loss) per common share:
   Continuing operations.................................. $ (0.25) $  0.15 $ (0.23)
   Discontinued operations................................   (1.07)    0.07    0.12
                                                           -------  ------- -------
Basic earnings (loss) per share........................... $ (1.32) $  0.22   (0.11)
                                                           =======  ======= =======
Diluted earnings (loss) per common share:
   Continuing operations.................................. $ (0.25) $  0.14 $ (0.23)
   Discontinued operations................................   (1.07)    0.07    0.12
                                                           -------  ------- -------
Diluted earnings (loss) per share......................... $ (1.32) $  0.21 $ (0.11)
                                                           =======  ======= =======
</TABLE>

                                     F-11

<PAGE>

                    NOVAMED EYECARE, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The following items are not included in diluted earnings per share
calculation since their effects are anti-dilutive (in thousands):

<TABLE>
<CAPTION>
                                                         2001 2000 1999
                                                         ---- ---- -----
       <S>                                               <C>  <C>  <C>
       Subordinated exchangeable promissory notes....... --    --  1,135
       Series C and Series D convertible preferred stock  --   --  2,713
       Stock options.................................... 377   --  1,799
       Series A and B convertible preferred stock.......  --   --  7,501
</TABLE>

5. ACQUISITIONS

   The Company generally acquires certain net assets of companies with a
similar eye care services focus through the purchase method of accounting. The
results of operations are included in the consolidated financial statements of
the Company from the date of acquisition. The following represents the
significant acquisitions occurring in 2001, 2000 and 1999:

<TABLE>
<CAPTION>
                                                                     Purchase
 Acquisition                           Location     Effective Date    Price
 -----------                        --------------- -------------- ------------
 <S>                                <C>             <C>            <C>
 2001
    ASC (60%)...................... Thibodaux, LA   November 2001  $1.4 million
 2000
    Marketing Products Company..... Houston, TX     May 2000       $4.7 million
    ASC............................ Atlanta, GA     September 2000 $1.5 million
    ASC and LVC.................... Columbus, GA    October 2000   $0.7 million
    ASC............................ Cincinnati, OH  December 2000  $1.3 million
 1999
    Wholesale Optical Laboratories. Chicago, IL     January 1999   $5.7 million
                                    Indianola, IA
    ASC............................ St. Joseph, MO   December 1999 $0.1 million
    ASC............................ Chattanooga, TN  December 1999 $1.5 million
</TABLE>

   Goodwill recorded upon acquisition of the above was $1.3 million, $7.8
million, and $7.2 million in 2001, 2000 and 1999 respectively. The current year
goodwill created was not amortized in accordance with SFAS 142. The goodwill
from previous acquisitions is being amortized over 25 years with the exception
of the wholesale optical laboratories which are amortized over 40 years.

   The following unaudited pro forma results of operations for the years ended
December 31, 2001, 2000 and 1999 assume that the business acquisitions
subsequent to January 1, 1999 described above occurred at the beginning of the
year preceding the year of the acquisition. The unaudited pro forma results
from continuing operations below are based on historical results of operations,
include adjustments for depreciation, amortization and taxes and do not
necessarily reflect actual results that would have occurred (in thousands,
except per share amounts):

<TABLE>
<CAPTION>
                                                  Year ended December 31,
                                                 ------------------------
                                                  2001     2000    1999
     -                                           -------  ------- -------
                                                        (Unaudited)
     <S>                                         <C>      <C>     <C>
     Pro forma net revenue...................... $70,822  $72,329 $58,614
     Pro forma net income (loss)................  (6,083)   4,123     183
     Pro forma earnings (loss) per common share:
        Basic...................................   (0.25)    0.17   (0.18)
        Diluted.................................   (0.25)    0.16   (0.18)
</TABLE>

                                     F-12

<PAGE>

                    NOVAMED EYECARE, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


6. PROPERTY AND EQUIPMENT

   Property and equipment consist of the following as of December 31, 2001 and
2000 (in thousands):

<TABLE>
<CAPTION>
                                                        2001     2000
                                                       -------  -------
       <S>                                             <C>      <C>
       Equipment...................................... $12,078  $15,507
       Equipment under capital lease obligations......     160       86
       Computer software..............................     803    1,297
       Furniture and fixtures.........................     952      934
       Leasehold improvements.........................   2,139    2,382
                                                       -------  -------
                                                        16,132   20,206
       Less--Accumulated depreciation and amortization  (7,716)  (6,312)
                                                       -------  -------
                                                       $ 8,416  $13,894
                                                       =======  =======
</TABLE>

   Depreciation and amortization expense for property and equipment in 2001,
2000 and 1999 was approximately $3.4 million, $3.1 million and $1.6 million,
respectively. In 2001 the Company recorded an impairment charge of $2.6 million
to write-down computer equipment and software related to the restructuring of
its information technology function.

7. INTANGIBLE ASSETS

   Intangible assets consist of the following as of December 31, 2001 and 2000
(in thousands):

<TABLE>
<CAPTION>
                                          Amortization
                                             Period     2001     2000
                                          ------------ -------  -------
       <S>                                <C>          <C>      <C>
       Goodwill.......................... 25-40 Years  $29,270  $28,916
       Service agreements................  25 Years      1,119    1,309
                                                       -------  -------
          Total..........................               30,389   30,225
          Less--Accumulated amortization.               (3,938)  (2,884)
                                                       -------  -------
                                                       $26,451  $27,341
                                                       =======  =======
</TABLE>

   Amortization expense for intangible assets in 2001, 2000 and 1999 was
approximately $1.1 million, $1.0 million and $0.7 million, respectively.

8. ACCRUED EXPENSES

   Accrued expenses consist of the following as of December 31, 2001 and 2000
(in thousands):

<TABLE>
<CAPTION>
                                                            2001   2000
                                                           ------ ------
       <S>                                                 <C>    <C>
       Accrued payroll and related benefits............... $1,053 $  844
       Accrued interest...................................    136    715
       Accrued professional fees, business taxes and other  1,082    645
                                                           ------ ------
                                                           $2,271 $2,204
                                                           ====== ======
</TABLE>

9. RESTRUCTURING AND OTHER CHARGES

   The Plan contemplates the Company pursuing and/or negotiating the
following--(a) closure of certain facilities due to under-performing results
including one ASC, seven LVC centers and one fixed laser site; (b) termination
of an acquisition contract; and (c) reorganization and downsizing of the
Company's information

                                     F-13

<PAGE>

                    NOVAMED EYECARE, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

technology function to conform to the needs of continuing operations and the
pursuit of the Company's discontinued operations plan. The Company recorded the
following restructuring charges in the third quarter of 2001:

<TABLE>
<CAPTION>
                                                        Reserve at
                                      Amounts          December 31,
                                      Accrued Activity     2001
                                      ------- -------- ------------
            <S>                       <C>     <C>      <C>
            Restructuring charges
            Facility closures--
               Asset impairments..... $ 3,303 $(2,398)    $  905
               Lease commitments.....   1,768     (51)     1,717
            Contract termination.....   1,851     (15)     1,836
            Reorganization of IT--
               Asset impairments.....   3,296  (3,284)        12
               Lease commitments.....     456      --        456
            Other....................     238    (141)        97
                                      ------- -------     ------
               Restructuring charges. $10,912 $(5,889)    $5,023
                                      ======= =======     ======
</TABLE>

   The Company had entered into an agreement to purchase an ASC for $9.3
million upon the resolution of certain contingencies or pay a termination fee.
The termination fee is included in the restructuring charges. Effective January
1, 2002 the Company terminated its contract to purchase this ASC. Through
December 31, 2001, the Company has closed four LVC centers and one fixed laser
site.

   During the third quarter of 2001, the Company recorded other charges of $3.7
million. Included in these charges were--(a) a $2.0 million increase in
facility accounts receivable reserves; (b) professional fees incurred in
development of the Plan of $0.5 million; and (c) severance and other employee
costs incurred prior to approval of the Plan of $1.2 million.

10. INCOME TAXES

   The income tax provision (benefit) from continuing operations consists of
the following for the years ended December 31, 2001, 2000 and 1999 (in
thousands):


<TABLE>
<CAPTION>
                                    2001     2000  1999
                                   -------  ------ -----
                       <S>         <C>      <C>    <C>
                       Current
                          Federal. $  (847) $1,701 $(827)
                          State...    (112)    260  (136)
                                   -------  ------ -----
                                      (959)  1,961  (963)
                                   -------  ------ -----
                       Deferred
                          Federal.  (2,686)    367   214
                          State...    (355)     18    35
                                   -------  ------ -----
                                    (3,041)    385   249
                                   -------  ------ -----
                                   $(4,000) $2,346 $(714)
                                   =======  ====== =====
</TABLE>

                                     F-14

<PAGE>

                    NOVAMED EYECARE, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The reasons for the differences between the income tax expense and the
amounts calculated using the U.S. statutory rate of 34% were as follows:

<TABLE>
<CAPTION>
                                                 2001  2000  1999
                                                 ----  ----  ----
              <S>                                <C>   <C>   <C>
              Tax expense at U.S. statutory rate 34.0% 34.0% 34.0%
              Intangible asset amortization..... (1.5)  5.0  16.2
              State taxes, net..................  4.5   4.7   5.6
              Discount on conversion of notes...   --    --  17.1
              Other.............................  2.3  (4.5) (5.5)
                                                 ----  ----  ----
              Provision for income taxes........ 39.3% 39.2% 67.4%
                                                 ====  ====  ====
</TABLE>

   Deferred tax assets (liabilities) are comprised of the following at December
31, 2001 and 2000 (in thousands):

<TABLE>
<CAPTION>
                                                         2001     2000
                                                        -------  -------
      <S>                                               <C>      <C>
      Current deferred tax assets (liabilities)
         Discontinued operations and restructuring..... $ 3,569  $    --
         Compensation expense..........................     274      341
         Receivable and inventory reserves.............     123      306
         Prepaid expense...............................    (543)    (587)
         Other.........................................      88       19
                                                        -------  -------
                                                          3,511       79
                                                        -------  -------
      Long-term deferred tax assets (liabilities)
         Discontinued operations and restructuring.....  16,416       --
         Depreciation and amortization.................  (2,110)  (2,262)
         Compensation expense related to stock options.     422      522
         Discount on conversion of notes...............     331      363
         Other.........................................      80     (124)
                                                        -------  -------
                                                         15,139   (1,501)
         Valuation allowance...........................  (3,854)      --
                                                        -------  -------
                                                         11,285   (1,501)
                                                        -------  -------
                                                        $14,796  $(1,422)
                                                        =======  =======
</TABLE>

   The Company has recorded a valuation allowance on the anticipated portion of
the losses on the sale of discontinued operations expected to be generated
which may be capital in nature, and on a portion of the stock options not
expected to be exercised.

   The Company paid $1.7 million, $2.1 million and $2.8 million for income
taxes in 2001, 2000 and 1999, respectively.

   The Company has recorded current tax receivables of $2.4 million and
$165,000 at December 31, 2001 and 2000, respectively. The 2001 receivable is
comprised of $1.5 million for the refund of 2001 estimated tax payments and
$900,000 for net operating losses generated in 2001 to be carried back to prior
year tax returns.

                                     F-15

<PAGE>

                    NOVAMED EYECARE, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


11. LONG-TERM DEBT

   Long-term debt consists of the following as of December 31, 2001 and 2000
(in thousands):

<TABLE>
<CAPTION>
                                                      2001     2000
                                                     -------  -------
          <S>                                        <C>      <C>
          Revolving credit facility................. $20,695  $26,184
          Other.....................................     417      218
                                                     -------  -------
                                                      21,112   26,402
          Less--Current maturities of long-term debt    (404)    (218)
                                                     -------  -------
                                                     $20,708  $26,184
                                                     =======  =======
</TABLE>

Revolving Credit Facility

   The Company amended its revolving credit facility on August 29, 2001. The
primary purpose of this amendment was to revise the acquisitions and
affiliation covenants to better conform to the Company's surgical facilities
focus. On October 23, 2001, the Company amended its revolving credit agreement
to reflect implementation of the Plan. The amendment included an initial
reduction of the maximum commitment available under the facility from $50
million to $45 million. Beginning January 1, 2002, the maximum commitment
available under the facility will be reduced by $2.5 million per quarter,
resulting in a maximum commitment of $35 million as of October 1, 2002. The
credit agreement expires on June 30, 2003. Under the amended facility, interest
on borrowings under the credit agreement is payable at an annual rate equal to
the lender's published base rate plus the applicable borrowing margin ranging
from 0% to 1.0% or LIBOR plus a range from 1.5% to 3.0%, varying upon the
Company's ability to meet financial covenants. The weighted average interest
rate on credit line borrowings was 6.5% for the twelve months ended December
31, 2001 and 4.0% at December 31, 2001. The credit agreement contains covenants
that include limitations on indebtedness, liens, capital expenditures,
acquisitions and affiliations and ratios that define borrowing availability and
restrictions on the payment of dividends. The Company is required to use 100%
of the proceeds from its divestiture transactions to pay down its outstanding
debt. The Company further amended its credit agreement subsequent to December
31, 2001 to include additional covenants. The Company will be in default if its
cash expenditures incurred in connection with the Plan (including, without
limitation, the costs of structuring and negotiating the divestiture
transactions, terminating employees and closing facilities), exceeds by $10
million the sum of its EBITDA from the discontinued management services
operations plus the cash proceeds from these transactions. As of December 31,
2001, the Company was in compliance with all of its credit agreement covenants.

Interest Expense

   The Company paid $2.2 million, $1.2 million and $1.9 million for interest
and commitment fees during 2001, 2000 and 1999, respectively.

Subordinated Exchangeable Promissory Notes

   The Company issued subordinated exchangeable promissory notes (the Notes) in
connection with the acquisition of certain net assets of Affiliated
Professional Entities and certain ASCs, and the right to provide services to
Affiliated Professional Entities. In connection with the IPO, $9.7 million of
subordinated exchangeable promissory notes were exchanged for 1.5 million
shares of the Company's common stock at an exchange ratio of $1.00 worth of
common stock, based upon the initial public offering price, for each $0.80 of
outstanding principal on the Notes. The Company recorded the difference between
the value of the common stock and the Notes as a non-recurring, non-cash
expense. Accordingly, the Company recorded additional interest expense of $2.4
million related to the discount on the exchange of the Notes. During 1999, the
Company retired the remaining $2.2 million of the Notes.

                                     F-16

<PAGE>

                    NOVAMED EYECARE, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   As disclosed in a prospectus filed with the Securities and Exchange
Commission on August 18, 1999, in connection with the exchange of $9.7 million
of the Company's subordinated exchangeable promissory notes resulting from its
IPO, the Company agreed to lend each of these noteholders an amount equal to
the Federal and state income taxes payable by the holder as a result of the
exchange of the notes, but only for those shares of the Company's common stock
received in the exchange which they still owned as of April 1, 2000. In
accordance with these agreements, the Company loaned $2.7 million to the
holders, the majority of which was advanced in April 2000. The tax loans are
noninterest bearing, nonrecourse to the debtor and secured by a number of
shares of the Company's common stock held by the debtor having a value, based
on the offering price, equal to two times the loan amount. Upon the sale by a
debtor after April 1, 2000 of any shares of the Company's common stock issued
in exchange for a note, the debtor will be required to repay a fraction of the
debtor's initial tax loan amount equal to the number of shares sold divided by
the total number of shares of the Company's common stock previously issued in
exchange for a note and owned by the debtor as of April 1, 2000. The tax loans
are payable by the debtors upon the Company's demand for payment. Currently,
the Company intends to allow the debtors to repay these loans as they dispose
of their shares of the Company's common stock. The Company also has agreed to
reimburse these debtors on a grossed-up basis, for any Federal or state taxes
that they recognize as a result of imputed interest on the tax loans.

12. OPERATING AND CAPITAL LEASES

   The Company has commitments under long-term, non-terminable operating
leases, principally for facility and office space. Lease terms generally cover
one to ten years. Certain leases contain consecutive renewal options of
five-year periods and escalation clauses. Included are lease commitments
related to its discontinued management services business, which the Company
expects will be assumed by the buyers of the physician practices. As part of
the restructuring charge recorded in September 2001, the Company reserved
approximately $1.3 million for these commitments related to facilities it has
closed or plans to close. The Company intends to enter into sublease agreements
as the facilities are vacated.

   The Company entered into two medical equipment capital leases at one of its
ASCs during 2001. Capital leases of continuing operations only, are included in
the table below.

   At December 31, 2001, minimum annual rental commitments are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                    Operating Capital
                                                     Leases   Leases
                                                    --------- -------
          <S>                                       <C>       <C>
          2002.....................................  $ 6,745    $54
          2003.....................................    6,246     13
          2004.....................................    5,502     --
          2005.....................................    3,889     --
          2006 and thereafter......................    5,011     --
                                                     -------    ---
             Minimum lease payments................   27,393     67
             Less sublease receipts................     (161)    --
                                                     -------    ---
             Total minimum lease payments..........  $27,232     67
                                                     =======
             Less: amount representing interest....              (3)
                                                                ---
             Total obligation under capital leases.             $64
                                                                ===
</TABLE>

   Included above are total commitments of $7.8 million, at approximately $1.8
million per year, which relate to facilities that are leased from related
parties.

   Rent expense of continuing operations related to operating leases amounted
to approximately $1.6 million, $1.1 million and $1.0 million during 2001, 2000
and 1999, respectively.

                                     F-17

<PAGE>

                    NOVAMED EYECARE, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


13. COMMITMENTS AND CONTINGENCIES

Litigation

   The Company is subject to various claims and legal actions that arise in the
ordinary course of business. In the opinion of management, the ultimate
resolution of such matters will not have a material adverse effect on the
Company's financial position or results of operations.

Professional Liability Risk

   The Company maintains third party professional liability insurance for its
ASCs and business activities. Although the Company believes that this insurance
is adequate as to the amounts at risk, there can be no assurance that any claim
asserted against the Company will not exceed the coverage limits of such
insurance.

Insurance

   The Company is insured with respect to medical malpractice risks on a
claims-made basis. Management is not aware of any claims against the Company
that might have a material impact on the Company's financial position or
results of operations.

Purchase Commitments

   Effective March 1, 2001, the Company entered into a new five-year supply
agreement with Alcon Laboratories, Inc. setting forth the terms upon which it
can procure and utilize excimer lasers manufactured by Alcon. During the
five-year term, the Company will pay Alcon monthly based on the number of
procedures performed on each of its APEX/Infinity lasers and LADARVision
Systems. The Company is required to pay for a minimum number of annual
procedures on each LADARVision System during the five-year term, whether or not
these procedures are performed. As of December 31, 2001, the Company has
entered into commitments to pay Alcon up to approximately $1.4 million annually
during the five-year term. The minimum commitment will increase if the Company
deploys additional laser systems.

   Effective April 10, 2001, the Company entered into a two-year Product Usage
and Volume Lease Purchase agreement with one of its surgical suppliers, under
which the Company is required to purchase a minimum quantity of products at a
predetermined price. At December 31, 2001 the Company had remaining product
purchase commitments of $504,000.

Employment Agreements

   The Company has employment agreements with thirteen of its executives that
specify that if the executive is terminated by the Company for other than cause
following a change in control of the Company, the executive shall receive
severance pay ranging from twelve to twenty-four months salary plus bonus and
certain other benefits.

14. STOCKHOLDERS' EQUITY

   In connection with the Company's IPO, Series A Stock, Series B Stock, Series
C Stock and Series D S tock converted into common stock on a share-for-share
basis. Following conversion of the outstanding preferred stock into common
stock at the IPO, the Series A, B, C and D convertible preferred stock were
eliminated or canceled and these shares are not available for reissuance.

   On August 18, 1999, the Company sold 3,000,000 new shares of common stock in
an initial public offering at a price of $8.00 per share. Net proceeds were
approximately $20.2 million after deducting underwriting discounts and
commissions and offering expenses. In addition, the underwriters exercised
their over-allotment

                                     F-18

<PAGE>

                    NOVAMED EYECARE, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

option on September 1, 1999, to acquire additional 600,000 shares of the
Company's common stock at $8.00 per share, contributing $4.5 million of
additional net proceeds.

Redemption Right

   The Series C and Series D Stock (Senior Preferred Stock) were redeemable
upon a two-thirds vote of the shareholders, at the greater of a prescribed
liquidation preference amount per share, or the fair value of such preferred
stock as established by independent appraisers. The Senior Preferred Stock
converted into common stock at the date of the IPO. The Company recorded
related accretion of $2.0 million on these shares in 1999 through the
conversion date.

Rights Agreement

   Certain shareholders possess rights to purchase fractional shares of Series
E Junior Participating Preferred Stock with a par value of $.01 per share at a
price of $110 per one one-thousandth of a share, subject to adjustment as
defined in the Rights agreements. These rights are not exercisable until the
announcement of the occurrence of certain events as defined in an agreement
which also describes the various shareholders' rights.

   Upon the occurrence of certain events, each right holder will be entitled to
receive shares of common stock, or in specified circumstances other assets
having a value of two times the purchase price of the right. Additionally, the
Board of Directors may exchange the rights, in whole or in part, without
additional payment, for shares of common stock at an exchange ratio defined in
the agreement. At any time prior to certain events, the Board of Directors may
redeem all, but not less than all, of the rights at a redemption price of $.01
per right.

15. EMPLOYEE BENEFIT PLANS

Employee Benefits and Compensation

   The Company maintains a voluntary savings plan (the Savings Plan) for
eligible employees under section 401(k) of the Internal Revenue Code whereby
participants may contribute a percentage of up to 15% of their compensation.
The Savings Plan provides for the Company to match 50% of the employee's
contributions on the first 3% of salary contributed by each employee. The
Company's matching contributions approximated $368,000, $362,000 and $251,000
for 2001, 2000 and 1999, respectively.

Employee Stock Purchase Plan

   The Company has an employee stock purchase plan for all eligible employees.
Under the plan, shares of the Company's common stock may be purchased at
six-month intervals at 85% of the lower of the fair market value on the first
or the last day of each six-month period. Employees may purchase shares having
a value not exceeding 10% of their gross compensation during an offering
period; however, the amount of an employee's purchase may not exceed $20,000 in
any offering period or $25,000 in any calendar year. Approximately 76,500
shares and 61,500 shares were purchased during 2001 and 2000, respectively. The
employee stock purchase plan began on October 1, 1999 and, accordingly, no
shares were purchased during 1999. At December 31, 2001, 262,000 shares were
reserved for future issuance.

Stock Option Plans

   The Company is authorized to issue up to 8,451,800 shares of its common
stock, par value $.01 per share under various stock option plans. Authorized
options for common stock under the various plans are generally exercisable over
a four-year period with  1/8 of the total options granted becoming exercisable
six months from the date of each grant and  1/48 of the total options granted
becoming exercisable each month thereafter. The option period for common stock
options is 10 years from the date each option is granted. All current
outstanding options are nonqualified stock options.

                                     F-19

<PAGE>

                    NOVAMED EYECARE, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The Company grants stock options to employees and nonemployee members of the
Company's Board of Directors. Pursuant to Accounting Principles Board No. 25,
the Company recognizes as compensation expense the difference between the
exercise price and the fair market value of its common stock on the date of
grant. Stock-based compensation expense is deferred and recognized over the
vesting period of the stock option. During the years ended December 31, 2001
and 2000, the Company did not recognize any stock based compensation expense.
During July, 1999, the Company fully vested all 1,050,800 options granted from
February 1, 1999 through July 23, 1999, contingent on the completion of the
IPO. Accordingly, the Company recorded $1.6 million, net of tax, as
compensation expense during 1999 related to those options which became fully
vested on the date of the IPO.

   In addition, the Company has granted stock options to physicians employed by
Affiliated Professional Entities as well as a consultant. For these option
grants, the Company records a compensation charge, which is equal to their
estimated fair market value on the date of the grant as determined by the
Black-Scholes option-pricing model. The physicians reimburse the Company for
the amount of the compensation charge related to their stock option grant.

   The following table summarizes the activity in the stock option plan:

<TABLE>
<CAPTION>
                                                                Weighted
                                                                Average
                                      Options                   Exercise
                                    Outstanding Price Per Share  Price
                                    ----------- --------------- --------
       <S>                          <C>         <C>             <C>
       Balance at December 31, 1998  4,143,000   $1.25-$ 6.00    $2.55
          Granted..................  1,343,850   $4.38-$10.80    $6.69
          Exercised................   (367,562)  $1.25-$ 9.00    $2.93
          Canceled.................   (111,053)  $1.25-$10.80    $4.48
                                    ----------
       Balance at December 31, 1999  5,008,235   $1.25-$10.80    $3.52
          Granted..................  1,610,350   $1.06-$14.94    $8.26
          Exercised................   (372,231)  $1.25-$10.00    $1.91
          Canceled.................   (764,912)  $1.88-$13.44    $7.37
                                    ----------
       Balance at December 31, 2000  5,481,442   $1.06-$14.94    $4.53
          Granted..................  1,953,000   $1.15-$ 2.84    $1.63
          Exercised................    (79,074)  $1.25-$ 1.88    $1.48
          Canceled................. (1,076,777)  $1.25-$13.88    $4.99
                                    ----------
       Balance at December 31, 2001  6,278,591   $1.06-$14.94    $3.52
                                    ==========                   =====
</TABLE>

   The weighted average fair value of options granted in 2001 was $1.21 per
share.

   The following table summarizes information about stock options outstanding
at December 31, 2001:

<TABLE>
<CAPTION>
                           Options Outstanding      Options Exercisable
                       ---------------------------- --------------------
                         Number            Average    Number    Average
          Range of     Outstanding Average Exercise Exercisable Exercise
       Exercise Prices at 12/31/01  Life    Price   at 12/31/01  Price
       --------------- ----------- ------- -------- ----------- --------
       <S>             <C>         <C>     <C>      <C>         <C>
       $  1.06- 1.56    1,465,726    6.9    $ 1.24     787,784   $ 1.25
       $  1.69- 2.50    2,842,900    7.3      1.87   1,625,658     1.96
       $  2.74- 4.00      270,000    6.3      3.39     235,400     3.43
       $  4.38- 6.00      804,000    7.0      5.41     691,227     5.39
       $  6.75-10.06      321,080    7.9      8.65     214,076     8.99
        $10.80-14.94      574,885    8.1     11.98     263,691    11.96
        -------------   ---------    ---    ------   ---------   ------
       $  1.06-14.94    6,278,591    7.2    $ 3.52   3,817,836   $ 3.61
        =============   =========    ===    ======   =========   ======
</TABLE>

                                     F-20

<PAGE>

                    NOVAMED EYECARE, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The Company believes the exercise price of stock options granted prior to
the IPO, approximated or exceeded the fair value of the applicable class of
stock at the date of grant based on the pricing of transactions involving the
preferred stock as discussed in Note 14, and the Company's financial condition
at the date of grant. Following the IPO, options have been granted with
exercise prices, which are either equal to or above the market value of the
stock on the date of grant.

   The following summarizes the pro forma effect on net income (loss) if the
fair values of stock based compensation had been recognized in the year
presented as compensation expense on a straight-line basis over the vesting
period of the grant (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                       2001     2000   1999
                                                     --------  ------ -------
  <S>                                                <C>       <C>    <C>
  Net income (loss) available to common stockholders $(34,262) $3,648 $(3,181)
  Earnings (loss) per common share:
     Basic.......................................... $  (1.38) $ 0.15 $ (0.30)
     Diluted........................................ $  (1.38) $ 0.14 $ (0.30)
</TABLE>

   The fair value of these options was estimated using the Black-Scholes
option-pricing model with the following assumptions:

<TABLE>
<CAPTION>
                                              2001  2000  1999
                                              ----  ----  ----
                <S>                           <C>   <C>   <C>
                Expected option life in years    4     4  4.92
                Risk-free interest rate...... 4.36% 5.93% 5.22%
                Dividend yield...............   --    --    --
                Expected volatility.......... 1.00  .950  .850
</TABLE>

16. OPERATING SEGMENTS

   The Company manages its business segments by types of service provided. The
Company's reportable segments are as follows:

   Surgical facilities. Surgical facilities includes the results of operations
   from owning and/or operating ASCs, LVC centers, and fixed site laser
   services agreements.

   Product sales. Product sales includes the Company's optical products
   purchasing organization, wholesale optical laboratories, optical
   dispensaries, and beginning in May 2000 a producer of marketing products and
   services.

   The accounting policies of the various segments are the same as those
described in the "Summary of Significant Accounting Policies" in Note 2. The
Company evaluates the performance of its segments based on earnings before
taxes (EBT) and cash flow (EBITDA). Segment EBT includes all revenue and
expenses directly attributable to the segment except amortization of intangible
assets and excludes certain expenses that are managed outside the reportable
segment. Items excluded from the segment EBT primarily consist of corporate
expenses for salaries, wages and benefits, general and administrative, interest
on debt, and amortization of intangible assets. Segment EBITDA includes
earnings before interest, taxes, depreciation and amortization.

   The Company excludes intercompany transfers for management reporting
purposes, as they have no effect on the EBT of the individual segments. Segment
identifiable assets include accounts receivable, inventory, other current
assets and long-lived assets of the segment. Corporate identifiable assets
represent all other assets of the Company including cash and cash equivalents,
corporate other current assets, and corporate long-lived assets, which include
property and equipment, notes receivable, intangible assets, and other
long-term assets. Capital

                                     F-21

<PAGE>

                    NOVAMED EYECARE, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

expenditures for long-lived assets are not reported to management by segment
and are excluded, as presenting such information is not practical. The Company
has no revenues attributed to customers outside of the United States and no
assets located in foreign countries.

<TABLE>
<CAPTION>
                                       Surgical  Product
                                      Facilities  Sales  Corporate  Total
                                      ---------- ------- --------- --------
    <S>                               <C>        <C>     <C>       <C>
    2001
       Net revenue...................  $39,363   $30,700 $     --  $ 70,063
       Earnings (loss) before taxes..   13,074     2,335  (25,588)  (10,179)
       Depreciation and amortization.    2,092       278    2,229     4,599
       Interest income...............       --         4       54        58
       Interest expense..............       12         2      951       965
       Identifiable assets...........   12,816     4,531   64,626    81,973
                                       =======   ======= ========  ========
    2000
       Net revenue...................  $41,182   $26,666 $     --  $ 67,848
       Earnings (loss) before taxes..   17,105     3,216  (14,336)    5,985
       Depreciation and amortization.    1,575       233    2,232     4,040
       Interest income...............       --        13      106       119
       Interest expense..............        2        --      971       973
       Identifiable assets...........   14,157     6,209   96,291   116,657
                                       =======   ======= ========  ========
    1999
       Net revenue...................  $31,042   $19,736 $     --  $ 50,778
       Earnings (loss) before taxes..   12,492     2,274  (15,826)   (1,060)
       Depreciation and amortization.      920       175    1,298     2,393
       Interest income...............       --        31      165       196
       Interest expense..............        2        --      709       711
       Identifiable assets...........   10,476     4,230   69,952    84,658
                                       =======   ======= ========  ========
</TABLE>

17. RELATED-PARTY TRANSACTIONS

Facility Rent

   The Company leases facility space from various related parties, which
include affiliated providers. Amounts paid to related parties for rent, taxes
and other facility costs amounted to approximately $2.3 million, $2.1 million
and $1.6 million during 2001, 2000 and 1999, respectively.

Notes Receivable

   The Company holds notes receivable of $3.1 million, less reserves of $1.7
million, from physicians affiliated with the Company. This includes $2.7
million of noninterest bearing tax loans issued in connection with the IPO (See
Note 11). The remainder of the loans bear interest rates between 9.0-9.5%, are
secured against future services, and are either payable upon demand of the
Company or within a prescribed term.

Acquisition of Midwest Uncuts, Inc.

   Effective January 1, 1999, the Company acquired all of the issued and
outstanding shares of Midwest Uncuts, Inc. in exchange for $4.6 million in net
cash and 250,000 shares of Series A convertible preferred stock. The
stockholders were Mr. and Mrs. John P. Winjum, the parents of the Company's
Chairman of the Board, President and Chief Executive Officer.

                                     F-22

<PAGE>

                    NOVAMED EYECARE, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Other

   The Company receives professional services from a firm that employs a
director of the Company. Total payments for services received during 2001, 2000
and 1999 were approximately $720,500, $617,000 and $1.8 million, respectively.

18. QUARTERLY FINANCIAL DATA (Unaudited)

   Summarized quarterly financial data for 2001 and 2000 is as follows (in
thousands except per share data):

<TABLE>
<CAPTION>
                                                           Quarter
                                              ---------------------------------
                                               First  Second   Third    Fourth
 2001                                         ------- ------- --------  -------
 <S>                                          <C>     <C>     <C>       <C>
    Net revenue.............................. $18,251 $18,972 $ 16,837  $16,003
    Income (loss) from continuing operations.   1,906   1,807  (14,204)   1,306
    Net income (loss) from operations:
        Continuing...........................     861     867   (8,614)     707
        Discontinued.........................     317     362  (27,097)      --
    Net income (loss)........................   1,178   1,229  (35,711)     707
    Basic earnings (loss) per share..........    0.05    0.05    (1.44)    0.03
    Diluted earnings (loss) per share........    0.05    0.05    (1.44)    0.03

                                                           Quarter
                                              ---------------------------------
                                               First  Second   Third    Fourth
 2000                                         ------- ------- --------  -------
    Net revenue.............................. $15,705 $17,442 $ 17,756  $16,945
    Income from continuing operations........   1,590   1,829    1,949    1,508
    Net income from operations:
        Continuing...........................     883     966      899      891
        Discontinued.........................     595     492      258      360
    Net income...............................   1,478   1,458    1,157    1,251
    Basic earnings per share.................    0.06    0.06     0.05     0.05
    Diluted earnings per share...............    0.06    0.06     0.05     0.05
</TABLE>

                                     F-23

<PAGE>

                                                                     Schedule I

                             NOVAMED EYECARE, INC.

                         RULE 12-09 VALUATION RESERVES

                                  (in 000's)

<TABLE>
<CAPTION>
                                Balance at Charged to             Balance
      Allowance for contractual beginning  costs and              at end
      adjustments and bad debt  of period   expenses  Deductions of period
      ------------------------  ---------- ---------- ---------- ---------
      <S>                       <C>        <C>        <C>        <C>
                1999...........   $2,942     11,174    (11,477)   $2,639
                                  ======     ======    =======    ======

                2000...........   $2,639     14,376    (14,267)   $2,748
                                  ======     ======    =======    ======

                2001...........   $2,748     20,237    (16,456)   $6,529
                                  ======     ======    =======    ======
</TABLE>

<PAGE>

                                  SIGNATURES

   Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on the 29th day of
March, 2002.

                                          NOVAMED EYECARE, INC.

                                          By: /S/  STEPHEN J. WINJUM
                                             __________________________________
                                             Stephen J. Winjum
                                             President, Chief Executive Officer
                                               and Chairman of the Board of
                                               Directors

   Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 29th day of March, 2002.

          Signature                       Title
          ---------                       -----
   /S/  STEPHEN J. WINJUM     President, Chief Executive
-----------------------------   Officer (Principal
      Stephen J. Winjum         Executive Officer),
                                Chairman of the Board of
                                Directors, and a Director

   /S/  SCOTT T. MACOMBER     Executive Vice President and
-----------------------------   Chief Financial Officer
      Scott T. Macomber         (Principal Financial
                                Officer)

    /S/  ROBERT L. HIATT      Vice President Finance
-----------------------------   (Principal Accounting
       Robert L. Hiatt          Officer)

     /S/  R. JUDD JESSUP      Director
-----------------------------
       R. Judd Jessup

     /S/  SCOTT H. KIRK       Director
-----------------------------
     Scott H. Kirk, M.D.

  /S/  STEVEN V. NAPOLITANO   Director
-----------------------------
    Steven V. Napolitano

   /S/  C.A. LANCE PICCOLO    Director
-----------------------------
     C.A. Lance Piccolo