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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-K

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

                  For the fiscal year ended December 31, 1999

                        Commission File Number: 0-26625

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

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

         980 North Michigan Avenue, Suite 1620, Chicago, Illinois 60611
              (Address of principal executive offices) (zip code)

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

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

          Securities registered pursuant to Section 12(g) of the Act:

                     Common Stock, par value $.01 per share
                                (Title of Class)

                        Preferred Stock Purchase Rights
                                (Title of Class)

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

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

   The aggregate market value of the registrant's 14,256,560 shares of voting
stock held by non-affiliates of the registrant, based upon the last reported
sale price of the registrant's Common Stock on March 24, 2000 was $176,424,930.
The number of shares outstanding of the registrant's Common Stock, par value
$.01, as of March 24, 2000 was 24,398,584.

                      DOCUMENTS INCORPORATED BY REFERENCE

   Portions of the registrant's Definitive Proxy Statement in connection with
the registrant's 2000 Annual Meeting of Stockholders are incorporated by
reference into Part III of this Report on Form 10-K.

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                                     PART I

Item 1. Business

   Because we want to provide investors with more meaningful and useful
information, this Annual Report on Form 10-K (the "Form 10-K") contains, and
incorporates by reference, certain "forward-looking statements" (as such term
is defined in Section 21E of the Securities Exchange Act of 1934, as amended)
that reflect our current expectations regarding our future results of
operations, performance and achievements. These forward-looking statements are
made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. We have tried, wherever possible, to identify
these forward-looking statements by using words such as "anticipates,"
"believes," "estimates," "expects," "plans," "intends" and similar expressions.
These statements reflect our current beliefs and are based on information
currently available to us. Accordingly, these statements are subject to certain
risks, uncertainties and contingencies which could cause our actual results,
performance or achievements in 2000 and beyond to differ materially from those
expressed in, or implied by, such statements. These risks and uncertainties
include: the acceptance of laser vision correction and other refractive
surgical procedures by eye care professionals and the general public; our
ability to establish and maintain profitable affiliations with eye care
professionals; the adoption of competing new technologies for vision correction
surgery; reductions in prices for laser vision correction procedures and other
reimbursement rates; proposed health care reforms; and the factors set forth
under "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Factors that Could Affect our Operations." We undertake
no obligation to update or revise any such forward-looking statements that may
be made to reflect events or circumstances after the date of this Form 10-K or
to reflect the occurrence of unanticipated events.

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

General

   We are an eye care services company focused on laser vision correction. We
are currently conducting operations primarily in six core regional markets:
Chicago, Illinois; Kansas City, Missouri; Louisville, Kentucky; Richmond,
Virginia; St. Louis, Missouri; and the Atlanta, Georgia and Chattanooga,
Tennessee metropolitan areas.

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

   As of March 24, 2000, we own and operate:

  .  12 eye surgery and laser centers where our affiliated eye care
     professionals perform laser vision correction and other eye-related
     surgical procedures

  .  an eye-only research organization with an emphasis on laser vision
     correction that provides clinical and other research services to eye
     care device, product and pharmaceutical manufacturers

  .  an optical services division that sells eye care products and
     accessories to eye care professionals, including corrective lenses and
     eyeglasses produced by our three wholesale optical laboratories, and
     eyeglass frames and contact lenses purchased from manufacturers by our
     optical products purchasing organization

   As of March 24, 2000, we also operate under service agreements, seven laser
vision correction centers where our affiliated eye care professionals perform
laser vision correction surgery.
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   Generally, we enter into long-term business relationships, or affiliations,
with eye care professionals by:

  .  acquiring their non-medical assets including equipment, leasehold
     interests and working capital

  .  hiring their non-medical personnel

  .  assuming their office leases

  .  entering into long-term service agreements with their professional
     entities

   Under these service agreements, we provide business, information
technology, administrative and financial services to our affiliated eye care
professionals and their optical retail outlets in exchange for a management
fee.

   As of March 24, 2000, we have affiliated with 103 eye care professionals.
Our affiliated eye care professionals provide a wide range of eye care
services to patients including laser vision correction surgery, basic eye
examinations and the diagnosis and treatment of complex eye conditions. Our
affiliated eye care professionals currently practice in 56 eye care clinics
which are leased and staffed by us. In addition, our affiliated eye care
professionals operate 32 optical retail outlets, each of which is located
within one of our affiliated eye care clinics, where they sell eyeglasses,
contact lenses and other optical products and accessories to patient-
consumers. In addition, we have entered into three fixed-site laser agreements
in Delaware, Ohio and Illinois.

Industry

 General

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

   Eye care represents one of the largest health care service and product
markets in the U.S. Projected annual spending in 2001 for health care costs
associated with eye and vision conditions is expected to be $29 billion, while
annual spending on retail optical products is expected to be an additional $18
billion, representing a total market of approximately $47 billion.

 Vision Correction Surgery

   According to industry sources, over 161 million people in the U.S. require
eyeglasses or contact lenses to correct refractive vision conditions which
result from the improper curvature of the cornea. If the cornea's curvature is
not correct, the cornea cannot properly focus the light passing through it
onto the retina, and the person will see a blurred image. The three most
common refractive conditions are:

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

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

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

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   Recently, new surgical technologies and techniques have been introduced for
surgical correction of common vision conditions which result from the improper
curvature of the cornea. Radial Keratotomy, or RK, introduced in the U.S. in
the 1970s, was the first surgical technique approved for vision correction. RK
procedures require a delicate surgical technique and significant physician
training, and the procedure can result in the instability of the eye over a
period of months to years. Use of an excimer laser to alter the curvature of
the cornea has become the most common method of surgical vision correction.
Although not approved in the U.S. for general use until 1996, Photorefractive
Keratectomy, or PRK, was introduced abroad in 1988, as the first vision
correction surgery that used laser technology. PRK offers several advantages
over RK, including a shorter, simpler procedure, a less substantial training
requirement for ophthalmologists and fewer complications. However, the
procedure proved to be more painful and typically required three to six weeks
of recovery time before full visual acuity was restored, with the potential
that full benefit of the procedure would not be realized for up to six months.

   Laser In-Situ Keratomileusis, or LASIK, was introduced in 1996, leading to a
dramatic increase in the popularity of laser vision correction surgery. LASIK
offers the ease-of-use benefits to ophthalmologists afforded by PRK, while
providing:

  .  significant reductions in patient pain or discomfort

  .  patient recovery times ranging from a few hours after the procedure to
     two weeks

  .  reduced complication rates

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

   The number of vision correction procedures performed in the U.S. has
expanded rapidly since 1996, primarily as a result of the advantages of the
LASIK procedure. In 1999, eye care professionals performed an estimated 1
million laser vision correction surgery procedures in the U.S., representing an
increase of 113% over the approximately 470,000 procedures performed in 1998,
with volume projected to grow to approximately 2 million procedures in 2001.
Industry forecasts estimate 1.5 million laser vision correction surgery
procedures being performed in 2000. Despite this rapid growth, the number of
vision correction surgery patients in 1999 represented 0.3% of the 161 million
people with refractive vision conditions in the U.S.

 Other Eye Care Services

   Cataract Surgery. Cataract surgery is currently the most widely performed
surgical procedure in the U.S. A cataract occurs when the normally transparent
lens of the eye becomes cloudy as part of the aging process. In cataract
surgery, the ophthalmologist removes the clouded natural lens and replaces it
with a synthetic intraocular lens. Cataract surgery is typically performed on
an outpatient basis using local anesthesia, and the procedure time is typically
less than 30 minutes. According to the American Society of Cataract and
Refractive Surgery, more than 60% of people over the age of 60 have some degree
of cataract formation. Cataract procedures are expected to continue to increase
for the next several years, driven primarily by the aging of the population and
the introduction of improved technologies and surgical techniques. With the
preponderance of cataract surgery patients being over the age of 65, the
Medicare program has been the primary source of reimbursement for cataract
surgery providers.

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   Other Eye Disorders. Other common eye disorders include glaucoma, macular
degeneration and diabetic retinopathy. Glaucoma is one of the leading causes of
preventable blindness in the U.S. and the single most common cause of blindness
among African-Americans. By 2030, industry sources project that the number of
glaucoma cases diagnosed will double, primarily as a result of the aging of the
general population and an increase in the average life span. Age-related
macular degeneration is the leading cause of visual impairment for persons age
75 and older, and it is the most common cause of new cases of visual impairment
among those over age 65. Diabetic retinopathy is a leading cause of vision loss
and blindness. More than 40% of patients with diabetes for 15 years or more
have some degree of blood vessel damage that may result in diabetic
retinopathy. Incidence of this disease is expected to increase dramatically as
a result of a growing number of patients diagnosed with diabetes. Treatment of
these eye and vision conditions is generally reimbursed by Medicare and other
third party payors.

 Optical Services and Products

   While the number of patient options for vision correction has increased with
improved surgical vision correction technologies and techniques, the market for
basic optical goods including corrective lenses, eyeglass frames, contact
lenses and other optical products and accessories, remains a significant
market. According to industry sources, projected 2001 consumer spending is
expected to be approximately $18 billion on eyewear. Eyeglass frames are
typically sold through retail optical outlets located in optometrist and
ophthalmologist clinics, as well as through retail stores.

Our Business Model

   We have focused on building regional clusters of eye surgery and laser
centers and affiliated eye care professionals. We structure these regional
clusters to achieve a hub and spoke configuration of affiliated eye care
professionals around our eye surgery and laser centers. We believe our business
model provides us with several advantages in assisting our affiliated eye care
professionals in developing a laser vision correction practice. These
advantages include our ability to:

  .  establish and maintain long-term relationships with leading
     ophthalmologists and optometrists through access to our eye surgery and
     laser centers, clinical research capability and range of business,
     information technology, administrative and financial services

  .  assist our affiliated eye care professionals in establishing regional
     market leadership in laser vision correction through our clinical
     research, information technology and marketing know-how

  .  provide our affiliated eye care professionals with the benefits of
     regional brand recognition

  .  create multiple sources of revenue through the range of business,
     information technology, administrative and financial services and eye
     care products that we offer

   We work with our affiliated eye care professionals to develop a patient-
consumer approach that we believe benefits not only the growth of their laser
vision correction practices, but all aspects of their continuum of eye care
services, ranging from basic eye examinations to the treatment of complex eye
and vision conditions.

   We have fully implemented our business model in five of our six existing
regional markets. We are currently implementing our model in our sixth regional
market, the Atlanta, Georgia and Chattanooga, Tennessee metropolitan areas,
which we entered through affiliations with eye care professionals beginning in
December 1999. We implement our business model by building around the following
key components:

 Eye Surgery and Laser Centers and Laser Vision Correction Centers

   We operate 12 eye surgery and laser centers, each of which is a wholly-
owned, licensed ambulatory surgical center. Eye care professionals perform
laser vision correction, cataract and other eye related surgical procedures at
our eye surgery and laser centers. We also operate under service agreements
seven laser vision correction centers where our affiliated eye care
professionals perform laser vision correction surgery. We also

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have three fixed-site laser agreements pursuant to which we lease excimer
lasers and provide various services to eye care providers in Delaware, Ohio and
Illinois. As of March 24, 2000, we have 20 excimer lasers in service and an
additional three lasers dedicated to conducting clinical trials. We plan to
deploy additional excimer lasers during the remainder of 2000.

   Eighteen of our current FDA-approved lasers are subject to a supply
agreement with Summit Technology, Inc. This supply agreement is nonexclusive
and we are free to obtain lasers from other laser manufacturers. Under this
agreement, we have the right to utilize Summit-manufactured lasers for periods
ranging from 36 to 42 months. During these periods, we pay Summit monthly based
on the number of procedures performed with each laser. We are required to pay
for a minimum number of procedures on each laser during the commitment period,
whether or not these procedures are actually performed. Summit may terminate
the agreement with respect to any particular laser if we fail, after reasonable
cure periods, to comply with the terms of the agreement relating to the
particular laser or to pay Summit the required monthly payments. We may
terminate the agreement with respect to any particular laser if we satisfy the
minimum payment obligations required to be paid to Summit during the term or if
the FDA withdraws or materially restricts its approval of the use of Summit's
excimer laser. In October 1999, the Food and Drug Administration approved
Summit's Apex Plus excimer laser for the treatment of myopia and high myopia
with or without astigmatism using LASIK.

 Management Services

   We have long-term service agreements in place with professional entities
covering 53 ophthalmologists and 50 optometrists, who provide eye care services
in one or more of our 56 eye care clinics. Generally, we seek to cluster eye
care clinics within regional markets that can support one or more eye surgery
and laser centers. Our strategy involves affiliating with leading eye care
professionals within a regional market until we have achieved a cluster of eye
care clinics, affiliated eye care professionals and eye surgery and laser
centers in a hub and spoke configuration throughout the regional market.

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

  .  billing, collection and cash management services

  .  procuring and maintaining all office space, office and medical supplies,
     medical and nonmedical equipment, information systems, and furniture and
     furnishings

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

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

  .  all administrative and support services

  .  information technology services

  .  marketing services

  .  assisting our affiliated eye care professionals with the establishment
     and implementation of quality assurance, risk management and utilization
     review programs

  .  assisting our affiliated eye care professionals in obtaining and
     maintaining federal, state and local licenses and permits

  .  negotiating managed care contracts on behalf of our affiliated eye care
     professionals

   In addition to affiliating with eye care professionals through the
acquisition of their nonmedical assets and employees, we are also pursuing
application service provider (ASP) contractual relationships with eye care
professionals focusing on the deployment of our information technology and
laser vision correction capabilities.

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Under these alternative arrangements, we intend to provide a core set of
services to eye care professionals on a fee-for-service basis. Contrary to our
more traditional affiliation model, we do not anticipate under these
arrangements acquiring the nonmedical assets or hiring the nonmedical personnel
of the eye care professionals. Rather, we will enter into multi-year service
agreements pursuant to which we will be the sole and exclusive provider of
information technology services and other services integral to the eye care
professionals' growth and development of their laser vision correction
business. Under these agreements, the eye care professionals will retain
control over their day-to-day business operations. The exclusive services that
we intend to provide under these agreements include:

  .  installation, maintenance and support of our information technology
     systems

  .  installation, maintenance and support of excimer lasers and other
     equipment used to perform laser vision correction surgery

  .  sales and marketing services designed to assist the eye care
     professionals in growing their laser vision correction business

  .  patient financing and credit card services for laser vision correction
     patients

   Although we are currently negotiating several transactions, we have not yet
entered into any of these ASP contractual relationships with any eye care
professionals. We anticipate pursuing our traditional contractual affiliation
model as well as our new ASP-based model in 2000.

 Optical Services and Products

   We own and operate three full-service wholesale optical laboratories that
specialize in surfacing, finishing and distributing corrective lenses and
eyeglasses. Our laboratories have in excess of 350 active customers, including
affiliated and non-affiliated ophthalmologists, optometrists, opticians and
optical retail chains.

   Our optical products purchasing organization allows affiliated and non-
affiliated eye care professionals to purchase optical products through us at
volume discounts. We have in excess of 700 customers that utilize our optical
products purchasing organization. We also provide monthly reports to our
customers that allow them to identify purchasing trends and manage their
optical product inventories more efficiently. We intend to expand the scope of
services offered to our customers by including eye care equipment used in our
affiliated and non-affiliated eye care professionals' offices and optical
laboratories.

 Research

   We own and operate an eye-only research organization that conducts Phase
II--IV clinical trials on eye care devices and pharmaceuticals, with an
emphasis on laser vision correction. Our research organization is based in
Kansas City, Missouri, and currently has research sponsor agreements relating
to approximately 50 clinical studies involving over 500 subjects participating
in clinical trials. Our research organization staff has a combined 80 years of
research experience, and we have recently hired an individual with over twenty
years experience in the research industry to serve as President of the
organization.

Our Growth Strategy

   We are focused on the rapidly growing U.S. market for laser vision
correction surgery and our goal is to become the leading laser vision
correction services and facilities company in each of our existing and future
regional markets. We intend to achieve this goal by continuing to establish
contractual affiliations with leading eye care professionals and by
implementing a growth strategy which includes the following specific
components:

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   Expanding our presence in existing regional markets. We believe that there
are significant growth opportunities in our existing regional markets. These
growth opportunities will be driven largely by:

  .  continuing to affiliate with leading eye care professionals

  .  acquiring or establishing eye surgery and laser centers and laser vision
     correction centers

  .  expanding our sales and marketing programs to increase demand for laser
     vision correction surgery

  .  integrating our affiliated eye care professionals into strong,
     regionally branded entities

  .  continued development and implementation of our business, information
     technology, administrative and financial services.

   Selectively Targeting and Entering New Markets. We believe our management
team's experience in building and developing successful eye care businesses
will enable us to effectively identify new markets. We intend to enter new
markets through multiple avenues, including:

  .  acquiring existing or establishing new eye surgery and laser centers

  .  acquiring existing or establishing new laser vision correction centers

  .  entering into contractual affiliations with leading ophthalmologists and
     optometrists, including our application service provider (ASP)
     contractual relationships

  .  developing and implementing our business, administrative and financial
     services in each new region

   Strengthening the consumer-patient marketing support that we provide our
affiliated eye care professionals. We continue to expand our sales and
marketing programs, which currently include:

  . regional branding

  .  direct to patient-consumer advertising

  .  patient seminars on laser vision correction

  .  centralized toll-free call centers

  .  corporate and group sales

   In addition, we will continue to pursue new and emerging growth
opportunities. These opportunities may involve acquisitions, joint ventures and
partnerships that build from our core businesses. Others may involve extensions
of our existing capabilities and technologies, including our ASP capabilities.

Competition

   The market for laser vision correction and other refractive surgery is
subject to intense competition. In offering laser vision correction services
and access to related equipment, we and our affiliated eye care professionals
compete with other entities, including:

  .  individual ophthalmologists

  .  refractive laser center companies

  .  other surgery and laser centers

  .  manufacturers of excimer laser equipment

  .  hospitals

In addition, the laser vision correction and other refractive surgery
procedures performed by affiliated eye care professionals at our eye surgery
and laser centers compete with more traditional non-surgical treatments for
refractive conditions, including eyeglasses and contact lenses.

   Eye care professionals interested in deploying excimer laser technology have
formed commercial enterprises in order to support the capital requirements for
acquiring the lasers and other necessary equipment. The industry today remains
highly fragmented, with most procedures performed by independent physician
groups. Several refractive laser center companies are developing national
operations. In addition, several eye care companies are featuring access to
laser vision correction and other refractive surgery services as a component of
their eye care practice development activities.

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   Our eye surgery and laser centers and affiliated eye care professionals
generally compete on the bases of:

  .  quality of patient care

  .  reputation

  .  price

   We compete in fragmented geographic markets and do not face any single,
dominant U.S. national competitor. Our competitors in every market are
individual doctors, who may practice alone or in groups. Some of these doctors
may perform laser vision correction procedures on behalf of competitors who
provide services and facilities related to laser vision correction. These
corporate providers include TLC The Laser Center, Inc., Laser Vision Centers,
Inc., ClearVision Laser Centers, Ltd., LCA-Vision Inc. and ARIS Vision, Inc.

   In the market for providing business, information technology,
administrative and financial services to eye care professionals, we primarily
compete with VisionAmerica, Inc. and Vision Twenty-One, Inc. The bases for
competition in this market include:

  .  service

  .  pricing

  .  strength of delivery network

  .  strength of operational systems

  .  the degree of cost efficiencies

  .  access to surgery facilities

  .  marketing strength

  .  information technology systems

  .  managed care expertise

  .  patient access

  .  quality assessment programs

   Although there are competitors in some of our markets who charge less for
the products and services we provide, we believe that our integrated eye care
model and alliances with recognized industry leaders afford us a competitive
advantage. Similarly, there are competitors of our affiliated eye care
professionals who charge less for laser vision correction. However, we believe
that industry experience to date suggests that price generally has not been
the driving factor in the patient decision regarding laser vision correction.

   Our application service provider (ASP) services will be comprised largely
of information technology services and systems, and related business services.
The market for information technology systems and services is highly
competitive and rapidly changing. Our principal competitors in this area will
be software companies that provide practice management software and
information technology consulting firms.

   Suppliers of eyeglasses and contact lenses, including, for example,
optometric chains, may also compete with us and our affiliated eye care
professionals, either by marketing alternatives to laser vision correction or
other refractive surgery procedures or by purchasing excimer lasers and
offering refractive surgery to their customers.

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   We compete in the optical laboratory market on the bases of:

  .  quality of service

  .  breadth of services

  .  reputation

  .  price

   Our three wholesale optical laboratories face a variety of national,
regional and local competitors.

   In the market for providing optical group purchasing services, we primarily
compete with C&E Vision Group, Block Vision, Vision West and Buyer's Edge.
Competition in this market is based upon:

  .  service

  .  price

  .  strength of the purchasing organization, including the ability to
     negotiate discounts

   Although there are competitors in some of our markets that charge less for
optical laboratory and optical products purchasing services, we believe that
our expertise in providing custom surfacing and finishing in our laboratory and
the purchasing services from our optical products purchasing organization
afford us a competitive advantage in each of these markets.

Employees

   As of March 1, 2000, we had approximately 1,132 employees, 922 of whom are
full-time employees. We are not a party to any collective bargaining
agreements.

Trademarks

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

Governmental Regulation

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

   We cannot assure you that Federal or state regulatory authorities would not
challenge any of our business operations and arrangements with our affiliated
eye care professionals. If any of our activities are challenged, we may have to
divert substantial time, attention and resources from running our business to
defend against these challenges regardless of their merit. If we do not
successfully defend these challenges, we and our affiliated providers may face
a variety of adverse consequences including service agreements being terminated
or rendered unenforceable, third party payor agreements being terminated,
affiliated providers losing their eligibility to participate in Medicare,
Medicaid or other Federal health care programs, or losing other contracting
privileges and, in some instances, civil or criminal fines. Under some
circumstances, we may be able to redesign or reformulate our relationships or
arrangements to address these challenges. 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 and our affiliated eye care
professionals 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 response to new or revised laws, regulations
or interpretations, we could be required to revise the

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structure of our legal arrangements or the structure of our fees, incur
substantial legal fees, fines or other costs, or curtail our business
activities, reducing the potential profit to us of some of our legal
arrangements, any of which may have a material adverse effect on our business,
financial condition and results of operations.

   The following is a summary of some of the health care regulatory issues
affecting us, our affiliated eye care providers and our respective operations.

 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, and exclusion from
Federal programs including Medicare or Medicaid.

   The Federal anti-kickback statute contains a number of exceptions. In order
to address the problems created by the broad language of the statute, Congress
directed the Department of Health and Human Services to develop regulatory
exceptions, known as safe harbors, to the Federal anti-kickback statute.
However, relationships for which there is no safe harbor protection and
relationships that do not meet the prescribed safe harbor standards do not
necessarily violate the statute.

   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. We do not provide
"designated health services." Our affiliated providers, however, do provide
limited categories of designated health services, specifically, ultrasound
services, including A-scans and B-scans, and prosthetic devices, including
eyeglasses and contact lenses furnished to patients following cataract surgery.

   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.

   In January 1998, the government promulgated proposed rules interpreting
provisions of the Stark Law. Because the proposed rules leave many ambiguities,
it is likely that the final regulations will differ somewhat from the proposal.
We cannot predict whether our affiliated professional entities will be affected
once final regulations pursuant to the Stark Law are published.

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

 State Law

   Anti-Kickback Laws. In addition to the Federal anti-kickback law, a number
of states have enacted laws which prohibit the payment for referrals and other
types of anti-kickback arrangements. These state laws typically apply to all
patients regardless of their source of payment.

                                       10
<PAGE>

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

   Corporate Practice of Medicine Laws. A number of states have enacted laws
which prohibit the corporate practice of medicine. These laws are designed to
prevent interference in the medical decision-making process by anyone who is
not a licensed physician. Many states have similar restrictions in connection
with the practice of optometry. Application of the corporate practice of
medicine prohibition varies from state to state. Because the corporate practice
of medicine doctrine has been seldom enforced or litigated in the states where
we do business, the precise parameters of the doctrine have not been defined,
particularly in terms of the management responsibilities that may be delegated
to a company that provides management services. Because of this, although we
neither employ doctors nor provide medical services, 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, 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 medical doctrine. In
such an event, we may be required to redesign or reformulate our relationships
with our affiliated eye care professionals and there is a possibility that some
provisions of our service agreements may not be enforceable.

   Fee-Splitting Laws. The laws of some states prohibit providers from dividing
with anyone, other than providers who are part of the same group practice, any
fee, commission, rebate or other form of compensation for any services not
actually and personally rendered. Penalties for violating these fee-splitting
statutes or regulations may include revocation, suspension or probation of a
provider's license, or other disciplinary action. In addition, courts have
refused to enforce contracts found to violate state fee-splitting prohibitions.
The precise language and judicial interpretation of fee-splitting prohibitions
varies from state to state. Courts in some states have interpreted fee-
splitting statutes to prohibit all percentage of gross revenue and percentage
of net profit management fee arrangements. Other state statutes apply only to
prohibit fee splitting in return for referrals.

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

   Facility Licensure and Certificate of Need. We may be required to obtain
licenses from the state departments of health in states where we open or
acquire eye surgery and laser centers. We believe that we have obtained the
necessary licenses in states where licenses are required. However, we believe
courts and state regulatory authorities generally have provided little
clarification as to some of the regulations governing licensure requirements.
It is possible that a state regulatory authority could challenge our position.
With respect to future expansion, we cannot assure you that we will be able to
obtain the required licenses. However, we have no reason to believe that, in
states requiring facility licenses, we will not be able to obtain this license
without unreasonable expense or delay.

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

                                       11
<PAGE>

   Insurance Provisions. Many states also regulate the establishment of various
health care provider networks. These laws do not typically affect providers of
business and administrative services to professional entities. We are aware,
however, of some state insurance regulations requiring organizations involved
in specified types of contracting arrangements to register with the state
department of insurance and purchase surety bonds. It also is possible that a
state could require our licensure as a provider network or organization, health
maintenance organization or insurer. However, as long as another entity in the
chain of contracts is licensed by the state department of insurance, we believe
that we are unlikely to be viewed by any state where we do business as
requiring a license from the department. Because we do not enter into any
capitated or other risk-sharing contract without an HMO or other licensed
entity in the chain of contracts, we believe that we are not required to be
licensed under the insurance provisions of any states in which we currently
operate. However, we believe courts and state regulatory authorities generally
have provided little clarification as to some of the regulations governing the
need for licensure. It is possible that a state regulatory authority could
challenge our determination. We cannot assure you that we will be able to
acquire an insurance license in all states where licensure is required.
However, we have no reason to believe that in those states that require an
insurance or other license, we will not be able to obtain one.

 Excimer Laser Regulation

   Medical devices, including the excimer lasers used in our eye surgery and
laser centers, are subject to regulation by the U.S. Food and Drug
Administration, referred to as 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.

   Failure to comply with applicable FDA requirements could subject us, our
affiliated providers 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.

 Regulation of Laser Vision Correction Marketing

   The marketing and promotion of laser vision correction and other vision
correction surgery procedures in the U.S. are subject to regulation by the FDA
and the Federal Trade Commission, referred to as the FTC. The FDA and FTC have
released a joint communique on the requirements for marketing these procedures
in compliance with the laws administered by both agencies. The FTC staff also
issued more detailed staff guidance on the marketing and promotion of these
procedures and has been monitoring marketing activities in this area through a
non-public inquiry to identify areas that may require further FTC attention.
The FDA has traditionally taken the position that the promotion and advertising
of lasers by manufacturers and physicians should be limited to the uses
approved by the FDA.

Item 2. Properties

   We do not own any real property. We lease space for our corporate
headquarters in Chicago, our regional offices, our surgery and laser centers,
the clinics of our affiliated eye care professionals and our optical services
manufacturing and warehouse operations. In some cases, these facilities are
leased from our affiliated eye care professionals and other related parties.
See "Item 13--Certain Relationships and Related Transactions." Our corporate
offices in the Chicago metropolitan area consist of 8,150 square feet in
downtown Chicago, and 10,499 square feet in Des Plaines, Illinois.

   The terms and conditions of our real property leases vary. The forms of
lease range from "modified triple net" to "gross" leases, with terms generally
ranging from month-to-month to ten years, with certain leases having multiple
five-year renewal terms at our option. Generally, our eye surgery and laser
centers, eye care clinics and optical retail outlets are located in medical
complexes, office buildings or free-standing buildings. The square footage of
these offices range from 300 to 22,993 square feet, and the terms of these
leases have expiration dates ranging from June 30, 2000 to February 29, 2010.
Any capacity constraints with our affiliated

                                       12
<PAGE>

eye care clinics and optical retail outlets can generally be resolved either
through a build-out of adjacent space or the leasing of additional office space
in other proximate locations. Depending on state licensing and Certificate of
Need issues, addressing capacity constraints in any of our eye surgery and
laser centers in a similar manner may require state regulatory approval.

Item 3. Legal Proceedings

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

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

   We did not submit any matter to a vote of our security holders during the
fourth quarter of 1999.

                                       13
<PAGE>

                                    PART II

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

Price Range of Common Stock

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

<TABLE>
<CAPTION>
                                                                    High   Low
                                                                   ------ -----
   <S>                                                             <C>    <C>
   Fiscal year ending December 31, 1999:
     Third Quarter (beginning August 18, 1999).................... $15.63 $7.88
     Fourth Quarter...............................................  11.69  4.81
</TABLE>

   On March 24, 1999, the last reported sale price of our common stock was
$12.38, and there were approximately 383 holders of record of our common stock.
This figure does not consider the number of individual holders of securities
that are held in the "street name" of a securities dealer.

Dividends

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

Sales of Unregistered Securities

 January 1, 1999 through June 30, 1999

   On January 1, 1999, we issued 250,000 shares of our Series A convertible
preferred stock, par value $0.01 per share, to two individual investors in
exchange for all of the capital stock of Midwest Uncuts, Inc.

   On January 8, 1999, we issued 80,000 shares of Series A convertible
preferred stock to an individual investor in exchange for 25% of the membership
interests in a limited liability company that owns and operates an ambulatory
surgery center. As a result of the transaction, we own 100% of the entity.

   On January 15, 1999, we issued 20,000 shares of Series A convertible
preferred stock to an affiliated eye care professional in exchange for the eye
care professional's shares of the capital stock of an eye care practice.

   On January 22, 1999, we issued 80,000 shares of Series A convertible
preferred stock to two corporate investors in exchange for 25% of the
membership interests in a limited liability company that owns and operates an
ambulatory surgery center. As a result of the transaction, we own 100% of the
entity.

   On July 16, 1999, we issued 75,000 shares of common stock to an affiliated
professional entity in connection with the acquisition of our clinical research
business.

   During the period from January 1, 1999 through June 30, 1999, we issued
100,000 shares of Series A convertible preferred stock and 95,750 shares of
common stock upon the exercise of options under our stock incentive plan.

 July 1, 1999 through September 30, 1999

   The information regarding the sale of unregistered securities during the
1999 third quarter is incorporated by reference from Part II, Item 2 of our
Form 10-Q as filed with the Securities and Exchange Commission on November 15,
1999.

                                       14
<PAGE>

 October 1, 1999 through December 31, 1999

   On December 31, 1999, we issued 49,485 shares of common stock to an
affiliated professional entity in connection with the acquisition of an eye
surgery and laser center and substantially all of the nonmedical assets of the
affiliated professional entity.

   No underwriters were engaged in connection with the issuance of the
foregoing securities. Moreover, the issuance of these securities was made in
reliance upon the exemptions from registration in Section 4(2) of the
Securities Act of 1933 for transactions not involving a public offering. The
foregoing issuances of shares upon exercise of options were made under Rule 701
promulgated under the Securities Act of 1933.

                                       15
<PAGE>

Item 6. Selected Financial Data

   The consolidated statement of operations data set forth below for the years
ended December 31, 1999, 1998, and 1997, and the balance sheet data at December
31, 1999 and 1998, are derived from our respective audited consolidated
financial statements which are included elsewhere herein. The consolidated
statement of operations data set forth below with respect to the year ended
December 31, 1996, and the consolidated balance sheet data at December 31, 1997
and 1996, are derived from our audited financial statements which are not
included in this Form 10-K. The financial data for the year ended December 31,
1995, are derived from our unaudited consolidated financial statements and
include, in the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the data for the
period presented.

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

<TABLE>
<CAPTION>
                                             Year Ended December 31,
                                     ------------------------------------------
                                       1999     1998     1997    1996     1995
                                     --------  -------  ------- -------  ------
                                      (in thousands, except per share data)
<S>                                  <C>       <C>      <C>     <C>      <C>
Consolidated Statement of
 Operations Data:
Net revenue........................  $102,588  $63,729  $42,408 $15,850  $  568
                                     --------  -------  ------- -------  ------
Recurring operating expenses.......    93,531   58,986   40,387  16,679   1,396
Compensation expense related to
 stock options (a).................     2,690      --       --      --      --
                                     --------  -------  ------- -------  ------
Income (loss) from operations......     6,367    4,743    2,021    (829)   (828)
                                     --------  -------  ------- -------  ------
Discount to initial public offering
 price upon the exchange of
 subordinated notes for common
 stock (a).........................    (2,425)     --       --      --      --
                                     --------  -------  ------- -------  ------
Net income (loss)..................       874    1,706      105    (912)   (807)
Accretion of Series C and Series D
 convertible preferred stock (a)...    (2,035)    (739)     --      --      --
                                     --------  -------  ------- -------  ------
Income (loss) available to Series A
 and Series B convertible preferred
 and common stockholders...........  $ (1,161) $   967  $   105 $  (912) $ (807)
                                     ========  =======  ======= =======  ======
Diluted earnings (loss) per common
 share.............................  $  (0.06) $  0.06  $  0.01 $ (0.08) $(0.46)
                                     --------  -------  ------- -------  ------
Diluted weighted average common
 shares outstanding................    17,965   16,003   17,237  11,358   1,747
                                     ========  =======  ======= =======  ======
Pro forma net income (a)...........  $  4,523  $ 2,111
                                     ========  =======
Pro forma diluted earnings per
 common share......................  $   0.20  $  0.10
                                     ========  =======
Pro forma weighted average number
 of common shares outstanding......    22,476   21,649
                                     ========  =======
<CAPTION>
                                               As of December 31,
                                     ------------------------------------------
                                       1999     1998     1997    1996     1995
                                     --------  -------  ------- -------  ------
<S>                                  <C>       <C>      <C>     <C>      <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents..........  $  1,828  $ 1,875  $ 4,009 $ 5,951  $  642
Total assets.......................    88,252   62,679   52,734  27,694   2,034
Total debt, excluding current
 portion...........................       196   20,427   15,838   6,378     --
Redeemable convertible preferred
 stock.............................       --    16,430   12,680   5,794     --
Total stockholders' equity.........    74,781   16,954   18,149  12,755   1,786
</TABLE>
--------
Notes:
(a)  In connection with our initial public offering consummated on August 18,
     1999 (IPO), we recorded noncash, nonrecurring charges for compensation
     expense related to stock options and a discount to the IPO offering price
     upon the exchange of subordinated notes for common stock in 1999 and 1998.
     In addition, we recorded accretion of Series C and Series D convertible
     preferred stock to increase the carrying value of such stock to its
     potentially redeemable value. The pro forma net income gives effect to
     these noncash, nonrecurring charges, as well as the pro forma elimination
     of the interest expense related to the subordinated notes which were
     exchanged at the IPO. Please see the notes to consolidated financial
     statements included elsewhere in this Form 10-K for more discussion.

                                       16
<PAGE>

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

   You should read the following discussion along with our consolidated
financial statements and related notes included herein. Our actual results,
performance and achievements in 2000 and beyond may differ materially from
those expressed in or implied by forward-looking statements contained in this
discussion. Such forward-looking statements are made within the meaning of the
Private Securities Litigation Reform Act of 1995.

Results of Operations

   Unaudited Pro Forma Information. In connection with our initial public
offering consummated on August 18, 1999 ("IPO"), certain noncash, nonrecurring
charges were recorded in our 1999 and 1998 consolidated statements of
operations. The following unaudited pro forma summary presents the results of
operations as if the events described more fully in the notes below had
occurred at the beginning of the periods presented (amounts in thousands,
except per share data):

<TABLE>
<CAPTION>
                                                                Years Ended
                                                                December 31,
                                                               ---------------
                                                                1999     1998
                                                               -------  ------
   <S>                                                         <C>      <C>
   Income (loss) available to Series A and Series B
    convertible preferred and common stockholders............. $(1,161) $  967
   Eliminate compensation expense related to stock options
    (a).......................................................   2,690     --
   Eliminate discount to initial public offering price upon
    the exchange of subordinated notes for common stock (b)...   2,425     --
   Eliminate preferred stock accretion upon conversion to
    common stock (c)..........................................   2,035     739
   Eliminate interest expense upon debt conversion to common
    stock (d).................................................     400     800
   Related income tax benefit.................................  (1,866)   (395)
                                                               -------  ------
   Pro forma net income....................................... $ 4,523  $2,111
                                                               =======  ======
   Pro forma earnings per diluted common share................ $  0.20  $ 0.10
                                                               =======  ======
   Pro forma weighted average diluted shares outstanding......  22,476  21,649
                                                               =======  ======
</TABLE>
--------
Notes:
(a)  Represents the pro forma elimination of the compensation expense
     associated with the IPO-related vesting of certain stock options granted
     in 1999.
(b)  Represents the pro forma elimination of the additional interest expense
     which resulted from the exchange of subordinated exchangeable promissory
     notes into common stock at a discount to the IPO price per share.
(c)  Represents the pro forma elimination of the accretion of the Series C and
     Series D convertible preferred stock through the IPO to its estimated fair
     market value. Upon the completion of the IPO, the Series C and Series D
     convertible preferred stock converted into common stock.
(d)  Represents the pro forma elimination of the interest expense from the
     subordinated exchangeable promissory notes which were converted to common
     stock at the time of the IPO.

 Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998

   Net Revenue. Net revenue increased 61.0% from $63.7 million to $102.6
million. Management services revenue increased 53.6% from $36.1 million to
$55.4 million. The increase in management services revenue was primarily a
result of overall increases in laser vision correction, cataract and other
ophthalmic surgery procedures performed by our affiliated eye care
professionals as well as new affiliations with eye care professionals. Surgery
and laser center revenue increased 57.0% from $20.1 million to $31.6 million,
primarily as a result of a 165.2% increase in laser vision correction
procedures, compared to 1998. The increase in laser vision correction
procedures was a result of both an increase in the overall demand for the
procedure as well as an increase in the number of our affiliated eye care
professionals performing the procedure. We also experienced a 13.4% increase in
the number of cataract and other eye related surgical procedures, compared to
1998. Product sales revenue increased 106.7% from $7.5 million to $15.6
million, primarily as a result of the acquisition of Midwest Uncuts, Inc., a
wholesale optical laboratory, in January 1999.

                                       17
<PAGE>

   Salaries, Wages and Benefits. Salaries, wages and benefits expense increased
48.2% from $25.3 million to $37.4 million. As a percentage of revenue,
salaries, wages and benefits expense decreased from 39.6% to 36.5%. The
absolute increase in salaries, wages and benefits expense primarily reflects
the additional payroll incurred as a result of new acquisitions and
affiliations. The decrease in salaries, wages and benefits expense as a
percentage of net revenue was a result of better utilization of staff due
primarily to the increased volume of laser vision correction, cataract and
other eye-related surgical procedures.

   Cost of Sales and Medical Supplies. Cost of sales and medical supplies
expense increased 66.7% from $15.8 million to $26.3 million. As a percentage of
revenue, cost of sales and medical supplies expense increased from 24.7% to
25.6%. The absolute increase in cost of sales and medical supplies expense is
primarily a result of the January 1, 1999, acquisition of Midwest Uncuts, Inc.
and of higher volumes at the NovaMed Alliance, our optical products purchasing
organization. The increase in laser vision correction procedures and the
related supply costs also contributed to the absolute increase during the
period. In general, the optical laboratories and the NovaMed Alliance have
higher cost of sales as a percentage of revenue than the optical retail outlets
of our affiliated eye care professionals.

   Selling, General and Administrative. Selling, general and administrative
expense increased 70.3% from $14.6 million to $24.9 million. As a percentage of
revenue, selling, general and administrative expense increased from 22.9% to
24.3%. The absolute increase in selling, general and administrative
expenditures related primarily to the expansion of sales and marketing efforts
in connection with our laser vision correction business, which includes the
continued investment in regional brands. In addition, we increased our
information technology expenditures related to our enterprise-wide information
systems and other programs supporting our laser vision correction business.

   Depreciation and Amortization. Depreciation and amortization expense
increased 47.4% from $3.3 million to $4.9 million. Acquisitions, affiliations
and increased capital expenditures have increased overall depreciation and
amortization expense.

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

   Other Expense. Other expense decreased 8.2% from $1.4 million to $1.3
million. The decrease in other expense was primarily related to the reduction
of interest expense as a result of the reduction of outstanding indebtedness
from the application of the proceeds of our IPO. In addition, $9.7 million of
our subordinated exchangeable promissory notes were exchanged for our common
stock, based upon the IPO price for each $0.80 worth of outstanding principal
on the notes. We recorded the difference between the value of common stock and
the notes as a nonrecurring, noncash interest expense of $2.4 million.

   Provision for Income Taxes. Our effective tax rate increased to 67.4% from
49.4%. Our effective tax rate is affected by expenses that are deducted from
operations in arriving at pre-tax income that are not allowed as a deduction on
our Federal income tax return, primarily goodwill amortization and the
nondeductible portion of the additional interest expense resulting from the
exchange of the subordinated exchangeable promissory notes for common stock, as
discussed above.

   Accretion of Series C and Series D Convertible Preferred Stock. In
connection with our IPO, approximately 16.3 million shares of Series A, Series
B, Series C and Series D preferred stock, which represented all of the issued
and outstanding shares of preferred stock, converted into shares of our common
stock. Prior to the IPO, however, the holders of the Series C and Series D
convertible preferred stock had the right to tender their stock for redemption
in 2004 and 2005 at the greater of the amount originally paid for the preferred
stock or its fair market value. Because the redemption right was outside of our
control, generally

                                       18
<PAGE>

accepted accounting principles require that until the redemption date, we
increased the value of the preferred stock to its ultimate redemption value, a
principle known as accretion. This accretion is deducted from net income in the
accompanying consolidated statements of operations to arrive at the income
available for common stockholders. Although we did not have an independent
appraisal, we estimated the potential future redemption value based upon
various transactions with third parties, through comparison to similar public
companies and, ultimately, on our IPO price. Based upon these estimates, we
recorded accretion of $2.0 million up to the effective date of the IPO on
August 18, 1999, and $739,000 for the twelve months ended December 31, 1998.

 Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997

   Net Revenue. Net revenue increased 50.3% from $42.4 million to $63.7
million. Management services revenue increased 47.8% from $24.4 million to
$36.1 million. The increase in management services revenue was primarily
related to new affiliations with eye care professionals as well as overall
increases in laser vision correction, cataract and other eye related surgical
procedures performed by our affiliated eye care professionals. These new
affiliations included a number of optical retail outlets that also contributed
to the increase in management services revenue. Surgery and laser center
revenue increased 39.0% from $14.5 million to $20.1 million primarily due to
better utilization of our surgery and laser centers and a 503.5% increase in
laser vision correction procedures, compared to the year ended December 31,
1997. In addition, we experienced a 24.1% increase in the number of cataract
and other eye related surgical procedures, compared to the year ended December
31, 1997. Product sales revenue increased 114.2% from $3.5 million to $7.5
million, primarily as a result of higher volumes at the NovaMed Alliance.

   Salaries, Wages and Benefits. Salaries, wages and benefits expense increased
39.4% from $18.1 million to $25.3 million. As a percentage of revenue,
salaries, wages and benefits expense decreased from 42.7% to 39.6%.
Approximately half of the absolute increase in salaries, wages and benefits
expense was a result of acquisitions and affiliations. We also invested in
additional personnel, including sales, marketing and information technology
personnel, in the second half of 1998 as part of our growth strategy relating
to laser vision correction.

   Cost of Sales and Medical Supplies. Cost of sales and medical supplies
expense increased approximately 80.7% from $8.7 million to $15.8 million. As a
percentage of revenue, cost of sales and medical supplies expense increased
from 20.6% to 24.7%. The absolute increase in these expenses during 1998 was
primarily related to the increased volume of laser vision correction, cataract
and other eye related surgical procedures performed in our eye surgery and
laser centers as well as the increased costs associated with increased sales at
the NovaMed Alliance. The increase in the cost of sales and medical supplies
expense as a percentage of revenue was primarily due to increased sales at the
NovaMed Alliance, which generally sells products with a higher cost of sales as
a percentage of revenue than our other sources of revenue.

   Selling, General and Administrative. Selling, general and administrative
expense increased approximately 29.3% from $11.3 million to $14.6 million. As a
percentage of revenue, selling, general and administrative expense decreased
from 26.7% to 22.9%. The absolute increase in selling, general and
administrative expenditures related primarily to investments in information
technology and marketing to support our growth related to laser vision
correction. Our selling, general and administrative expense as a percentage of
revenue declined as a result of spreading fixed operating costs over an
increased revenue base.

   Depreciation and Amortization. Depreciation and amortization expense
increased 49.7% from $2.2 million to $3.3 million. Increased capital spending,
acquisitions and a change in the estimated useful life of intangible assets
caused this increase. Effective January 1, 1998, we decreased our useful life
of intangible assets related to service agreements entered into, on or before
January 1, 1998, from 32 to 25 years, which added $250,000 to amortization
expense in 1998.

   Other Expense. Other expense decreased 19.7% from $1.7 million to $1.4
million. Other expense was primarily related to interest expense, resulting
from additional borrowings used primarily to fund acquisitions

                                       19
<PAGE>

and capital expenditures. In addition, in 1997 we recorded a one-time expense
of $589,000 for the disposition of fixed assets.

   Provision for Income Taxes. Our effective tax rate declined from 66.2% to
49.4%. Our effective tax rate is affected by expenses that are deducted from
operations in arriving at pre-tax income that are not allowed as a deduction on
our Federal income tax return, primarily goodwill amortization. The increase in
pre-tax income over the amount of non-deductible expenses caused our effective
tax rate to decline.

Liquidity and Capital Resources

   We generated cash from operating activities for 1999 of $1.0 million. We
used $18.6 million in our investing activities in 1999, which included nine
acquisitions and/or affiliations and the purchase of property and equipment. We
used net bank borrowings of $5.3 million, the net proceeds from the issuance of
stock of $25.7 million, and net cash from operating activities to fund our
investing activities and to retire subordinated debt and other debt
obligations. As of December 31, 1999 and 1998, we had cash and cash equivalents
of approximately $1.8 million and $1.9 million, respectively, and working
capital of approximately $12.0 million and $9.2 million, respectively.

   In May 1999, we increased our revolving credit facility to $35 million.
Advances under the credit facility are secured by substantially all of our
assets. The credit agreement expires in July 2000. Accordingly, the amount
outstanding as of December 31, 1999, has been classified as a current liability
in our consolidated balance sheets. Interest is payable at an annual rate equal
to our lender's published base rate minus .50% or LIBOR plus a range from 1.5%
to 2.0%, varying upon our ability to meet financial covenants. As of December
31, 1999, the annual rate was approximately 8.0%. Our credit agreement includes
a commitment fee of .375% for the unused portion during the commitment period.
Our credit agreement contains covenants that include limitations on
indebtedness, liens, capital expenditures, ratios that define borrowing
availability and restrictions on the payment of dividends. As of December 31,
1999, we were in compliance with all of our credit agreement covenants except
for the capital expenditure limitation for which we received a waiver. We had
$31.8 million available on our line of credit as of December 31, 1999.

   We expect our funds from operations and our existing revolving credit
facility will be sufficient to fund our operations and capital expenditures for
at least 12 months. We are currently in the process of renegotiating our
revolving credit facility to expand our borrowing capacity and to extend the
facility beyond July 2000. Our future capital requirements and the adequacy of
our available funds will depend on many factors, including the timing of our
acquisition activities, new affiliations with eye care professionals, capital
requirements associated with our laser vision correction services and
facilities, expansions and the future cost of surgical equipment.

   Most of our current FDA-approved lasers are subject to a supply agreement
with Summit Technology, Inc. Under this agreement, we utilize Summit-
manufactured lasers for periods ranging from 36 to 42 months. During these
periods, we pay Summit monthly based on the number of procedures performed with
each laser. We are required to pay for a minimum number of procedures on each
laser during the commitment period, whether or not these procedures are
actually performed. As of December 31, 1999, we have entered into commitments
to pay Summit approximately $7.4 million during the term of these commitments,
with $4.7 million remaining to be paid.

   In connection with the exchange of $9.7 million of our subordinated
exchangeable promissory notes, we have agreed to lend each of these noteholders
on April 1, 2000, 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 our common stock received in the exchange which they still own on
April 1, 2000. We estimate the aggregate amount of these tax loans will not
exceed $4 million. Each of the tax loans will be noninterest bearing,
nonrecourse to the debtor and secured by a number of shares of our 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 our common stock issued in exchange for a note, the debtor will be
required to repay a

                                       20
<PAGE>

fraction of the debtor's initial tax loan amount equal to the number of shares
sold divided by the total number of shares of our common stock previously
issued in exchange for a note and owned by the debtor on April 1, 2000. The tax
loans also will be payable by the debtors upon our demand for payment.
Currently, we intend to allow the debtors to repay these loans as they dispose
of their shares of our common stock. We also have agreed to reimburse these
debtors, on a grossed-up basis, for any Federal or state taxes that they
recognize as a result of imputed interest on the tax loans.

Effect of Year 2000

   Based upon our preparation and readiness, we did not experience any
significant negative effects of the potential year 2000 date change as it
related to computer systems. We did increase our inventory of certain essential
products used in our operations in the event of any year 2000-related delays in
shipments. We have been able to utilize the increased inventory of products in
the ordinary course of our business and do not have any excess inventory
related concerns.

   In addition, other than the previously announced delay in payments from
Medicare, which resumed in mid-January 2000, there were no disruptions in
payments from third-party payers.

Factors that Could Affect our Operations

   Investors should consider the following risks in connection with an
investment in us.

 Risks Relating to Our Business

  Our failure to grow, or to manage our growth, could reduce our ability to
  continue to achieve or sustain profitability

   Our growth strategy is focused on our existing and future regional markets
and involves:

  .  affiliating with additional eye care professionals through long-term
     service agreements

  .  entering into application service provider (ASP) agreements with eye
     care professionals

  .  establishing or acquiring additional eye surgery and laser centers

  .  assisting our affiliated eye care professionals in opening new eye care
     clinics and in offering a broader range of services and products

   Pursuing new eye surgery and laser centers and affiliations with eye care
professionals presents us with a variety of challenges. We may not experience
an increase in surgical procedures at our existing eye surgery and laser
centers or management fees from our affiliated eye care professionals. We may
not be able to achieve the economies of scale and patient base, or provide the
business, administrative and financial services, required to sustain
profitability in our existing and future eye surgery and laser centers or in
the clinics of our affiliated eye care professionals.

   We have only recently begun pursuing application service provider (ASP)
contractual relationships with eye care professionals. Our ASP agreements focus
principally on providing eye care professionals with information technology and
related e-services, together with laser vision correction services. The market
for information technology systems and services is highly competitive and
rapidly changing. Our ability to compete in this market will depend in part on
our ability to enter into, and successfully provide services under, these ASP
agreements.

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

                                       21
<PAGE>

  Our limited operating history and our dependence on laser vision correction
  and other refractive surgical procedures make it difficult to predict our
  future results of operations

   There is limited financial data upon which you can evaluate our future
results of operations and our growth prospects. This evaluation should take
into account the risks and difficulties frequently encountered by companies
early in their development, particularly companies in new and rapidly evolving
markets, including the laser vision correction market. We may not be able to
successfully address these risks and uncertainties, in which case, our recent
results and growth rate may not be indicative of our future results of
operations and growth rate.

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

   Our profitability and growth will depend upon broad acceptance by eye care
professionals and the general population of laser vision correction and other
refractive surgical procedures in the U.S. Eye care professionals and the
general population might not broadly accept laser vision correction surgery
because of:

  .  the cost of the procedure that, to date, has primarily been paid
     directly by patients

  .  concerns about the safety and effectiveness of laser vision correction,
     which are partially attributable to some reports of:

   --an increase in the light scattering properties of the cornea during
    healing

   --undesirable visual sensations produced by bright lights

   --decreases in contrast sensitivity

   --unintended over- or under-corrections

   --decline in corrective effect

   --disorders of corneal healing, corneal scars and corneal ulcers

   --induced astigmatism

   --lack of sufficient long-term follow-up data

   --adverse patient reactions or negative publicity involving patient
    outcomes availability of alternative methods for correcting vision
    conditions

   If eye care professionals and the general population do not widely accept
laser vision correction and other refractive surgical procedures, a significant
source of our historical and future revenue and earnings growth will be
limited.

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

   Competitors with substantially greater financial, technical, managerial,
marketing and other resources and experience may compete more effectively than
us. We and our affiliated eye care professionals compete with other businesses,
including other refractive laser center companies, hospitals, individual
ophthalmologists and optometrists, other surgery and laser centers, eye care
clinics and providers of retail optical products. Our wholesale optical
laboratories and optical products purchasing organization also face competition
on national, regional and local levels. Companies in other health care industry
segments, including managers of hospital-based medical specialties or large
group medical practices, may become competitors in providing surgery and laser
centers as well as competitive eye care related services. Competition for
retaining the services of highly qualified ophthalmologists and optometrists
and medical, technical and managerial personnel is significant, and we may not
be able to help our affiliated eye care professionals identify, hire, train,
retain and affiliate with these types of individuals in the future.

                                       22
<PAGE>

  If we find it necessary to reduce prices in response to competition, we
  could experience reductions in profitability and revenue growth

   The market for providing laser vision correction and other refractive
surgery procedures is becoming increasingly competitive. Several eye care
companies feature these services as a component of their activities. As laser
vision correction and other refractive surgery becomes more prevalent, we
expect a greater number of independent ophthalmologists to develop laser vision
correction and other refractive surgery practices.

   In the event our competitors offer laser vision correction or other
refractive surgery services at lower prices than we and our affiliated eye care
professionals do, we may have to lower the prices we charge. If we lower
prices, we could experience reductions in our profitability and revenue growth.

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

   Adoption of new technologies that may be comparable or superior to the
excimer laser could reduce the amount of the management fees we receive from
affiliated professional entities and facility fees we receive from eye care
professionals who use our eye surgery and laser centers. Reduction of these
sources of revenue could decrease our profitability. In this case, we might
have to expend significant capital resources to deploy new technology and
related equipment to remain competitive. Our inability to provide access to new
and improving technology could deter eye care professionals from affiliating
with us or from using our eye surgery and laser centers.

  Our failure to maintain or establish profitable affiliations with a
  sufficient number of eye care professionals could limit our profitability
  and revenue growth

   Our success depends upon our ability to establish affiliations with eye care
professionals in our existing and future markets. We may not be able to enter
into contractual arrangements with ophthalmologists or optometrists on
satisfactory terms, and these affiliations may not be profitable for us. In
addition, if vision correction technology becomes available to ophthalmologists
that is less expensive than the medical equipment currently required for laser
vision correction, eye care professionals might have less interest in our
services and our eye surgery and laser centers. If we fail to establish or
maintain profitable affiliations with a sufficient number of qualified
ophthalmologists and optometrists, we could experience reductions in our
profitability and revenue growth.

  Loss of the services of ophthalmologists or optometrists could impair our
  sources of revenue and our ability to grow our business

   Our success depends, in part, on the services of the ophthalmologists and
optometrists with whom we affiliate. Our inability to attract and retain eye
care professionals could limit our sources of revenue, our ability to grow our
business and our ability to expand our research operations. Generally, our
affiliated ophthalmologists enter into five-year employment agreements with our
affiliated professional entities. These agreements generally contain noncompete
and nonsolicitation covenants and often require the ophthalmologist to pay
liquidated damages that are generally in excess of $500,000 in the event that
he or she quits prior to the end of the initial term. Our affiliated
optometrists enter into employment contracts with our affiliated professional
entities which also contain noncompete and nonsolicitation covenants. The
noncompete and nonsolicitation covenants generally preclude the ophthalmologist
or optometrist from competing with his or her employer within a specified
geographic range, or soliciting the employer's patients or employees, during
the employment term and for a one-year period following termination. The
damages provisions and restrictive covenants may not effectively deter
affiliated eye care professionals from quitting if they elect to pay the
liquidated damages or establish a practice outside the geographic scope of the
noncompete covenant.

   The enforceability of restrictive covenants of these types will depend upon
a variety of equitable factors, including public policy concerns regarding
broad restrictions that might limit the availability of medical care. If a
court deems the scope or duration of the restrictive covenants or liquidated
damages provisions excessive, they may not be enforceable.

                                       23
<PAGE>

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

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

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

   The provision of eye care services entails the potentially significant risk
of physical injury to patients and an inherent risk of potential malpractice,
product liability and other similar claims. Our insurance may not be adequate
to satisfy claims or protect us or our affiliated eye care professionals 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.

  Lack of adequate financing could limit our growth

   Successful implementation of our growth strategy will require continued
access to capital. If we do not have sufficient cash resources, our growth
could be limited unless we are able to obtain capital through additional equity
or debt financings. We intend to finance future acquisitions, affiliations and
our other strategic initiatives by using a combination of cash, debt and
capital stock. However, if our stock does not maintain sufficient value, or is
not deemed to be an acceptable form of consideration, we may be required to use
more of our cash resources or obtain other financing. Capital may not be
available to us for acquisitions, affiliations or other needs. Further, if
financing is available, it may not be on terms that are favorable to us or
sufficient for our needs.

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

   Our assets include substantial intangible assets in the form of service
agreements with our affiliated eye care professionals and goodwill. At December
31, 1999, intangible assets represented approximately 54% of total assets and
64% 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 rights we receive under our service agreements. The value of
these assets may not be realized. We regularly evaluate whether events and
circumstances have occurred that indicate all or a portion of the carrying
amount of the asset may no longer be recoverable, in which case an additional
charge to earnings may become necessary. If, during our evaluation, we
determine that the undiscounted cash flow from a surgery and laser center or an
affiliated practice is not sufficient to recover the unamortized intangible
asset, we will reduce the unamortized balance to its realizable amount and
incur a corresponding charge to earnings. To date, we have not written off a
significant portion of unamortized intangible assets attributable to service
agreements or goodwill. If, in the future, we determine that our unamortized
intangible assets have suffered an impairment which requires us to write off a
large portion of unamortized intangible assets due to a change in events or
circumstances, this write off would significantly reduce our total assets and
we could incur a substantial charge to earnings.

 Risks Relating to Our Industry

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

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

  . Federal and State:

   --anti-kickback statutes

   --self-referral laws

   --civil false claims acts

                                       24
<PAGE>

  . State:

   --corporate practice of medicine restrictions

   --fee-splitting laws

   --facility license requirements and certificates of need

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

  . Federal Trade Commission guidelines for marketing and promoting laser
    vision correction and other refractive surgery procedures

   Many of these laws and regulations are subject to varying interpretations,
and courts and regulatory authorities generally have provided little
clarification. Moreover, state and local laws and interpretations vary from
jurisdiction to jurisdiction. As a result, we may not always be able to
accurately predict interpretations of applicable law, and Federal and state
authorities could challenge some of our activities. 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:

  . our affiliated eye care professionals terminating their service
    agreements or having these agreements rendered unenforceable

  . third party payors terminating their agreements with our affiliated eye
    care professionals

  . our affiliated eye care professionals losing their eligibility to
    participate in Medicare or losing other contracting privileges

  . in some instances, civil or criminal fines

   Any of these consequences could reduce our revenue and earnings growth.

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

  Shortages in supplies of lasers and other surgery-related products and
  equipment may impair our ability to provide our affiliated eye care
  professionals with necessary equipment

   There are a limited number of manufacturers of laser vision correction and
refractive surgery-related products and equipment. These products and equipment
may not be available in the quantities or time frames we require. Any shortages
in our supplies of these products may limit our affiliated eye care
professionals' ability to sustain or increase their volume of laser vision
correction and other refractive surgeries and our ability to open or operate
eye surgery and laser centers. This could adversely affect our relationships
with our affiliated eye care professionals and result in a reduction of our
revenue from management fees and in the utilization levels at our eye surgery
and laser centers.

  Litigation in the medical device industry may impair our ability to provide
  our affiliated eye care professionals with necessary equipment

   The medical device industry, including the eye-related laser equipment
sector, has experienced substantial litigation in the U.S. regarding patents
and proprietary rights. Any future litigation that relates to equipment we use
at our eye surgery and laser centers may impair our ability to provide access
to this equipment. Our inability to provide our affiliated eye care
professionals with access to this equipment would impair their ability to
sustain or increase their volume of laser vision correction or other refractive
surgery procedures. This could adversely affect our relationships with our
affiliated eye care professionals and result in a reduction of our revenue from
management fees and in the utilization levels at our eye surgery and laser
centers.

                                       25
<PAGE>

  Medicare and private third-party payor cost containment efforts and
  reductions in reimbursement rates could reduce our revenue and our cash
  flow

   We estimate that for the year ended December 31, 1999, government sponsored
health care programs, directly or indirectly, accounted for approximately 38%
of our total revenue. This includes management fee revenue from affiliated eye
care professionals who receive payments from these programs, as well as
facility fees we receive directly for eye care professionals' use of our eye
surgery and laser centers. This revenue does not include amounts derived from
laser vision correction, which is an elective procedure that patient-consumers
pay for out-of-pocket.

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

   Reductions in payments to our eye surgery and laser centers and affiliated
eye care professionals or other changes in reimbursement for eye care services
could reduce our revenue and our cash flow.

 Risks Relating to our Common Stock

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

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

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

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

   Our results of operations have varied and may continue to fluctuate from
quarter to quarter. We have a high level of fixed operating costs, including
compensation costs and minimum usage commitments on our excimer lasers. As a
result, our profitability depends to a large degree on the volume of surgical
procedures performed in, and on our ability to utilize the capacity of, our eye
surgery and laser centers and on the volume of patients treated in the clinics
of our affiliated eye care professionals.

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

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

  . availability or sudden loss of the services of our affiliated eye care
    professionals

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

  . the timing and relative size of acquisitions and affiliations with eye
    care professionals

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

                                       26
<PAGE>

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

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

  Our existing stockholders will have the ability to control our affairs and
  to deter a change in control and their interests in a change in control may
  differ from your interests

   As of February 29, 2000, our Rule 144 Affiliates and affiliated eye care
professionals owned approximately 68% of the outstanding shares of our stock.
As a result, if these persons act together, they will have the ability to
exercise substantial control over our affairs and to elect a sufficient number
of directors to control our board of directors. Because of their relationships
with us, many of these persons may have interests in a change in control that
differ from your interests.

   For example, our affiliated eye care professionals may have an interest in
the quality and nature of management services to be rendered following a change
in control. This interest could cause them to resist a change in control that
they perceive will result in new, different or less desirable management
services being offered to them.

   In addition, our affiliated eye care professionals have agreed not to sell
their shares of our stock, subject to some exceptions, prior to August 19,
2000, without the prior written consent of Donaldson, Lufkin & Jenrette
Securities Corporation. They also have agreed to specified volume limitations
on sales of our stock during the period from August 19, 2000 through August 18,
2001. Consequently, the ownership position of our Rule 144 Affiliates and
affiliated eye care professionals, as well as the contractual restrictions
agreed to by our affiliated eye care professionals, may also have the effect of
delaying, deterring or preventing a change in control, even if a change in
control would be beneficial to you.

  52% of our total outstanding shares are restricted from resale but may be
  sold into the market in the future, which could cause our stock price to
  drop significantly

   As of February 29, 2000, there were 24,291,796 shares of our common stock
outstanding. This includes the 4,600,000 shares sold in our initial public
offering in August 1999, which can be resold in the public market immediately
unless acquired by our affiliates, as that term is defined under the Securities
Act of 1933. As of February 29, 2000, our affiliated eye care professionals
owned 12,682,303 shares of our common stock which are subject to lock-up
agreements restricting their sale until August 19, 2000. For a one-year period
thereafter, our affiliated eye care professionals will then be subject to
volume and manner of sale limitations.

   As restrictions on resale end, our stock price could drop significantly if
the holders of these restricted shares sell them or if the market perceives
that these holders intend to sell shares. This could occur without regard to
the performance of our business.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

   Our exposure to interest rate risk relates primarily to our debt obligations
and temporary cash investments. Interest rate risk is managed through variable
rate borrowings under our credit facility. On December 31, 1999, we had $3.2
million of debt outstanding under our credit facility. Our revolving line of
credit bears interest at an annual rate equal to our lender's published base
rate minus 0.50% or LIBOR plus a range from 1.5% to 2.0%, varying upon our
ability to meet financial covenants.

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

                                       27
<PAGE>

Item 8. Financial Statements and Supplementary Data

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

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

   None.

                                       28
<PAGE>

                                    PART III

Item 10. Directors and Executive Officers of the Registrant

   The information in response to this item is incorporated by reference from
the "Proposal No. 1--Election of Directors," "Other Directors" and "Executive
Officers" sections of the Definitive Proxy Statement to be filed with the
Securities and Exchange Commission in connection with our 2000 Annual Meeting
of Stockholders (the "2000 Proxy Statement").

Item 11. Executive Compensation

   The information in response to this item is incorporated by reference from
the "Executive Compensation" section of the 2000 Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management

   The information in response to this item is incorporated by reference from
the "Security Ownership of Certain Beneficial Owners and Management" section of
the 2000 Proxy Statement.

Item 13. Certain Relationships and Related Transactions

   The information in response to this item is incorporated by reference from
the "Certain Relationships and Related Transactions" section of the 2000 Proxy
Statement.

                                       29
<PAGE>

                                    PART IV

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

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

    1. The following consolidated financial statements of the Company, with
      the report of independent public accountants, are filed as part of
      this Form 10-K:
      . Report of Independent Public Accountants
      . Consolidated Balance Sheets
      . Consolidated Statements of Operations
      . Consolidated Statements of Stockholders' Equity
      . Consolidated Statements of Cash Flows
      . Notes to Consolidated Financial Statements

    2. The following consolidated financial statement schedules of the
      Company are filed as part of this Form 10-K:
      Schedule I--Rule 12-09 Valuation Reserves

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

<TABLE>
<CAPTION>
 Exhibit
 Number                 Exhibit
 -------                -------
 <C>     <S>
  3.1+   Amended and Restated Certificate of Incorporation of the Registrant
  3.2+   Bylaws of the Registrant
  4.1+   Specimen stock certificate representing Common Stock
  4.2+   Registrant's Rights Agreement
 10.1+   Registrant's Amended and Restated Stock Incentive Plan
 10.2+   Registrant's Amended and Restated 1999 Stock Purchase Plan
 10.3+   Indemnification Agreement
 10.4+   Registration Rights Agreement
 10.5+   Subordinated Registration Rights Agreement
 10.6+   Employment Agreement
 10.7+*  Summit Technology, Inc. Agreement
 10.8+   Second Amendment and Consent to the Amended and Restated Credit
         Agreement
 10.12+* Management Services Agreement (SureVision Eye Centers, L.L.C.)
 10.13+* Management Services Agreement (Hunkeler Eye Centers. P.C.)
 10.15+  Registrant's 401(k) Plan
 10.16*  First Amendment to the Amended and Restated Summit Technology, Inc.
         Agreement and Second Amendment to the Amended and Restated Summit
         Technology, Inc. Agreement
  21     Subsidiaries of the Registrant
 23.1    Consent of Arthur Andersen LLP
  27     Financial Data Schedule
</TABLE>
--------
+  Incorporated by reference to the corresponding Exhibit of the Registrant's
   Registration Statement on Form S-1 (Reg. No. 333-79271).
*  Portions of this Exhibit have been omitted based upon a request for
   confidential treatment of this document; omitted portions have been
   separately filed with the Commission.

   (b) Reports on Form 8-K:
     We did not file any reports on Form 8-K during 1999.

                                       30
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board Directors of
NovaMed Eyecare, Inc.:

   We have audited the accompanying consolidated balance sheets of NOVAMED
EYECARE, INC. AND SUBSIDIARIES as of December 31, 1999 and 1998 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

   In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NovaMed Eyecare, Inc. and
Subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.

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

                                          Arthur Andersen LLP

Chicago, Illinois
February 8, 2000

                                      F-1
<PAGE>

                     NOVAMED EYECARE, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                      December 31, December 31,
                                                          1999         1998
                                                      ------------ ------------
<S>                                                   <C>          <C>
                       ASSETS
Current assets:
  Cash and cash equivalents..........................   $ 1,828      $ 1,875
  Accounts receivable, net of allowances of $12,714
   and $10,347, respectively.........................    14,501       11,278
  Due from affiliated providers, net.................     1,931          110
  Notes receivable from affiliated providers.........       342          393
  Inventory..........................................     3,427        1,490
  Other current assets...............................     2,113        1,240
                                                        -------      -------
    Total current assets.............................    24,142       16,386
Property and equipment, net..........................    16,065        9,893
Notes receivable from related party..................       --           400
Intangible assets, net...............................    47,852       35,660
Other assets, net....................................       193          340
                                                        -------      -------
    Total assets.....................................   $88,252      $62,679
                                                        =======      =======
        LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable...................................   $ 3,608      $ 3,142
  Accrued expenses...................................     4,662        3,297
  Income taxes payable...............................       275          427
  Current maturities of long-term debt...............     3,617          300
                                                        -------      -------
    Total current liabilities........................    12,162        7,166
                                                        -------      -------
Long-term debt, net of current maturities............       196       20,427
                                                        -------      -------
Deferred income tax liability........................     1,113        1,702
                                                        -------      -------
Commitments and contingencies
Redeemable convertible preferred stock:
  Series C convertible preferred stock, $.01 par
   value, none and 2,400,000 shares authorized, none
   and 2,000,000 issued and outstanding at December
   31, 1999 and 1998, respectively...................       --         6,350
                                                        -------      -------
  Series D convertible preferred stock, $.01 par
   value, none and 3,000,000 shares authorized; none
   and 2,323,837 issued and outstanding at December
   31, 1999 and 1998, respectively...................       --        10,080
                                                        -------      -------
Stockholders' equity:
  Series A convertible preferred stock, $.01 par
   value, none and 13,112,000 shares authorized, none
   and 11,740,055 shares issued and none and
   11,072,698 shares outstanding at December 31, 1999
   and 1998, respectively............................       --           117
  Series B convertible preferred stock, $.01 par
   value, none and 455,000 shares authorized, none
   and 400,000 issued and outstanding at December 31,
   1999 and 1998, respectively.......................       --             4
  Series E junior participating preferred stock, $.01
   par value, 1,912,000 shares authorized, none
   outstanding at December 31, 1999 and 1998,
   respectively......................................       --           --
  Common stock, $.01 par value, 81,761,465 shares
   authorized, 24,159,199 and 2,751,254 shares issued
   outstanding at December 31, 1999 and 1998,
   respectively......................................       242           28
  Additional paid-in-capital.........................    74,628       17,955
  Retained earnings (deficit)........... ............       (89)       1,072
  Treasury stock, at cost, consists of 507,347 shares
   of Series A convertible preferred stock at
   December 31, 1998 ................................       --        (2,222)
                                                        -------      -------
    Total stockholders' equity.......................    74,781       16,954
                                                        -------      -------
    Total liabilities and stockholders' equity.......   $88,252      $62,679
                                                        =======      =======
</TABLE>

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

                                      F-2
<PAGE>

                     NOVAMED EYECARE, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                 (Amounts in thousands, except per share data)

<TABLE>
<CAPTION>
                                                   Years Ended December 31,
                                                   --------------------------
                                                     1999     1998     1997
                                                   --------  -------  -------
<S>                                                <C>       <C>      <C>
Net revenue:
  Management services............................. $ 55,374  $36,053  $24,401
  Surgery and laser centers.......................   31,615   20,131   14,484
  Product sales and other.........................   15,599    7,545    3,523
                                                   --------  -------  -------
    Total net revenue.............................  102,588   63,729   42,408
                                                   --------  -------  -------
Operating expenses:
  Salaries, wages and benefits....................   37,437   25,266   18,123
  Cost of sales and medical supplies..............   26,278   15,762    8,723
  Selling, general and administrative.............   24,904   14,625   11,315
  Depreciation and amortization...................    4,912    3,333    2,226
  Compensation expense related to stock options...    2,690      --       --
                                                   --------  -------  -------
    Total operating expenses......................   96,221   58,986   40,387
                                                   --------  -------  -------
    Income from operations........................    6,367    4,743    2,021
                                                   --------  -------  -------
Other (income) expense:
  Interest expense................................    1,513    1,546    1,363
  Interest income.................................     (214)    (273)    (322)
  Minority interests in earnings of consolidated
   entities.......................................      --       132      108
  Other...........................................      (39)     (32)     561
  Discount to initial public offering price upon
   the exchange of subordinated notes for common
   stock .........................................    2,425      --       --
                                                   --------  -------  -------
    Total other expense...........................    3,685    1,373    1,710
                                                   --------  -------  -------
Income before income taxes........................    2,682    3,370      311
Provision for income taxes........................    1,808    1,664      206
                                                   --------  -------  -------
Net income........................................      874    1,706      105
Less--Accretion of Series C and Series D
 convertible preferred stock......................   (2,035)    (739)     --
                                                   --------  -------  -------
Income (loss) available to Series A and Series B
 convertible preferred and common stockholders.... $ (1,161) $   967  $   105
                                                   ========  =======  =======
Earnings (loss) per common share:
  Basic........................................... $   0.19  $  0.07  $  0.01
                                                   ========  =======  =======
  Diluted......................................... $  (0.06) $  0.06  $  0.01
                                                   ========  =======  =======
Weighted average common shares outstanding:
  Basic...........................................   10,464    2,751    2,178
                                                   ========  =======  =======
  Diluted.........................................   17,965   16,003   17,237
                                                   ========  =======  =======
</TABLE>

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

                                      F-3
<PAGE>

                     NOVAMED EYECARE, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                             (Amounts in thousands)

<TABLE>
<CAPTION>
                     Series A        Series B
                     Preferred      Preferred    Common Stock                                   Treasury Stock
                   --------------  ------------  ------------ Additional              Retained  ---------------      Total
                             Par           Par           Par   Paid-In     Deferred   Earnings                   Stockholders'
                   Shares   Value  Shares Value  Shares Value  Capital   Compensation (Deficit) Shares  At Cost     Equity
                   -------  -----  ------ -----  ------ ----- ---------- ------------ --------- ------  -------  -------------
<S>                <C>      <C>    <C>    <C>    <C>    <C>   <C>        <C>          <C>       <C>     <C>      <C>
Balance, December
 31, 1996........   11,584  $ 116    400  $  4      --  $--    $12,635     $   --      $   --      --   $   --      $12,755
 Stock issued in
  conjunction
  with practice
  affiliations...      --     --     --    --     2,748   27     5,263         --          --      --       --        5,290
 Redemption of
  shares.........      --     --     --    --       --   --        --          --          --      (78)    (187)       (187)
 Stock options
  exercised......      149      1    --    --       --   --        185         --          --      --       --          186
 Net income......      --     --     --    --       --   --        --          --          105     --       --          105
                   -------  -----   ----  ----   ------ ----   -------     -------     -------  ------  -------     -------
Balance, December
 31, 1997........   11,733    117    400     4    2,748   27    18,083         --          105     (78)    (187)     18,149
 Stock options
  exercised/sold..       7    --     --    --         3    1        32         --          --      --       --           33
 Redemption of
  Series A
  preferred
  stock, net.....      --     --     --    --       --   --        (71)        --          --   (1,228)  (5,380)     (5,451)
 Issuance of
  Treasury stock
  in conjunction
  with practice
  affiliations...      --     --     --    --       --   --        (89)        --          --      799    3,345       3,256
 Accretion of
  Series C and D
  preferred
  stock..........      --     --     --    --       --   --        --          --         (739)    --       --         (739)
 Net income......      --     --     --    --       --   --        --          --        1,706     --       --        1,706
                   -------  -----   ----  ----   ------ ----   -------     -------     -------  ------  -------     -------
Balance, December
 31, 1998........   11,740    117    400     4    2,751   28    17,955         --        1,072    (507)  (2,222)     16,954
 Common stock
  issuances,
  net............      --     --     --    --     3,202   32    22,257         --          --      398    2,017      24,306
 Conversion of
  preferred stock
  to common
  stock..........  (11,740)  (117)  (400)   (4)  16,464  165    18,422         --          --      --       --       18,466
 Conversion of
  subordinated
  notes to common
  stock..........      --     --     --    --     1,516   15    12,110         --          --      --       --       12,125
 Common stock
  reacquired from
  affiliates.....      --     --     --    --       --   --        --          --          --     (437)  (2,179)     (2,179)
 Deferred
  compensation
  expense........      --     --     --    --       --   --      2,690      (2,690)        --               --          --
 Amortization of
  deferred
  compensation
  expense........      --     --     --    --       --   --        --        2,690         --      --       --        2,690
 Issuance of
  stock in
  conjunction
  with
  affiliations
  and
  acquisitions...      --            --    --        60    1       656         --          --      345    1,511       2,168
 Stock options
  exercised/sold..     --     --     --    --       166    1       538         --          --      201      873       1,412
 Accretion of
  Series C and
  Series D
  preferred
  stock..........      --     --     --    --       --   --        --          --       (2,035)    --       --       (2,035)
 Net income......      --     --     --    --       --   --        --          --          874     --       --          874
                   -------  -----   ----  ----   ------ ----   -------     -------     -------  ------  -------     -------
Balance, December
 31, 1999........      --   $ --     --   $--    24,159 $242   $74,628     $   --      $   (89)    --   $   --      $74,781
                   =======  =====   ====  ====   ====== ====   =======     =======     =======  ======  =======     =======
</TABLE>

   The accompanying notes are an integral part of this consolidated financial
                                   statement

                                      F-4
<PAGE>

                     NOVAMED EYECARE, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Amounts in thousands)

<TABLE>
<CAPTION>
                                                    Years Ended December 31,
                                                    --------------------------
                                                      1999     1998     1997
                                                    --------  -------  -------
<S>                                                 <C>       <C>      <C>
Cash flows from operating activities:
 Net income........................................ $    874  $ 1,706  $   105
 Adjustment to reconcile net income to net cash
  provided by (used in) operating activities, net
  of effects of purchase transactions--
  Depreciation and amortization....................    4,912    3,333    2,226
  Noncash employee stock option expense............    2,690      --       --
  Discount from conversion of subordinated
   exchangeable notes to common stock..............    2,425      --       --
  Deferred taxes...................................     (631)   1,237      171
  Preferred stock issued for services..............      --       --       125
  Minority interests...............................      --       (46)      41
  Loss on disposition of property and equipment....      --       --       589
  Changes in noncash working capital items--
   Accounts receivable and due (to) from affiliated
    providers, net.................................   (4,152)  (3,204)  (3,015)
   Inventory.......................................   (1,251)    (374)      (5)
   Other current assets............................   (1,452)    (260)    (374)
   Other noncurrent assets.........................      221      (70)    (180)
   Accounts payable, accrued expenses and income
    taxes payable..................................   (2,636)      65     (105)
                                                    --------  -------  -------
    Net cash provided by (used in) operating
     activities....................................    1,000    2,387     (422)
                                                    --------  -------  -------
Cash flows from investing activities:
 Purchases of property and equipment...............   (8,744)  (4,466)  (2,875)
 Acquisitions of and affiliations with entities,
  net..............................................  (10,305)  (3,649)  (2,222)
 Receipt (issuance) of notes receivable from
  affiliated providers.............................      452    1,491   (1,918)
                                                    --------  -------  -------
    Net cash used in investing activities..........  (18,597)  (6,624)  (7,015)
                                                    --------  -------  -------
Cash flows from financing activities:
 Borrowings under revolving line of credit.........   26,600   14,735    3,000
 Payments under revolving line of credit...........  (31,885)  (6,250)  (3,000)
 Payments of subordinated debt.....................   (2,200)  (3,700)     --
 Proceeds from the issuance of stock, net of
  issuance costs...................................   25,718    3,044    6,946
 Payments for the redemption of preferred stock,
  net of transaction costs.........................      --    (5,262)    (187)
 Payments of other long-term debt and capital lease
  obligations......................................     (683)    (464)  (1,264)
                                                    --------  -------  -------
    Net cash provided by financing activities......   17,550    2,103    5,495
                                                    --------  -------  -------
Net decrease in cash and cash equivalents..........      (47)  (2,134)  (1,942)
Cash and cash equivalents, beginning of year.......    1,875    4,009    5,951
                                                    --------  -------  -------
Cash and cash equivalents, end of year............. $  1,828  $ 1,875  $ 4,009
                                                    ========  =======  =======
</TABLE>

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

                                      F-5
<PAGE>

                     NOVAMED EYECARE, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL INFORMATION

Description of the Business

   NovaMed Eyecare, Inc. (NovaMed) along with its wholly-owned subsidiaries
(collectively, the Company), is an eye care services company engaged in the
business of: (i) owning, operating and/or managing eye surgery and laser
centers, optical retail outlets, wholesale optical laboratories, and an optical
products purchasing organization; (ii) providing financial, administrative,
information technology, marketing and other business services to ophthalmic and
optometric providers; and (iii) providing clinical and other research services
to eye care device, product and pharmaceutical manufacturers. The Company
operates within the United States in core regional markets including Chicago,
Illinois; St. Louis, Missouri; Kansas City, Missouri; Louisville, Kentucky;
Richmond, Virginia; and the Atlanta, Georgia and Chattanooga, Tennessee
metropolitan areas.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial Statement Presentation

   The consolidated financial statements have been prepared on the accrual
basis of accounting and include the accounts of NovaMed and its wholly owned
subsidiaries. The Company acquires certain net operating assets and assumes
certain liabilities of physician groups (the Affiliated Professional Entities).
The Company provides services, facilities and equipment to affiliated eye care
professionals under long-term service agreements (SA). Each of the SAs is
generally for a 40-year term and requires the Company to provide all of the
business, administrative and financial services necessary to operate the eye
care clinics and optical dispensaries. These services typically include:

  . billing, collection and cash management services

  . procuring and maintaining all office space, office and medical supplies,
    medical and nonmedical equipment, information systems, and furniture and
    fixtures

  . subject to federal and state law, recruiting, employing, supervising and
    training all nonprofessional personnel

  . assisting affiliated professionals in recruiting additional
    ophthalmologists and optometrists

  . all administrative and support services

  . information technology services

  . marketing services

  . assisting affiliated professionals with the establishment and
    implementation of quality assurance, risk management and utilization
    review programs

  . assisting affiliated professionals in obtaining and maintaining Federal,
    state and local licenses and permits

  . negotiating managed care contracts on behalf of affiliated eye care
    professionals

                                      F-6
<PAGE>

                     NOVAMED EYECARE, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The SAs provide that the Affiliated Professional Entities retain sole and
exclusive control over the dispensing of all medical and other professional
services to their patients. The SAs also provide that the Affiliated
Professional Entities:

  . retain control over all decisions relating to the selecting, hiring,
    compensating and terminating of eye care professionals

  . retain control over all corporate governance decisions and other internal
    matters affecting the operation of their legal entities

  . employ or otherwise retain a sufficient number of ophthalmologists and
    optometrists to provide professional eye care services to their patients

   Under the SAs, the Company is generally required to pay all expenses
incurred in connection with the business and medical operations of the eye care
clinics and optical dispensaries, except for the salaries and benefits of those
eye care professionals who have an ownership interest in the professional
entity employing them. The Affiliated Professional Entities then reimburse the
Company on a monthly basis for those expenses that are paid on behalf of the
Affiliated Professional Entities.

   In addition to being reimbursed for eye care clinic and optical dispensary
overhead, the Company is paid a monthly fee for its services. This fee is
generally based on a fixed monthly amount established in an annual budget that
the Company negotiates each year with its Affiliated Professional Entities. If
the revenue or expenses of the eye care clinics and retail optical outlets in
any month vary from the budget for that month, then the fee is adjusted to
reflect the actual results of the eye care clinics and retail optical outlets.
There are no limitations on the amount of these fee adjustments. On average,
the fees paid to the Company in 1999 represented approximately 36.6% of the
earnings before interest and taxes of the Affiliated Professional Entities. The
earnings of the Affiliated Professional Entities are determined by subtracting
the expenses of the eye care clinics and retail optical outlets from the net
professional services and other revenue earned by the Affiliated Professional
Entity. These expenses generally include all expenses incurred in connection
with the business and medical operations of the Affiliated Professional Entity,
except for any salaries and benefits of those eye care professionals who have
an ownership interest in the Affiliated Professional Entity. Each Affiliated
Professional Entity is then responsible for paying the salaries and benefits of
its eye care professional-owners from the amount retained by the Affiliated
Professional Entity after paying the management fee.

   The SAs are generally not terminable by the Affiliated Professional Entities
unless a court makes a final determination that the Company has breached a
material fiduciary duty owed to the eye care professionals, or that the Company
has misappropriated or misapplied funds of the eye care professionals. The
Company generally can not terminate the SAs unless:

  . one or a group of Affiliated Professionals loses their medical license

  . the professional entity loses its Medicare provider number or ability to
    treat Medicare patients

  . the professional entity is dissolved or goes bankrupt

  . the affiliated eye care professionals default in the performance of any
    of their material duties

   The Company does not generally enter into nominee shareholder arrangements
with Affiliated Professional Entities, nor does it have a "controlling
financial interest" in the Affiliated Professional Entities as defined by EITF
97-2, "Applications of FASB Statement No. 94 and APB No. 16 to Physician
Practice Management Entities and Certain Other Entities under Contractual
Management Arrangements." Accordingly, the Company does not consolidate the
financial statements of the Affiliated Professional Entities. All significant
intercompany accounts and transactions have been eliminated.

                                      F-7
<PAGE>

                     NOVAMED EYECARE, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


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.

Due (To) From Affiliated Providers

   Amounts due (to) from affiliated providers, which are unsecured,
noninterest-bearing and due on demand, include amounts owed to Affiliated
Professional Entities for services performed under SAs, receivables from
Affiliated Professional Entities and affiliated providers for expenses paid on
their behalf and certain other receivables.

Inventory

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

Property and Equipment

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

Intangible Assets

   The Company's 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.
Because the Company does not practice medicine, maintain patient relationships,
hire physicians or enter into employment agreements with the physicians, the
intangible asset created in the affiliation is solely with the SA for the
Affiliated Professional Entity and there are no other significant, identifiable
intangible assets. In connection with the determination of the appropriate life
of the SAs' identifiable intangible assets, the Company analyzes the nature of
each Affiliated Professional Entity with which an SA is entered into, including
the Affiliated Professional Entity's historical profitability, the number of
physicians in each Affiliated Professional Entity, number of service sites,
ability to recruit additional physicians, relative market position, the length
of time each Affiliated Professional Entity has been in existence, and the term
of the SA. Based on this practice-by-practice evaluation, the Company's SAs are
amortized over a composite period ranging between 5 and 25 years. For practices
with a 25-year amortization period, the Company believes that the related
physician groups are long-lived entities with an indeterminate life and that
the physicians, patient demographics and customer relationships will be
continuously replaced. In addition, for these practices, none of the Affiliated
Professional Entities nor physicians, individually, are material to the results
of operations of the Company. Also, each Affiliated Practice Entity has had
positive operating income since the date of affiliation. The Company also has
the right to require the Affiliated Professional Entity to purchase and assume
the assets (including unamortized intangible assets) and liabilities and
obligations provided by the practice upon the involuntary termination of the
SA. Through December 31, 1999, there have been no involuntary terminations.

Impairment of Long-Lived Assets

   The Company reviews the carrying value of the identifiable intangible assets
and goodwill at least quarterly on an entity-by-entity basis to determine if
facts and circumstances exist which would suggest that

                                      F-8
<PAGE>

                     NOVAMED EYECARE, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

assets might be impaired or that the amortization period needs to be modified.
Among the factors the Company considers in making the evaluation are changes in
the Affiliated Professional Entity or SLC's market position, reputation,
profitability and geographical penetration. 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 Affiliated
Professional Entity/SLC and determine if the identifiable intangible assets
and/or goodwill are recoverable based on these undiscounted cash flows. If
impairment is indicated, then an adjustment will be made to reduce the carrying
amount of these assets to their fair value. To date, no such impairments have
been incurred.

Income Taxes

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

Fair Value of Financial Instruments

   The carrying value of all financial instruments such as accounts receivable,
amounts due (to) 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 carrying amounts of the
Company's notes receivable from affiliated providers, line of credit and
obligations under capital leases approximate fair value because the interest
rates on these instruments are subject to change with, or approximate, market
interest rates.

Minority Interests

   Until November 1998, the Company owned 75% of two SLCs, and recorded the
results of their operations under the consolidation method of accounting. The
interests of the minority owners in the earnings of these SLCs were reflected
as minority interests in the consolidated financial statements. In November
1998, the Company purchased the remaining minority interests of two SLCs held
by certain persons associated with Affiliated Professional Entities for 160,000
shares of the Company's Series A convertible preferred stock. Accordingly, the
Company now owns 100% of 12 SLCs. The acquisition of the minority interests was
accounted for under the purchase method of accounting.

Revenue Recognition

 Management Services

   Management services revenue is equal to the net revenue of the Affiliated
Professional Entities, less amounts retained by the Affiliated Professional
Entities. The amounts retained by the Affiliated Professional Entities
represent the net billings of the Affiliated Professional Entities less
operating expenses and the Company's management fee. Management services
revenue is recognized when the Affiliated Professional Entities render services
and recognize operating expenses under the accrual method of accounting. Net
revenue is recorded by the Affiliated Professional Entities at established
rates reduced by a provision for contractual adjustments and doubtful accounts.
Contractual adjustments arise due to the terms of certain reimbursement
contracts. Such adjustments represent the difference between the charges at
established rates and estimated recoverable amounts and are recognized in the
period the services are rendered. Any differences between estimated contractual
adjustments and actual final settlements under reimbursement contracts, which
are immaterial, are recognized as contractual adjustments in the period of
final settlements.

                                      F-9
<PAGE>

                     NOVAMED EYECARE, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   For the years ended December 31, 1999, 1998 and 1997, management services
revenue was as follows (in thousands):

<TABLE>
<CAPTION>
                                                  Years Ended December 31,
                                                  ---------------------------
                                                    1999      1998     1997
                                                  --------  --------  -------
   <S>                                            <C>       <C>       <C>
   Net revenue of the Affiliated Professional
    Entities .................................... $ 66,151  $ 46,285  $32,253
   Less--amounts retained by Affiliated
    Professional Entities........................  (10,777)  (10,232)  (7,852)
                                                  --------  --------  -------
                                                  $ 55,374  $ 36,053  $24,401
                                                  ========  ========  =======
</TABLE>

   For the years ended December 31, 1999, 1998 and 1997, the management
services revenue of one Affiliated Professional Entity accounted for 16.3%,
15.4% and 15.9% of total net revenue, respectively.

 Surgery and Laser Centers Revenue

   Revenue derived from SLCs is based on fees charged to patients, third-party
payors or others for use of the SLCs and relate primarily to cataract, laser
vision correction and other surgical procedures. SLC revenue is net of
contractual adjustments and a provision for doubtful accounts. Although the
Company does not separately track contractual adjustments and provisions for
doubtful accounts, management believes that the amounts related to bad debts
are immaterial for all periods presented. This revenue is recognized by the
Company and is not subject to SAs.

 Optical Product Sales and Other

   Through 1998, optical product sales consisted solely of an optical products
purchasing organization (the Alliance). The Alliance negotiates volume buying
discounts with optical products manufacturers. Products are sold to both
affiliated and non-affiliated ophthalmologists and optometrists. All sales to
affiliated ophthalmologists and optometrists are eliminated in consolidation.
Most of the products are shipped directly from the manufacturer to the
customer. Revenue is recognized, net of an allowance for returns, based on the
amount billed to the customer and is recorded upon receipt of the invoice from
the manufacturer or the shipping date if shipped from the Alliance. Beginning
in January 1999, the Company acquired a wholesale optical laboratory, Midwest
Uncuts, Inc., which manufactures and distributes corrective lenses and
eyeglasses to both affiliated and non-affiliated ophthalmologists and
optometrists (see Note 3). The Company's wholesale optical laboratory
recognizes revenue when product is shipped, net of an allowance for returns.

Cost of Sales and Medical Supplies

   Cost of sales and medical supplies includes the cost of optical products
such as frames, optical lenses, contact lenses and medical supplies.

Earnings (Loss) Per Common Share

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

                                      F-10
<PAGE>

                    NOVAMED EYECARE, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


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

   For 1999, 1998 and 1997, total earnings were allocated to each class of
stock based upon the weighted average shares outstanding for each class as a
percentage of total weighted average shares outstanding.

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

<TABLE>
<CAPTION>
                                                     Years Ended December 31,
                                                    ---------------------------
                                                      1999      1998     1997
                                                    --------  -------- --------
<S>                                                 <C>       <C>      <C>
  Income (loss) available to Series A and B
   convertible preferred and common stockholders... $ (1,161) $    967 $    105
  Income (loss) allocated to preferred
   stockholders....................................   (3,130)      784       89
                                                    --------  -------- --------
  Income (loss) available to common stockholders--
   basic........................................... $  1,969  $    183 $     16
                                                    ========  ======== ========
  Income (loss) available to common stockholders--
   diluted......................................... $ (1,161) $    967 $    105
                                                    ========  ======== ========
  Basic weighted average number of common shares
   outstanding.....................................   10,464     2,751    2,178
  Weighted average number of common shares issuable
   upon the conversion of dilutive preferred
   shares..........................................    7,501    11,780   14,624
  Effect of dilutive securities--stock options.....      --      1,472      435
                                                    --------  -------- --------
  Diluted weighted average number of shares
   outstanding.....................................   17,965    16,003   17,237
                                                    ========  ======== ========
  Earnings (loss) per common share:
    Basic.......................................... $   0.19  $   0.07 $   0.01
                                                    ========  ======== ========
    Diluted........................................ $  (0.06) $   0.06 $   0.01
                                                    ========  ======== ========
</TABLE>

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

<TABLE>
<CAPTION>
                                                               1999  1998  1997
                                                               ----- ----- -----
   <S>                                                         <C>   <C>   <C>
   Subordinated exchangeable promissory notes................. 1,135 4,714 8,099
   Series C and Series D convertible preferred stock.......... 2,713 4,130 2,629
   Stock options.............................................. 1,799   --    --
</TABLE>

Stock Compensation

   In October 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123, "Accounting for Stock-Based Compensation," which allows entities
to measure compensation costs related to awards of stock-based compensation
using either the fair value method or the intrinsic value method. The Company
has elected to account for stock-based compensation programs using the
intrinsic value method. See Note 12 for the pro forma disclosures of the
effect on net income (loss) and earnings (loss) per share.

                                     F-11
<PAGE>

                     NOVAMED EYECARE, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Concentration of Credit Risk

   For the years ended December 31, 1999, 1998 and 1997, approximately 38%, 49%
and 61%, 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 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.

Unaudited Pro Forma Information

   In connection with the Company's IPO, certain noncash, nonrecurring charges
were recorded in the accompanying 1999 and 1998 consolidated statements of
operations. The following unaudited pro forma summary presents the results of
operations as if the events described more fully in the notes below had
occurred at the beginning of the periods presented (amounts in thousands,
except per share data):

<TABLE>
<CAPTION>
                                                                Years Ended
                                                               December 31,
                                                              ----------------
                                                               1999     1998
                                                              -------  -------
<S>                                                           <C>      <C>
  Income (loss) available to Series A and Series B
   convertible preferred and common stockholders............. $(1,161) $   967
  Eliminate compensation expense related to stock options
   (a).......................................................   2,690      --
  Eliminate discount to initial public offering price upon
   the exchange of subordinated notes for common stock (b)...   2,425      --
  Eliminate preferred stock accretion upon conversion to
   common stock (c)..........................................   2,035      739
  Eliminate interest expense upon debt conversion to common
   stock (d).................................................     400      800
  Related income tax benefit.................................  (1,866)    (395)
                                                              -------  -------
  Pro forma net income....................................... $ 4,523  $ 2,111
                                                              =======  =======
  Pro forma earnings per diluted common share................ $  0.20  $  0.10
                                                              =======  =======
  Pro forma weighted average diluted shares outstanding......  22,476   21,649
                                                              =======  =======
</TABLE>
--------
Notes:
(a) Represents the pro forma elimination of the compensation expense associated
    with the IPO-related vesting of certain stock options granted in 1999.
(b) Represents the pro forma elimination of the additional interest expense
    which resulted from the exchange of subordinated exchangeable promissory
    notes for common stock at a discount to the IPO price per share.
(c) Represents the pro forma elimination of the accretion of the Series C and
    Series D convertible preferred stock through the IPO to its estimated fair
    market value. Upon the completion of the IPO, the Series C and Series D
    convertible preferred stock converted into common stock.
(d) Represents the pro forma elimination of the interest expense from the
    subordinated exchangeable promissory notes which were exchanged for common
    stock at the time of the IPO.

                                      F-12
<PAGE>

                     NOVAMED EYECARE, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


3. AFFILIATIONS AND ACQUISITIONS

   The Company acquires certain net assets of Affiliated Professional Entities
and the entire operations of the SLCs. In addition, the Company acquires the
right to provide services to Affiliated Professional Entities. The following
represents the significant practice affiliations occurring in 1999, 1998 and
1997:

<TABLE>
<CAPTION>
    Affiliated Professional Entity          Effective Date       Location
    ------------------------------          --------------       --------
   <S>                                      <C>            <C>
   1999:
   Eye Healthcare Associates............... November 1999  St. Louis, MO
   Young Eye Clinic (1).................... December 1999  St. Joseph, MO
   Pomerance Eye Center (1)................ December 1999  Chattanooga, TN
   1998:
   Eyecare Midwest......................... July 1998      Kansas City, MO
   1997:
   Dominion Eye Associates (1)............. January 1997   Richmond, VA
   Hunkeler Vision Centers (1)............. March 1997     Kansas City, MO & KS
   American Eye Institute (1).............. May 1997       New Albany, IN
</TABLE>
  --------
  (1) Affiliation includes SLC(s)

   The acquisitions of nonmedical operating assets and liabilities have been
accounted for using the purchase method of accounting and, accordingly, the
purchase price has been allocated to the tangible assets acquired and
liabilities assumed based on the estimated fair values at the dates of
acquisition. Simultaneous with each acquisition, the Company entered into an SA
with each Affiliated Professional Entity. The following is an allocation of
purchase price for the acquisitions completed during the years 1999, 1998 and
1997 (in thousands):

<TABLE>
<CAPTION>
                                                       1999     1998     1997
                                                      -------  -------  -------
   <S>                                                <C>      <C>      <C>
   Intangible assets acquired........................ $ 9,690  $ 6,920  $17,746
   Net liabilities assumed...........................  (2,827)     (15)    (570)
                                                      -------  -------  -------
       Total purchase................................   6,863    6,905   17,176
   Less--
     Fair value of stock issued......................  (1,073)  (3,256)  (5,290)
     Notes issued....................................    (550)     --    (9,664)
                                                      -------  -------  -------
       Cash purchase price........................... $ 5,240  $ 3,649  $ 2,222
                                                      =======  =======  =======
</TABLE>

   In January 1999, the Company acquired Midwest Uncuts, Inc., a wholesale
optical laboratory with two manufacturing locations, from a related party (See
Note 14). The transaction was accounted for by the purchase method of
accounting and the results of operations are included in the consolidated
financial statements since the date of acquisition. The consideration for the
acquisition consisted of $4.6 million of net cash and 250,000 shares of Series
A convertible preferred stock issued at a value of $4.38 per share. The
acquisition resulted in $5.2 million of goodwill. Subsequent to December 31,
1999, the Company entered into a practice affiliation with an Affiliated
Professional Entity in the greater Atlanta, GA area. Total cash consideration
was approximately $5.7 million.

                                      F-13
<PAGE>

                     NOVAMED EYECARE, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


4. PROPERTY AND EQUIPMENT

   Property and equipment consist of the following as of December 31, 1999 and
1998 (in thousands):

<TABLE>
<CAPTION>
                                                                1999     1998
                                                               -------  -------
   <S>                                                         <C>      <C>
   Equipment.................................................. $15,780  $ 8,792
   Equipment under capital lease obligations..................   1,039    1,039
   Computer software..........................................   2,059    1,006
   Furniture and fixtures.....................................   1,070      608
   Leasehold improvements.....................................   2,745    1,996
                                                               -------  -------
                                                                22,693   13,441
   Less--Accumulated depreciation and amortization............  (6,628)  (3,548)
                                                               -------  -------
                                                               $16,065  $ 9,893
                                                               =======  =======
</TABLE>

   Depreciation and amortization expense for property and equipment in 1999,
1998 and 1997, was approximately $3.1 million, $1.9 million and $1.4 million,
respectively. In addition, during 1997, the Company replaced its management
software system and, as a result, recorded an expense for the write-off of the
net book value of approximately $589,000 which is included in other expense on
the accompanying consolidated statements of operations.

5. INTANGIBLE ASSETS

   Intangible assets consist of the following as of December 31, 1999 and 1998
(in thousands):

<TABLE>
<CAPTION>
                                                  Amortization
                                                     Period     1999     1998
                                                  ------------ -------  -------
   <S>                                            <C>          <C>      <C>
   SAs and goodwill..............................  5-25 Years  $52,112  $38,185
   Less--Accumulated amortization................               (4,260)  (2,525)
                                                               -------  -------
                                                               $47,852  $35,660
                                                               =======  =======
</TABLE>

   Amortization expense for intangible assets in 1999, 1998 and 1997, was
approximately $1.8 million, $1.4 million and $826,000, respectively. Effective
January 1, 1998, the Company reduced the maximum useful life of the costs
associated with affiliations under the SAs from 32 years to 25 years. This
change was made to conform the Company's policy with that adopted by other
health care services companies during 1998 and to better represent the useful
lives of the SAs. The change in the estimated useful life was treated on a
prospective basis and increased 1998 amortization expense by $250,000.

6. ACCRUED EXPENSES

   Accrued expenses consist of the following as of December 31, 1999 and 1998
(in thousands):

<TABLE>
<CAPTION>
                                                                   1999   1998
                                                                  ------ ------
   <S>                                                            <C>    <C>
   Accrued payroll and related benefits.......................... $2,113 $1,988
   Accrued interest..............................................     83    674
   Accrued other.................................................  2,466    635
                                                                  ------ ------
                                                                  $4,662 $3,297
                                                                  ====== ======
</TABLE>

                                      F-14
<PAGE>

                     NOVAMED EYECARE, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


7. INCOME TAXES

   The provision for income taxes consists of the following for the years ended
December 31, 1999, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
                                                          1999    1998  1997
                                                         ------  ------ -----
   <S>                                                   <C>     <C>    <C>
   Current--
     Federal............................................ $2,094  $  366 $  31
     State..............................................    345      61     4
                                                         ------  ------ -----
                                                          2,439     427    35
                                                         ------  ------ -----
   Deferred--
     Federal............................................   (542)  1,062   151
     State..............................................    (89)    175    20
                                                         ------  ------ -----
                                                           (631)  1,237   171
                                                         ------  ------ -----
                                                         $1,808  $1,664 $ 206
                                                         ======  ====== =====
   The reasons for the differences between the income tax expense and the
amounts calculated using the U.S. statutory rate of 34% were as follows (in
thousands):
<CAPTION>
                                                          1999    1998  1997
                                                         ------  ------ -----
   <S>                                                   <C>     <C>    <C>
   Tax expense at U.S. statutory rate................... $  912  $1,146 $ 106
   Intangible asset amortization........................    435     283   192
   State taxes, net.....................................    150     235    49
   Discount on conversion of notes......................    459     --    --
   Exercise of employee stock options...................   (213)    --    --
   Reversal of valuation allowance related to operating
    loss carryforward...................................    --      --   (141)
   Other................................................     65     --    --
                                                         ------  ------ -----
   Provision for income taxes........................... $1,808  $1,664 $ 206
                                                         ======  ====== =====
</TABLE>

   Deferred tax assets (liabilities) are comprised of the following at December
31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
                                                               1999     1998
                                                              -------  -------
   <S>                                                        <C>      <C>
   Current deferred tax assets (liabilities)
     Compensation expense.................................... $   216  $    98
     Receivable allowances...................................     208      220
     Prepaid expense.........................................    (568)     --
     Other...................................................     (24)    (130)
                                                              -------  -------
                                                                 (168)     188
                                                              -------  -------
   Long-term deferred tax assets (liabilities)
     Depreciation and amortization...........................  (1,769)  (1,168)
     Acquisitions............................................    (705)    (335)
     Compensation expense related to stock options...........   1,067      --
     Discount on conversion of notes.........................     416      --
     Other...................................................    (122)    (199)
                                                              -------  -------
                                                               (1,113)  (1,702)
                                                              -------  -------
                                                              $(1,281) $(1,514)
                                                              =======  =======
</TABLE>
   The Company paid none, $594,000, and $2.8 million for income taxes during
1997, 1998, and 1999, respectively.

                                      F-15
<PAGE>

                     NOVAMED EYECARE, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


8. LONG-TERM DEBT

   Long-term debt consists of the following as of December 31, 1999 and 1998
(in thousands):

<TABLE>
<CAPTION>
                                                                1999     1998
                                                               -------  -------
   <S>                                                         <C>      <C>
   Subordinated exchangeable promissory notes................. $   --   $11,900
   Revolving line of credit...................................   3,200    8,485
   Other......................................................     613      342
                                                               -------  -------
                                                                 3,813   20,727
   Less--Current maturities of long-term debt.................  (3,617)    (300)
                                                               -------  -------
                                                               $   196  $20,427
                                                               =======  =======
</TABLE>

Subordinated Exchangeable Promissory Notes

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

   In connection with the exchange of $9.7 million of the Notes, the Company
has agreed to lend each of these noteholders on April 1, 2000, an amount equal
to the Federal and state income taxes payable by the holder as a result of the
exchange which they still own on April 1, 2000. The estimated aggregate amount
of these tax loans will not exceed $4 million. Each of the tax loans will be
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 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 common stock previously issued in exchange for a note and
owned by the debtor on April 1, 2000. The tax loans also will be payable by the
debtors upon demand by the Company for payment. The Company intends to allow
the debtors to repay these loans as they dispose of their shares of our common
stock. The Company also has agreed to reimburse these debtors, on grossed-up
basis, for any Federal or state taxes that they recognize as a result of
imputed interest on the tax loans.

Revolving Credit Facility

   The Company has entered into a $35 million credit agreement (the Credit
Facility) which provides for a revolving line of credit that expires in July
2000. Accordingly, the Company has recorded the amount outstanding at December
31, 1999, as a current liability in the accompanying consolidated balance
sheets. The Company is currently in the process of renegotiating the revolving
credit facility to expand its borrowing capacity and to extend the facility
beyond July 2000. The Credit Facility provides that interest is payable at
LIBOR, plus an applicable margin ranging from 1.5% to 2.0%, depending on the
Company's leverage ratios (as defined), or at the prime rate minus .50%. As of
December 31, 1999, the effective interest rate on the Credit Facility was
approximately 8.0%. In addition, the Company must pay a commitment fee of .375%
for the unused portion during the revolving commitment period. Advances under
the line of credit are secured by substantially all of the Company's assets.
The Credit Facility contains certain covenants, which include

                                      F-16
<PAGE>

                     NOVAMED EYECARE, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

limitations on indebtedness, liens, capital expenditures and certain ratios,
which define borrowing availability. In addition, the Company must maintain a
minimum net worth (as defined in the Credit Facility) of $40 million. As of
December 31, 1999, the Company was in compliance with the covenants of the
Credit Facility except for the capital expenditures limitation for which the
Company received a waiver. As of December 31, 1999, the Company had $31.8
million available on its line of credit.

Interest Expense

   The Company paid $1.9 million, $1.4 million and $624,000 for interest and
commitment fees during 1999, 1998 and 1997, respectively.

9. OPERATING LEASES

   The Company has commitments under long-term, nonterminable operating leases,
principally for facility and office space. Lease terms generally cover one to
ten years. Certain leases contain consecutive renewal options of five-year
periods. At December 31, 1999, minimum annual rental commitments under
operating leases with terms in excess of one year are as follows (in
thousands):

<TABLE>
     <S>                                                                <C>
     2000.............................................................. $ 4,775
     2001..............................................................   3,840
     2002..............................................................   3,095
     2003..............................................................   2,734
     2004 and thereafter...............................................   7,301
                                                                        -------
       Total minimum lease payments.................................... $21,745
                                                                        =======
</TABLE>

   Rent expense related to operating leases amounted to approximately $5.2
million, $3.6 million, and $2.9 million during 1999, 1998 and 1997,
respectively.

10. 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
SLC and business activities and procures insurance for its Affiliated
Professional Entities through a third party insurer. Although the Company
believes that this insurance is adequate as to the amounts at risk, there can
be no assurance that any claim asserted against the Company will not exceed the
coverage limits of such insurance.

Insurance

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


                                      F-17
<PAGE>

                     NOVAMED EYECARE, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Purchase Commitment

   The Company has entered into an agreement with a vendor to purchase
approximately $7.4 million of medical supplies over a defined term. As of
December 31, 1999, the Company has a minimum remaining commitment of $4.7
million, which expires in December 2002.

11. STOCKHOLDERS' EQUITY

   NovaMed Holdings Inc. (Holdings) was incorporated in November 1996. In
conjunction with a recapitalization on December 20, 1996 (the
Recapitalization), Holdings issued 11,584,000 shares of Series A convertible
preferred stock, par value $.01 per share (Series A Stock), to replace
previously granted 5,792 units of NovaMed Eyecare Management, LLC (NovaMed
LLC). In addition, Holdings issued options to purchase 1,528,000 shares of
Series A Stock in exchange for options to purchase 764 units of NovaMed LLC.

   Contemporaneous with the Recapitalization, Holdings issued 400,000 shares of
Series B convertible preferred stock, par value $.01 per share (Series B
Stock), for $2.50 per share; 2,000,000 shares of Series C convertible preferred
stock, par value $.01 per share (Series C Stock), for $3.00 per share; and
warrants to purchase an aggregate of 684,932 shares of Series D convertible
preferred stock, par value $.01 per share (Series D Stock), at $4.38 per share.
The warrant to purchase the Series D stock was exercised in April 1998. In May
1999, Holdings reincorporated as a Delaware corporation and changed its name to
NovaMed Eyecare, Inc. In addition, in connection with the Company's IPO, Series
A Stock, Series B Stock, Series C Stock and Series D Stock converted into
common stock on a share-for-share basis. Following conversion of the
outstanding preferred stock into common stock at the IPO, the Series A, B, C
and D convertible preferred stock was eliminated or canceled and these shares
are not available for reissuance.

   On August 18, 1999, the Company sold 3,000,000 new shares of common stock in
an initial public offering at a price of $8.00 per share. Net proceeds were
approximately $20.2 million after deducting underwriting discounts, commissions
and offering expenses. In addition, the underwriters exercised their over-
allotment option on September 1, 1999, to acquire an additional 600,000 shares
of the Company's common stock at $8.00 per share, contributing $4.5 million of
additional net proceeds.

Registration Rights

   Certain stockholders existing prior to the IPO have the right to demand
registration of 4,257,269 of the Company's shares. At any time at least six
months after the IPO, the holders of Series C or D convertible preferred stock
prior to the IPO are entitled to one demand registration upon initiation by at
least 51% of these holders. Thereafter, a second demand registration may be
initiated by not less than 25% of these holders. The Company is only required
to effect a registration if at least 20% of the common stock that was Series C
or D convertible preferred stock prior to the IPO is to be sold in the demand
offering and the anticipated aggregate offering price of the demand
registration exceeds $5.0 million. These holders will be entitled to sell all
of the shares requested to be registered, subject to pro rata cutback in the
underwriters' discretion.

   In addition certain stockholders existing prior to the IPO have piggyback
registration rights for 18,843,118 shares covering future offerings by the
Company. In a secondary public offering effected by the Company, these holders
are entitled to pro rata piggyback registration rights with respect to 50% of
the shares, other than shares to be sold for the Company's benefit, permitted
by the underwriters to be sold in a secondary offering.

   In a secondary offering initiated by the Company, the Company's stockholders
that held common stock and Series A or B convertible preferred stock prior to
the IPO are entitled to pro rata piggyback registration rights with respect to
50% of the shares, other than shares to be sold for the Company's benefit,
permitted by the underwriter to be sold. These holders also have piggyback
registration rights with respect to any registration

                                      F-18
<PAGE>

                     NOVAMED EYECARE, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

effected pursuant to the demand registration rights of the Company's
stockholders that held Series C or D convertible preferred stock prior to the
IPO; provided, however, that any of these registration rights are subordinate
to the rights of the Company's former Series C or D convertible preferred
holders and the Company to participate in the offering and are subject to
cutback in the underwriter's discretion. The holders of 12,682,303 of these
shares have agreed not to exercise these rights for one year after the date of
the IPO.

Redemption Right

   In connection with the issuance of the Series C and Series D Stock (Senior
Preferred Stock), NovaMed amended its articles of incorporation (the Amendment)
to provide that holders of at least two-thirds of the then outstanding Senior
Preferred Stock may elect to redeem for cash up to 50% of their respective
shares each year after April 2004, and April 2005, at the greater of a
prescribed liquidation preference amount per share (the Carrying Value), or the
fair value of such preferred stock as established by independent appraisers.
The Amendment provided for a mandatory conversion of each share of convertible
preferred stock to one share of common stock in the event NovaMed undertook a
qualifying IPO.

   Although the Company had not obtained an independent appraisal, it had
estimated the potential future redemption value based upon various transactions
with third parties, through comparison to comparable publicly traded companies
and the Company's IPO price per share. Based upon the estimates, the Company
recorded accretion of $2.0 million and $739,000 to increase the carrying value
of the Senior Preferred Stock to the date of the IPO in 1999 and for the year
ended December 31, 1998, respectively. In connection with the Company's IPO,
the Senior Preferred Stock converted into common stock thereby eliminating the
need for future accretion.

Rights Agreement

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

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

Treasury Stock

   In May 1998, the Board of Directors authorized a repurchase of up to
1,200,000 shares of the Company's Series A Stock. The Company purchased a total
of 1,188,414 shares at an aggregate cost of $5.3 million. In addition, during
1999, the Company reacquired 437,000 shares in connection with the termination
of affiliations with eye care professionals. All outstanding treasury shares
were reissued in connection with the Company's IPO or practice affiliations.

12. EMPLOYEE BENEFIT PLANS

Employee Benefits and Compensation

   The Company maintains a voluntary savings plan (the Plan) for eligible
employees under section 401(k) of the Internal Revenue Code whereby
participants may contribute a percentage of up to 15% of their

                                      F-19
<PAGE>

                     NOVAMED EYECARE, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

compensation. The Plan provides for the Company to match 50% of the employee's
contributions on the first 3% of salary contributed by each employee. The
Company's matching contributions approximated $251,000, $136,000 and $70,000
for 1999, 1998 and 1997, respectively.

Employee Stock Purchase Plan

   The Company has an employee stock purchase plan for all eligible employees.
Under the plan, shares of the Company's common stock may be purchased at six-
month intervals at 85% of the lower of the fair market value on the first or
the last day of each six-month period. Employees may purchase shares having a
value not exceeding 10% of their gross compensation during an offering period;
however, the amount of an employee's purchase may not exceed $20,000 in any
offering period or $25,000 in any calendar year. The plan began on October 1,
1999 and, accordingly, no shares were purchased during 1999. At December 31,
1999, 400,000 shares were reserved for future issuance.

Stock Option Plans

   In December 1996, the Company adopted the NovaMed Holdings Inc. Stock
Incentive Plan (the Plan). The Company has authorized 6,251,800 shares of its
common stock, par value $.01 per share, to be reserved for future grants.
Authorized options for common stock under the Plan are exercisable over a four-
year period with vesting beginning six months from the date of each grant and
1/48th of the total options granted becoming exercisable each month thereafter.
The option period for Common Stock options is 10 years from the date each
option is granted. All current outstanding options are nonqualified stock
options.

   The Company grants stock options to employees and nonemployee members of the
Company's Board of Directors. Pursuant to Accounting Principles Board Opinion
No. 25, the Company recognizes as compensation expense the difference between
the exercise price and the fair market value of its common stock on the date of
grant. Stock-based compensation expense is deferred and recognized over the
vesting period of the stock option. During the years ended December 31, 1998
and 1997, the Company did not recognize any stock based compensation expense.
During July 1999, the Company fully vested all options granted from February 1,
1999 through July 23, 1999, which were granted with exercise prices below the
fair market value, contingent on the completion of the IPO. The Company issued
1,050,800 options during this time period. Accordingly, the Company recorded a
pre-tax expense of $2.7 million, as compensation expense during 1999 related to
those options which became fully vested on the date of the IPO.

   In addition, the Company granted stock options to physicians employed by
Affiliated Professional Entities. The physicians reimburse the Company in full
for the compensation charge taken upon the granting of these options, which is
equal to their estimated fair market value on the date of the grant as
determined by the Black-Scholes option-pricing model.

                                      F-20
<PAGE>

                     NOVAMED EYECARE, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


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

<TABLE>
<CAPTION>
                                                                        Weighted
                                                                        Average
                                                 Options    Price Per   Exercise
                                               Outstanding    Share      Price
                                               ----------- ------------ --------
   <S>                                         <C>         <C>          <C>
   December 31, 1996..........................  1,533,001  $1.25-$ 2.50  $1.31
     Granted..................................  2,013,500  $1.88-$ 4.38  $2.11
     Exercised................................   (149,373) $1.25-$ 1.88  $1.26
     Canceled.................................   (253,712) $1.25-$ 2.50  $1.45
                                                ---------
   December 31, 1997..........................  3,143,416  $1.25-$ 4.38  $1.81
     Granted..................................  1,129,000  $3.50-$ 6.00  $4.53
     Exercised................................     (7,388) $1.25-$ 2.50  $1.93
     Canceled.................................   (122,028) $1.25-$ 3.85  $2.05
                                                ---------
   December 31, 1998..........................  4,143,000  $1.25-$ 6.00  $2.55
     Granted..................................  1,343,850  $4.38-$10.80  $6.69
     Exercised................................   (367,562) $1.25-$ 9.00  $2.93
     Canceled.................................   (111,053) $1.25-$10.80  $4.48
                                                ---------
   December 31, 1999..........................  5,008,235                $3.52
                                                =========                =====
</TABLE>

   The weighted average fair value of options granted in 1999 was $4.09 per
share.

   The following table summarizes information about stock options outstanding
at December 31, 1999:

<TABLE>
<CAPTION>
                           Options Outstanding      Options Exercisable
                       ---------------------------- --------------------
                         Number            Average    Number    Average
        Range of       Outstanding Average Exercise Exercisable Exercise
     Exercise Prices   at 12/31/99  Life    Price   at 12/31/99  Price
     ---------------   ----------- ------- -------- ----------- --------
     <S>               <C>         <C>     <C>      <C>         <C>
       $1.25- 1.25        942,875    5.9    $1.25      942,875   $1.25
       $1.88- 2.50      1,711,000    7.2     2.04    1,231,007    2.02
       $3.00- 4.38        733,010    8.2     3.79      328,948    3.76
       $5.00- 7.19      1,300,500    9.1     5.62      889,557    5.43
       $7.69-10.80        320,850    9.3     9.67      242,300    9.71
     -----------        ---------    ---    -----    ---------   -----
       $1.25-10.80      5,008,235    7.7    $3.52    3,634,687   $3.32
     ===========        =========    ===    =====    =========   =====
</TABLE>

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

<TABLE>
<CAPTION>
                                                            1999    1998 1997
                                                           -------  ---- -----
   <S>                                                     <C>      <C>  <C>
   Net income (loss) available to common stockholders..... $(3,507) $578 $  14
   Earnings (loss) per common share:
     Basic................................................ $   .04  $.04 $ --
     Diluted.............................................. $  (.20) $.04 $ --
</TABLE>

                                      F-21
<PAGE>

                     NOVAMED EYECARE, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The fair value of these options was estimated using the Black-Scholes
option-pricing model for 1999 and the minimum value method in 1998 and 1997
with the following assumptions:

<TABLE>
<CAPTION>
                                                               1999  1998  1997
                                                               ----  ----  ----
   <S>                                                         <C>   <C>   <C>
   Expected option life in years.............................. 4.92    10    10
   Risk-free interest rate.................................... 5.28% 6.06% 4.85%
   Dividend yield.............................................  --    --    --
   Expected volatility........................................ .850   N/A   N/A
</TABLE>

13. OPERATING SEGMENTS

   During 1998, the Company adopted SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." The Company manages its business
segments by types of service provided. The Company's reportable segments are as
follows:

   Management services. Management services include medical services provided
to patients, the sale of optical products and research.

   Surgery and Laser Centers. Surgery and laser centers include the results of
operations from owning, managing or operating surgery and laser centers, laser
vision correction centers and fixed-site laser services agreements.

   Product sales. Product sales include the Alliance, the Company's optical
products purchasing organization, and beginning in 1999, Midwest Uncuts, Inc.,
a wholesale optical laboratory.

   The accounting policies of the various segments are the same as those
described in the "Summary of Significant Accounting Policies" in Note 2, except
for the management services segment. Management services revenue is reported to
management using the net revenue of the Affiliated Professional Entities as the
total revenue. The revenue for the management services segment on the
accompanying consolidated statements of operations is the net revenue of the
Affiliated Professional Entities reduced by amounts retained by the Affiliated
Professional Entities (see Note 2). Under either approach, the earnings before
income taxes (EBT) are identical.

   The Company evaluates the performance of its segments based on EBT. Segment
EBT includes all revenue and expenses directly attributable to the segment
except amortization of intangible assets and excludes certain expenses that are
managed outside the reportable segment. Items excluded from the segment EBT
primarily consist of corporate expenses for salaries, wages and benefits,
general and administrative, interest on debt, and amortization of intangible
assets.

                                      F-22
<PAGE>

                     NOVAMED EYECARE, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The Company excludes intercompany transfers for management reporting
purposes, as they have no effect on the EBT of the individual segments. Segment
identifiable assets include accounts receivable, inventory, other current
assets and long-lived assets of the segment. Corporate identifiable assets
represent all other assets of the Company including cash and cash equivalents,
corporate other current assets, and corporate long-lived assets, which include
property and equipment, notes receivable, intangible assets, and other long-
term assets. Capital expenditures for long-lived assets are not reported to
management by segment and are excluded, because presenting such information is
not practical.

<TABLE>
<CAPTION>
                                     Surgery
                         Management and Laser Product
                          Services   Centers   Sales   Corporate  Eliminations  Total
                         ---------- --------- -------  ---------  ------------ --------
                                                (In thousands)
<S>                      <C>        <C>       <C>      <C>        <C>          <C>
1999--
  Net revenue...........  $66,151    $31,615  $15,599  $    --      $(10,777)  $102,588
  EBT...................    6,185     12,588    1,483   (17,574)         --       2,682
  Depreciation and
   amortization.........    1,142        920      142     2,708          --       4,912
  Interest (income).....      (18)       --       (31)     (165)         --        (214)
  Interest expense......        3          2        1     1,507          --       1,513
  Identifiable assets...   15,601     10,273    3,329    59,049          --      88,252
                          =======    =======  =======  ========     ========   ========
1998--
  Net revenue...........  $46,285    $20,131  $ 7,545  $    --      $(10,232)  $ 63,729
  EBT...................    5,707      7,181      546   (10,064)         --       3,370
  Depreciation and
   amortization.........      874        563        5     1,891          --       3,333
  Interest (income).....      (14)       --       (11)     (248)         --        (273)
  Interest expense......       17          1        1     1,527          --       1,546
  Identifiable assets...   12,120      7,236    1,301    42,022          --      62,679
                          =======    =======  =======  ========     ========   ========
1997--
  Net revenue...........  $32,253    $14,484  $ 3,523  $    --      $ (7,852)  $ 42,408
  EBT...................    4,192      5,349      173    (9,403)         --         311
  Depreciation and
   amortization.........      587        386        9     1,244          --       2,226
  Interest (income).....      --         (12)      (4)     (306)         --        (322)
  Interest expense......      --          35        1     1,327          --       1,363
  Identifiable assets...    8,717      4,373      517    39,127          --      52,734
                          =======    =======  =======  ========     ========   ========
</TABLE>

   The Company has no revenue attributed to customers outside of the U.S. and
no assets located in foreign countries.

14. RELATED-PARTY TRANSACTIONS

Facility Rent

   The Company leases facility space from various partnerships, which include
affiliated providers as partners and trusts in which relatives of the
affiliated providers are named beneficiaries. Rent expense on related-party
operating leases amounted to approximately $1.6 million, $1.5 million and $1.3
million during 1999, 1998 and 1997, respectively.

Notes Receivable

   The Company holds notes receivable of $342,000 from physicians affiliated
with the Company. The loans bear interest rates between 9.0-9.5%, are secured
against future services, and are either payable upon demand of the Company or
within two years of issuance, at the Company's discretion.

                                      F-23
<PAGE>

                     NOVAMED EYECARE, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Acquisition of Midwest Uncuts, Inc.

   Effective January 1, 1999, the Company acquired all of the issued and
outstanding shares of Midwest Uncuts, Inc. in exchange for $4.6 million in net
cash and 250,000 shares of Series A Stock. The stockholders were Mr. and Mrs.
John P. Winjum, the parents of the Company's Chairman of the Board, President
and Chief Executive Officer. Prior to this acquisition, the Company had
retained Midwest Uncuts, Inc., to finish and surface lenses on a purchase order
basis on market terms. The Company made payments of approximately $982,000 and
$820,000 during 1998 and 1997, respectively.

Other

   The Company receives professional services from a firm that employs a
director of the Company. Total payments for services received during 1999, 1998
and 1997 were approximately $1.8 million, $422,000 and $516,000, respectively.

                                      F-24
<PAGE>

                             NOVAMED EYECARE, INC.

                         RULE 12-09 VALUATION RESERVES
                                   (in 000's)

<TABLE>
<CAPTION>
Allowance
for
contractual
adjustments   Balance at  Charged to            Balance at
and bad      beginning of costs and               end of
debt            period     expenses  Deductions   period
-----------  ------------ ---------- ---------- ----------
<S>          <C>          <C>        <C>        <C>
1997           $ 2,521     $30,413    $ 25,940   $ 6,994
               =======     =======    ========   =======
1998           $ 6,994     $40,647    $(37,294)  $10,347
               =======     =======    ========   =======
1999           $10,347     $56,536    $(54,169)  $12,714
               =======     =======    ========   =======
</TABLE>

                                     SCH-I
<PAGE>

                                   SIGNATURES

   Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on the 30th day of
March, 2000.

                                          NovaMed Eyecare, Inc.

                                                 /s/ Stephen J. Winjum
                                          By: _________________________________
                                                     Stephen J. Winjum
                                                 President, Chief Executive
                                                        Officer and
                                                  Chairman of the Board of
                                                         Directors

   Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 30th day of March, 2000.

<TABLE>
<CAPTION>
              Signature                                 Title
              ---------                                 -----

<S>                                     <C>
       /s/ Stephen J. Winjum            President, Chief Executive Officer
______________________________________   (Principal Executive Officer),
          Stephen J. Winjum              Chairman of the Board of Directors,
                                         and a Director

       /s/ Ronald G. Eidell             Executive Vice President, Chief
______________________________________   Financial Officer and Secretary
           Ronald G. Eidell

       /s/ Martin A. Koehler            Vice President Finance and Principal
______________________________________   Accounting Officer
          Martin A. Koehler

    /s/ John D. Hunkeler, M.D.          Director
______________________________________
        John D. Hunkeler, M.D.

      /s/ Scott H. Kirk, M.D.           Director
______________________________________
         Scott H. Kirk, M.D.

        /s/ R. Judd Jessup              Director
______________________________________
            R. Judd Jessup

     /s/ Steven V. Napolitano           Director
______________________________________
         Steven V. Napolitano

      /s/ James B. Tananbaum            Director
______________________________________
          James B. Tananbaum

       /s/ Peter C. Wendell             Director
______________________________________
           Peter C. Wendell

   /s/ Douglas P. Williams, M.D.        Director
______________________________________
      Douglas P. Williams, M.D.
</TABLE>