SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

|ý                                                   | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|--------------------------------------------------- | ----------------------------------------------------------------------------------------
|For the fiscal year ended December 31, 2007        
|o                                                   | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|for the transition period
from                   to

Commission File Number: 0-26625

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

|Delaware                                                       |  | 36-4116193                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction
of incorporation or organization) |  | (I.R.S. Employer Identification No.)

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:

Title of each class

Name of each exchange on which registeredCommon Stock, par value $.01 per share

The NASDAQ Stock Market, LLCPreferred Stock Purchase Rights

The NASDAQ Stock Market, LLC


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

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.    Yes o    No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act.    Yes o    No ý

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 ý    No o

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.    o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "large
accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act (check one):

|Large accelerated filer o |  | Accelerated filer ý |  | Non-accelerated filer o (Do not check if a smaller reporting company) |  | Smaller reporting company o
|------------------------- |  | ------------------- |  | --------------------------------------------------------------------- |  | ---------------------------

Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act).    Yes o    No ý

The aggregate market value of the registrant's 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 June 30, 2007 was $134,844,639. The number of shares outstanding of the registrant's Common Stock, par value $.01 per share, as of March 10, 2008 was
24,587,093.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Definitive Proxy Statement in connection with the registrant's 2008 Annual Meeting of Stockholders are incorporated by
reference into Part III of this Annual Report on Form 10-K.



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PART I

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 that could cause our
actual results, performance or achievements in 2008 and beyond to differ materially from those expressed in, or implied by, such statements. These risks and uncertainties include: reduced prices and
reimbursement rates for surgical procedures; our ability to acquire, develop or manage a sufficient number of profitable surgical facilities; our ability to manage our increasing borrowing costs as we
incur additional indebtedness to fund the acquisition and development of surgical facilities; our ability to access capital on a cost-effective basis to continue to successfully implement
our growth strategy; our ability to maintain successful relationships with the physicians who use our surgical facilities; our ability to grow and manage effectively our increasing number of surgical
facilities; competition from other companies in the acquisition, development and operation of surgical facilities; and the application of existing or proposed government regulations, or the adoption
of new laws and regulations, that could limit our business operations, require us to incur significant expenditures or limit our ability to relocate our facilities if necessary. These factors
and others are more fully set forth under "Item 1A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, Inc. and its consolidated
subsidiaries.

Item 1.    Business

General

NovaMed, Inc. is a health care services company and an owner and operator of ambulatory surgery centers (ASCs). Our primary focus and strategy is to
acquire, develop and operate ASCs in joint ownership with physicians throughout the United States. As of March 15, 2008, we own and operate 34 ASCs located in 17 states, plus two ASCs that we
are planning to divest in 2008. Historically, most of our ASCs have been single-specialty ophthalmic surgical facilities where ophthalmologists perform surgical proceduresprimarily
cataract surgery. Over the past four years, however, we have focused on expanding into other specialties such as orthopedics (including podiatry), urology, gastroenterology, pain management, plastic
surgery, gynecology and otolaryngology (ENT). This expansion into other specialties has been accomplished through both the acquisition of new ASCs and the addition of new specialties to our existing
ASCs. As of March 15, 2008, 10 of our 34 ASCs offer surgical services in specialties other than ophthalmology. We continue to explore opportunities to acquire ASCs offering differing types of
medical specialties. We also continue to explore ways to efficiently add new specialties to our existing ASCs.

As
of March 15, 2008, we own a majority interest in 32 of our ASCs with the minority interests generally being held by physicians. We own 100% of the equity interests in our other
two ASCs; however, in the future we may elect to sell a minority interest in these facilities to physicians.

In
addition to having surgical equipment in our ASCs, we also provide excimer lasers to ophthalmologists for their use in performing laser vision correction surgery in their offices. We
provide these excimer lasers and other services pursuant to laser services agreements.

We
also own and operate optical laboratories, an optical products purchasing organization and a marketing products and services business.

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In
addition to our surgical facilities and optical products businesses, we provide management services to two eye care practices pursuant to long-term service agreements.
Under these service agreements, we provide business, information technology, administrative and financial services to these practices in exchange for a management fee. These management services are
provided to an optometric practice with an optical retail store located in the Chicago market and an ophthalmology practice with multiple locations in Atlanta, Georgia.

We
were originally organized as a Delaware limited liability company in March 1995 under the name NovaMed Eyecare Management, LLC. In connection with a venture capital investment
made in November 1996, NovaMed Holdings Inc., an Illinois corporation, was formed to serve as a holding company, with NovaMed Eyecare Management, LLC as our principal operating
subsidiary. In May 1999, NovaMed Holdings Inc. reincorporated as a Delaware corporation and changed its name to NovaMed Eyecare, Inc. In August 1999, we consummated our initial public
offering of common stock. In March 2004, we changed our name to NovaMed, Inc. We also changed the name of our principal operating subsidiary to NovaMed Management Services, LLC.

Information Available

Our corporate headquarters are located at 980 North Michigan Avenue, Suite 1620, Chicago, Illinois 60611, and our website is www.novamed.com. We file annual, quarterly, and current reports, proxy statements, and other documents with the Securities and Exchange Commission (the
"SEC") under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The public may read and copy any materials that we file with the SEC at the SEC's public reference facilities at
Room 1580, 100 F Street, N.E., Washington, D.C. 20549. Also, the SEC maintains an Internet website that contains reports, proxy and information statements, and other information
regarding issuers, including us, that file their Exchange Act documents electronically with the SEC. The public can obtain any documents that we file with the SEC at http://www.sec.gov.

We
also make available free of charge on or through our Internet website (http://www.novamed.com) our Annual Report on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and, if applicable, amendments to those reports filed or furnished
pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the SEC.

Industry Overview

Ambulatory Surgery Center Industry

The term "ambulatory surgery" refers to medical procedures performed on a nonhospitalized patient who is able to return home the same day. Since the inception of
outpatient surgery centers in the early 1970s, the ASC industry has grown consistently, with approximately 5,700 ASCs in the United States as of August 2007 according to Verispan, L.L.C., an
independent health care market research and
information firm. Improved surgical techniques and technologies have significantly expanded the number of surgical procedures that can be performed in an ASC. Lasers, enhanced endoscopic techniques
and fiber optics have reduced the trauma and recovery time associated with many surgical procedures. Improved anesthesia has minimized post-operative side effects such as nausea and
drowsiness, resulting in shorter recovery times and in many cases eliminating the need for overnight hospitalization.

We
also believe that the convenience and efficiencies offered by an ASC have also contributed to the growth in ASC procedures. We believe that many physicians prefer an ASC to a hospital
because of greater scheduling flexibility, faster turnaround time between cases and more efficient nurse staffing. Patients prefer the experience of a surgical facility dedicated to their specialized
surgery that is free from disruptions or scheduling conflicts that often arise in hospitals due to emergency procedures or more complex surgical procedures that take longer than expected.

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In
addition to these technological advancements and operating efficiencies, we believe that public and private third party payors recognize the cost-effective benefits of
ASCs. We believe that surgery performed at an ASC is generally less expensive than hospital-based outpatient surgery because of lower facility costs, more efficient staffing and space utilization and
a specialized operating environment focused on cost containment.

Optical Products and Services Industry

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.

While
the number of patient choices 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.
Eyeglass lenses and frames are typically sold through retail optical outlets located in optometrist and ophthalmologist clinics, as well as through retail stores.

Our Business Model

We are focused primarily on acquiring, developing and operating ASCs within new and existing markets. We believe that our experience in operating ASCs, when
coupled with our management services experience in working with physicians, will provide our physician-partners with an efficient operating environment to maximize quality patient care. Our business
was founded in the eye care setting, but we have expanded into other specialties and expect to continue to acquire and develop ASCs in varying specialties.

Surgical Facilities

As of March 15, 2008, we own and operate 34 ASCs, each of which is a state-licensed and Medicare-certified ASC, plus two ASCs that we are planning to
divest in 2008. Physicians perform a variety of surgical procedures in our ASCs, including ophthalmology, orthopedics (including podiatry), urology, gastroenterology, pain management, plastic surgery,
gynecology and ENT. Sixty-six percent of the surgical procedures performed in our facilities in 2007 were ophthalmic procedures, with orthopedics, pain management, gastroenterology,
urology and ENT comprising 10%, 8%, 7%, 3% and 3%, respectively.

We
generally own and operate our surgical facilities through joint ownership arrangements in which we own a majority interest in the facility and the minority equity interests are held
by physicians that perform surgeries in the ASC and live in the ASC's local community. Each facility is generally owned and operated through a separate limited liability company, with one of our
wholly owned subsidiaries generally serving as the manager of the entity. In certain instances, we may own the facility through a limited partnership with one of our wholly owned subsidiaries serving
as the general partner.

In
addition to owning and operating ASCs, we also are parties to laser services agreements pursuant to which we provide excimer lasers and various services to ophthalmologists for their
use in performing laser vision correction surgery.

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Product Sales

We own and operate an optical laboratory business that specializes in surfacing, finishing and distributing corrective lenses and eyeglass lenses. Our
laboratories have in excess of 250 active customers, including ophthalmologists, optometrists, opticians and optical retail chains. Our optical products purchasing organization allows eye care
professionals to purchase optical products through us from more than 200 suppliers. We expanded our purchasing organization in December 2007 when we acquired an optical products purchasing
organization based in Minneapolis, Minnesota. With this acquisition, we now process consolidated monthly billing for over 2,500 customers. Customers of these businesses include our former affiliated
doctors who are parties to multi-year optical supply agreements with us pursuant to which our group purchasing organization and optical laboratories are the primary providers of optical
products and supplies to these doctors. Generally, unless the parties agree on extensions, these supply agreements will expire between July 2008 and December 2012. The product sales revenue generated
from these customers in 2007 constituted less than ten percent of our total product sales revenue.

In
addition, our marketing products and services business provides eye care professionals and vendors with a range of products and services including brochures, videos, advertising and
website design, education and training programs, and consulting services.

We
also have a long-term service agreement with an optometric practice located in Illinois. The optometric practice also has a retail optical outlet that sells eyeglasses and
other products to patients. We provide all of the services, facilities and equipment necessary to operate this optometric practice under a 25-year service agreement. The services include:



Other

We also have a 40-year service agreement in place with an ophthalmology practice with multiple locations in Atlanta, Georgia. We provide all of the
services, facilities and equipment necessary to operate this medical practice, including services identical in nature to those described above with respect to our Illinois affiliated optometric
practice.

For
a further discussion regarding these segments and their respective financial information, please see "Item 7Management's Discussion and Analysis of Financial
Condition and Results of Operations."

Our Growth Strategy

Surgical Facilities

We are focused on acquiring, developing and operating ASCs. Historically, our emphasis was primarily on eye surgical services. Over the past several years,
however, we have expanded into other specialties such as orthopedics (including podiatry), urology, gastroenterology, pain management, plastic surgery and gynecology. This expansion into other
specialties has been through both the acquisition of new facilities and the addition of specialties to our existing centers. While ophthalmology is still our largest

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specialty
and a key part of our growth strategy, we are actively evaluating and pursuing opportunities in other specialties. The key elements of our growth strategy are:





The revenue generated by our ASCs is driven by the surgical procedures performed by physicians. Revenue growth in our existing ASCs is expected to be derived from
an increase in surgical procedures performed at each facility, with this increase attributable to existing physicians or new physicians utilizing the facility. All of our ASCs currently have the
capacity to handle additional procedures. Given this capacity, we introduce the benefits of our facilities to new physicians who may be using other less efficient and convenient facilities. We believe
the efficiency and convenience of an ASC, and the opportunity to work in facilities affiliated with a national ASC operator with significant management expertise, are appealing to physicians and their
patients and provides a more attractive setting than hospitals. We employ sales people in several of our markets who are working on a full-time basis to market our ASCs to potential
physicians. We also work with our physicians to identify new procedures, technologies or equipment to integrate into our facilities and
expand the scope of surgical services offered in a cost-effective manner. Moreover, as we continue to expand the number of multi-specialty ASCs within our portfolio, reimbursements from
private third party payors will likely increase as an overall percentage of our surgical facility revenue. Thus, we will continue to evaluate opportunities to maximize our managed care panel
participation and reimbursement levels.

With
some of our existing centers that currently provide only eye-related surgical services, we are exploring efficient ways to add new surgical specialties. We are often
required to obtain state licensure approval to add other specialties to our existing centers. The likelihood of our success in receiving these approvals will vary by state.

Staffing
and medical supply costs are generally an ASC's two largest expense categories. We analyze staffing schedules and work with physicians to schedule surgeries in a manner that
maximizes staff efficiency and optimizes staffing costs. We also have negotiated purchasing contracts with many of our largest vendors and we educate our physicians on lower cost supply alternatives
that still maintain high patient care standards.



We have a development staff that is responsible for identifying, evaluating and negotiating the acquisition of majority interests in ASCs in new or existing
markets. In certain instances, we may also consider acquiring a minority, rather than a majority, equity interest. The acquisition of a well-established ASC is an attractive means of entry
into a new market, particularly in states that require a certificate of need (CON) for development. In analyzing potential transactions, the evaluation of our prospective physician-partners is a
critical factor. We recognize that the success of our ASCs is tied directly to the success of our physician-partners and their practices. We believe our management services experience from our history
as a physician practice management company greatly enhances our physician evaluation process.

We
also assess the target facility's potential for future growth. We identify opportunities to add new physicians or surgical procedures, or to improve managed care participation. We
also examine the opportunities to reduce expenses through improved staff efficiency, better physician scheduling and reduced supply costs. Our development staff and operations personnel work closely
with our physician

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partners
to formulate a growth strategy for each newly acquired facility to maximize our return on investment.

We
currently intend to finance our future acquisitions of equity interests in ASCs using cash generated from our operations and amounts borrowed under our $125 million credit
facility that expires on February 5, 2010.



Our development staff is also responsible for identifying potential opportunities to build new ASCs with physician-partners. These projects involve partnering
with one or more physicians in a local community that is either underserved from a facility standpoint, or involve physicians who don't have the resources, productivity or expertise to construct a
facility on their own and seek an experienced partner to help finance, structure and oversee the project. Generally, development of a new ASC can be an attractive alternative in states that do not
require a CON to build a new center. We have developed two of our 34 ASCs as of March 15, 2008.

Product Sales

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. We also recently added to our optical products group purchasing organization by purchasing another purchasing
organization based in Minneapolis, Minnesota.

Competition

Surgical Facilities

In acquiring, developing and operating our ASCs, our principal competitors are corporations, physicians and hospitals. There are several publicly held and private
companies actively engaged in the acquisition, development and operation of ASCs. 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 companies that have
subsidiaries or divisions engaged in this business.
Many of these competitors have greater resources than us. In each of our local markets, we also compete with hospitals and other ASCs in attracting physicians to utilize our ASCs, for patients and for
managed care contracting opportunities.

Product Sales

Our two optical laboratories face a variety of national, regional and local competitors. We compete in the optical laboratory market on the bases of quality and
breadth of service, 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 with suppliers.

Other

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 price.

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Employees

As of March 3, 2008, we had approximately 691 employees, 463 of whom are full-time employees. We are not a party to any collective bargaining
agreements and we consider our relations with our employees to be good.

Many
of our ASCs are located adjacent to a physician practice. In some instances, our ASCs may lease from the physician practice some or all of the individuals who provide services in
the ASC on our behalf. This is typically only done when the ASC may provide surgical services on a limited schedule. This leasing model allows us to staff these centers in a more
cost-effective manner.

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 regulating our businesses.

We
believe our business practices comply in all material respects with applicable federal, state and local laws and regulations. If the legal compliance of any of our activities were
challenged, however, we might have to divert substantial time, attention and resources from running our business to defend against these challenges regardless of their merit. In such circumstances, if
we do not successfully defend these challenges, we might face a variety of adverse consequences including losing our ASC licenses, 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.

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 during 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, repurchase minority equity interests in our ASCs that are owned by physicians, 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 could have a material adverse effect on our business, financial condition and results of operations.

The
following is a summary of the principal 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
anti-kickback statute is broadly written as to encompass many legitimate, harmless and pro-competitive arrangements. Consequently, Congress has enacted a
series of statutory exceptions to the

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anti-kickback
statute, and the Inspector General for the U.S. Department of Health and Human Services (DHHS) has promulgated a series of regulatory "safe harbors." 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 exist. 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, and is not necessarily illegalper se.

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, specifically.
As of March 15, 2008, we co-own 32 of our ASCs with one or more physicians, and we will likely co-own with physicians most of the ASCs that we will acquire in the
future. We will also likely be selling minority 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 notper seunlawful 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 to the greatest extent possible.

The
applicable regulatory authorities have provided limited guidance regarding ASC ownership arrangements that are permissible under the anti-kickback statute. Based on the
guidance that is available, we believe that our joint ownership arrangements comply with the anti-kickback law based on, among other things, the following factors: all of the jointly owned
ASCs are Medicare certified; patients referred to an ASC by an investor are informed of the referring physician's investment interest in the ASC; the terms on which an investment interest in the ASC
is offered to an investor are not 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 will loan money to any investors or guarantee debt of any investors incurred to purchase the investment interest; the return on investment in the ASC is directly proportional to the investors'
investment interests; the ASCs treat federal health program beneficiaries in a non-discriminatory manner; and Medicare-recognized surgical procedures 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.

Generally
speaking, the Stark Law does not prohibit referrals to ASCs from physicians with ownership or investment interests in those ASCs. Medicare regulations provide two exceptions
that protect referrals to ASCs by physicians who have ownership or compensation relationships with those ASCs. The first exception expressly exempts items and services which are identified as
designated health services for which payment is included in the ASC composite rate. Referrals made for these items and services by physicians with a financial relationship do not violate the Stark Law
when furnished in the ASC setting. Thus, when an intraocular lens, or IOL, used in cataract surgery, or another service or item that would otherwise qualify as a "designated health service," is
included in an ASC composite payment rate, the IOL (or other such service or item) will not be considered to be a "designated health service." The second exception provides that prosthetics,
prosthetic devices, and durable medical equipment implanted at a Medicare-certified ASC by the referring physician or a member of the referring physician's group practice also are

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specially
excepted, even when the Medicare payment for these items is separate fromi.e.,not bundled intothe ASC
payment.

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 $5,500 to $11,000 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 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. Final rules for most 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. Our ASCs are utilizing standard transactions and approved code sets, all in compliance with HIPAA.

On
December 28, 2000, as modified on May 31, 2002 and August 14, 2002, the DHHS published final rules addressing "Standards for Privacy of Individually Identifiable
Health Information" under HIPAA's administrative simplification provisions. Compliance with these rules was required by April 14, 2003. These rules create substantial compliance issues for all
"covered entities"which include health care providers, health plans and health care clearinghousesthat engage in regulated transactions and activities. Operations of our ASCs
are covered by the final rules. We believe our ASCs are in substantial compliance with these final rules.

Final
rules addressing the "Security Standards" under HIPAA's administrative simplification provisions were published on February 20, 2003. Compliance with these regulations was
required by April 21, 2005. We believe our ASCs are in compliance.

Violations
of HIPAA's administrative simplification provisions can result in civil penalties of up to $25,000 per person per year for each violation or 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 are required to obtain and maintain licenses from the state departments of
health in states where we open, acquire and operate ASCs. We believe that we have obtained, and that we maintain, the necessary licenses in states where licenses are required. With respect to future
expansion, we cannot assure you that we will be able to obtain the required licenses without unreasonable expense or delay. In addition, we cannot assure you that we will be able to maintain licenses
for all of our operating ASCs. We believe our ASCs are in compliance with all applicable state licensure requirements, but we cannot guaranty that the state departments of health will continue to view
our facilities as being in compliance.

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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 our future development of
new ASCs or expansion of
existing ASCs, 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 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 with which the providers have a compensation relationship. In some
states, these restrictions apply regardless of the patient's source of payment.

State Privacy Laws.Numerous states have enacted privacy laws that have similar objectives to the federal HIPAA privacy
regulations. These laws, which vary from state to state, require that certain protective measures be taken in connection with the disclosure of a patient's identifying information.

Corporate Practice of Medicine.A number of states have enacted laws that prohibit, or have common law that prohibits, 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 provide services to physicians in connection with their
performance of surgical procedures through laser services agreements and through our remaining management services agreements. 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 only
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 ASCs, are subject to regulation by 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.

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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.

Government RegulationManagement Services

Our management services business and the operations of our affiliated providers are also subject to extensive and continuing regulation by governmental entities
at the federal, state and local levels. The following is a summary of the principal health care regulatory issues affecting our management services business, both with respect to our affiliated
providers and us:



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 exist. 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. We believe the provision of these designated health services satisfies an exception to the Stark Law. In addition, 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. We have
taken actions to assist our remaining affiliated providers with their HIPAA compliance efforts.



State Privacy Laws.State health information privacy laws may also apply to the activities of our affiliated providers. There
is very little guidance regarding the application of these state privacy laws. We cannot be sure that the privacy measures taken by our affiliated providers will be construed as complying with these
laws. In the event the privacy measures taken by these professionals are deemed not to comply with a particular state's health privacy laws, we may need to incur significant time, effort and expense
to establish compliance.

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 with our affiliated providers 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 providers and there is a possibility that some provisions of our service agreements may not be enforceable.

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Fee-Splitting Laws.We believe our management fee arrangements with our affiliated providers 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.

Discontinued Operations

On December 12, 2007, our Board of Directors approved a plan to close or sell three ASCs located in Laredo, Texas, Thibodaux, Louisiana and Columbus,
Georgia. The Board determined to close or sell two of these ASCs due to their continued unprofitability. The Board decided to close or sell the third facility located in Thibodaux, Louisiana because
of the facility's competitive position in the market, limited growth potential, and the lack of a succession plan for its sole surgeon in this rural area who is planning to retire shortly. As of
March 15, 2008, we have sold our equity interests in the Columbus, Georgia and Thibodaux, Louisiana facilities. The results of these ASCs are classified as discontinued operations for all
periods presented.

Effective
November 1, 2005, we sold our 80% interest in our St. Joseph, Missouri ASC to our existing physician-partners. We sold our interest due to state licensure issues
unique to this ASC as well as its limited growth potential. The results of this ASC are classified as discontinued operations for all periods presented.

In
October 2001, we announced our intentions to discontinue our management services business and beginning in the third quarter of 2001, we reflected the management services business as
discontinued operations in our financial statements. We completed our discontinued operations plan in December 2003 when we consummated our last divestiture transaction. From December 2001 to December
2003, we negotiated and closed nineteen divestiture transactions. After failing to find a buyer for two of our practices on terms acceptable to us, we subsequently decided to retain these practices.
These two practices are reported in continuing operations for all periods presented.

Item 1A.    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 Business



Government
sponsored health care programs accounted for approximately 35% of our consolidated net revenue for the year ended December 31, 2007. The health care industry is
continuing to experience a trend toward cost containment as government and private third-party payors seek to contain 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, resulted in
reduced payments to ASCs. Medicaid and other governmental and private insurance payments also could be affected to the extent that these insurance companies use payment methodologies based on Medicare
rates, or take actions independent of Medicare to revise payment methodologies.

On
January 1, 2008, pursuant to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (referred to as the "Medicare Modernization Act"), CMS began
implementing a new

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methodology
for determining Medicare payment rates for ASCs. Under the new rate-setting methodology, ASC facility payments generally now are a percentage (currently 65 percent) of
the rates paid to hospitals for the same services when furnished on an outpatient basis in the hospital setting. Payments for certain services commonly furnished in a physician office are capped at
the amount Medicare pays physicians as a technical component when the services are furnished in the office setting. As such, payments for many procedures commonly furnished in our ASCs are well below
the payment a hospital would receive for the same procedure.

When
CMS implemented these revised rates, payment amounts for most procedures furnished by our ASCs changed, in some cases significantly. Payment for some high-volume
procedures, such as cataract extraction, increased, while payment for others, such as YAG and gastroenterology procedures, decreased.

CMS
is implementing the new methodology over four years; CMS also will revise the percentage relationship between hospital and ASC payments annually. Consequently, we expect Medicare
payments for most procedures furnished by our ASCs to fluctuate annually, and in some cases significantly.

Additionally,
the Medicare Modernization Act provides that there shall be no inflation update to Medicare ASC rates during calendar years 2005 through 2009. This freeze will adversely
affect the revenues of our business. Further, the President of the United States recently recommended that Congress extend the inflation freeze for two additional years, through 2011. If approved by
Congress, the gap between Medicare payments to our facilities and hospitals for comparable procedures likely would continue to widen, and our ASCs could be paid even less than hospitals than they
currently are.

Under
current regulations, ASC Covered Procedures,i.e.,those for which a facility fee is provided by the Medicare program, are
those procedures specifically approved by CMS. CMS develops and maintains a listing of ASC Covered Procedures (defined by HCPCS Code). A facility fee is available only for listed procedure codes.
Effective January 1, 2008, CMS added approximately 800 procedures to the list of approved procedures. At present, approximately 3,300 procedures are approved for the ASC setting. CMS is
expected to update this annually. Consequently, there is a material risk that CMS will reduce the number of ASC Covered Procedures. On November 26, 2004, CMS proposed to delete 100 procedures
from the list of ASC Covered Procedures, including many procedures that are commonly furnished in ASC settings. Although CMS ultimately decided in May 2005 to delete only five of the proposed 100
procedures, CMS could again propose and ultimately decide to substantially reduce the number of procedures for which Medicare will pay an ASC facility fee, a change that could affect the financial
viability of our business. To the extent that any procedures performed at our ASCs are deleted from the list of ASC Covered Procedures, it could negatively and materially affect our revenue and
business.

Considerable
uncertainty surrounds the future determination of Medicare reimbursement levels for ambulatory surgical services. Services reimbursable under the Medicare program are
subject to legislative change, administrative rulings, interpretations, discretion, governmental funding restrictions and requirements for utilization review. Such matters, as well as more general
governmental budgetary concerns, may significantly reduce payments made to ASCs under this program, and there can be no assurance that future Medicare payment rates will be sufficient to cover the
costs of, or cost increases in, providing services to Medicare patients.

Revenue
from laser vision correction procedures comprised approximately two percent of our surgical facilities net revenue for the year ended December 31, 2007. The market for
providing laser vision correction and other refractive surgery procedures continues to be highly competitive. In response, many of our competitors are offering laser vision correction or other
refractive surgery services at lower
prices than the prices we charge. 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.

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As
we develop and acquire more multi-specialty ASCs, we anticipate that the percentage of our surgical facilities net revenue derived from governmental payors such as Medicare will
decrease while reimbursements from private third party payors will increase. Given this changing payor mix, our success will depend on our ability to negotiate favorable contracts with private third
party payors. Even though our relative dependence on Medicare reimbursements may decrease, our revenue from private third party payors could be negatively affected by any adverse Medicare changes
because many private third party payors tie their reimbursement levels to Medicare rates.



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 grow or sustain profitability in our existing and future ASCs. Newly acquired or developed facilities may generate losses or experience lower operating margins than our more established
facilities, or they may not generate returns that justify our investment.

The
current market for ASC acquisitions is very competitive, and most potential targets are evaluating offers from multiple bidders. This bidding process often results in increased
purchase prices and less favorable transaction terms. In many instances, we have dropped out of the bidding because we thought the price was too high or other proposed terms were unacceptable. 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 adequate
capital to finance these endeavors.

We
anticipate that we will fund the acquisition and development of future ASCs from cash generated from our operations and amounts borrowed under our credit facility. The maximum
commitment available under our credit facility is currently $125 million. Our current credit facility expires on February 5, 2010. As of March 15, 2008, we have approximately
$100 million of availability under our credit facility.

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



The success of our business depends on our relationship with, and the success and efforts of, the physicians who perform surgical procedures at our ASCs. Our
physician partners may perform surgical procedures at other facilities or hospitals, are not required to use our ASCs and may choose not to perform procedures at our ASCs. Our revenue and
profitability would decline if our relationship with key physicians deteriorated or those physicians reduced or eliminated their use of our ASCs. In addition, our business and reputation could be
damaged if the physicians who use our ASCs fail to provide quality medical care or follow required professional guidelines at our facilities.

In
addition, co-owning ASCs with physicians may create additional regulatory risk. See "Government RegulationFederal LawAnti-Kickback
Statute."



Our acquisition and development program requires substantial capital resources and the operations of our existing ASCs also require ongoing capital expenditures.
Our future capital requirements and the adequacy of our available funds will depend on many factors, including the timing and size of our acquisitions, development and expansion activities, the
capital requirements associated with our ASCs, the

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future
cost of medical equipment and our ability to generate cash flow. If we identify favorable acquisition and development opportunities that require additional resources, we may be required to
incur additional indebtedness or issue equity securities in order to pursue these opportunities. We may be unable to obtain sufficient financing on terms satisfactory to us, or at all. As a result,
our acquisition and development activities would have to be curtailed or eliminated and our financial results would be adversely affected.

If
we choose to use indebtedness to fund our growth, we may become significantly leveraged in the future. As of March 15, 2008, we had approximately $100 million of
availability under our credit facility. Given that we intend to continue to finance our acquisitions by using a combination of cash generated from our business operations and borrowings under our
credit facility, we may in the future need to increase our maximum available commitment. We have an option under our credit facility to increase the maximum commitment to $150 million under
certain conditions. To the extent we are able to increase our maximum commitment, if at all, such an increase may not be on terms that are favorable to us or sufficient for our needs. Our maximum
borrowing availability and applicable interest rates under our credit facility are calculated based on a ratio of our total indebtedness to our earnings before interest, taxes, depreciation and
amortization (EBITDA), all as more fully defined in our credit facility. Our credit facility currently provides for temporary increases in this ratio through September 30, 2008 for purposes of
calculating our maximum borrowing availability. This ratio will decrease following September 30, 2008 and will reduce our maximum borrowing capacity. In addition, our higher level of borrowings
and the continued periodic escalation in interest rates have increased our borrowing costs which have adversely affected our profitability. In addition, on June 27, 2007, we issued
$75 million aggregate principal amount of 1.0% convertible senior subordinated notes due June 15, 2012.

The
degree to which we are leveraged could cause us to dedicate a substantial portion of our cash flow from operations to the payment of principal and interest on our indebtedness,
reducing the funds available for our operations. As our indebtedness increases, the portion of our borrowings at variable interest rates will also likely increase which will leave us vulnerable to
interest rate increases. Our degree of leverage may also make us vulnerable to a downturn in our business or the economy generally and, to the extent we become more highly leveraged than some of our
competitors, place us at a competitive disadvantage. We could also fund our growth, or reduce our outstanding indebtedness, through the issuance of equity securities. To the extent any such equity
financing is available to us, it may be dilutive to our current equity holders.



Under the net share settlement feature of the Convertible Notes, we are required to repay the principal portion of the Convertible Notes in cash. Our business and
growth strategy, including our ability to finance the acquisition and development of new ambulatory surgery centers, could be negatively impacted if we do not have sufficient financial resources, or
are not able to arrange suitable financing, to pay the required amounts upon conversion or tender of the Convertible Notes.



Our growth strategy includes increasing our revenue and earnings by increasing the number of procedures performed at our ASCs. Because we do not anticipate price
increases from third party payors, our operating margins will be adversely affected if we do not increase the revenue and procedure volume of our existing ASCs to offset increases in our operating
costs. We seek to increase procedure volume and revenue at our ASCs by increasing the number of physicians performing procedures at our facilities, obtaining new or more favorable managed care
contracts, improving patient flow at our centers and achieving operating efficiencies. We may not be successful in these endeavors.

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We
acquired ten ASCs in 2006 and two ASCs in 2007. Our business strategy contemplates us continuing to acquire and develop more ASCs in the future. Our growth has placed, and will
continue to place, increased demands on our employees, business systems and other resources. Continued expansion of our operations will require substantial financial resources and management
attention. To accommodate our past and anticipated future growth, we will need to continue to implement and improve the management and operation of our business systems and to expand, train, manage
and motivate our employees. Our operating results could suffer if we do not properly manage our growth.



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, hospitals, individual physicians, other ASCs, laser vision correction 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. Hospitals and other ASCs may be more successful in attracting physicians to
utilize their facilities. Our 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.

We
also face competitive pressures from local hospitals. In addition to competing for patients and physician relationships, ASCs are often required by Medicare and certain state laws to
maintain a written transfer agreement with an area hospital. A transfer agreement provides that a hospital will accept an ASC's patient in the event of an emergency. Generally, we have not encountered
problems obtaining transfer agreements from area hospitals. In limited instances, however, we have observed hospitals resisting entering into transfer agreements for what we believe to be competitive
reasons. While there often are alternatives for ASCs to comply with federal and state regulations without a transfer agreement, competitive pressures from hospitals may make it more difficult and/or
expensive for our ASCs to maintain their licensure and/or Medicare certification.



We
are subject to extensive government regulation and supervision under federal, state and local laws and regulations. Many of these laws and regulations are subject to varying
interpretations, and courts and regulatory authorities generally have provided limited 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:



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

For
example, 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. This statute is very broad and Congress directed the
Department of Health and Human Services to develop regulatory exceptions, known as safe harbors, to the statute's referral prohibitions. While we have attempted to structure the ownership and
operation of our ASCs within a safe harbor, we do not satisfy all of the requirements. Because there is no legal requirement that relationships fit within a safe harbor, a business arrangement that
does not comply with the safe harbor, or for which a safe harbor does not exist, does not necessarily violate the anti-kickback statute.

Presently,
despite the fact that we do not fit within a safe harbor, we believe that our ownership and operation of ASCs complies with the anti-kickback statute. However,
existing interpretations or enforcement of the federal anti-kickback statute or other applicable federal or state laws and regulations could change. If so, violations of the
anti-kickback statute or other laws may result in substantial civil and criminal penalties and exclusion from participation in Medicare, Medicaid and other federally funded programs.

On
June 19, 2007, the Inspector General for the U.S. Department of Health and Human Services posted Advisory Opinion No. 07-05. In this Advisory Opinion, the
Inspector General declined to grant a favorable opinion to an arrangement in which a hospital proposed to purchase a subset of the units held in the ASC by two of the largest users of the ASC. The
Inspector General stated that while none of the elements of the arrangement necessarily indicated fraud or abuse, it could not conclude that the difference in the cost of capital acquisition between
the hospital and the physician owners was not related to the business generated by the owners for the ASC or the hospital. Although we cannot predict the ultimate application of this opinion and its
impact on our business, based on the guidance that is available we believe that our joint ownership arrangments comply with the anti-kickback law.

In
addition, there also is a material risk that Congress, CMS or the states could revise physician ownership and referral laws in a manner that could prohibit or limit physician
ownership of ASCs. In December 2003, Congress enacted legislation imposing an 18-month moratorium on physician referrals to certain categories of hospitals, i.e.,those classified as "specialty
hospitals" under the law, if the physician has an ownership interest in the entity. This moratorium expired
in June 2005. While this legislation applied only to hospitals, and not to ASCs, future actions by either Congress or CMS to extend or possibly expand the scope of the moratorium potentially could
prohibit or limit physician ownership of ASCs. Additionally, several states are considering limits on physician ownership in and referrals to specialty hospitals, and a few are considering similar
limitations on physician ownership in and referrals to ASCs. In New Jersey, a state court in November 2007 ruled that physicians who refer their patients to an ASC in which they have an ownership
interest, violate the New Jersey Codey Act's ban against self-referrals. The court's ruling, if not overturned,
could force many ASCs in New Jersey to limit referrals from physician owners and return payments received pursuant to prohibited referrals. To the extent that Congress, CMS or any of the states act to
prohibit or limit physician ownership of ASCs, the investment structure of our ASCs could be affected.

Our
limited liability company agreements and limited partnership agreements pursuant to which we own our ASCs provide that if certain laws and regulations change, or the interpretation
and/or enforcement of such laws and regulations change, we may have to purchase some or all of the equity interests in our ASCs owned by physicians. The regulatory changes that could trigger this
repurchase include it becoming: (i) illegal for a physician to own an equity interest in one of our ASCs; (ii) illegal for physician-owners in our ASCs to refer Medicare or other
patients to the facility; or (iii) substantially likely that the receipt by physician-owners of cash distributions from the limited liability company or partnership

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will
be illegal. The cost of repurchasing these equity interests would be substantial. We may not have sufficient capital resources to fund these obligations, and it may trigger the need to procure
additional debt or equity financing. To the extent any such financing was available to us, it may be on terms that reduce our earnings or are dilutive to our current equity holders. While we attempt
to structure these purchase obligations as favorable as possible to us, the triggering of these obligations could have a significantly negative effect on our financial condition and business
prospects.

Furthermore,
CMS may revise the Medicare conditions for coverage of ASC services. Our Medicare-certified ASCs are required to comply with a series of regulatory obligations in order to
qualify services furnished in those facilities for Medicare reimbursement. On August 31, 2007, CMS proposed to revise the Medicare conditions of coverage for the first time in many years. Many
of the proposed changes would revise current requirements substantially. It is our expectation that our facilities and operations could be modified as necessary to comply with whatever new conditions
might be established. However, bringing our facilities and operations into compliance could involve substantial costs to the company. Moreover, it is possible that our facilities and operations could
not be revised sufficiently to be in compliance with new Medicare conditions, in which case some or all of our ASCs may be forced to disenroll from the Medicare program. Many governmental and private
payors require Medicare certification as a condition to participate in their payment plans. Any ASC not enrolled in Medicare may likewise be precluded from enrolling in other governmental and private
payor plans. Such exclusion would have a material negative effect on our business. CMS could finalize these changes as early as this year.



Most states require licenses to own and operate ASCs, and some states require a certificate of need, or CON, to construct or modify an ASC. Several states
recently have been revising licensure and CON laws in a manner that makes it more difficult to develop or relocate ASCs. If we are unable to procure
the appropriate state licensure approvals, or if we are unable to obtain a CON in states with CON laws, then we may not be able to acquire or construct a sufficient number of ASCs, or to expand the
scope of services offered in our existing ASCs, to achieve our growth strategy. Procuring these approvals could take considerable time, effort and expense, and may result in delays in opening new or
modified facilities. Moreover, if we are unable to maintain good relations with the landlords of our ASCs, we may be forced to relocate a facility from time to time. If we are forced to relocate a
facility, we may incur substantial costs in building out and furnishing our new location. In addition, depending on the state, we may also have difficulty obtaining the necessary state licensure and
CON approvals to relocate the facility. See "Government RegulationState Law."



Although we conduct extensive due diligence prior to acquiring an ASC and are generally indemnified by the sellers, our acquisitions could subject us to claims,
suits or liabilities relating to unknown or contingent liabilities or from incidents occurring prior to our acquisition of the facility. If we incur these liabilities and are not indemnified or
insured for them, our operating results and financial condition could be adversely affected.



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 physicians who use our surgical facilities, or the amount of revenue derived from our laser services agreements. Reduction of these sources of revenue could decrease our profitability. We
also may have to expend significant capital resources to

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deploy
new technology and related equipment to remain competitive. Our inability to provide access to new and improving technology could deter physicians from using our surgical facilities or
equipment.



Our success depends, in part, on the services of key management personnel, including Thomas S. Hall our President, Chief Executive Officer and Chairman of the
Board, and Scott T. Macomber, our Executive Vice President and Chief Financial Officer. We do not know of any reason why we might be likely to lose the services of either 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 either of these officers, we believe that our business could be adversely
affected.



The provision of surgical 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.

Our
insurance policies are generally renewed on an annual basis. Although we believe we will be able to renew our current policies or otherwise obtain comparable professional liability
coverage, we have no control over the potential costs to renew. Increases in professional liability and other insurance premiums will negatively affect our profitability.



Intangible
assets, primarily in the form of goodwill, represent a significant portion of our total assets. At December 31, 2007, intangible assets of our continuing operations
represented approximately 75% of total assets and 226% 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, and at least annually, 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 impairment charge to earnings may become necessary. If, in the future, we
determine that our intangible assets have suffered an impairment that requires us to write off a portion of the asset due to a change in events or circumstances, this write-off could
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.

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Numerous
federal regulations have been adopted under the Health Insurance Portability and Accountability Act of 1996 (HIPAA). Compliance with HIPAA regulations governing patient privacy
was required by April 14, 2003. We have taken actions in an effort to establish our compliance with HIPAA's privacy regulations, and we believe that we are in substantial compliance with
HIPAA's privacy regulations. These actions include having our ASCs and affiliated providers implement new HIPAA-compliant policies and procedures, conducting employee HIPAA training, identifying
"business associates" with whom we need to enter into HIPAA-compliant contractual arrangements and various other measures. Ongoing implementation and oversight of these measures involves significant
time, effort and expense.

Other
federal regulations adopted under HIPAA require that our affiliated providers and us be capable of conducting certain standardized health care transactions, including billing and
other claims transactions. We have undertaken significant efforts, involving substantial time and expense, to assure that our ASCs and affiliated providers can submit transactions in compliance with
HIPAA. We anticipate that continuing time and expense will be required to maintain the ability to submit HIPAA-compliant transactions, and to make sure that newly-acquired ASCs can submit
HIPAA-compliant transactions.

In
addition, compliance with the HIPAA security regulations was required by April 21, 2005. In general, the security regulations require ASCs and other covered entities to
implement reasonable technical, physical and administrative security measures to safeguard protected health information maintained, used and disclosed in electronic form. We have taken actions in an
effort to establish our compliance with HIPAA's security regulations, and we believe that we are in substantial compliance with HIPAA's security regulations. Ongoing implementation and oversight of
these measures involves significant time, effort and expense.

HIPAA
violations could expose us to civil penalties of up to $25,000 per person per year for each violation or 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



After giving effect to the convertible note hedge and warrant transactions that we entered into in connection with our convertible note offering in June 2007, the
conversion of some or all of our 1.0% convertible senior subordinated notes due June 15, 2012 (the "Convertible Notes") may dilute the ownership interests of our existing stockholders. With the
net share settlement feature of the Convertible Notes, upon conversion we will deliver cash instead of shares to repay the principal amount of the Convertible Notes. At the time of conversion we may
elect to finance all or a portion of this $75 million through the issuance of equity securities which may be dilutive to our current equity holders and could adversely affect the market price
of our common stock. If at the time of conversion our share price exceeds the conversion price of $6.371 per share then we have the option of funding such excess residual value with shares of our
common stock or cash. Pursuant to the note hedge transaction, Deutsche Bank AG London is required to deliver to us those shares of our common stock necessary to cover the residual value of any excess
over $6.371 per share. To the extent our share price exceeds $8.31 per share, then pursuant to the warrant transaction, we will be required to deliver shares of our common stock representing the value
of the warrants in excess of $8.31 per share. In addition, if a "qualifying fundamental change" occurs prior to maturity of the Convertible Notes, the conversion rate will be increased by an
additional number of shares of common stock as provided for in the indenture governing the Convertible Notes. This additional issuance of common stock pursuant to these warrants may also be dilutive
to our current equity holders and could adversely affect the prevailing market prices of our common stock. In addition, the existence of the Convertible Notes and the related convertible note hedge
and warrant transactions may encourage

21

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short
selling by market participants because the conversion of the Convertible Notes could depress the price of our common stock.



In connection with the issuance of the Convertible Notes, we entered into a privately negotiated convertible note hedge transaction with Deutsche Bank AG London,
which is expected to reduce the potential dilution to our common stock upon any conversion of the Convertible Notes. We also entered
into a warrant transaction with Deutsche Bank AG London with respect to our common stock pursuant to which we may issue shares of our common stock. In connection with hedging these transactions,
Deutsche Bank AG London or its affiliates were expected to enter into various over-the-counter derivative transactions with respect to our common stock at, and possibly after,
the pricing of the Convertible Notes and may have purchased or may purchase shares of our common stock in secondary market transactions following the pricing of the Convertible Notes. These activities
could have had, or could have, the effect of increasing the price of our common stock. Deutsche Bank AG London or its affiliates are likely to modify their hedge positions from time to time prior to
conversion or maturity of the Convertible Notes by purchasing and selling shares of our common stock, other of our securities or other instruments it may wish to use in connection with such hedging.
The effect, if any, of any of these transactions and activities on the market price of our common stock or the Convertible Notes will depend in part on market conditions and cannot be ascertained at
this time, but any of these activities could adversely affect the value of our common stock (including during any period used to determine the amount of consideration deliverable upon conversion of
the Convertible Notes).



The terms of the Convertible Notes require us to purchase the Convertible Notes for cash in the event of a fundamental change. A takeover of our company would
trigger the requirement that we purchase the Convertible Notes. This may have the effect of delaying or preventing a takeover of our company that would otherwise be beneficial to investors.



During 2007, the market price of our common stock was volatile, fluctuating from a high trading price of $7.91 to a low trading price of $4.10 per share. 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 rent. 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.

The
timing and degree of fluctuations in our operating results will depend on several factors, including:



22

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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.



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.

Item 1B.    Unresolved Staff Comments

None.

Item 2.    Properties

We generally do not own any real property, except in one instance in which one of our ASCs owns the underlying real estate. We generally lease space for our
corporate offices, our ASCs and our product sales operations, all of which are located in 18 states. As part of our management services business, we also continue to lease the clinics of our
affiliated providers. In some cases, these facilities are leased from related parties. See "Item 13Certain Relationships and Related Transactions." Our corporate offices currently
consist of 9,993 square feet in Chicago, Illinois, 7,600 square feet in Des Plaines, Illinois, and 3,293 square feet in Alpharetta, Georgia.

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 renewal terms exercisable at our option. Generally, our ASCs and eye care clinics are located in medical
complexes, office buildings or free-standing buildings. The square footage of these offices range from 2,157 square feet to 12,541 square feet, and the terms of these leases have
expiration dates ranging from September 30, 2008 to July 31, 2017. Depending on state licensing and certificate of need issues, relocating or expanding the space in any of our ASCs may
require state regulatory approval.

23

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The
following is a list of our 34 ASCs as of March 15, 2008 (excluding two that we are planning to divest in 2008):

|Location              |  | Number of
Operating
Rooms |  | Our Ownership
Percentage |      | Specialty      
|--------------------- |  | ------------------------- |  | ------------------------ | ---- | ---------------
|Jonesboro, AR         |  | 2                         |  | 51                       | %    | Ophthalmology  
|Whittier, CA          |  | 2                         |  | 51                       | %    | Multispecialty 
|Colorado Springs, CO  |  | 2                         |  | 51                       | %    | Ophthalmology  
|Denver, CO            |  | 1                         |  | 51                       | %    | Ophthalmology  
|Altamonte Springs, FL |  | 1                         |  | 70                       | %    | Orthopedic     
|Gainesville, FL       |  | 2                         |  | 51                       | %    | Ophthalmology  
|Lake Worth, FL        |  | 2                         |  | 60                       | %    | Ophthalmology  
|Sebring, FL           |  | 2                         |  | 51                       | %    | Multispecialty 
|Atlanta, GA           |  | 2                         |  | 100                      | %    | Ophthalmology  
|Chicago, IL           |  | 1                         |  | 69.5                     | %    | Ophthalmology  
|Maryville, IL         |  | 1                         |  | 77                       | %    | Ophthalmology  
|Oak Lawn, IL          |  | 4                         |  | 51                       | %    | Multispecialty 
|River Forest, IL      |  | 2                         |  | 70                       | %    | Ophthalmology  
|Merrillville, IN      |  | 2                         |  | 51                       | %    | Ophthalmology  
|New Albany, IN        |  | 2                         |  | 67.5                     | %    | Ophthalmology  
|New Albany, IN        |  | 2                         |  | 51                       | %    | Pain Management
|Overland Park, KS     |  | 3                         |  | 51                       | %    | Ophthalmology  
|Berkley, MI           |  | 2                         |  | 51                       | %    | Ophthalmology  
|Kalamazoo, MI         |  | 4                         |  | 62.5                     | %    | Multispecialty 
|Florissant, MO        |  | 1                         |  | 100                      | %    | Ophthalmology  
|Kansas City, MO       |  | 2                         |  | 51                       | %    | Ophthalmology  
|St. Peters, MO        |  | 2                         |  | 54                       | %    | Multispecialty 
|Warrensburg, MO       |  | 2                         |  | 51                       | %    | Ophthalmology  
|Fremont, NE           |  | 1                         |  | 51                       | %    | Multispecialty 
|Bedford, NH           |  | 1                         |  | 51                       | %    | Ophthalmology  
|Nashua, NH            |  | 2                         |  | 51                       | %    | Ophthalmology  
|Sandusky, OH          |  | 1                         |  | 60                       | %    | Ophthalmology  
|Chattanooga, TN       |  | 1                         |  | 57                       | %    | Ophthalmology  
|Cleveland, TN         |  | 2                         |  | 65                       | %    | Multispecialty 
|Dallas, TX            |  | 3                         |  | 65                       | %    | Multispecialty 
|San Antonio, TX       |  | 2                         |  | 55                       | %    | Ophthalmology  
|Tyler, TX             |  | 2                         |  | 60                       | %    | Ophthalmology  
|Richmond, VA          |  | 1                         |  | 51                       | %(1) | Ophthalmology  
|Madison, WI           |  | 2                         |  | 51                       | %    | Ophthalmology  

---

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.

24

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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 2007.

PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Price Range of Common Stock

Since August 18, 1999, our common stock has been traded on the NASDAQ Global Select 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 Global Select Market:

High

LowFiscal year ended December 31, 2007:Fourth Quarter

$
5.73

$
4.10Third Quarter

$
6.25

$
4.22Second Quarter

$
7.75

$
5.43First Quarter

$
7.91

$
6.01Fiscal year ended December 31, 2006:Fourth Quarter

$
8.74

$
6.72Third Quarter

$
8.50

$
6.08Second Quarter

$
7.50

$
6.60First Quarter

$
8.63

$
6.28


On
March 10, 2008, the last reported sale price of our common stock was $3.60, and there were 266 holders of record of our common stock. This figure does not include the number of
individual
beneficial holders of securities that are held in the "street name" of a securities dealer. The quotations listed above do not reflect retail mark-ups or commissions and may not
necessarily represent actual transactions.

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 for the
foreseeable future. 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 $125 million credit
facility prohibits the payment of dividends on our common stock.

25

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Item 6.    Selected Financial Data

The consolidated statement of operations data set forth below for the years ended December 31, 2007, 2006 and 2005 and the balance sheet data at
December 31, 2007 and 2006, are derived from our 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, 2004 and 2003 and the consolidated balance sheet data at December 31, 2005, 2004 and 2003 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.

|                                                    |  | Year Ended December 31,
|--------------------------------------------------- |  | -----------------------
|
|
|Consolidated Statement of Operations Data:(a)(b)(c) |  |                        
|Net revenue                                         |  | $                      
|                                                    |  |                        
|Operating income                                    |  | $                      
|                                                    |  |                        
|Income from continuing operations                   |  | $                      
|                                                    |  |                        
|Income from continuing operations per basic share   |  | $                      
|                                                    |  |                        
|Income from continuing operations per diluted share |  | $                      
|                                                    |  |                        
|Other Data:(a)(c)(d)                                |  |                        
|ASCs operated at end of period                      |  |                        
|                                                    |  |                        
|Number of surgical procedures performed             |  |                        
|                                                    |  |                        

|
|

|                                       |  | As of December 31,
|-------------------------------------- |  | ------------------
|
|
|Consolidated Balance Sheet Data:(a)(c) |  |                   
|Working capital                        |  | $                 
|Total assets                           |  |                   
|Total debt, excluding current portion  |  |                   
|Total stockholders' equity             |  |                   

---

Notes:

26

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

The following discussion and analysis presents our consolidated financial condition at December 31, 2007 and 2006 and the results of operations for the
years ended December 31, 2007, 2006 and 2005. You should read the following discussion together with the "Selected Financial Data," our consolidated financial statements and the related notes
and other financial data contained elsewhere in this annual report. In addition to the historical information provided below, we have made certain estimates and forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those anticipated or implied by these estimates and forward-looking statements as a result of certain factors, including those
discussed in the section captioned "Risk Factors," the introductory paragraph to Part I, and elsewhere in this Form 10-K.

Overview

We consider our core business to be the ownership and operation of ambulatory surgery centers (ASCs). As of December 31, 2007, we owned and operated 34
ASCs of which 32 were jointly owned with physician-partners. We also owned three ASCs that we plan to divest in 2008. We also own other businesses including an optical laboratory, an optical products
purchasing organization, and a marketing products and services company. We also provide management services to two eye care practices.



ASC Strategy.We measure the success of our ASC strategy based on our ability to achieve or exceed the following key
objectives:



In
addition to the above key ASC objectives, our overall strategy also includes maintaining a strong balance sheet, continuing to grow the other segments of our business, and attracting
and retaining employees to help us achieve our growth objectives.

27

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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 Consolidated Financial Statements), 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 and patient visits to our eye care practices, net of contractual allowances and a provision for doubtful accounts, is recognized at the time the service is
performed. The contractual allowance is the difference between the fee we charge 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 when Medicare is the payor, our contracted rate with other third party payors or our
historical experience when we do not have a specific Medicare or contracted rate. We base our estimate for doubtful accounts on the aging category and our historical collection experience. Our optical
products purchasing organization negotiates buying discounts with optical product manufacturers. The buying discounts and any handling charges billed to the members of the purchasing organization
represent the revenue recognized. Product sales revenue from our optical laboratories and marketing products and services business, net of an allowance for returns and discounts, is recognized when
the product is shipped or service is provided to the 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.

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

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.

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.

Stock-based Compensation.On January 1, 2006, we adopted SFAS No. 123(R), Share-Based
Payment, which requires us to measure and recognize compensation expense for all share-based payment awards based on estimated fair values
at the date of grant. Determining the fair value of share-based awards requires judgment in developing assumptions, which involve a number of variables. We calculate fair value by using the
Black-Scholes option-pricing model, which requires estimates for expected volatility, expected dividends, the risk-free interest rate and the expected term of the option. We also estimate
the expected service period over which our stock-based awards will vest. Each of these assumptions, while reasonable,

28

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requires
a certain degree of judgment and the fair value estimates could vary if actual results are materially different than those initially applied.

Results of Operations

The following table summarizes our operating results as a percentage of net revenue for the years indicated.

|                                                       |                                                         | 2007 |       | 2006 |       | 2005 |      
|------------------------------------------------------ | ------------------------------------------------------- | ---- | ----- | ---- | ----- | ---- | -----
|Net revenue:                                           |                                                         |      |       |      |       |      |      
|                                                       | Surgical facilities                                     |      | 82.2  | %    | 77.8  | %    | 73.1 
|                                                       | Product sales and other                                 |      | 17.8  |      | 22.2  |      | 26.9 
|                                                       |                                                         |      |       |      |       |      |      
|                                                       | Total net revenue                                       |      | 100.0 |      | 100.0 |      | 100.0
|                                                       |                                                         |      |       |      |       |      |      
|Operating expenses:                                    |                                                         |      |       |      |       |      |      
|                                                       | Salaries, wages and benefits                            |      | 31.0  |      | 32.8  |      | 32.0 
|                                                       | Cost of sales and medical supplies                      |      | 23.4  |      | 24.4  |      | 24.4 
|                                                       | Selling, general and administrative                     |      | 18.3  |      | 18.2  |      | 20.1 
|                                                       | Depreciation and amortization                           |      | 2.8   |      | 2.6   |      | 2.9  
|                                                       |                                                         |      |       |      |       |      |      
|                                                       | Total operating expenses                                |      | 75.5  |      | 78.0  |      | 79.4 
|                                                       |                                                         |      |       |      |       |      |      
|                                                       | Operating income                                        |      | 24.5  |      | 22.0  |      | 20.6 
|                                                       |                                                         |      |       |      |       |      |      
|Other (income) expense:                                |                                                         |      |       |      |       |      |      
|                                                       | Interest expense                                        |      | 3.8   |      | 2.9   |      | 1.0  
|                                                       | Interest income                                         |      | (0.1  | )    | (0.1  | )    | (0.1 
|                                                       | Minority interests in earnings of consolidated entities |      | 11.9  |      | 11.0  |      | 9.3  
|                                                       | Gain on sale of minority interests                      |      | (0.1  | )    | (0.1  | )    | (0.1 
|                                                       | Non-consolidated impairment charge                      |      | 0.8   |      |      |      |     
|                                                       | Other                                                   |      |      |      | (0.3  | )    | (0.6 
|                                                       |                                                         |      |       |      |       |      |      
|                                                       | Total other (income) expense                            |      | 16.3  |      | 13.4  |      | 9.5  
|                                                       |                                                         |      |       |      |       |      |      
|Income before income taxes                             |                                                         | 8.2  |       | 8.6  |       | 11.1 |      
|Income tax provision                                   |                                                         | 3.6  |       | 3.4  |       | 4.5  |      
|                                                       |                                                         |      |       |      |       |      |      
|Income from continuing operations                      |                                                         | 4.6  |       | 5.2  |       | 6.6  |      
|Income (loss) from discontinued operations             |                                                         | (0.2 | )     | 0.2  |       | 0.3  |      
|Net gain (loss) on disposal of discontinued operations |                                                         | (8.7 | )     |     |       | 0.1  |      
|                                                       |                                                         |      |       |      |       |      |      
|Net income (loss)                                      |                                                         | (4.3 | )%    | 5.4  | %     | 7.0  | %    
|                                                       |                                                         |      |       |      |       |      |      

Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006

Net Revenue

Consolidated.Total net revenue increased by 23.4% from $104.3 million to $128.6 million. Net revenue by
segment is discussed below.

Surgical Facilities.The table below summarizes surgical facilities net revenue and procedures performed for 2007 and 2006.
Net revenues generated from surgical facilities are derived from the fees charged for the procedures performed in our ASCs and through our laser services agreements. Our procedure volume is directly
impacted by the number of ASCs we operate, the number of excimer lasers in service, and their respective utilization rates. Surgical facilities net revenue increased by 30.4% from $81.1 million
to $105.8 million. This increase was primarily the result of a $21.4 million increase from ASCs we acquired or developed after January 1, 2006 ("new ASCs") and a
$5.0 million, or 7.4%, increase from

29

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ASCs
that we owned for the entire comparable reporting periods ("same-facility"). The increase in same-facility net revenue was primarily the result of a 9.3% increase in the
number of same-facility procedures performed offset by a 1.7% decrease in the net revenue per procedure due to a change in procedure mix.

|Dollars in thousands |                                 | 2007            |  | 2006 |        | Increase
(Decrease) |  
|-------------------- | ------------------------------- | --------------- |  | ---- | ------ | ------------------- | -
|Surgical Facilities: |                                 |                 |  |      |        |                     |  
|                     | Same-facility:                  |                 |  |      |        |                     |  
|                     |                                 | Net revenue     |  | $    | 72,952 |                     | $
|                     |                                 | # of procedures |  |      | 86,434 |                     |  
|                     | New ASCs:                       |                 |  |      |        |                     |  
|                     |                                 | Net revenue     |  | $    | 32,563 |                     | $
|                     |                                 | # of procedures |  |      | 42,331 |                     |  
|                     | ASC Closure/Laser Terminations: |                 |  |      |        |                     |  
|                     |                                 | Net revenue     |  | $    | 237    |                     | $
|                     |                                 | # of procedures |  |      | 622    |                     |  

On
August 2, 2007, the Centers for Medicare and Medicaid Services (CMS) issued a final rule establishing the policies for the revised payment system for services provided in ASCs.
The 2008 ASC rates, which were published on November 1, 2007, will be approximately 65% of the hospital outpatient department payment rates, as compared to 62% in the proposed rule announced on
August 8, 2006. In addition, the revised rates are scheduled to phase in evenly over four years beginning January 1, 2008 and in 2010 the rates will be adjusted annually based on changes
in the consumer price index for urban consumers. We estimate that the impact of the final rule, based on our current procedure mix, payor mix and volume, will be neutral to earnings per share.

On
February 8, 2006, the President signed into law the Deficit Reduction Act of 2005. This legislation required CMS to limit Medicare reimbursements for surgical procedures
furnished in ASCs to the amount paid to a hospital for the same service effective for services furnished on and after January 1, 2007. The most significant impact to us from this legislation
was the reduction in the Medicare facility fee for the after-cataract laser surgery procedure, which is also known as the YAG procedure. We estimate that the negative impact from the decreased
Medicare facility fee paid for these procedures in 2007 was a reduction of approximately $1.2 million in net surgical facilities revenue. This equates to an estimated negative impact in
earnings per share of approximately $0.02 in 2007.

The
success of our business depends on our relationship with, and the success and efforts of, the physicians who perform surgical procedures at our ASCs. Our revenue and profitability
would decline if our relationship with key physicians deteriorated or those physicians reduced or eliminated their use of our ASCs.

Product Sales and Other.The table below summarizes product sales and other net revenue by significant business component.
Product sales and other net revenue decreased by 1.3% from $23.2 million to $22.9 million. Net revenue at our marketing products and services business decreased by $0.8 million.
This decrease is due to the 2006 addition of marketing consulting services associated with increased services provided to medical device manufacturers to promote their new refractive intraocular lens
technology. Net revenue at our optical laboratory business increased by $0.3 million due to an increase in existing customer orders and improved external marketing. Net revenue at our optical
products purchasing organization increased by $0.4 million due to an increase in existing customer orders and new customers.

30

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Net
revenue from our ophthalmology practice decreased by $0.1 million primarily due to a decrease in the number of patient visits.

|Dollars in thousands                      |                                          | 2007 |        | 2006  |   | Increase
(Decrease) |      
|----------------------------------------- | ---------------------------------------- | ---- | ------ | ----- | - | ------------------- | -----
|Product Sales:                            |                                          |      |        |       |   |                     |      
|                                          | Optical laboratories                     |      | $      | 6,245 |   | $                   | 5,964
|                                          | Optical products purchasing organization |      |        | 3,073 |   |                     | 2,649
|                                          | Marketing products and services          |      |        | 4,079 |   |                     | 4,918
|                                          | Optometric practice/retail store         |      |        | 1,936 |   |                     | 1,877
|                                          |                                          |      |        |       |   |                     |      
|                                          |                                          |      | 15,333 |       |   | 15,408              |      
|                                          |                                          |      |        |       |   |                     |      
|Other:                                    |                                          |      |        |       |   |                     |      
|                                          | Ophthalmology practice                   |      |        | 7,510 |   |                     | 7,619
|                                          | Other                                    |      |        | 26    |   |                     | 132  
|                                          |                                          |      |        |       |   |                     |      
|                                          |                                          |      | 7,536  |       |   | 7,751               |      
|                                          |                                          |      |        |       |   |                     |      
|Total Net Product Sales and Other Revenue |                                          | $    | 22,869 |       | $ | 23,159              |      
|                                          |                                          |      |        |       |   |                     |      

Salaries, Wages and Benefits

Consolidated.Salaries, wages and benefits expense increased by 16.5% from $34.2 million to $39.8 million. As a
percentage of net revenue, salaries, wages and benefits expense decreased from 32.8% to 31.0% primarily due to minimal corporate infrastructure expenses added to service new ASCs. Salaries, wages and
benefits expense by segment is discussed below.

Surgical Facilities.Salaries, wages and benefits expense in our surgical facilities segment increased by 30.0% from
$17.4 million to $22.6 million. The increase was the result of staff costs at ASCs acquired during 2006 and 2007 and staffing required at same-facility ASCs due to increased
procedure volume.

Product Sales and Other.Salaries, wages and benefits expense in our product sales and other segments decreased by 1.5% from
$8.3 million to $8.2 million.

Corporate.Salaries, wages and benefits expense increased by 6.5% from $8.5 million to $9.1 million. The
increase was primarily due to $0.7 million of additional stock-based compensation expense recorded in 2007 and annual salary increases. We also recorded $0.3 million and
$0.4 million of severance expense during 2007 and 2006, respectively, relating to the resignation of a senior executive in each year.

Cost of Sales and Medical Supplies

Consolidated.Cost of sales and medical supplies expense increased by 18.8% from $25.4 million to
$30.2 million. As a percentage of net revenue, cost of sales and medical supplies expense decreased from 24.4% to 23.4%. Cost of sales and supplies expense by segment is discussed below.

Surgical Facilities.Cost of sales and medical supplies expense in our surgical facilities segment increased by 25.4% from
$19.2 million to $24.1 million. As a percentage of net revenue, cost of sales and medical supplies expense decreased from 23.7% to 22.8% primarily due to lower expense margins at some of
our new ASCs. The expense increase was the result of costs associated with our new ASCs and increased procedure volumes at some of our same-facility ASCs.

Product Sales and Other.Cost of sales and medical supplies expense in our product sales and other segments decreased by 1.9%
from $6.2 million to $6.1 million.

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Selling, General and Administrative

Consolidated.Selling, general and administrative expense increased by 24.1% from $18.9 million to
$23.5 million. As a percentage of net revenue, selling, general and administrative expense increased from 18.2% to 18.3%. Selling, general and administrative expense by segment is discussed
below.

Surgical Facilities.Selling, general and administrative expense in our surgical facilities segment increased by 34.5% from
$15.2 million to $20.5 million. The increase was due to costs associated with our new ASCs and an increase of $1.1 million in management and billing/collections fees charged to
the ASCs for services rendered by our corporate personnel.

Product Sales and Other.Selling, general and administrative expense in our product sales and other segments decreased by
3.5% from $3.6 million to $3.5 million.

Corporate.Corporate selling, general and administrative expense decreased by $0.6 million from $0.16 million
to a negative $0.5 million. This decrease consists of two components. Corporate selling, general and administrative expenses decreased by $1.1 million due to an increase of
$1.1 million in management and billing/collections fees charged to the operating segments for services rendered by certain corporate personnel. Corporate selling, general and administrative
expenses increased by $0.6 million due to higher professional fees, information technology, and consulting expenses.

Depreciation and Amortization.Depreciation and amortization expense increased 34.2% from $2.7 million to
$3.6 million due to increases in depreciation associated with our new ASCs and capital expenditures in our surgical facilities segment.

Minority Interests.Minority interests in the earnings of our ASCs were $15.3 million in 2007 as compared to
$11.4 million in 2006. Of this increase, 83.6% was attributable to new ASCs.

Interest (Income) Expense, net.Interest (income) expense, net increased from $2.9 million to
$4.8 million due to our increased borrowings to fund our ASC acquisitions.

Loss on Investment in Nonconsolidated Affiliate.During the fourth quarter of 2007, we recorded a
$1.0 million impairment charge relating to our 25% interest in an ASC located in Ft. Lauderdale, Florida.

Other (Income) Expense.Other income was $0.1 million in 2007 as compared to $0.4 million in 2006.
This decrease is primarily due to our share of increased operating losses from our nonconsolidated affiliate and the 2006 gain on sale of an ASC.

Provision for Income Taxes.Our effective tax rate in 2007 was 43.8% compared to 39.0% in 2006. Of the increase,
3.9% was the result of recording a 100% valuation allowance against the tax benefit relating to the loss on investment in our non-consolidated affiliate and 0.9% related to an increase in
our blended state partnership tax rate (see Note 10 to Consolidated Financial Statements for components of the effective tax rate). Our effective tax rate was affected by expenses that are
deducted from operations in arriving at pre-tax income that are not allowed as a deduction on our federal income tax return.

Discontinued Operations.On December 12, 2007, our Board of Directors approved a plan to close or sell three
majority owned ASCs located in Columbus, Georgia; Laredo, Texas and Thibodaux, Louisiana. Prior to reporting these ASCs as discontinued operations, they represented approximately 2% of our
consolidated net revenue and a net loss of approximately $0.01 per diluted share in 2007. The Board determined to close or sell the Columbus, Georgia and Laredo, Texas ASCs due to their continued
unprofitability. The Thibodaux, Louisiana ASC only has one surgeon who is planning to retire shortly. The decision to close or sell this ASC was based on the ASC's competitive position in the market,
limited growth potential, and the lack of a succession plan for the surgeon in this rural area.

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Subsequent
to the decision to sell or close the ASCs above, we completed the sale of the Columbus, Georgia ASC. The Company received net sale proceeds of $0.1 million and recorded
a net loss on disposal of the ASC of $1.6 million during the fourth quarter of 2007.

During
the fourth quarter of 2007, we recorded a net loss on the pending divestiture of the Laredo, Texas ASC of $8.1 million. The net loss primarily related to the write down of
the carrying value of net assets to our estimate of fair market value less costs to sell the ASC.

During
the fourth quarter of 2007, we recorded a net loss on the pending divestiture of the Thibodaux, Louisiana ASC of $1.5 million. The net loss primarily related to the write
down of the carrying value of net assets to our estimate of fair market value less costs to sell the ASC. On February 28, 2008, we completed the sale of this ASC.

In
addition to recording the net loss on disposal of the ASCs described above, we reported the results of operations of these ASCs within discontinued operations for all periods
presented within the Consolidated Statement of Operations.

Year Ended December 31, 2006 Compared to the Year Ended December 31, 2005

Net Revenue

Consolidated.Total net revenue increased by 33.0% from $78.4 million to $104.3 million. Net revenue by segment
is discussed below.

Surgical Facilities.The table below summarizes surgical facilities net revenue and procedures performed for 2006 and 2005.
Net revenues generated from surgical facilities are derived from the fees charged for the procedures performed in our ASCs and through our laser services agreements. Our procedure volume is directly
impacted by the number of ASCs we operate, the number of excimer lasers in service, and their respective utilization rates. Surgical facilities net revenue increased by 41.4% from $57.3 million
to $81.1 million. This increase was primarily the result of a $20.8 million increase from ASCs we acquired or developed after January 1, 2005 ("new ASCs") and a
$4.1 million, or 8.3%, increase from ASCs that we owned for the entire comparable reporting periods ("same-facility"). The increase in same-facility net revenue was
primarily the result of a 1.3% increase in the number of same-facility procedures performed and a 7.0% increase in the net revenue per procedure due to a change in procedure mix.

|Dollars in thousands |                                 | 2006            |  | 2005 |        | Increase
(Decrease) |  
|-------------------- | ------------------------------- | --------------- |  | ---- | ------ | ------------------- | -
|Surgical Facilities: |                                 |                 |  |      |        |                     |  
|                     | Same-facility:                  |                 |  |      |        |                     |  
|                     |                                 | Net revenue     |  | $    | 54,129 |                     | $
|                     |                                 | # of procedures |  |      | 61,095 |                     |  
|                     | New ASCs:                       |                 |  |      |        |                     |  
|                     |                                 | Net revenue     |  | $    | 25,616 |                     | $
|                     |                                 | # of procedures |  |      | 33,021 |                     |  
|                     | ASC Closure/Laser Terminations: |                 |  |      |        |                     |  
|                     |                                 | Net revenue     |  | $    | 1,352  |                     | $
|                     |                                 | # of procedures |  |      | 2,045  |                     |  

On
February 8, 2006, the President signed into law the Deficit Reduction Act of 2005. This legislation requires CMS to limit Medicare reimbursements for surgical procedures
furnished in ASCs to the amount paid to a hospital for the same service effective for services furnished on and after January 1, 2007. This change will negatively impact our business.
Considering the procedures performed in our ASCs in 2006

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and
prior years, the most significant impact to us from this legislation will be the reduction in the Medicare facility fee for the after-cataract laser surgery procedure, which is also known as the
YAG procedure. Based on the number of YAG procedures performed in our ASCs during the fourth quarter of 2006, we estimate that the annual impact from the decreased Medicare facility fee paid for these
procedures is a reduction of approximately $1.2 million to $1.4 million in net surgical facilities revenue. This would equate to an estimated negative impact in earnings per share of
between $0.01 and $0.02. To the extent that other payors, governmental and private, adopt this practice, the impact could be greater.

The
success of our business depends on our relationship with, and the success and efforts of, the physicians who perform surgical procedures at our ASCs. Our revenue and profitability
would decline if our relationship with key physicians deteriorated or those physicians reduced or eliminated their use of our ASCs. In 2005, we began to experience a significant decline in the number
of procedures performed at one of our ASCs acquired in 2004. This decline was primarily associated with certain physicians (none of whom were physician-partners) no longer using the ASC during 2005.
We continued to experience a decline in the number of procedures performed at this ASC for the first three quarters in 2006 over the same period in 2005, but experienced an increase in the fourth
quarter of 2006 compared to the fourth quarter of 2005. Net revenue from this ASC in 2006 decreased approximately $1.0 million, or 28%, versus 2005. This decrease had a negative impact on net
income in 2006 of approximately $250,000.

Product Sales and Other.The table below summarizes product sales and other net revenue by significant business component.
Product sales and other net revenue increased by 10.0% from $21.1 million to $23.2 million. Net revenue at our marketing products and services business increased by $1.0 million.
This increase is due to the addition of marketing consulting services associated with increased services provided to medical device manufacturers to promote their new refractive intraocular lens
technology. Net revenue at our optical laboratory business increased by $0.6 million due to an increase in existing customer orders and improved external marketing. Net revenue from our
ophthalmology practice increased by $0.5 million primarily due to an increase in the number of patient visits.

|Dollars in thousands                      |                                          | 2006 |        | 2005  |   | Increase
(Decrease) |      
|----------------------------------------- | ---------------------------------------- | ---- | ------ | ----- | - | ------------------- | -----
|Product Sales:                            |                                          |      |        |       |   |                     |      
|                                          | Optical laboratories                     |      | $      | 5,964 |   | $                   | 5,360
|                                          | Optical products purchasing organization |      |        | 2,649 |   |                     | 2,345
|                                          | Marketing products and services          |      |        | 4,918 |   |                     | 3,890
|                                          | Optometric practice/retail store         |      |        | 1,877 |   |                     | 1,883
|                                          |                                          |      |        |       |   |                     |      
|                                          |                                          |      | 15,408 |       |   | 13,478              |      
|                                          |                                          |      |        |       |   |                     |      
|Other:                                    |                                          |      |        |       |   |                     |      
|                                          | Ophthalmology practice                   |      |        | 7,619 |   |                     | 7,093
|                                          | Other                                    |      |        | 132   |   |                     | 486  
|                                          |                                          |      |        |       |   |                     |      
|                                          |                                          |      | 7,751  |       |   | 7,579               |      
|                                          |                                          |      |        |       |   |                     |      
|Total Net Product Sales and Other Revenue |                                          | $    | 23,159 |       | $ | 21,057              |      
|                                          |                                          |      |        |       |   |                     |      

Salaries, Wages and Benefits

Consolidated.Salaries, wages and benefits expense increased by 36.1% from $25.1 million to $34.2 million. As a
percentage of net revenue, salaries, wages and benefits expense increased from 32.0% to 32.8% primarily due to $1.9 million of stock-based compensation expense recorded in 2006 and increased
corporate infrastructure expenses during 2006. Salaries, wages and benefits expense by segment is discussed below.

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Surgical Facilities.Salaries, wages and benefits expense in our surgical facilities segment increased by 41.2% from
$12.3 million to $17.4 million. The increase was the result of staff costs at ASCs acquired during 2005 and 2006 and staffing required at same-facility ASCs due to increased
procedure volume.

Product Sales and Other.Salaries, wages and benefits expense in our product sales and other segments increased by 6.3% from
$7.8 million to $8.3 million. The increase is primarily due to the addition of new marketing consulting services within our marketing products and services business.

Corporate.Salaries, wages and benefits expense increased by 70.2% from $5.0 million to $8.5 million. The
increase was primarily due to $1.9 million of stock-based compensation expense recorded in 2006, additional employees required to service the new ASCs, annual salary increases and increased
corporate infrastructure expenses. We also recorded $0.4 million of severance expense during 2006 relating to the resignation of a senior executive. Salaries, wages and benefits expense during
2005 was unusually low due to the vacancy of the CEO position for seven months of the year.

Cost of Sales and Medical Supplies

Consolidated.Cost of sales and medical supplies expense increased by 32.9% from $19.1 million to
$25.4 million. As a percentage of net revenue, cost of sales and medical supplies expense remained flat at 24.4%. Cost of sales and supplies expense by segment is discussed below.

Surgical Facilities.Cost of sales and medical supplies expense in our surgical facilities segment increased by 44.0% from
$13.4 million to $19.2 million. As a percentage of net revenue, cost of sales and medical supplies expense increased from 23.3% to 23.7%. The expense increase was the result of costs
associated with our new ASCs, increased procedure volumes at some of our same-facility ASCs and the higher cost of refractive intraocular lenses.

Product Sales and Other.Cost of sales and medical supplies expense in our product sales and other segments increased by 7.1%
from $5.8 million to $6.2 million primarily due to costs associated with increased customer orders from both existing and new customers at our optical laboratory business.

Selling, General and Administrative

Consolidated.Selling, general and administrative expense increased by 20.3% from $15.7 million to
$18.9 million. As a percentage of net revenue, selling, general and administrative expense decreased from 20.1% to 18.2%. Selling, general and administrative expense by segment is discussed
below.

Surgical Facilities.Selling, general and administrative expense in our surgical facilities segment increased by 31.2% from
$11.6 million to $15.2 million. The increase was due to costs associated with our new ASCs and an increase of $0.9 million in professional fees which include management and
billing/collections fees charged to the ASCs for services rendered by corporate personnel.

Product Sales and Other.Selling, general and administrative expense in our product sales and other segments increased by
2.3% from $3.5 million to $3.6 million primarily due to the revenue increase within our marketing products and services business.

Corporate.Corporate selling, general and administrative expense decreased by 83.5% from $0.6 million to
$0.1 million. This decrease was primarily due to an increase of $0.9 million in management and billing/collections fees charged to the operating segments for services rendered by certain
corporate personnel. In addition, 2005 included presiding director expenses. Excluding the $0.9 million increase in management and billing/collection fees charged to the operating segments,
corporate general and administrative expenses increased by $0.4 million primarily due to higher professional fees relating to
costs to comply with section 404 of the Sarbanes-Oxley Act and information technology/consulting expenses. We expect to continue to incur costs associated with being a public company in future
years.

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Depreciation and Amortization.Depreciation and amortization expense increased 20.7% from $2.2 million to
$2.7 million due to increases in depreciation associated with our new ASCs and capital expenditures in our surgical facilities segment.

Other (Income) Expense.Minority interests in the earnings of our ASCs were $11.4 million in 2006 as
compared to $7.3 million in 2005. Of this increase, 83.0% was attributable to new ASCs. Minority interests are expected to continue to be higher in 2007 due to ASCs acquired in 2006.

Provision for Income Taxes.Our effective tax rate in 2006 was 39.0%. Our effective tax rate was 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.

Liquidity and Capital Resources

Operating activities for 2007 generated $18.3 million in cash flow compared to $14.7 million in 2006. Before considering changes in operating assets
and liabilities, operating cash flow increased by $1.5 million. During 2007 and 2006, working capital generated $0.8 million and consumed $0.4 million in cash, respectively. The
cash consumption during 2006 was primarily due to a delay in receiving new insurance provider numbers which delayed the billing and collection process for certain ASCs acquired in 2006. There were no
such delays experienced during 2007.

Cash
flows used in investing activities was $41.8 million in 2007 compared to $57.8 million in 2006. Investing activities in 2007 included the acquisition of two ASCs for
$32.6 million, the acquisition of an optical products purchasing organization for $7.0 million and the purchase of property and equipment for $2.5 million. These investments were
partially offset by proceeds from the sale of minority equity interests in two of our ASCs for $0.3 million and proceeds from the sale of our majority interest in one of our ASCs for
$0.1 million. Investing activities in 2006 included the acquisition of ten ASCs for $55.1 million and the purchase of property and equipment for $3.5 million. These investments
were partially offset by proceeds from the sale of minority equity interests in two of our ASCs for $0.7 million and proceeds from the sale of property and equipment for $0.4 million.

Cash
flows provided by financing activities in 2007 included proceeds of $1.1 million from the exercise of stock options and issuance of stock to employees as part of our employee
stock purchase plan offset by $33.7 million of net payments under our credit facility and $2.7 million of capital lease and other debt obligation payments. On June 27, 2007, we
received $62.4 million of net proceeds in connection with the issuance of convertible subordinated notes (as described below and in Note 11) and immediately used these proceeds to pay
down debt under our revolving credit facility. Cash flows provided by financing activities in 2006 included $40.7 million of net borrowings under our credit facility, $4.0 million of
borrowings related to our New Albany, Indiana ASC and $0.7 million from the exercise of stock options and issuance of stock to employees as part of our employee stock purchase plan offset by
payments of capital leases and other debt of $1.2 million.

On
June 27, 2007, we issued $75 million aggregate principal amount of 1.0% convertible senior subordinated notes due June 15, 2012 (the "Convertible Notes").
Proceeds from the Convertible Notes were used to pay down $62.4 million of outstanding indebtedness on our revolving credit facility and to fund the $10.0 million net cost of the
convertible note hedge and warrant transactions described below. Interest on the Convertible Notes is payable semi-annually in arrears on June 15 and December 15 of each
year, commencing December 15, 2007. The Convertible Notes rank subordinate to our senior debt and rank pari passu or senior to all of our other subordinated indebtedness. The aggregate
underwriting discount incurred with respect to the issuance of the Convertible Notes was $2.6 million, which has been recorded as debt discount on our consolidated balance sheet and is being
amortized using the effective interest rate method over the term of the Convertible Notes.

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The
Convertible Notes include a net-share settlement feature that requires us to settle conversion of the notes in cash up to the notes' principal amount and settle any
excess of the Convertible Notes' conversion value above their principal amount by delivering shares of our common stock, cash, or a combination of cash and common stock, at our option. As a result of
the net-share settlement feature, we will be able to substantially reduce the number of shares issuable in the event of the conversion of the Convertible Notes by repaying principal in
cash instead of issuing shares of common stock for that amount. Additionally, we will not be required to include the underlying shares of common stock in the calculation of our diluted weighted
average shares outstanding for earnings per share until our common stock price exceeds $6.371. During a public meeting held July 25, 2007, the Financial Accounting Standards Board ("FASB")
indicated that it would change the accounting for net-share settled convertible debt. The proposed change would result in us recording interest expense on the Convertible Notes in an
amount greater than the current 1% coupon rate. The FASB is expected to issue authoritative guidance regarding net-share settled convertible debt through a FASB Staff Position (FSP).

Concurrent
with the sale of the Convertible Notes, we entered into a convertible note hedge transaction with respect to our common stock (the "purchased call options") with Deutsche Bank
AG London (the "counterparty), an affiliate of the underwriter. The purchased call options cover an aggregate of approximately 11.8 million shares of our common stock at a strike price of
$6.371 per
share. The cost of the call options totaled $24.0 million. In connection with the cost of the call options, we recorded a deferred tax asset of $8.2 million to additional paid in capital
to reflect the future cash benefit of the deduction over the term of the Convertible Notes. We also sold warrants to the counterparty to purchase from us an aggregate of approximately
11.8 million shares of our common stock at an exercise price of $8.31 per share and received proceeds of $14.0 million. Taken together, the call option and warrant agreements have the
effect of increasing the effective conversion price of the Convertible Notes to $8.31 per share. For a further discussion of the Convertible Notes and the related call options and warrants see
Note 11 to the consolidated financial statements.

At
December 31, 2007, we had $24.0 million of borrowings outstanding under our revolving credit facility and were in compliance with all of our covenants. Effective
February 7, 2007, we amended our credit facility, increasing the maximum commitment available under the facility from $80 million to $125 million and extending the expiration date
to February 5, 2010. The maximum commitment available under the facility is the lesser of $125 million or the maximum allowed under the calculated ratio limitations. The amended credit
agreement also includes an option allowing us to increase the maximum commitment available to $150 million under certain conditions. Maximum borrowing availability and applicable interest rates
under the facility are based on a ratio of our total indebtedness to our earnings before interest, taxes, depreciation and amortization as defined in the credit agreement. The amended credit agreement
provides for temporary increases in this ratio through September 30, 2008 for purposes of calculating our maximum borrowing availability. Interest on borrowings under the facility is payable at
an annual rate equal to our lender's published base rate plus the applicable borrowing margin ranging from 0% to 0.5% or LIBOR plus a range from 1.25% to 2.50%, varying depending upon our ratios and
ability to meet other financial covenants. In addition, a fee ranging from .20% to .25% is charged on the unused portion of the commitment. The credit agreement contains customary covenants that
include limitations on indebtedness, liens, capital expenditures, acquisitions, investments and share repurchases, as well as restrictions on the payment of dividends; however, many of these
limitations were changed by these amendments. On May 31, 2007, we amended our credit facility pursuant to which our lenders consented to the acquisition of a 62.5% equity interest in Surgery
Center of Kalamazoo, LLC for a purchase price of $24.6 million. Under the terms of our credit facility, we are required to obtain the consent of our lenders for any acquisition exceeding
$20.0 million individually under certain conditions. This amendment also contained modifications to various definitions and financial covenants to enable the purchased entity, as a new
subsidiary, to continue to maintain its existing bank debt of approximately $1.6 million outside of the credit facility. Effective June 20, 2007, we amended our credit facility to obtain
lenders' consent to the Convertible Notes offering and the related convertible note hedge and warrant transactions. The

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amendment
also modified certain loan pricing, financial covenants and various definitions. On December 13, 2007, we amended our credit facility to modify various definitions and financial
covenants to allow one of our subsidiaries, NovaMed Surgery Center of Altamonte Springs, LLC, to procure up to $4.0 million of indebtedness outside the credit facility to fund the
construction of a new site for this ASC. The weighted average interest rate on credit line borrowings at December 31, 2007 was 7.80%.

During
2006, we entered into two interest rate swap agreements. The interest rate swaps protect us against certain interest rate fluctuations of the LIBOR rate on $24 million of
our variable rate debt under our credit facility. The date of the first interest rate swap was April 12, 2006, and it expires on April 19, 2009. This interest rate swap effectively fixes
our LIBOR rate on $12 million of variable rate debt at a rate of 5.34%. The date of the second interest rate swap was June 28, 2006 and it expires on
September 30, 2008. This interest rate swap effectively fixes our LIBOR rate on $12 million of variable rate debt at a rate of 5.75%. Effective August 1, 2006, NovaMed Eye Surgery
Center of New Albany, LLC ("New Albany ASC"), of which we own a 67.5% majority interest, entered into a $4 million installment note which matures on August 1, 2013. Interest is
payable at the lender's one month LIBOR rate, designated or published on the first of each month, plus 2.0%. The New Albany ASC entered into a five-year interest rate swap agreement that
effectively fixes the LIBOR rate on this debt at 5.51%.

As
of December 31, 2007 and 2006, we had cash and cash equivalents of $6.4 million and $2.7 million, respectively, of which $3.0 million and
$2.7 million, respectively, was restricted pursuant to agreements with six of our ASCs. As of December 31, 2007 and 2006, working capital was $18.4 million and
$10.2 million, respectively.

We
expect our cash flow from operations and funds available under our existing credit facility to 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 and size of our acquisition, development and expansion activities, capital requirements
associated with our surgical facilities, and the future cost of surgical equipment.

On
December 12, 2007, our Board of Directors approved a plan to close or sell three majority owned ASCs located in Columbus, Georgia; Laredo, Texas and Thibodaux, Louisiana. Prior
to reporting these ASCs as discontinued operations, they represented approximately 2% of our consolidated net revenue and a net loss of approximately $0.01 per diluted share in 2007. The Board
determined to close or sell the Columbus, Georgia and Laredo, Texas ASCs due to their continued unprofitability. The Thibodaux, Louisiana ASC only has one surgeon who is planning to retire shortly.
The decision to close or sell this ASC was based on the ASC's competitive position in the market, limited growth potential, and the lack of a succession plan for the surgeon in this rural area. For a
further discussion of discontinued operations see Note 9 to the consolidated financial statements.

We
had an option to purchase an additional 26% equity interest from our physician-partner in our Ft. Lauderdale, Florida ASC to enable us to increase our interest in the ASC to a
majority equity interest. Because we did not exercise this option by July 2007, we have exercised our option to sell our minority interest to our physician-partner for the original price paid. The
sale of this interest has not yet occurred.

Two
partners in our Richmond, Virginia ASC who each own a 14.5% equity interest have the option to sell us back their interest at the same price they paid to acquire their interest.

Off-Balance Sheet Arrangements

Under the definition contained in Item 303(a)(4)(ii) of Regulation S-K, we do not have any off-balance sheet arrangements.

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Contractual Obligations and Commitments

We have various contractual obligations which are recorded as liabilities in our consolidated financial statements. Other items, such as certain purchase
commitments are not recognized as liabilities in our consolidated financial statements but are required to be disclosed. For example, we are contractually committed to make certain minimum lease
payments for the use of property under operating lease agreements. The following table summarizes our significant contractual obligations and commitments at December 31, 2007 and the future
periods in which such obligations are expected to be settled in cash.

|                                          |  | Payments due by period (dollars in thousands)
|----------------------------------------- |  | ---------------------------------------------
|
|Capital leases                            |  | $                                            
|Operating leases                          |  |                                              
|Long-term debt(1)                         |  |                                              
|Interest payments on long-term debt(1)    |  |                                              
|Convertible notes(2)                      |  |                                              
|Interest payments on convertible notes(2) |  |                                              
|Notes payable                             |  |                                              
|Purchase commitments                      |  |                                              
|                                          |  |                                              
|Total                                     |  | $                                            
|                                          |  |                                              

|
|

|                 |  | Expiration by period (dollars in thousands)
|---------------- |  | -------------------------------------------
|
|Letter of Credit |  | $                                          
|                 |  |                                            
|Total            |  | $                                          
|                 |  |                                            

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Recent Accounting Pronouncements

We adopted the provisions of FASB Interpretation No. 48Accounting for Uncertainty in Income Taxeson
January 1, 2007 ("FIN 48"). As a result of the implementation of FIN 48, we recognized a liability for unrecognized tax benefits of approximately $0.4 million during 2007.
No adjustment was made to the beginning retained earnings balance, as the ultimate deductibility of all these tax positions was judged to be highly certain but there is uncertainty about the timing of
such deductibility. No interest or penalties have been accrued relative to these positions since we have either a tax loss or have utilized a net operating loss carryforward to offset any taxable
income in all subject years. Deferred tax assets have been recorded to recognize the future benefits of the positions reserved for in the FIN 48 liability. Because of the impact of deferred
income tax accounting, the temporary differences would not affect the annual effective tax rate.

In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS No. 157 defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after
November 15, 2007. In February of 2008, the FASB issued FASB Staff position 157-2 which delays the

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effective
date of SFAS 157 for non-financial assets and liabilities which are not measured at fair value on a recurring basis (at least annually) until fiscal years beginning after
November 15, 2008. We are currently evaluating the impact of the adoption of SFAS No. 157 on our consolidated financial statements and note disclosures.

In
February 2007, the FASB issued SFAS No. 159,"The Fair Value Option for Financial Assets and Financial Liabilities."SFAS
No. 159 allows entities the option to measure eligible financial instruments at fair value as of specified dates. Such election, which may be applied on an instrument by instrument basis, is
typically irrevocable once elected. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and will become effective for us
beginning with the first quarter of 2008. We are currently evaluating the impact of the adoption of SFAS No. 157 on our consolidated financial statements and note disclosures.

In
December 2007, the FASB issued SFAS No. 160, "Non-Controlling Interests in Consolidated Financial Statements an amendment of ARB No. 51" ("SFAS 160").
SFAS 160 establishes new standards for the accounting for and reporting of non-controlling interests (formerly
minority interests) and for the loss of control of partially owned and consolidated subsidiaries. SFAS 160 does not change the criteria for consolidating a partially owned entity.
SFAS 160 is effective for fiscal years beginning after December 15, 2008. The provisions of SFAS 160 will be applied prospectively upon adoption except for the presentation and
disclosure requirements which will be applied retrospectively. We are currently evaluating the impact of the adoption of SFAS No. 160 on our consolidated financial statements and note
disclosures.

In
December 2007, the FASB issued SFAS No. 141(revised 2007) ("SFAS 141R"), a revision of SFAS 141, "Business Combinations." SFAS 141R establishes
requirements for the recognition and measurement of acquired assets, liabilities, goodwill, and non-controlling interests. SFAS 141R also provides disclosure requirements related to
business combinations. SFAS 141R is effective for fiscal years beginning after December 15, 2008. SFAS 141R will be applied prospectively to business combinations with an
acquisition date on or after the effective date.

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Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

We have exposure to interest rate risk related to our financing, investing and cash management activities. We have not held or issued derivative financial
instruments other than the use of variable-to-fixed interest rate swaps for portions of our borrowings. We do not use derivative instruments for speculative purposes. Our
borrowings are primarily indexed to the prime rate or LIBOR and have a mix of maturities. We entered into two swap agreements in 2006 as follows: $12.0 million in principal amount outstanding
under our credit facility with a fixed rate of 5.34% from April 19, 2006 to April 19, 2009 and $12.0 million in principal amount outstanding under our credit facility with a fixed
rate of 5.75% from September 30, 2006 to September 30, 2008. In addition, NovaMed Eye Surgery Center of New Albany, LLC, of which we own a 67.5% equity interest, entered into a
swap agreement in 2006 as follows: $3.3 million in principal amount outstanding as of December 31, 2007 under a note with National City Bank with a fixed rate of 5.51% from
August 4, 2006 to August 1, 2011.

On
December 31, 2007, we had $24.0 million outstanding under our credit facility, all of which was subject to the two swap agreements noted above. Accordingly, a
hypothetical 100 basis point increase in market interest rates would not result in any additional annual interest expense. Borrowings under our credit facility bear interest at an annual rate equal to
our lender's published base rate plus an applicable borrowing margin ranging from 0% to 0.50% or LIBOR plus a range from 1.25% to 2.50%, varying upon our ability to meet financial covenants.

Item 8.    Financial Statements and Supplementary Data

The consolidated financial statements and financial statement schedules, with the Reports of Independent Registered Public Accounting Firms, listed in
Item 15 are included in this Form 10-K.

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.    Controls and Procedures



We maintain a system of disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act, that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chairman and Chief Executive
Officer and Executive Vice President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

We
have carried out an evaluation under the supervision and with the participation of the Company's management, including the Company's Chairman and Chief Executive Officer and Executive
Vice President and Chief Financial Officer (its principal executive officer and principal financial officer), of the effectiveness of the design and operation of our disclosure controls and procedures
as of the end of the period covered by this report. Based on their evaluation, the Chairman and Chief Executive Officer and Executive Vice President and Chief Financial Officer concluded that such
disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this report.

41

---





There were no changes in our internal control over financial reporting that occurred during the three-month period ended December 31, 2007 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in
Rule 13a-15(f) and 15d-15(f) of the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Under the supervision and with the participation of
our senior management, including our Chairman and Chief Executive Officer and Executive Vice President and Chief Financial Officer, we assessed the effectiveness of our internal control over financial
reporting as of December 31, 2007, using the criteria set forth in theInternal ControlIntegrated Frameworkissued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).

We
acquired two ASCs and a group purchasing organization during 2007. Management's evaluation of internal control over financial reporting excluded these businesses acquired during 2007,
with total assets of $44.1 million and net revenue of $8.6 million included in our consolidated financial statements as of and for the year ended December 31, 2007.

Based
on this assessment, management has concluded that our internal control over financial reporting is effective as of December 31, 2007. BDO Seidman, LLP, our
independent registered public accounting firm, has issued an audit report on our internal control over financial reporting which is included with our financial statements in Item 15(a)(1) and
incorporated by reference.

Item 9B.    Other Information

None.

42

---



PART III

Item 10.    Directors, Executive Officers and Corporate Governance

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 our Definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with our 2008 Annual Meeting of Stockholders (the "2008 Proxy
Statement").

Item 11.    Executive Compensation

The information in response to this item is incorporated by reference from the "Executive Compensation" section of the 2008 Proxy Statement.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information in response to this item is incorporated by reference from the "Security Ownership of Certain Beneficial Owners and Management" and "Executive
Compensation" sections of the 2008 Proxy Statement.

Item 13.    Certain Relationships and Related Transactions, and Director Independence

The information in response to this item is incorporated by reference from the "Certain Relationships and Related Transactions, and Director Independence" section
of the 2008 Proxy Statement.

Item 14.    Principal Accountant Fees and Services

The information in response to this item is incorporated by reference from the "Disclosure of Auditor Fees" section of the 2008 Proxy Statement.

43

---





PART IV

Item 15.    Exhibits and Financial Statement Schedules

|Exhibit
Number |  | Exhibit                                                                                                                                           
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|2.1(A)         |  | Purchase Agreement dated as of June 1, 2007 with members of Surgery Center of Kalamazoo, LLC                                                      
|3.1(B)         |  | Amended and Restated Certificate of Incorporation of the Registrant                                                                               
|3.2(C)         |  | Amended and Restated Bylaws of the Registrant                                                                                                     
|3.3(D)         |  | Certificate of Ownership and Merger                                                                                                               
|4.1(B)         |  | Specimen stock certificate representing Common Stock                                                                                              
|4.2(B)         |  | Registrant's Rights Agreement                                                                                                                     
|4.3(E)         |  | Indenture, dated as of June 27, 2007, between Registrant and LaSalle Bank National Association, Trustee                                           
|4.4(E)         |  | First Supplemental Indenture, dated as of June 27, 2007, between Registrant and LaSalle Bank National Association, Trustee                        
|4.5(E)         |  | Form of Note issued pursuant to the Indenture and First Supplemental Indenture                                                                    
|4.6(E)         |  | Confirmation, dated June 21, 2007, between Deutsche Bank AG London and Registrant regarding warrants sold by Registrant to Deutsche Bank AG London
|10.1(B)        |  | Registrant's Amended and Restated 1999 Stock Purchase Plan                                                                                        
|10.2(B)        |  | Indemnification Agreement                                                                                                                         
|10.3(B)        |  | Registration Rights Agreement                                                                                                                     
|10.4(B)        |  | Subordinated Registration Rights Agreement                                                                                                        
|10.5(F)        |  | Employment Agreement dated October 16, 2001 with Scott T. Macomber                                                                                
|10.6(G)        |  | Form of Stock Option Agreement for stock option awards under the 2005 Stock Incentive Plan                                                        
|10.7(G)        |  | First Amendment to Employment Agreement dated July 15, 2005 with Scott T. Macomber                                                                
|10.8(H)        |  | Asset Contribution and Exchange Agreement dated as of August 15, 2005 with Center for Outpatient Surgery                                          
|10.9(I)        |  | Employment Agreement dated as of October 27, 2005 with Thomas S. Hall                                                                             
|10.10(I)       |  | Restricted Stock Award Agreement dated as of October 27, 2005 with Thomas S. Hall                                                                 
|10.11(J)       |  | Asset Contribution and Exchange Agreement dated as of February 21, 2006 with Preston Plaza Surgery Center, LLP                                    

44

---



|10.12(K) |  | Asset Contribution and Exchange Agreement dated as of July 19, 2006 with Clearview Surgical Institute, Ltd.                     
|-------- |  | --------------------------------------------------------------------------------------------------------------------------------
|10.13(L) |  | Asset Contribution and Exchange Agreement dated as of October 3, 2006 with Surgery Center of Cleveland, LLC                     
|10.14(M) |  | Sixth Amended and Restated Credit Agreement dated as of February 7, 2007                                                        
|10.15(N) |  | Registrant's Second Amended and Restated Stock Incentive Plan                                                                   
|10.16(N) |  | Registrant's Amended and Restated 2000 Employee Stock Incentive Plan                                                            
|10.17(N) |  | Registrant's Amended and Restated 2001 Employee Stock Incentive Plan                                                            
|10.18(N) |  | Registrant's Amended and Restated 2005 Restricted Stock Plan                                                                    
|10.19(N) |  | Registrant's Amended and Restated 2005 Stock Incentive Plan                                                                     
|10.20(A) |  | First Amendment to Credit Agreement and Consent to Acquisition dated as of May 31, 2007                                         
|10.21(O) |  | Second Amendment to Credit Agreement dated as of June 20, 2007                                                                  
|10.22(P) |  | Third Amendment and Consent to Credit Agreement dated as of December 13, 2007                                                   
|10.23(E) |  | Confirmation, dated June 21, 2007, between Deutsche Bank AG London and Registrant regarding a convertible note hedge transaction
|10.24(Q) |  | Separation Agreement and General Release dated January 7, 2008 with Jack M. Clark, Jr.                                          
|21       |  | Subsidiaries of the Registrant                                                                                                  
|23.1     |  | Consent of BDO Seidman, LLP                                                                                                     
|31.1     |  | Certification by the CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                              
|31.2     |  | Certification by the CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                              
|32       |  | Certification of CEO and CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                          

---

45

---



46

---





Report of Independent Registered Public Accounting Firm

Board
of Directors and Shareholders
NovaMed, Inc.
Chicago, Illinois

We
have audited the accompanying consolidated balance sheets of NovaMed, Inc. and subsidiaries as of December 31, 2007 and 2006 and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2007. In connection with our audits of the financial statements, we have also
audited Schedule IIValuation Reserves. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.

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

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NovaMed, Inc. and subsidiaries as of
December 31, 2007 and 2006 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting
principles generally accepted in the United States of America.

Also,
in our opinion, the financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), NovaMed, Inc. and subsidiaries' internal control over
financial reporting as of December 31, 2007, based on criteria established inInternal ControlIntegrated Frameworkissued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 14, 2008 expressed an unqualified opinion thereon.

/s/
BDO Seidman, LLP

Chicago,
Illinois
March 14, 2008

F-1

---





Report of Independent Registered Public Accounting Firm on  Internal Control over Financial Reporting

Board
of Directors and Shareholders
NovaMed, Inc.
Chicago, Illinois

We
have audited NovaMed, Inc. and subsidiaries' internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Frameworkissued by
the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company's
management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Item 9A, Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting
based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the
financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As
indicated in the accompanying Item 9A, Management's Report on Internal Control Over Financial Reporting, management's assessment of and conclusion on the effectiveness of
internal control over financial reporting did not include the internal controls of two of its ambulatory surgery centers and a group purchasing organization, which the Company acquired on various
dates during 2007, and whose financial statements reflect total assets and net sales constituting $44.1 million and $8.6 million, respectively, of the related consolidated amounts as of
and for the year ended December 31, 2007. Our audit of the Company's internal control over financial reporting also did not include an evaluation of the internal control over financial
reporting of these three acquired entities.

In
our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the COSO criteria.

F-2

---



We
have also audited, in accordance with the standards of the Public Company Accounting Standards Board (United States), the consolidated balance sheets of NovaMed, Inc. and
subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended
December 31, 2007 and our report dated March 14, 2008 expressed an unqualified opinion thereon.

/s/
BDO Seidman, LLP

Chicago,
Illinois
March 14, 2008

F-3

---





NOVAMED, INC. AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS        (Dollars in thousands)

|                                                          |                                                                                                                                                  | December 31,
2007                          |         | December 31,
2006 |        
|--------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ------- | ----------------- | -------
|ASSETS                                                    |                                                                                                                                                  |                                            |         |                   |        
|Current assets:                                           |                                                                                                                                                  |                                            |         |                   |        
|                                                          | Cash and cash equivalents, including $2,961 and $2,745 of restricted cash, respectively                                                          |                                            | $       | 6,382             |        
|                                                          | Accounts receivable, net of allowances of $27,698 and $24,169, respectively                                                                      |                                            |         | 19,298            |        
|                                                          | Notes and amounts due from related parties                                                                                                       |                                            |         | 471               |        
|                                                          | Inventory                                                                                                                                        |                                            |         | 2,366             |        
|                                                          | Prepaid expenses and deposits                                                                                                                    |                                            |         | 1,410             |        
|                                                          | Current tax assets                                                                                                                               |                                            |         | 1,840             |        
|                                                          | Current assets of discontinued operations                                                                                                        |                                            |         | 163               |        
|                                                          |                                                                                                                                                  |                                            |         |                   |        
|                                                          |                                                                                                                                                  | Total current assets                       |         |                   | 31,930 
|Property and equipment, net                               |                                                                                                                                                  |                                            | 13,566  |                   |        
|Intangible assets, net                                    |                                                                                                                                                  |                                            | 147,558 |                   |        
|Noncurrent deferred tax assets, net                       |                                                                                                                                                  |                                            | 1,718   |                   |        
|Other assets, net                                         |                                                                                                                                                  |                                            | 889     |                   |        
|Noncurrent assets of discontinued operations              |                                                                                                                                                  |                                            | 43      |                   |        
|                                                          |                                                                                                                                                  |                                            |         |                   |        
|                                                          |                                                                                                                                                  | Total assets                               |         | $                 | 195,704
|                                                          |                                                                                                                                                  |                                            |         |                   |        
|LIABILITIES AND STOCKHOLDERS' EQUITY                      |                                                                                                                                                  |                                            |         |                   |        
|Current liabilities:                                      |                                                                                                                                                  |                                            |         |                   |        
|                                                          | Accounts payable                                                                                                                                 |                                            | $       | 7,848             |        
|                                                          | Accrued expenses                                                                                                                                 |                                            |         | 4,479             |        
|                                                          | Current maturities of long-term debt                                                                                                             |                                            |         | 1,035             |        
|                                                          | Current liabilities of discontinued operations                                                                                                   |                                            |         | 130               |        
|                                                          |                                                                                                                                                  |                                            |         |                   |        
|                                                          |                                                                                                                                                  | Total current liabilities                  |         |                   | 13,492 
|Long-term debt, net of current maturities                 |                                                                                                                                                  |                                            | 28,500  |                   |        
|Convertible subordinated debt, net of debt issuance costs |                                                                                                                                                  |                                            | 72,676  |                   |        
|Long-term liabilities of discontinued operations          |                                                                                                                                                  |                                            |        |                   |        
|Other long-term liabilities                               |                                                                                                                                                  |                                            | 839     |                   |        
|Deferred income tax liabilities                           |                                                                                                                                                  |                                            |        |                   |        
|Minority interests                                        |                                                                                                                                                  |                                            | 15,024  |                   |        
|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, 2007 and 2006      |                                            |         |                  |        
|                                                          | Common stock, $0.01 par value, 81,761,465 shares authorized, 29,406,779 and 28,533,676 shares issued at December 31, 2007 and 2006, respectively |                                            |         | 293               |        
|                                                          | Additional paid-in-capital                                                                                                                       |                                            |         | 93,271            |        
|                                                          | Accumulated deficit                                                                                                                              |                                            |         | (17,250           | )      
|                                                          | Accumulated other comprehensive loss                                                                                                             |                                            |         | (450              | )      
|                                                          | Treasury stock, at cost, 4,842,839 and 4,713,417 shares at December 31, 2007 and 2006, respectively                                              |                                            |         | (10,691           | )      
|                                                          |                                                                                                                                                  |                                            |         |                   |        
|                                                          |                                                                                                                                                  | Total stockholders' equity                 |         |                   | 65,173 
|                                                          |                                                                                                                                                  |                                            |         |                   |        
|                                                          |                                                                                                                                                  | Total liabilities and stockholders' equity |         | $                 | 195,704
|                                                          |                                                                                                                                                  |                                            |         |                   |        

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

F-4

---





NOVAMED, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF OPERATIONS        (Dollars in thousands, except per share data)

|                                                      |         | Years Ended December 31,                                |                             
|----------------------------------------------------- | ------- | ------------------------------------------------------- | ----------------------------
|
|Net revenue:                                          |         |                                                         |                             
|                                                      |         | Surgical facilities                                     |                             
|                                                      |         | Product sales and other                                 |                             
|                                                      |         |                                                         |                             
|                                                      |         |                                                         | Total net revenue           
|                                                      |         |                                                         |                             
|Operating expenses:                                   |         |                                                         |                             
|                                                      |         | Salaries, wages and benefits                            |                             
|                                                      |         | Cost of sales and medical supplies                      |                             
|                                                      |         | Selling, general and administrative                     |                             
|                                                      |         | Depreciation and amortization                           |                             
|                                                      |         |                                                         |                             
|                                                      |         |                                                         | Total operating expenses    
|                                                      |         |                                                         |                             
|                                                      |         |                                                         | Operating income            
|                                                      |         |                                                         |                             
|Other (income) expense:                               |         |                                                         |                             
|                                                      |         | Interest expense                                        |                             
|                                                      |         | Interest income                                         |                             
|                                                      |         | Minority interests in earnings of consolidated entities |                             
|                                                      |         | Gain on sale of minority interests                      |                             
|                                                      |         | Loss on investment in non-consolidated affiliate        |                             
|                                                      |         | (Earnings) loss of non-consolidated affiliate           |                             
|                                                      |         | Other                                                   |                             
|                                                      |         |                                                         |                             
|                                                      |         |                                                         | Total other (income) expense
|                                                      |         |                                                         |                             
|Income before income taxes                            |         |                                                         | 10,558                      
|Income tax provision                                  |         |                                                         | 4,626                       
|                                                      |         |                                                         |                             
|Income from continuing operations                     |         |                                                         | 5,932                       
|Income (loss) from discontinued operations            |         |                                                         | (306                        
|Gain (loss) on disposal of discontinued operations    |         |                                                         | (11,220                     
|                                                      |         |                                                         |                             
|Net income (loss)                                     |         | $                                                       | (5,594                      
|                                                      |         |                                                         |                             
|Earnings per common share from continuing operations: |         |                                                         |                             
|                                                      | Basic   |                                                         | $                           
|                                                      |         |                                                         |                             
|                                                      | Diluted |                                                         | $                           
|                                                      |         |                                                         |                             
|Net earnings (loss) per common share:                 |         |                                                         |                             
|                                                      | Basic   |                                                         | $                           
|                                                      |         |                                                         |                             
|                                                      | Diluted |                                                         | $                           
|                                                      |         |                                                         |                             

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

F-5

---





NOVAMED, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY        (Dollars and shares in thousands)

|                                                             |  | Common Stock |  |   |     | Deferred
Compensation
Restricted
Stock |   | Accumulated
Other
Comprehensive
Loss |   | Retained
Earnings
(Accumulated)
(Deficit) |        | Treasury Stock |   |      |  
|------------------------------------------------------------ |  | ------------ |  | - | --- | -------------------------------------- | - | ------------------------------------ | - | ----------------------------------------- | ------ | -------------- | - | ---- | -
|
|
|Balance, December 31, 2004                                   |  | 25,650       |  | $ | 256 |                                        | $ | 79,710                               |   | $                                         |       |                | $ |     |  
|Shares received as consideration in divestiture transactions |  |             |  |   |    |                                        |   |                                     |   |                                           |       |                |   |     |  
|Stock options exercised                                      |  | 864          |  |   | 9   |                                        |   | 3,423                                |   |                                           |       |                |   |     |  
|Shares issuedemployee stock purchase plan                   |  | 19           |  |   |    |                                        |   | 77                                   |   |                                           |       |                |   |     |  
|Restricted stock grant                                       |  | 250          |  |   | 3   |                                        |   | 1,620                                |   |                                           | (1,623 | )              |   |     |  
|Stock-based compensation expense                             |  |             |  |   |    |                                        |   |                                     |   |                                           | 51     |                |   |     |  
|Net income                                                   |  |             |  |   |    |                                        |   |                                     |   |                                           |       |                |   |     |  
|                                                             |  |              |  |   |     |                                        |   |                                      |   |                                           |        |                |   |      |  
|Balance, December 31, 2005                                   |  | 26,783       |  |   | 268 |                                        |   | 84,830                               |   |                                           | (1,572 | )              |   |     |  
|Reclassification of deferred compensation                    |  |             |  |   |    |                                        |   | (1,572                               | ) |                                           | 1,572  |                |   |     |  
|Stock options exercised                                      |  | 1,673        |  |   | 17  |                                        |   | 4,367                                |   |                                           |       |                |   |     |  
|Shares issuedemployee stock purchase plan                   |  | 23           |  |   |    |                                        |   | 136                                  |   |                                           |       |                |   |     |  
|Restricted stock grant                                       |  | 55           |  |   |    |                                        |   |                                     |   |                                           |       |                |   |     |  
|Stock-based compensation expense                             |  |             |  |   |    |                                        |   | 1,892                                |   |                                           |       |                |   |     |  
|Unrealized loss on interest rate swaps                       |  |             |  |   |    |                                        |   |                                     |   |                                           |       |                |   | (254 | )
|Net income                                                   |  |             |  |   |    |                                        |   |                                     |   |                                           |       |                |   |     |  
|                                                             |  |              |  |   |     |                                        |   |                                      |   |                                           |        |                |   |      |  
|Balance, December 31, 2006                                   |  | 28,534       |  |   | 285 |                                        |   | 89,653                               |   |                                           |       |                |   | (254 | )
|Stock options exercised                                      |  | 761          |  |   | 8   |                                        |   | 2,693                                |   |                                           |       |                |   |     |  
|Shares issuedemployee stock purchase plan                   |  | 37           |  |   |    |                                        |   | 163                                  |   |                                           |       |                |   |     |  
|Restricted stock grant                                       |  | 75           |  |   |    |                                        |   |                                     |   |                                           |       |                |   |     |  
|Stock-based compensation expense                             |  |             |  |   |    |                                        |   | 2,602                                |   |                                           |       |                |   |     |  
|Sale of warrants                                             |  |             |  |   |    |                                        |   | 14,000                               |   |                                           |       |                |   |     |  
|Convertible note call options, net of $8,160 tax benefit     |  |             |  |   |    |                                        |   | (15,840                              | ) |                                           |       |                |   |     |  
|Unrealized loss on interest rate swaps                       |  |             |  |   |    |                                        |   |                                     |   |                                           |       |                |   | (196 | )
|Net loss                                                     |  |             |  |   |    |                                        |   |                                     |   |                                           |       |                |   |     |  
|                                                             |  |              |  |   |     |                                        |   |                                      |   |                                           |        |                |   |      |  
|Balance, December 31, 2007                                   |  | 29,407       |  | $ | 293 |                                        | $ | 93,271                               |   | $                                         |       |                | $ | (450 | )
|                                                             |  |              |  |   |     |                                        |   |                                      |   |                                           |        |                |   |      |  

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

F-6

---





NOVAMED, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS        (Dollars in thousands)

|                                             |                                                                                                                         | Years Ended December 31,                         |                                                            
|-------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------ | -----------------------------------------------------------
|
|Cash flows from operating activities:        |                                                                                                                         |                                                  |                                                            
|                                             | Net income (loss)                                                                                                       |                                                  | $                                                          
|                                             | Adjustments to reconcile net income (loss) to net cash provided by operations, net of effects of purchase transactions: |                                                  |                                                            
|                                             |                                                                                                                         | Depreciation and amortization                    |                                                            
|                                             |                                                                                                                         | Gain on sale of minority interests/divestitures  |                                                            
|                                             |                                                                                                                         | (Earnings) loss of non-consolidated affiliate    |                                                            
|                                             |                                                                                                                         | Loss on investment in non-consolidated affiliate |                                                            
|                                             |                                                                                                                         | Stock-based compensation expense                 |                                                            
|                                             |                                                                                                                         | Loss on sale of ASC                              |                                                            
|                                             |                                                                                                                         | Deferred income taxes                            |                                                            
|                                             |                                                                                                                         | Minority interests                               |                                                            
|                                             |                                                                                                                         | Distributions to minority partners               |                                                            
|                                             |                                                                                                                         | Goodwill and asset impairment charge             |                                                            
|                                             |                                                                                                                         | Changes in operating assets and liabilities     |                                                            
|                                             |                                                                                                                         |                                                  | Accounts receivable                                        
|                                             |                                                                                                                         |                                                  | Inventory                                                  
|                                             |                                                                                                                         |                                                  | Other current assets                                       
|                                             |                                                                                                                         |                                                  | Accounts payable, accrued expenses and income taxes payable
|                                             |                                                                                                                         |                                                  | Other noncurrent assets                                    
|                                             |                                                                                                                         |                                                  |                                                            
|                                             |                                                                                                                         |                                                  |                                                            
|                                             |                                                                                                                         |                                                  |                                                            
|Cash flows from investing activities:        |                                                                                                                         |                                                  |                                                            
|                                             | Payments for acquisitions, net                                                                                          |                                                  |                                                            
|                                             | Purchases of property and equipment                                                                                     |                                                  |                                                            
|                                             | Proceeds from sale of minority interests                                                                                |                                                  |                                                            
|                                             | Proceeds from sale of property and equipment                                                                            |                                                  |                                                            
|                                             | Proceeds from sale of ASC                                                                                               |                                                  |                                                            
|                                             | Other                                                                                                                   |                                                  |                                                            
|                                             |                                                                                                                         |                                                  |                                                            
|                                             |                                                                                                                         |                                                  |                                                            
|                                             |                                                                                                                         |                                                  |                                                            
|Cash flows from financing activities:        |                                                                                                                         |                                                  |                                                            
|                                             | Borrowings under revolving credit agreement                                                                             |                                                  |                                                            
|                                             | Payments under revolving credit agreement                                                                               |                                                  |                                                            
|                                             | Other long term borrowings                                                                                              |                                                  |                                                            
|                                             | Proceeds from the issuance of convertible subordinated debt, net                                                        |                                                  |                                                            
|                                             | Proceeds from the issuance of stock, net of issuance costs                                                              |                                                  |                                                            
|                                             | Payments of other debt, debt issuance fees and capital lease obligations                                                |                                                  |                                                            
|                                             |                                                                                                                         |                                                  |                                                            
|                                             |                                                                                                                         |                                                  |                                                            
|                                             |                                                                                                                         |                                                  |                                                            
|Net increase in cash and cash equivalents    |                                                                                                                         |                                                  | 3,639                                                      
|Cash and cash equivalents, beginning of year |                                                                                                                         |                                                  | 2,743                                                      
|                                             |                                                                                                                         |                                                  |                                                            
|Cash and cash equivalents, end of year       |                                                                                                                         | $                                                | 6,382                                                      
|                                             |                                                                                                                         |                                                  |                                                            

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

F-7

---





NOVAMED, INC. AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        (Dollars in thousands, except per share data)

1. GENERAL INFORMATION

Description of the Business

NovaMed, Inc. (NovaMed) along with its subsidiaries (collectively, the Company) is an owner and operator of ambulatory surgery centers (ASCs). The
Company's primary focus and strategy is to acquire, develop and operate ASCs in joint ownership with physicians throughout the United States. At December 31, 2007, the Company owned and
operated 34 ASCs where surgeons perform various surgical procedures. The Company owned a majority interest in 32 of its ASCs with physicians owning the remaining equity interests in these ASCs. The
Company owns all of the equity interests in its other two ASCs. In the future the Company may elect to sell to physicians a minority interest in these two facilities. The Company also owned three ASCs
that it plans to divest in 2008. The Company also has laser services agreements pursuant to which it provides excimer lasers and other services to ophthalmologists for their use in performing laser
vision correction (LVC) surgery.

The
Company also owns and operates optical laboratories, an optical products purchasing organization and a marketing products and services business.

The
Company also continues to provide management services to two eye care practices pursuant to long-term service agreements. These practices are located in Illinois and
Georgia. Under these service agreements, the Company provides business, information technology, administrative and financial services to its affiliated providers in exchange for a management fee.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Financial Statement Presentation and Principles of Consolidation

The consolidated financial statements include the financial statements of NovaMed and its wholly owned and majority owned subsidiaries. The Company uses the
equity method of accounting for the ASC in which it owns a minority interest. The Company consolidates two physician practice management (PPM) entities under the guidance of
EITF 97-2,Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician Practice Management Entities and Certain Other Entities
with Contractual Management Arrangements. All significant intercompany balances and transactions have been eliminated in consolidation. Prior year amounts have been
reclassified to conform to current year 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. Pursuant to six of
its limited liability company agreements, the cash held by each entity is restricted to that entity's use. The cash balance subject to such restrictions was $2,961 and $2,745, at December 31,
2007 and 2006, respectively. Pursuant to one of its limited liability company agreements, reserves established to fund the operating and other liabilities of that entity are to be held in that
entity's bank account. The cash balance subject to such restriction was $0 at December 31, 2007 and 2006.

Inventory

Inventory consists primarily of surgical supplies used in connection with the operation of the Company's ambulatory surgery centers (ASCs) and optical products
such as eyeglass frames, optical lenses

F-8

---



NOVAMED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

and
contact lenses. 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.

As of December 31,

2007

2006Surgical supplies

$
1,530

$
1,028Optical products


745


912Other


91


139Total inventory

$
2,366

$
2,079


Property and Equipment

Property and equipment are stated at lower of cost or fair 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 up to the lease term 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. The Company accounts for intangible assets in accordance with Statement of Financial Accounting Standards No. 142,Goodwill and Other
Intangible Assets(SFAS 142). Goodwill is not amortized but is subject to an annual impairment assessment in relation to its fair value.

Impairment of Long-Lived Assets

The Company reviews the carrying value of the long-lived assets periodically to determine if facts and circumstances exist that would suggest that
assets might be impaired or that the useful lives should 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, an adjustment will be made to reduce the carrying amount of these assets to their fair
value. The Company accounts for impairment and disposal of its long-lived assets in accordance with Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets(SFAS 144).

F-9

---



NOVAMED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Income Taxes

The Company uses the liability method of accounting for income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes. Deferred income taxes reflect the net 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 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 its notes receivable from related parties, line of
credit, convertible notes 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.
The Company enters into interest rate swap agreements to protect it against interest rate fluctuations of the LIBOR rate on certain of its debt. The fair value of the swaps is determined based on
market interest rates for similar maturity periods.

The
Company has historically granted certain physicians physically settled written call options on the equity of certain ASCs. The Company's policy is to estimate and record the fair
market value of these call options on the grant date and record subsequent increases and decreases in the fair market value as expense or income, respectively, in the Company's Consolidated Statement
of Operations. If the related option is subsequently exercised, the Company's policy is to reverse the cumulative effect of the previously recorded expense or income associated with changes in the
fair market value of the written call options.

Revenue Recognition



Revenue in the Company's ASCs is based on fees charged to patients, third-party payors or others for use of the facilities and relates primarily to surgical
procedures performed in the ASCs. 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. Surgical
facility revenue is net of contractual adjustments and a provision for doubtful accounts and is recognized at the time the surgical procedure is performed. The contractual allowance is the difference
between the fee charged and the amount expected to be paid by the patient or the applicable third-party payor, which includes Medicare and private insurance. The Company bases its estimates for the
contractual allowance on the Medicare reimbursement rates when Medicare is the payor, contracted rates with other third party payors or historical experience when
there is not a specific contracted rate. The estimate for doubtful accounts is based on the aging category and historical collection experience.



The Company's optical products purchasing organization negotiates volume buying discounts with optical products manufacturers. The buying discounts and any
handling charges billed to the members of

F-10

---



NOVAMED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

the
buying group represent the revenue recognized for financial reporting purposes. Revenue is recognized as orders are shipped to members. The Company bases its estimates for sales returns and
discounts on historical experience and has not experienced significant fluctuations between estimated and actual return activity and discounts given. Revenue generated from affiliated ophthalmologists
and optometrists with whom the Company has a management services agreement is eliminated in consolidation.

The
Company's 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 discounts. The Company's marketing products and services company recognizes revenue when the product is shipped or service
rendered.

The
Company owns the net operating assets and has long-term service agreements (SAs) with an ophthalmology practice and an optometric practice with a retail optical store.
The Company provides services, facilities and equipment under these SAs. The SAs have 25 to 40-year terms and require the Company to provide all of the business, administrative and
financial services necessary to operate the practices and the retail optical store. The Company recognizes the revenue of the SAs based on services performed and retail sales adjusted for contractual
arrangements. These practices are consolidated in the Company's financial statements and all intercompany transactions are eliminated.

The
Company also records an estimate for doubtful accounts based on the aging category and historical collection experience of each product sales and other business described above.

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 paid by the Company related to operating the equipment used in LVC procedures.

Stock Based Compensation

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004),Share
Based Payment(SFAS 123(R)), applying the modified prospective method. Prior to the adoption of SFAS 123(R), the Company applied the provisions of APB Opinion
No. 25,Accounting for Stock Issued to Employees(APB 25), in accounting for its stock-based awards, and accordingly, recognized no
compensation cost for its stock plans other than for its restricted stock awards. Under the modified prospective method, SFAS 123(R) applies to new awards and to awards that were outstanding as
of December 31, 2005 that are subsequently vested, modified, repurchased or cancelled. Compensation expense recognized during 2007 and 2006 includes the portion vesting during the period for
(1) all share-based payments granted prior to, but not yet vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the original provisions of
Statement of Financial Accounting Standards No. 123,Accounting for Stock-Based Compensation(SFAS 123) and (2) all share-based
payments granted subsequent to December 31, 2005, based on the grant-date fair value estimated in accordance with FAS 123(R). All such estimates were made using the
Black-Scholes option-pricing model.

Prior
to January 1, 2006, the Company accounted for its stock-based employee compensation plans under the recognition and measurement principles of APB 25, and related
interpretations. No stock option

F-11

---



NOVAMED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

based
employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to or above the market value of the underlying common stock at the
date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123(R).

2005Net incomeas reported

$
5,589Deduct: Total stock-based employee compensation expense, net of related tax effects


(640
)Pro forma net income


4,949Earnings per share:Basicas reported

$
0.25Basicpro forma

$
0.23Dilutedas reported

$
0.23Dilutedpro forma

$
0.21


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

2005Expected option life in years

4Risk-free interest rate

3.93
%Dividend yield

Expected volatility

.660


Concentration of Credit Risk

For the years ended December 31, 2007, 2006 and 2005, approximately 35%, 38% and 39%, 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.

F-12

---



NOVAMED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements

The Company adopted the provisions of FASB Interpretation No. 48Accounting for Uncertainty in Income Taxes(FIN 48) on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized a liability for unrecognized tax benefits of approximately $0.4 million
during 2007. No adjustment was made to the beginning retained earnings balance, as the ultimate deductibility of all these tax positions was judged to be highly certain but there is uncertainty about
the timing of such deductibility. No interest or penalties have been accrued relative to these positions since the Company has either a tax loss or have utilized a net operating loss carryforward to
offset any taxable income in all subject years. Deferred tax assets have been recorded to recognize the future benefits of the positions reserved for in the FIN 48 liability. Because of the
impact of deferred income tax accounting, the temporary differences would not affect the annual effective tax rate.

In
September 2006, the FASB issued Statement of Financial Accounting Standards No. 157,Fair Value Measurements(SFAS 157).
SFAS 157 defines fair value, establishes a framework for measuring fair value,
and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. In February of 2008, the
FASB issued FASB Staff position 157-2 which delays the effective date of SFAS 157 for non-financial assets and liabilities which are not measured at fair value on a
recurring basis (at least annually) until fiscal years beginning after November 15, 2008. The Company is currently evaluating the impact of the adoption of SFAS 157 on its consolidated
financial statements and note disclosures.

In
February 2007, the FASB issued Statement of Financial Accounting Standards No. 159,The Fair Value Option for Financial Assets and Financial
Liabilities(SFAS 159). SFAS 159 allows entities the option to measure eligible financial instruments at fair value as of specified dates. Such election, which
may be applied on an instrument by instrument basis, is typically irrevocable once elected. SFAS 159 is effective for financial statements issued for fiscal years beginning after
November 15, 2007 and will become effective for us beginning with the first quarter of 2008. The Company is currently evaluating the impact of the adoption of SFAS 159 on its
consolidated financial statements and note disclosures.

In
December 2007, the FASB issued Statement of Financial Accounting Standards No. 160,Non-Controlling Interests in Consolidated Financial
Statements an amendment of ARB No. 51(SFAS 160). SFAS 160 establishes new standards for the accounting for and reporting of non-controlling
interests (formerly minority interests) and for the loss of control of partially owned and consolidated subsidiaries. SFAS 160 does not change the criteria for consolidating a partially owned
entity. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The provisions of SFAS 160 will be applied prospectively upon adoption except for the
presentation and disclosure requirements which will be applied retrospectively. The Company is currently evaluating the impact of the adoption of SFAS 160 on its consolidated financial
statements and note disclosures.

In
December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(revised 2007) (SFAS 141R), a revision of SFAS 141, "Business Combinations."
SFAS 141R establishes requirements for the recognition and measurement of acquired assets, liabilities, goodwill, and non-controlling interests. SFAS 141R also provides
disclosure requirements related to business combinations. SFAS 141R is effective for fiscal years beginning after December 15, 2008. SFAS 141R will be applied prospectively to
business combinations with an acquisition date on or after the effective date.

F-13

---



NOVAMED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

3. EARNINGS PER COMMON SHARE (EPS)

Basic EPS is calculated by dividing net income by the weighted average number of common shares. Diluted EPS is calculated by dividing net income by the weighted
average number of common shares, including the dilutive effect of potential common shares outstanding during the period. The dilutive effect of potential common shares, consisting of outstanding stock
options and restricted stock, is calculated using the treasury stock method.

Earnings
per common share is calculated as follows:

|                                                                 |                         | Year Ended December 31,
|---------------------------------------------------------------- | ----------------------- | -----------------------
|
|Income from continuing operations                                |                         | $                      
|(Loss) income from discontinued operations                       |                         |                        
|                                                                 |                         |                        
|Net (loss) income                                                |                         | $                      
|                                                                 |                         |                        
|Basic weighted average number of common shares outstanding       |                         |                        
|Effect of dilutive securitiesstock options and restricted stock |                         |                        
|                                                                 |                         |                        
|Diluted weighted average number of shares outstanding            |                         |                        
|                                                                 |                         |                        
|Basic earnings (loss) per common share:                          |                         |                        
|                                                                 | Continuing operations   |                        
|                                                                 | Discontinued operations |                        
|                                                                 |                         |                        
|Basic earnings (loss) per share                                  |                         | $                      
|                                                                 |                         |                        
|Diluted earnings (loss) per common share:                        |                         |                        
|                                                                 | Continuing operations   |                        
|                                                                 | Discontinued operations |                        
|                                                                 |                         |                        
|Diluted earnings (loss) per share                                |                         | $                      
|                                                                 |                         |                        

4. STATEMENT OF CASH FLOWSSUPPLEMENTAL INFORMATION

|                                    |                             | Years ended December 31,
|----------------------------------- | --------------------------- | ------------------------
|
|Supplemental cash flow information: |                             |                         
|                                    | Interest paid               |                         
|                                    | Income taxes paid           |                         
|                                    | Income tax refunds received |                         

Non-cash investing and financing activities:

During the first quarter of 2007, a former senior executive exercised stock options to acquire 287,199 shares of common stock. Per the terms of the stock option
agreements and the Company's stock incentive plans, the former executive tendered to the Company 82,006 shares of the Company's common stock to fund the $626 aggregate exercise price. The Company
added these tendered shares into treasury resulting

F-14

---



NOVAMED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

4. STATEMENT OF CASH FLOWSSUPPLEMENTAL INFORMATION (Continued)

in
an increase in treasury stock of $626. These shares are available for future issuance under the Company's stock incentive plans.

During
2007 and 2006, the Company received 47,416 and 21,522 shares of its common stock from certain executives to fund $153 and $158 of tax withholding, respectively, due on restricted
stock granted to them, which vested during the year. These were recorded as treasury shares and certain of these shares are available for future issuance under the Company's stock incentive plans.

During
the first quarter of 2006, the Company received 305,254 shares of its common stock from the estate of Stephen J. Winjum to fund the $2,296 aggregate option exercise price of the
estate's remaining 1,330,730 options. During the third quarter of 2005, the Company received 129,180 shares of its common stock from the estate to fund the $994 aggregate option exercise price of
240,000 options due to expire on August 21, 2005. These were recorded as treasury shares and are available for future issuance under the Company's stock incentive plans.

During
the first quarter of 2005, the Company received 31,200 shares of its common stock from a former affiliated physician as final settlement of a lawsuit. Treasury shares were
recorded at $197 and this amount was reported as income from discontinued operations. The Company also received 17,518 shares of its common stock to repay $104 of outstanding notes receivable from one
of its divestiture transactions.

In
2007, 2006 and 2005, the Company obtained medical equipment by entering into capital leases for $294, $279 and $368, respectively.

5. ACQUISITIONS AND SALES OF MINORITY INTERESTS

The Company accounts for acquisitions of majority equity interests in ASCs using 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
Company acquired a majority interest in two ASCs in 2007, one of which was significant enough to require pro forma disclosure. The Company also acquired a 100% interest in an optical
products purchasing organization in 2007. The Company acquired a majority interest in nine and four ASCs during 2006 and 2005, respectively. Total cash acquisition cost in 2007 for these ASCs and
optical products purchasing organization was $39,600 of which the Company allocated $36,701 to goodwill and $1,750 to amortizable intangible assets. Total cash acquisition cost in 2006 for these ASCs
was $51,110 of which the Company allocated $47,473 to goodwill. Total cash acquisition cost in 2005 for these ASCs was $18,464 of which the Company allocated $17,322 to goodwill. The goodwill is not
amortized in accordance with SFAS 142 and is expected to be fully deductible for tax purposes.

On
June 1, 2007, the Company acquired a 62.5% interest in the Surgery Center of Kalamazoo ("Kalamazoo"), a multi-specialty ASC located in Portage, Michigan, for $24,600, of which
the Company allocated $24,662 to goodwill. In addition to the purchase price, the Company paid $86 of direct acquisition costs. The acquisition was funded from the Company's credit facility. The
purchase price for the 62.5% ownership interest in Kalamazoo was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of the
acquisition date. Any excess of the

F-15

---



NOVAMED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

5. ACQUISITIONS AND SALES OF MINORITY INTERESTS (Continued)

purchase
price over the estimated fair value of the identifiable net assets acquired was recorded as goodwill. The following table summarizes the purchase price allocation:

Fair value of current assets

$
1,084Fair value of long-term assets


1,067Fair value of current liabilities


(614
)Fair value of long-term liabilities


(1,489
)Minority partner share of net assets


(24
)Goodwill


24,662Total purchase price

$
24,686


In
addition, on August 2, 2006, NovaMed Eye Surgery Center of New Albany, LLC ("New Albany ASC"), of which the Company owns a 67.5% interest, acquired substantially all of
the assets of the John Kenyon Center for Eye Surgery, an ophthalmic ASC located in Jeffersonville, Indiana. The New Albany ASC entered into a $4,000 installment note to fund this acquisition. The term
of the loan is seven years. $3,957 of the purchase price was allocated to goodwill. In September, the Jeffersonville ASC was consolidated with the New Albany ASC, located in New Albany, Indiana.

The
following unaudited pro forma results of operations assume that the business acquisitions in 2007 and 2006 occurred as of January 1, 2006 and that the business acquisitions in
2006 and 2005 occurred as
of January 1, 2005. The unaudited pro forma results below are based on historical results of operations and do not necessarily reflect actual results that would have occurred:

|                                                      |         | Year ended December 31,
|----------------------------------------------------- | ------- | -----------------------
|
|Net revenue                                           |         | $                      
|Operating income                                      |         |                        
|Income from continuing operations                     |         |                        
|Net income (loss)                                     |         |                        
|Earnings per common share from continuing operations: |         |                        
|                                                      | Basic   |                        
|                                                      | Diluted |                        
|Earnings (loss) per common share:                     |         |                        
|                                                      | Basic   |                        
|                                                      | Diluted |                        

Effective
January 31, 2006, the Company acquired an additional 15% interest in its pain management ASC located in New Albany, Indiana for $150. The Company purchased 7.5% from
each of its existing partners, increasing the Company's ownership in this ASC to 51%. Prior to this additional purchase, the Company consolidated this ASC because it maintained effective control over
the ASC's assets and operations. The Company continues to consolidate this ASC.

F-16

---



NOVAMED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

5. ACQUISITIONS AND SALES OF MINORITY INTERESTS (Continued)

Effective January 31, 2006, the Company's ASC located in Berkley, Michigan redeemed its retiring partner's entire interest in this ASC, issuing a
promissory note payable in eight quarterly installments through November 1, 2007. This physician's 24% interest was allocated proportionately among the remaining partners. As a result of this
redemption, the Company's ownership interest in this ASC increased by 16% from its previous 51% to 67%. Effective September 1, 2006, the Company sold this 16% interest to its two existing
partners and a new physician partner for $443, reducing the Company's interest in this ASC to 51%.

Effective
March 25, 2005, the Company entered into an Option Purchase Agreement with its two physician-partners in its Overland Park, KS ASC. These physician-partners had
previously given notice of their intent to exercise an option to purchase all of the Company's interest in this ASC effective as of April 15, 2005. Under the terms of the Option Purchase
Agreement, the Company purchased this option from these physician-partners for an aggregate sum of $3,600, with $1,800 paid to each physician-partner. As a result of this transaction, the option was
terminated and the Company has retained its 51% interest in this ASC.

The
Company also sold minority equity interests in seven of its existing ASCs during 2007, 2006 and 2005 to various physicians. From the sale of minority interests, the Company received
in the aggregate approximately $273, $210 and $941 in cash proceeds in 2007, 2006 and 2005, respectively.

6. PROPERTY AND EQUIPMENT

Property and equipment consist of the following as of December 31, 2007 and 2006:

2007

2006Equipment

$
19,085

$
15,337Information technology


2,959


2,398Furniture and fixtures


1,187


1,038Land and buildings


286


286Leasehold improvements


8,899


8,25132,416


27,310LessAccumulated depreciation and amortization


(18,850
)

(14,303
)$
13,566

$
13,007


Depreciation
and amortization expense in 2007, 2006 and 2005 was $3,635, $2,708 and $2,243, respectively.

7. GOODWILL AND OTHER INTANGIBLE ASSETS

The Company accounts for intangible assets in accordance with SFAS 142. The carrying value of these assets is assessed at least annually and an impairment
charge is recorded if appropriate.

F-17

---



NOVAMED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

7. GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)

Goodwill
balances by reportable segment are summarized in the table below:

|                           |  | Unamortized Goodwill |         |   |  
|-------------------------- |  | -------------------- | ------- | - | -
|
|Balance January 1, 2005    |  | $                    | 44,624  |   | $
|Acquisitions               |  |                      | 17,287  |   |  
|Purchase price adjustments |  |                      | (106    | ) |  
|Amortization               |  |                      |        |   |  
|                           |  |                      |         |   |  
|Balance December 31, 2005  |  |                      | 61,805  |   |  
|Acquisitions               |  |                      | 51,559  |   |  
|Amortization               |  |                      |        |   |  
|                           |  |                      |         |   |  
|Balance December 31, 2006  |  |                      | 113,364 |   |  
|Acquisitions               |  |                      | 32,019  |   |  
|Purchase price adjustments |  |                      | (154    | ) |  
|Amortization               |  |                      |        |   |  
|Impairments                |  |                      | (10,537 | ) |  
|                           |  |                      |         |   |  
|Balance December 31, 2007  |  | $                    | 134,692 |   | $
|                           |  |                      |         |   |  

8. ACCRUED EXPENSES

Accrued expenses consist of the following as of December 31, 2007 and 2006:

2007

2006Accrued payroll and related benefits

$
2,046

$
1,959Accrued incentive compensation


655


1,571Accrued interest


197


656Deferred revenue


612


646Accrued professional fees


501


585Accrued business taxes


307


278Alcon reserve minimum





165Other


161


396$
4,479

$
6,256


9. DISCONTINUED OPERATIONS

As of January 1, 2002, the Company adopted SFAS 144 under which it reports as discontinued operations certain entities that have been disposed of or
are classified as held for sale. Under SFAS 144, an entity held for sale that qualifies as a discontinued operation is measured at the lower of its carrying amount or fair value less cost to
sell. A loss is recognized for any initial or subsequent write-down to fair value less cost to sell and is reported within discontinued operations. The results of operations of current

F-18

---



NOVAMED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

9. DISCONTINUED OPERATIONS (Continued)

and
prior periods of an entity disposed of or classified as held for sale is reported in discontinued operations.

On
December 12, 2007, the Board of Directors of the Company approved a plan to close or sell three majority owned ASCs located in Columbus, Georgia; Laredo, Texas and Thibodaux,
Louisiana. Prior to reporting these ASCs as discontinued operations, they represented approximately 2% of the Company's consolidated net revenue and a net loss of approximately $0.01 per diluted share
in 2007. The Board determined to close or sell the Columbus, Georgia and Laredo, Texas ASCs due to their continued
unprofitability. The Thibodaux, Louisiana ASC only has one surgeon who is planning to retire shortly. The decision to close or sell this ASC was based on the ASC's competitive position in the market,
limited growth potential, and the lack of a succession plan for the surgeon in this rural area.

Subsequent
to the decision to sell or close the ASCs above, the Company completed the sale of the Columbus, Georgia ASC. The Company received net sale proceeds of $141 and recorded a net
loss on sale of the ASC of $1,648 during the fourth quarter of 2007.

During
the fourth quarter of 2007, the Company recorded a net loss on the pending divestiture of the Laredo, Texas ASC of $8,092. The net loss primarily related to the write down of the
carrying value of net assets to the Company's estimate of fair market value less costs to sell the ASC.

During
the fourth quarter of 2007, the Company recorded a net loss on the pending divestiture of the Thibodaux, Louisiana ASC of $1,480. The net loss primarily related to the write down
of the carrying value of net assets to the Company's estimate of fair market value less costs to sell the ASC. On February 28, 2008, the Company completed the sale of this ASC.

In
addition to recording the net loss on disposal of the ASCs described above, the Company reported the results of operations of these ASCs within discontinued operations for all periods
presented within the Consolidated Statement of Operations and has excluded amounts related to these ASCs from amounts reflected in footnotes that disclose information about continuing operations.

During
the third quarter of 2006 the Company reversed the remaining reserve balance related to its 2001 Plan of Discontinued Operations and Restructuring, as all identified liabilities
had been settled.

Effective
November 1, 2005, the Company sold its 80% interest in an ASC located in St. Joseph, Missouri to its physician-partners resulting in net gain on sale of $71. The
Company sold its interest due to state licensure issues unique to this ASC as well as its limited growth potential. The operating results of this ASC have been reported as discontinued operations in
2005.

During
the first quarter of 2005, the Company received 31,200 shares of its common stock as settlement of a dispute related to liquidating damages due the Company from a former
affiliated physician. The value of these shares as of the settlement date, net of tax, of $122 is reported as income from discontinued operations.

F-19

---



NOVAMED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

9. DISCONTINUED OPERATIONS (Continued)

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

|                                                       |  | Year ended December 31, |        
|------------------------------------------------------ |  | ----------------------- | -------
|
|Net revenue                                            |  | $                       | 2,456  
|Operating expense                                      |  |                         | 3,289  
|Interest and other (income) expense, net               |  |                         | (331   
|                                                       |  |                         |        
|(Loss) income from operations before income taxes      |  |                         | (502   
|Income tax (benefit) expense                           |  |                         | (196   
|                                                       |  |                         |        
|Net (loss) income                                      |  | $                       | (306   
|                                                       |  |                         |        
|(Loss) gain on disposal of discontinued operations     |  | $                       | (11,042
|Income tax expense                                     |  |                         | 178    
|                                                       |  |                         |        
|Net (loss) gain on disposal of discontinued operations |  | $                       | (11,220
|                                                       |  |                         |        

10. INCOME TAXES

The Company and some of its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, the
Company is no longer subject to U.S. federal, state or local income tax examinations by tax authorities for years before 2004.

As
discussed in Note 2, the Company adopted the provisions of FASB Interpretation No. 48,Accounting for Uncertainty in Income
Taxes,on January 1, 2007 ("FIN 48"). As a result of the implementation of FIN 48, the Company recognized a liability for unrecognized tax benefits of
approximately $416. No adjustment was made to the beginning retained earnings balance, as the ultimate deductibility of all these tax positions was judged to be highly certain but there is uncertainty
about the timing of such deductibility. No interest or penalties have been accrued relative to these positions due to the Company having either a tax loss or having utilized a net operating loss
carryforward to offset any taxable income in all subject years. Deferred tax assets have been recorded to recognize the future benefits of the positions reserved for in the FIN 48 liability.
Because of the impact of deferred income tax accounting, the temporary differences would not affect the annual effective tax rate.

Should
the Company need to accrue interest or penalties on unrecognized tax positions, it would recognize the interest in interest expense and penalties in operating expenses.

A
reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

Unrecognized tax benefitsJanuary 1, 2007

$
416Gross increasestax positions in prior period


Gross decreasestax positions in prior period


Gross increasescurrent period tax positions


99Settlements


(80
)Lapse of statute of limitations


Unrecognized tax benefitsDecember 31, 2007

$
435


F-20

---



NOVAMED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

10. INCOME TAXES (Continued)

The
income tax provision from continuing operations consists of the following for the years ended December 31, 2007, 2006 and 2005:

2007

2006

2005CurrentFederal

$


$


$
State


323


317


228323


317


228DeferredFederal


(5,125
)

1,774


1,447State


335


237


376Deferred tax provision (benefit)


(4,790
)

2,011


1,823Less: discontinued operations tax (provision) benefit


18


(129
)

(218
)(4,772
)

1,882


1,605OtherTax benefit of convertible note hedge payment and stock-based compensation recorded as additional paid-in-capital


9,075


1,340


1,668$
4,626

$
3,539

$
3,501


A
reconciliation of income tax expense from continuing operations and the amount calculated using the U.S. statutory rate of 34% is presented as follows:

2007

2006

2005Tax expense at U.S. statutory rate

34.0
%
34.0
%
34.0
%State taxes, net

4.4

3.9

4.9Valuation allowance

3.9



Other

1.5

1.1

1.1Provision for income taxes

43.8
%
39.0
%
40.0
%


At
December 31, 2007, the Company had federal net operating loss carryforwards of approximately $7,100 and $250 of federal alternative minimum tax credits. The federal net
operating loss carryforwards expire in 2022, 2023 and 2028 and the federal alternative minimum tax credits carry forward indefinitely. The Company also has capital loss carryforwards of approximately
$7,100, net of a $6,700 valuation reserve, that expire starting in 2007 through 2010. Due to the new reporting requirements of FAS123(R), the asset related to the net operating loss carryforward is
not recorded on the Company's balance sheet because the loss was created by the tax benefits of stock option exercises and under the new accounting rules cannot be recognized for book purposes until
the benefit has been realized by actually reducing taxes payable.

F-21

---



NOVAMED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

10. INCOME TAXES (Continued)

Deferred
tax assets (liabilities) are comprised of the following at December 31, 2007 and 2006:

2007

2006Deferred tax assetsDiscontinued operations and restructuring

$
6,753

$
2,872Goodwill impairment charges


1,613


1,613Capital loss carryforward


2,682


2,686Loss on investment on nonconsolidated affiliate


396


Deferred revenue


89


180Convertible note hedge payment


7,344


AMT credit


251


251Discount on conversion of notes


139


171Compensation expense related to stock options


1,337


654Receivable and inventory reserves


464


129Compensation expense


228


190Other


377


20621,673


8,952Valuation allowance


(9,069
)

(4,536
)Total deferred tax assets


12,604


4,416Deferred tax liabilitiesDepreciation and amortization


(8,784
)

(5,789
)Prepaid expense


(262
)

(269
)Other





(25
)Total deferred tax liabilities


(9,046
)

(6,083
)Net deferred tax assets (liabilities)

$
3,558

$
(1,667
)


The
Company recorded a valuation allowance on a portion of the losses on the sale of discontinued operations which are capital in nature, and on a portion of the stock options not
expected to be exercised. Additionally, a valuation allowance has been recorded with respect to increased capital loss carryforwards generated by the loss on equity investment in a nonconsolidated
affiliate in 2007.

11. LONG-TERM DEBT AND CONVERTIBLE SENIOR SUBORDINATED NOTES

Long-term debt consists of the following as of December 31, 2007 and 2006:

2007

2006Revolving credit facility

$
24,000

$
57,700Capital lease obligations (see Note 12)


575


462Notes payable


4,960


4,181LessCurrent maturities


(1,035
)

(1,231
)Total long-term debt

$
28,500

$
61,112Convertible subordinated debt, net of discount

$
72,676





F-22

---



NOVAMED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

11. LONG-TERM DEBT AND CONVERTIBLE SENIOR SUBORDINATED NOTES (Continued)

Cash
payments required on long-term debt in the five years and thereafter subsequent to December 31, 2007 are reflected in the table below:

2008

$
1,4172009


1,4022010


25,2682011


1,2342012


75,885Thereafter


471Total cash payments

$
105,677Less: interest on capital leases and notes payable


(1,142
)Less: convertible debt discount


(2,324
)Total long-term debt

$
102,211


Revolving Credit Facility

Effective February 7, 2007, the Company amended its credit facility, increasing the maximum commitment available under the facility from $80,000 to
$125,000 and extending the expiration date to February 5, 2010. The maximum commitment available under the facility is the lesser of $125,000 or the maximum allowed under the calculated ratio
limitations. The amended credit agreement also includes an option allowing the Company to increase the maximum commitment available to $150,000 under certain conditions. Maximum borrowing availability
and applicable interest rates under the facility are based on a ratio of total indebtedness to earnings before interest, taxes, depreciation and amortization as defined in the credit agreement. The
amended credit agreement provides for temporary increases in this ratio through September 30, 2008 for purposes of calculating the maximum borrowing availability. Interest on borrowings under
the facility is payable at an annual rate equal to the Company's lender's published base rate plus the applicable borrowing margin ranging from 0% to .5% or LIBOR plus a range from 1.25% to 2.50%,
varying depending upon the calculated ratios and the Company's ability to meet other financial covenants. In addition, a fee ranging from .175% to .250% is charged on the unused portion of the
commitment. The credit agreement contains customary covenants that include limitations on indebtedness, liens, capital expenditures, acquisitions, investments and share repurchases, as well as
restrictions on the payment of dividends; however, many of these limitations were changed by these amendments. On May 31, 2007, the Company amended its credit facility pursuant to which its
lenders consented to the acquisition of a 62.5% equity interest in Surgery Center of Kalamazoo, LLC for a purchase price of $24,600. Under the terms of its credit facility, the Company is
required to obtain the consent of its lenders for any acquisition exceeding $20,000 individually under certain conditions. This amendment also contained modifications to various definitions and
financial covenants to enable the purchased entity, as a new subsidiary of the Company, to continue to maintain its existing bank debt of approximately $1,640 outside of the credit facility. Effective
June 20, 2007, the Company amended its credit facility to obtain lenders' consent to the Convertible Notes offering and the related convertible note hedge and warrant transactions. The
amendment also modified certain loan pricing, financial covenants and various definitions. On December 13, 2007, the Company amended its credit facility to modify various definitions and
financial covenants to allow one of its subsidiaries, NovaMed Surgery Center of Altamonte Springs, LLC, to procure

F-23

---



NOVAMED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

11. LONG-TERM DEBT AND CONVERTIBLE SENIOR SUBORDINATED NOTES (Continued)

up
to $4,000 of indebtedness outside of the credit facility to fund the construction of a new site for this ASC.

At
December 31, 2007, the Company had $24,000 of borrowings outstanding under its revolving credit facility with a weighted average interest rate of 7.8%, and was in compliance
with all of its credit agreement covenants. The weighted average interest rate on credit line borrowings during 2007 and 2006 was 7.5% and 6.9%, respectively. In addition, the Company paid a fee
ranging from .20% to .25% on the unused portion of the commitment.

During
2006, the Company entered into two interest rate swap agreements related to its revolving credit facility. The interest rate swaps protect the Company against certain interest
rate fluctuations of the LIBOR rate on $24,000 of the Company's variable rate debt under the credit facility. The date of the first interest rate swap was April 12, 2006, and it expires on
April 19, 2009. This interest rate swap
effectively fixes the Company's LIBOR rate on $12,000 of variable rate debt at a rate of 5.34%. The date of the second interest rate swap was June 28, 2006 and it expires on
September 30, 2008. This interest rate swap effectively fixes the Company's LIBOR rate on $12,000 of variable rate debt at a rate of 5.75%. The Company has recognized the fair value of these
interest rate swaps as a long-term liability of approximately $384 and $225 at December 31, 2007 and 2006, respectively.

Effective
August 1, 2006, NovaMed Eye Surgery Center of New Albany, LLC ("New Albany ASC"), of which the Company owns a 67.5% majority interest, entered into a $4,000
installment note which matures on August 1, 2013. Interest is payable at the lender's one month LIBOR rate, designated or published on the first of each month, plus 2.0%. The New Albany ASC
entered into a five-year interest rate swap agreement that effectively fixes the LIBOR rate on this debt at 5.51%. The New Albany ASC has recognized the fair value of this interest rate
swap as a long-term liability of approximately $98 and $44 at December 31, 2007 and 2006, respectively. Annual principal payments of the note for the five years commencing with 2008
are $484, $522, $562, $606, $653 and $458 thereafter.

The
fair value of the interest rate swaps is determined based on market interest rates for similar maturity periods. Payments or receipts of cash under the interest rate swaps are shown
as a part of operating cash flow, consistent with the interest expense incurred pursuant to the credit facility and the installment note.

At
December 31, 2007 the Company had outstanding letters of credit issued to two of its optical products buying group vendors in the amounts of $238 and $140 that expire on
March 31, 2008 and December 31, 2008, respectively. The outstanding letters of credit reduce the amount available under the credit facility.

Convertible Senior Subordinated Notes

On June 27, 2007, the Company issued $75,000 aggregate principal amount of 1.0% convertible senior subordinated notes due June 15, 2012 (the
"Convertible Notes"). Proceeds from the Convertible Notes were used to pay down $62,375 of outstanding indebtedness on the Company's revolving credit facility and to fund the $10,000 net cost of the
convertible note hedge and warrant transactions described below. Interest on the Convertible Notes is payable semi-annually in arrears on June 15 and December 15 of each
year, commencing December 15, 2007. The Convertible Notes rank subordinate to all of the Company's senior debt and rank pari passu or senior to all of the Company's other subordinated
indebtedness.

F-24

---



NOVAMED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

11. LONG-TERM DEBT AND CONVERTIBLE SENIOR SUBORDINATED NOTES (Continued)

The
Convertible Notes include a net-share settlement feature that requires the Company to settle conversion of the notes in cash up to the notes' principal amount and settle
any excess of the Convertible Notes' conversion value above their principal amount by delivering shares of the Company's stock, cash, or a combination of cash and common stock, at the Company's
option. As a result of the net-share settlement feature, the Company will be able to substantially reduce the number of shares issuable in the event of the conversion of the Convertible
Notes by repaying principal in cash instead of issuing shares of common stock for that amount. Based on the provisions of Emerging Issues Task Force No. 90-19, "Convertible Bonds with Issuer Option to Settle for Cash upon
Conversion"("EITF 90-19") and Emerging Issues Task Force
No. 00-19,"Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled In, a Company's Own Stock"("EITF 00-19"), the net-settlement feature is accounted for as convertible debt and is not subject to the provisions of Statement of Financial Accounting Standards
No. 133,"Accounting for Derivative Instruments and Hedging Activities"("SFAS No. 133"). Additionally, the Company is not required to
include the underlying shares of common stock in the calculation of the Company's diluted weighted average shares outstanding for earnings per share until the Company's common stock price exceeds
$6.371. During a public meeting held July 25, 2007, the Financial Accounting Standards Board ("FASB") indicated that it would change the accounting for net-share settled convertible
debt. The proposed change would result in the Company recording interest expense on the Convertible Notes in an amount greater than the current 1% coupon rate. The FASB is expected to issue
authoritative guidance regarding net-share settled convertible debt through a FASB Staff Position (FSP).

The
aggregate underwriting discount with respect to the issuance of the Convertible Notes was $2,625, which has been recorded as debt discount on the Company's consolidated balance sheet
and is being amortized using the effective interest rate method over the term of the Convertible Notes.

The
Convertible Notes also contain a restricted convertibility feature that does not affect the conversion price of the Convertible Notes but, instead, places restrictions on a holder's
ability to convert their Convertible Notes into shares of the Company's common stock. A holder may convert the Convertible Notes prior to December 15, 2011 only if one or more of the following
conditions are satisfied:



F-25

---



NOVAMED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

11. LONG-TERM DEBT AND CONVERTIBLE SENIOR SUBORDINATED NOTES (Continued)



Holders
may also surrender their Convertible Notes for conversion anytime after December 15, 2011 at any time prior to the close of business on the business day immediately prior
to the stated maturity date regardless of whether any of the foregoing conditions have been satisfied. Upon the satisfaction of any of the foregoing conditions as of the last day of a reporting
period, or during the twelve months prior to the stated maturity date, the Company would write off to expense all remaining unamortized debt issuance costs and discount in that period.

If
the Convertible Notes are converted in connection with certain fundamental changes that occur prior to December 15, 2011, the Company may be obligated to issue additional
shares upon conversion as a make-whole premium with respect to the Convertible Notes.

Concurrent
with the sale of the Convertible Notes, the Company entered into a convertible note hedge transaction with respect to the Company's common stock (the "purchased call option")
with Deutsche Bank AG London (the "counterparty"), an affiliate of the underwriter. The purchased call options cover an aggregate of approximately 11,772 shares of the Company's common stock at a
strike price of $6.371 per share. The cost of the call options totaled $24,000. The Company also sold warrants to the counterparty to purchase from the Company an aggregate of approximately 11,772
shares of the Company's common stock at an exercise price of $8.31 per share. The Company received proceeds from the sale of these warrants of $14,000. Taken together, the call option and warrant
agreements have the effect of increasing the effective conversion price of the Convertible Notes to $8.31 per share. The call options and warrants must be settled in net shares, except in connection
with certain
termination events, in which case they would be settled in cash based on the fair market value of the instruments. On the date of settlement, if the market price per share of the Company's common
stock is above $8.31 per share, the Company will be required to deliver shares of its common stock representing the value of the warrants in excess of $8.31 per share.

The
warrants have a strike price of $8.31 and are generally exercisable at anytime. The Company issued and sold the warrants in a transaction exempt from the registration requirements of
the Securities Act of 1933, as amended, because the offer and sale did not involve a public offering. There were no underwriting commissions or discounts in connection with the sale of the warrants.

In
accordance with EITF No. 00-19 and Statement of Financial Accounting Standards No. 150,"Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity,"the Company recorded the call options as a reduction and the warrants as an increase in additional paid in capital, and
will not recognize subsequent changes in fair value of the call options and warrants in its consolidated financial statements. For income tax purposes, the Company has elected to apply the Integration
Regulations under Treas. Reg. 1.275-6 to treat the Convertible Notes and the associated call options as synthetic debt instruments and is accordingly deducting the option premium paid for
the call options as original issue discount over the five-year term. A deferred tax asset of $8,160 was initially recorded to reflect the future cash benefit of the deduction over the term
of the Convertible Notes. Also, pursuant to Internal Revenue Code Section 1032, the Company will not recognize any gain or loss for tax purposes with respect to the exercise or lapse of the
warrants.

F-26

---



NOVAMED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

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 and escalation clauses.

The
Company entered into two new capital leases for medical equipment during 2007 and assumed one capital lease with its 2007 acquisitions. In addition, the Company had eight capital
leases for medical equipment that existed as of December 31, 2006. The net book value of assets under capital leases was $877 and $736 at December 31, 2007 and 2006, respectively. The
annual interest rates on capital leases range from 6.0% to 10.2%.

At
December 31, 2007, minimum annual rental commitments are as follows:

|                    |                                       | Operating
Leases |       | Capital
Leases |  
|------------------- | ------------------------------------- | ---------------- | ----- | -------------- | -
|2008                |                                       | $                | 5,583 |                | $
|2009                |                                       |                  | 5,179 |                |  
|2010                |                                       |                  | 4,198 |                |  
|2011                |                                       |                  | 3,567 |                |  
|2012                |                                       |                  | 2,826 |                |  
|2013 and thereafter |                                       |                  | 7,849 |                |  
|                    |                                       |                  |       |                |  
|                    | Minimum lease payments                |                  |       | 29,202         |  
|                    | Less: sublease receipts               |                  |       | (619           | )
|                    |                                       |                  |       |                |  
|                    | Total minimum lease payments          |                  | $     | 28,583         |  
|                    |                                       |                  |       |                |  
|                    | Less: amount representing interest    |                  |       |                |  
|                    |                                       |                  |       |                |  
|                    | Total obligation under capital leases |                  |       |                |  
|                    |                                       |                  |       |                |  

Included
in the table above are operating lease annual rent commitments with related parties for the five years commencing with 2008 of approximately $2,414, $2,387, $2,338, $1,911,
$1,398 and $4,443 thereafter. Rent expense of continuing operations related to operating leases amounted to $6,529, $5,280 and $4,250 during 2007, 2006 and 2005, respectively.

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.

F-27

---



NOVAMED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

13. COMMITMENTS AND CONTINGENCIES (Continued)

Insurance

The Company is insured with respect to professional liability 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

The Company had a nonexclusive supply agreement with Alcon Laboratories, Inc. pursuant to which it could procure and utilize excimer lasers and other
equipment manufactured by Alcon which terminated on December 31, 2006. The Company paid Alcon a monthly fee based on the number of procedures performed on each of its LADARVision Systems. The
Company was required to pay for a minimum number of annual procedures on each LADARVision System during the term, whether or not these procedures were performed. The annual minimum commitment for 2006
was approximately $800.

The
Company has entered into various Product Usage and Volume Lease Purchase agreements with some of its surgical suppliers, under which the Company is required to purchase a minimum
quantity of products at a predetermined price. At December 31, 2007, the Company had remaining product purchase commitments of $607.

Pursuant
to the sale of a 29% interest in its Richmond, VA ASC to two physicians, the Company granted the physicians an option to sell back their interests to the Company for the
original price paid at any time. The Company has recorded a liability on its balance sheet within Minority interests in the event this option is exercised.

Employment Agreements

The Company has employment agreements with certain 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

Rights Agreement

Certain stockholders 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 the agreement (none of which are currently expected) which also describes the various stockholders' 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.

F-28

---



NOVAMED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

14. STOCKHOLDERS' EQUITY (Continued)

Other Comprehensive Income

The Company reports other comprehensive income as a measure of changes in stockholders' equity that resulted from recognized transactions and other economic
events of the period from non-owner sources. Other comprehensive income of the Company results from adjustments due to the fluctuation of the value of the Company's interest rate swaps
accounted for under Statement of Financial Accounting Standard No. 133,Accounting for Derivative Instruments and Hedging Activities, as amended.
The Company entered into two interest rate swaps during the second quarter of 2006 and one of its 67.5% owned subsidiaries entered into an interest rate swap during the third quarter of 2006. The
Company's share of the negative value of the interest rate swaps was $450 at December 31, 2007 and is recorded as accumulated other comprehensive loss in the accompanying consolidated balance
sheet. The total comprehensive loss for the year ended December 31, 2007 was $5,790. The total comprehensive income for the years ended December 31, 2006 and 2005 was $5,483 and $5,589,
respectively. See Note 11 for further discussion of the interest rate swaps.

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 (up to 100%) of their compensation not to exceed IRS limits. During 2007 the Savings Plan provided for the Company to match 50% of the employee's contributions
on the first 4% of salary contributed by each employee. The Company's matching contributions approximated $307, $153 and $145 for 2007, 2006 and 2005, 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 in any offering period or $25 in any calendar year. Approximately
36,800 shares, 22,800 shares and 19,000 shares were purchased under this plan during 2007, 2006 and 2005, respectively. At December 31, 2007, 51,900 shares were reserved for future issuance.
Under the provisions of SFAS 123(R), the Company recognized compensation expense of $46 and $56 during 2007 and 2006, respectively.

Stock Plans

The Company is authorized to issue up to 10,101,800 shares of its common stock, par value $.01 per share under various stock plans. Of this amount, 710,907 shares
remain available for issuance as of December 31, 2007. Authorized options for common stock under the various plans generally become exercisable over a four-year period with
1/8th of the total options granted becoming exercisable six months from the date of each grant and 1/48th of the total options granted becoming exercisable each month

F-29

---



NOVAMED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

15. EMPLOYEE BENEFIT PLANS (Continued)

thereafter.
The option period for common stock options is generally 10 years from the date each option is granted. All current outstanding options are nonqualified stock options.

Effective
January 1, 2006, the Company adopted SFAS 123(R), applying the modified prospective method. Prior to the adoption of SFAS 123(R), the Company applied the
provisions of APB 25 in accounting for its stock-based awards, and accordingly, recognized no compensation cost for its stock
plans other than for its restricted stock awards. Under the modified prospective method, SFAS 123(R) applies to new awards and to awards that were outstanding as of December 31, 2005
that are subsequently vested, modified, repurchased or cancelled. Compensation expense recognized during 2007 and 2006 includes the portion vesting during the period for (1) all share-based
payments granted prior to, but not yet vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123 and
(2) all share-based payments granted subsequent to December 31, 2005, based on the grant-date fair value estimated using the Black-Scholes option-pricing model. The Company
calculated its available APIC pool of net excess benefits using the transition method as defined in paragraph 81 of SFAS 123(R). During 2007, the Company granted its directors and
employees options to purchase 574,500 shares with an exercise price of $7.35 per share and options to purchase 88,000 shares with a weighted average exercise price of $6.05 per share. Stock
compensation expense of $1,955 and $1,381 was recognized on existing stock options during the twelve months ended December 31, 2007 and 2006, respectively. As a result of the Company's decision
to adopt the modified prospective method, prior period results have not been restated.

The
fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for stock options
granted during 2007, 2006 and 2005.

2007

2006

2005Expected option life in years

6

6

4Risk-free interest rate

4.76
%
4.71
%
3.93
%Dividend yield





Expected volatility

47.92
%
50.76
%
66.00
%


The
expected option life used for 2007 and 2006 grants was the weighted average of the vesting term assuming options are exercised as vested and the original contractual term of the
option. The expected option life for 2005 grants was the vesting term of the option. The risk free interest rate is based on the yield curve for U.S. Treasury zero-coupon issues with an
equivalent remaining term. The dividend yield is based on the Company's current dividend yield as the best estimate of projected dividend yield for periods within the expected life of the options. The
expected volatility in 2007 is based on the historical volatility of the Company's stock price. The weighted average fair value of options granted in 2007, 2006 and 2005 were $3.74, $3.79 and $3.20
per share, respectively.

F-30

---



NOVAMED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

15. EMPLOYEE BENEFIT PLANS (Continued)

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

|                             |                      | Options
Outstanding |            | Price Per
Share |               | Weighted
Average
Exercise
Price
|---------------------------- | -------------------- | ------------------- | ---------- | --------------- | ------------- | -------------------------------
|Balance at January 1, 2005   |                      | 6,183,750           |            | $0.74$12.61    |               | $                              
|                             | Granted              |                     | 919,500    |                 | $5.15$  6.96 |                                
|                             | Exercised            |                     | (868,138   | )               | $0.78$  6.00 |                                
|                             | Forfeited or expired |                     | (302,316   | )               | $0.78$12.00  |                                
|                             |                      |                     |            |                 |               |                                
|Balance at December 31, 2005 |                      | 5,932,796           |            | $0.74$12.61    |               | $                              
|                             | Granted              |                     | 554,600    |                 | $6.87$  8.00 |                                
|                             | Exercised            |                     | (1,672,533 | )               | $0.74$  6.00 |                                
|                             | Forfeited or expired |                     | (210,795   | )               | $1.27$12.00  |                                
|                             |                      |                     |            |                 |               |                                
|Balance at December 31, 2006 |                      | 4,604,068           |            | $0.74$12.61    |               | $                              
|                             | Granted              |                     | 662,500    |                 | $4.64$  7.35 |                                
|                             | Exercised            |                     | (761,332   | )               | $0.78$  6.87 |                                
|                             | Forfeited or expired |                     | (296,411   | )               | $3.50$12.61  |                                
|                             |                      |                     |            |                 |               |                                
|Balance at December 31, 2007 |                      | 4,208,825           |            | $0.74$12.00    |               | $                              
|                             |                      |                     |            |                 |               |                                

The
following table summarizes information about stock options outstanding at December 31, 2007:

|Options Outstanding |  | Options Exercisable
|------------------- |  | -------------------
|
|$  0.742$  0.83    |  | 440,250            
|$  1.15  $  1.70   |  | 646,998            
|$  1.75  $  2.04   |  | 457,500            
|$  2.84  $  4.07   |  | 88,000             
|$  4.45  $  6.00   |  | 929,797            
|$  6.24  $  9.00   |  | 1,495,630          
|$10.00  $12.00     |  | 150,650            
|                    |  |                    
|$  0.74  $12.00    |  | 4,208,825          
|                    |  |                    

The
aggregate intrinsic value is defined as the difference between the market value of the Company's stock as of the end of the period and the exercise price of the stock options. The
aggregate intrinsic value for stock options outstanding and exercisable as of December 31, 2007 was $4,509 and $4,506, respectively. The total intrinsic value of stock options exercised during
the year ended 2007 was $1,476. As a result of the stock options exercised, the Company recorded common stock and additional paid-in-capital of $2,700, which includes $940 of
tax benefits recognized. During the years ended December 31, 2007, 2006 and 2005, cash received from stock options exercised was $1,134, $712 and $864, respectively.

F-31

---



NOVAMED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

15. EMPLOYEE BENEFIT PLANS (Continued)

The
following is a summary of nonvested stock option activity:

Number of
Shares

Weighted
Average
Grant-Date
Fair ValueNonvested at January 1, 2005

1,359,908

$
1.46Granted

919,500

$
3.20Vested

(695,807
)
$
1.54Forfeited

(298,796
)
$
1.56Nonvested at December 31, 2005

1,284,805

$
2.64Granted

554,600

$
3.79Vested

(559,558
)
$
2.47Forfeited

(72,192
)
$
3.14Nonvested at December 31, 2006

1,207,655

$
3.22Granted

662,500

$
3.74Vested

(599,704
)
$
3.21Forfeited

(178,761
)
$
3.68Nonvested at December 31, 2007

1,091,690

$
3.46


At
December 31, 2007, there was $3,779 of total unrecognized compensation cost related to nonvested stock options. This cost will be recognized over 4 years.

On
January 25, 2007, a former senior executive exercised stock options to acquire 287,199 shares of common stock. Per the terms of the stock option agreements and the Company's
stock incentive plans, the former executive tendered to the Company 82,006 shares of the Company's common stock to fund the $626 aggregate exercise price. The Company added these tendered shares into
treasury resulting in an increase in treasury stock of $626. These shares are available for future issuance under the Company's stock incentive plans.

On
February 1, 2006, the estate of Stephen J. Winjum exercised all remaining stock options held by the estate to acquire 1,330,730 shares of common stock. Per the terms of the
stock option agreements and the Company's stock incentive plans, the estate tendered to the Company 305,254 shares of the Company's common stock that the estate owned to fund the $2,296 aggregate
exercise price. The Company added these tendered shares into treasury resulting in an increase in treasury stock of $2,296. These tendered shares are available for future issuance under the Company's
stock incentive plans.

The
Company also grants restricted stock awards to certain employees. Restricted stock awards are valued at the closing market value of the Company's common stock on the day prior to the
grant, and the total value of the award is recognized as expense ratably over the vesting period of the employees receiving the grants. The Company granted 75,000 restricted shares at a market value
of $7.35 per share from its 2005 Stock Incentive Plan to various executives on February 21, 2007. The Company granted 55,000 restricted shares at a market value of $6.87 per share from its 2005
Stock Incentive Plan to various executives on June 20, 2006. The Company granted 250,000 restricted shares at a market value of $6.49 per share from its 2005 Restricted Stock Plan to its Chief
Executive Officer on November 14, 2005. As of

F-32

---



NOVAMED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

15. EMPLOYEE BENEFIT PLANS (Continued)

December 31,
2007, the total amount of unrecognized compensation expense related to nonvested restricted stock awards was approximately $1,297, which is expected to be recognized over a
weighted-average period of approximately 2.3 years. The Company recognized compensation expense of $600, $455 and $51 on existing restricted stock awards during the years ended
December 31, 2007, 2006 and 2005, respectively.

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 reportable segment aggregates the results of operations from owning and/or operating
ASCs and fixed site laser services agreements. Earnings before taxes in 2007, 2006 and 2005 include $79, $101 and $110, respectively, of gains from the sale of minority interests in the Company's
ASCs.

Product sales.Product sales segment aggregates the Company's optical products purchasing organization, optical laboratories,
marketing products and services company and an optometric practice with a retail optical store.

Other.Other segment aggregates management services provided to a physician practice with multiple locations in Atlanta,
Georgia and an administrative services agreement.

Corporate.Corporate consists of corporate expenses for salaries, wages and benefits, general and administrative costs not
allocated to the operating segments and interest on debt.

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). Segment EBT includes all revenue and expenses directly attributable to the segment, certain corporate expenses for salaries, wages and
benefits directly attributable to the management of the reportable segment and allocated management, billing and collection fees.

Segment
identifiable assets include accounts receivable, inventory, other current assets and long-lived assets, including goodwill, 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 and other long-term assets and assets of

F-33

---



NOVAMED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

16. OPERATING SEGMENTS (Continued)

discontinued
operations. The Company has no revenues attributed to customers outside of the United States and no assets located in foreign countries.

|                              |  | Surgical Facilities |         | Product Sales |   | Other  |  | Corporate |       | Total
|----------------------------- |  | ------------------- | ------- | ------------- | - | ------ |  | --------- | ----- | -----
|2007                          |  |                     |         |               |   |        |  |           |       |      
|Net revenue                   |  | $                   | 105,752 |               | $ | 15,334 |  | $         | 7,509 |      
|Earnings (loss) before taxes  |  |                     | 15,486  |               |   | 3,966  |  |           | 807   |      
|Depreciation and amortization |  |                     | 3,017   |               |   | 232    |  |           | 137   |      
|Interest income               |  |                     | 98      |               |   |       |  |           |      |      
|Interest expense              |  |                     | 378     |               |   |       |  |           |      |      
|Capital expenditures          |  |                     | 1,529   |               |   | 246    |  |           | 123   |      
|Accounts receivable           |  |                     | 11,864  |               |   | 6,720  |  |           | 628   |      
|Identifiable assets           |  |                     | 160,387 |               |   | 20,149 |  |           | 2,394 |      
|                              |  |                     |         |               |   |        |  |           |       |      
|2006                          |  |                     |         |               |   |        |  |           |       |      
|Net revenue                   |  | $                   | 81,097  |               | $ | 15,408 |  | $         | 7,691 |      
|Earnings (loss) before taxes  |  |                     | 13,524  |               |   | 3,856  |  |           | 843   |      
|Depreciation and amortization |  |                     | 2,196   |               |   | 222    |  |           | 91    |      
|Interest income               |  |                     | 68      |               |   |       |  |           |      |      
|Interest expense              |  |                     | 179     |               |   |       |  |           |      |      
|Capital expenditures          |  |                     | 2,302   |               |   | 232    |  |           | 609   |      
|Accounts receivable           |  |                     | 11,299  |               |   | 4,495  |  |           | 584   |      
|Identifiable assets           |  |                     | 141,434 |               |   | 11,611 |  |           | 2,370 |      
|                              |  |                     |         |               |   |        |  |           |       |      
|2005                          |  |                     |         |               |   |        |  |           |       |      
|Net revenue                   |  | $                   | 57,345  |               | $ | 13,479 |  | $         | 7,524 |      
|Earnings (loss) before taxes  |  |                     | 10,555  |               |   | 2,892  |  |           | 696   |      
|Depreciation and amortization |  |                     | 1,637   |               |   | 207    |  |           | 104   |      
|Interest income               |  |                     | 25      |               |   |       |  |           |      |      
|Interest expense              |  |                     | 22      |               |   |       |  |           |      |      
|Capital expenditures          |  |                     | 2,191   |               |   | 249    |  |           | 80    |      
|Accounts receivable           |  |                     | 6,845   |               |   | 3,962  |  |           | 524   |      
|Identifiable assets           |  |                     | 80,408  |               |   | 11,066 |  |           | 1,739 |      
|                              |  |                     |         |               |   |        |  |           |       |      

17. RELATED-PARTY TRANSACTIONS

Facility Rent

The Company leases facility space from various related parties, which include partners, at rates the Company believes approximate fair market value. Amounts paid
to related parties for rent, taxes and other facility costs amounted to approximately $2,620, $2,159 and $1,578 during 2007, 2006 and 2005, respectively. The Company's minimum annual rental
commitments include total commitments of $14,891 that relate to facilities leased from related parties. Annual rent commitments for the five years commencing with 2007 are $2,414, $2,387, $2,338,
$1,911, $1,398 and $4,443 thereafter. (See Note 12).

F-34

---



NOVAMED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

17. RELATED-PARTY TRANSACTIONS (Continued)

Notes Receivable

The Company holds notes receivable of $1,335, less reserves of $888, from physicians affiliated with the Company. This balance includes a $1,190
non-interest bearing tax loan issued in connection with the IPO (see below) and a $144 note, bearing a 7% interest rate, due October 2008 which was issued in one of the Company's
divestiture transactions.

As
disclosed in a prospectus filed with the Securities and Exchange Commission on August 18, 1999, in connection with the exchange of $9,700 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 $2,723 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. During 2004, one of the note holders repaid his note with
shares of the Company's common stock. The remaining tax loan is payable by the debtor upon the Company's demand for payment. Currently, the Company intends to allow the debtor to repay this loan as he
disposes of his shares of the Company's common stock. The Company also has agreed to reimburse this debtor on a grossed-up basis, for any Federal or state taxes that he recognizes as a
result of imputed interest on the tax loan.

Other

The Company received professional services from firms that employed a director of the Company. Total payments for services received during 2007, 2006 and 2005
were approximately $633, $121 and $158, respectively.

18. SUBSEQUENT EVENTS

On February 28, 2008, the Company sold its 70% interest in its Thibodaux, Louisiana ASC for $227.

F-35

---



NOVAMED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

19. QUARTERLY FINANCIAL DATA(Unaudited)

Summarized quarterly financial data for 2007 and 2006 is as follows:

|                                  |                         | Quarter |       
|--------------------------------- | ----------------------- | ------- | ------
|
|
|Net revenue                       |                         | $       | 30,568
|Operating income                  |                         |         | 7,297 
|Income (loss) from:               |                         |         |       
|                                  | Continuing operations   |         |       
|                                  | Discontinued operations |         |       
|                                  |                         |         |       
|Net income (loss)                 |                         |         | 1,492 
|Basic earnings (loss) per share   |                         |         | 0.06  
|Diluted earnings (loss) per share |                         |         | 0.06  

|
|

|                           |                         | Quarter
|-------------------------- | ----------------------- | -------
|
|
|Net revenue                |                         | $      
|Operating income           |                         |        
|Income from:               |                         |        
|                           | Continuing operations   |        
|                           | Discontinued operations |        
|                           |                         |        
|Net income                 |                         |        
|Basic earnings per share   |                         |        
|Diluted earnings per share |                         |        

---

Note:

F-36

---





Schedule II

NOVAMED, INC. AND SUBSIDIARIES  RULE 12-09 VALUATION RESERVES  (Dollars in thousands)

|Allowance for contractual adjustments and bad debts |  | Balance at
beginning
of period |        | Charged to
costs and
expenses |         | Deductions |          | Balance at
end of
period
|--------------------------------------------------- |  | ------------------------------ | ------ | ----------------------------- | ------- | ---------- | -------- | ------------------------
|2005                                                |  | $                              | 9,429  |                               | 86,588  |            | (83,249  | )                       
|                                                    |  |                                |        |                               |         |            |          |                         
|2006                                                |  | $                              | 12,768 |                               | 135,375 |            | (123,974 | )                       
|                                                    |  |                                |        |                               |         |            |          |                         
|2007                                                |  | $                              | 24,169 |                               | 211,401 |            | (207,872 | )                       
|                                                    |  |                                |        |                               |         |            |          |                         

---





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.

| |  | NOVAMED, INC.
| |  | -------------
| |  | By:          

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.

|Name                                        |  | Title                                                                                                  |  | Date          
|------------------------------------------- |  | ------------------------------------------------------------------------------------------------------ |  | --------------
|                                            |  |                                                                                                        |  |               
|/s/THOMAS S. HALLThomas S. Hall             |  | President, Chief Executive Officer (Principal Executive Officer), Chairman of the Board and a Director |  | March 17, 2008
|/s/SCOTT T. MACOMBERScott T. Macomber       |  | Executive Vice President and Chief Financial Officer (Principal Financial Officer)                     |  | March 17, 2008
|/s/JOHN P. HARTJohn P. Hart                 |  | Vice President, Corporate Controller (Principal Accounting Officer)                                    |  | March 17, 2008
|/s/ROBERT J. KELLYRobert J. Kelly           |  | Lead Director and a Director                                                                           |  | March 17, 2008
|/s/R. JUDD JESSUPR. Judd Jessup             |  | Director                                                                                               |  | March 17, 2008
|/s/SCOTT H. KIRKScott H. Kirk, M.D.         |  | Director                                                                                               |  | March 17, 2008
|/s/STEVEN V. NAPOLITANOSteven V. Napolitano |  | Director                                                                                               |  | March 17, 2008
|/s/C.A. LANCE PICCOLOC.A. Lance Piccolo     |  | Director                                                                                               |  | March 17, 2008

---



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